JIN JIANG INVESTMENT LTD AND ANOTHER v. 深圳市威廉金融控股有限公司 AND OTHERS

HCA 196/2021

[2022] HKCFI 378

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 196 OF 2021

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J U D G M E N T

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A.  Introduction

1.  The core facts of this case are straightforward.  The Plaintiffs together transferred to various Defendants the total sum of HK$1,029,000,000 (“the HK$1 billion”), which was never returned, either as funds or as value in any other form.  The parties’ dispute lies in the original reason for the transfer and whether there was any obligation for return.

2.  In this Judgment, references to numbered plaintiffs and defendants will either be by a given definition or to, for example, “P1”, “P2”, “D23”, “D24” etc.

3.  On 1 February 2021, on the ex parte applications of P1 and P2 (together “Ps”), I granted the following orders (“Order”): (1) a Mareva injunction prohibiting the D2-D6 (“Zhang”, “Wang Tao”, “China Create”, “Wang Xu”, and “State Frontier” respectively)  from dealing with their assets to the ‘ceiling figure’ of the HK$1 billion; and (b) a proprietary injunction against China Create, Wang Xu and State Frontier in various amounts.

4.  By summons dated 2 February 2021, Ps applied for continuation of the Order against Zhang, Wang Tao, China Create, Wang Xu and State Frontier (“Continuation Summons”).  Save as regards Zhang, who has not been taking an active part in these proceedings, the Continuation Summons is opposed.  The opposition is predicated on every typical argument, namely: (1) the Order was wrongfully obtained ex parte, without justification for proceeding on that basis; (2) there was serious material non-disclosure; (3) Ps have shown no serious issue to be tried (let alone a good arguable case); (4) there is no demonstrable risk of dissipation; and (5) on the balance of convenience, the Order should be set aside or discharged.

5.  By summons dated 30 July 2021, China Create applied – as an alternative to the opposition to the Continuation Summons – to vary the terms of the Order (“Variation Summons”).  The variation sought is solely to enable China Create to fulfil the condition imposed by the Court of Appeal in another action involving it, where China Create was given leave to defend that action on condition (“Condition”)  of payment into Court of the sum of HK$295,014,400 (“Condition Sum”).

6.  The substantive hearings of the Continuation Summons and the Variation Summons were agreed to be dealt with together on 16 December 2021. In practical terms, of course, the Variation Summons needs to be considered only if the Continuation Summons succeeds.

7.  In the hearing, P1 and P2 were represented by Mr Patrick Chung, Mr Michael Ng and Mr Brian Fan.  Wang Tao and China Create were represented Ms Elizabeth Cheung and Ms Candice Lau.  Wang Xu and State Frontier were represented by Mr John Hui.  The hearing bundle was not compact, and all sides put in reasonably full written submissions and made detailed oral submissions.  I mean no disrespect that I shall not refer to all of the detail in those materials, though I have it in mind.

8.  At the conclusion of the hearing, I reserved my decision. This is my Judgment.

B.  The Parties

9.  P1 is a Hong Kong company, and P2 is a registered business in Hong Kong.  At all material times, both were beneficially owned and controlled by a Mr Shum Tin Ching (“Shum”).  But the person representing P1 and P2 in the negotiations of the relevant transactions was a Ms Cheuk Hiu Nam (“Cheuk”).

10.  Cheuk and Shum are also connected through a Hong Kong listed company known as Jiayuan International Group Limited (stock code: 2768)  (“JIGL”).  Cheuk is the CEO and an executive director of JIGL.  Shum is the chairman and a non-executive director of JIGL.  Shum is also the sole shareholder and director of Mingyuan Group Investment Limited (“Mingyuan”), which is the controlling shareholder of JIGL.

11.  There are 33 Defendants in this case.  Zhang and Wang Tao are said to have been a ‘power couple’, who were active in the capital markets in both Hong Kong and on the Mainland.

12.  D1 (“William Financial”), China Create and State Frontier were companies under the control of Zhang and/or Wang Tao and/or Wang Xu at the material times.

13.  William Financial was a company incorporated in the PRC and was effectively owned and controlled by Zhang via an intermediary company, for which I shall use the shorthand of “CC Financial”. William Financial was once registered as a private equity fund manager with the Mainland authority, but was investigated by the China Securities Regulatory Commission and prosecutorial procedures were said to have commenced in January 2021.  William Financial is apparently no longer in operation, and has been deregistered as a private equity fund manager by the relevant authorities.

14.  China Create is a BVI company which was wholly owned and controlled by either Wang Tao or Zhang from February 2011 to March 2018.  Though ownership of its shares has since been transferred away, China Create is still under the control of Wang Tao.

15.  State Frontier is a BVI company the sole shareholder and director of which is Wang Xu.  Wang Xu is the brother of Wang Tao.

16.  On 1 June 2021, Zhang was sentenced to life imprisonment for illegal defrauding public investors and leading triad-related criminal syndicate, etc.  No court documents were adduced to give particulars of Zhang’s conviction, but media reports say that he had, through the fraudulent financing platform “88 Wealth Network” and a group of companies including William Financial, China Create and others, made up fake investment projects, accepted deposits from the public unlawfully, etc.

17.  Also, Wang Tao has been on the wanted list of the PRC’s authorities and has been residing in the United States since 2019.

18.  Wang Tao was (from the Defendants’ side)  the person negotiating with Cheuk (for the Ps)  for the transactions.  Cheuk and Wang’s relationship went back to 2016 during JIGL’s initial public offering (“IPO”).  State Frontier subscribed to some of the JIGL IPO shares.  Wang Tao helped JIGL to line up loans from time to time using her networks.  In March 2016, Wang Tao helped to arrange a loan in the sum of RMB130 million to JIGL.

C.  Overview of Respective Cases

C.1   Ps’ case

19.  In a nutshell, Ps’ case is that they entered into five investment agreements (“WF Agreements”)  with William Financial, in which the latter promised to invest Ps’ money (i.e. the HK$1 billion)  with a guaranteed return of 12% per annum for 2 years.

20.  The WF Agreements were all titled “William Financial Merger Investment Fund Agreements” and numbered in sequence.   The 5 WF Agreements are numbered 42, 44, 45, 76 and 77.  Each WF Agreement supposedly gave rise to a separate investment fund (“WF Fund”).  All the agreements are either undated or partly dated.

21.  WF Agreements 42, 44 and 45 were entered into in early June 2017 (“June Agreements/Funds”)  and WF Agreements 76 and 77 were entered into in December 2017 (“December Agreements/Funds”).  P1 was identified as the investor in the June Funds and P2 as the investor in the December Funds.  William Financial was the other contracting party (identified as the fund manager)  for all the WF Funds.

22.  The agreements are short written documents, the body of which are less than 2 pages each.  The terms were simple and look rather ‘home-made’.  Ps would invest a certain amount of initial capital for the guaranteed return of 12% per annum.  The WF Funds were to last for 2 years upon inception.  The WF Funds were to invest in a wide range of securities.  For WF Funds 42, 76 and 77, P1/P2 had to transfer the initial capital into a bank account as instructed by William Financial.  For Agreements 44 and 45, P1 had to transfer the capital to the account of D12 (“Linkful”).

23.  Ps duly transferred HK$1 billion in different batches into six bank accounts, including that of Linkful and five others as instructed by Wang Tao or her associates.  Other than Linkful, other receivers of note were D8 (“Baijin”), D10 (“Baida”), D12 (“Envision”)  and D15 (“Sino Esteem”).  JIGL had dealt with Baijin’s account as early as 2016, when Wang Tao lined up a RMB130 million loan for it.

24.  The June Funds matured in June 2019, and the December Funds in December 2019.  However, when the 2-year terms expired, no money was returned nor was the promised 12% delivered – nor were any investments handed over.

25.  Ps obtained a PRC legal opinion which advised that the 5 WF Funds or the 5 WF Agreements were not registered with the relevant PRC authorities and no diligence was conducted on the investors (i.e. Ps)  as required under the PRC law.  The PRC legal opinion thus concluded that the WF Funds were likely to be “fictitious”.  Ps say the agreements were instruments of fraud and no such “funds” ever existed.  They say there was a ‘mega-fraud’ and they were not the only ones to fall victim.

26.  But Ps’ case on why the HK$1 billion should be returned does not turn on breach of contract.  They said the WF Agreements were part of a large fraud masterminded by Wang Tao and Zhang, together with other Defendants.

27.  Ps’ recovery actions started in around July 2020, when they sought Norwich Pharmacal orders against banks to trace the whereabouts of the HK$1 billion.  The fund tracing exercise was completed by December 2020.  It was discovered that, after the funds were transferred to the ‘1^st layer’ recipients as instructed by Wang Tao and/or her associates, the funds were further transferred to the ‘2^nd layer’ and then the ‘3^rd layer’ recipients.  More than 30% of the HK$1 billion was eventually transferred to accounts held by Wang Tao, China Create, Wang Xu and State Frontier.  In most cases, the sum received or part of it was immediately transferred away upon receipt, sometimes in the exact amount.  Most recipients were companies with a PRC individual as the sole shareholder and director. Some of the recipient accounts had had insubstantial balance prior to the receipts of the respective part of the HK$1 billion and are now closed or have very little balance.

28.  An example given was Baida.  After receiving part of the HK$1 billion, almost the entire amount was immediately transferred away.  Before receipt, Baida’s account had a balance of HK$9,203.18.  After the transfer away, the balance fell back to HK$9,008.39.

29.  Ps said these banking account activities bore the hallmarks of money laundering and were circumstantial evidence of a fraud.

30.  From the alleged fraud, Ps have raised myriad causes of actions against the Defendants or some of them: unlawful conspiracy, tort of deceit, fraud/fraudulent misrepresentation, breach of constructive trust, dishonest assistance of breach of trust, knowing receipt and unjust enrichment.

C.2   Wang Tao’s & China Create’s case

31.  Wang Tao’s and China Create’s case is that the 5 WF Agreements were, in essence, a sham.  They were not intended by the contracting parties to give rise to binding legal rights and obligations, contrary to what the black-and-white documents suggested.

32.  Around the same time when the WF Agreements were executed and the funds transferred, JIGL had two rounds of placement of shares, one in June 2017 and one in December 2017 (respectively “June Placing” and “December Placing”, collectively “Placings”).  The Placings were very successful and raised a total sum of about HK$2.6 billion for JIGL.

33.  Wang Tao says that the HK$1 billion was never intended for investment purposes.  Instead, Cheuk’s side wanted to use the money to subscribe for shares in the Placings.  They wanted to leverage on Wang Tao’s margin financing capabilities, and so they transferred the HK$1 billion to Wang Tao who would then use that sum to participate in the Placings in the name of various entities (“Placing Arrangements”).  The WF Agreements were only entered into to “document the passage of funds for accounting purpose”.  Wang Tao’s side would earn a 2% fee in return for the use of her margin capability.

34.  The natural question is why the real purpose of margin financing could not be documented as what it was, but had to be covered up or legitimized by sham agreements.  That has never been directly answered by Wang Tao and China Create in evidence.  But, albeit only in the Skeleton Submissions filed for them shortly before the hearing, it was suggested that Ps needed the sham to circumvent the regulatory requirements because they and the persons behind them were all connected persons of JIGL.

35.  Simply put, it is argued that it was Shum/Cheuk’s side who purchased the JIGL placement shares; the Defendants were mere conduits for Ps to participate in the Placings, and did not beneficially own the HK$1 billion or the JIGL shares.

36.  Of course, even under this theory, one would expect that the Defendants would still have to return the HK$1 billion or the shares to their beneficial owners at some point.  Wang Tao and China Create do say that the JIGL shares had to be returned eventually, but to JIGL – not to Ps or Shum or Cheuk.

37.  But on 17 January 2019, there was a sudden plunge of 80% of JIGL’s share price, from about HK$13 to less than HK$3.  Wang Tao and China Create say the sudden plunge led to margin calls and to shares held in the placees’ accounts being liquidated, resulting in substantial loss for the Defendants, and the Defendant placees are thus the real victims. This is said to explain why the Defendants did not have to return the HK$1 billion or the JIGL shares to the beneficial owners.

C.3   Wang Xu’s & State Frontier’s case

38.  The fund tracing exercise conducted by Ps shows that the total sum received by State Frontier from HK$1 billion was HK$281,900,000 (“HK$282 million”).

39.  Wang Xu’s and State Frontier’s case is that Wang Xu was instructed by Wang Tao to participate in the June and December Placings on her behalf.  Wang Tao wanted to participate in the Placings, but was short of funds and wanted to make use of State Frontier’s margin quota.  Due to the close and trusting relationship built up with Wang Tao over the years, Wang Xu did not second-guess what Wang Tao told him.

40.  Mr Hui submitted that all (or most)  causes of action raised against his clients are predicated on Wang Xu and State Frontier having knowledge of the fraud, which the Ps were unable to prove.

41.  Mr Hui also submitted that if the injunction was to be continued, the amount should be adjusted to only cover the HK$282 million which was received by Wang Xu and State Frontier.

D.  The PRC Judgment

42.  In the hearing, Mr Chong heavily relied on a PRC judgment dated 2 June 2020, issued by the People’s Court of Longgang District, Shenzhen City, Guangdong Province (“PRC Judgment”).  There, Huang Xuli (“Huang”), the personal assistant of Wang Tao, was sentenced to 5 years’ imprisonment for conducting unlawful cross-border currency exchange transactions in breach of the PRC’s capital control regulations.

43.  Mr Chong sought to rely on the PRC Judgment to prove the modus operandi of Wang Tao – how she had been laundering money and conducting illegal transactions through a network of shell companies and natural persons some of which are also Defendants in the present case.  The fraud to which Ps had fallen victim were, he said, operated under the same modus operandi.

44.  The intended reliance raises the question as to the admissibility of the PRC Judgment, by reference to what is sometimes called the rule or principle in Hollington: see Hollington v F Newthorn & Co [1943] KB 587.  The starting point is that it is trite that a judgment and factual finding of another court or tribunal in earlier proceedings, whether civil or criminal, is inadmissible in subsequent proceedings, unless the party against whom the finding is sought to be deployed is bound by it by reason of an estoppel per rem judicatam.  The rationale for the principle can be explained as follows:

(1)  a central part of a judge’s task in a civil case is to evaluate the evidence adduced by the parties, and to decide what conclusions may properly be drawn from that evidence;

(2)  in performing that task, consistently with the parties’ right to a fair trial before an impartial and independent tribunal, the judge must make his or her own evaluation of the evidence, and not defer to the opinion of anyone else;

(3)  therefore, it is not proper for a judge to be influenced by the opinion of a previous court;

(4)  if the evidence before the judge is the same as that before the earlier court, the judge is in as good a position to draw inferences and conclusions from the evidence;

(5)  if the evidence before the judge is different from that before the earlier court, the opinion of the earlier court does not assist the judge’s task;

(6)  indeed, and in any event – except as regards that of the relevant decision maker or an expert in a relevant discipline – the opinion of someone who is not the trial judge is, as a matter of law, irrelevant and should not be taken into account.

45.  Mr Chong said his reliance on the PRC Judgment does not fall foul of the Hollington principle, because he did not seek to rely on the findings of the PRC Court.  He sought only to rely on the statement or reported statements in the PRC Judgment of the factual evidence before that court.  I agree that such materials are not excluded by the operation of the Hollington principle.  Mr Chong also submitted that the evidence given by the witnesses in Huang’s case should be admissible in the present case as hearsay evidence. Despite the objection raised by Ms Cheung, I accept that the evidence given by the witnesses in the PRC Judgment is admissible as hearsay in the present case.  Of course, what weight, if any, is to be given to hearsay evidence in civil proceedings is a different matter, which can be assessed including by reference to those questions posed in section 49 of the Evidence Ordinance.

46.  Ms Cheung reminded me that Wang Tao was not the defendant in the case leading to the PRC Judgment, and she did not have the opportunity to rebut what Huang or other witnesses said.  But it seems to me that that point also should go to the weight of the evidence.

47.  The PRC Judgment identifies that Huang pleaded guilty and gave substantial evidence to explain Wang Tao’s operation.  Huang was employed by CC Financial in February 2016.  CC Financial conducted its financial activities through the “88 Wealth Platform” and offline channels.  China Create had more than RMB 1 billion when she first joined.

48.  Huang’s role was to act as Wang Tao’s personal assistant.  Wang Tao operated illegal foreign currency exchange (between HK Dollar and RMB)  for profit through a network of overseas and domestic companies. These illegal currency exchange transactions were often disguised in a number of loan contracts.

49.  Huang helped Wang Tao to open bank accounts and securities accounts, handle documents, draft loan contracts, make bank transfers, keep accounts, etc.  She handled many transactions in the magnitude of millions of dollars.  Since February 2018, she also helped to purchase BVI and Cayman Island companies for the purpose of purchasing Hong Kong shares and debentures.

50.  Some Defendants’ bank accounts through which the HK$1 billion in the present case was channelled also featured in Huang’s evidence as entities controlled by/connected to Wang Tao.  She said:

(1)  State Frontier was purchased in Wang Xu’s name but was actually controlled by Wang Tao.

(2)  Carnival Group International Holdings Limited (D23)  had entered into illegal currency exchange transaction with Wang Tao.  Baijin was involved in the illegal transactions with D23.

(3)  Liu Jiangyuan (D9), the owner of Baijin, was a friend of Wang Tao.

(4)  Xiao Shu (D11)  also gave evidence that he had made use of the illegal foreign exchange services and Wang Tao charged a “channel fee” (“通道費”).

51.  Other witnesses in Huang’s case also gave evidence that Wang Tao had offered investment services similar to the WF Funds in the present case:

(1)  Xiao Shu (D11)  said Wang Tao requested him to introduce clients with spare money which could be placed with her for wealth management for a fixed term and with a promised annual rate of return.  Xiao introduced a Yang Zhuoya.

(2)  Ms Yang gave evidence that she placed RMB 400 million with Wang Tao for investment by entering into a loan contract with a term of 2 years. But after Wang Tao’s husband, Zhang, was arrested, Yang’s investment money was not paid back.

52.  When CC Financial was investigated and seized in December 2018, Wang Tao told Huang to hide in Hong Kong.  She hid in Hong Kong for more than a month as instructed.  When she returned to Shenzhen in February 2019, she resigned.   Her role was later assumed by Wang Hao, who is Wang Tao’s cousin.  It is of note that in March 2020, Wang Tao transferred all shares in China Create to Wang Hao (though Wang Tao now accepts that she remains the beneficial owner, and so it remains under her control).

53.  It can be noted that the illegal transactions referenced in the PRC Judgment were cross-border currency exchanges, which is perhaps different from Ps’ allegation of making up fictitious investment “funds”.  Yang did say her investment money was not returned, but that is not necessarily the same as saying the investment was a fraud.  Ps’ case about the WF Funds seems closer to the matters on which Zhang was said to have been convicted.

54.  Ps also relied on the experience of a listed company known as Life Healthcare which it said has also fallen victim to Wang Tao’s fraud.  Life Healthcare entered into one of the WF Agreements (numbered 35)  in May 2017 in return for a fixed annual return of 4.75%.  However, in its 2019 annual report, the Board of Life Healthcare decided to record that investment sum as an impairment.

E.  The WeChat messages

E.1   WeChat Messages as Main Plank of Defence

55.  As Ms Cheung said, no stone would be left unturned in opposition to the Continuation Summons.  But, clearly, Ms Cheung understood her best case to be on material non-disclosure.  Nevertheless, that basis of challenge is inextricably tied up in this case with the argument that Ps have not shown a good arguable case.  It is, therefore, convenient to traverse the materials relating to the merits of the claim and defence and relating to allegations of material non-disclosure together.

56.  Wang Tao’s (and China Create’s)  case is mainly built upon a series of instantaneous WeChat messages among Wang Tao, Cheuk, Huang (Wang Tao’s assistant), Cathy Wang (“Cathy”)  (Cheuk’s assistant), and Andy Siu (the General Manager of the Financing and Capital Centre in the JIGL)  around the same time when the WF Agreements were executed.  Wang Tao’s case is that these messages prove that the WF Agreements were only employed – in effect – to cover up the real arrangement, i.e. the Placing Arrangements.

57.  Ps have admitted that at around the same time when the 5 WF Agreements were executed, Cheuk had also asked Wang Tao to line up investors to participate in the June Placing and the December Placing. But Ps have insisted that the Placings and the WF Agreements were separate transactions.  On Ps case, the alleged Placing Arrangements – by which Ps are said to have passed the HK$1 billion through Wang Tao and her networks to leverage on her margin capability – simply did not exist.  Ps/Cheuk believed that Wang Tao would (separately)  line up independent placees.  They said if Wang Tao did channel the money to participate in the Placings, that is a further evidence of fraud against them.

58.  Ps position is that the WeChat messages could not prove the Placing Arrangements:

(1)  Cheuk could not confirm the veracity of those messages.  Cheuk had switched her mobile phones a few times, and she no longer had a complete record of her own WeChat messages.  Both Andy Siu and Cathy have already left their original employment.  She cast doubt on Wang Tao’s ability to obtain some WeChat records of Huang to which Wang Tao was not privy, since Huang’s phones were confiscated by the PRC authorities when she was arrested.

(2)  In any event, those WeChat messages could not prove a connection between the WF Agreements and the Placings.  As expected, Ps offered a different interpretation to many of the messages relied upon by Wang Tao and China Create.

E.2   WeChat messages around June Placing / June Funds

59.  Ms Cheung took me through the WeChat messages in some detail.  Though I do not propose to rehearse the detail of the messages one by one, I think that when reading the messages as a whole, the broad picture can be described as follows:

(1)  The June Placing started on 6 June and was completed on 19 June 2017.  Leading up to the commencement and shortly after the completion of the placing, there was a good deal of discussion between Cheuk and Wang Tao.  There was a thread of conversation between Cheuk and Wang which shows that Cheuk was making use of capital from Wang Tao’s side to participate in the placing and was trying to agree with her some sort of fee/commission structure for such assistance.

(2)  The June WF Funds were executed during the lead-up to the commencement of the June Placing.  It appears that the deal was struck between Cheuk and Wang Tao.  Once the deal was struck, the paperwork and the transfer of funds would be passed to Huang and Andy Siu for handling.

(3)  The discussion between Cheuk and Wang Tao concerning the financing of the June Placing resembles true business negotiation.  Cheuk went into some detail to confirm the actual fees her side had to pay Wang Tao.

(4)  On the other hand, the conversation regarding the WF Funds strike less as a true negotiation.  There was barely any discussion on the keys terms of the WF Agreements, such as investment size, duration of fund, name of investors, etc.  They were left to be filled in by Cheuk’s side.  Maybe the negotiation happened somewhere else, but no such evidence has yet been adduced by Ps’ side.

60.  The involvement of Andy Siu was relied upon by Ms Cheung to say that the June Placing was connected with the June WF Agreements.  Andy Siu was introduced as the General Manager of the Financing and Capital Centre of the JIGL and as a colleague of Cheuk to Wang Tao and Huang.  Ms Cheung said that if the WF Funds and the June Placing were unconnected, it could not be explained why the investor side of the WF Funds (i.e. Ps’ or Cheuk’s side)  would have a staff member from JIGL to handle the paper work of the WF Funds.  No good reasons were provided by Ps’ side.  Cheuk’s affidavit evidence is that Andy Siu had already left JIGL, and she was not able to confirm the veracity of the WeChat records adduced.  I agree this is not strong evidence for Ps.

61.  The conversation regarding the June Placing and the conversation regarding the June WF Funds mostly occurred on different threads or in different chat groups, despite their proximity in time.  However, there was a particular conversation between Cheuk and Wang Tao where the June Placing and the “investment funds” were mentioned in the same thread of conversation.  (In passing, I note the contest between the parties as to whether the accurate translation in some of the messages should be to “funds” or “investment funds”.  But that contest is unlikely to be resolvable without a more thorough investigation of the overall context, possible only at a trial.)

62.  That conversation which seems to deal with both the June Placing and investment of funds occurred in the morning of 22 May 2017. Each side said the conversation is significant, and the parties fought on the correct English translation.  Wrapped up in their discussions regarding the June Placing, Cheuk said to Wang Tao in a voice message (with the different offered translations below):

“哎欸王總，早呀。唉我想再確認一下就是你那邊6千是沒問題的是吧。因為我想今週的時候呢，就是欸有一些手續呀，就是那些的話，就是也欸盡快把它更正掉，那所以呢你就是你那邊基金的一些情況，譬如說是哪個2個基金，或者是到時候就是我欸的那些走哪個去的那些路徑。那然後我們都確定好，那所以呢就是這一邊就是看欸我們今週裡面能不能夠都把這。。。這些欸情況都定掉，那欸如果欸你那邊就是有一些什麼的update 的話, 那你隨便告訴我，那反正我們在欸中環呀在金鐘呀，我們可以再碰碰。”

“Wang Zong, morning! Um I would just like to confirm again that there is no issue with 60 million from your side. Since I want to, in this week, that there will be um certain procedures, i.e. if there is, should also be corrected as soon as possible. So for certain situations concerning funds on your side, such as which to funds they will be, or when the time comes, the route for where mine would go. Then after we have confirmed, so it depends on um whether we can, within this week .. confirm these situations. So um if um there is any update on your end, please tell me any time. Since we are in um Central and Admiralty anyway, we can meet again.”

“I would like to confirm that your 6000 does not have any problem. Because I think this week, there are some procedures, that is, amended as soon as possible, so you can give some information about your investment fund, such as which to investment funds, or which one I will invest in at that time. Then we will all be sure. Okay, so let us see if we can within this week … these circumstances are all set. Then if there is some update on your side, then you can tell me any time. Anyway, we are in Central and Admiralty, we can meet up again.”

63.  Reading what Cheuk said in the context, it could sound like Cheuk and Wang Tao were pulling together their capital to participate in the June Placing.  Cheuk was confirming the route by which her side’s capital should go (assuming “mine” refers to her capital).  The route was supposed to be two of Wang Tao’s investment funds, and she wanted to ascertain which two.

64.  Ps said that that conversation only refers to the WF Funds but was unrelated to the June Placing.  In that thread, all preceding and subsequent discussion to that conversation concerns the June Placing.  I note that that thread of conversation between Cheuk and Wang Tao continued as follows:

(1)  On 24 May 2017, Cheuk said the placing was approaching the final stage and she wanted to confirm the “quota” which Wang Tao’s side could provide.  The Chinese phrase used by Cheuk is “額度”, which in the finance context commonly refers to margin quota or credit limit.

(2)  In the morning of 25 May 2017, Cheuk went to some length to confirm with Wang Tao the costs she had to bear for occupying Wang’s capital quota (資金額度).  Similarly, “額度”, is likely to be referring to margin quota.  Various charges/fees were mentioned, including a “passage fee” (“通道費”)  of 2%, which was supposed to be charged by Wang Tao.

(3)  On 26 May 2017, Cheuk sought to confirm with Wang Tao the names of the three companies and their securities accounts which would be used to receive the JIGL shares.

65.  There is some support for the idea that the route by which the UD$60 million mentioned by Cheuk was eventually passed was through WF Fund 42 and WF Fund 44.

(1)  US$60 million was about HK$467.89 million. The sums invested in WF Fund 42 (HK$312 million)  and WF Fund 44 (HK$156 million)  totalled HK$468 million.  The two agreements were executed on 1 and 6 June 2017.

(2)  In the afternoon of 22 and on 23 May 2017, there was a chat conversion between Wang Tao, Cheuk, Huang and Andy Siu regarding WF Fund 42.  The conversation suggested that Cheuk and Wang Tao decided to enter the transaction and asked Huang and Andy Siu to finalize the details/execute the documents.  Cheuk was referred to as “Cheuk Zong of the JIGL” (佳源的卓總)  and Andy Siu was added to the group by Cheuk as her colleague to handle the execution of documents.

(3)  From the chat conversation, it seems that the people in the group understood Cheuk, Andy Siu and JIGL were on the same side and it was people from that side who were purchasing the WF Funds.

(4)  On 1 June 2017, Huang sent the draft WF Agreements 42 and 44 to Andy Siu.  The size of fund to be invested in WF Fund 44 was left blank, to be filled in by Andy Siu.

(5)  From 1 June 2017 to 6 June 2017 (the date when the June Placing started), Andy Siu transferred part of the Subject Sum to three ‘1^st layer’ recipients of WF Fund 42 (Baijin, Baida, and D12), and to Linkful, the designated recipient of WF Fund 44.

66.  Ms Cheung said when Cheuk asked for the names of the three companies and their accounts, she was referring to the recipients designated by Wang Tao to receive the money under WF Fund 42. On the face of it, it does tally with the terms of the WF Funds.  No receiving bank account was named in WF Fund 42 and the terms provided that the receiving bank accounts were to be designated by Wang Tao’s side.  But the terms of WF Fund 44 already designated Linkful to be the recipient.

67.  Ms Cheung also relied on a calculation table which was sent by Andy Siu to Huang on 13 July 2017.  The calculation table listed the details of four placees (China Create, State Frontier, D22 (“Swift Fortune”), and Sino Wealthy Limited – a company Wang Tao says she lined up through her friend D14)  in the June Placement, including the number of shares purchased, their fund invested (“投入”)  and the amount of margin financing obtained by them.  Andy Siu urged Huang to sign the “agreements” as soon as possible and that the excess amount would be refunded and the outstanding sum would be paid (“合同請盡快簽回，餘下金額多退少補“).

68.  Ms Cheung said this table shows the reconciliation process conducted between Wang Tao’s side and Cheuk’s side, to ensure that the WF Funds and agreements executed matched up with the June Placing Arrangement.  On the other hand, Cheuk explained that JIGL compiled the table because it had to keep an eye on placees which used margin to purchase shares because that would have an impact on JIGL’s share price.  Ms Cheung questioned why JIGL would have to ask Wang Tao’s side to check that information if the purpose of the table was as Ps asserted.  On Ps’ case, they did ask Wang Tao to line up independent places, and those placees were lined up by Wang Tao.  Thus, there could be legitimate reasons why JIGL would check with Wang Tao about the placees’ information.

69.  Cheuk also explained that the detailed talk about fees/commission to be paid to Wang Tao was concerning an intended loan to be extended from Wang Tao, but which did not materialize in the end.  She also said that she used to understand that Wang Tao ran a legitimate cross border currency exchange service under the PRC’s policy to gradually relax its foreign exchange control.  That was a cash pooling service which would entail a “passage fee” of 2%.  If Wang Tao lined up placees from the mainland with insufficient cash in HK dollars and who were unwilling to pay the 2% to convert funds into HK dollars, Cheuk/JIGL would have to bear that costs.  Cheuk said she now knew that such service offered by Wang Tao was illegal, as stated in the PRC Judgment.  As the loan did not eventuate, Ps did not need to pay the 2%, which Cheuk said is consistent with Wang Tao never asking for the 2% because the alleged Placing Arrangements did not exist.

E.3   WeChat messages around December Placing / December Funds

70.  The messages in December 2017 are perhaps less strong for the defence than those in June 2017.  The messages do not directly link the December Placing to WF Funds 76 and 77, although the two matters occurred around the same time.

71.  On 13 December 2017, Cheuk urged Huang to send a signed version of WF Agreement 76, because there would be a need for some “justification” to be presented to the bank before they could transfer the money.  Huang asked if the receiving bank could be a personal account, but Cheuk said an investment fund account would be better because the money was for investment purpose.

72.  Ms Cheung submitted that this shows that the WF Agreements were only produced to provide justification for banks, and were not intended to create genuine legal obligations.  Mr Chong said Cheuk’s request for an investment funds account shows that she meant the WF Funds to be genuine, and there was nothing improper to want to have documents to show the banks.

73.  On 15 December 2017, Huang asked Wang Tao and Cheuk whether, if the bank asked for reasons of the transfer, she could say that it was a loan because investment fund accounts were more sensitive. Again, Ms Cheung said that shows that parties would document the passage of funds in different ways.

E.4   WeChat messages chasing annual statement of WF Funds

74.  In February 2019, Cheuk chased after Wang Tao for the annual statements of the WF Funds.  Mr Chong said that showed that Cheuk did intend the WF Funds to be real instead of a sham.

75.  However, if one reads the WeChat messages on 18 February 2019, Cheuk’s purpose might be read as to obtain a proper annual statement to satisfy JIGL’s auditor for JIGL’s 2018 annual report.  She referred to how the WF Funds’ annual statements should look like “if they had not lost”.

F.  Other evidence for the Placing Arrangement?

76.  If the case of the alleged Placing Arrangements is to be made good, it might be expected the fund flow would show (1) that all of the HK$1 billion was used to purchase JIGL shares in the June Placing and the December Placing, and (2) that margin finance was raised on all of the sum.

77.  However, that was apparently not the case.  The fund tracing exercise conducted by Ps showed that a substantial part of the HK$1 billion was transferred to various recipients for purposes not connected to the June/December Placings.  No explanation for this has been given by Wang Tao.

78.  Even on Wang Tao’s case, not all of the placees lined up by her used margin financing.  Swift Fortune and Sino Wealthy did not use any margin.  Again, no explanation was offered.

79.  State Frontier produced some of the monthly statements of its securities accounts which revealed that the account used in the June Placing was apparently a cash account and no margin was obtained.  Mr Chong questioned why Ps would use companies with no margin accounts if the purpose of channelling the HK$1 billion through Wang Tao was for margin financing.  Mr Hui, responding to this point raised for the first time in the hearing, said that maybe margin was obtained in other accounts since State Frontier had the practice of switching the shares from one security firm to another.  But this assertion was, perhaps understandably, unsupported by any documents.  Anyway, the use of, and extent of use of, margin financing is something clearly amenable to further investigation.

80.  Besides the use of margin, monthly statements for the Defendants’ securities accounts could have served another crucial purpose, namely for them to explain the loss they allegedly suffered in the stock plunge on 17 January 2019.  Without that, they could not explain why they should not have to return any part of their received portion of the HK$1 billion or the shares purchased, despite the fact that they were not the beneficial owners.  Monthly statements for the month of January 2019 – which are presumably in their custody – would be the convenient and perhaps persuasive evidence to show the margin call and the loss.  Yet, the January statements were not produced.

81.  Ps also questioned the logicality of Wang Tao’s assertion that the original arrangement was eventually to return the JIGL shares “to JIGL”.  Taken literally, it would mean giving the shares to JIGL, which would not directly benefit Shum/Cheuk/Ps.  But it may be that Wang Tao regarded Cheuk and Ps (and subsequently Shum)  as on the same side as JIGL, so that returning the shares to JIGL could be loosely understood as returning to the JIGL side.

82.  Included in the evidence is also correspondence from Wang Tao to Shum, where she was trying to engage him or his nominee in settlement discussions or negotiations.  In one email dated 10 December 2020, Wang Tao suggests that the “plunge in stock and bond prices last year has brought huge losses to both of our companies”.  She refers to trying to discuss the matter with Cheuk, and the hope that Shum would arrange for Cheuk to communicate (as she was the most familiar with the situation), and the aim to come up with the best solution to try to minimise both parties’ losses, and protect interests to the greatest extent.  Shum responded by saying he was not familiar with the situation mentioned.  Later, in an email dated 24 December 2020, Wang Tao suggested to Shum that they were both victims in the matter, that the loan agreements did not reflect their real intentions, and it would lead to all sorts of risks to Shum’s company if too much were to be disclosed.  I have not seen any response to that email.

G.  Commerciality of the Placing Arrangement

83.  Ps also rely heavily on what was said to be the lack of commerciality in the alleged Placing Arrangements.  Even on Wang Tao’s case, based on the HK$1 billion and value of shares subscribed by placees lined up by her, the loan-to-margin ratio is quite low, I think only about 19%.  But some evidence suggests that traditional banking institutions would offer a margin ratio of about 30% to 60%, so that Ps/Shum did not gain more margin through Wang Tao.

84.  Shum also said the Placing Arrangement was the worst deal he could ever have imagined: he would provide HK$1 billion to purchase the JIGL shares, yet the shares would be “returned to JIGL”.  He or Ps would get nothing in return.  Further, whilst the shares were supposed to be “returned to JIGL”, there was no mechanism by which Shum or Ps could control the placees, and the shares were indeed eventually not returned.

85.  Shum also said if he wanted to inject capital into JIGL, such sum could be directly injected, by way of direct subscription for more of JIGL’s shares or for its bonds/notes, etc.  Through the Placing Arrangement, Shum/Mingyuan’s control over JIGL actually decreased from 72.29% to 55.06%.

86.  In the overall circumstances, there is a decent argument that leveraging on Wang Tao’s margin financing capability could not be the valid commercial reason why Shum’s side would want to pass the funds through the various recipients or placees for the June Placing and December Placing.

87.  However, the commerciality for Shum/Ps of the Placing Arrangements would be more obvious if the real purpose was to hide the identity of the true placees or the true source of funds for the June Placing and December Placing.  Shum, being a connected person, would be subject to various regulatory requirements if he was to participate in the Placings.  It might also be thought commercially sound that the majority shareholder of a listed company would want to put up a pretence that the company’s shares are in high demand by independent third party investors in the market.  That might show market confidence in the listed company’s stock, and in fact over the 6-month period between the two Placings, JIGL’s share price went up from HK$3 to HK$6, and then further to about HK$14 before the plunge in January 2019.

88.  It might also be thought that a decrease of shareholding from 72.29% to 55.06% makes little material practical difference in terms of control.  Thus, hiding the identity of the true placees could provide good commercial justification as to why Shum/Cheuk/Ps would want to participate in the Placing Arrangement.

89.  Of course, this is a serious allegation against JIGL (and Shum, Cheuk and the Placees)  which had declared to the Stock Exchange and public investors, in various written forms, that the placees were independent third parties unconnected to the JIGL and so was their source of fund.  Indeed, Ps seek to capitalize on those declarations as contemporaneous documents contradicting the existence of the Placing Arrangements.

H.  Continuation of the Order?

H.1   Sufficient merits against Wang Tao and China Create

90.  I shall deal first with whether Ps have shown a serious issue to be tried and/or a good arguable case against Wang Tao and China Create, since this point can be disposed of quickly.  In my view, Ps clearly have demonstrated merits in the claim to meet both standards.

91.  Ps’ case is a simple one.  There is no dispute that they had transferred the HK$1 billion to bank accounts as instructed by Wang Tao and her associates, and that sum has never been returned.  Nor has any other asset of value been returned.  Although Ps did not plead a case of breach of contract, there was a set of written agreements (the WF Agreements)  showing that they did intend the HK$1 billion to be used for investment purposes.  Their case of a ‘mega fraud’ and Wang Tao’s modus operandi of conducting unlawful business operations through a network of companies and natural persons (including some Defendants in the present case)  are to some extent supported by the evidence given by witnesses in the PRC Judgment.

92.  The WeChat messages do lend some support to show that the WF Agreements may be connected with the June Placing and December Placing.  But it seems less likely that the real arrangement/purpose which was concealed by the allegedly sham agreements was to make use of Wang Tao’s margin financing capability, as initially suggested by her and China Create.  The fact that on Wang Tao’s case the loan-to-margin ratio obtained by placees lined up by her was only 19% significantly weakens that argument.

93.  Hiding the true identity of the placees would make commercial sense from the perspective of Shum/Cheuk’s side.  But that is not how the case had been substantially developed in the affidavit evidence, and that would still not explain the mismatch in the fund flow and monthly statements.

94.  The WeChat messages do suggest that there may be much more to these matters than meets the eyes.  The June Placing and the December Placing may well be connected with the WF Agreements.  But it is trite that even a good arguable defence does not necessarily negate a good arguable case.  The account proffered by Wang Tao and China Create in the instant case is far from sufficient to make Ps’ case fail the merits test for the grant of Mareva or proprietary interlocutory injunctive relief.

H.2   Sufficient merits against Wang Xu and State Frontier

95.  Wang Xu’s and State Frontier’s strongest case was put forward as being on the suggested lack of knowledge of the alleged fraud on Wang Xu’s part.  But his own evidence is that he would follow Wang Tao’s orders unquestionably.  That is consistent with Huang’s evidence recorded in the PRC Judgement that State Frontier was only a corporate shell incorporated under Wang Xu’s name for Wang Tao’s use.  As Mr Chong submitted, if State Frontier was under Wang Tao’s control, so must Wang Xu have been.  I do not accept Mr Hui’s submission that the brother-sister relationship was “at best neutral”.

96.  Wang Xu said he ‘lent’ State Frontier’s securities’ account to his sister because she wanted to make use of State Frontier’s margin quota.  But that may not hold water if State Frontier did not use any margin in the June Placing and the securities account it used was indeed a cash account instead of a margin account.  In any event, I also agree with Mr Chong that the overall circumstances should at least have put Wang Xu and State Frontier on enquiry – if they were not mere cyphers of Wang Tao.

97.  Further, the Court is entitled to draw an adverse inference from the omission to produce to the January 2019 monthly statements which were supposed to show the margin call on the relevant accounts and to explain why the JIGL shares or the part of the HK$1 billion – which were admittedly not beneficially owned by them – did not have to be returned.

H.3   Material Non-Disclosure

98.  Both Ms Cheung and Mr Hui submitted that Ps had failed to discharge their duty of full and frank disclosure.

99.  Ms Cheung submitted that the material non-disclosure on Ps’ part was not on a small scale.  It was not a case of putting wrong emphasis on a point, or tucking a relevant matter away in the exhibits.  Instead, Ms Cheung submitted that there had been deliberate concealment of relevant matters on a massive scale.  The relevant matters not disclosed were the existence of the Placing Arrangements, and those WeChat records which, she said, showed the connection between the WF Funds and the Placings.  Ms Cheung submitted that the contemporaneous messaging records demonstrated what happened prior to, during and after making the 5 WF Agreements; failing to make proper disclosure of those matters put ‘blinkers’ on the Court.

100.  Mr Chong submitted that Ps could not be blamed for failing to anticipate a defence as far-fetched as that presented by Wang Tao and China Create.  On Ps’ case, the WF Agreements and the Placings were two separate sets of transactions, and Ps could not have thought or anticipated that the WeChat messages would be “reverse engineered” to say that the WF Agreements were a sham.

101.  Had Ps’ case been a straightforward one based on a breach of the 5 WF Agreements, I would have less hesitation in holding that it would have been too demanding to ask Ps to anticipate a defence that the agreements were a sham.  But, as Ms Cheung pointed out, Ps have chosen to plead a case of ‘mega fraud’, rather than pursue a claim in contract directly on the agreements (presumably to avoid the exclusive jurisdiction clause in the WF Agreements, and perhaps to make the PRC Judgment and Zhang’s conviction more relevant).  Though Ps pleaded a ‘mega fraud’, yet they omitted to mention the wider conversation which was happening at the same time.  Ms Cheung submitted that disclosure could have been given, and the messages could have been explained by Ps, but they were not.

102.  Reasonably strong evidence of material non-disclosure comes from Ps’ own fund tracing exercise and bank disclosure applications.  The fund tracing exercise, which was completed in December 2020, had shown that significant portions of the HK$1 billion had been used to purchase the JIGL shares in the Placings. Parts of the HK$1 billion transferred to Wang Xu and State Frontier were eventually used in the June Placing and the December Placing.  Part of the HK$1 billion transferred to Sino Wealthy was used in the December Placing.  Miss Cheung said all these should have alerted Cheuk, who had personally discussed with Wang Tao on both the June/December Placings and the WF Agreements, to the need to make disclosure.

103.  It was also Cheuk who brought in Andy Siu, the General Manager of JIGL, to handle the execution of the WF Agreements with Huang in the WeChat group for the June Placing.

104.  Ms Cheung also submitted that Ps’ choice of deponent for the affidavit evidence of the ex parte application was a deliberate attempt to conceal the web of relationships among Ps, Shum, Cheuk and JIGL, and that Shum’s and Cheuk’s roles were downplayed in the papers for the ex parte application.  The affidavit evidence of the injunction application was deposed by Zheng Lei, who had no direct knowledge of the 5 WF Agreements, and was not even the shareholder of P1 at the relevant time.

105.  Cheuk, the CEO and executive director of JIGL, was the one directly involved in the 5 WF Agreements and yet her role/importance was watered down, if not concealed.  She would appear to have been the one with the most personal and direct knowledge to give evidence about the so-called ‘mega fraud’, but Cheuk was introduced in Zheng Lei’s affidavit by stating that Ps:

got in touch with one Miss Cheuk Hiu Nam (“Miss Cheuk”), who was well connected in the financial sector both in Hong Kong and the People’s Republic of China (the “PRC”).

106.  That is hardly a full description, bearing in mind Cheuk’s riles in JIGL, and it was at least potentially misleading given that Cheuk and Ps were indeed connected via Shum, and where the relationships – including that with Wang Tao – went long back before 2017.  (I also note that Cheuk was also involved as negotiator with Wang Tao on the transaction relating to the Sky Motion Action: see below.)  Even Shum, who was the beneficial owner and controller of both P1 and P2 at the material time, would appear to have been a much more suitable deponent than Zheng Lei.

107.  Ms Cheung submitted that because both Cheuk and Shum are obviously connected to the JIGL, their roles in the WF Agreements were downplayed in order to conceal the WF Agreements’ connection with the June Placing and December Placing.

108.  I can see the real force of all these submissions.  The fact that Cheuk held office in JIGL and knew that a substantial part of the HK$1 billion was ultimately channelled to purchase JIGL shares in the June Placing and the December Placing, but the evidence did not draw the Court’s attention to the Placings which she was negotiating with Wang Tao at the same time, is particularly alarming.  The lengthy and extensive contact between Cheuk and Wang Tao, and at least some of the context of it, was another matter which probably should have been properly drawn to the attention of the Court.  Further, an explanation could have been given as to the involvement of Andy Siu, had it been revealed that he was contemporaneously involved, including in the transfer of funds.

109.  However, the relevance of the Placings to the WF Agreements is inextricably linked with the defence that the WF Agreements were but a sham to cover up the Placing Arrangements.  Wang Tao’s and China Create’s case is, in turn, substantially dependent on the WeChat messages, the interpretation (not just the translation)  of which is hotly debated among the parties and where I think that debate could only be resolved at trial.

110.  Since the materiality of the matters relied upon in the context of the allegations of material non-disclosure is closely interwoven with the argument as to the sham nature of the WF Agreements, it appears that the material non-disclosure ground could not be resolved without the Court having to engage in a mini-trial at the interlocutory stage.  However, it is well settled that the Court should not embark on such an exercise: see, for example, Zhao Zhi Qiang v Zhao Zhiguan and Asian Trinity Limited [2020] HKCFI 2990, at §§55-56.

111.  Not without some reluctance in light of my views and serious doubt as to the adequacy of disclosure, in the exercise of my discretion and in view of the overall circumstances, I have come to the view that the Order should not be discharged on the ground of material non-disclosure.  Nor without determination of the interwoven matters would it really have been possible to decide if any non-disclosure was such as would lead not just to the discharge of the Order obtained ex parte, but also to the refusal of any re-grant (in circumstances where I have already held that there are at least sufficient merits on the claim to justify the making of the Order).

H.4   Risk of Dissipation

112.  There is no dispute that the HK$1 billion was transferred to the Defendants.  Wang Tao/China Create and Wang Xu/State Frontier have suggested that they no longer have the money or its traceable proceeds, i.e. the JIGL shares.  Yet no evidence has been produced so far to substantiate precisely how and why they no longer have them, except by the bare assertion of an alleged margin call.

113.  There is also substantial evidence pointing towards the low commercial morality on the part of the relevant Defendants, which weigh in favour of inferring a risk of assets dissipation, in the Court’s holistic assessment.

114.  The evidence given by the witnesses in the PRC judgment shows that Wang Tao was committing foreign exchange crimes through her network of corporate vehicles and natural persons, including Wang Xu, and China Create and State Frontier.  Whilst the exact crime relevant to the PRC Judgment differed from the fraud asserted in the present case, there is clearly circumstantial evidence showing a propensity to commit commercial crimes by the same group of persons and entities.  Ms Yang’s testimony in the PRC Judgment and Life Healthcare’s experience are also evidence that Wang Tao and her associates have been duping victims into investment products which did not deliver return as promised, and indeed no return at all.  Of course, I bear in mind that that is hearsay evidence, but it seems to me that it is evidence on which I can properly place some weight for present purposes.

115.  In any event, Wang Tao’s defence in the present case is based upon her own assertion that the WF Agreements were a sham.  It is her own case that the WF Agreements were executed to provide a false picture or pretence to third parties, being (in the original narration)  banks and/or (as developed in argument)  the regulatory authorities of listed companies and the investing public.  In other words, the defence is based upon the assertion that the Defendants were perfectly content to – and intended to – dupe third parties into believing the WF Agreements were genuine, when they were knowingly not genuine.  Of itself, this demonstrates a low standard of commercial morality.

116.  I also agree with Mr Chong that there is evidence of actual dissipation.  Two days after the injunction Order was made, Wang Tao transferred all her shares in China Create to Wang Hao, her cousin and assistant.  Whilst Wang Tao’s stance now is that China Create remains still under her beneficial ownership and control, no proper explanation has been given to explain the transfer and its timing.

117.  Wang Tao also has been residing out of the Hong Kong jurisdiction since 2019.  She was also on the wanted person list of the PRC police in September 2019.  Although she offered Covid-19 related reasons to justify her not returning to the Mainland or Hong Kong, those reasons were vague and without particulars.  There is force in Mr Chong’s submissions that Wang Tao had apparently fled to the United States to avoid criminal investigations against her in the PRC.

118.  I have taken into account that Wang Tao was at times actively seeking engagement with Cheuk and Shum in mid to late 2020, which Ms Cheung said countered the suggestion that there should be an inference of risk of dissipation.  But I do not think contact about negotiating a potential acceptable solution is of much weight against the overall circumstances, where no such solution was negotiated and litigation became highly likely, and has been pursued.

119.  In light of the above, I have no hesitation in finding that risk of assets dissipation is established against Wang Tao and China Create.

120.  Further, in view of the facts that Ps have established an arguable case of fraud, Wang Xu and State Frontier have failed to produce the January 2019 monthly statements to explain why they no long have the part of the HK$1 billion transferred to them or its traceable proceeds, and Huang’s evidence as recorded in the PRC Judgment, I am satisfied that Ps have established a risk of dissipation against Wang Xu and State Frontier to the required threshold.

H.5   Whether Ps entitled to apply ex parte without notice

121.  Both Ms Cheung and Mr Hui submitted that there was no need for secrecy nor any urgency to justify making the application for the injunction orders on an ex parte without no notice basis.  Ms Cheung further submitted that if there was only urgency but no need for secrecy, the application should have been made on an ex parte on notice basis.

122.  There is no dispute that parties had been in communication throughout 2019 by way of WeChat messages or having face to face meet-up to reach some sort of settlement regarding the disputes.  But Ps and Ds had different accounts of what the disputes were.  Ps’ understanding of the picture would also have evolved as more evidence was unearthed.

123.  I am also satisfied that there is no inordinate delay on Ps’ part.  The June WF Funds were to mature in June 2019; and the December Funds, in December 2019.  Ps’ first legal actions to seek recovery of the funds was the gagging order application and the Norwich Pharmacal application which were granted in July 2020 and the fund tracing was completed in December 2020.  Then the ex parte injunction application was taken out about a month later.

124.  I also think the present facts pointing to a low commercial morality on the part of Wang Tao, China Create, Wang Xu and State Frontier also explain why Ps was entitled to apply ex parte without notice.  It should also not be forgotten that the application made included seeking injunctive relief against Zhang, whose position also made the ex parte application appropriate.

125.  I would not set aside the ex parte Order, nor refuse to continue the Order on the basis that the application ought not to have been made ex parte.

H.6   Amount of Injuncted Sum as against Wang Xu and State Frontier

126.  Mr Hui submitted that the causes of actions pleaded against Wang Xu and State Frontier could be divided into fault-based claims and receipt-based claims.  The fault-based claims include fraud, tort of deceit, breach of constructive trust, dishonest assistance, etc.  The receipt-based claims include unjust enrichment and knowing receipt.  Mr Hui submitted that proving all the fault-based claims would require proving the knowledge of the fraud on the part of Wang Xu and State Frontier, where it is common ground that their alleged knowledge of the fraud was all based on inference.

127.  I have found that receiving the parts of the HK$1 billion into Wang Xu/State Frontier’s accounts should have put them on enquiry, since, among other reasons given above, the alleged reasons giving by Wang Tao, i.e. to make use of their margin ‘quota’, could not hold much water.  As such, Mr Hui’s argument that the amount covered by the injunction Order should be reduced to the sum flowing from the receipt-based claims falls away.

128.  In essence, the claim against Wang Xu and State Frontier is that they were knowing participants in the much wider fraud relating to the HK$1 billion, and it seems to me to be appropriate in the circumstances that the terms of the Order affecting them should extend to that full amount.

H.7   Balance of Convenience and Conclusion on Continuation

129.  It seems to me obvious that the balance of convenience points in favour of the continuation of the Order, in the sense that the risk of injustice flowing from non-continuation should Ps later succeed on their claim is greater than that flowing from continuation should Ps later fail on their claim. 

130.  Overall in the exercise of my discretion, I am satisfied that the Order made should be continued against Zhang, Wong Tao, China Create, Wang Xu and State Frontier until trial or further order.

I.  China Create’s Variation Summons

131.  As Ps’ application on the Continuation Summons has succeeded, China Create’s Variation Summons comes into play.

132.  Previously, China Create was also made a defendant in a separate set of proceedings, being HCA 1151/2019, Sky Motion Holdings Limited v China Create Captial Limited (“Sky Motion Action”).  It is of note that Ps’ solicitors in this action are also Sky Motion’s solicitors in the Sky Motion Action.

133.  In passing, it can also be noted that (1) Sky Motion’s claim was based on a Chinese agreement entitled “Loan Agreement”, but where it was common ground that the agreement was actually for the transfer by China Create to Sky Motion of financial instruments (secured notes and shares)  of JIGL in consideration of payment by Sky Motion to China Create of almost HK$344 million, (2) the relevant agreement was negotiated between Cheuk on behalf of Sky Motion and Wang Tao on behalf of China Create; and (3) there was also WeChat messaging between Cathy and Huang (who Wang Tao said in that action “handled administrative affairs according to my instructions”).

134.  On 24 June 2019, and as amended, Sky Motion successfully obtained a Mareva injunction against China Create up to the value of HK$500 million (“Sky Motion Injunction”).

135.  Sky Motion also applied for summary judgment on its claim.  DHCJ MK Liu granted China Create unconditional leave to defend on 7 January 2021.  But, on Sky Motion’s appeal, the Court of Appeal (“CA”)  gave China Create conditional leave to defend.  The condition imposed was that China Create has to pay into Court the Condition Sum within 28 days (though that time has since been extended pending the determination of the Variation Summons).  Default of payment of the Condition Sum into Court would lead to the entering of judgment against China Create.

136.  Though the CA’s order does not specify in terms that the payment in is to stand as security for Sky Motion’s claim, that is the effect of the order, under RHC Order 14 rule 4(3): see also Hong Kong Civil Procedure 2022 Note §14/4/18.

137.  Subsequently, an order was made by consent in the Sky Motion Action to permit China Create to deal with the sale proceeds of the sale of 39,198,000 MOBVISTA shares (“the Sale Proceeds”)  for the sole purpose of paying into Court the Condition Sum, and for the Sky Motion Injunction to be varied accordingly, and to provide for the reduced ‘ceiling figure’ (after that payment into Court)  from HK$500 million to HK$204,985,600.

138.  However, when Ps were invited (by letter to their solicitors, being the same solicitors acting for Sky Motion who had consented to the variation of the Sky Motion Injunction)  to consent to a variation of the Order in this case, consent to variation was refused.  The stated basis for refusing consent was that, unless China Create could credibly demonstrate that the value of its assets even after the intended payment would be at least up to the value of the HK$1 billion the subject of the Order, Ps would not be in a position to agree to the proposed variation.

139.  Therefore, by the Variation Summons, China Create seeks to vary the Order so that the Sale Proceeds could be released from the injunction Order to meet the condition imposed by the CA.

140.  In the injunction Order granted by me in the present case, only HK$30 million was subject to a proprietary injunction, with the rest of the HK$999 million was subject only to a Mareva injunction.  It is well established that assets subject to a Mareva injunction remain the assets of the defendant and do not stand as security for the plaintiff.   Subject to the defendant’s demonstrating that he has no other assets with which to fund the litigation, the ordinary rule is that he should have resort to the frozen funds to finance his defence: see, for example, Halifax Plc v Chandler [2001] EWCA Civ 1750, at §§16-17, cited in Hong Kong in CK v TCH [2019] HKFC 179, (unreported, FCMC 5240/2011, 9 July 2019)  at §§20-23.

141.  It is also trite that Mareva injunctions are not intended to punish or penalize the party subject to it.  A Mareva injunction should not operate oppressively to prevent the defendant from dealing with his assets in the ordinary course of business or any more than is absolutely necessary to protect the plaintiff from the risk of dissipation, see Halifax Plc, at §§19-20.

142.  In general, when a defendant seeks the release of funds subject to a Mareva injunction to meet certain expenses, the Court should consider whether the defendant has provided sufficient evidence to show that (a) the defendant does not have other assets available to meet those expenses; and (b) the purpose of the application was not an attempt to dissipate the assets to frustrate the plaintiff’s enforcement of a judgment: see Hong Kong Civil Procedure 2022 Note §29/1/79.

143.  In this case, the purpose for releasing the Sale Proceeds is legitimate, namely to pay them into Court to meet the Condition imposed by CA (though I do not think meeting the Condition falls within the usual understanding of the term ‘ordinary course of business’).  In one sense, paying the condition Sum into Court would only involve the moving of assets/money from one place to another, both within the Court’s supervision.  Further, as noted, the consequence of failure to meet the Condition could be significant, as summary judgment will be entered into against China Create.  Indeed, in its solicitors’ correspondence, China Create suggested that it must be in the interests of Ps in this case to avoid judgment being entered in favour of Sky Motion in the Sky Motion Action.

144.  The real dispute between China Create and Ps lies in whether China Create has shown that it has no alternative source of funds to meet the Condition.  In that regard, Ms Cheung has provided an extensive analysis of China Create’s assets to demonstrate that it does not have enough assets to meet the Condition unless the Sale Proceeds are released from the frozen assets.  On its face, that appears to be correct.

145.  But Mr Chong submitted that the Court should bring a healthy scepticism to an assessment of the financial information provided by China Create.  In particular, Ps have shown an arguable case of fraud against the Defendants, and China Create has been less than candid in revealing how its legal fees in Sky Motion and the current case have been met so far.

146.  Further, Mr Chong also emphasized that when determining whether a defendant has an alternative source of funds, the Court will not limit its consideration to funds to which the defendant has a legal right, if there are reasonable grounds for believing that it can obtain money from elsewhere or in some other manner: see XY LLC v Jesse Zhu [2018] HKCFI 1485 at §22.  Mr Chong invited the Court to consider the ultimate controller of China Create, Wang Tao, as a person who would “prop up” the corporate entity. Indeed, Mr Chong seemed to suggest that Zhang, Wang Tao, and China Create could or should be regarded as one single economic entity when the Court determines whether China Create has alternative funds.

147.  Ms Cheung emphasised that China Create and Wang Tao are of course separate legal entities, and it cannot simply be said that the company is under the control of Wang Tao and so is able to obtain funds from her.  But, in my view, that submission is inconsistent with settled authority.  In case of a corporate defendant, the Court can and does look to the shareholders to see if there are reasonable grounds to believe that the shareholders are the source of funds for the corporate defendant: see the XY LLC case at §§23-37.

148.  On the other hand, whilst the Court is entitled to look beyond the assets legally owned by a corporate defendant in determining whether it has alternative sources of funds, simply because the corporate has a wealthy shareholder on its own is insufficient to show “reasonable grounds” to believe that a corporate defendant could look to the shareholder or has other sources of fund.

149.  But I am persuaded in the present case that there is substantial evidence to show that China Create has all along been funded by Wang Tao or her associates.  As submitted by Mr Chong, China Create, a company which runs no substantial business, is currently holding more than HK$1 billion worth of shares.  The purchase money must have come from an external source.  The fact that, as of now and despite being subject to two Mareva injunctions, China Create is still able to meet its legal expenses in the current case and the Sky Motion Action suggests that it continues to obtain funds from a readily-available external source.

150.  The burden falls on the party seeking an order to release assets from an injunction to show that it has no other sources of funds it could look to.  Wang Tao was aware of the importance of fully disclosing China Create’s financial position and that of those who might be thought to be China Create’s source of funds, such as herself and Zhang.  That is why she sought to explain in her affirmation why she and her husband could not be China Create’s source of funds.  Yet, the financial picture provided is far from complete.  In the absence of any proper explanation as to the source of funds of the assets obtained by China Create and of payment for China Create’s legal expenses incurred so far, I have come to the view that China Create has failed to show by sufficient evidence that it has no other alternative source of funds from which to meet the Condition.

151.  There is one more feature of the consideration, which arises from the particular facts of this case.  If the sum is released to satisfy the Condition imposed by the CA’s order for China Create to be able to defend the claim in the Sky Motion Action, that sum will stand as security for Sky Motion’s claim.  If, eventually, China Create loses in both actions and its assets are insufficient to meet judgment debts in both cases, it seems that Sky Motion would then have higher priority to claim that security sum in Court than Ps in the present case.  In other words, allowing the application would – or at least firmly could – prejudice Ps’ position, and I reject Ms Cheung’s submission to the contrary.

152.  I have, of course, taken into account that, in granting conditional leave to defend in the Sky Motion Action, the CA would have thought that the condition would be able to be met by China Create (for it would have been the wrongful exercise of discretion to impose a condition knowing that it could not be met).  But I note that the CA specifically stated that, in so far as China Create might wish to fulfil the Condition from the portfolio which is subject to the Mareva injunction, that was a matter for an application to the judge at first instance (and not a matter for the CA).  In so saying, the CA must have had in mind the principles applicable on the exercise of the judge’s discretion, along the lines that I have set out and followed above, and the possibility that on the evidence deployed in any such application permission to use the frozen portfolio might not be granted.

J.  Conclusion

153.  In conclusion, I allow the Continuation Summons and I dismiss the Variation Summons.

154.  I see no reason why cost should not follow the event on each summons.  Therefore, I order Ps’ costs of the Continuation Summons to be paid by Wang Tao, China Create, Wang Xu and State Frontier to be taxed if not agreed, on a party and party basis, and to be payable forthwith. I further order Ps’ costs of the Variation Summons to be paid by China Create, to be taxed if not agreed, on a party and party basis, and to be payable forthwith.  Despite the number of Counsel involved, I do not grant a certificate for two Counsel.

155.  However, in the first instance, I make those orders on a nisi basis.  The orders will become absolute after 14 days, if no variation application is made within that time.  Any variation application will be dealt with on paper.