NICEKIND HOLDINGS LTD. v. D.H. INTERNATIONAL LTD.

1998, No. A1678

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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REASONS FOR DECISION

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1. The Plaintiff claims against the Defendant the sum of HK$6.5 m. being part of the consideration for a rather complicated transaction in respect of the purchase of some shares. However it is not disputed that the Plaintiffs had a cheque for the said sum which upon presentation in accordance with an arrangement was countermanded by the Defendants. The Plaintiff thus sues upon a dishonoured cheque.

2. The Plaintiffs obtained an 'ex parte' Mareva injunction against the Defendants, a Cayman Islands company, from Mr. Justice Sears on the 24th February 1998, and it was continued inter partes by order of Madam Justice Yuen on the 27th February. The issue before me upon application to continue the injunction is whether there is a real risk of the Defendant dissipating its assets so as to justify the continuation of the injunction.

3. The Defendants being an offshore company is obliged under S.333 of the Companies Ordinance to register at the Companies Registry in Hong Kong if it establishes a place of business in Hong Kong. They did not do so. Mr. Warren Chan Q.C. on behalf of the Defendants contended before me that it was not obliged to do so because it had no place of business. This argument is fatally flawed. It is clearly in the business of purchasing shares. There is ample evidence that this is its business in Hong Kong. Mr. Chan in dealing with another point, namely the effect on the business reputation of the Defendant company with banks etc. in Hong Kong which he underlined as the onerous effect of the Mareva injunction, lent weight to Mr. Ng's contention that the Defendant was carrying on business in Hong Kong from the address in the Agreement (Exhibit MN 1a). That address is described in the agreement as its place of business in Hong Kong. I doubt in any event that the Plaintiffs would have transacted with the Defendants unless they had a place of business in Hong Kong. In my view it is clear that the Defendants are in breach of the requirements under the ordinance. That being so there are no documents at the Companies Registry which would give the Plaintiff any information as to the share holding, financial position generally or assets in particular. Understandably Mr. Ng relies upon this state of affairs as underlining the risk with such Defendants. There is no reciprocity of enforcement of judgments with the Cayman Islands.

4. Mr. Chan has argued, in effect, that the mere status of being an off-shore company should not put a question mark against his clients. As a bald statement he may well be right but there is a more detailed picture available of this company and it is in breach of a very important part of Hong Kong Company Law. He also argues that little attention should be paid to the Plaintiffs contention that failure to register deprives them of important information about the Defendants, because even if the Defendants were a Hong Kong private limited company, the Plaintiffs would be none the wiser in this regard. I cannot accept the validity of such an argument. It begs the question.

5. Mr. Chan in dealing with the position of this Defendants cites Lord Justice Lawton in Third Chandris Shipping Corporation v. Unimarine S.A. [1979] 1 Q.B. 645 (at p.671).

"The mere fact that a defendant having assets within the jurisdiction ..... is a foreigner or a foreign corporation cannot, in my judgment, by itself justify the granting of a Mareva injunction."

I agree. But we are not dealing here with a mere fact as is readily apparent from the foregoing. In any event Lawton L.J.'s statement was made in the context of a fuller consideration of Mareva injunctions and a re-reading of the full paragraph repays consideration. These were in any event the early days of the use of Mareva injunction. Lawton L.J. had gone on to say:

"There must be facts from which the ... Court like a prudent sensible commercial man can properly infer a danger of default if assets are removed from the jurisdiction. ...... What (commercial men) have to do is to find out all they can about the party with whom they are dealing, including origins, business domicile, length of time in business, assets and the like; and they will probably be wary of the appearances of wealth which are not backed up by known assets ......

[Judges] should not expect to be given proof of previous defaults or specific incidents of commercial malpractice ....... In my judgment an affidavit in support of a Mareva injunction should give enough particulars of the Plaintiff's case to enable the court to assess its strength and should set out what inquiries have been made about the defendant's business and what information has been revealed, including that relating to its size, origins, business domicile, the location of its known assets and the circumstances in which the dispute has arisen. These facts should enable a commercial judge to infer whether there is likely to be any real risk of default. Default is most unlikely if the defendant is a long established well-known foreign corporation or is known to have substantial assets in countries where ... judgments can easily be enforced [either under reciprocal enforcement legislation or other wise.]. But if nothing can be found out about the Defendant, that by itself may be enough to justify a Mareva injunction."

6. In the judgment of Cumming-Bruce, L.J. at p.673(H) to 674(A) is the comment:

"Relevant facts in these cases were the characteristics of the foreign corporation, so organised as to prevent anyone discovering anything about its capacity to pay its debts. This .... distinguished it from the foreign trading corporations of whom particulars are available in the country where they are registered."

This was a succinct echo of Denning M.R.'s statement in his judgment at p.669 A-C an extract relied upon by Mr. Ng.

"... The mere fact that a defendant is abroad is not by itself sufficient. No one would wish any reputable foreign country to be plagued with a Mareva injunction simply because it has agreed to London arbitration. But there are some foreign companies whose structure invites comment. We often see in this court a corporation which is registered in a country where the company law is so loose that nothing is known about it - where it does no work and has no officers and no assets. Nothing can be found out about the membership, or its control, or its assets, or the charges on them.

Judgment cannot be enforced against it. There is no reciprocal enforcement of judgments ......

...... In such cases the very fact of incorporation there gives some ground for believing there is a risk that, if judgment ... is obtained, it may go unsatisfied. Such registration of such companies may carry many advantages to the individuals who control them, but they may suffer the disadvantage of having a Mareva injunction granted against them. The giving of security for a debt is a small price to pay for the convenience of such a registration."

7. Mr. Warren Chan also places reliance on a passage from the judgment of Mustill J. (as he then was) in the decision at first instance in Ninemia Maritime Corporation v. Trave G.m.b.h. [1983] 1 W.L.R. p.1412 which was repeated by Kerr L.J. in his judgment on appeal. But there too the context for the comment is highly relevant, and should not out of context be advanced as a basic principle: the defendants (sellers) were members of a long established group of companies with a good reputation for honouring the obligations of companies within the group, and being incorporated in West Germany were subject to the New York Convention on the Enforcement of Arbitration Awards. That is a very different situation from the one presented to me.

8. Further reliance is placed upon the fact that prior to the countermanding of the cheque, the Defendants had paid large sums to the Plaintiffs. No store can in my view be set by this; this is not a picture of a long standing trading reputation. In fact I need to remind myself of Mr. Chan's suggestion that the Defendants are not in business in Hong Kong, hence their non-registration. Besides it is well known that some businesses seek to establish a status of apparent probity by paying promptly simply to be able to trade; later default is not anticipated by the trading partner. This is of course a countermanded cheque, not a simple refusal to pay.

9. The position of the Defendants' assets in Hong Kong is advanced by them in support of the argument that there is no risk of dissipation or removal of assets. They have deposed to possessing HK$274 m. shares in a single listed company Dah Hwa International (Holdings) Limited which represent 67% odd of the company's total share capital, and that by reason of the restrictions on and requirements of such disposal there cannot be such a risk and the Plaintiffs would have ample notice of any intended disposal. They also state they have US$7 m. worth of shares in various companies. In support of this is a letter from the Singapore branch of the Austrian bank, Creditanstalt. This simply states that at the close of business on the 26th February 1998 "records show a balance of US$7,182,110 net asset value in the account [88032]".

10. Turning to the affirmation of Mr. Lee Sam Yuen, a director of the Defendants, filed on the 12th March 1998, paragraph 5 deals with the shareholding at the Singapore branch of the Austrian bank. Mr. Lee says the shares were "pledged to the Bank" but goes on to say that he confirms that there is no amount outstanding which would affect the shares. It would have been simple enough for the Bank to have confirmed this but he goes on to say "due to the internal policy of the Bank ... it cannot issue any certificate to prove that the securities account is unencumbered." I find this strange but it may simply mean that the bank has a floating charge over the securities to "secure" an overdraft facility which has not crystallised. Whatever the position I consider that it could have been dealt with in a straightforward way in the affirmation and it has not.

11. Paragraph 3 purports to deal with the shareholding in the Dah Hwa Company asserting the value at just under HK$275 m. It does not say where the share certificate is held, whether any of the shareholding is charged as a security. It is to be noted that the Defendants are represented by a firm of solicitors with offices world-wide, and considerable experience in commercial disputes. They can safely be taken to know what information is relevant. Mr. Chan says that whatever deficiencies are disclosed in this affirmation must be attributed to the shortcomings of a busy company director not used to the niceties of litigation. That I cannot accept.

12. The affidavit filed on behalf of the Plaintiff shows that (”22) the Defendants, through Mr. Tai, told him that the shares purchased had been charged to the Austrian bank. This has not been contradicted or even commented upon in the Defendants affirmations. There is no information as to the state of the bank accounts held in Hong Kong.

13. Since the notice of dishonour the Defendants made no response to the Plaintiffs attempted contacts. This is not a crucial matter in the overall scenario, nonetheless it is one more factor in the backcloth. Nor do I consider the fact that the Defendants had sufficient time within which to effect a disposal of assets following issue of the writ of which they were aware, a significant fact affecting an inference which may properly be drawn.

14. I am satisfied that there is a real risk of the Defendants disposing of its assets. The status of the company and its non-compliance with the laws of Hong Kong on its own justifies that inference. The additional evidence in my view shows how very real that risk is . The injunction is to continue.

15. The Defendant additionally attacks the Plaintiff's openness in relation to its own financial position when applying ex parte for the injunction. The Plaintiff has been in business for over 10 years. It has assets in Hong Kong. Mr. Chan contends that its accounts contradict that picture and that the court may have been misled. I do not think that is the case. The auditors certainly gave a qualified opinion and the accounts show an accumulated loss in excess of HK$10 m. However there is an enormous increase in turnover in 1996 over 1995 but a very small increase, proportionally, in the accumulated losses. Assets are shown at HK$27 m. with liabilities of over HK$9 m. The auditors have expressed, inter alia, their lack of information as to the recoverability of about 3/4 of the debts due to the company, and about 3/4 also of the liabilities. I think it would be fair however to require a fortification of the undertaking and the figure suggested by Mr. Ng on behalf of the Plaintiffs of $400,000 is acceptable. There will be an order for costs in the cause.