YAU CHIU WAH v. GOLD CHIEF INVESTMENT LTD. AND ANOTHER

HCA807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.807 OF 2001

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REASONS FOR DECISION

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The application before the court

1. There is before the court an application by the plaintiff for an order for cross-examination of one Yu Won Kong Dennis ("Mr Yu") on his 2nd and 4th affirmations dated 6 March 2001 and 15 June 2001, filed on behalf of the 1st defendant.

2. On 8 January 2002, after hearing argument from the plaintiff and the 1st defendant, I made the following orders :-

(1) The 1st defendant be given leave to file and serve further affidavit evidence within 21 days of 8 January 2002.

(2) Mr Yu do attend before a judge of the Court of First Instance on a date to be fixed not less than 21 days from 8 January 2002 for the purpose of being cross-examined on his 2nd and 4th affirmations and on any other affirmations filed pursuant to Order (1) above.

(3) Any other deponent of affirmations or affidavits served pursuant to order (1) above do also attend for cross-examination as aforesaid.

(4) The costs of and occasioned by the application be to the plaintiff in any event.

Background

3. The application arises from a Mareva injunction granted by Waung J on 19 February 2001 in which it was ordered, inter alia, as follows :-

"Disclosure of information

(1) The Defendant must inform the Plaintiff in writing within 14 days from today of all its assets of an individual value of HK$4,950,000 or more in Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets. The 1st Defendant may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate it.

(2) This information must be confirmed in an affidavit which must be served on the Plaintiff's solicitors within 14 days after this Order has been served on the Defendant."

4. The 1st defendant sought to comply with this order (without prejudice to its position that the Mareva injunction should be discharged) by the 2nd affidavit of Mr Yu dated 6 March 2001 ("Mr Yu's 2nd affirmation"). In that affirmation, it was stated :-

"2. I make this affirmation in compliance with the 1st Defendant's undertaking to the Court stipulated in the Order of Mr Justice Yeung on 23 February 2001, to inform the Plaintiff of all its assets of an individual value of HK$4,950,000 or more in Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets, which are as follows:

Particulars
Details of Assets	Value (HK$)	Location
244,169,585 shares of Prosper eVision Limited(closing price was $0.159 per share as at 28 February 2001)	38,822,964.01	3 million shares held with Sun Hung Kai Securities Investment Services Limitedand share certificates of the remaining shares are kept in Beijing, PRC"

I shall hereinafter refer to Prosper eVision Limited simply as "PeV".

5. Subsequent to Mr Yu's 2nd affirmation came the hearing in which the plaintiff applied to continue the Mareva injunction granted by Waung J and the 1st defendant applied to have it set aside. That hearing was before me on 20 April 2001. In a reserved judgment handed down on 15 May 2001, I discharged the injunction granted by Waung J but indicated that I was prepared to grant a fresh one. After another hearing on 12 June 2001, an order was made finalising the terms of the new injunction.

6. Subsequent to the judgment handed down on 15 May 2001, the plaintiff applied by summons dated 28 May 2001 seeking the following orders consequent upon Mr Yu's 2nd affirmation, namely that :-

(1) The 1st defendant do disclose whether any of the shares in PeV (referred to in that affirmation) was encumbered and, if so, to provide details of such encumbrances.

(2) The 1st defendant do provide on oath the information referred to above, identifying all relevant documents.

(3) The 1st defendant do disclose on oath all of its assets, other than the said shares, of an individual value of $50,000 or more whether in its own name or not and whether solely or jointly owned, giving the value, location and full details of such assets and identifying all relevant documents.

7. This summons was necessitated by the 1st defendant's refusal to clarify whether or not the PeV shares referred to in Mr Yu's 2nd affirmation were encumbered. This question had been asked in correspondence but without any positive response. It was also a question I had asked during the hearing on 20 April 2001, to which there was also no substantive response. It is, as the plaintiff puts it, a simple question. In my judgment handed down on 15 May 2001, I had commented on this.

8. The 28 May 2001 summons was dealt with by a consent order made by Mr Recorder Kenneth Kwok, SC on 13 June 2001, whereby the 1st defendant agreed to disclose voluntarily on oath all the matters requested in the summons. I would add that this order was made a day after the hearing before me in which the terms of the re-granted Mareva injunction were finalised. One of these terms was that, after argument, I increased the amount allowed to the 1st defendant to expend on legal costs from $100,000 to $1 million. I was satisfied at that time that this amount was not excessive or unreasonable in the circumstances. I shall be returning to this part of the order presently.

9. By his 4th affirmation dated 15 June 2001 ("Mr Yu's 4th affirmation"), Mr Yu sought to comply with the consent order. What was now stated regarding the defendant's assets was this :-

"2. I make this affirmation to inform the Plaintiff of the following information in relation to the 1st Defendant's assets :

	Particulars
Details of Assets	Value (HK$) (as of 8 June 2001)	Location
241,169,585 shares ofProsper eVision Limited(closing price was $0.183per share as at 8 June 2001)	44,134,034.05	The shares are pledged to a third party in Beijing as security and in consideration for a loan of HK$46,100,000.00. On 8 June 2001, the interest due on the said loan was HK$1,456,760.00
		The relevant document in respect of the above encumbrance is a Loan Agreement signed on 8 January 2001 in Beijing. The said share certificates were deposited with the said third party in Beijing and the loan was drawn down in full on the same day.
3,000,000 shares of Prosper eVision Limited	549,000.00	The shares are held in the 1st Defendant's account with Sun Hung Kai Securities Investment Services Limited and are not subject to any encumbrance. The said shares are held in the said account for convenience only.
Credit balance	97,790.97	This sum is held in the 1st Defendant's cash account with Sun Hung Kai Securities Investment Services Limited
Credit balance	122.01	Current account no. 004-002-332328-001-02 of the 1st Defendant held with Hongkong and Shanghai Banking Corporation Limited

3. The net market value of the aforementioned shares as at 8 June 2001 was HK$44,683,034.05 after taking into account the loan and interest thereon was a deficit of HK$2,873,725.95.

4. The 1st Defendant does not have any other assets of an individual value of HK$50,000.00 or more other than those of such value set out above."

10. Furthermore, although Mr Yu dealt with the 1st defendant's assets (comprising according to him the PeV shares and some minor credit balances in certain financial institutions), no documents were provided. I shall also be returning to this aspect later.

11. Not satisfied with this affirmation, the plaintiff issued the present summons for an order that Mr Yu be cross-examined on his two affirmations. The grounds were essentially that the 1st defendant had not made proper disclosure of its true financial position and that it was therefore necessary for Mr Yu to be cross-examined for this purpose.

12. Given this background, I now turn to the applicable legal principles.

The applicable principles

13. There is undoubtedly jurisdiction in the court to order cross-examination of a deponent on any affidavit or affirmation made by him in compliance with an order for discovery under a Mareva injunction : see paragraph 29/1/68 Hong Kong Civil Procedure 2002; Bekhor v. Bilton [1981] QB 923, at 944; House of Spring Gardens Limited v. Waite [1985] FSR 173 at 176. Whether or not the jurisdiction will be exercised in any case is a matter of discretion.

14. Insofar as relevant to the present application, the following principles emerge from the authorities as to how this discretion is to be exercised :-

(1) The object of an order for cross-examination is to enable a Mareva injunction to be made more effective : cf. Bekhor v. Bilton. This afterall is the justification for an order for discovery as an ancillary order to a Mareva injunction in the first place. It has to be remembered that the purpose of such cross-examination is to obtain more information as to a defendant's assets and as to the whereabouts of such assets in circumstances where the court has already formed the view that there exists a risk of dissipation. The purpose is not to enable information to be gathered so as to impugn the defendant's credit or to investigate whether there has been a breach of the Mareva injunction and thereby obtaining material for possible contempt proceedings : see Bayer v. Winter (No. 2) [1986] 1 WLR 540.

(2) An order for cross-examination is far from being automatic. On the contrary, such orders, if made pre-judgment, are rare. The court is more likely to make such an order post-judgment than pre-judgment. This is because, pre-judgment, there is no certainty that at the end of the day the plaintiff will win and if the claim fails, then the time (and expense) involved in a cross-examination exercise would have been wasted, not to mention the injustice to a defendant of being subject to what is often likely to be hostile cross-examination. I would also observe here that the cross-examination of a deponent is not simply an examination on an appointed date. It is possible if not probable that further discovery in preparation for the hearing may be required. The production of accounts in the case of a company is perhaps an example of this. Pre-judgment, therefore, the making of such an order runs the risk of producing a trial within a trial resulting in the court and the parties being distracted at least to a certain degree from what is the real purpose of an action, namely, the proper adjudication of the dispute between the parties. It has been commented that the granting of an order for cross-examination pre-judgment is exceptional and a strong step often difficult to justify : see Mareva Injunctions and Anton Piller Relief by Steven Gee, QC (4th edition) at page 354. See also in this context : Wendy Wenta Seng Yuen v. Philip Pak-Yiu Yuen [1984] HKLR 431, at 436 E-H per Fuad JA.

(3) I would also add here that it is not permissible for a cross-examination to be conducted for the purpose of eliciting material to be used at trial : see CBS United Kingdom Limited v. Perry [1985] FSR 421 at 425-6. Where the cross-examination will deal with the same issues as those at trial, exceptional circumstances will have to be shown. In Grand Empire Holdings Limited v. Marco International (HK) Limited, unreported, 7 December 1999, Burrell J, it was said at page 4 :

"In my judgment, if the cross-examination is to be on the same issues as those which form the basis of the dispute between the parties, an order under Order 38, rule 2, should rarely, if ever, be made. In this case, there are no exceptional circumstances which would merit such an order."

(4) True that the court therefore has to undertake a balancing exercise, but ultimately the key to whether an order should be made lies in my view on the justice of the situation facing the court. I gratefully adopt the simple and practical formulation of the discretion by Burrell J in Grand Empire Holdings Limited v. Marco International (HK) Limited, where at page 2, the learned judge said :

"The court has an unfettered discretion to order cross-examination and that discretion should be exercised in favour of the parties seeking it when the court is satisfied that it is necessary in the interests of justice. In other words, if there is a real risk that justice will not be done if cross-examination is not allowed, then leave should be granted."

(5) Put simply, the question for the court is this : Would the making of an order result in justice being achieved; conversely, if an order were not made, would there be injustice?

15. It may be argued (as indeed Mr Wong for the 1st defendant has done) that the terms of a Mareva injunction itself, applying as it does to the whole of a defendant's assets up to a stipulated limit, gives sufficient protection to a plaintiff without the need for any further orders such as an order for cross-examination. The argument runs essentially thus : since the Mareva injunction affects all assets (subject to exceptions and limits), why is it therefore necessary to try to identify specific assets? If the defendant breaches the injunction by dealing with his assets, whether disclosed or not, he is liable to be held in contempt.

16. In my judgment, these are not convincing arguments at all. Mareva injunctions are exceptional orders but once granted, they must be made effective and practical. The possibility of contempt proceedings (which are usually long drawn out applications) cannot by itself provide the only practical means of making effective a Mareva injunction. The reason why ancillary orders to a Mareva injunction are made is so that as far as possible, precise assets of the defendant are located and identified. I have already in my judgment handed down on 12 June 2001 referred to the practice that parties seeking Mareva relief should identify specific assets. The identification of specific assets enables a Mareva injunction to be made more effective. For example, third parties may hold the assets of a defendant and it is important that they are informed of the injunction so as to avoid any dealing with the relevant assets, whether knowingly or unwittingly. The reference to the position of third parties as a standard feature of the terms of a Mareva injunction underlines just how common it is that third parties are involved with the assets of a defendant. The present case provides an example of this. According to Mr Yu's 4th affirmation, the share certificates for the PeV shares are deposited with or held by third parties.

The present case

17. It will be apparent that the present application by the plaintiff is for an order for cross-examination of the deponent of two affirmations pre-judgment. The issues that divide the parties in this action (which I have earlier set out in my judgment dated 15 May 2001) will have to be resolved at a trial yet to take place.

18. Mindful as I am of the desirability not to have unnecessary distractions deflecting the parties and the court from dealing with the real controversy in this action, I am of the view that in the present case, it would be in the interests of justice that an order for cross-examination be made.

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

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

21. In the present case, the 1st defendant was ordered to file affidavit evidence giving discovery of its assets. It purported to do so by Mr Yu's 2nd and 4th affirmations.

22. I regret to say that I have found the picture presented by the 1st defendant of its financial position far from satisfactory. I come to this view for the following reasons :-

(1) In Mr Yu's 2nd affirmation, the overwhelming impression given by him is that the 1st defendant had assets (being the PeV shares) to the value of $38,822,964.01. In other words, there were more than enough assets, as disclosed, to meet any judgment which may be given against it in this action. It will be recalled that the limit of the Mareva injunction is $4,945,553.

(2) Some three months later, by Mr Yu's 4th affirmation, the position had dramatically changed. Instead of having sufficient assets to meet any judgment, the 1st defendant was now contending that it was in the position of being effectively unable to meet any judgment made against it. This at least was the impression it was giving. The main difference between the 2nd and 4th affirmations was that the PeV shares were now said to be encumbered and all along encumbered, even at the time Mr Yu's 2nd affirmation was served.

(3) Although documents were referred to, none was exhibited. Mr Wong submitted that under the terms of the consent order all that the 1st defendant had to do was to "identify" documents, not exhibit them. Be that as it may (and I should not be taken to accept this), the fact remains that there are no documents to support this quite dramatic (to say the least) turn of events.

(4) At the hearing on 12 June 2001, following an application by the 1st defendant which was resisted by the plaintiff, I ordered as one of the Exceptions to the injunction, that the 1st defendant was to be allowed to spend up to $1 million on legal advice and representation up to and including trial. This was an increase from the previous figure of $100,000. In my judgment, I said :

"In relation to the amount that the 1st defendant should be permitted to spend on legal costs for the action, the figure which I allow for legal costs is $1 million. The 1st defendant must be allowed to defend the action properly. A Mareva injunction is not made to cause disruption. Its function is to freeze a party's assets in the face of a risk of dissipation. Expenditure on matters such as daily living expenses and legal costs will always be allowed where the amounts sought are reasonable. Mr Chan, for the plaintiff, submits that it is necessary to ascertain the totality of the 1st defendant's assets before such an allowance can be made. I disagree. Only where the amount sought is unreasonable or excessive, then perhaps it may be relevant to look at the totality of the plaintiff's assets. However, I am of the view that a figure of $1 million is neither excessive nor unreasonable."

(5) I would not have allowed the increase if I had known that the available assets of the plaintiff were non-existent. Indeed, it would have been pointless to increase the amount from $100,000 to indeed any figure if there were no assets freely available to the 1st defendant. No explanation has been given to me (and none was given when the 1st defendant served its affidavit evidence in response to the present summons) as to why an application was made for an increase in the allowance for legal fees when, apparently, the 1st defendant had no available assets. This gives rise, as the plaintiff submits, to an inference that there may be other assets which the 1st defendant has not disclosed. I see the force in these submissions.

23. Furthermore, the unsatisfactory feeling that the court has been left with, is exacerbated by the conduct of the 1st defendant :

(1) It is clear from the correspondence before me that the plaintiff has been enquiring of the 1st defendant since at least 11 April 2001 as to whether the PeV shares were encumbered. No positive reply to this simple question was received until Mr Yu's 4th affirmation.

(2) I have already referred to the inquiry I raised at the hearing on 20 April 2001 as to whether the shares were encumbered. Thus, from that time at least, the 1st defendant must have been aware of the importance of this question.

(3) The defendant may well have an explanation for its conduct and an answer to the queries raised. In my judgment, an order for cross-examination is appropriate in the circumstances I have mentioned. This would be to enable the plaintiff and the court to ascertain from the defendant its true financial position. The attempts on the 1st defendant's part so far to disclose its true financial position have been, to put mildly, somewhat unenthusiastic.

24. Mr Wong said that if I was in any way minded to make an order, instead of an order for cross-examination, I should order the 1st defendant to file further affidavit evidence to explain its financial position as, I suppose, some sort of last chance to be given to it. I have decided not to make such an order in lieu of an order for cross-examination, for the following reasons :-

(1) The defendant has now had two opportunities to state its financial position on oath. This has not provided the desired result.

(2) The defendant's conduct so far also leads me to the view that rather than have a situation in which more time is taken up by continued requests for information, it would be better simply to have the 1st defendant's witnesses cross-examined. I echo here the sentiments of Cumming-Bruce LJ in House of Spring Gardens Limited v. Waite where at 183, the learned judge said :

"It may be that there are situations in which the circumstances demonstrate that it is more sensible, if only for reasons of speed and urgency, not to order further affidavits in order to fill that vacuum alleged to exist in the affidavits filed pursuant to the original order, but to proceed at once to order that the defendants attend for cross-examination upon their affidavits. The purpose of the cross-examination would be to elicit with greater particularity the extent and the whereabouts of the defendants' assets."

25. It will be recalled that one of the orders made by me at the conclusion of the hearing was that leave was to be given to the 1st defendant to file and serve further affidavit evidence. This does in fact enable another opportunity to be given to the 1st defendant to fill in the gaps in the existing evidence and to reveal its true financial position as required by the previous orders. If satisfactory evidence is served, there would then probably be no need for a cross-examination to take place and the plaintiff would be at risk at least as to costs to proceed in such circumstances. However, if the evidence provided is not satisfactory, it would be desirable to have cross-examination of the relevant deponents without yet another application to court.

26. The 1st defendant submits that it should not be harassed by an order for cross-examination. Whether the 1st defendant will be harassed or not, the object of the exercise is to enable, as I have said, the plaintiff and the court to ascertain the 1st defendant's true financial position. Insofar as any harassment is involved (and I see none), the 1st defendant has to a large extent brought this upon itself.