FREEMAN SECURITIES LTD(PREVIOUSLY KNOWN AS DYNASTY SECURITIES LTD) v. IP PO KI

HCA 2368/2018

[2021] HKCFI 1564

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2368 OF 2018

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J U D G M E N T

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Introduction

1.  On 18 December 2020 I handed down my judgment (“Judgment”) in respect of the appeal by the Defendant (“D”) from the decision of Master Gary C C Lam, by which the Master gave summary judgment to the Plaintiff (“P”) under RHC Order 14 r. 3 for HK$174,806,632.87, being the full amount of P’s claim.

2.  At paragraphs 25-28 of my Judgment I said as follows:

“25. This is a case where I am left with real doubt as to the veracity of the case put forward by D and my first inclination therefore was to affirm the decision of the Master and dismiss this appeal and I have been very close to doing so. In this respect it would seem unlikely that D can improve his case if the matter were to go to trial. In particular, if he has been unable to locate Zhang and Wang [potential witnesses who D had identified as being in a position to corroborate the defence which D had put forward] and obtain their assistance for the purposes of the application for summary judgment, there would appear to be no good reason to suppose that he will be able to do so for the purposes of any trial. However, in case I am wrong about this and D is able to obtain corroboration for his case…… I think it is right to give leave to D to defend these proceedings, albeit only on a conditional basis.

26. I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources. The usual terms on which conditional leave to defend is given are to require the defendant to bring into court within a specified time a sum equivalent to the whole or part of the claim, in default of which the plaintiff is at liberty to sign final judgment. I am however conscious of the fact that the quantum of P's claim is very substantial and that I should not make a conditional order with which, in practice, it will be impossible for D to comply.

27. In the circumstances, I will make an order that D shall have leave to defend these proceedings conditional upon him paying into court the sum of HK$85 million (which is a little less than half of the amount of P's claim) within 14 days of the handing down of this judgment. If this condition is complied with the costs of P's application including the costs before the Master will be costs in the cause. However, if this condition is not complied P shall be at liberty to sign judgment for the full amount of the claim, interest and the costs of the action including the costs of this application both here and before the Master.

28. As I have not heard the parties as to the conditions which it would be appropriate to impose on granting D leave to defend the proceedings and there is no evidence or other material before the court as to D's means or resources, I will give the parties liberty to apply within 14 days of the handing down of this judgment to vary the order I have made as to the condition for granting D leave to defend these proceedings.  In the event that such an application is made within this time, the time for complying with the condition will be extended for 14 days from the determination of that application.”

3.  By summons issued on behalf of D on 31 December 2020, D applied for an order varying the condition I imposed for granting D leave to defend the proceedings by substituting HK$50,000 as the amount to be paid into court in place of the sum of HK$85 million which was specified in the judgment (“D’s Variation Summons”). D’s Variation Summons was supported by D’s 2^nd Affirmation, affirmed and filed on the same day.

4.  By summons issued on behalf of P on 4 January 2020, P applied for leave to appeal to the Court of Appeal from my Judgment on the basis of the draft Notice of Appeal which was annexed to the summons (“P’s Summons for leave to appeal”).

5.  On 18 January 2021 I directed that both summonses be disposed of on paper and gave directions for their further conduct as follows:

5.1  As regards D’s Variation Summons:

(a)  That P’s evidence in opposition should be filed within 14 days;

(b)  That D’s evidence in reply should be filed within 14 days thereafter;

(c)  That D’s written submissions be filed within 7 days after the filing of D’s reply evidence, and

(d)  That P’s written submissions be filed within 14 days after the filing of D’s submissions.

5.2  As regards P’s Summons for Leave to Appeal:

(a)  That P’s written submissions be filed within 7 days, and

(b)  That D’s written submissions be filed within 14 days thereafter

6.  As regards D’s Variation Summons:

(a)  The affirmation of Leung Shun Ting Christie (“Christie Leung”) was affirmed and filed on behalf of P on 2 February 2021;

(b)  D’s 3^rd Affirmation was affirmed and filed in reply on 2 March 2021;

(c)  D’s written submissions were filed on 9 March 2021;

(d)  P’s written submissions were filed on 23 March 2021;

(e)  The 2^nd Affirmation of Christie Leung was affirmed and filed (without leave) on 23 March 2021

(f)  On 26 March 2021, D applied for leave to adduce further evidence

(g)  On 9 April 2021 I gave retrospective leave for the filing of Christie Leung’s 2^nd Affirmation; I gave D leave to file a further affirmation and I gave directions for the filing of supplemental written submissions.

(h)  D’s 4^th Affirmation was filed on 23 April 2021

(i)  On 11 May 2021 P & D each filed supplemental submissions.

7.  As regards P’s Summons for leave to appeal:

(a)  P filed skeleton submissions on 9 March 2021, and

(b)  D filed submissions on 16 March 2021.

P’s application for leave to appeal

8.  P’s application for leave to appeal can be dealt with shortly.

9.  It is not disputed that conditional leave to defend proceeding may be granted where there exists a fair or reasonable probability of the defendants having a real or bona fide defence.  Although in my judgment I expressed doubt as to the veracity of the case put forward by D and of D’s ability to adduce evidence at trial which would go to corroborate it, I implicitly accepted that it remained possible that material evidence might be forthcoming to support D’s case and on that basis I gave leave to defend the proceedings conditional upon the payment of a very substantial sum into court.

10.  P accepts that an appeal against the order I made would be an appeal against the exercise of discretion; that the Court of Appeal will not exercise that discretion afresh and will only interfere where it is shown that the discretion was exercised wrongly.

11.  In order to succeed on an application for leave to appeal, P is required to show that the intended appeal enjoys at the very least a reasonable prospect of success, i.e. that there is a reasonable prospect of the Court of Appeal interfering with the exercise of discretion. I am not satisfied that this has been shown and accordingly I dismiss P’s application for leave to appeal.

D’s Summons for variation

12.  The legal principles on the granting of conditional leave to defend proceedings under RHC Order 14 and those applicable where, as here, a defendant seeks to argue his impecuniosity, in order to avoid the imposition of a financial condition or limit or reduce such a condition, are clear and not in doubt.

13.  It is not disputed that the Court has power to impose such a financial condition and that the powers granted to the court in this respect are broad. The court is required to take all circumstances into account when imposing a condition, including the financial circumstances of the defendant and for practical purposes should not impose a condition which it is impossible for the defendant to meet as the imposition of such a condition would be tantamount to granting summary judgment to the plaintiff.

14.  Where, as here, a defendant seeks to avoid a financial condition on the basis of impecuniosity the defendant must adduce sufficient and proper evidence of his means and make full and frank disclosure of his financial resources: see Yorke Motors (a firm) v. Edwards [1982] 1 WLR 444 at 449.

15.  It is not enough for a defendant to show that meeting the condition would be onerous or difficult; he must show that it would be impossible: Yorke Motors at 449.

16.  Further it is not enough for a defendant to show that he does not personally have the means to meet the condition. In Liu Ke Mian Lorraine v. De Xin Da Trading Co Ltd (unreported), HCMP 1481/2016, 30 September 2016, the Court of Appeal said (at §28):

“A defendant seeking to avoid or limit a financial condition on account of his impecuniosity, is required to make a full and frank disclosure and to put sufficient and proper evidence before the court, including not only did he not have the money himself but that he was unable to raise it elsewhere…….”

17.  In D’s 2^nd Affirmation filed in support of his application for variation, D 2 stated as follows:

•  he was currently unemployed;

•  his trading in financial markets (which gave rise to P’s claims) ceased in 2018 following the loss of most of his assets therein;

•  his living expenses are now financed by advances of HK$40,000 per month made to him by way of loan by a close friend with whom he lives, rent free;

•  the payments of HK$40,000 per month are paid into his account at HSBC from which HK$14,1117.86 per month is paid out to pay off the amount owed on a credit card issued by Standard Chartered Bank. As at 30 November 2020, the balance standing to the credit of the HSBC account stood at HK$40,117.86

•  D had a further account at the Bank of China which he did not use;

•  he did not own any real property or any investments;

•  as well as being indebted to his friend in relation to the advances which have been made to him, he is indebted to P in the sum of HK$160,000, being costs awarded against D, which have been summarily assessed, and he is also indebted to his former solicitors for legal fees amounting to HK$222,625. He is unable to repay any of these debts.

•  His sister has lent D money from time to time; she has paid approximately $650,000 in legal fees to D’s former solicitors and has offered to lend D HK$50,000 to pay into court in the event that the condition imposed on granting D leave to defend these proceedings is varied as sought by D’s summons. 

18.  In Christy Leung’s 1^st affirmation, the assertions made by D in his 2^nd Affirmation were challenged and attention was drawn to the fact that he had not disclosed the fact that, formerly, D held very substantial shareholdings in listed companies which were sold in 2017 for very large amounts; that he had in the past been recorded as residing at various addresses other than that he said he now shared with his friend; that he holds several credit cards in addition to those which he disclosed and he is still registered as director, shareholder and company secretary of various private companies.

19.  I have carefully considered the matters raised in Christy Leung’s 1^st affirmation in the light of the responses made by D in his subsequent affirmations and I have concluded that he has satisfactorily responded to the challenges made to the assertions made in D’s 2^nd Affirmation; that notwithstanding that he has in the past been recorded as residing at various addresses, there is no evidence to show that he has ever owned real property; that whilst he does hold various credit cards, there is no reason to doubt D’s explanation that they are not currently in use and that whilst he is registered as a director, shareholder and company secretary of various private companies, there is no reason to doubt D’s explanation that these are companies owned by his friend; that he merely acts as nominee and that these positions do not give rise to any emoluments.

20.  The one matter which has given me cause for concern relates to D’s former holding of shares in listed companies and their sale in 2017. The fact of such holdings was first revealed in Christy Leung’s 2^nd Affirmation, viz:

20.1  As at 18 January 2017, D held 28,978,629 shares in Code Agriculture (Holdings ) Ltd (now known as Farnova Group Holdings Ltd)(“Code Agriculture”);

20.2  As at 17 October 2003, D held 21,180,000 shares in GR Investments International Limited  (now known as Prosperity Investment Holdings Limited) (“GR Investment”)

20.3  As at 8 March 2017, D held 33,830,000 shares in Inno-Tech Holdings Limited (“Inno-Tech”)

In Christy Leung’s 2^nd Affirmation, reference was also  made to the fact that D is shown as holding a 100% interest in Fortuna Investments Ltd, a BVI company which in turn owns 100% of Besuccess Investments Limited, a company incorporated in Hong Kong.

21.  In D’s 3^rd Affirmation, D repeated that he is does not currently hold any shares and stated that he liquidated the shares he formerly held because, at the material time he was in financial trouble. D gave the following further explanation:

21.1  D first acquired shares in Code Agriculture on 2 November 2015; his shareholding steadily reduced from initially 160,000,000 shares to 28,978,629 on 18 January 2017 which he sold in May 2018

21.2  D acquired 21,180,000 shares in GR Investments on 17 October 2003. These were sold “many years ago”

21.3  D acquired the 33,830,000 shares in Inno-Tech on 17 October 2016. These were sold in May 2018

21.4  Fortuna Investments and Besuccess Investments Ltd were shell companies with no business operations which were struck off and dissolved many years ago.

22.  D did not in his 3^rd affirmation explain what became of the proceeds of sale and he asserted that he had been unable to obtain statements from the brokers who acted for him on account of the fact that the brokerage accounts he formerly had were closed.

23.  Following the filing and service of D’s 3^rd Affirmation, a notice was served by P on D to produce the relevant brokerage account statements.  However D objected to produce the documents referred to in the notice on the ground that they were not referred to in his 3^rd Affirmation. Notwithstanding this, on the basis of D’s disclosure of interest forms, Ms. Leung was able to state that:

23.1  D’s shares in Code Agriculture were disposed of as follows:

(a)  On 30 December 2016, 44,500,000 shares were sold for HK$48,950,000;

(b)  On 6 January 2017, 45,500,000 shares were sold for HK$50,050,000

(c)  On 18 January 2017, another 50,0000 shares were sold for HK$48,500,000

23.2  On the basis of published historical prices for shares in Code Agriculture and inno-Tech:

(a)  the sale price for the 28,978,629 shares in Code Agriculture sold by D in May 2018 would have been approximately HK$2,645,748.83

(b)  the sale price for the 33,830,00 shares in Innno-Tech sold by D in May 2018 would have been approximately HK$5,110,021.50

24.  Notwithstanding D’s objection to produce the documents which were the subject of P’s Notice to Produce and the fact that, in D’s 2^nd Affirmation, D had stated that he had been unable to obtain brokerage statements, he did subsequently produce redacted copies of the brokerage statement for January 2017 and that for May 2018, copies of which were exhibited to D’s 4^th Affirmation. D gave the following further explanation:

24.1  As regards the January 2017 statement:

(a)  the proceeds of HK$48,500,000 from the sale of the 44,500,000 shares in Code Agriculture were applied to reduce D’s margin debt from HK$53,005,489.02 to HK$4,231,562.17;

(b)  the proceeds of HK$49,869,970.15 from the sale of the 45,500,000 shares in Code Agriculture were applied to pay off D’s margin debt and resulted in a credit balance of HK$638,407.98 (in D’s favour) on his brokerage account;

(c)  the proceeds of HK$48,500,000 from the sale of the 50,000,000 shares in Code Agriculture were again applied to pay off D’s margin debt and resulted in a credit balance of HK$26,884,027.35(in D’s favour) on his brokerage account;

(d)  By 27 January 2017, D was again indebted on his margin account in the amount of HK$11,307,607.11.

24.2  As regards the May 2018 statement:

(a)  On 16 May 2018, D sold 830,000 shares of Inno-Tech for HK$132,800;

(b)  On 16 May 2018, D sold 28,978,629 shares of Code Agriculture for HK$2,810,927.10

(c)  The net proceeds from these 2 transactions were immediately withdrawn by D “to pay off my debts”

(d)  The brokerage account was closed on the same day.

24.3  D had been informed by his brokers that they had no records of the sale of the remaining 33,000,000 shares in Inno-Tech, albeit that D recalls that they were sold in about May 2018 for HK$4,800,000 less commission and stamp duty.  According to D the proceeds were again used to pay off his (unspecified) debts.

25.  On behalf of D, it is submitted that, although D is obliged to adduce sufficient and proper evidence as to his means and make full and frank disclosure of his financial resources, that obligation is limited to D’s current means and resources and D is not required to provide a historical account of each and every asset he has previously owned and each dollar that he has previously earned. In other words, D is required to disclose his current financial state, not how that has come to pass.

26.  I do not accept the proposition advanced by D that where a defendant seeks to argue his impecuniosity in order to avoid the imposition of a financial condition on being granted leave to defend proceedings or to limit or reduce such a condition, a defendant is not required to disclose how his current financial condition has come to pass. In my view, where, as here, a defendant has in the past had substantial means or assets but asserts that he has become impecunious, he is required to disclose what has become of his means and assets and how he has become impecunious. This is particularly so in the present case where it is apparent that D was once a very wealthy man who had substantial shareholdings which were sold for about HK$155 million.

27.  D asserts that the proceeds of sale of the shares in question were used to satisfy margin calls and to pay off some unparticularized debts. I do not find this convincing and I am not prepared to accept on their face these broad assertions:

27.1  In the first place I regard it as being wholly unsatisfactory that, having initially stated in D’s 3^rd affirmation that he had been unable to obtain statements of his brokerage account with Satinu Markets Limited and having then objected to producing them in response to a formal Notice to Produce, D then belatedly and without explanation produced heavily redacted copies of selected statements not only  of Satinu Markets Limited but also of another brokerage by the name of Seeker Markets Limited and of HEC Securities Limited which give an incomplete account of how the proceeds of sale of the shares were applied and, because of the redactions (for which no explanation has been given), raise unanswered questions:

27.2  Apart from the issue as to margin calls, D has provided no particulars of the alleged debts which were allegedly paid off from the proceeds of sale of the shares.

28.  In imposing the financial condition I did in granting D leave to defend the present proceedings I was prompted by considerations similar to those referred to by Dwight J in Bank of Leumi (UK) Plc v. Philip Robert Akrill [2014] EWHC 4341 (Ch.), viz: (a) to test the bona fides of the party against whom the condition is ordered (b) to protect the claimants to some extent and (c) to discourage the defendant from delaying the progress of the litigation. In my view, none of these purposes would be satisfied were I to accede to D’s present application and allow him to defend these proceedings by the payment of HK$50,000 into court, which is an insignificant sum compared to the amount of the claim .

29.  On any basis, I am not satisfied that D has adduced sufficient or proper evidence as to his means and assets and I do not accept that he has made full and frank disclosure of his financial resources.

30.  In all the circumstances, I am not prepared to accede to the application made by D’s Variation Summons.

Orders

31.  Both P’s Summons for Leave to appeal and D’s Variation Summons are therefore dismissed.

32.  I will make orders nisi that costs should follow the events, so that D shall have the costs of P’s Summons for leave to appeal whilst P shall have the costs of D’s Variation Summons.