ICICI BANK UK PLC v. 4C’S DIAMONDS DISTRIBUTORS (A FIRM) AND ANOTHER

HCMP 1445/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1445 OF 2014

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BETWEEN

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D E C I S I O N

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1.  The plaintiff is the wholly owned subsidiary of ICICI Bank Ltd which is the largest private sector bank in India.

2.  The 1^st defendant is a firm engaged in the diamond business operating from premises at Star House, Salisbury Road, Tsimshatsui (Star House).

3.  The 2^nd defendant is the trading name of a sole proprietorship by Mr Jayeshkumar Indravadan Shah (Mr Shah) which trades in polished diamonds, rough diamonds, gems and jewellery out of the premises at Star House.

4.  The defendants are customers of the Digico group of companies.  The Digico group of companies operates in Europe through Diminco NV (Diminco).

5.  In Hong Kong it operates through Digico Holdings Ltd (Digico) and Digico’s wholly owned subsidiary Diamart Ltd (Diamart).  Digico and Diamart’s registered office are also at the premises at Star House.

6.  Mr Chetan Choksi (Mr Choksi) and his immediate family has a controlling interest in Digico through two BVI companies, Altran Business SA and Wellex Corporation.

7.  The present application relates to court proceedings in Belgium (the Belgium proceedings).

8.  The claim which is being made by the plaintiff in those proceedings is based upon a Receivables Pledge Agreement dated 15 December 2006 between Diminco as pledgor and the plaintiff as pledgee (the RP Agreement).

9.  In simple terms, the way the agreement was intended to operate was when Diminco sold diamonds and other jewellery to its customers Diminco pledged that payments due to them in accordance with invoices would be paid to the plaintiff.

10.  Of some importance to the present application is Clause 4.1 of the RP Agreement:

“Notifications to Eligible Counterparties

Each time an Eligible Contract is entered into or a Diamonds Receivable come into existence, the Pledgor shall at the request of the Pledgee (i) deliver a notice of the Pledge to the Third Parties, in the form of Schedule 2 (the ‘Initial Notice’), and (ii) deliver to the Pledgor a copy of such notice acknowledged by each such Third Parties.”

11.  As already indicated, the defendants were customers of Diminco and the Belgium proceedings related to invoices allegedly coming within the ambit of the RP Agreement.

12.  The form of relief sought in the proceedings in Hong Kong is a Mareva injunction over the assets of the defendants and delivery up or preservation of assets pending satisfaction of the judgment in the Belgium proceedings commenced against the defendants.

13.  In order to address the risks prior to the substantive hearing of the originating summons, the plaintiff obtained on 12 June 2014 an ex parte Mareva injunction before DHCJ Sakhrani.

14.  Following this, an extension to the Mareva injunction was sought and obtained before DHCJ ST Poon to preserve the assets subject to the Mareva injunction.

15.  The form of the preservation aspect was consensual.  However it is the plaintiff’s contention that the defendants procrastinated and failed to comply with that order, thus necessitating a further application before DHCJ ST Poon.

Legal principles

16.  Mr Bartlett, for the plaintiff, submitted that section 21M of the High Court Ordinance, Cap 4 provided that a Mareva injunction in aid of foreign proceedings did not require the support of a substantive underlying claim in Hong Kong.  The foreign proceedings provided the necessary platform for the Mareva injunction to be issued.

17.  It was necessary for a plaintiff to demonstrate that the foreign proceedings must be “capable” of giving rise to a judgment which could be enforced in Hong Kong.

18.  As to the threshold to be adopted it was necessary to have regard to section 21M and to Order 29, rule 8 of the Rules of the High Court and it could be gleaned from these provisions that the normal Mareva principles would govern what “capable” meant.

19.  The court must bear in mind that in making its decision it does so in aid of the substantive foreign court.

20.  A helpful commentary on the approach to be adopted when granting Mareva relief is found in the passage on p391 of the judgment of Ma J (as he then was) in Yau Chiu Wah v Gold Chief Investment Ltd [2002] 1 HKC 383 at 391:

19. I start from the basic rationale underlying the granting of Mareva relief.  It is to ensure that the plaintiff is given adequate protection from the possibility of being left with a barren judgment in circumstances where a real risk exists of the defendant dissipating its assets before judgment.

20. Where it has been shown that the plaintiff is entitled to a Mareva injunction, the court will also ensure, as I have said, by the making of ancillary orders, that the injunction is made effective.  One such ancillary order, as I have already noted, is the making of orders for discovery and as an adjunct to that, an order for cross‑examination of deponents of affidavits served for the purpose of revealing the whereabouts and existence of the defendant’s assets.  I have already mentioned one of the justifications for this : to inform third parties who may be involved.”

21.  This passage supports the orders for the preservation and delivery up of assets made by DHCJ ST Poon. 

22.  Mr Barlow SC, for the defendants, submitted that the issue of the ex parte order was an abuse of the process of the court.

23.  He based this contention upon the premise that what the deputy judge had been seized of was a proprietary claim to the defendants’ assets.

24.  It is accordingly necessary to consider the order which was made:

“ INJUNCTION PROHIBITING DISPOSAL

OF ASSETS IN HONG KONG

IMPORTANT

NOTICE TO THE DEFENDANT

1. This Order prohibits you from dealing with your assets up to the amount stated.

The Order is subject to the exceptions which are set out in the Order.  You should read the whole of this document carefully.  You are advised to consult a solicitor as soon as possible.  You have the right to ask the court to vary or discharge this Order.

2. If you disobey this Order you may be found guilty of contempt of court and you or any of your directors may be fined or your assets may be seized.

BEFORE DEPUTY HIGH COURT JUDGE SAKHRANI IN CHAMBERS
(NOT OPEN TO PUBLIC)
ORDER

An ex parte application was made on the 12^th day of June 2014 by counsel for the Plaintiff, to the Judge who read the draft originating summons and the affirmations listed in Schedule 1 and accepted the undertakings in Schedule 2 at the end of this Order.  After hearing the application the Judge made the following Order.

IT IS ORDERED that:

Restriction on disposal of assets

1 The 1^st Defendant must not—

1.1 remove from Hong Kong any of its assets which are within Hong Kong, whether in its own name or not, and whether solely or jointly owned, up to the value of US$3,545,358.45; or

1.2 in any way dispose of or deal with or diminish the value of any of his assets, which are within Hong Kong, whether in its own name or not, and whether solely or jointly owned up to the value of US$3,545,358.45.  This prohibition includes the following assets in particular:

1.2.1 the business inventory of the 1^st Defendant held at Flat 1724, 17^th Floor, Star House, 3 Salisbury Road, Tsim Sha Tsui (‘Star House’) comprising of jewellery, polished diamonds, rough diamonds, loose precious stones, ingots of silver, gold and palladium, mounts of silver, gold and palladium and rejected/broken jewellery, or the sale proceeds if any of the inventory has been sold; and

1.2.2 office equipment at Star House belonging to the 1^st Defendant.

2 If the total unencumbered value of the 1^st Defendant’s assets in Hong Kong exceeds US$3,545,358.45, the 1^st Defendant may remove any of those assets from Hong Kong or may dispose of or deal with them so long as the total unencumbered value of its assets still in Hong Kong remains above US$3,545,358.45.

3 The 2^nd Defendant must not—

3.1 remove from Hong Kong any of its assets which are within Hong Kong, whether in its own name or not, and whether solely or jointly owned, up to the value of US$1,137,181.15; or

3.2 in any way dispose of or deal with or diminish the value of any of his assets, which are within Hong Kong, whether in its own name or not, and whether solely or jointly owned up to the value of US$1,137,181.15. This prohibition includes the following assets in particular:

3.2.1 the business inventory of the 2^nd Defendant held at Flat 1724, 17^th Floor, Star House, 3 Salisbury Road, Tsim Sha Tsui (‘Star House’) comprising of jewellery, polished diamonds, rough diamonds, loose precious stones, ingots of silver, gold and palladium, mounts of silver, gold and palladium and rejected/broken jewellery, or the sale proceeds if any of the inventory has been sold; and

3.2.2 office equipment at Star House belonging to the 2^nd Defendant.

4 If the total unencumbered value of the 2^nd Defendant’s assets in Hong Kong exceeds US$1,137,181.15, the 2^nd Defendant may remove any of those assets from Hong Kong or may dispose of or deal with them so long as the total unencumbered value of its assets still in Hong Kong remains above US$1,137,181.15.”

25.  What is clear from this is that no proprietary claim is being made against the assets of the defendants.

26.  What is being claimed in accordance with almost all Mareva injunctions is an order prohibiting the defendants from disposing of assets in such a manner as to defeat the legitimate claims of the plaintiff.  If the 1^st defendant is able to set aside US$3,545,358.45 they are completely at liberty to deal with their assets in any way they like.

27.  In the same manner the 2^nd defendant would be able to do likewise if it sets aside US$1,137,181.15.

28.  Mr Barlow informed the court that his clients had been put out of business for five months.  That may well be true.  However if they either paid into court the amount of the claim or set aside assets up to that amount they would have complied with the order made by the court and could continue with their business assuming they had sufficient funds to do so.

29.  That disposes of the contention advanced by Mr Barlow that this was a proprietary claim and that the issue of the Mareva injunction was an abuse of the process of the court.

30.  I will now turn to what is, in my opinion, the core issue outstanding between the parties.

31.  Put in simple terms the issue is the nature of the relationship between the two defendants of the one part and Diminco of the other part.

32.  Mr Bartlett submitted that the only realistic way of dealing with this issue on all of the evidence which was available was to treat the defendants and Diminco as what he aptly described as one amorphous whole.

33.  On the other hand, Mr Barlow contended that this was not the correct approach.  He argued that they were all separate and distinct entities and that dealings between them were at arm’s length.

34.  As indicated earlier Diminco and Diamart are subsidiary companies of Digico. Mr Choksi has a controlling interest of Digico.

35.  Mr Shah affirmed the affirmation in opposition to the granting of the ex parte Mareva injunction and, in so doing, displayed a detailed knowledge concerning the affairs of Digico.

36.  Mr Shah is an authorised signatory on Diamart’s bank accounts and the bank account of the 1^st defendant.

37.  The premises in Star House are owned by Diamart and the registered offices of Digico and Diamart are both at Star House.

38.  Mr Shah is also held out as the person in charge of the Star House premises and as representing the 1^st defendant. 

39.  Both defendants, Digico and Diamart, all occupy the premises at Star House.  They all also carry on business in the diamond trade.

40.  Both of the defendants occupy the premises as licencees and do not pay any rent for this.

41.  Perhaps of even greater significance the Group Jewellers Block Insurance issued by Antwerp Insurers covers risk for Diminco, the 1^st defendant, Diamart and Digico.

42.  When all of this is taken in conjunction with the relatively lower threshold of proof which has to be surmounted by the plaintiff to justify the issuing of a Mareva injunction I have no doubt that the Mareva injunction was properly issued.

43.  The consequence of all of this has an important impact upon the viability of the claim being made in the Belgium proceedings and also upon the question of the risk of assets being dissipated in Hong Kong.

44.  It would have been noted that by virtue of the provisions contained in the RP Agreement it was necessary that notice of payment in respect of receivables had to be given to third parties.

45.  Five of the relevant invoices did not have a note indorsed on them signifying notice had been given.  Only two had endorsed upon them a chop indicating that the requisite notice had been given. 

46.  If the parties concerned were indeed at arm’s length fairly considerable difficulties might be encountered in establishing that notice had in fact been given and that the terms of the RP Agreement had been complied with.

47.  Once it is established that all of the respective parties amounted to an amorphous whole it can much more readily be established that even if the notice requirements had not been strictly complied with everyone was fully aware of the true position.

48.  The other aspect of the matter which is affected by this finding is that if the parties are not in fact at arm’s length and independent this reflects badly upon their commercial morality.

49.  It is particularly important that a preservation order should be made on account of the very high value of diamonds and the relatively informal arrangements made for their storage at the Star House premises.

50.  Apparently the only means of identifying the ownership of the diamonds belonging to the different parties occupying the Star House premises is that packages containing the diamonds have labels written by hand attached to each of them indicating their ownership.

51.  For all these reasons I grant the relief sought in the originating summons and as varied or modified by further orders of the court.

52.  There will be liberty to apply if any difficulty is encountered in the drafting of the final order.

53.  I make an order nisi that the plaintiff is to have their costs.