HERBERT SMITH FREEHILLS (a firm) v. CHRIS AU AND ANOTHER

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3030 OF 2015

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JUDGMENT

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Introduction

1.  This is the hearing of the summons taken out by the plaintiff (P) on 21 November 2016.[1] It is about the post‑judgment worldwide Mareva Injunction which P has obtained against the first defendant (D1).  The first question before the court is whether the said injunction, which was first granted ex parte[2] and subsequently continued inter partes,[3] should be further continued and if so, whether and to what extent it should be varied.

2.  If P’s injunction was to continue, then the second question for the court would be about the scope of the disclosure order against D1 which is ancillary to and in aid of the said injunction.[4]

3.  As regards the first question, Ms Au, counsel for D1, opposes the continuation of the injunction and asks that it be discharged.  She relies on two main grounds: (i) there was no genuine urgency to justify the ex parte application and that any urgency was “self‑induced” by P as a result of their own delay in taking out enforcement action; and (ii) there was material non‑disclosure by P in their supporting affidavit used at the ex parte stage.[5]

4.  On the other hand, Ms Cheung, counsel for P, submits that there were genuine reasons why P had not sought to enforce the judgment debt they obtained against D2 (D1’s co‑defendant) earlier and that there was real urgency for the ex parte application against D1. Besides, it is her major contention that there was no material non‑disclosure. However, if the court was not with her on the latter point, her fallback position would be that any material non‑disclosure was innocent rather than deliberate and in which case she would ask for a re‑grant of the injunction.

5.  I note that the questions about lack of urgency and material non‑disclosure had in fact been raised inter parte on 25 November 2016.[6] As such, there may be an argument that the two points could and should have been dealt with at that hearing.  However, Ms Cheung, by referring to §18/19/10, Hong Kong Civil Procedure 2017 (HKCP), has reservation about the applicability of the boarder principle of res judicata in Henderson v Henderson[7]to interlocutory proceedings and she does not seek to rely on that principle.  Given the stance of counsel, I would not deal with the point in the discussion below.

BACKGROUND

6.  Briefly stated, P is a firm of solicitors who had acted for D1 and D2 in a High Court action.[8] One core issue in that action was the existence and extent of the beneficial interest of various parties in the shares of D2.  It was the claim of the plaintiffs in that action that they also had beneficial interests and that they were entitled to two‑thirds of the money in the DBS bank account of D2.  On the other hand, D1 claimed that the plaintiffs in that action did not have any interests in D2 and that the money in D2’s DBS bank account belonged wholly to him.

7.  P’s claim against D1 and D2 was for unpaid fees for the legal services which they had provided to them in the High Court action.  P obtained a default judgment against D2 for about $6.21 million plus interest and costs on 30 May 2016[9] and a summary judgment against D1 for about $7.45 million plus interest and costs on 12 August 2016.[10]  There had been no appeal from those judgments.  However, neither D1 nor D2 had paid any of the judgment debts they owed to P and meanwhile the interests kept on accruing.

8.  It is pertinent to note that whilst the liability of D2 to P was “joint and several” with that of D1, D1’s indebtedness to P was greater than that of D2 by about $1.24 million.  Without condescending to the details of calculation and set‑off, it suffices to say (and there is no dispute) that as at 18 November 2016 when P applied ex parte for the injunction against D1, the total indebtedness of the defendants to P had rolled up to about $9.31 million.  It was also up to that amount that D1’s assets were eventually frozen by the injunction P obtained.  P stated in their supporting affidavit that they were at that stage not seeking to enforce their judgment against D2.[11]

9.  Nevertheless, as the matter developed, on 27 January 2017 P obtained a garnishee order absolute relating to the aforesaid D2’s DBS bank account, as a result of which a total of about $7.46 million was paid to P.  After deducting that sum, as at 14 February 2017 the balance of D1’s indebtedness to P was reduced to $1,952,977.76, with a daily interest of $374.30.  Given this recent development, P agrees that their injunction against D1 should be “downsized” to $1,952,977.76.

CONSIDERATION

Urgency for ex parte application

10.  The relevant legal principles governing post‑judgment worldwide Mareva Injunction are well‑established: see, e g, HKCP 29/1/65‑71 & 83; also Spry on Equitable Remedies.[12]  I also bear in mind the ex parte nature of P’s application which carries with it the duty to make full and frank disclosure: see, e g, HKCP at §29/1/51.  The law is largely not in dispute.

11.  As aforesaid, P obtained judgments against D1 and D2 respectively in August and May 2016.  However, P had not applied for any injunction until mid‑November 2016.  In view of the fact that P was subsequently able to recover a large portion of their debts from D2, Ms Au contends that any perceived urgency for the ex parte application was in fact attributed to P’s delay in taking out enforcement action against the defendants. It is further submitted that had P taken out enforcement against D2 earlier, the value of D1’s assets that needed to be restrained would have been greatly reduced.

12.  In order to assess the validity of Ms Au’s contention above, it is necessary to examine the state of affairs as at mid‑November 2016 when the ex parte application was made.  The following facts taken from P’s supporting affidavit, which are either not in dispute or in my view not disputable, are pertinent:

(i) since 29 January 2014, D2’s DBS bank account had been frozen by an injunction granted by Zervos J. [13]  As such, P could not have enforced their judgment against that bank account unless and until that injunction was discharged;

(ii) there is no evidence before me as to when and how the injunction against D2’s DBS bank account was discharged. Nevertheless, it was something outside P’s control;

(iii) P received news that the High Court action had settled or was in the course of being settled which would involve a significant payment to D1.  At that time P was no longer D1’s solicitors and did not know about the terms of the settlement.  There were, however, reasons for P to believe that the settlement might lead to the discharge of injunction against D2’s DBS bank account, so that D1 could have access to some or all of those funds;[14]

(iv) P’s experience with D1 caused them to believe that there was a high risk of an immediate dissipation of any assets which D1 received by way of the settlement and that he would continue to make every effort to avoid paying his debts to P;[15] and

(v) P’s stated purpose for seeking the injunction against D1, which I accept was and is their genuine purpose in spite of the allegations of D1 to the otherwise,[16] was to allow them to secure and properly identify his assets so that they could determine the most effective course to encore the judgment against him.[17]

13.  In view of the above, I am satisfied that what prompted P to apply for the Mareva Injunction against D1 was the settlement which had been, or would be imminently reached in the High Court action with respect to the funds held by D2 in its DBS bank account and the real risk that those funds would be used by D1 and not used to pay his outstanding debts to them.  Therefore, I am also satisfied that there was genuine urgency for P’s application arising from the aforesaid settlement and that ground alone was sufficient to justify the application ex parte.

Non-disclosure

14.  Ms Au relies on the following matters which, she contends, constitute material non‑disclosure:

(i) P not giving reasons for not taking enforcement action against D2 in the supporting affidavit;

(ii) P not explaining the “practical effects” of the bankruptcy petition against D1 on his bank accounts;

(iii) P’s failure to disclose the possibility of them applying to be substituted as the petitioners in the bankruptcy proceedings against D1 in case of the withdrawal of the original petitioning creditors; and

(iv) P’s failure to disclose that they had acted in breach of their duty of confidentiality by making use of an affirmation of D1 which they had obtained in the capacity as his then legal adviser.

15.  As regards (i), P had already disclosed in their supporting affidavit that they had no present intention to seek enforcement against D2.[18] It was also stated that D2’s DBS bank account had already been subject to an injunction granted by Zervos J.[19]  Therefore, in my view it would be obvious to any court reading the supporting affidavit that it was simply not a viable option to take any enforcement action against D2 then.  Secondly, even if I were wrong to say that the point would be obvious, objectively speaking the existence of the injunction against D2’s DBS bank account would have rendered any enforcement action against that bank account not viable.  As such, I do not accept that there was a material non‑disclosure just because a plaintiff had omitted to mention an option which was objectively not open to him.  Thirdly, the liability of D1 and D2 to P being “joint and several”, it is a matter entirely for P which of them to go after or in what consequence.  I can see no valid cause of complaint on the part of D1, had P decided not to go after D2 at all.  There is simply no duty on P to give reasons for the course they had taken.

16.  As to (ii), P had stated in their supporting affidavit that in September 2016 there were bankruptcy petitions in Hong Kong as well as in Singapore against D1, that in both jurisdictions P had entered a Notice of Intention to Appear and that they supported the petitions.[20]  Ms Au accepts that a bankruptcy petition would not have the legal effect of preventing the subject of that petition from dissipating his assets if he wished to do so.  The present complaint of Ms Au is that P had not pointed out in their supporting affidavit that the “practical reality” of the bankruptcy petitions was that D1’s bank accounts would be frozen and this would have a bearing on the assessment of the risk of assets dissipation.  As such, it is submitted that there was a duty on P to inform the court in their supporting affidavit of that “practical reality”.

17.  I am unable to accept Ms Au’s above submission.  My reasons are as follows:

(a) I do not think that the court needs to be specifically informed of the “practical reality” of a bankruptcy petition with regard to the subject’s bank accounts.  That, in my view, is a matter of common sense and judicial notice.

(b) The evidence before the court was that D1 had the practice of controlling his assets through nominee companies. As such, unless the banks were aware of the relationship between D1 and his nominee companies; otherwise, the bankruptcy petitions would unlikely to have the practical effect of freezing the bank accounts of D1’s companies as Ms Au contends.

(c) There was evidence before the court that D1 had assets other than monies in bank accounts and the bankruptcy petition would not have prevented D1 from dissipating those assets.  Moreover, as Ms Cheung is quick to point out, the rights of a trustee in bankruptcy being territorial, it is conceivable that D1 could dissipate his assets situated outside of Hong Kong beyond the reach of any hypothetical future trustee in bankruptcy.

Based on the above, I am of the view that the utility of specifically informing the court of the practical effects of a bankruptcy petition would be minimal and the omission to do so in the supporting affidavit in an ex parte application like the one under consideration is not a material non‑disclosure.

18.  As to (iii), P stated in the supporting affidavit that they received news that the Hong Kong petition for bankruptcy would be withdrawn shortly as a result of a settlement.  P also stated that the Singaporean petition was being withdrawn because of a successful appeal by D1. The present complaint of Ms Au, however, is that P had failed to disclose that they could have applied to be substituted as the petitioners so that the bankruptcy proceedings might continue.  Reliance was placed by Ms Au on the fact that P is an international law firm with vast experience in litigation matters.  Ms Au further pointed out that P had in fact subsequently applied for substitution.  It is submitted therefore that P had painted a “highly misleading” picture in their supporting affidavit that the bankruptcy proceedings would shortly come to an end.

19.  When assessing Ms Au’s contention above, I take into account the following:

(a) from a natural reading of P’s supporting affidavit, they referred to their support of the bankruptcy petitions both in Hong Kong and in Singapore just to show that they had sought to enforce their judgment against D1;[21]

(b) it had never been P’s position that the bankruptcy petitions would have the effect of mitigating against the risk of D1 dissipating his assets;

(c) there was nothing to suggest that P had already formed the intention to apply for substitution at the time they made the ex parte application for Mareva Injunction;

(d) P had expressed in the supporting affidavit that they intended that the bankruptcy proceedings should continue. It was more than a month after P’s ex parte application that the Hong Kong bankruptcy petition was withdrawn by way of a consent summons.[22]  Upon being informed of the withdrawal, P immediately wrote to court to apply for substitution;[23] and

(e) the statutory demand upon which P was entitled to rely for the purpose of substitution in the Hong Kong bankruptcy proceedings was just a demand in respect of costs orders totalling $204,000 and interest thereon which represented only a small fraction of the judgment debt which D1 owes to P.

20.  Nevertheless, having regard to Brink’s Mat Ltd v Elcombe,[24] I am unable to say that any court reading about the imminent prospect of the bankruptcy proceedings being withdrawn would not regard it as material to the issue of urgency, even though P had not specifically relied on this as a ground for showing urgency.  Moreover, the withdrawal of the bankruptcy proceedings may bear on the risk of assets dissipation in that the administrative measures voluntarily imposed by the banks on the subject’s accounts would then be lifted.  The weight to be attached to these considerations should be a matter for the court to decide.  As such, I am inclined to the view that P’s omission to mention the possibility of them applying for a substitution so as to allow the Hong Kong bankruptcy proceedings to continue amounts to a material non‑disclosure.

21.  However, I note that the court has a discretion, notwithstanding proof of material non‑disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms.  In the present case, I find that there are ample grounds to justify the continuation or re‑grant of the injunction against D1.

22.  Firstly, there is nothing to suggest that the omission was deliberate rather than innocent.  On the other hand, I am satisfied that it had always been P’s intention to seek enforcement of its judgment against D1 and if necessary by declaring him bankrupt.  That has been made explicit in P’s supporting affidavit.  I am satisfied that the omission was innocent.

23.  Secondly, I am of the view that D1’s litigation conduct exhibited in the present proceedings has been reprehensible:

(i) At the hearing before DHCJ Fung, SC, D1 sought to oppose the continuation of P’s injunction by submitting that his assets were “effectively frozen” due to the bankruptcy petition without informing the court that he was at that time negotiating a withdrawal with the petitioning creditors.

(ii) In the affirmation D1 filed on 16 December 2016 in opposition to the continuation of P’s injunction, he still maintained that the bankruptcy petition would have the effect of freezing his assets. Again, nothing was said about the imminent withdrawal which was to take place a few days afterwards on 23 December 2016.

(iii) It lies ill in the mouth of D1 on the one hand to assert that P had failed to disclose the possibility of a substitution, whilst on the other hand opposed P’s application for substitution which eventually led to the dismissal of the bankruptcy petition.[25]

24.  Thirdly, as P’s application to be substituted as the petitioning creditors has been successful opposed by D1, the non‑disclosure is very much “water under the bridge” and any effect it may have on the present proceedings would be very limited.

25.  In the circumstances, having regard to the legal principles stated in Excel Courage Holdings Ltd v Wong Sin Lai,[26] I am of the clear view that this is a suitable case to exercise the court’s discretion to allow P’s injunction to continue.  As such, there is no need to order a re-grant. However, if need be, I will make such an order in spite of the aforesaid material non‑disclosure.

26.  As to (iv), which is about P’s use of the information contained in D1’s 2014 affirmation filed in the High Court action for the purpose of their application for injunction against D1, this point can be dealt with shortly.  D1’s affirmation had not only been filed with the court, served on the plaintiffs in the High Court action, but had also been referred to in written submissions for the hearing before Zervos J and the order subsequently made by the learned judge on 11 July 2014.[27]  As such, the contents of D1’s affirmation has already been in the public domain and clearly neither privileged nor confidential.  There is no substance in this point.

Variation of the Mareva Injunction

27.  Ms Au asks that, if P’s injunction is to continue, then it should be varied as to (1) the amount; (2) the geographical scope; and (3) the assets/ entities specified in Schedule 3 and Schedule 4.

28.  As regards (1), Ms Cheung has already agreed that P’s injunction should be “downsized” to $1,952,977.76.

29.  As regards (2), there is evidence contained in P’s supporting affidavit showing that D1 at least had a bank account in Singapore.[28]  Ms Au submits that P’s allegation is vague and that they have failed to satisfy their duty to make “due inquiries” about D1’s assets.  However, Ms Au has not specified what types of inquiry she has in mind.  There are also the added difficulties arising from a banker’s duty of confidentiality to its customers.  In the circumstances, I am unable to see why P’s injunction should be limited to D1’s assets in Hong Kong.

30.  As to (3), Schedule 3 (List of Properties and Assets in Hong Kong)[29] and Schedule 4 (List of Accounts in Hong Kong)[30] of the Mareva Injunction were based on the information contained in D1’s 2014 affirmation filed in the High Court action.  In the absence of any evidence to the contrary, I am unable to see why P should not be entitled to rely on what D1 had deposed to in that affirmation.  However, Ms Cheung has fairly indicated that, based on the information now available, Item 6 on Schedule 3 (Catalunya Limited) and Items 1 and 3 on Schedule 4 (Kudeta Limited and Catalunya Limited) should now be removed and I so order.

Scope of disclosure order

31.  The disclosure sought by P in paragraph 2 of their summons dated 21 November 2016[31] follows closely the standard form provided in Practice Direction 11.2, save and except that (i) it requires D1 to disclose his assets whether in or outside Hong Kong and (ii) in the case of bank accounts, D1 is required to provide the name and address of the branch, the name of the account holder, the amount of the balance and a list of all the authorised signatories to the account.

32.  Ms Au takes exception to (i) and (ii) above, submitting that strict compliance with the Practice Direction is generally expected, that any departures have to be explained and that P has failed so to do.

33.  I am unable to accept Ms Au’s above submissions.  As regards (i), in case of a worldwide Mareva Injunction, a disclosure order requiring the defendant to disclose his assets both in and outside Hong Kong is justified in so far as there is evidence that he has assets in and outside Hong Kong.  As regards (ii), the addition requirement is in my view reasonable and not objectionable as regards bank accounts.

34.  In paragraph 3 of P’s summons, they ask that D1’s disclosure should include, but not limited to, various forms of property including bank accounts in his personal names (3.1), bank accounts in company names (3.2), investments (3.3), shares (3.4), securities (3.5), properties (3.6), monies (3.7), cars (3.8), personal effects (3.9) and the items of any settlement in the High Court action insofar as relating to D1 (3.10).  Paragraph 4 of P’s summons is the standard requirement that D1 is to verify the information he disclosed by an affirmation. 

35.  Ms Au criticises that it is not clear whether paragraph 3 is merely an enumeration of paragraph 2 and that no specified amount was provided for the items listed out in paragraph 3.  Ms Au also criticises that Item 3.10 is vague and may involve D1 breaching his duty of confidentiality to other parties, although she accepts that confidentiality is not by itself a reason to oppose discovery/disclosure: PCCW-HKT International Ltd v New World Telephone Ltd[32] citing Science Research Council v Nassé.[33]

36.  In response, Ms Cheung clarified that:

(i) paragraph 3 of P’s summons is just an elaboration of paragraph 2;

(ii) it has always been P’s intention that the $100,000 lower limit specified in paragraph 2 also applies to paragraph 3 and she has no difficulty adding the $100,000 lower limit to paragraph 3 to make that explicit; and

(iii) as regards Item 3.10, all that P is interested to know is the payments or benefits, rather than their sources, which D1 has received or is to receive from the settlement.

37.  During exchange with counsel, I raised with Ms Cheung my concern about the wording of Item 3.2 which reads as follows:

“all bank accounts in the name of all Hong Kong private or foreign companies and/or trusts or other vehicles over which the 1^st Defendant has an interest;”

Upon reflection, Ms Cheung agrees that the item should be re‑phrased as follows:

“all bank accounts in the name of all Hong Kong private or foreign companies and/or trusts or other vehicles over which the 1^st Defendant has the power, directly or indirectly, to dispose of or deal with as if they were his own;”

38.  As regards Item 3.10, Ms Cheung agrees to amend it as follows:

“Any payments of money, properties, choses in action and any benefits received or to be received by the 1^st Defendant, whether directly or indirectly, and any confirmation of the 1^st Defendant’s ownership of assets, either directly or indirectly, contained in any settlement relating to HCA 183/2014.”

As regards the above proposal, Ms Au was unable to inform the court whether D1 has in fact reached any settlement with the other parties in the High Court action. 

39.  Having considered the submissions from both sides, I reject Ms Au’s submission that paragraph 3 of P’s summons is redundant.  I am of the view that although there is substantial overlap between the items covered in paragraph 2 and paragraph 3 of P’s summons, the specific items listed in paragraph 3 would provide further guidance to D1 as to what is required of him and would avoid any misunderstanding.  Furthermore, I am of the view that the above proposed amendments to paragraph 3 by Ms Cheung are fair and reasonable and I endorse them.

CONCLUSION

40.  Based on the above, I order that the worldwide Mareva Injunction against D1 granted on 18 November 2016 and continued on 25 November 2016 is to continue until further order save and except that:

(i) the value of the assets restrained is now reduced to “up to HK$1,952,977.76;

(ii) Item 6 on Schedule 3 is now removed; and

(iii) Items 1 and 3 on Schedule 4 are now removed.

41.  As regards disclosure of information, I make an order in terms of paragraphs 2, 3 and 4 of P’s summons dated 21 November 2016 save and except that:

(i) the words “of a consolidated value of HK$100,000 or more” is inserted at paragraph 3 after “the following assets”;

(ii) Item 3.2 is amended as stated above; and

(iii) Item 3.10 is amended as stated above.

COSTS

42.  It is trite that costs are at the discretion of the court.  I have regard to O 65 r 5 of the Rules of the High Court and the commentary at §29/1/55, HKCP.  I am also alive to the principles stated in Re Elgindata Ltd (No 2).[34]

43.  In my view, despite the slight amendments to the Mareva Injunction and the terms of the disclosure order, P is the real winner of the case.  In the circumstances, I make an order nisi that P has the costs of this application and the hearing.