LEW KEE JACK v. CHINA RAILWAY INVESTMENT (HK) LTD AND OTHERS

HCA2845/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2845 OF 2003

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J U D G M E N T

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1. I have before me two applications in this interlocutory matter. One application is by the three defendants for discharge of ex parte Mareva injunction granted by Sakhrani J on 1 August. The other application is by the plaintiff for the continuation of the ex parte order of Sakharni J. Unfortunately, the contest between the plaintiff and the defendants ranged over a wide area in this interlocutory hearing which should have taken much less time than what occurred, something like three and a half days.

2. The parties before me are, firstly, the plaintiff in the form of Mr Lew Kee Jack, a Canadian Chinese although he speaks, writes and understands no Chinese, who had made a considerable fortune with his restaurant business and who has subsequently become an international investor and has substantial investment in Asia. He does not live full time in Hong Kong but spends part of his time in Hong Kong. On the other side are three corporate defendants. They are all part of what I will call China Railway Construction Group. The parent company is China Railway Construction Corporation. The main subsidiary in Hong Kong is the 3rd defendant, China Railway Construction Corporation (HK) Limited. The 1st defendant, China Railway Investment (HK) Limited, is a fully-owned subsidiary of the 3rd defendant, and the 2nd defendant, Asianotice Investment Limited, a BVI company, is a shelf company that was specially created for the transaction and is a wholly-owned subsidiary, as I understand it, of the 1st defendant. The 4th defendant, Mr Yiu Fung, was what is called a broker and his broking activity brought about the transaction which is now the subject of the dispute.

3. In 2000 the telecom market was hot everywhere in the world. In Hong Kong it was particularly hot because a company in Hong Kong, by the name of China Unicom Limited ("China Unicom") which is a subsidiary of a Chinese corporation by the name of China United Telecommunications Corporation ("United"), had just gone public in Hong Kong and the shares in June 2000 had already reached something like $16. China Unicom shares were very much sought after and it is in that context that when the plaintiff learned from a middleman that the China Railway Construction Group had in its possession 'founder' shares in United which could be converted into the China Unicom shares that an interest was shown which eventually led to the meeting alleged by the plaintiff to have taken place on 30 June 2000. There is no dispute that there was some sort of meeting although Mr Hao Gui Lin ("Mr Hao") who is the overall boss of China Railway Construction Group activities in Hong Kong could not, on affidavit, say or agree with what was alleged to have taken place on 30 June 2002. His version was either he could not remember or that large part of what was alleged by the plaintiff was not true. At the meeting alleged by the plaintiff on 30 June 2002, four persons were there, the plaintiff, his broker Eric Lee, Mr Hao and Mr Yiu. The name card at the point of introduction of Mr Hao was given to the plaintiff (at page 320) showing Mr Hao as being the managing director of China Railway Construction Corporation (HK) Limited, that is, of the 3rd defendant.

4. After discussion, it is alleged by the plaintiff that there was an oral agreement which resulted in a handshake between the plaintiff on the one hand and the 3rd defendant on the other hand, as represented by Mr Hao, for the purchase by the plaintiff of United 'founder' shares owned by the 3rd defendant or by the China Railway Construction Group, a block of six million shares, at the price of HK$10 per share including commission of HK$1.50 payable to Mr Yiu, or HK$8.50 without the commission, and with the agreement and representation and warranty by Mr Hao that those United 'founder' shares of the China Railway Construction Group would be convertible into China Unicom shares, that is, into the marketable Hong Kong shares, one-for-one, and such conversion would take place very soon but not later than two years. If there was no conversion within two years, the money paid would be refunded. These allegations are pleaded in paragraph 11 of the Statement of Claim and this is the heart of the plaintiff's case. The essence of the plaintiff's case is that the commercial attraction of this investment, with the United 'founder' shares at HK$10 per share representing a 40% discount from the prevailing market price of China Unicom shares and that the disadvantage of not being able to have the shares for possibly two years (that was the promised period) is reflected in the discount. The important attraction is that the United 'founder' shares, because of the representation of the close relationship between the 'founder' shareholder, that is the China Railway Construction Group with United, would be converted into marketable China Unicom shares.

5. The deal described above was struck and the investment was made. Money was paid and documents came into being. There are a large number of documents involved, for example, in the first deal, that, is the first six million shares purchase, there is the document where one can see at pages 134 to 135, a notice dated 3 July about signing document from Mr Yiu to Eric Lee; there is the draft Chinese agreement that was sent under cover at page 136 of the fax of 3 July; there is the document at page 150 which is a fax dated 10 July enclosing a transfer acknowledgement from Guangzhou South China; there is, at page 159 (10 July) and furthermore at page 161 (11 July), assurances from the 1st defendant; then at page 162 (12 July) further warranty and guarantees from the 1st defendant, and then finally at page 167 with translation at page 172, the Chinese agreement. So a lot of documents subsequent to the 30 June meeting were created.

6. The second transaction, the second deal of purchase, was for a larger block of 10 million United 'founder' shares, this time at a slightly adjusted price of HK$10 per share plus commission. The commission amount has gone down to HK$6,000,000. The documentation generated for that is much smaller, it seems to include only on page 284 a letter (27 July) from the 1st defendant to Eric Lee saying that the sale is from its original shareholding, at HK$10 per share. The Chinese agreement which is in the similar form as the first deal is at page 291 with the translation at page 296, and then finally at page 285 a document dated 30 August is an acknowledgement of the transfer of the shareholding signed by the 1st defendant. Annexed to each of the Chinese agreements are a lot of other documentation, many of which are important.

7. There is no dispute that many payments were made by the plaintiff and the skeleton argument of Mr Barlow in the original application shows payments totalling some HK$137,000,000 were made to the 1st defendant, HK$14,000,000 to the 2nd defendant and HK$15,000,000 to the 4th defendant. These were paid at the directions of the China Railways in Hong Kong.

8. The history of the matter, so far as the present application is relevant, shows that when it came close to the two-year period promised in the 30 June agreement there was no conversion and no news, so there were then series of discussions between the plaintiff and Mr Hao leading to Mr Lew being invited to go to Beijing to meet the head office, that is, the higher ups of the China Railway Construction Group, but that did not result in any solution. A large number of alternative offers were made to Mr Lew, but they were not really acceptable to him. The history then went from the parties negotiating to the solicitors being involved, and correspondence showed that there was demand from the plaintiff's solicitors in March 2003 leading to rejection after some delay by the defendants' solicitors in June 2003, and in July 2003 proceedings were issued. The order now under consideration was made on 1 August after abortive attempts.

9. Before I go on to consider the details and to analyse some of the points addressed to me, I think it is salutary to remind oneself that this is an application for interlocutory injunction and the observation of Lord Diplock in American Cyanamid is worth remembering. The White Book sets this out very clearly in page 477 the principle laid down in American Cyanamid and I just read parts of what is set out there at 29/1/9 :

" (1) The grant of an interlocutory injunction is a remedy that is both temporary and discretionary.

(2) The evidence available to the court at the hearing of the application for an interlocutory injunction is incomplete. It is given on affidavit and has not been tested by oral cross-examination.

(3) It is no part of the court's function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature considerations. These are matters to be dealt with at the trial.

(4) When an application for an interlocutory injunction to restrain a defendant from doing acts alleged to be in violation of the plaintiff's legal right is made upon contested fact, the decision whether or not to grant an interlocutory injunction has to be taken at a time when ex hypothesi the existence of the right or the violation of it, or both, is uncertain and will remain uncertain until final judgment is given in the action.

(5) It was to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved that the practice arose of granting him relief by way of interlocutory injunction.

(6) But (at least since the middle of the nineteenth century) this has been made subject to the plaintiff's undertaking to pay damages to the defendant for any loss sustained by reason of the injunction if it should be held at the trial that the plaintiff had not been entitled to restrain the defendant from doing what he was threatening to do.

(7) The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable. ...

...

(9) There is no rule of law or practice to the effect that the court is not entitled to take any account of the balance of convenience unless it has first been satisfied that upon the evidence adduced by both the parties on the hearing of the application the applicant had satisfied the court that on the balance of probabilities the acts of the other party sought to be enjoined with would, if committed, violate the applicant's legal rights. The purpose sought to be achieved by giving to the court discretion to grant interlocutory injunctions would be stultified if the discretion were clogged by such a technical rule.

(10) However, the court must be satisfied that the claim is not frivolous or vexatious; in other words, that there is a serious question to be tried.

(11) So, unless the material available to the court at the hearing of the application for an interlocutory injunction fails to disclose that the plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, the court should go on to consider whether the balance of convenience lies in favour of granting or refusing interlocutory relief that is sought."

And then, if I may also refer to the consideration for a Mareva, and I do not think it is contested, which is set out in paragraph 29/1/15/9/6 :

"That for a domestic Mareva injunction the plaintiff must show (1) there is a good arguable case on the substantive claim over which the court has jurisdiction."

10. In Steven Gee's book on Mareva Injunction, it is said at pages 183 to 184 that Mustill J (as he then was) described a good arguable case as one which is more than barely capable of serious argument but not necessarily one which the judge considers would have a better than 50% chance of success.

11. I would therefore adopt the standard in this hearing to be a good arguable case. I would also take on board the wide-known practice in an interlocutory injunction application, whether Mareva or otherwise, not to indulge in protracted forensic examination of the evidence to examine whether there is no good arguable case or to determine the various merits of the contending causes of actions or remedies. A broad view can be taken and should be taken on these interlocutory applications so that a quick result can be reached. Very often, the primary dispute on such an application is over the balance of convenience and not as to the detailed merits of the claim. I regret that at this hearing that was not the approach adopted by the defendants despite repeated discouragement from the bench. Persistent submission was made as to the lack of bona fide or lack of a good arguable case having regard to the documents and to the surrounding circumstances and to the affidavit evidence even casting doubt about credibility of Mr Lew, so on and so forth. In my view this approach is not a fruitful exercise. What I therefore prefer to do is to look broadly at the three causes of action relied upon by the plaintiff against the defendants to see whether a good arguable case has been made out or not made out as the defendants contended. If the first requirement of the injunction of a good arguable case is satisfied (which argument took most of the court's time), there is very little scope for elaboration on the minor questions of delay and dissipation of assets raised by the defendants. So I propose to consider first the three causes of action. I think we have covered them a great deal at the hearing :

(1) Fraudulent misrepresentation.

(2) Quistclose trust.

(3) Breach of the agreement.

12. The fraudulent misrepresentation lies at the heart of Mr Scott's case. The allegation is that there was, on the 30 June meeting, the representations leading to the oral agreement. In the course of the hearing, the parties referred to the four essential ingredients for two deals alleged. What is known as Step 1B is the allegation that there was a warranty or representation of the 3rd defendant that it or China Railway Construction Group was the owner of United 'founder' shares, the subject of the sale. Step 2 is the allegation that there was a warranty or representation that these United 'founder' shares, which are of particular value because of the close relationship between the 'founder', China Railway construction Group and United, will be converted one-to-one into China Unicom shares. Step 3 is the allegation that there was the representation that these United 'founder' shares will be converted within two years at the latest. Step 4 is the allegation that if they are not converted within two years, then the money invested will be returned to Mr Lew.

13. The case of the plaintiff is that when the plaintiff was given those representations the defendants knew that they were not true, and therefore they are fraudulent. The extraordinary turn of events, during the course of the proceedings in this case, is that Mr Chan on behalf of the defendants informed the court on instructions that the defendants did not have any United 'founder' shares and that China Railway Construction Group was not a 'founder' shareholder, and that the defendants went outside both in relation to the first deal and the second deal to buy United shares. So, there is therefore an admitted breach if there was found to be an alleged representation. The question therefore is : Was there a representation? If there was, then it must have been fraudulent because the admitted case is that the defendants knew they did not have these United 'founder' shares. The case of Mr Chan is that because they did not have the United 'founder' shares, therefore they could not possibly have made the representation. But I think, this is putting the case the other way round. The real question is : Was it likely, inherently probable, that such a representation was made? What was the main inducement to the plaintiff so far as inherent probability is concerned and as I indicated throughout the hearing, there is every possibility and it is inherently commercially and sensible for the plaintiff to have been in receipt of such representation before he would make that kind of large investment.

14. The other question much pressed by the defendants is : Do the documents conclusively or clearly show that this could not have been the case. The proper approach to interlocutory injunction that I have earlier indicated is here applicable. I have before me an interlocutory application hearing where the material is not complete and where by every single consideration, this is not a straightforward or easy case. Documents appear in English as well as in Chinese and some of them are not so consistent. Some of the meanings of the documents raise difficult questions, and there is even questions of translation. How can a court, at an interlocutory application such as this, come to a view that there is no serious question for the trial, or that the plaintiff does not have a good arguable case? I have no hesitation, having heard this case for three and a half days, in reaching to the view (as was found by Sakhrani J when he granted ex parte order) that the plaintiff has a genuine and good arguable case that should go to trial. That deals with the first cause of action.

15. The second cause of action is that there was a "Quistclose" situation, namely that payments were made for a specific purpose, for the purpose of buying the defendants' United 'founder' shares, and that this had not happened. It is submitted that this had not happened because the defendants did not have the United 'founder' shares and did not promise they had them. The question of course is very much tied to the first point whether there was an agreement for the defendants' United 'founder' shares. If there was a specific purpose, then the money paid is subject to the trust. I do not believe that, if the first cause of action is good then there is anything against the second cause of action.

16. The third cause of action is that in any event, even if there was merely the agreement, the plaintiff is entitled to have the conversion within two years, either because of its implied term or because of its express term, and there had been non-performance, so the plaintiff is entitled to the money back.

17. There is no particular argument by Mr Chan at the hearing on the question : If there was fraudulent misrepresentation by the 3rd defendant to the plaintiff, then the 1st and 2nd defendants are also liable because they are knowing participants in the fraudulent misrepresentation and recipients of the money paid, so they are constructive trustees.

18. In my view the case will largely turn on the central allegation of 1B. The central allegation of 1B is that you told me you have United 'founder' shares which are extremely valuable. They are valuable because of the alleged close relation between the 'founder' China Railway Construction Group and United, these 'founder' shares would be converted and could be converted into China Unicom shares. The evidence including the documents suggest that there is a good possibility that this is what was said to the plaintiff.

19. The other important feature is the "two years". It is said that if one looks at the documents, especially the Chinese agreement, there is no promise of two years nor is there stated the obligation to return the money after two years. It was explained in the affidavit of Mr Lew the reason for the lack of the documentation on this is because of the unwillingness of Mr Hao to record such in writing unless he received formal instructions from Beijing.

20. The story of the plaintiff is set out in very clear terms. The Mareva order was obtained on the strength of a full Statement of Claim, a fairly full skeleton by Mr Barlow and Mr Barlow in fact even set out towards the end of the skeleton some perceived defences of the defendants. It is of course ex parte application on notice with the defendants being there. I think the plaintiff has done all that could be expected. So on the hotly contested issue of whether no good arguable case had been shown, I simply cannot agree with Mr Chan's submissions and it seems to me that the criteria of what Mustill J said in Ninema is more than met. On the basis that I find a good arguable case had been made out, then the only point left to consider are some minor points submitted by Mr Chan.

21. So far as delay is concerned, I think having regard to the circumstances, especially the course taken and the correspondence, I do not see there is any case of delay. The plaintiff did all that he could. Unfortunately the case is sufficiently complex as to require even senior counsel to take a bit of time to prepare. If that was not done then the plaintiff would be accused of not making full and frank disclosure. So I do not think there is any question of delay. The case Nicekind Holdings Limited cited to me of the Court of Appeal turns on special facts and I do not think it applies here.

22. So far as dissipation of assets is concerned, Mr Scott has helpfully taken me through a list of what he calls "relevant material" that the court can take into account in deciding whether there is sufficient evidence of dissipation. At the forefront of that list is of course the mortgage. This is the document (Bundle 3, page 312) which Mr Hao submitted to Mr Lew and asked Mr Lew to sign. The transaction covered by the document obviously was a non-existing transaction and Mr Lew was therefore in fact being asked by Mr Hao to put his name to a fraudulent document. Mr Lew quite rightly refused. Some attempt to explain it away was made by Mr Hao but that does not take away from the full implication of what had happened, namely the extremely low morality of both Mr Hao and of his China Railway Construction Group in Hong Kong which do not regard truth as being important.

23. There is the consideration in this case also of the very large size of the claim, the nature of liquid assets which can be flicked away at the stroke of a pen, the strange way the defendants reacted to the chasing by the plaintiff, both between person and person and between solicitors and solicitors. Of course, the final consideration is that it is a case of fraud, and the case of fraud is such that there seemed to be almost admitted most of the essential elements of fraud, subject only to the hotly debated question of alleged representation. So the plaintiff has achieved a high degree of conviction of a genuine case of fraudulent misrepresentation that requires the protection of the court.

24. I agree it is an unusual case and I agree that the remedy of $151,000,000 Mareva order is severe. It is a heavy order, but I think in the circumstances of this case it is justified.

25. I finally turn to the lightly pressed point of misrepresentation to the ex parte judge, that is, the alleged disappearance of Mr Hao from Hong Kong. Mr Hao was said in the plaintiff's affidavit of failing to respond to Mr Lew because he had left Hong Kong. Mr Hao did not leave Hong Kong and I think Mr Lew has probably got it wrong if he thinks that Mr Hao has left Hong Kong. But there was no allegation that Mr Hao disappeared with some sinister implication. Mr Hao is not the defendant. If Mr Hao is the defendant rather than the Chinese Railways companies being the defendants, then the allegation might be material. Mr Hao was just an officer of China Railways sent from Beijing and he may be sent back to Beijing. The important part is whether there is a risk of dissipation of the corporate defendants' corporate assets and I do not think the judge was misled in any way or took Mr Hao left Hong Kong into consideration. In fact it is nowhere reflected in his reasoned judgment. I think this is a non-point.

26. I therefore come to the view that there are no grounds for setting aside the ex parte order and there are ample grounds for continuing with the ex parte order. The application for discharge of the ex parte order is therefore dismissed and I make an order in favour of the plaintiff to continue the order of Sakhrani J.