DISCREET LTD. v. GLOBAL ISLAND INVESTMENTS LTD. AND ANOTHER

CACV 328/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 328 OF 2002

(ON APPEAL FROM HCCT NO. 48 OF 2002)

____________________

____________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Saunders given on 20 July 2002 in respect of an application to continue a Mareva injunction. At the conclusion of the hearing of this appeal this court dismissed this appeal and said that it would give its reasons in writing which we now do.

Background

2. The application for the Mareva injunction which is the subject of this appeal is unusual to the extent that the application was made by the 1st defendant to secure an injunction against the plaintiff. This factor caused some difficulty initially and is reflected both in the judgment below and in the judgment of Madam Justice Yuen JA of 26 November on the application for security for costs. However, it is now no longer relevant. Put shortly, the background to the matter is that the plaintiff had contracted to build a house on land which it had sold to the 1st defendant. There was an arbitration clause in the contract. An arbitration was commenced on 24 January 2002. Shortly thereafter the defendant paid the plaintiff the sum of $4,155,000 as it was required under the contract.

3. This action was commenced by the plaintiff on 30 May 2002 in order to remove the arbitrator and prevent him continuing with the arbitration. The Mareva injunction proceedings commenced on 3 July 2002. There was a first interim award in the arbitration of $128,544 on 16 July 2002. As already noted, the judgment in the court below was given on 20 July 2002. Since the judgment a further interim award of $217,686 has been made in September. The awards made so far, together with interest and the estimated costs, would come to approximately $750,000, according to the figures given to Madam Justice Yuen.

4. The judge examined the circumstances of the plaintiff. It is a property company. Prior to the beginning of 2002 it had three main investment properties, these were: Sienna Garden, a property in Ting Kau, which was unused but there was, apparently, a possibility for redevelopment but not until some time in the future, and a residential flat in what appears to be an old block in Robinson Road. On 16 January 2002 the plaintiff contracted to sell the Sienna Garden property for $26.5 million.

5. Prior to the sale of the Sienna Garden property, the rental income which it produced was just over $2 million per year. The judge observed that the only valuation before him was that the Sienna Garden property had been valued at $46 million in January 2000. The judge was therefore, clearly, left in the dark as to what the value of the property was in 2002. He expressed the view that the possibility remained that it had been sold at an undervalue.

6. The plaintiff attempted to introduce new evidence on the appeal. Insofar as the evidence went as to valuation it was clearly unsatisfactory and not such as a court could rely upon. It appeared to be a letter from an estate agent, written after the date of the judgment in the court below, on its face it would not have been admissible in evidence. In those circumstances that evidence could clearly not be admitted. Insofar as the plaintiff attempted to explain the identity of the purchaser, what was put in did not answer properly any queries and indeed it raised a number of questions as to exactly which company it was and who was behind the purchase of Sienna Garden.

7. In paragraph 24 of the judgment the judge said;

"The whole of these circumstances present the following picture. Discreet is a technically insolvent company, operating at a very substantial revenue loss each year, but that from time to time has substantial sums of cash passing through its accounts. As soon as funds reach the accounts they are immediately withdrawn so that the accounts are maintained with relatively nominal balances. Some of those withdrawals are for the direct benefit of Mr. Kwan personally or are made to a company solely owned by him. The account into which rental income was paid has apparently not been disclosed. The company has, immediately before the arbitration began, and with the knowledge that arbitration or litigation is imminent, sold a property that is substantial in both capital and income terms, at a potentially significant undervalue to a purchaser whose true identity cannot be determined. Mr. Kwan has, in his conduct of the Mareva litigation been, at best, less than frank."

8. In my view the judge was amply justified in the conclusions to which he arrived. Whether or not the judge overlooked the fact that the rental income had previously been assigned to the mortgagee bank matters not. Put quite simply the plaintiff was run on the basis that it did not retain any cash balances and money that came into its accounts soon found its way out. There was clearly here a consistent course of such transfers such that it might legitimately be said that the plaintiff was maintained with the bare minimum cash that was needed and any excess cash was removed from it. That removal might be by way of expenses or otherwise. Some of those expenses were in themselves somewhat surprising. For example, the accounts showed entertainment expenses in the year 2002 a sum of $72,000. It would be a little surprising to know that the plaintiff company would have needed entertainment expenses let alone to that extent. It might also be added that it would be difficult to discern from the accounts alone whether the valuation of the properties shown in the accounts can be considered appropriate at today's level.

9. On behalf of the plaintiff, Mr Kwok's main point was that the judge had approached the decision as to whether to maintain the Mareva injunction by using considerations relevant to giving security for the damages and costs likely to be awarded rather than considering whether it had been shown that there was a significant danger that there would be dissipation of assets. In my view, that criticism of the judge's approach is not valid. As already indicated the judge considered the question of the withdrawal of the funds and the manner in which it was done. Clearly he had to do that in the context of whether such funds as remained would be sufficient to satisfy any awards and other amounts which were likely to become due. That, however, does not take away from the fact that the considerations taken into account by the judge were the correct considerations. In those circumstances, in my view, it cannot be said that the judge erred in the exercise of his discretion and it was not open to this court to interfere with the judge's decision. The appeal was therefore dismissed.

Hon Le Pichon JA:

10. I agree.