LINK FISH IMPORT & EXPORT S.L. v. MULTIPLY IMPORT & EXPORT HK LTD AND ANOTHER

HCMP 331/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 331 of 2016

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D E C I S I O N

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1.  There are three summonses before the court:

(1) The plaintiff’s summons dated 15 February 2016 for continuation of the Mareva injunction granted by DHCJ Kent Yee on 15 February 2016 against the 1^st and 2^nd defendants and continued (with variations) by the order of Ng J dated 19 February 2016 (“Mareva Injunction”).

(2) The plaintiff’s summons dated 15 February 2016 for an order against Hang Seng Bank Limited and Hongkong and Shanghai Banking Corporation Limited (“HSBC”) requiring them to disclose documents relating to the bank accounts of the 1^st defendant and 2^nd defendant respectively, which mirror the terms of the ex parte order granted by DHCJ Kent Yee on 15 February 2016, and continued by the order of Ng J dated 19 February 2016 (“Bankers’ Order”).

(3) The 1^st defendant’s summons dated 17 February 2016 for discharge of the ex parte Mareva Injunction and the ex parte Bankers’ Order.

2.  In addition, the parties place three further summonses before the court:

(1) The 2^nd defendant’s summons dated 4 March 2016 for discharge of the Mareva Injunction and the Bankers’ Order (“2^nd defendant’s Summons”).

(2) The 1^st defendant’s summons dated 30 March 2016 to strike out the originating summons dated 15 February 2016 (“Strike out Summons”).

(3) The plaintiff’s summons for leave to convert the originating summons into a writ and for directions on filing of pleadings (“Conversion Summons”).

3.  Voluminous documents are included in the hearing bundles, which take up nine bundles.  As must be obvious to the legal advisers of the parties, the hearing was only set down for one day to deal with the first three summonses, it would be impossible for the court to deal with any substantive arguments on the further three summonses.  However, instead of proposing directions on the further conduct of the new summonses, counsel for all parties put in full submissions on all six summonses and did not even consider what directions they intend to seek, despite the court’s earlier indication that it would only give directions on such summonses.

4.  Worse still, unbeknownst to this court, the 2^nd defendant’s Summons had in fact already been adjourned pursuant to the order made by DHCJ Wilson Chan on 23 March 2016 (upon the consent summons dated 17 March 2016) to be heard not before 5 April 2016.  Instead of drawing to the attention of the court the existence of this order, the 2^nd defendant’s solicitors saw fit to include all the affirmations filed in support of the 2^nd defendant’s Summons and instructed counsel to put in submissions purporting to argue for a discharge of the Mareva Injunction against the 2^nd defendant. No explanation has been proffered by the 2^nd defendant’s counsel to justify the act of the solicitors.  In light of this, at the hearing, I ordered the solicitors for the 2^nd defendant to show cause as to why they should not bear the costs of and occasioned by the 2^nd defendant’s Summons.

Background fact

5.  The background fact relevant to the applications is set out in the Affirmation of Pedro Manuel Lopez Moreno (“Pedro”) filed in support of the plaintiff’s ex parte application and does not appear to be  disputed by the defendants.

6.  The plaintiff is a company incorporated in Spain in April 2011 and engages in the business of sale and purchase of promotional items, primarily for the alcoholic beverage industry.  The 1^st defendant is a trading company incorporated in Hong Kong and is a supplier of promotional items relating to alcoholic beverages.  The 2^nd defendant is a trading company incorporated in Hong Kong.

7.  The 1^st and 2^nd defendants appear to be closely connected in that they use the same company secretary and the same office, which is also the registered office of the sole shareholder of the 1^st and 2^nd defendants.  The 1^st and 2^nd defendants had a common director, Ladislao Vajda Guerrero (“Ladislao”), albeit at different points of time.  Upon Ladislao’s resignation as director of the 1^st and 2^nd defendants, he was replaced by Ascot Asia Corporation (“Ascot”), which remained the director of the 1^st and 2^nd defendants.  Pedro says that Ladislao is the husband of Maria, and that the signature of the person signing on behalf of Ascot appears to be that of Maria.

8.  The plaintiff is a vehicle formed by Pedro and Ms Maria‑Teresa Aguado Mateos (“Maria”) for the purpose of pursuing the business of sale and purchase of promotional items, primarily for the alcoholic beverage industry.  Pedro through his company holds 50.01% shares in the plaintiff.  The remaining shares are held by Maria’s vehicle, Britaldos Corporate S.L. (“Britaldos”), and her personal friend as to 48.99% and 1% respectively.

9.  Pedro is a director and administrator of the plaintiff.  He is the sole financier of the plaintiff in that he provided all the start‑up capital (€100,000) and the monthly working capital (€1,500,000) required by the plaintiff.

10.  Maria is a director of the plaintiff.  She and her team at Britaldos have been handling the day‑to‑day business and operation of the plaintiff in exchange for monthly service fee of €14,000.  According to Pedro, the bases of his participation in the plaintiff are that the expected profit margin of the plaintiff’s business would be 16% to 21%, and that the profits made by the plaintiff would be distributed to the shareholders in the form of dividends.

11.  In April 2011, through the introduction of Maria, the plaintiff began to conduct business with the 1^st defendant. In May 2013, Maria introduced the 2^nd defendant as a new customer to the plaintiff, and the 2^nd defendant began to purchase promotional items from the plaintiff.

12.  On 12 January 2016, Pedro received an email from Ms Carmen Patricia Gonzalez Martinez (“Carmen”), who claimed to be a former employee of a business owned by Maria which operated at the plaintiff’s business premises in Spain.  In the email, Carmen said that she had information concerning some “irregularities” in relation to the plaintiff’s business dealings which involved Maria.  At the subsequent meeting held on that day, Pedro was informed by Carmen that:

(1) Maria was the owner of the 1^st and 2^nd defendants;

(2) Maria had been committing a fraud against the plaintiff by creating fictitious transactions with companies owned and/or controlled by her which required the plaintiff making payments to such companies; and

(3) if Pedro wanted to ascertain whether a fraud had been perpetrated on the plaintiff, he should request for the underlying documents relating to the transactions between the plaintiff and the 1^st and 2^nd defendants as no such document could be provided by Maria, the 1^st or 2^nd defendants.

13.  Upon investigating into the identity of the 1^st and 2^nd defendants, Pedro became aware of the apparently close connections between the 1^st and 2^nd defendants (described in §7 above).

14.  On 13 January 2016, Pedro through his business partner in Hong Kong, Jose Roman, requested one King Leong of the 1^st defendant to provide copies of the bills of lading and commercial invoices of the various shipments alleged to have been made.  King Leong said he would check the records and get back to him but he never did.  Jose Roman’s subsequent attempts to contact King Leong by phone were unsuccessful.  Upon learning this, Pedro stopped all further payments to the 1^st defendant on the same day.

15.  When Pedro confronted Maria about the suspected fictitious transactions on 14 January 2016, she denied any wrongdoing and stated that she did not know any of the directors of the 1^st and 2^nd defendants. Despite Pedro’s request to provide copies of the bills of lading and commercial invoices in relation to the transactions between the plaintiff and the 1^st and 2^nd defendants, Maria refused to provide any document to him.  She resigned from the plaintiff on 20 January 2016.

16.  In light of Maria’s response, Pedro began to review the plaintiff’s accounting and banking documents.  From the documents reviewed by Pedro, it appeared that the modus operandi of the dealings between the plaintiff and the 1^st and 2^nd defendants, as directed by Maria, were as follows:

(1) The 2^nd defendant, itself an agent, was supposed to have certain direct customers which required promotional items for their business.  The 2^nd defendant placed orders for promotional items with the plaintiff.  The plaintiff, in turn, placed orders for the same items with the 1^st defendant, which was said to be a producing sourcing / procurement company.

(2) The 1^st defendant was required to procure the items ordered by the plaintiff from various manufacturing factories in mainland China and arrange for delivery of the same to the customers as directed by the 2^nd defendant.

(3) The 1^st defendant issued invoices to the plaintiff for payment of the items ordered.  The plaintiff paid all the amounts invoiced by way of advance payment to the 1^st defendant.

(4) The plaintiff then issued invoices to the 2^nd defendant, with a mark‑up up for its profit margins.

Plaintiff’s case

17.  Pedro identified 118 payments in the aggregate amount of US$10,736,931.55 (“the Sum”) made by the plaintiff to the 1^st defendant in relation to 45 orders[1] placed between 2 August 2004 and 5 January 2006 using the same modus operandi (collectively “Impugned Orders”).

18.  It is the plaintiff’s case that it had been defrauded into paying the Sum to the 1^st defendant in that, despite having received the Sum:

(1) The 1^st defendant never sourced or purchased any items required by the plaintiff under the Impugned Orders, whether from any mainland factories or elsewhere.

(2) The 1^st defendant never delivered any items under the Impugned Orders to the plaintiff or the customers as directed by the 2^nd defendant.

(3) The 2^nd defendant defaulted on all the invoices issued by the plaintiff in relation to these Impugned Orders.

19.  Mr Toby Brown, counsel for the plaintiff, relies on the failure of Maria and the 1^st defendant in producing any underlying documents in respect of the Impugned Orders and submits that this is a clear case of fraud which has been perpetrated on the plaintiff by Maria, with the involvement or assistance of the 1^st and 2^nd defendants.  Mr Brown submits that in respect of the Impugned Orders:

(1) the 1^st defendant accepts that it did not deliver the items ordered under 30 of them, albeit raising various excuses to justify its failure to make delivery; and

(2) the 1^st defendant asserts that it had delivered the items under 15 orders to the 2^nd defendant, but was unable to produce any third party documents in support of such delivery.

20.  Mr Brown argues that as the plaintiff has paid the Sum pursuant to the Impugned Orders, which were the devices used by Maria and the 1^st and 2^nd defendants to defraud the plaintiff, the 1^st defendant has been holding the Sum on trust for the plaintiff.  Alternatively, as the items under the Impugned Orders had been paid for but have not been delivered, the plaintiff claims the Sum as money had and received and/or unjust enrichment.

Grounds for discharge

21.  The 1^st defendant denies any wrongdoing on its part.  Mr Earl Deng, counsel for the 1^st defendant, submits that the ex parte Mareva Injunction and the Bankers’ Order should be discharged on the following grounds.

22.  First, the plaintiff has failed to make full and frank disclosure at the ex parte application in failing to disclose the following facts and matters:

(1) There had been “years of successful transactions” between the plaintiff and the 1^st defendant during which items were delivered to the plaintiff’s customers.  The Impugned Orders were part of the over 300 transactions made between the plaintiff and the 1^st defendant in their normal course of business through which, it is said, the plaintiff has made “lucrative profits” of €900,000 in 2015 and roughly €4 million from the transactions made with the 2^nd defendant over the years.

(2) The present dispute arose out of the plaintiff’s refusal to pay the full amounts payable to the 1^st defendant which constituted an anticipatory breach of its contractual obligations.

(3) The 2^nd defendant made partial payments in respect of some of the invoices issued for the Impugned Orders.

(4) The 1^st defendant had been in operation at its registered office at Room 504, Texwood Plaza, but the plaintiff’s representative deliberately visited an office which was no longer in use, thus giving the false impression to the court that the 1^st defendant had disappeared.

(5) The identity of Carmen has not been identified. Nor has the plaintiff explained why Carmen did not provide any evidence on oath.

23.  Secondly, the plaintiff has no good arguable case for fraud against the 1^st defendant because:

(1) the plaintiff’s claim, at its highest, is a contractual dispute arising out of the plaintiff’s anticipatory breach of its contractual obligation to make full payments for the Impugned Orders, and the 1^st defendant was entitled to refuse to deliver the items ordered;

(2) the 1^st defendant has since 2007 been operating a genuine business and is not a shell company;

(3) the 1^st defendant’s dealings with the plaintiff and the 2^nd defendant are “commercially explicable with good business sense”;

(4) the alleged “circulation of money” has not been established; and

(5) no fraud involved in the Impugned Orders.

24.  Thirdly, the originating summons is “defective” as it failed to identify the basis for seeking the relief against the defendants or to provide the particulars of the alleged fraud.

25.  Fourthly, there is no risk of dissipation of assets on the part of the 1^st defendant.

26.  Fifthly, the balance of convenience is against the continuation of the Mareva Injunction and the Bankers’ Order, which have been “highly disruptive” to the 1^st defendant’s operation and has caused irreparable damage to its business including damage to its goodwill and reputation.  The Bankers’ Order was obtained and used by the plaintiff for ulterior purposes, viz to obtain trade secrets and confidential information from the 1^st defendant.

Applicable principles

27.  It is well established that in applying for a Mareva injunction, the plaintiff must show:

(1) that it has a good arguable case on a substantive claim over which the court has jurisdiction;

(2) that there are assets within the jurisdiction;

(3) that the balance of convenience is in favour of grant; and

(4) that there is a real risk of dissipation of assets, or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effect (Hong Kong Civil Procedure 2016, §29/1/65).

28.  As for the duty to make full and frank disclosure at the ex parte stage, an applicant has to disclose all matters material to the “weighing operation” that the court has to consider in deciding whether or not to grant the relief sought, and to identify matters of fact or law which could reasonably be raised by the defendant against the making of the order (Cheer Signal Development Ltd v Wong Siu Fan & ors, HCA 780/2015, 26 October 2015, at §10, per Au‑Yeung J).  If material non‑disclosure is established, the court will be astute to ensure that a plaintiff who obtains an ex parte injunction without full disclosure is deprived of any advantage he may have derived by that breach of duty (Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1356G – 1357B–C, per Ralph Gibson LJ; Excel Courage Holdings Ltd & ors v Wong Sin Lai & ors [2014] 3 HKLRD 642 at §§56 – 58, per Kwan JA).

Whether there was material non‑disclosure

29.  Before dealing with the points raised by Mr Deng on material non‑disclosure, it is necessary to consider the relationship between the parties in particular, whether on the evidence now before the court, it is right to regard the 1^st and 2^nd defendants as independent third parties.

30.  In the 1^st and 3^rd affirmations filed by King Leong on behalf of the 1^st defendant, he asserted that the 1^st and 2^nd defendants are “separate legal entities” and, as the general manager of the 1^st defendant, he was not privy to the business operations of the 2^nd defendant. Nor did he have any knowledge of “the internal management / shareholding structure of [the defendant]”.  Although King Leong was unable to deny the close connections between the 1^st and 2^nd defendants as shown in the records filed at the Companies Registry, he accused the plaintiff for twisting the facts as it was his understanding that “most business / companies in Hong Kong have such shareholding structure to protect its shareholders and to achieve tax efficiency”.  The distinct impression he sought to portray was that the 1^st defendant was independent of the 2^nd defendant and had nothing to do with its business or affairs.

31.  The denial of King Leong in having any involvement in the 2^nd defendant’s business and affairs is shown to be false, as the plaintiff has produced documents showing that he had been described as the 2^nd defendant’s representative in Hong Kong.  In the face of the documents produced by the plaintiff, in his 5^th affirmation, King Leong said that the 1^st defendant was the 2^nd defendant’s agent in Hong Kong and that he was the 2^nd defendant’s contact person.

32.  Indeed, at the hearing, Mr Deng relies heavily on the agency relationship between the 1^st and 2^nd defendants.  It is clear from Mr Deng’s arguments that the 1^st defendant has been financing the business of the 2^nd defendant by providing the amounts it required to pay the plaintiff in Hong Kong as well as the other expenditures incurred from time to time.

33.  It is also notable to see that the 1^st defendant has not denied the plaintiff’s allegation that Maria was the beneficial owner of both the 1^st and 2^nd defendants.

34.  In light of the above evidence, there are strong grounds to believe that the 1^st and 2^nd defendants were the vehicles used by Maria in entering into the Impugned Orders with the plaintiff.

35.  I turn to consider the matters which Mr Deng submits have not been disclosed by the plaintiff at the ex parte stage.

36.  As regards the “years of successful transactions” said to have been made between the plaintiff and the 1^st and 2^nd defendants (see §22(1) above), the plaintiff did disclose, in Pedro’s affirmation filed in support of the ex parte application, the fact that prior to the present claim, it had been dealing with the 1^st and 2^nd defendants since April 2011 and May 2013 respectively, and that the scale of the business had increased significantly over the years.  Pedro also explained the fact (which is not in dispute) that as Maria had been in charge of the plaintiff’s business, he was unable to provide further information or documents about the dealings between the plaintiff and the 1^st and 2^nd defendants.  Thus, even if, as the 1^st defendant asserts, the transactions between the plaintiff and the 1^st and 2^nd defendants were successful and lucrative profits were generated, these were not matters which Pedro, acting on behalf of the plaintiff, would have been able to say at the ex parte application.  In any event, the matters are in dispute.  The plaintiff says that despite the apparent scale of its business, no profit has ever been paid to the plaintiff, whether by way of dividend or otherwise.

37.  As the matter now stands, I do not regard the 1^st defendant’s characterisation of the plaintiff’s claim as a contractual dispute (§22(2) above) is apposite, much less a matter which ought to have been disclosed at the ex parte stage.

38.  As for the partial payments relied on by the 1^st defendant (§22(3) above), they were made by the 2^nd defendant, not the 1^st defendant.  As Pedro was not privy to the Impugned Orders, it is understandable that he would not have been able to tell from the invoices issued to the 2^nd defendant and payments made by the 2^nd defendant that they necessarily relate to one another.  Mr Brown submits that although the 2^nd defendant paid an aggregate amount of €472,223.27 to the plaintiff, the plaintiff is unable to say whether they were paid in respect of the Impugned Orders.  In any event, this is a point which concerns the 2^nd defendant, not the 1^st defendant. If the 2^nd defendant decides to pursue the point, it will be argued with the benefit of all the evidence.

39.  The complaint about the description of the state of the 1^st defendant’s office (§22(4) above) must be seen in context.  There is no dispute that the office visited by Pedro was the registered office of the 1^st defendant and that at the time of his visit, the lights were turned off and no one was working in the office.  Nor is there any dispute that the plaintiff’s legal advisers had visited the office stated in the 1^st defendant’s pro forma invoices but found that it was occupied by another company.  I do not see how the 1^st defendant can castigate the plaintiff’s description in Pedro’s affirmation at the ex parte stage as material non‑disclosure.

40.  The complaint about the identity of Carmen (§22(5) above) is wholly without merit.  In fact, the full name of Carmen and her relationship with Maria were disclosed at the ex parte stage.  It was made clear in Pedro’s affirmation that Carmen was the one who told Pedro about the possible irregularities and asked him to look into the matter.  The fact that Carmen has not made any affirmation is neither here nor there.  What matters is whether following the investigations made by Pedro, there were valid grounds in support of the plaintiff’s claim.

41.  For the above reasons, none of the grounds for alleged material non‑disclosure is made out.

Whether plaintiff has a good arguable case

42.  The plaintiff’s claim is simple.  It claims that it was defrauded by Maria and the 1^st and 2^nd defendants of the Sum through the Impugned Orders.  If, as the plaintiff contends, the 1^st and 2^nd defendants were involved in the fraud, they would be regarded as holding the Sum as constructive trustees for the plaintiff.

43.  The strength of the plaintiff’s claim is reinforced by fact that despite the requests of the plaintiff, neither Maria nor the 1^st and 2^nd defendants have been able to produce the underlying documents issued by any independent third parties such as the commercial invoices issued by the manufacturers of the items, or bills of lading issued by the shipping companies involved in delivering the items to the 2^nd defendant’s customers (collectively “Third Parties Documents”).

44.  Mr Brown submits that the 1^st and 2^nd defendants were fully aware of the importance of producing the Third Parties Documents because at the return day of the Mareva Injunction, Ng J specifically remarked that if the 1^st and 2^nd defendants wanted to contend that the Impugned Orders were genuine, they should produce the underlying documents to substantiate their case.  However, despite the many affirmations and the voluminous exhibits filed by the 1^st defendant in opposition to the Mareva Injunction, no Third Parties Documents have been produced.

45.  Further, the modus operandi of the dealings between the plaintiff and the 1^st and 2^nd defendants, on their face, appeared to have been designed to benefit the 1^st defendant at the expense of the plaintiff.  This is because the 1^st defendant did not have to deploy any funds to its business, as the plaintiff alone had to pay for all the items ordered in advance and irrespective of whether the 1^st defendant would deliver the items in future.  At the same time, the 1^st defendant was able to make considerable profits out of all the items ordered by the 2^nd defendant. In effect, the plaintiff was financing the business of the 1^st defendant, assuming all the credit risk associated with such business and allowing the 1^st defendant to receive “commissions” for no apparent reason.

46.  There is no explanation from Maria, being the only director entrusted with the responsibility of carrying on the plaintiff’s business, as to why she considered that it was in the interests or to the benefit of the plaintiff to interpose the 1^st defendant as the “agent” between the plaintiff and the 2^nd defendant or to enter into transactions with the 1^st and 2^nd defendants using the modus operandi.  Nor do I consider there is any credible reason as to why it was necessary or commercially beneficial to the plaintiff for Maria to appoint the 1^st defendant as its “agent”.

47.  Taking into account the matters set out in §§30 to 34 and 42 to 46 above, there are valid grounds in support of plaintiff’s case that the 1^st and 2^nd defendants were the vehicles used by Maria for the purpose of defrauding the plaintiff.

48.  Mr Deng advances five points in support of his argument that the plaintiff does not have a good arguable case against the 1^st defendant. The points under §23(1) – (3) and (5) above all go to the 1^st defendant’s contentions that its business and dealings with the plaintiff and the 2^nd defendant were genuine such that there is no merit in the plaintiff’s claim for fraud.  In particular, Mr Deng submits that no fraud was involved in the Impugned Orders in that according to the 1^st defendant’s analysis in the “Overall Summary of Transactions”:

(1) The items under 6 orders had already been manufactured and were kept in storage at the 1^st defendant’s expense pending instructions from the plaintiff.  Amongst them, although Johnson & Johnson, which was said to be the customer placing 5 of the orders, did not recognise or confirm that it had placed these orders with the 1^st defendant, this was probably due to the fact that plaintiff had sent its own internal invoices (rather than external invoices) to Johnson & Johnson.  Calsabor has confirmed the external invoice in relation to its order in response to the plaintiff’s request.

(2) The items under 14 orders had already been delivered to end customers, evidenced by the receipts and/or delivery notes produced by the 1^st defendant.  Of these orders, the 2^nd defendant has produced payment advices showing that it had paid €472,223.27 in respect of 7 orders to the plaintiff.

(3) The items under 25 orders were withheld by the 1^st defendant as the plaintiff had since early January 2016 stopped making any further payment to the 1^st defendant. It is said that “according to the terms of dealings” with the plaintiff, the 1^st defendant was not obliged to deliver any of the items unless and until full payment in advance has been made.

49.  At their highest, these are matters of defence to the plaintiff’s claim which cannot be resolved at this stage.  I note that the so‑called receipts and delivery notes are not documents emanated from independent third parties but were documents generated by the 1^st and 2^nd defendants themselves.  I agree with Mr Brown that in the absence of any Third Parties Documents, the plaintiff has made out a sufficiently strong case to cross the threshold of a good arguable case against the 1^st defendant.

50.  As for the fourth point (see §23(4) above), Mr Deng submits that there is no basis for the plaintiff’s “theory” of “circulation of money” because:

(1) the bank statements of the 1^st and 2^nd defendants relied on by the plaintiff did not identify the payers or payees, and the plaintiff has refused to disclose its own records, such that the 1^st and 2^nd defendants have not been able to verify the cashflow analysis prepared by the plaintiff;

(2) not all the amounts received by the plaintiff from the 2^nd defendant were derived from the amounts paid by the plaintiff to the 1^st defendant;

(3) the payments made by the 1^st defendant to the 2^nd defendant’s account at HSBC did not represent the entire amount the 1^st defendant is liable to pay; and

(4) although the amounts paid by the 2^nd defendant in settlement of the amounts owed to the plaintiff were roughly the same as the amounts transferred by the 1^st defendant into the 2^nd defendant’s HBSC account in the past, this was attributable to the fact that the 2^nd defendant’s only payment obligation and source of revenue in Hong Kong were to and from the plaintiff and the 1^st defendant respectively.

51.  In my view, Mr Deng’s arguments on the “circulation of money” are based on a misconception that the plaintiff has the burden of proving that each of the payments made by the plaintiff to the 1^st defendant must have been paid to or utilised by the 2^nd defendant when there is no such requirement.  In fact, based on the bank statements obtained under the Bankers’ Order, the plaintiff came up with an analysis to trace and follow the use of the Sum and identified that a substantial part of the Sum was in fact used by the 1^st defendant for the purpose of financing the business of the 2^nd defendant.  The “circulation of money” is the evidence to demonstrate the close relationship between the 1^st and 2^nd defendants and the fact that the 1^st defendant had been using the funds paid by the plaintiff to finance the business of the 2^nd defendant.  It is clear from Mr Deng’s submissions that having considered the analysis of fund flow, the 1^st defendant now accepts that it has been using the funds received from the plaintiff to finance the 2^nd defendant’s business and that the two companies have been operating closely.

Whether the originating summons is defective

52.  Mr Deng submits that fraud must be pleaded with utmost particularity, and it is an abuse of the court’s process where “a plaintiff sues before he makes up his mind as to the subject matter of his complaint (Tam Chi Kok v Fok, HCA 1859/1992, 12 June 2003, at §§30 – 31, 104, per DHCJ A Cheung J (as he then was) ).  Moreover, an originating summons is defective where it gives no indication of the basis on which the relief is sought, particularly where serious allegations of misconduct are alleged (Securities and Futures Commission v Tiger Asia Management, HCMP 1502/2009, 21 June 2011, at §§9 – 10, per Harris J; Hong Kong Civil Procedure 2016, Vol 1, §7/7/4).

53.  Mr Deng argues that in the originating summons, the causes of action pleaded are money had and received and/or unjust enrichment.  No allegation of fraud or conspiracy to defraud has been pleaded let alone particularised.  At the ex parte hearing, the plaintiff’s counsel tried to justify the use of the originating summons on the ground that the proceedings would likely go undefended as the defendants “had disappeared” and he “undertook” to convert the proceedings into a writ if the defendants decide to defend the proceedings.  Despite the undertaking, the plaintiff failed to take any steps to rectify “this fundamental procedural law”.

54.  There is no merit in Mr Deng’s argument.  While it is correct that where the plaintiff’s claim is based on fraud, the proceedings should normally be commenced by a writ, the fact that the plaintiff commenced the proceedings by an originating summons would not render the proceedings to become defective.  More importantly, in the originating summons, the plaintiff made clear that its claim is for the Sum paid to and received by the 1^st and 2^nd defendants.  One of the reliefs claimed is a declaration that the 1^st and 2^nd defendants held the Sum as constructive trustees, which is consistent with the plaintiff’s claim for fraud.  It is also clear from the affirmations of Pedro filed in these proceedings that the plaintiff’s claim has always been one for fraud, and considerable details of its claim, which go far beyond the material fact required to be pleaded in a statement of claim, have been provided to the defendants.

Risk of dissipation of assets

55.  It is well established that a risk of dissipation may be inferred where the evidence shows that the defendant has acted with an “unacceptably low standard of commercial morality” (Honsaico Trading Ltd v Hong Yiah Seng Co Ltd [1990] 1 HKLR 235; Standard Chartered Securities Ltd v Lai Arthur & ors [1993] 1 HKC 375 at 393H – 394B).  The court may more readily infer a real risk of dissipation if a good arguable case is established on a claim for fraud or dishonesty (CAC Brake Co Ltd Zhuhai v Bene Manufacturing Co Ltd, CACV 94/1998, 30 April 1998).

56.  By reason of the following matters, I consider that the plaintiff has shown that there is a risk of dissipation of assets on the part of the 1^st defendant:

(1) The plaintiff has a good arguable case for fraud against the 1^st defendant.

(2) The 1^st defendant was at the centre of all the Impugned Orders and participated in all the dealings with the plaintiff and the 2^nd defendant and obtained substantial benefits from them.  Given its involvement in the Impugned Orders and its relationship with Maria, it can readily be inferred that the 1^st defendant was aware of the fact that Maria was a director of the plaintiff and the owner of the 1^st and 2^nd defendants, and that her act in causing the plaintiff to enter into the Impugned Orders and paying the Sum to the 1^st defendant using the modus operandi constituted breach of fiduciary duties owed to the plaintiff.

(3) As the recipient of the Sum in circumstances where it was aware of the breach of fiduciary duties, it was unconscionable for the 1^st defendant to retain the Sum (BCCI v Akindele [2001] Ch 437).

(4) The 1^st defendant has had the benefit of the use of the Sum but has not delivered most, if not all, of the items ordered by the plaintiff under the Impugned Orders.

Balance of convenience

57.  In my view, the balance of convenience is clearly in favour of the continuation of the Mareva Injunction and the Bankers’ Order.  While I accept that the Mareva Injunction may have disrupted the business and operation of the 1^st defendant, but that is the result of the 1^st defendant’s involvement in the Impugned Orders.  If, as the 1^st defendant suggests, it has a genuine and substantial business and operation, there is no reason why it cannot pay the Sum into court as security for the plaintiff’s claim whereupon the Mareva Injunction can be discharged.

58.  The Bankers’ Order only required the banks to produce the documents relating to the payments into and out of the 1^st defendant’s bank accounts.  Other than a bare assertion, the 1^st defendant has not been able to explain why the disclosure of such documents would allow Pedro “to gain access to trade secrets such as customer lists, supplier information, purchase and sale price and other key contracts” or to enable Pedro to compete with the 1^st defendant through his companies. I reject Mr Deng’s submissions that the plaintiff obtained the Bankers’ Order for the alleged or any improper purposes.  As is clear from the evidence on “circulation of money” discussed above, it was only after the plaintiff had obtained the documents from the banks that it was able to uncover the fact that the Sum had been used by both the 1^st and 2^nd defendants and that the 1^st defendant had been financing the business of the 2^nd defendant.

Conclusion

59.  I make the following order:

(1) The Mareva Injunction and the Bankers’ Order be continued against the 1^st defendant until determination of the proceedings or further order of the court.

(2) The 1^st defendant’s summons dated 17 February 2016 for discharge of the Mareva Injunction and the Bankers’ Order be dismissed.

(3) There be a costs order nisi that:

(a) the costs of and occasioned by the 1^st defendant’s summons dated 17 February 2016 and of the hearing on 5 April 2016 be paid by the 1^st defendant to the plaintiff forthwith on a party and party basis, to be taxed if not agreed; and

(b) save for the costs of the hearing on 5 April 2016, the costs of and occasioned by the plaintiff’s summons dated 15 February 2016 for continuation of the Mareva Injunction and the Bankers Order including all costs reserved be in the cause as between the plaintiff and the 1^st defendant.

(4) In respect of the Strike out Summons and the Conversion Summons, I make a costs order nisi that there be no order as to costs, as both the plaintiff and the 1^st defendant are at fault in seeking to advance substantive arguments on their summonses without leave of the court and without first writing to the other party with a view to agree on the directions on their summonses.

60.  For the avoidance of doubt, as the hearing does not concern the 2^nd defendant, no order is made on the plaintiff’s summons dated 15 February 2016 as against the 2^nd defendant and the same should be heard together with the 2^nd defendant’s Summons.  The Mareva Injunction and Bankers Order shall continue in the terms ordered by Ng J on 19 February 2016.  As for the costs of and occasioned by the 2^nd defendant’s Summons at the hearing, I have ordered the 2^nd defendant’s solicitors to show cause as to why they should not bear the costs.  My decision on costs will be handed down separately.