WASON HOLDINGS LTD AND OTHERS v.BHP INTERNATIONAL MARKETS LTD AND ANOTHER

CACV 83/2015

[2018] HKCA 113

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 83 OF 2015

(ON APPEAL FROM HCA 1692 OF 2014)

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REASONS FOR JUDGMENT
AND
COSTS ORDER NISI

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Hon Yuen JA:

1.  I agree with the Reasons for Judgment of Barma JA and his order nisi in respect of costs. 

Hon Barma JA:

2.  This was an appeal by the 1^st defendant, BHP International Markets Limited against certain of the orders made by Chow J on 20 March 2015, pursuant to leave granted by the judge on 16 April 2015. 

3.  By the parts of his order appealed against, the judge had continued, as against the 1^st defendant, an injunction that had been granted ex parte by Anthony Chan J on 28 August 2014.  The injunction sought to prevent the 1^st defendant from disposing of or otherwise dealing with some 288,520,000 shares in Powerlong Real Estate Holdings Limited or their proceeds of sale.  The shares had been deposited by the plaintiffs with Haitong International Securities Company Limited (the 1^st defendant’s securities broker) as security for a loan of US$22,867,382.87 granted by the 1^st defendant to the 1^st plaintiff.  The judge also ordered the 1^st defendant to disclose how the proceeds of sale of such shares had been dealt with (it having become clear that the shares had already been sold by the 1^st defendant), identifying the present whereabouts of such proceeds or their equivalent.

4.  At the conclusion of the hearing, we allowed the appeal and indicated that we would give our reasons for doing so later, together with an order nisi as to the costs of the appeal.  These are those reasons and order.  The delay in handing them down is regretted.

5.  The background to the proceedings is as follows.  The plaintiffs are investment companies incorporated in the British Virgin Islands, controlled by family members of Mr Hoi Kin Hong, the chairman of Powerlong, which is itself a Cayman Islands company listed on the Stock Exchange of Hong Kong.  The 1^st defendant is a Bahamas company.  One of its major lines of business is the making of loans to borrowers against the security of relatively illiquid shares.  The plaintiffs were introduced to the 1^st defendant by a Miss Lam Ching Ching, a financial intermediary based in Singapore.

6.  According to the 1^st defendant, its business model involves making non-recourse loans against security over illiquid shares, on terms which entitle it to sell or deal with such security at any time, without any requirement that the borrower should be in default of its obligations under the loan agreement.  It sometimes (perhaps more often than not) sells the shares provided as security in order to generate funds to enable it to make further loans to other borrowers, although when it does this, it will take steps to hedge the sales to put itself into a position to redeliver shares to the borrower whose shares have been sold, when the loan is repaid.

7.  Having been introduced by Ms Lam, the 1^st plaintiff and 1^st defendant entered into a Stock Secured Financing Agreement on 5 February 2014, by which the 1^st defendant agreed to make available to the 1^st plaintiff a non-recourse loan against the security of the Powerlong shares.

8.  There was, however, a dispute as to the terms on which the loan was made.  Three versions of the loan agreement existed, all of which were placed before the court by the 1^st plaintiff.  These were respectively described by the plaintiffs as the “Authentic Agreement”, the “Altered Agreement” and the “Manipulated Agreement”.  The plaintiffs contended that the “Authentic Agreement”, under clause 5(d) of which the 1^st defendant was only entitled to sell the Powerlong shares in the event of a default on the part of the plaintiffs, represented the true agreement between the parties, and that the “Altered Agreement”, which arguably did not require a default before the shares could be sold, was a forgery.  The third version – the “Manipulated Agreement” – did not appear to feature significantly in the proceedings below.

9.  The 1^st defendant did not accept that the descriptions of the different versions of the agreement used by the plaintiffs was appropriate.  The judge did not come to any finding as to which version was the authentic one, and nor does this court.  It was accepted by both sides that the question of what were the actual terms of the agreement, and what was the proper construction of those terms, gave rise to serious questions to be tried.

10.  Following the making of the agreement (whatever its true terms and their proper construction), the loan was advanced to the 1^st plaintiff in three tranches between 11 February and 15 May 2014, and the Powerlong shares were deposited by the plaintiffs with Haitong.

11.  The plaintiffs contend, consistently with the version of the agreement described as the “Authentic Agreement”, that they believed that the shares would remain with the defendants as long as the terms of the loan were observed, which according to the plaintiffs, they were.  However, in mid-August 2014, the plaintiffs noticed irregular movements in the shares of Powerlong, which led them to suspect that the 1^st defendant may not, after all, have retained the shares, and that the shares might have been sold in the market.

12.  Dissatisfied with the 1^st defendant’s and Haitong’s responses to their enquiries, on 28 August 2014 the plaintiffs applied for and obtained an ex parte injunction from Anthony Chan J.  The injunction prevented the 1^st defendant from disposing of or otherwise dealing with the shares, their proceeds of sale, or the present equivalent of such proceeds.  It also required the 1^st defendant to make an affidavit to inform the plaintiffs of the current location of the shares and their proceeds of sale. 

13.  The writ, issued the next day, sought a declaration that the shares were (from their deposit pursuant to the loan agreement) held by the 1^st defendant on constructive trust for the plaintiffs, an injunction to prevent the 1^st defendant from dealing with the shares, an order for the return of the shares against repayment of the loan, and damages for breach of the loan agreement.  It also contained claims for damages for conversion of the shares and for equitable compensation for the breach of the alleged constructive trust.

14.  Initially, the plaintiffs were informed in September 2014 that 520,000 shares had been sold in the open market, but that 288,000,000 shares had been transferred to a company called Global Prime Partners and were still retained by them.  This was confirmed in an affidavit filed on behalf of the 1^st defendant.  However, it later transpired that this was not the case, and that the remaining 288,000,000 shares had also been sold some time earlier, by the end of May 2014.  This was also subsequently confirmed by the 1^st defendant, who sought to explain how the mistake in what they had earlier said occurred.

15.  As a result of this development, the plaintiffs applied for a Mareva injunction against the 1^st defendant.  However, the application was refused by Godfrey Lam J, primarily on the ground that no risk of dissipation of assets had been shown.  Thereafter, the plaintiffs obtained an injunction against Matford LLC (who were joined as the 2^nd defendant to the writ), to whom the 288,000,000 shares had been sold, preventing Matford from disposing or dealing with the shares, their proceeds or the present equivalent of the proceeds.

16.  Subsequently, in November 2014, the substantive proceedings as between the plaintiffs and the 1^st defendant were stayed to arbitration.

17.  Meanwhile, the 1^st defendant approached Ms Lam in Singapore, with a view to obtaining her assistance and evidence to resist the plaintiffs’ claims.  Ms Lam was initially cooperative, and provided detailed information to the 1^st defendant’s solicitors in the course of a fairly lengthy interview.  The information provided was recorded in an attendance note.  The information tended to support the 1^st defendant’s case as to which version of the agreement was the one actually entered into (namely, the version described by the plaintiffs as the “Altered Agreement”), although it did not assist on the question of how that version of the agreement should be construed.  However, shortly after that interview, and before Ms Lam was able to make an affidavit on behalf of the 1^st defendant, proceedings were brought against her by the plaintiffs in Singapore, seeking disclosure of documents and answers to interrogatories relating to the making of the loan agreement.  As part of those proceedings, an injunction was issued by which she was enjoined from disclosing the Singapore proceedings, or information or documents in relation to, or connected with, those proceedings.  In effect, this also prevented her from further discussing the subject of the present proceedings with the 1^st defendant – at any rate, this was how the order seems to have been understood by Ms Lam, who declined thereafter to cooperate further with the 1^st defendant, or to explain why she would not do so.  The 1^st defendant was unable to obtain information about the Singapore proceedings against Ms Lam, and although the 1^st defendant voiced its concern that Ms Lam had been prevented from assisting it, the plaintiffs did not provide any information relating to the Singapore proceedings during the course of the hearing below.

18.  There were four summons before the court in the hearing below.  These were:

(a) the plaintiff’s summons of 29 August 2014 for further continuation of the ex parte injunction order;

(b) the 1^st defendant’s summons of 3 September 2014 for fortification of the plaintiff’s cross-undertaking in damages and seeking the discharge of the ex parte injunction order;

(c) the plaintiff’s summons of 5 December 2014 seeking an order for disclosure of information and documents relating to the past and present location of the proceeds of sale of the Powerlong shares; and

(d) the 1^st defendant’s summons of 19 December seeking to strike out the writ on various grounds.

19.  The judge acceded to the plaintiff’s applications ((a) and (c) above), and dismissed those of the 1^st defendant ((b) and (d) above).  This appeal is not concerned with the application for fortification or the application to strike out, and these applications are not further discussed below.  However, the 1^st defendant maintains that the ex parte injunction should have been discharged, that it should not have been continued and that the disclosure order (which is ancillary to the injunction) should have been accordingly refused.

20.  The judge concluded that, subject to the question of discharge of the injunctions for material non-disclosure, it would be appropriate to continue them.  He considered that there were serious questions to be tried in relation to the actual terms of the loan agreement, whether the 1^st defendant was in breach of the loan agreement by selling the shares, whether the sale of the shares amounted to a conversion of them, and whether the proceeds of sale were held on constructive trust for the plaintiffs.  He noted that the injunction sought was not a Mareva injunction, but one targeted at the shares or their proceeds, which was proprietary in nature (he also noted that the injunction over the shares was not pursued as against the 1^st defendant, as the shares had been sold to the 2^nd defendant, but this appears to have been overlooked in finalising the order below, as that order retains the injunction in relation to the shares).  He considered that while the injunction over the proceeds essentially concerned money, it was relevant to take into account that the 1^st defendant did not appear to have substantial assets within the jurisdiction, that its assets were tied up in its loan book and could not be readily turned into cash, and that the injunction sought was proprietary in nature, and that all of these factors favoured the granting of the injunction sought over the proceeds of sale.

21.  So far as the application for discharge was concerned, the judge rejected the suggestion that the injunction (at least so far as it related to the proceeds of sale) would serve no useful purpose.  He also rejected the 1^st defendant’s contention that the plaintiffs had been guilty of material non-disclosure at the ex parte stage in three respects.  None of these are the subject matter of appeal.

22.  However, there was a further complaint of non-disclosure of the full picture in relation to Ms Lam’s evidence (a matter which arose after the making of the ex parte order), namely that the plaintiff had not informed the court that it had obtained the Singapore injunction against Ms Lam, and had failed to place before the court the material it had relied on to obtain that injunction, which would, it was said, have tended to support the 1^st defendant’s case as to the version of the loan agreement which represented the true agreement between the parties.

23.  As to this, the judge was prepared to infer that some steps had been taken to prevent Ms Lam from cooperating with the 1^st defendant, and that this was most likely by way of an injunction obtained in Singapore.  However, he considered that he should proceed on the basis that any such injunction had been properly and justifiably obtained, and thus not an improper act on the plaintiffs’ part.  He held that it was not, in those circumstances, possible to be satisfied that the details of those proceedings were relevant to the question of whether or not the injunction should be continued, particularly as that evidence was likely to be relevant to the question of whether or not the 1^st defendant was entitled to sell the shares absent any default by the plaintiffs, as to which it was common ground that there was a serious question to be tried.

24.  Having concluded that the injunction should not be discharged, but should be continued, the judge went on to conclude that it would be appropriate to make the disclosure orders sought by the plaintiffs.

25.  The 1^st defendant sought leave to appeal against the judge’s orders in relation to the continuation, discharge and disclosure summonses.  The judge gave leave to appeal, limited in effect to a single ground: namely, the alleged non-disclosure of the position in relation to the Singapore proceedings against Ms Lam.  He also made it clear that it was open to the 1^st defendant to seek leave to appeal on other grounds from the Court of Appeal.

26.  The 1^st defendant did not make any such application to this court.  Instead, it sought to raise further grounds of appeal by way of a Supplementary Notice of Appeal dated 16 September 2015, pursuant to RHC Order 59 rule 7.

27.  Ground (1) contended that the judge had erred in law, or acted in disregard of principle, or failed to take account of relevant matters in several respects, namely:

(a) he had failed to have regard to the fact that the 1^st defendant had already sold the shares, thus rendering paragraph 1 and 3(1) of the injunction order inapt;

(b) he had failed to take account of the fact that the Powerlong shares were held in scripless form, and thus could not be converted, or made the subject matter of a constructive trust;

(c) he had failed to have regard to the fact that the writ did not assert, as against the 1^st defendant, any constructive trust over the sale proceeds, so that it was inappropriate to grant a proprietary injunction in respect of the sale proceeds or such assets as might be represented by them in the hands of the 1^st defendant;

(d) he had confused Mareva injunction principles with those applicable to adequacy of damages and the balance of convenience; and

(e) by reason of the foregoing points, failed to recognise that he had no jurisdiction to grant a proprietary injunction against the 1^st defendant, whether in relation to the shares or their proceeds of sale.

28.  Ground (2) advanced contentions as to why the plaintiffs’ version of events was improbable, and also expanded on the 1^st defendant’s complaints relating to the non-disclosure by the plaintiff of the Singapore proceedings.

29.  Ground (3) contended that the evidence filed by Ms Lam in the Singapore proceedings (which it was agreed could be placed before this court), should have led the judge to consider that it was likely that the plaintiffs and Ms Hoi were knowingly putting forward a false case as to the true terms of the loan agreement.

30.  Mr Coleman SC, appearing for the plaintiffs, objected to this approach, and contended that the 1^st defendant should not be permitted to rely on the additional grounds advanced.  To this, Mr Barlow SC (for the 1^st defendant) responded that he only sought to rely on ground (1) to the extent that it went to the court’s jurisdiction to grant the injunctions; that ground (2) was essentially a reformulation of the ground on which leave had been granted; and that the same was true of ground (3).

31.  In my view, none of the points advanced under ground (1) are properly to be characterised as going to the court’s jurisdiction to grant proprietary injunctive relief.  The description of these points, in the opening part of ground (1), as errors of law or principle, or as failures to take into account relevant matters, is a more appropriate characterisation.  They are simply additional grounds of appeal, which the 1^st defendant has not sought or obtained leave to argue.  On that basis, Mr Barlow did not, as I understood him, seek to pursue them further.

32.  That said, Mr Coleman accepted that the injunction in relation to the shares was no longer necessary, and could be discharged in any event.  He also accepted that the writ did not in terms contain a proprietary claim in respect of the proceeds of sale in the hands of the 1^st defendant, but pointed out that at the time the proceedings were brought, the plaintiffs’ understanding (later confirmed by the initial information provided by the 1^st defendant) was that very few of the shares had been sold.  He also submitted that this could easily be cured and put forward a form of words to expressly plead a proprietary claim in respect of the proceeds of sale of the shares.  Mr Barlow contended that leave should not be given for the amendment to be made now.  However, having regard to the fact that there was clearly a proprietary claim in respect of the shares, the plaintiff’s lack of knowledge at the outset of the proceedings as to what had become of the shares, and the fact that a proprietary claim was asserted as against the 2^nd defendant both in respect of the shares and any proceeds of sale, we were satisfied that leave to make the amendment should be granted.

33.  I turn now to Mr Barlow’s main point: the failure to bring to the court below’s attention the fact of the Singapore injunction against Ms Lam.  While I would agree with Mr Barlow that it was unsatisfactory that this was put before the judge, the fact is that the judge correctly inferred that there was likely to have been an order made by the Singapore court against Ms Lam that had the effect of preventing or discouraging her from providing further assistance to the 1^st defendant.  He went on to assume that the order was properly made.  In my view, he was entitled to do so.  The orders made against Ms Lam for disclosure and interrogatories have not been challenged and have been complied with.  She has not sought to challenge the injunction order against her.  In the circumstances, there is no basis for suggesting that the orders were other than valid and proper.

34.  Although the Singapore order resulted in Ms Lam not cooperating further with the 1^st defendant, the 1^st defendant was nonetheless able to put forward a detailed version of her evidence in the form of the attendance note.  Although the judge seems to have regarded it as being of perhaps less weight than an affidavit, it seems to me that he was right to regard it as not taking matters much further in relation to the central issue of the true terms of the loan agreement.  It appears from what Ms Lam told the 1^st defendant’s solicitors (and later confirmed in her evidence given in response to the interrogatories) that there were in fact two versions of the loan agreement (i.e. both the “Authentic Agreement” and the “Altered Agreement”), both of which had been sent to the 1^st defendant, and both of which had been signed by both the 1^st plaintiff and the 1^st defendant.  While it is fair to say that the 1^st defendant’s case is that it immediately advised Ms Lam and the 1^st plaintiff that it would only accept the version in which clause 5(d) entitled it to sell the shares regardless of whether or not the 1^st plaintiff was in default, it remains the case that having regard to the existence of the two versions, both signed by both parties, the question of which was the version actually agreed between them remained an open one in respect of which there remained a serious question to be tried.  It is also pertinent to note that it appears from Ms Lam’s evidence in the Singapore proceedings, that when later asked to provide a copy of the loan agreement to the plaintiffs, she provided the version which she now says was the incorrect one.  In all, the position as to which version of the agreement governed the relationship between the parties remains unclear.  The judge was therefore justified in taking the view that the disclosure of the Singapore proceedings would not have advanced matters in relation to this issue, and thus was not a matter that would have impacted on the balancing exercise to be performed.

35.  I therefore do not think that, even if it might have been preferable for the full picture to be placed before the judge, the matters not disclosed were of such materiality as to justify the discharge of the injunctions.

36.  However, there was a further matter, which although not raised in the notice of appeal, was in our view of such substance that we invited submissions in relation to it.  This related to the fact that even if characterised as being proprietary in nature, the injunction essentially required the 1^st defendant to set aside money in order to pay the plaintiffs in the event that their claim was successful.  In those circumstances, we had serious reservations as to whether or not the balance of convenience was in favour of the injunction being granted, or whether it would be just and convenient to grant such an injunction.

37.  Mr Coleman submitted that as the injunction sought was not a Mareva injunction, it was not necessary to demonstrate a risk of dissipation of assets.  As we understood it, Mr Barlow did not dissent from this proposition.  Mr Coleman further submitted, and I accept, that as the injunction sought was proprietary, it was also unnecessary to show that damages would not be an adequate remedy. However, it remains necessary to demonstrate that the balance of convenience favours the granting of the injunction, and that it would be just and convenient to do so.

38.  With respect to the judge, and to Mr Coleman, I am clearly of the view that in the circumstances of this case, the balance of convenience was against the granting of the injunction sought.  Given that the shares had been sold, the effect of the injunction could be to secure a sum of money (whether the cash proceeds of the sale of the shares, or the eventual proceeds of any further loan to other customers of the 1^st defendant which could be identified as having been made using those proceeds) to satisfy any judgment the plaintiffs might ultimately obtain.  However, given the nature of the business operated by the 1^st defendant, requiring it to set aside a sum of money, which it would be prevented from deploying in its business, would be likely to have a significant adverse impact.  On the other hand, from the plaintiffs’ point of view, whatever judgment they may obtain at the end of the day is likely to involve the payment of money to them.  Where that money comes from is ultimately of little consequence to the plaintiffs.  Although their claim may be characterised as proprietary, in the particular circumstances of this case, it is nonetheless a claim to money.  Unless there is reason to think that the 1^st defendant will be unable to meet such a claim, there is no particularly pressing need for money to be kept aside to meet it.  With respect to the judge, while he was correct to say that the 1^st defendant did not have much in the way of assets in Hong Kong, it did not follow that the 1^st defendant’s assets overall (although possibly not very liquid) were not adequate to enable the plaintiffs’ claims to be met.  The amount of the claim against the 1^st defendant is not simply the value of the shares that were sold – credit must be given for the USD 22,867,382 advanced as a loan to the 1^st plaintiff, which had not yet been repaid.  This would substantially reduce any amount payable to the plaintiff, making it all the more likely that the 1^st defendant, would be able to meet the claim if successful.

39.  Balancing the risk of injustice to the plaintiffs if the injunction is refused against the risk of injustice to the 1^st defendant if the injunction proves to have been wrongly granted, it seems to me that the balance comes down clearly in favour of the 1^st defendant, and as such, the injunction should have been refused.

40.  For the foregoing reasons, I considered that the appeal should be allowed, and that the order below continuing the injunction should be set aside.  It follows from this that the disclosure order should likewise be set aside.

41.  So far as costs are concerned, although the 1^st defendant has succeeded in setting aside the order below, it has done so not on the ground for which it was given leave, but on a ground raised by the court.  In the circumstances, I am of the view that the appropriate order nisi as to costs would be that there should be no order as to costs, here or in the court below.