PALOMA CO LTD v. CAPXON ELECTRONIC INDUSTRIAL CO LTD

HCCT 53/2017

[2020] HKCFI 3050

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 53 OF 2017

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R E A S O N S   F O R   D E C I S I O N

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1.  There are before the Court 2 summonses both issued by Paloma Company Limited, the judgment creditor (“Paloma”):

(1)  The summons dated 4 August 2020 (“Receivers Summons”) for appointment of receivers by way of equitable execution over the shares in Lancom Limited (“Lancom”) held by Capxon Electronic Industrial Company Limited, the judgment debtor (“Debtor”); and

(2)  The summons dated 31 July 2020 (“Injunction Summons”) for continuation of the ex parte Mareva injunction granted by Alex Lee J on 30 July 2020 (“Injunction”) against Lancom and Capxon International Electronic Company Limited, a listed company in Hong Kong Limited (“Listco”), up to HK$273 million.

2.  At the hearing, I made an order appointing 2 nominees of Paloma as receivers over the 85,137,200 shares in Lancom (“Shares”), instead of the accountants nominated by Paloma.  Paloma is the single largest creditor of the Debtor[1] and is familiar with the affairs of Lancom and the Debtor, having in the past 6 years been trying to enforce the Judgment (as defined in §8 below) against the assets of the Debtor.  I consider that Paloma is in the best position to consider whether there are viable claims against any third parties and whether it is in the interests of Lancom to pursue such claims.  The potential claims available to Lancom are said to be the most valuable assets of Lancom.  

3.  I decline to continue the Injunction given that its stated purpose, viz., to preserve the assets of Lancom and Listco pending determination of the Receivers Summons, had become spent. 

Background facts

4.  The Debtor was incorporated in Taiwan and is a subsidiary of Listco which held 96.54% of its shares.  Mr Lin Chin Tsun (“Mr Lin”) was its Chairman.  The Debtor is the sole shareholder of Lancom. 

5.  Lancom is a company incorporated in Hong Kong.  It was controlled by Mr Lin and his wife, Ms Chou Chiu Yueh (“Mrs Lin”), who were its directors. 

6.  Listco through Multiple Investments Limited, a wholly owned subsidiary incorporated in the BVI (“MIL”), owned and controlled 2 wholly owned subsidiaries established in the Mainland, being Capxon Electronic (Shenzhen) Co Ltd (“Capxon Electronic”) and Capxon Trading (Shenzhen) Co Ltd (“Capxon Trading”) (together “Mainland Subsidiaries”).   

7.  By an arbitral award made in Japan dated 6 August 2014 (“Award”), the Debtor was ordered to pay JPY 2,427,186,647 to Paloma together with interests and costs.  The Debtor’s attempts to set aside the Award were dismissed by Tokyo District Court (in January 2016), Tokyo High Court (in February 2017), Japan Supreme Court (in May 2017) and Taiwan Shilin District Court (in March 2018). 

8.  By Order dated 12 October 2017, Mimmie Chan J gave leave to Paloma to enforce the Award as a judgment in Hong Kong (“Judgment”).

9.  On 23 November 2017, Paloma obtained a charging order nisi over the Shares. 

10.  In April 2018, the Debtor was put into solvent voluntary liquidation in Taiwan and Mr Lin was appointed as its liquidator.  

11.  On 14 May 2020, Keith Yeung J made the charging order nisi over the Shares absolute (“Charging Order”), and ordered the Debtor to disclose all transactions through which any of its assets or the assets of Lancom of an individual value of HK$100,000 or more have been  disposed of,  transferred or removed from the Debtor or Lancom since August 2014 (“Disclosure Order”). 

12.  On 13 July 2020, Paloma obtained a garnishee order in respect of an account receivable in the amount of NT$88,559,975 (“NT Receivable”) due from Lancom to the Debtor (“Garnishee Order”). 

13.  To date, Paloma has only been able to recover (1) NT$2,727,000 of rent, (2) NT$6,990,338 from sale of landed properties in Taiwan; and (3) NT$205,173 cash.  The Debtor still owed Paloma approximately HK$273 million.   

14.  It is Paloma’s case that with the benefit of the Disclosure Order it was able to discover, for the first time, details of the following transactions which are said to have been made a view to dissipate Lancom’s valuable assets.  These included:

(1)  On 1 August 2014, Lancom resolved to sell its shares in the Mainland Subsidiaries to MIL.  This left Lancom with account receivables of HK$447 million and cash/bank balance of HK$15 million.

(2)  Between 22 and 28 August 2014, Lancom used the cash received from MIL to advance loans in the aggregate sum of US$27.63 million to Listco.

(3)  From January to April 2015, Lancom lent further loans to Listco in the total sum of HK$224 million. 

(4)  On 20 April 2015, Waystech Trading Ltd, a BVI company wholly owned by Listco (“Waystech”), assumed Listco’s obligations to pay RMB 98 million and US$19.6 million to Lancom.  In addition, Lancom lent a further sum of US$8.85 million to Waystech. 

(5)  Lancom gradually ceased operation in that its revenue was reduced from HK$678 million in 2014 to HK$55 million in 2015, and to nil in 2019.    

15.  Mr Jonathan Chang SC (leading Mr Jason Yu) submits that as a result of the above “asset-striping scheme”, Lancom has been transformed from a company with profitable business and valuable assets (i.e. the Mainland Subsidiaries) to a company with no business and its only assets are receivables from Waystech and Capxon Trading (the latter has commenced liquidation on 13 July 2020).  Mr Chang SC contends that the timing and apparent lack of commercial reasons for the above transactions strongly suggest that they were made for the purpose of putting Lancom’s assets out of the reach of Paloma. 

16.  On the other hand, Mr Jose Maurellet SC (leading Ms Esther Mak), counsel for the Debtor, Lancom and Listco, submits that the transactions formed part of the group’s “day-to-day operations for legitimate commercial purposes” and “similar transactions had been consistently carried out by Lancom since its incorporation”.  Specifically, he submits that:

(1)  the Mainland Subsidiaries were transferred from Lancom to MIL in response to unfavourable market conditions, and the transfers served to maximise the group’s profit and offset the losses suffered by the group’s aluminium foil business;

(2)  Lancom derived its revenue as an intermediary, and loans from Lancom to Listco were common and were made to promote the development of Lancom;

(3)  the transfer of Lancom’s receivables from Listco to Capxon Electronic and MIL was “in order to net off the account payables owing from Lancom” to Capxon Electronic and MIL and was “part of the routine accounting practice” of the group;

(4)  the transfer of receivables from Listco to Waystech was part of the group’s effort to increase its investments (through Waystech) in the manufacture of high-end aluminium foil products.  The loans to Waystech were in the interests of Lancom, as more business for the group means “more opportunities for Lancom to act as an intermediary in these dealings and derive profit therefrom”.  Waystech has substantial investment in 2 (other) subsidiaries in Mainland which are valued at US$39.6 million, and will be able to repay funds to Lancom once it receives dividends from such subsidiaries; and

(5)  Lancom ceased its business because of the dispute with Paloma which had deterred customers from placing orders with the group. 

17.  Paloma does not accept the explanations proffered by Lancom and Listco on the basis that they are not supported by contemporaneous documents.  It contends that the impugned transactions show that the persons in control of Lancom acted in breach of their fiduciary duties by sacrificing the interests of Lancom to those of the group.

18.  Against the above background, on 30 July 2020, Paloma obtained the Injunction against Lancom and Listco.  The basis for seeking the Injunction, as described in the ex parte application, was the need to preserve the status quo pending determination of the Receivers Summons. 

Receivers Summons

19.  The applicable principles are not in dispute and have been sufficiently summarised in Cruz City v Unitech [2015] 1 All ER (Comm) 336, §47, per Males J:

“(a) The overriding consideration in determining the scope of the court’s jurisdiction is the demands of justice. Those demands include the promotion of the policy of English law that judgments of the English court and English arbitration awards should be compiled with and, if necessary, enforced.

(b) Nevertheless the jurisdiction is not unfettered. It must be exercised in accordance with established principles, though it is capable of being developed incrementally. It is not limited to situations where equity would have appointed a receiver before the fusion of law and equity pursuant to the 1873 and 1875 Judicature Acts. Specifically, in modern conditions where business is increasingly global in nature, the jurisdiction is ‘unconstrained by rigid expressions of principle and responsive to the demands of justice in the contemporary context’.

(c) The jurisdiction will not be exercised unless there is some hindrance or difficulty in using the normal processes of execution, but there are no rigid rules as to the nature of the hindrance or difficulty required, which may be practical or legal, and it is necessary to take account of all the circumstances of the case. That is all that is meant by dicta which speak of the need for ‘special circumstances’: see in particular the decision of Tomlinson J in Masri cited above and also the decision of Arnold J in UCB Home Loans Corporation Ltd v Grace [2011] EWHC 851 (Ch), [2011] All ER (D) 228 (Mar), holding that there were sufficient ‘special circumstances’ rendering it just and convenient to appoint a receiver by way of equitable execution when it would be ‘difficult for the claimant to enforce its judgment by other means’ and that the appointment of a receiver was the only realistic prospect available to the judgment creditor to enforce its judgment in the short term.

(d) As the statutory source of the court’s power to appoint a receiver speaks of what is ‘just and convenient’, it is impossible to say that convenience is not at least a relevant consideration (albeit not the only one).

(e)  A receiver will not be appointed if the court is satisfied that the appointment would be fruitless, for example because there is no property which can be reached either in law or equity. That is an aspect of the maxim that equity does not act in vain.  However, a receiver may be appointed if there is a reasonable prospect that the appointment will assist in the enforcement of a judgment or award.  It is unnecessary, and will generally be pointless, for the court to attempt to decide hypothetical questions as to the likely effectiveness of any order.  That applies with even greater force where such questions involve disputed issues of foreign law.  It is sufficient that there is a real prospect that the appointment of receivers will serve a useful purpose.”

20.  Mr Chang SC submits that it is just and convenient for the Court to appoint receivers over the Shares for the following reasons. 

21.  First, legal execution of the Judgment has proved to be futile in that:

(1)  Although Paloma obtains the Charging Order over the Shares, it is highly unlikely that the Shares can be sold to any willing buyer, at any rate not without a substantial amount.  This is because the only known assets of Lancom are the receivables due from Waystech and Capxon Trading. Neither of them appears to have any sufficient liquid funds to repay Lancom. 

(2)  As for the Garnishee Order, Lancom does not have any liquid assets to repay the NT Receivable owed to the Debtor.

22.  Second, the Court may empower receivers to exercise a judgment debtor’s right over its shareholdings which are assets of the judgment debtor itself. 

(1)  This includes the exercise of voting rights to appoint directors or to put the subsidiary companies into liquidation so as to obtain a distribution of their surplus assets (Cruz City, §48; Pacific Harbour Advisors Pte Ltd & anor v Winson Federal Limited & ors, HCA 1257/2013, 22 May 2015, §§10, 55). 

(2)  The Court may also empower the receivers to bring proceedings in the name of the owner of the property of which they have been appointed receiver.  In Levermore v Levermore [1979] 1 WLR 1277 at 1282, Balcombe J observed that “it is not uncommon as a matter of practice when a receiver is appointed, whether by way of equitable execution or for the interim preservation of property, to authorise the receiver in an appropriate case to bring any necessary proceedings in the name of the estate owner of the property of the which he has been appointed receiver”. 

(3)  In the present case, the Court can empower the receivers to exercise the voting rights on the Shares to appoint themselves as directors of Lancom so that they can cause Lancom to bring proceedings to recover its assets. 

23.  Third, Lancom has direct claim against Waystech in respect of the amounts due, and potential claims against Mr Lin, Mrs Lin and Listco in respect of the impugned transactions whereby the loans advanced to and repayable by Listco were transferred to Waystech (as described in §14(2)-(4) above).  Such claims may be pursued by the receivers in the name of Lancom for the purpose of recovering the loss said to have been suffered by Lancom.   

24.  In his skeleton submissions, Mr Maurellet SC advances the following points in opposition to the Receivers Summons:

(1)  The burden is on Paloma to satisfy the Court that the potential claims are reasonably arguable, such that there is a reasonable prospect that the appointment would assist in the enforcement of the Judgment (Cruz City, §47(e)). 

(2)  Paloma is not seeking to appoint receivers over the causes in action in which it has interest, but the causes of action which belong to the Debtor and the case of Levermore v Levermore is distinguishable on this basis. 

(3)  Paloma must show a connection between the liability owing to it from the Debtor and the rights it seeks to exercise over Lancom’s board which concern recovery of assets against  third parties. 

(4)  Paloma’s interest in the Shares only arose on 23 November 2017 when it obtained the charging order nisi, but the transactions it seeks to impugn took place at the time when Paloma had no interest in Lancom. 

(5)  The allegation that the impugned transactions constituted misappropriation of Lancom’s assets has no merits as the transactions were carried out for proper and legitimate purposes, consistent with how the group companies have been operated throughout the years.  It is said that the transactions were in the interests of Lancom, to which the group’s interest is “derivatively relevant” (Mortimore, Company Directors, 3^rd ed, §13.15; Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 (CA) §366-367; Facia Footwear Ltd (in administration) v Hinchliffe [1998] 1 BCLC 218 at 228). 

(6)  Lancom would not be adversely affected by the transfer of the loans from Listco to Waystech, given that under the agreement pursuant to which the transfer was made, Waystech has recourse against Listco.   

(7)  In any event, the sale of the Mainland Subsidiaries and the transfer of the receivables have been adopted and impliedly ratified by the Debtor qua Lancom’s sole shareholder.  The approval by Mr Lin and Mrs Lin qua directors constituted informal authorisation or ratification by the sole shareholder of Lancom (In re Duomatic Ltd [1996] 2 Ch 365 at 373).   

(8)  The Court should be slow to exercise its discretion to appoint receivers, given that it is open to Paloma to institute “special liquidation” in Taiwan and sought the standard order for recognition and assistance in respect of the Debtor’s property in Hong Kong including the Shares.  This notwithstanding, Paloma decides to apply for appointment of receivers whose powers “are capable of conflicting with the development of Taiwan liquidation”.   

25.  It seems to me that this is not the forum for resolving the debates over the merits of the potential claims which may be made in the name of Lancom.  The Court is concerned with whether there is any hindrance or practical difficulty in the legal execution of the Judgment and whether Paloma is unable to obtain the fruits of the Judgment through the Charging Order and Garnishee Order obtained to date. 

26.  In my view, the Charging Order and the Garnishee Order are plainly not sufficient to enable Paloma to obtain the fruits of the Judgment.  As matter now stands, Lancom has been transformed from a profitable company which owned all the equity in the Mainland Subsidiaries to a company with no business and whose assets consisted only of receivables from companies which, on their face, do not have sufficient liquid assets to repay the amounts due to Lancom.  In view of the stance taken by Mr Lin and Mrs Lin throughout the enforcement proceedings, it is clear that they will not take any steps to recover the amounts due to Lancom, still less to commence claims in the name of Lancom against any third parties (including themselves) in respect of the loss said to have been suffered by Lancom in the impugned transactions even if there is merit to do so.  The history of this case shows that unless receivers are appointed over the Shares, Paloma would not be able to recover the real value of the Shares. 

27.  At the hearing, Mr Maurellet SC acknowledges, rightly, that it is difficult to have any sensible opposition to the Receivers Summons. His oral submissions focus on the terms of the order.  He submits that the powers conferred on the receivers should not go beyond the stated purpose of the application, which is to allow the receivers to exercise the voting rights over the Shares to appoint themselves as directors of Lancom.  Once appointed as directors, it is a matter for them to consider what steps should be taken by Lancom with a view to recover its assets or loss said to have been suffered.  I agree.  The terms of the Order (set out in the end of this Decision[2]) are revised to make it clear that the powers given to the receivers would not be taken as the Court giving sanction to the receivers (or the directors to be appointed) to take any proceedings in the name of Lancom, which remains a matter for the directors to decide.  Mr Maurellet SC, on behalf of the Debtor, gives undertakings to the Court to take all reasonable steps to facilitate the transfer of the Shares to the receivers and the appointment of the receivers as directors.  The undertakings are set out in the latter part of Schedule 2 to the Order.   

28.  As for costs, Paloma being the successful party, is entitled to be paid the costs of and occasioned by the Receivers Summons by the Debtor, to be taxed on a party and party basis with certificate for 2 counsel.

Injunction Summons

29.  The principles governing the grant of Mareva injunction are well established.  Paloma must show a good arguable case; a real risk of dissipation of assets on the part of Lancom and Listco; and that balance of convenience is in favour of the grant.  Mareva injunctions are more readily granted after judgment (China CITIC v Li Kwai Chun [2018] HKCFI 1800, §§28, 31). 

30.  Where, as here, the injunction is sought against a non-party against whom no claim for substantive relief is made (“NCAD”) under the Chabra jurisdiction, the Court will be guided by the following principles set out in XY, LLC v Jesse Zhu [2017] 5 HKC 479 at §§24-26:

“24. A convenient starting point is a summary of the Chabra jurisdiction taken from the judgment of Popplewell J in PJSC Vseukrainskyi Aktsionernyl Bank v Maksimov [2013] EWHC 422 (Comm) at §7 as approved by Tomlinson LJ in Lakatamia Shipping at §32:

‘(1) The Chabra jurisdiction may be exercised where there is good reason to suppose that assets held in the name of a defendant against whom the claimant asserts no cause of action (the NCAD) would be amenable to some process, ultimately enforceable by the courts, by which the assets would be available to satisfy a judgment against a defendant whom the claimant asserts to be liable on his substantive claim (the CAD).

(2) The test of “good reason to suppose” is to be equated with a good arguable case, that is to say one which is more than barely capable of serious argument, but yet not necessarily one which the judge believes to have a better than 50% chance of success.

(3) In such cases the jurisdiction will be exercised where it is just and convenient to do so. The jurisdiction is exceptional and should be exercised with caution, taking care that it should not operate oppressively to innocent third parties who are not substantive defendants and have not acted to frustrate the administration of justice.

(4) A common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD. Such assets will be treated as in truth the assets of the CAD if they are held as nominee or trustee for the CAD as the ultimate beneficial owner.

(5) Substantial control by the CAD over the assets in the name of the NCAD is often a relevant consideration, but substantial control is not the test for the existence and exercise of the Chabra jurisdiction. Establishing such substantial control will not necessarily justify the freezing of the assets in the hands of the NCAD. Substantial control may be relevant in two ways. First, evidence that the CAD exercises substantial control over the assets may be evidence from which the court will infer that the assets are held as nominee or trustee for the NCAD as the ultimate beneficial owner. Secondly, such evidence may establish that there is a real risk of dissipation of the assets in the absence of a freezing order, which the claimant will have to establish in order for it to be just and convenient to make the order. But the establishment of substantial control over the assets by the CAD will not necessarily be sufficient: a parent company may exercise substantial control over a wholly owned subsidiary, but the principles of separate corporate personality require the assets to be treated as those of the subsidiary not the parent. The ultimate test is always whether there is good reason to suppose that the assets would be amenable to execution of a judgment obtained against the CAD.’

25. It is pertinent to note that in proposition (4), it was stated that a common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD. As pointed out by Gloster J in Parbulk II at §46, it is clear that the English court does not regard the Chabra-type jurisdiction as limited to cases where the NCAD holds, or has received, assets beneficially belonging to the CAD or assets in which the CAD has some sort of proprietary entitlement. In this respect, the English court decisions followed the important decision of the High Court of Australia in Paul Cardile v LED Building Proprietary Ltd (1999) 198 CLR 380. At §§57 and 58 of the joint judgment of Gaudron, McHugh, Gummow and Callinan JJA, the High Court of Australia stated:

‘What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word “may”, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:

(i) the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including “claims and expectancies”, of the judgment debtor or potential judgment debtor; or

(ii) some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.

It is that principle which we would apply to this case. Its application is a matter of law, although discretionary elements are involved.’

26.  It is recognized that the second limb of the principle set out in §57(ii) is ‘potentially of extremely wide application.’  As stated by Briggs Jin Revenue & Customs Commissioners v Egleton [2007] 1 All ER 606 at §29, ‘it appears to contemplate that jurisdiction exists to make a freezing order against any potential debtor of an individual or company against whom the claimant has a cause of action, upon the footing that since enforcement of a judgment against the defendant may lead to its liquidation or (if an individual) bankruptcy, and since a liquidator or trustee in bankruptcy may then be able to pursue claims against third parties, then jurisdiction exists to enable the plaintiff to seek a freezing order against any such third parties, always assuming that the other discretionary considerations, such as a risk of dissipation of assets, are satisfied.’”

31.  Mr Chang SC submits that there are good reasons to suppose that the assets held in the name of Lancom and Listco are amenable to enforcement of the Judgment in that:

(1)  The Court has jurisdiction to freeze the assets of third party debtors of the company which the petitioner seeks to wind up (Revenue and Customs Commissioners v Elgeton [2007] 1 All ER 606, §§1-3, 22-42, considered in XY, at §26).  The position is a fortiori where a creditor seeks to appoint receivers by way of execution over the debtor’s assets instead of a winding up order against the debtor. 

(2)  In the present case, there is good reason to suppose that (i) the receivers can be appointed, who can then sue in the name of Lancom; and (ii) Lancom has good arguable claims against Listco which the receivers may cause Lancom to pursue.  There is therefore good reason to suppose that, by this process, the assets of Listco and Lancom will be made available to satisfy the Judgment. 

32.  While one can see that the assets of Lancom may be made available to satisfy the Judgment through the process of appointment of receivers by way of equitable execution (such that there was a valid basis to seek a Mareva injunction against its assets pending determination of the Receivers Summons), the same cannot be said of the assets of Listco. 

(1)  The application for appointment of receivers has nothing to do with Listco, still less its assets. 

(2)  The fact that after appointment of receivers, steps may be taken by the receivers to replace the directors of Lancom who, in turn, may cause Lancom to commence claim against Listco does not make Listco to become a NCAD within the “second limb” of the Chabra jurisdiction as discussed in §26 of XY.  Indeed, if one takes Mr Chang SC’s argument to its logical conclusion, it would mean that the Chabra jurisdiction can be extended to any third party against whom a company owned by the debtor (not the debtor itself) may have a claim, and the threshold for seeking an injunction against such NCAD would be even lower than the threshold for seeking an injunction against a CAD[3] (the latter requires the applicant to demonstrate that it has a good arguable claim against the CAD, but there is no such requirement in the case of an application against a NCAD).  I do not think the “second limb” of the Chabra jurisdiction can be extended in this way. 

(3)  In any event, there is no basis to suggest that Listco’s assets will become amenable to enforcement of the Judgment, whether by the process of winding up or appointment of receivers over Listco. 

33.  Even if, contrary to my view, the Chabra jurisdiction can be extended to the assets of Listco, it has not been shown that there is a real risk of dissipation of assets on the part of Listco for the reasons set out in §§34 to 39 below.

34.  First, Mr Chang SC submits that a real risk of dissipation of assets can be inferred where it is shown that a debtor proposes to take advantage of every opportunity to resist enforcement of a judgment, to evade responsibility to pay a judgment creditor what is due and to put every obstacle in the way to prevent enforcement, citing Marsi v Consolidated Contractors International Co Sal & anor [2008] ILPr 14 at §§82-84.  Further, evidence of dishonest and fraudulent conduct which form the basis of a claim could point powerfully towards inferring a risk of dissipation (Convoy Collateral Ltd v Cho Kwai Chee & ors [2020] HKCA 537 §53). 

35.  Neither consideration discussed in Marsi and Convoy applies to Listco.  All the allegations of wrongdoings are directed against Mr Lin and Mrs Lin who, in turn, controlled the Debtor and Lancom.  By contrast, Listco is under the control of its board of directors, which comprises 8 directors of which 3 are independent non-executive directors.  There is no proper basis to assert that Listco is under the control of Mr Lin and Mrs Lin. 

36.  Second, Mr Chang SC contends that it is easier to infer a risk of dissipation of assets after judgment (China CITIC v Li, §31).  In the present case, all the fixed assets of Lancom were sold within 2 months of the Award, and substantial amounts of Lancom’s funds were paid to Listco in the following months by way of loans, and Lancom’s remaining liquid assets were diverted to Waystech in the form of loans. 

37.  I do not think that one can infer a real risk of dissipation of assets post-Judgment vis-à-vis Listco, given that the Judgment was not against Listco.  In any event, as Mr Chang SC confirms in his oral submissions, there is no allegation that the sale of the Mainland Subsidiaries was made at an undervalue or that Listco would not be able to repay the loans advanced by Lancom.  As for the further loans advanced to Waystech, it is not suggested that Listco had any involvement in making such loans.  That being the case, I am unable to see how one can infer a risk of dissipation of assets on the part of Listco from any of the transactions relied upon by Mr Chang SC.

38.  Third, Mr Maurellet SC submits that a substantial delay in seeking a Mareva injunction and the lack of proper explanation for it militate against any real risk of dissipation of assets.  The Court would not usually grant injunctions where significant time has elapsed and an injunction would in effect be locking the stable door after the horse has bolted (Re Chau Cham Wong Patrick [2016] 2 HKLRD 278 §§33-34, per Peter Ng J).  Paloma has for the past 2 years contended that there had been an “asset-stripping scheme” by Mr Lin and Mrs Lin and that the transfer of the Mainland Subsidiaries constituted a misappropriation of Lancom’s assets.  Mr Lin and Mrs Lin clearly have had knowledge of the claim for a long time and would have disposed of the assets of Lancom or Listco before Paloma applied for the Injunction, should they inclined to do so.  I agree. 

39.  Fourth, as pointed out by Mr Maurellet SC in his oral submissions, the oddity of Paloma’s allegation is that the alleged asset-stripping did not result in dissipation of assets on the part of Listco, as all the assets remain under the companies under the umbrella of Listco.  This reinforces Listco’s contention that there is no risk of dissipation of assets on the part of Listco.  I agree that this factor negates any suggestion of real risk of dissipation of assets on the part of Listco. 

40.  In view of the above conclusions, it is unnecessary to consider whether balance of convenience is in favour of the grant or continuation of the Injunction.  If it is necessary to consider balance of convenience, I think the balance comes against the grant or continuation of the Injunction. 

(1)  The Injunction, although described as an “injunction prohibiting disposal of assets in Hong Kong”, in fact covered (i) Lancom’s assets located outside of Hong Kong, being the receivables from Waystech and Capxon Trading; and (ii) Listco’s direct or indirect shareholding or equity interests in 14 subsidiaries most of which are overseas companies.

(2)  The prejudice to Listco is obvious.  It is no answer for Paloma to say that Listco has in its public announcement stated that the Injunction does not have an adverse impact on the group’s business operations as a whole.  As Mr Maurellet SC submits, the longer the Injunction remains in place, the more likely it is that there would be an economic impact which is always insidious and hard to pin down (Deiulemar Shipping SA v Transfield ER Futures Ltd [2011] 1 HKLRD 75 (CA) at §55, per Stone J).

41.  For the above reasons, I do not think there was a proper basis for Paloma to seek the Injunction against Listco, let alone on an ex parte basis.  Even if it were necessary to consider the Injunction Summons, I would not accede to Paloma’s application for continuation of the Injunction as against Listco.  It follows that the costs of and occasioned by the Injunction Summons should be paid by Paloma to Listco, to be taxed if not agreed, with certificate for 2 counsel. 

42.  As regards Lancom, I consider that there was a proper basis for Paloma to seek the Injunction against Lancom pending determination of the Receivers Summons, given that (1) Lancom comes within the “second limb” of the Chabra jurisdiction, and (2) Lancom had been under the control of Mr Lin and Mrs Lin, who were admittedly involved in approving the impugned transactions, such that one can infer a real risk of dissipation of assets on the part of Lancom.  Were it necessary to do so, I would continue the Injunction.  In the circumstances, a fair costs order should be that there be no order as to costs as between Paloma and Lancom in respect of the Injunction Summons. 

 

 

(Linda Chan) Judge of the Court of First Instance High Court

 

APPENDIX

ORDER FOR THE APPOINTMENT OF RECEIVERS BY EQUITABLE EXECUTION

1.  Persons to be nominated by the Judgment Creditor (whose identity shall be confirmed by the Judgment Creditor to the Court within 3 days hereof) (the “Receivers”), be and hereby are appointed as receivers to receive the 85,137,200 ordinary shares in Lancom Limited currently registered in the name of the Judgment Debtor (the “Lancom Shares”) and the dividends, profits and moneys receivable in respect of the Judgment Debtor’s interest in the Lancom Shares (the “Income”).

2.  The Receivers be entitled to do all acts and things as may reasonably be required to receive the Lancom Shares and the Income (if any) and carrying out their functions in relation thereto, including but not limited to the powers set out in Schedule 3 hereto. The powers vested in the Receivers may be exercised jointly or individually.

OBLIGATIONS OF THE JUDGMENT DEBTOR

3.  The Receivers shall have power to request any documentation or information from the Judgment Debtor, Lancom Limited and each of their directors, officers, liquidators and/or agents as the Receivers may reasonably require for the purposes of getting in the Lancom Shares and/or the Income (if any) and carrying out their functions in relation thereto.

4.  The Judgment Debtor and Lancom Limited shall:

(a)  Provide within a reasonable time to the Receivers such information and documentation relating to the Lancom Shares and/or the Income (if any); and

(b)  Do not refrain from doing all such things, including but not limited to the acts and things set out in paragraph 5 of this Order,

as the Receivers may reasonably require for the purposes of getting in the Lancom Shares and/or the Income (if any) and carrying out their functions in relation thereto.

5.  The Judgment Debtor be restrained from taking any steps to dispose, or part with possession, of all the books and records in respect of Lancom Limited, except as requested by the Receivers pursuant to paragraphs 3 and 4 of this Order.

6.  A party who is an individual who is ordered not to do something must not do it himself or in any other way. He must not do it through others acting on his behalf or on his instructions or with his encouragement.

7.  A party which is a corporation and which is ordered not to do something must not do it itself or by its directors, officers, employees or agents, or in any other way.

RECEIVERS’ ACCOUNTS

8.  The Receivers shall within 3 months after the date of this Order, and at such further and other times as may be ordered by the Court submit their accounts to the Judgment Creditor and the Judgment Debtor, and shall within 1 month after their accounts are submitted and at such further and other times as may be hereafter ordered by the Court pay the balance or balances appearing due on the accounts so left, or such part thereof as shall be certified as proper to be so paid, such sums to be paid in or towards satisfaction of what shall for the time being be due in respect of the order of the Honourable Madam Justice Mimmie Chan dated 12 October 2017 for the sum of JPY2,427,186,647 plus interest at the rate of 6% per annum on (i) the sum of JPY1,311,973,002 from 1 January 2011 until payment; (ii) the sum of JPY942,366,339 from 1 July 2012 until payment; (iii) the sum of JPY172,847,306 from 1 December 2012 until payments; and further arbitration related expenses in the sum of JPY23,618,062 (the “Judgment”) and costs of enforcement.

THIRD PARTIES AND PRIOR INCUMBRANCERS 

9.  It is a contempt of court for any person notified of this Order knowingly to assist in or permit a breach of it. Any person doing so may be sent to prison, fined or have his assets seized.

10.  This appointment shall be without prejudice to the rights of any prior incumbrances upon the Lancom Shares who may think proper to take possession of or receive the same by virtue of their respective securities or, if any prior incumbrances is in possession, then without prejudice to such possession.

11.  The Receivers have liberty, if they shall think proper (but not otherwise), out of the dividends, profits and moneys to be received by him to keep down the interest upon the prior incumbrances, according to their priorities, and be allowed such payments, if any, in passing his accounts.

PAYMENT OF BALANCE INTO COURT

12.  The balance (if any) remaining in the hands of the Receivers, after making the several payments referred to in this Order, shall unless otherwise directed by the Court forthwith be paid by the Receivers into Court to the credit of this action, subject to further order.

PERSONS OUTSIDE HONG KONG 

13.  The terms of this Order do not affect or concern anyone outside Hong Kong until it is declared enforceable or is enforced by a court in another jurisdiction and then they are to affect him only to the extent they have been declared enforceable or have been enforced UNLESS such person is:

(a)  a person to whom this Order is addressed or an officer or an agent appointed by power of attorney of such a person, including but not limited to Lin Chin Tsun as liquidator of the Judgment Debtor and director of Lancom Limited and Chou Chiu Yueh as director of Lancom Limited; or

(b)  a person who is subject to the jurisdiction of this Court and (i) has been given written notice of this Order at his residence or place of business within the jurisdiction of this court and (ii) is able to prevent acts or omissions outside the jurisdiction of this court which are a breach or assist in a breach of this Order.

14.  Nothing in this Order shall, in respect of assets located outside Hong Kong, require the Judgment Debtor, Lancom Limited and/or their directors, officers, liquidations and/or agents to disobey the order of any court of competent jurisdiction in relation to such assets.

LIBERTY TO APPLY

15.  Any of the parties be at liberty to apply to the Judge in chambers as there may be occasion.

PRIVACY 

16.  For the avoidance of doubt, the Receivers may use and/or disclose the full terms of this order (including the schedules hereto) as they consider necessary for the purposes of the receivership.

17.  The Receivers shall be permitted to use and/or disclose all information that has come, or will come, into their possession for the purposes of the receivership.

COSTS 

18.  The Judgment Creditor’s costs of and occasioned by the Summons be paid by the Judgment Debtor and taxed on a party and party basis, to be taxed if not agreed, with certificate for two counsel.

 

SCHEDULE 2

Undertakings given to the Court by the Judgment Creditor 

(i)  If the Court later finds that the appointment or any act or omission of the Receivers has caused loss to the Judgment Debtor or any other party and decides that the Judgment Debtor or that other party should be compensated for that loss, the Judgment Creditor undertake that they will comply with any order that the Court may make.

(ii)  Anyone notified of this Order will be given a copy of it by the Judgment Creditor's solicitors.

(iii)  The Judgment Creditor will pay the reasonable costs of anyone other than the Judgment Debtor which have been incurred as a result of this Order including the costs of ascertaining whether that person holds any of the Judgment Debtor’s assets and if the court later finds that this Order has caused such a person loss, and decides that such person should be compensated for that loss, the Judgment Creditor will comply with any order the court may make.

(iv)  If for any reason this Order ceases to have effect, the Judgment Creditor will forthwith take all reasonable steps to inform, in writing, any person or company to whom they have given notice of this Order, or who they have reasonable grounds for supposing may act upon this Order, that it has ceased to have effect.

Undertakings given to the Court by the Judgment Debtor 

The Judgment Debtor undertakes to take all reasonable steps to facilitate the following:

(1)  Transfer and procure the transfer of the registered title of the Lancom Shares to the Receivers;

(2)  Deliver to the Receivers all books and records relating to the Lancom Shares and the Income (if any);

(3)  Appoint and procure the appointment of the Receivers (or their nominees) as directors of Lancom Limited; and

(4)  Remove and procure the removal of Lin Chin Tsun and Chou Chiu Yueh as directors of Lancom Limited.

SCHEDULE 3 

Powers of each of the Receivers (in addition to all other powers vested in each Receiver by virtue of his appointment)

1.  Power to take immediate possession of, collect, get in and receive all or any part of the Lancom Shares and/or the Income (if any).

2.  Power to take all such steps as may be necessary to cause the registration of themselves ( or their nominees) as the registered holders of the Lancom Shares.

3.  Power to transfer any shares, assets, property or ownership rights that are the subject of his appointment to himself or to a suitable person to hold the same on trust or as nominee or agent on his behalf.

4.  Power to exercise such voting or other rights or powers to which the Judgment Debtor as registered holder and/or beneficial owner of the Lancom Shares is entitled, including but not limited to the power to appoint themselves (or their nominees) as directors of Lancom Limited and to remove any existing director of Lancom Limited.

5.  Power to appoint a solicitor,accountant, surveyor, estate or other selling agent, valuer, auctioneer and/or other appropriate person (including his partners, divisions within and employees of his firm) to assist him in the performance of his duties.

6.  Power to appoint any trustee, nominee or agent to take any step which he is unable to do himself or which can more conveniently be done by such person.

7.  Power to effect or maintain policies of insurance in respect of any property or assets within his possession or control．

8.  Power to do any act or execute any deed, receipt or document or to make any payment which is necessary or incidental to his functions or the exercise of the foregoing powers.