SHEN FAT FURNITURE CO LTD v. JOY GLOBAL JOINT CO LTD AND OTHERS

HCA2221/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2221 OF 2007

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J U D G M E N T

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1.  The plaintiff has contracted with the 1st defendant to purchase substantial quantities of Cambodian rosewood from it. 

2.  When the first consignment arrived at Hong Kong, packed into four containers, it was discovered that what had been sent was not rosewood, but cheap timber logs said to be worth about one-twentieth of the value of the rosewood.

3.  On 23 October, the plaintiff applied to Wright J, ex parte, for Mareva injunctions prohibiting all four defendants from removing from Hong Kong assets up to the value of $3.2 million.

4.  Last Friday, 2 November, being the date appointed for the inter partes hearing, Mr Douglas Lam applied to have the injunctions discharged against the first three defendants, who he represents.  The 4th defendant, a Vietnamese national, resident in Vietnam, not appearing, nor being represented.

5.  Mr Vaughan who appeared for the plaintiff, asked for an adjournment and a continuation of the ex parte injunction.  This was because, as so often happens with these urgent matters, the first three defendants filed their evidence on the afternoon before the hearing, and Mr Vaughan wished for an opportunity to respond.

6.  The application to discharge Wright J’s orders were based on two grounds.  Firstly, due to alleged material non-disclosure of facts which should have been disclosed to Wright J at the ex parte hearing, and secondly, on the merits.

7.  Mr Lam wished to submit, certainly on behalf of the 2nd and the 3rd defendants, that in a case such as this in which serious fraud was being alleged against all four defendants, that the plaintiff had failed to make out a good arguable case against at least these two defendants. 

8.  For the 3rd defendant, the matter had become very urgent because his bank, on being served Wright J’s order, had suspended his credit cards, making life difficult for him, and that his reputation in the Korean business community, in particular, had suffered badly, he being the current secretary of the Korean Chamber of Commerce.

9.  I had thought, erroneously I am now told by Mr Vaughan today, that he had not agreed to my hearing and ruling on the application for a discharge based on the merits by either the 2nd or the 3rd defendants.  At all events, I heard the argument and reserved judgment to today.  By yesterday morning, the judgment had been substantially prepared, but in the course of yesterday, the plaintiff had filed evidence from Mr Tse on the plaintiff’s behalf, which was in reply to the affirmation of the 3rd defendant, which was before me on 2 November. 

10.  I was asked to admit that evidence, defer my judgment today and hear further argument based on that new evidence.  I agreed to do so, following which the 3rd defendant has put in a further affirmation which has been additionally responded to by Mr Tse.  I have now heard further argument, with the result that I have had to put aside my substantially prepared original judgment and start all over again.  I promised the parties my judgment later today, with the result that I propose to take the facts largely as read, rather than summarising them here. 

11.  If my judgment needs to be considered in another court,  I am afraid that that court will need to go to the affirmations rather than look to my judgment, for what I hoped would have been a helpful summary of the factual background of the dispute.  What I can say is that there is very compelling evidence that the plaintiff has been defrauded.

12.  The real question at issue is whether it can be shown, at this stage, that the 3rd defendant and the 2nd defendant, his corporate alter ego, can be said to have been a party to that fraud.  All that the plaintiff needs to show is that it has placed before me a good arguable case, that is to say a case which is well short of the standard of proof which will be required of it at the trial.

13.  The 3rd defendant’s case is that the real villain is a person called Ma, who supplied him and the 4th defendant, his business partner in this venture, with the wood.  Ma, says the 3rd defendant is, a crook.  Once this came to light, he has tried his best to ensure that the plaintiff will suffer no financial losses.  He wishes to repay the plaintiff its deposit of $116,805, as well as putting a stop to the payment by the Dah Sing Bank of an irrevocable letter of credit payable to the 2nd defendant in the amount of US$545,454.56.

14.  The 3rd defendant, very frankly it seems to me, accepts that the plaintiff has been duped, but not by any of these defendants.  In fact, he says, that it is the four defendants who have suffered the most.  The 3rd defendant and his partner the 4th defendant, had entered into an agreement with Mr Ma to purchase ongoing substantial consignments of rosewood for onward sale by them to customers like the plaintiff.  The 3rd and 4th defendants paid Mr Ma about US$650,000 in cash in order to purchase wood from him. Part of this amount included the US$116,805 cash deposit received by them from the plaintiff.

15.  According to the 3rd defendant, the defendants are far bigger victims of Mr Ma’s fraud than the plaintiff.  Ma has now been arrested crossing the Cambodia/Vietnam border with unauthorised amounts of cash on him, and with false travel documents.  Now that he’s been detained, the defendants have instructed lawyers in Vietnam to seek redress in the civil courts from Ma and this is borne out by a letter put in evidence from those lawyers.

16.  The 3rd defendant has, on the face of it, since the fraud has been discovered behaved with the utmost propriety in trying to minimise the plaintiff’s losses.  He arranged an inspection of the timber that was sent to Hong Kong.  He has not tried to run from his obligations and has, but without success, instructed the Dah Sing Bank to desist from paying out on the letter of credit.  It has declined to do so, save in circumstances where there is an injunction from the court, which is the current position.

17.  In the light of his conduct, the 3rd defendant says that there is no case of him being complicit with Mr Ma in defrauding the plaintiff by supplying it with grossly substandard timber, and if that is right, his company, the 2nd defendant, should also have the Mareva injunction discharged.

18.  Mr Lam has been at pains to agree some form of order with the plaintiff, which would ensure that the funds represented by the letter of credit are preserved for the benefit of the plaintiff.  This is an aspect that I will return to in a moment.  Mr Wilson Chan, who today has come in to lead Mr Vaughan, submits that there is more than sufficient evidence to support a good arguable case that the 3rd defendant is a party to the fraud, which has resulted in this very substandard timber being supplied instead of rosewood.  He has referred me to a number of features of the evidence, as had Mr Vaughan on 2 November. 

19.  There had been a meeting in Shenzhen between the 3rd and 4th defendants and Mr Cheung the plaintiff’s principal, together with Mr Tse, at which it is said that the 4th defendant at least, was to be present when the rosewood was to be loaded into the four containers.  That did not happen, which is an indication of the fact that both the 3rd defendant and the 4th defendants knew, or at best turned a blind eye to the fact that cheap timber was going to be consigned instead of rosewood, and for that reason, the 4th defendant absented himself from the loading process.

20.  Mr Wilson Chan has also relied on e-mails from the 3rd defendant telling the plaintiff’s representatives that there would be a discrepancy between the bill of lading, which would describe the consignment as, “wood,” instead of, “rosewood,” and the letter of credit.  The 3rd defendant said in the relevant e-mail that this would be so, because Vietnam, where the consignment would be sent from by sea, prohibited rosewood being exported from Vietnam.

21.    In the latest round of affirmations, Mr Tse has produced a  computer download of the Vietnamese Government’s regulations on exports, which Mr Wilson Chan says contradicts what the 3rd defendant said in his e-mail.  There is no prohibition on the export of rosewood in these circumstances from Vietnam.  If anything, Mr Chan submits that this is compelling evidence to show that the 3rd defendant knew cheap timber would be sent, and not rosewood, and that he was trying to get a waiver of the discrepancy from Mr Cheung, so that the bank would release the funds.

22.  Against that Mr Lam submits that the question of what the relevant law is in Vietnam is by no means clear on the basis of this downloaded information, and that in any event, the 3rd defendant, a novice in this business, could well have misunderstood the legal position.   Whereas, the plaintiff’s representatives, who have been in this trade for 10 years, would be far more likely to know the true position, and yet they did not question what the 3rd defendant was saying in his email at the time. 

23.  The difficulty here is that I have to resolve this matter on the basis of challenged affirmation evidence.  The certain truth, or at least as certain as our adversarial system can provide, will only emerge at the trial of the action.  The best that I can do is to deal with this on the basis of a broad overall appreciation of the affirmation evidence, bearing in mind that where fraud is alleged, even at this stage, where only a good arguable case needs to be shown, the quality of the evidence must be commensurate to the gravity of the charge, a charge of dishonesty that is being advanced against the 3rd defendant.

24.  In considering the evidence overall, I do not believe the plaintiff’s evidence is equal to a good arguable case.  If anything, the burden of the evidence, on paper, supports the 3rd defendant that he and his partner have been victims of Mr Ma, just as much if not more so due to their greater financial losses than the plaintiff.  Despite Mr Chan’s and Mr Vaughan’s perfectly proper attempts to extract every ounce of prejudice against the 3rd defendant out of this evidence, by inviting me to draw adverse inferences from the factual circumstances, this is simply not possible on what I had read.

25.  Whilst the plaintiff would appear to have an unanswerable case of breach of contract against the 1st defendant, at this stage the evidence cannot pass muster for these purposes on the basis of a complicity in the fraudulent activities that must have occurred when the timber was loaded.  In saying that, I have also had regard to the absence of a proper log list being supplied to the plaintiff.  This is entirely consistent, on the basis of the totality of the evidence, with the 3rd and 4th defendants being mucked about by Mr Ma, who in that way could put his fraudulent scheme into practice.

26.  In these circumstances, I propose to discharge the injunction against the 3rd defendant.  Mr Lam has indicated to me that the 3rd defendant is prepared to provide suitable undertakings as to the proceeds of the letter of credit by way of protecting the plaintiff, which I will accept from him.  I will hear both parties now on the wording of that undertaking.

27.  Logically, the injunction, in its present form, should also go against the 2nd defendant, who I have described as the 3rd defendant’s corporate alter ego, but it is right to say that it does also stand in a separate position in its own right, as the beneficiary of the letter of credit. 

28.  Whilst I am able to discharge the injunction in its current Mareva form, because that order now becomes unnecessarily draconian, there ought to be some injunctive restraint placed upon the 3^rd Defendant in relation to the proceeds of the letter of credit, given the bank’s, at present, unbending position that it will pay out once the injunction goes.  I suspect, in these circumstances, that a specific limited injunction should be put in place, rather than an undertaking, the terms of which I will gladly hear counsel on.

29.  I also propose to give directions as to any other consequential matters.  I daresay now, that Mr Lam has obtained the discharge of the Mareva for the 3rd defendant it may be that he will not require a ruling on the issue of material non-disclosure, but I will let him tell me what he wants to do about that.

(Argument and discussion)

30.  In the light of what has happened today, as a result of my judgment, it strikes me that there should be no order for costs in respect of the reserved costs on the ex parte hearing before Wright J .  I am afraid the plaintiff will have to bear it’s own costs in respect to that.

31.  In respect of today’s judgment, things happen, as it were, between the making of the ex parte injunction and when the dust has settled and more evidence comes in.  I have great sympathy for the plaintiff in this matter.  It is difficult to judge these things to a nicety.  They have obviously been defrauded and they have moved as quickly as they could to protect their position.  I take the view that the better order is to say defendants’ costs in the cause, in respect of what I have done today.  So that will be in respect to the costs of 2 November and of today.