XCHRX HIGH FASHION GARMENTS CO. LTD. v. LAU KAM WING AND ANOTHER

HCA 3345/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3345 OF 1999

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REASONS FOR DECISIONS

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1. These are the reasons for the orders made by me on 12th May 1999 on the application of the Plaintiff for variation of Mareva injunction and on 21st May 1999 on the application of the Defendants for further variation of Mareva injunction.

The Background

2. The Plaintiff is a subsidiary of a listed company in Hong Kong with a factory in Dongguan, PRC manufacturing garments. The First Defendant was, until his dismissal, the Wholesale Manager of the Plaintiff and the Second Defendant is the wife of the First Defendant.

3. The First Defendant has admitted to the police that he had appropriated the Plaintiff's goods and the proceeds from sale of goods belonging to the Plaintiff since late 1996 and is charged with 23 charges under the Theft Ordinance. The value of the goods and money appropriated by the First Defendant is estimated to be HK$6,900,000.00. At the time of issuing the Writ of Summons, the Plaintiff discovered that the First Defendant had transferred at least HK$800,000.00 to the Second Defendant's bank account. The Plaintiff originally therefore claimed $6.9 million against the First Defendant and $800,000.00 against the Second Defendant.

4. On 22nd March 1999, on the basis of the above information verified by affidavits filed on behalf of the Plaintiff, Stone J granted an ex parte Mareva injunction against both Defendants, prohibiting the First Defendant from disposing of his assets up to the value of HK$6,900,000.00 and, the Second Defendant from disposing of her assets up to the value of HK$800,000,00. This part of the injunction order was continued by Sakhrani J on 26th March 1999.

5. In the mean time, the police retrieved some of the Plaintiff's goods from a firm named "Yin's Collection" and have discovered that the Second Defendant was a partner of this firm. As a consequence, the Plaintiff amended the Statement of Claim and now claims against the Second Defendant the total sum of HK$6,900,000,00 as well.

6. The Defendants filed their Defence on 6th May 1999. The First Defendant admitted that he had retained a total sum of HK$2,500,000.00 from the proceeds of selling the Plaintiff's goods. (Paragraphs 6 and 9 of the Defence) The Second Defendant admitted that she was a partner of "Yin's Collection" at the material times (paragraph 3 of the Defence) but denied that she had assisted the First Defendant in selling the appropriated goods (paragraph 7(b) of the Defence).

7. To reflect these changes since the order made by Sakhrani J, the Plaintiff took out a summons against the Second Defendant on 7th May 1999 seeking to increase the amount covered by the Mareva injunction as varied. The hearing of the Summons was scheduled for 28th May 1999; in the interim, the Plaintiff made an urgent ex parte application on 12th May 1999 to me for an order that would preserve all the net proceeds from the sale of the Second Defendant's flat which was due to complete on the following day.

The Ex parte application on 12th May 1999

8. Since the ex parte application on 12th May 1999 sought to vary an existing Mareva injunction, it would be prudent to recall the relevant parts of the existing order. The order made by Stone J prohibited both Defendants from disposing of their assets and specified that: -

"(2) This prohibition includes the following assets in particular:

(a) the Property known as Flat E, 6th Floor, Block 2, Fairview Garden, Nos. 53-61 Wai Tsuen Road, Tsuen Wan, New Territories, Hong Kong.

(4) If the total unencumbered value of the Second Defendant's assets in Hong Kong exceeds HK$800,000.00, the Second Defendant may remove any of those assets from Hong Kong or may dispose of or deal with them so long as the total unencumbered value of her assets still in Hong Kong remains above HK$800,000.00."

9. By the return date before Sakhrani J on 26th March 1999, the Plaintiff had further discovered that the Second Defendant was already bound by a sale and purchase agreement dated 13th March 1999 to sell her flat in Fairview Garden. The learned judge therefore varied the Mareva injunction granted by Stone J by expressly allowing the sale of the Second Defendant's flat to proceed on condition that HK$800,000.00 from the proceeds of sale be paid into court pending trial of the action.

10. On 12th May 1999, I was informed by the parties that the Second Defendant's flat was to be sold for about HK$2.4 million. The outstanding mortgage on the property was about HK$0.2 million. So the net proceeds from the sale would be approximately HK$2.2 million. What the Plaintiff sought from me on interim basis was to preserve this entire HK$2.2 million, rather than just HK$800,000.00 under the orders then still in force.

11. Although it was an urgent ex parte application, the Defendants were in fact warned and, during the hearing of the application, Mr. Wong appeared for the Defendants to oppose. It is important to note that all I had before me which were not available to Stone and Sakhrani JJ were: -

(a) The Defence filed on 6th May 1999 and

(b) The Second Affirmation of Lin Yuet Man dated 7th May 1999 filed on behalf of the Plaintiff. At that stage, due to time constraint, understandably there was no affidavit evidence filed on behalf of either Defendant in opposition to the application before me.

12. Obviously, it was not my place to go over the Mareva injunction granted by Stone J and continued by Sakhrani J. It was a foregone conclusion that the Mareva injunction should continue to attach to the Second Defendant's assets. The only question was whether the claw should extend beyond HK$800,000.00 to the whole HK$2.2 million.

13. The Second Affirmation by Lin Yuet Man deposed to facts as already stated in Paragraphs 6 and 7 supra. On those facts, there is at least a good arguable case that the Second Defendant colluded with the First Defendant in realizing the value of garments belonging to the Plaintiff unlawfully siphoned off by the First Defendant.

14. It was also pointed out that the Second Defendant did not have independent means until she became a partner in Yin's Collection. For a long time she had been supported by the First Defendant. Her investment in Yin's Collection was admittedly HK$150,000.00. When she withdrew from the partnership, she was paid off by a sum of HK$153,530.00. There is no reference to any prior distribution of profits. These are all apparent from the Defence filed by the Defendants on 6th May 1999. The irresistable inference one can draw is therefore that the Second Defendant's flat in Fairview Garden was purchased with money from the First Defendant.

15. The First Defendant having admitted that he had retained a total of HK$2.5 million belonging to the Plaintiff, and it is beyond dispute that the First Defendant had for some time become destitute, the money from the First Defendant used to purchase the Second Defendant's flat must be either money belonging to the Plaintiff or money the Plaintiff may recover as debt. Therefore, on any view, there is an overwhelming case that the Second Defendant's flat or rather the entire net proceeds of sale, being less than the HK$2.5 million admittedly withheld by the First Defendant from the Plaintiff and should be returned to the Plaintiff, is traceable asset. There was every reason to preserve the entire net proceeds of sale pending trial.

16. Mr. Wong for the Second Defendant contended that there was no risk of dissipation. In my view, there was abundant evidence of imprudent financial management on the part of the Defendants. One only needed to go to Paragraph 17 of the Defence. There, the Defendants aver that the Second Defendant took out two loans of at $1 million each from Citibank for use by the First Defendant to speculate in properties and shares. There is also evidence by affidavit from the Defendants that the loans were secured by mortgage on the Second Defendant's flat. Since the Second Defendant has risked her own home to finance speculation, how can the court not be concerned with risks!

17. The stance taken by the Second Defendant regarding the application to preserve the entire net proceeds of sale of the Second Defendant's flat may also be taken as evidence of intention to deprive the Plaintiff the fruits of possible judgment against the Defendants. Granted that the Second Defendant may well need to sell the flat to raise money for her livelihood in the mean time, the Mareva injunction granted by Stone J already provided for living expenses for the Second Defendant. If necessary, she can draw down a monthly sum from money in court even if the entire net proceeds from the sale is preserved in the court's interest bearing account. She has no need to have HK$2.2 million on the loose. I pointed out to Mr. Wong that, following Lord Hoffman, even if the Second Defendant has no intention to disappear with assets, in appropriate cases, the prudent course would still be to order preservation. The source of the authority is this: -

"But I think it is important in this area to distinguish between fundamental principles and what are sometimes described as "guidelines," i.e. useful generalisation about the way to deal with the normal run of cases falling within a particular category. The principal dilemma about the grant of interlocutory injunctions, whether prohibitory or mandatory, is that there is by definition a risk that the court may make the "wrong" decision, in the sense of granting an injunction to a party who fails to establish his right at the trial (or would fail if there was a trail) or alternatively, in failing to grant an injunction to a party who succeeds (or would succeed) at trial. A fundamental principle is therefore that the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been "wrong" in the sense I have described. The guidelines for the grant of both kinds of interlocutory injunctions are derived from this principle." Films rover Ltd. v. Cannon Film Sales Ltd. [1987] 1 W.L.R. 670 per Hoffman J. (as he then was) at 680. (Emphasis added)

18. In the premises, I had no hesitation to make the order as I did.

The application on 21st May 1999

19. It will be remembered that Sakhrani J in continuing the Mareva injunction also allowed HK$300,000.00 for the Defendants as litigation fund. According to an affirmation by Miss Eva Li, solicitor for the Defendants, filed on 20th May 1999, a total of HK$118,410.00 had been spent by way of legal costs for the Defendants up to 15th May 1999. The Defendants wish to appeal against the order made by me on the 12th May 1999. In order to seek funding to prosecute the appeal, the Defendants came before me on 21st May 1999 for increase in the amount of litigation fund allowed under the existing order. That application before me for funding is estimated to involve an extra HK$60,000.00 in legal costs. The appeal will, according to the Second Defendant, cost hundreds of thousands of dollars more.

20. The First Defendant and the Second Defendant were represented by separate counsel on this application for additional funding on 21st May 1999. In fact they operate in unison. Both counsel asked that the amount of litigation fund allowed at HK$300,000.00 be increased by HK$250,000.00 to HK$550,000.00. Their joint position is that the Defendants cannot be penalized by a Mareva injunction. The Defendants must be allowed to conduct their defence with funds frozen by the injunction. The Defendants cannot appeal unless lawyers are put in funds. Mr. Chan for the First Defendant referred me to PCW (Underwriting Agencies) Ltd. v. Dixon and another [1983] 2 All E.R. 158 and Cala Cristal JA and another v. Emran Al-Borno and others, The Times Law Reports, May 6, 1994 at page 251, as authorities in his support.

21. I indicated at once to the parties that I understood the fundamental principles applicable to this sort of cases. I announced that I was prepared to see to it that the Defendants would get funding. However, I had misgivings about the formula or terms of the order being sought although I realized that the sort of order being sought is in the common experience of the High Court.

22. Of course, usually, when the court decides that a defendant may use money from assets frozen by a Mareva injunction, an order is made specifying the limit of the amount that be drawn, say as in this case HK$300,000.00. Then, it so often happens that soon enough the defendant would come back for variation of the order to get a specified additional sum. During the life time of a Mareva injunction, two to three applications may be made for such variation. Most of the applications for variation are sorted out by consent order so they are not a bother for the court apart from the paper work. Still there are costs involved for all parties to the consent order.

23. It occurred to me that provision for litigation fund for defendants who are subject to a Mareva injunction is analogous to legal aid for poor litigants - financial assistance is given to needy litigants even though they do not have a "sure win" case. In legal aid cases, should the aided person loses his case, the Legal Aid Fund does not seek to recover its outlay from him, indeed in the vast majority of cases it would be impractical to recover legal aid expenditure from a defeated aided person. The same is equally true with the litigant at the wrong end of a Mareva injunction; such litigant on losing the trial would have used part of the moneys preserved by Mareva injunction which would otherwise be turned over to the plaintiff to satisfy judgment.

24. There are two commendable aspects of the legal aid scheme for poor litigants. First, the Legal Aid Fund does not pay out money in advance. Solicitors and counsel represent an aided person on the strength of a legal aid certificate which guarantees payment of the aided person's own legal costs. Provision for litigation fund under a Mareva injunction, according to current practice, however, is on the basis of appropriation in advance. The legal aid certificate has worked so well for so many years, why can't lawyers similarly undertake work for defendants bound by Mareva injunction on reimbursement basis? Provided that an appropriate order is made to ensure that lawyers would be paid from frozen assets in due course, there is no reason for appropriation in advance. A guaranteed reimbursement order would avert the need for repeated applications to top up approved litigation fund.

25. Secondly, The Legal Aid Scheme has in-built mechanisms to prevent litigation that is vexatious, frivolous or that lacks sufficient merits. An applicant for legal aid has to show that his case has sufficient merits, although the test of merits is not "sure win". After legal aid certificate has been granted, solicitors and counsel representing the aided person has to ensure that every step in the litigation is reasonable and that the aided person has an arguable case. If an aided person takes an unreasonable stance in any step in the litigation, the legal aid certificate may be discharged. Finally, irrespective of success or failure of the aided person's case in a step in the litigation or at trial, the aided person's own costs are taxed in accordance with Legal Aid Regulations. That taxation ensures that the aided person's own costs to be met by the Legal Aid Fund are reasonable.

26. Presently, defendants bound by a Mareva injunction is free to use the litigation fund provided for, without any check or control on whether the defendant is reasonable in taking any step or on whether the costs incurred are excessive. In the worst scenario, if a defendant, who knows better than every one else whether the allegation of fraud or debt against him is factually justified, decides to stall, he would have every incentive to fight and appeal, fight and appeal again - at every stage of the action. To him, he has nothing to lose by stringing out the proceedings and using the most expensive legal services because the money in the litigation fund would not be his even if he does not spend it. Mr. Hui for the Plaintiff in this case hit the nail on its head when he said that the mentality of a defendant who does not have a genuine valid defence is more likely to gamble with the ill gotten gains which would otherwise be frozen.

27. I hate to say this. But it is a truism that a percentage of lawyers, albeit a very small percentage only, in this sort of cases may be unscrupulous enough to undertake unnecessary work to booster their income, without regard to the interest of justice or even the interests of their own clients.

28. The present case is, I suspect, a case in point. The Plaintiff's case for the entire net proceeds from the sale of the Second Defendant's flat to be frozen is over-whelming. The amount frozen is less than one-third of the total claimed by the Plaintiff and slightly less than the amount of money held back from the Plaintiff and squandered. The amount of money frozen in court is safe. If eventually the court finds that the money frozen is hers to keep, the Second Defendant will get it back. Her living expenses and funding for proper defence have already been provided for under the existing Mareva injunction. I hope I do not appear to be conceited in saying this: appeal against the order made by me on 12th May 1999 is unjustified both from a legal and practical point of view. The appeal is just a gamble by a long shot. It defeats the very purpose of the Mareva injunction granted by Stone J and continued by Sakhrani J - to preserve assets.

29. I also observed that the Defendants had used part of the HK$300,000.00 litigation fund provided for under the existing Mareva injunction for defence of the First Defendant in the criminal case against him. Should he be found guilty by the criminal court, how ironical it would be that he had stolen from the Plaintiff and then used his ill gotten gains to finance his defence in the criminal trial for the stealing. Actually, I queried Mr. Chan for the First Defendant if he realized that the case of PCW (Underwriting Agencies) Ltd. v. Dixon and another he relied upon actually held that litigation fund provided under a Mareva injunction is for defence of the civil action. Mr. Chan suggested that the authority does not rule out use for criminal defence. I should think unless the court order expressly so allows, litigation fund provided under a Mareva injunction should only be used for defence of the very action only, not for other litigation.

30. In the event, I declined to grant a variation order in terms as sought. Instead, I made the following order: -

"that provision for the Second Defendant's own legal costs be varied in that there be paid out from the balance standing in the court's interest bearing account to the credit of the Second Defendant such amount as may be allowed by the court hearing any application, appeal or other matter in connection with this action that may take place after today in settlement of the Second Defendant's own costs already incurred in such application, appeal or other matter."

31. The order I made should in effect operate as a legal aid certificate for civil proceedings. It applies to whatever application, appeal or other step to be undertaken on behalf of the Second Defendant after the day the order was made. Of course those who represent the Second Defendant will need a specific order from the judge or master hearing the application, appeal or other matter for payment. In the normal course of events, I should think the judge or master would order that "the Second Defendant's own costs be taxed and paid out of funds in the court's interest bearing account to the credit of the Second Defendant" even though the Second Defendant is unsuccessful in the application, appeal or matter. However, if the judge or master considers that the conduct of the Second Defendant in the application, appeal or matter is grossly unreasonable, there is a residual discretion to disallow the Second Defendant's own costs. On the other hand, provided that the Second Defendant obtains an appropriate order for her own costs in the application, appeal or matter, her lawyers are guaranteed payment up to the last dollar in the money in court to the credit of the Second Defendant.

32. The order does not cover the First Defendant's legal cost because it deals with the net proceeds from the sale of the Second Defendant's flat. The Second Defendant claims that the flat or the proceeds have nothing to do with the First Defendant. At this stage, the court should not approve loan or gift by the Second Defendant to the First Defendant of what is still her money in court. It is pointless to approve increase of litigation fund for the First Defendant when he says he is basically broke.

33. The order does not touch upon the HK$300,000.00 litigation fund already approved by Sakhrani J. Of that amount, HK$200,000.00 has been paid by the First Defendant or the Second Defendant or both to solicitors as costs on account. If one studies the affirmations filed on behalf of the Defendants after 12th May 1999, there are several versions as to how much of the HK$200,000.00 has been spent. As far as I could discern, a significant amount from that HK$200,000.00 has been spent on defence of the First Defendant in his criminal case. I do not know whether such expenditure is within the ambit of the order by Sakhrani J. It is not my function to enforce that order and I have not received any complaint of breach of that order yet. All I need to say for the time being is that the order made by me on 21st May 1999 does not authorize payment out towards the amount authorized by Sakhrani J. The Second Defendant, according to her affirmation of means, still has monies and assets here and there, not a lot, but sufficient to make up the initial HK$300,000.00 litigation fund or to meet minor contingencies. Either the First Defendant or the Second Defendant or both may use what remains of the HK$300,000.00 litigation fund in any manner approved by Sakhrani J.

34. As to costs between the parties in the application heard on 21st May 1999, they should be costs in the cause. I so ordered.

35. The application to freeze the entire net proceeds of sale of the Second Defendant's flat having been fully argued by the parties, it was agreed that the return date of 28th May 1999 for the Plaintiff's summons taken out on 7th May 1999 should be vacated.