KWAI HUNG REALTY CO LTD v. LOCKIA DEVELOPMENT LTD

HCA 3280/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3280 OF 2001

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REASONS FOR DECISION

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1. I have before me a summons taken out by Kwai Hung Realty Company Limited, the plaintiff herein, for a Mareva injunction against Lockia Development Limited, the defendant herein, to restrain the defendant from selling, mortgaging, charging or in any way disposing of the property known as Nos. 65, 67 and 69 Shek Pai Wan Road, Aberdeen, Hong Kong ("the Property"), until after the trial of this action or further order. The summons was issued on 2 May 2003 and came before Suffiad J on the same day. An interim injunction was granted to restrain the defendant from disposing of the Property in any way until the return date of the summons on 13 June 2003. On the return date of the summons, Deputy Judge Poon adjourned it for argument and ordered that the interim injunction be continued until after the determination of the plaintiff's summons. At the adjourned hearing of the summons, I granted an interlocutory injunction to the plaintiff on the usual undertaking as to damages to restrain the defendant from dealing with the Property until after the trial of the action, which will take place in July 2004. These are the reasons for my decision.

The background

2. The writ herein was issued on 20 July 2001. The plaintiff claims against the defendant HK$49,686,462.80, being monies allegedly lent by the plaintiff to the defendant at the latter's request from time to time for payment of the purchase price of the Property, payment of compensation to the occupiers of the Property for delivery up of vacant possession, payment of rates and other expenses connected with the Property, and payment of charges for preparing annual return, tax return and other accounting documents in respect of the defendant.

3. The plaintiff was incorporated in 1972 and has been carrying on business as a property developer. It was founded by Mr Chan Kwai Hung ("the deceased"), who had passed away on 8 October 1999. The plaintiff was and is controlled by members of the family of the deceased. It has an authorised and paid up share capital of HK$20 million. Since 1981, the plaintiff had been involved in developing 16 building projects in Hong Kong. The deceased has left a will appointing his widow Madam Mou Shek Lan ("Madam Mou") the sole executrix.

4. The defendant was incorporated on 3 November 1994 with an authorised share capital of HK$10,000.00, divided into 10,000 shares of HK$1.00 each. Up to the death of the deceased, only two shares were issued, one to the deceased, the other to Madam Hui Dip Fun ("Madam Hui's sister"), who is the elder sister of Madam Hui Kwan Ying ("Madam Hui"). The deceased and Madam Hui's sister were the only directors of the defendant. According to a declaration of trust dated 21 June 1996, Madam Hui's sister held her share as a nominee upon trust for Madam Hui. Madam Hui had a daughter by the deceased. There is dispute as to whether Madam Mou had known of the relationship between the deceased and Madam Hui during the lifetime of the deceased.

5. The defendant was acquired by the deceased and Madam Hui in May 1996 for the purpose of holding the Property. The defendant became the registered owner of the Property by three assignments dated 28 February 1997, 6 November 1996 and 24 January 1998. The purchase price of Nos. 65 and 69 of the Property was HK$14 million each, and that of No. 67 was HK$15.3 million, making a total of HK$43.3 million.

6. Several actions were commenced involving Madam Hui and the deceased's family members after the death of the deceased. Among them is HCA No. 8062 of 2000, which was brought by Madam Hui against the personal representative of the deceased and the plaintiff, and it has been ordered to be tried at the same time as the present action. The statement of claim served by Madam Hui in HCA No. 8062 of 2000 raised essentially the same allegations relied on by the defendant in the defence in the present action.

7. The allegations of the plaintiff and the estate of the deceased and those of the defendant and Madam Hui as appeared in the pleadings may be summarised as follows.

8. As stated above, it is the plaintiff's case that sums in the total amount of HK$49 million odd were advanced by the plaintiff to the defendant. The advances were made from 7 June 1996 to 26 April 2001. The monies were advanced to the defendant on the oral requests of the deceased, who was acting on behalf of the defendant. There is apparently no dispute that all the monies were paid out of the funds of the plaintiff. The loans were acknowledged by the defendant as contained in or evidenced by various audit confirmations given by the defendant as requested by the plaintiff's auditors and the defendant's auditors from time to time. The plaintiff advanced the loans to the defendant to enable the latter to purchase the Property. The defendant has failed to make any repayment despite the demands of the plaintiff.

9. The defendant and Madam Hui deny that there was any loan made by the plaintiff to the defendant. Madam Hui makes a claim of over HK$50 million against the deceased's estate, alternatively against the plaintiff, in HCA No. 8062 of 2000. The defendant and Madam Hui rely on three verbal agreements made between the deceased and Madam Hui as follows:

(1)	the oral agreement on 27 May 1992
	This agreement is alleged to be made by the deceased in his personal capacity and/or on behalf of the plaintiff. It is alleged that Madam Hui gave HK$5 million to the deceased and he had agreed to purchase for her shares in the Hongkong and Shanghai Banking Corporation ("the Hongkong Bank shares") to the value of that amount. This agreement was evidenced by a memorandum signed by the deceased dated 27 May 1992 in which it was stated that the price of the Hongkong Bank shares was HK$15.58 per share as at that date, on which basis about 320,000 Hongkong Bank shares should have been purchased by the deceased for Madam Hui.
	In May 1996, Madam Hui decided to realise the Hongkong Bank shares and use the proceeds to finance her purchase of the Property. She then discovered that the deceased had not purchased any Hongkong Bank shares for her and so they made the second alleged agreement.
(2)	the oral agreement in May 1996
	It is alleged that this agreement was made by the deceased and Madam Hui and that the deceased was acting for and on behalf of the plaintiff, alternatively the deceased was acting both in his personal capacity and on behalf of the plaintiff.
	By this agreement, the plaintiff agreed to participate in the proposed purchase of the Property and to provide the entire capital for the purchase; the plaintiff was to participate through the deceased in the purchase of the Property and share the profit or loss equally with Madam Hui; the Property was to be purchased in the name of a limited company, namely the defendant, in which the deceased and Madam Hui were to have equal shareholding; the purchase price of the Property was to be "presumed" at HK$34 million for each of Nos. 65, 67 and 69 of the Property, making a total of HK$102 million, notwithstanding that the actual purchase price agreed by the owners with Madam Hui was HK$43.3 million in total; the plaintiff was to contribute to the purchase on the basis of the presumed price as if this was the actual price; the contribution made by the plaintiff would take the form of a loan to the company which was to hold the Property and be treated as directors' loan from the deceased and Madam Hui to the company; half of the capital provided by the plaintiff would be treated as part payment of the proceeds from the notional sale of the Hongkong Bank shares, as if these shares had been purchased on 27 May 1992 and were to be sold at the order of Madam Hui on completion of the purchase of the Property and for this purpose completion was to include the payment of compensation to the occupiers to obtain vacant possession; as for the balance of the proceeds of the notional sale of the Hongkong Bank shares taken on the completion date, the plaintiff would pay this to Madam Hui after deducting half of the expenses to be borne by Madam Hui in the acquisition of the Property; in consideration of the above, Madam Hui would not take legal action against the deceased to pursue her rights under the agreement in May 1992.
	After this agreement was made in May 1996, it was discovered that the unit price of the Hongkong Bank shares in May 1992 was about HK$46.00 and not HK$15.58 as stated in the memorandum dated 27 May 1992, so Madam Hui and the deceased reached an agreement to vary the second alleged agreement.
(3)	the oral variation agreement in May 1996
	This oral variation is alleged to be made by the deceased with Madam Hui on his own behalf and/or on behalf of the plaintiff. By the variation, it was agreed that the plaintiff was to contribute to the purchase of the Property on the basis of the actual purchase price instead of the "presumed" price; in consideration thereof, the unit purchase price of the Hongkong Bank shares would be treated as HK$15.58 for the purpose of the second alleged agreement.

10. On the basis of these three agreements as alleged, Madam Hui claims that the plaintiff, alternatively the estate of the deceased, owes HK$50 million odd to her, being the value of 320,000 Hongkong Bank shares that the deceased should have purchased for her and would have been sold on 24 March 1998 which was the completion date, less half of the expenses in the acquisition of the Property which should have been borne by her. This is her claim in HCA No. 8062 of 2000. By virtue of these alleged agreements, the defendant denies that it is liable to the plaintiff because the monies paid by the plaintiff should be treated as loans due to the directors of the defendant in accordance with the second alleged agreement as varied. It is alleged that the audit confirmations provided on behalf of the defendant to the plaintiff's auditors and the audited accounts of the defendant for the year ended 31 March 1999 do not accurately reflect the credit relation between the plaintiff and the defendant.

11. The plaintiff and the estate of the deceased deny the alleged oral agreements between the deceased and Madam Hui. For present purpose, it is not necessary to go into that aspect of the plaintiff's case. I should mention that in the first affirmation of Madam Mou filed on behalf of the plaintiff and placed before the court when the interim order was granted on 2 May 2003, there is an adequate summary of the case of the plaintiff and the defendant in this action and the pleadings in HCA No. 8062 of 2000 were exhibited to her affirmation. Madam Mou has asserted in her affirmation that the defendant's case was traversed by its own contemporaneous accounting records being its profits and loss accounts from its incorporation to the financial year of 1999/2000. I will have more to say about this when I deal with the submissions relating to material non-disclosure.

12. It is accepted by the defendant that the plaintiff has satisfied the requirement of a good arguable case for the purpose of obtaining a Mareva injunction.

13. The defendant was acquired solely for the purpose of holding the Property, which is its only substantial asset. There is no suggestion that the defendant has any other business activity. The buildings on the Property are in a derelict condition and appear to be waiting for demolition. The redevelopment of the Property has come to a complete standstill after the deceased had passed away. The sum invested into the Property, which was put up entirely by the plaintiff, is over HK$49 million. The Property was purchased at the peak of the market and has depreciated substantially with the fall in property prices ever since. According to a valuation report obtained by the plaintiff in mid April 2003, the value of the Property at the time of the report, taking into account its redevelopment potential, was HK$19.5 million. The valuation given by the surveyors engaged by the defendant in early March 2003 was HK$15 million.

14. Notwithstanding the depreciation in the only asset held by the defendant, the plaintiff saw no need for an interlocutory injunction to restrain disposition of the Property until April 2003, as the title deeds of the Property were deposited by the deceased with a firm of solicitors, Messrs Chan, Lau & Wai ("CLW"), and there was no demand for the return of the title deeds to the defendant until recently.

Events leading to the application for an injunction

15. On 13 December 2002, a firm of solicitors acting on behalf of the defendant made a demand by letter to CLW for the delivery up of the title deeds to these solicitors. CLW declined to comply with this until they were provided with a certified copy of the minutes of a duly convened meeting of the defendant's board of directors, resolving that instructions were to be given to the solicitors authorised by the defendant to request CLW to send the title deeds to such solicitors.

16. On 21 January 2003, Madam Hui's sister purported to exercise her power as the sole director of the defendant and appointed a company, Faith Brain Limited, as the other director of the defendant. On 8 February 2003, another demand was made to CLW by another firm of solicitors acting on behalf of the defendant for delivery up of the title deeds. When this demand was not complied with, on 13 February 2003 the defendant issued a writ in HCA No. 564 of 2003 against CLW for delivery up of the title deeds. On 18 March 2003, the defendant issued a summons for summary judgment against CLW in that action. CLW issued a summons to strike out the claim on 20 March 2003. Both were adjourned to be heard on 23 May 2003.

17. On 24 April 2003, Madam Hui's sister made an affirmation in HCA No. 564 of 2003 to oppose CLW's striking out application and exhibited to her affirmation a resolution of the board of directors of the defendant authorising the defendant's solicitors to act on its behalf and to take all necessary action to demand for the return of the title deeds. On 28 April 2003, CLW wrote to the plaintiff's solicitors enclosing a copy of this affirmation and stating that in view of the resolution which appeared to be a proper authorisation, CLW would be duty bound to deliver the title deeds to the defendant's solicitors and would soon be making arrangements to do so.

18. On 30 April 2003, Madam Mou made her first affirmation in support of this application. The plaintiff attempted to proceed ex parte but was directed by the court to notify the defendant of its application. The plaintiff's solicitors duly notified the defendant's solicitors on 30 April 2003 and served Madam Mou's affirmation on them that day. The summons was issued on the next working day being 2 May 2003 and an interim order was made on the same day.

Material non-disclosure

19. It was submitted by Mr Kenneth Chan on behalf of the defendant that the interim order should be discharged for material non-disclosure. The non-disclosure complained of is in these respects.

20. Firstly, the non-disclosure relates to two audit confirmations exhibited to Madam Mou's first affirmation as part of exhibits 13 and 15. The first document is a "Confirmation of Outstanding Balances" issued by the plaintiff's auditors to the defendant dated 16 September 1998 requesting the latter to confirm that as at 31 March 1998, there was an amount of HK$49,300,833.20 due from the defendant to the plaintiff as recorded in the plaintiff's accounts being an amount due from related companies. This document was purportedly signed and returned for and on behalf of the defendant on 9 October 1998. The second document is also a "Confirmation of Outstanding Balances" issued by the plaintiff's auditors to the defendant dated 12 October 2000 seeking confirmation of HK$49,652,471.20 due from the defendant to the plaintiff as at 31 March 2000 being amount due from related companies. That document was likewise purportedly signed and returned on behalf of the defendant.

21. These two documents are the subject of some of the interrogatories served by the defendant on the plaintiff and to which the plaintiff filed an answer on 28 November 2002. It is alleged that in failing to inform the court about the answer, there was material non-disclosure on the part of the plaintiff.

22. In the relevant answer, the plaintiff has stated that the first confirmation was signed by "Miss Lai Yuet Ngo of the Plaintiff for and on behalf of the Defendant" and that the second confirmation was signed by "Miss Lam Wai Yung of the Plaintiff for and on behalf of the Defendant". In the present application, Madam Hui's sister filed an affirmation on 26 May 2003 in which she alleged that neither she nor Madam Hui had authorised any one from the plaintiff to sign any document for and on behalf of the defendant. As I understand Mr Chan's submission, he was complaining that the plaintiff should have brought to the attention of the court the plaintiff's answer to the interrogatories. It is not alleged that the plaintiff had known of the assertion made in the affirmation of Madam Hui's sister that Miss Lai and Miss Lam were not authorised to sign documents on behalf of the defendant. That being the position, the non-disclosure complained of could not have been of any or any material weight in assessing the strength or otherwise of the plaintiff's case to decide whether an injunction should be granted. There was no prima facie reason why the plaintiff should not be entitled to rely on these confirmations purportedly given by the staff of the plaintiff on behalf of the defendant.

23. The second aspect of non-disclosure relates to the audited reports of the defendant of the years ended 31 March 1998 and 31 March 1999, which have been exhibited to Madam Mou's first affirmation as exhibits 13 and 14. It is alleged that the plaintiff had failed to refer the court to the change in accounting treatment in that in the first set of audited accounts, there was recorded an amount due to directors in the sum of HK$58,323,429.60 under current liabilities, whereas in the second set of audited accounts under current liabilities the amount due to director was stated as nil and there was instead an amount due to a related company in the sum of HK$49,600,546.20. Mr Chan submitted that the failure to do so was material non-disclosure.

24. I am unable to accept his submissions. Mr Chan contended that these matters not specifically drawn to the court's attention would have been relevant in the weighing exercise whether to grant the injunction in the first place. Mr K M Chong, who appeared for the plaintiff, has drawn my attention to other accounting records in support of his contention that the defendant's case (that half of the money contributed by the plaintiff towards the expenses of acquiring the Property was to be treated as director's loan from Madam Hui) is traversed by the defendant's own documents, issued by the auditors engaged by the defendant, and/or signed by Madam Hui or her sister. I do not propose to set out in detail these accounting records referred to by Mr Chong. Suffice it to say that the matters not specifically drawn to the court's attention at the first hearing do not detract in any material way the strength of the plaintiff's argument that it has a good arguable case. Indeed, Mr Chan has accepted at the present hearing and conceded that on the evidence as disclosed, including the matters not disclosed or specifically brought to the attention of the court on the previous occasion, a good arguable case was made out by the plaintiff for present purpose.

Risk of dissipation of asset

25. I turn to consider if there is any risk of dissipation of asset.

26. As I have already stated, the defendant is a dormant company with the Property as its only or only valuable asset. If the Property were disposed of, there is every reason to believe that any judgment obtained against the defendant would not be satisfied. This is a classic situation for a Mareva injunction.

27. In the first affirmation of Madam Mou, she deposed that about a week before her affirmation on 30 April 2003, she was told by her son-in-law Mr Ling Chi Kin that in early March 2003, Madam Hui had approached a business acquaintance of Mr Ling to seek a loan of HK$16 million to her on the security of a pledge of the Property. Madam Hui has not filed any affirmation in this application. Her sister filed an affirmation in which she deposed that she was told by Madam Hui that the latter did not approach any one for a loan on the security of the Property. Madam Hui had obtained a valuation report on the Property in early March 2003 and the surveyors had valued the Property at HK$15 million as at 5 March 2003. Hence, Madam Hui's sister contended that it was "impossible" for Madam Hui to obtain a loan for HK$16 million. Madam Hui's sister then produced a letter dated 2 May 2003 from a firm of solicitors to the solicitors for the defendant marked "subject to contract". By that letter, an offer was made to purchase the Property at HK$18 million with completion one month after the signing of the sale and purchase agreement. The defendant's solicitors were requested to take instructions on the offer and send the draft agreement for sale and purchase with the title deeds and documents to the offeror's solicitors soonest possible.

28. Whatever might be Madam Hui's intention as regards pledging the Property for a loan, it is clear that she has intended to dispose of the Property before the trial of this action. If there were no intentions to deal with the Property, the defendant would not have taken the steps it had taken to press for the return of the title deeds from CLW, as the development of the Property had come to a standstill since the death of the deceased four years ago. The obtaining of the valuation report by Madam Hui in March 2003 would seem to be another step taken with the objective of disposing of the Property in one way or other. There was no mention in the affirmation of Madam Hui's sister as to the circumstances in which the offer was received from a potential purchaser. The defendant chose to remain silent on this, so the court does not know if any action had been taken by the defendant to solicit any offer from potential purchasers or whether there had been prior negotiations before the "subject to contract" offer was made. No explanation was given of any pressing reason for the defendant, a dormant company with no liabilities other than the amount claimed by the plaintiff, to sell the Property before the trial of this action in July 2004. What is clear and there is no dispute about this is that the executrix of the estate of the deceased was not told of any proposal to sell the Property until Madam Hui's sister made and served her affirmation on 26 May 2003, notwithstanding that 50% of the shares of the defendant is vested in the estate of the deceased. The explanation advanced on behalf of the defendant that the executrix was not informed of the proposal to sell the Property because of the lack of trust on both sides with the litigation between them is unconvincing, to say the least.

29. I am satisfied there is a real risk of dissipation of asset that calls for the protection of a Mareva injunction. I reject the submission that there was delay on the part of the plaintiff in seeking a Mareva injunction. It would appear from the correspondence that CLW was in communication with the plaintiff's solicitors. So long as the title deeds were kept by CLW and the latter would not release them to the defendant's solicitors without informing the plaintiff's solicitors in advance, there was no apparent urgency to seek an interlocutory injunction until the plaintiff was so informed.

30. In the course of his submissions, Mr Chan informed the court that the defendant is prepared to give an undertaking to give at least 21 days advance notice to the plaintiff of its intention to enter into any sale and purchase agreement of the Property. This is to give the plaintiff the opportunity to come back to the court and seek appropriate relief if it should object to the sale. I indicated to Mr Chan that this undertaking is wholly unsatisfactory, as the plaintiff is bound to object to the sale, particularly as there is no protection to the plaintiff as regards the proceeds of sale. Mr Chan then informed the court on instructions that the defendant is prepared to offer an undertaking that in the event the Property is sold, the net proceeds of sale after paying the incidental and legal expenses, would be paid into court until the trial of this action.

31. I do not find the second undertaking acceptable in the particular circumstances of this case. I accept Mr Chong's submissions that a sale of the Property at this stage is against the interest of the plaintiff, as the Property has depreciated so much in value. If the Property were to be sold at HK$18 million, which would appear to be in line with the open market value according to the valuations obtained on both sides, and even if the entire sum were to be applied to settle the plaintiff's claim ultimately, this would only amount to about 37% of the principal of the loans made to the defendant. The plaintiff is hoping to reduce its loss if it should be able to develop the Property and make some profit out of the sale of the units in the new building. In the event that the plaintiff should succeed in its claim and the judgment should be unsatisfied, the plaintiff would seek a charging order against the Property and enforce it by an order of sale. The plaintiff would bid for the Property at that time to acquire the right to develop and take the risk of market fluctuations in future rather than suffer the certain and substantial loss if the Property were to be sold at present. For these reasons, I decline to accept the second undertaking in lieu of an injunction. I find that the balance of convenience lies in favour of granting an interlocutory injunction to restrain any disposition of the Property and I have so ordered.

32. I have considered the available evidence of the financial position of the plaintiff and rejected the suggestion made in the affirmation of Madam Hui's sister that there is any uncertainty that the plaintiff would be able to honour its undertaking as to damages. I do not think the evidence should warrant fortification of the plaintiff's undertaking as to damages.