XCHRX FOSHAN CITY COMMERCIAL BANK v. HONGO PROPERTIES LTD.

1998, No. A16190

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. On 23 December 1998, Nguyen, J. granted orders against the defendant at the instance of the plaintiff in the form of a Mareva injunction and for disclosure as an aid to tracing assets claimed by the plaintiff. I have before me applications by the plaintiff to continue those orders and to increase the amount of restriction under the Mareva order, and an application by the defendant to discharge the orders.

2. The plaintiff's statement of claim alleges a conspiracy to defraud by which the defendant and others induced the plaintiff to lend money by pretending that the money was for purchasing equipment in the mainland, but the money was used by the defendant to acquire and develop land in Hong Kong, and thus the defendant became a constructive trustee of the money. The defence consists largely of denials without a positive case being advanced.

3. The evidence of Mr Xu Yan Fong, the deputy manager of the plaintiff, is that Madam Ye Aihua (Mdm Ye), who was the general manager of the plaintiff, arranged the loans for a purportedly legitimate purpose, but in fact used the money to invest in the Hong Kong property market. One of her schemes was that involving the defendant, which was used to acquire and develop land in Hong Kong. The defendant was incorporated on 14 July 1992. Mdm Ye was one of the first three directors. By September 1992, Mdm Ye was the holder of 3,999 of a total of 9,998 shares, being the largest single shareholder. After Mdm Ye left the plaintiff, her activities came to light. In July 1998, Mdm Ye was confronted. She gave the plaintiff a signed statement. In this statement, dated 20 July 1998, Mdm Ye said, in translation, that the plaintiff "had provided me with funds to me, had through me invested in . . . [the defendant] was used for investment and development. . . . I confirm that [the plaintiff] is the actual investor of the above various investment projects . . . I do not own any rights or interests . . ." Mdm Ye made proposals for repayment of the money, but these came to naught. The plaintiff complains that, in spite of Mdm Ye telling the plaintiff, in effect, that the investment in the defendant was held by her on its behalf, the entire shareholding in the defendant had already been transferred, without the plaintiff's knowledge, to two British Virgin Islands companies so that the plaintiff is unable to know who has control of those shares. The plaintiff discovered the transfer of the shares, which was effected on 31 July 1997, only when it searched the Companies Registry on 27 November 1998 and read the defendant's annual return 14 July 1998 filed on 25 August 1998. Mr Xu also says that a change of the directors of the defendant "only became registered on 25 August 1998". In fact, this is not so. This change was contained in documents filed in the Companies Registry on 24 August 1997, but the plaintiff's solicitor says he did not notice this on an earlier search, being more interested in the shareholding of the defendant. But the important fact relied upon by the plaintiff is that, when Mdm Ye told the plaintiff that she held the investment in the defendant on behalf of the plaintiff, she knew that the shares had already been transferred to the BVI companies.

4. The evidence from the defendant speaks of material non-disclosures by the plaintiff to the ex parte judge, the absence of any risk of dissipation because of a lis pendens registered over the defendant's land, abuse of process of the court because the statement of claim is lacking in particulars, and an argument that Mdm Ye's statement is not an admission of fraud or conspiracy and does not support the plaintiff's case.

5. Mr Lai Siu Pui, who is the general manager of the defendant, says "I also confirm that Madam Ye Aihua has no control or interest in [the two BVI companies] and that Madam Ye was never a director of [them].". One has to wonder how Mr Lai knows this. He cannot know it from any public records, so he must have learnt it from some other source. He does not identify that source, or tell us any more.

6. Beyond what I have recited, the defendant does not deal with the merits of the plaintiff's case.

7. On this evidence, I conclude that there is at least a prima facie case that Mdm Ye received the money from the plaintiff by means of a fraudulent scheme, that she channelled part of this money to the defendant and that the defendant used this money to acquire assets. The only matter that can possibly be in any reasonable doubt is the state of mind of the defendant in taking part in this scheme. If it can be said that there is a prima facie case that Mdm Ye's state of mind can be attributed to the defendant, the plaintiff has made out its case at this stage. I have no doubt that the plaintiff's evidence coupled with Mdm Ye's statement creates the probability that the defendant was incorporated by Mdm Ye and another for the purpose of receiving the "stolen" money. For the purpose of receiving this tainted money and investing it, the mind of the defendant was the mind of Mdm Ye. There can be no other reasonable conclusion to draw from the evidence, including what Mdm Ye herself says.

8. That being the case, it must be so that the plaintiff is entitled to the assistance of the court in tracing the assets acquired with the money "stolen" from it, and is entitled to protection in relation to those assets until the matter is resolved. For that purpose, it seems to me that the orders made by the ex parte judge are reasonable and necessary. Mr Pow complains that some of the orders made are unnecessary. After the orders have been obeyed, and with hindsight, it may appear that the information supplied does not help in the tracing exercise. The problem at this stage is that one cannot know precisely what will help to trace until the defendant discloses the information. The court cannot have much sympathy with a defendant in this situation.

9. Some considerable time was taken up in this hearing in exploring whether or not the transfer of the shares to the BVI companies was a genuine arm's length transaction or a bogus scheme to make things more difficult for the plaintiff. There are some suspicious circumstances, but, to my mind, this transaction does not matter for the purposes of my decision. I am concerned with the defendant, and the defendant now remains the same entity that, prima face at least, dishonestly took part in a scheme to receive the money "stolen" from the plaintiff.

10. I deal now with the defendant's application to discharge the orders. This is founded on the bases of material non-disclosure and abuse of process.

11. The abuse of process argument is founded on an allegation that there was never any risk of dissipation of assets, and the application for the Mareva injunction was a façade behind which the plaintiff wished to mount a fishing expedition. Mr Pow says that the plaintiff's statement of claim is "hopelessly" lacking in particulars of fraud and conspiracy. The defendant complains that the ex parte judge was not told that it was considering an application to strike out on this ground. The statement of claim was before the ex parte judge, as was the defendant's skimpy defence. The defence said that it was "without prejudice to the defendant's right to apply for the striking out of the plaintiff's statement of claim", so the judge knew this. But there was not then, and there is not now, any application before the court for striking out. I do not want to prejudge any application to strike out and say only that, at this stage, it seems to me that the allegations in the statement of claim are sufficient for the purpose of the matters before me. I do not think there is any case here to support an allegation of abuse of process on this basis or any other. As to a risk of a dissipation of assets, I am dealing with a case in which, on the face of it, a defendant dishonestly received money "stolen" from a plaintiff. In that situation, there must be a risk of dissipation. The registration of the lis pendens will help to prevent dissipation, but the Mareva order strikes at more than the landed property.

12. The allegation of material non-disclosure rests on three grounds -

1. That the ex parte judge was not told that some of assets affected by the Mareva order were subject to the registration of a lis pendens;

2. That the plaintiff told the ex parte judge that, although the directors of the defendant were changed in July 1997, the registration of this change was not effected until 25 August 1998; and

3. That the judge was not told that the defendant was considering striking out the plaintiff's statement of claim.

13. As to the first point, I and counsel have listened to the recording of the proceedings before Nguyen, J.. From this, it appears quite clearly that Mr Fung told the judge about the registration of the lis pendens. Mr Pow concedes this, but says, in essence, that Mr Fung did not emphasise the point enough. I do not accept this. It is obvious from the recording that the judge was, as one would expect, paying careful attention to what Mr Fung was telling him. He did not give Mr Fung an easy time, and questioned him on several matters. The hearing lasted nearly an hour, and, from the exchanges between the judge and Mr Fung, it is apparent that the judge was considering the details of the matter carefully. I do not believe that he could have overlooked, misheard or failed to hear the clear statement by Mr Fung that there was a registration of a lis pendens.

14. I have already dealt with the third point. There is nothing in it.

15. On the second point, it is conceded by Mr Fung that a mistake was made. In fact, although the registration of the change of shareholding was not effected until 25 August 1998, the change of directors was registered on 24 August 1997. The plaintiff's solicitor says that he overlooked the registration of the change of directors in 1997 because he was interested in changes in the shareholdings. The plaintiff's evidence before the ex parte judge was that the defendant's shareholding was "secretly" transferred. Having regard to the fact that Mdm Ye made a statement to the plaintiff in which she concealed this fact, this is undoubtedly so. This was the important aspect of the matter. There was no statement that the directorships were "secretly" changed, although it is stated incorrectly that this change was only registered on 25 August 1998. It does not seem to me that this misstatement was deliberate or, in the light of all the other evidence, of any materiality. Even if it was of some materiality, I would have no hesitation, in the circumstances of this case, of exercising my discretion to continue or re-grant the orders.

16. Accordingly, I continue the orders made until the determination of the trial or further order. Mr Fung asks that the amount restricted be increased to $71,340,989 because this is at least the sum that it appears from the defendant's own evidence was dishonestly received from the plaintiff. This is right, and I continue the order in that sum.

17. In the event that I continue the orders, Mr Pow asks that I increase the allowance for legal expenses, and make a reasonable provision for time for the defendant to comply with the orders.

18. As to the legal expenses, I increase this sum to $200,000. As to the time within which the defendant should comply with the order, I say that the defendant has already had a lot of time to consider this matter. Whatever the position of the present shareholders, they must, in their own interest, have investigated many of the matters in respect of which information is sought. The defendant is not starting an investigation from this point. In these circumstances, I think it reasonable that the defendant comply with the disclosure orders within 7 days.

19. The matter of costs has not been argued, but it seems to me that, on the plaintiff's applications, the appropriate order is that the costs be the plaintiff's costs in the cause, and, on the defendant's application for discharge, which I find to be without merit and unnecessary, the costs be to the plaintiff in any event. I make orders nisi accordingly.