SECURITIES AND FUTURES COMMISSION v. WONG KWONG YU AND OTHERS

HCMP 1496/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1496 OF 2009

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D E C I S I O N

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1.  On 4 August 2009, I made an order on the ex-parte application of the SFC against the four defendants herein, to restrain their disposition of assets up to value of HK$1,655,l67,000, being the alleged loss suffered by GOME Electrical Appliances Holding Limited (“GOME”) resulting from a fraudulent scheme devised by the 1st defendant to facilitate the sale of his shares in GOME to the detriment of GOME in order to raise a substantial sum for the repayment of his debts.

2.  Today is the return date of the inter partes summons of the SFC for continuation of the order.

3.  The 1^st defendant is a director and 100% beneficial owner of the 3^rd and 4^th defendants, which are companies incorporated in the British Virgin Islands.  The 2^nd defendant is the 1^st defendant’s wife.

4.  Service of the order has been effected on the 3^rd and 4^th defendants.  The SFC has not been informed if the service of the order and other documents on the 1^st and 2^nd defendants by judicial authorities of the PRC has been successful.

5.  The 1^st and 2^nd defendants have not taken any steps to comply with the order.  They have not instructed solicitors to represent them in these proceedings.

6.  The 3^rd and 4^th defendants have retained solicitors and appeared by leading counsel today.

7.  By paragraph 3 of the ex-parte order, the defendants are required to deliver forthwith to the court certificates of shares of GOME to the value of HK$1,655,167,000.

8.  On 10 August, in compliance with the order, the 3^rd and 4^th defendants lodged into court 27 share certificates of GOME, representing 779,225,678 shares.  The closing price of the GOME shares on that day was HK$2.45, giving a value to those shares deposited of just over HK$1.9 billion, which was at that time comfortably in excess of the limit of HK$1.65 billion in the order.

9.  The SFC issued a summons on 3 September, seeking a variation of the order, for provision to be made for a mechanism to take into consideration the fluctuation in the value of GOME shares.  This was opposed by the 3^rd and 4^th defendants.

10.  The relevant paragraphs in the draft order submitted by the SFC are as follows:

“5.     Subject to paragraph 7 hereinbelow, the 3^rd and 4^th Defendants must not in any way dispose of or deal with shares of GOME up to the value of HK$1,655,167,000;

6.      In the event that the total current market value of 779,255,678 shares of GOME decreases to a level below HK$1,655,167,000 at the close of 3 consecutive trading days, upon notice given by the Plaintiff, the 3^rd and/or 4^th Defendants shall, as soon as reasonably practicable and in any event no later than 3 days after the occurrence of the shortfall, pay into the Court a sum equivalent to such shortfall and/or deliver certificates of the shares of GOME to the value equivalent to such shortfall to the Court;

7.      In the event that the total current market value of 779,255,678 shares of GOME increases to a level above HK$1,655,167,000 at the close of 3 consecutive trading days, the 3^rd and/or 4^th Defendants shall be at liberty to withdraw from the Court certificates of the shares of GOME to the value equivalent to such surplus as confirmed by the Plaintiff;

8.      The 3^rd and 4^th Defendants to retain sufficient unencumbered funds or shares in Hong Kong for the purpose of complying with the Order in paragraph 6.”

11.  The SFC adduced evidence showing in the three weeks between the date of deposit of the share certificates on 10 August and 1 September 2009, the closing price of GOME shares has fluctuated between a high of HK$2.45 and a low of HK$2.06.  This translates to a value ranging from HK$250 million well in excess of the limit in the order to a deficit of HK$50 million.  The break even price is HK$2.13.  I was given a further update of the trading from 2 to 7 September at the hearing today.

12.  Share prices will of course fluctuate, but the volatility of GOME shares is a far cry from the situation in Re Goldcone Properties Ltd (in liquidation), HCCW No. 391 of 1999, 15 April 2004, where Reyes J was looking at a difference between the limit of disposition in the Mareva injunction and the value of the assets subject to the injunction of somewhere between HK$3 to 4 million.

13.  In view of the volatility in price of GOME shares, the SFC deems it prudent to seek a variation of the order to protect against future fluctuations in the share price until trial of these proceedings or further order.

14.  Mr Poon, SC submitted on behalf of the 3^rd and 4^th defendants that the mechanics proposed are impracticable as this would involve the court constantly policing compliance with the order or hearing applications resulting from the fluctuation of share prices.

15.  Mr Westbrook, SC submitted that the proposed variation is to lay down a mechanism by the parties giving notice to each other if the share price should rise or fall below the limit.  This would not involve the court constantly to hear applications in the event the value of the shares deposited should be greatly in excess of the limit of the injunction or should fall well below it.

16.  I have considered the proposed mechanism in the light of Mr Poon’s submission.  In theory, if the aggregate value of the shares deposited should rise or fall below the limit in the order at the closing of three consecutive trading days by as little as 10 cents, the mechanism would be triggered.  It is no answer to say that the parties could be left to their good sense to act on the mechanism only when there is a sustained rise or fall in the value of the shares or if the fluctuation is so great that they should have resort to the notice system.

17.  In the decision of the Court of Appeal in Lam Ping Wan and Another v Ip Lam On, CACV No. 158 of 2000,13 July 2000, the court below had ordered that there be liberty to the defendant to apply for further fortification of the cross-undertaking in damages if the shares provided as security should substantially diminish in value because of a fall in the price of the shares before trial.

18.  The Court of Appeal was of the view that it was undesirable to word the provision in such terms.  The proper approach to vary an injunction would have given ample discretion to the court hearing the application and it is undesirable that the discretion of the court should be fettered in any way or that provision should be made for liberty to apply in some manner to foreshadow what might happen on a future application to vary.

19.  The proposed order of the SFC is a lot more restrictive than the provision considered by the Court of Appeal.

20.  I note also Mr Poon’s submission that paragraph 8 of the draft order is potentially oppressive as it would require crystal ball gazing on the part of the 3^rd and 4^th defendants to retain “substantial unencumbered funds or shares in Hong Kong” for the purpose of complying with the order, and could result in the freezing of a large portion of their assets beyond the limit in the order.

21.  For these reasons, I refuse the application of the SFC to vary the injunction by making an order in terms of paragraphs 5 to 8 of the draft submitted to me.

22.  I make the following orders today:

(1)  leave be granted to the plaintiff to withdraw the summons dated 5 August 2009 as against the 3^rd and 4^th defendants;

(2)  the ex parte order made on 4 August 2009 be continued until trial or further order as against the 1^st and 2^nd defendants;

(3)  the 23 certificates of the 684,000,000 shares of GOME deposited by the 3^rd defendant with the Court on 10 August 2009 be held by the Court until after the determination of an application by the 3^rd and 4^th defendants to discharge or vary the order herein or until trial or further order;

(4)  the 4 certificates of the 95,255,678 shares of GOME deposited by the 4^th defendant with the Court on 10 August 2009 be held by the Court until after the determination of an application by the 3^rd and 4^th defendants to discharge or vary the order herein or until trial or further order;

(5)  each of the 1^st, 2^nd, 3^rd and 4^th defendants (whether acting by himself and/or through others, including but not limited to his agents and/or nominees and/or servants) must not in any way dispose of or deal with or encumber the shares represented by the share certificates referred to in paragraphs (3) and (4) above;

(6)  the orders contained in paragraphs 1 to 12 and 16 to 21 of the order dated 4 August 2009 of Madam Justice Kwan be discharged in respect of the 3^rd and 4^th defendants;

(7)  leave be granted to the plaintiff to serve the following documents on the 1^st and 2^nd defendants out of the jurisdiction at their known address in China: (a) the order herein; and (b) the second affirmation of Yu Suk Kwan Elmond filed on 3 September 2009;

(8)  there be no order as to the costs of the summons dated 5 August 2009 as against the 3^rd and 4^th defendants;

(9)  the costs of this application be in the cause, with a certificate for two counsel; and

(10)    there be liberty to apply.