XCHRX A.S. DESIGN LTD. AND ANOTHER v. LAM YIU TO JOSEPH AND OTHERS

HCA 3329/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3329 OF 2001

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D E C I S I O N

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1. There are altogether 5 summonses before me at the hearing on 11 October 2001. The summonses issued by the Plaintiffs are as follows:-

(a) a summons dated 3 August 2001 in which the Plaintiff asked for judgment in this action;

(b) a summons issued on 13 September 2001 for the insertion of a provision in the Mareva injunction granted herein on 27 July 2001 by Chu J. The proposed provision was to make it clear that the 1st Defendant would be at liberty to use his funds in Mainland China to pay for legal costs and living expenses in Hong Kong.

2. The summonses issued by the 1st Defendant are as follows:-

(a) a summons issued on 11 September 2001 asking for variation of the said Mareva injunction in respect of making funds available for payment of legal costs and living expenses;

(b) a summons issued on 25 September 2001 asking for security for costs against the 2nd Plaintiff;

(c) a summons issued on 25 September 2001 asking for discovery with regard to accounts referred to in an affidavit of Simon Clarke sworn on 24 July 2000.

3. In the light of their positions taken by the parties before me, I only need to refer to 3 of these summonses briefly. In respect of the summons for discovery, the accounts were in fact provided by the Plaintiffs to the 1st Defendant. The only outstanding matter is question of costs. The summons was issued on 25 September 2001 whilst the accounts were provided on 3 October 2001. Hence, the 1st Defendant only asked for costs of the issue of the summons. Mr Wright, counsel for the Plaintiffs, argued that these accounts were not necessary for the 1st Defendant's presentation of their case and submitted that the proper order should be costs in the cause or no order as to costs or the 1st Defendant's costs in the cause. The application was made under Order 24 Rule 10. Paragraphs 8 and 9 of the affidavit of Simon Clarke of 24 July 2001 did make reference to these accounts. Therefore, prima facie, the 1st Defendant was entitled to require the production of the same for inspection. The 1st Defendant might have wished to verify the figures referred to in those paragraphs of the affidavit of Mr Clarke and it is within his right to do so. Therefore, I do not accept the submissions on behalf of the Plaintiffs and I would order that the Plaintiffs do pay the costs of the issue of this summons to the 1st Defendant in any event.

4. With regard to the Plaintiffs' summons of 13 September 2001, the 1st Defendant's position was that it was not necessary. However, Mr Collins who appeared before me on behalf of the 1st, 3rd, 4th and 5th Defendants accepted that the insertion of these provisions in the order would not do any harm to his clients. Whilst the Mareva injunction granted on 27 July 2001 by Chu J was restricted to Hong Kong assets, and hence by itself would not prevent funds from the Mainland China to be transferred to Hong Kong, it is at least arguable that as soon as they were transferred to Hong Kong they would be subject to the injunction. I therefore agree that it would be prudent to insert these provisions into the order and I will grant an order in terms of paragraph 1 of the summons of 13 September 2001 taken out by the Plaintiffs.

5. With regard to the summons for judgment taken out by the Plaintiffs on 3 August 2001, the position of the 1st Defendant was that the Plaintiffs were in fact proceeding on the basis of a settlement agreement which was subsequently repudiated by the 1st Defendant. Therefore at one stage, the Plaintiffs indicated through their solicitors to the 1st Defendant that they would not be proceeding with the summons. I was referred to a letter dated 19 September 2001 from Messrs Boase, Cohen & Collins, solicitors for the 1st Defendant to Messrs Kwok & Yih, solicitors for the Plaintiffs and a letter dated 20 September 2001 from Messrs Kwok & Yih to Messrs Boase, Cohen & Collins. On the other hand, the Plaintiffs' solicitors did indicate by a letter dated 8 October 2001 that they would be proceeding with the application for judgment on the basis of admissions made in the pleadings. At the hearing before me, Mr Collins for the 1st Defendant indicated that the 1st Defendant would not oppose to a judgment to the extent as admitted in the defence. After some arguments, parties were able to come to an agreement as to the extent to which a judgment could be entered on the basis of the admissions contained in the defence. At my invitation, the parties were able to come up with a draft judgment and by a fax dated 12 October 2001, Messrs Boase, Cohen & Collins indicated that they confirm they would not oppose to that draft judgment to be entered against the 1st Defendant. I, therefore, grant an order that judgment be entered accordingly.

Security for costs

6. I now come to the more contentious matters. With regard to the application for security for costs against the 2nd Plaintiff, that was made on the basis that the 2nd Plaintiff is ordinarily a resident out of the jurisdiction under Order 23 Rule 1. However, there is a 1st Plaintiff in this action which is a company in Hong Kong. The 1st Defendant accepted the principles as set out in paragraph 23/3/5 of Hong Kong Civil Procedure 2001. In general, no order for security for costs will be made if there is a co-plaintiff resident within the jurisdiction. However, as stated in that paragraph, the rule is subject to the general discretion of the court. I, therefore, have to decide on the matter with regard to the circumstances of this particular case.

7. The first thing that I bear in mind is the fact that the 1st Defendant has consented to a judgment to be entered against him and as I have indicated, I will order judgment to be so entered. Although the judgment was for damages to be assessed and for account to be taken and enquiry be made, Mr Collins told me that the amount estimated by the 1st Defendant to be payable under these heads was $2.2 million. Mr Collins also stressed that this is a figure accepted by the 1st Defendant just for the purpose of the applications before me. On the other hand, Mr Collins told me that according to the Plaintiffs' case the amount said to be due from the 1st Defendant was US$1.5 million. Mr Collins therefore submitted that there would be substantial dispute as to the assessment and the enquiries. Be that as it may, I am entitled to take into account of the fact that there are at least $2.2 million owed by the 1st Defendant to the Plaintiffs. In other words, these are monies of the Plaintiffs presently in the pocket of the 1st Defendant.

8. Mr Collins however submitted that I should not take into account of the $2.2 million because those were in fact in respect of claims of the 1st Plaintiff rather than the 2nd Plaintiff. He further submitted that there are in fact separate claims of the 2nd Plaintiff in the present action and therefore there is a possibility that the court may dismiss the claims of the 2nd Plaintiff whilst it allows the claim of the 1st Plaintiff. In that event, the 2nd Plaintiff would be liable for costs to the 1st Defendant which the 1st Defendant could not obtain from the 1st Plaintiff. If one examines the Statement of Claim filed in this action, one would immediately see that as far as the causes of action pleaded for which relief are sought in the prayers are concerned, they are basically all claims of the 1st Plaintiff. Although it is actually pleaded in paragraph 2 of the Statement of Claim that the 2nd Plaintiff is an associated company of the 1st Plaintiff and the relief are sought by both Plaintiffs, as the Statement of Claim stands, I do not see any independent cause of action by the 2nd Plaintiff. Basically the claim arose out of the employment relationship between the 1st Defendant and the 1st Plaintiff and the claim was contractual in nature. There is no suggestion in the Statement of Claim that the 2nd Plaintiff was a party to that contract. Paragraph 11 of the Statement of Claim pleads the wrongful use of various resources of the 1st Plaintiff, hence it is again a claim by the 1st Plaintiff. Paragraphs 12 and 13 plead a claim with regard to secret commissions. Again, if there is any claim arising out of that, it would be the claim of the 1st Plaintiff since the 1st Defendant was at all material times the employee of the 1st Plaintiff instead of the 2nd Plaintiff. Certainly, there is no independent or separate claims by the 2nd Plaintiff being pleaded in the Statement of Claim.

9. Mr Collins however submitted that there is an independent claim for intellectual property rights which he said according to the evidence were vested in the 2nd Plaintiff instead of the 1st Plaintiff. In this connection, he referred me to particulars (f) pleaded under paragraph 6 of the Statement of Claim. One has to bear in mind that paragraph 6 of the Statement of Claim is in fact pleading a claim of breach of the term of employment of the 1st Defendant, and therefore it must be a claim by the 1st Plaintiff. Paragraph (f) of the particulars reads as follow,

"As part of his duties for the 1st Plaintiff, the 1st Defendant was responsible for arranging the manufacture of products, including a product know as the 'razzle dazzle hoop combo'. All intellectual property rights in the products were vested in the 1st and/or 2nd Plaintiff."

I should also refer to paragraphs (g) and (h) of those particulars.

"(g) The 1st and 2nd Defendants, acting through the 3rd and/or 4th and/or 5th Defendants and/or Dream Plaza had sold the Plaintiffs' products including the 'razzle dazzle hoop combo' to customers of the Plaintiffs, including Intercontor Zentraleinkaug Handels GmbH.

(h) The Defendants and each of them have wrongfully failed to account to the Plaintiffs in respect of the profits and benefits they have obtained by the sale of the Plaintiffs' product."

10. Whilst these paragraphs if pleaded as an independent causes of action could be read as claims by the 1st and 2nd Plaintiffs jointly and therefore to such extent it may be said that there are claims by the 2nd Plaintiff in the action, I do not think they can be so regarded in the present pleadings because they are all pleaded as particulars given under paragraph 6 of the Statement of Claim. I have already referred to the fact that in paragraph 6, what is pleaded is basically a plea of breach of the implied or express term of the service agreement which was the agreement between the 1st Defendant and the 1st Plaintiff. In any event, even if these are treated as separate claims to be read independently from paragraph 6, I do not see any possibility of costs order being made against 2nd Plaintiff alone in the context of this case. These claims were made by both Plaintiffs together and if the claims failed, I cannot see any reason at the moment why the 1st Plaintiff should not be held liable for costs. Whilst I recognise the principle that it is prima facie unjust to allow a foreign plaintiff to proceed without making funds available in the jurisdiction to cover any order for costs made against him, in the circumstances of the present case bearing in mind the matters I have referred to, I hold that the interest of justice does not require me to make any order for security for costs against the 2nd Plaintiff. I would therefore dismiss the Defendant's summons of 25 September 2001 with regard to security for costs.

Variation of the Mareva injunction

11. Finally, I come to the application for variation of the Mareva injunction in respect of legal expenses and living expenses. For reasons unknown to me, there was no provision for these in the order of 27 July 2001 by Chu J although there were such provisions in the ex parte order made by Stone J on 24 July 2001.

12. On 10 August 2001, Chung J varied the order of Chu J of 27 July 2001 by allowing the 1st Defendant to utilise $200,000 in his bank account No. 604-001784-888 for (a) his living expenses in the sum of $20,000 per week; and (b) legal costs and disbursements up to $100,000. That was an interim measure because it was envisaged that the matter would be reviewed upon the hearing of the Plaintiffs' summons for judgment (which I have dealt with in Paragraph 5 above). I was told that the $200,000 has been exhausted ($100,000 by way of living expenses and $100,000 by way of legal expenses).

13. The Plaintiffs resist this application principally on the basis that the 1st Defendant has funds and property in Mainland China which he could resort to for these purposes. Therefore he should not be allowed to use the assets in Hong Kong which are subject to the injunction because that would be against the underlying policy of Mareva injunction. According to the disclosure given by the 1st Defendant in his affirmation of 7 August 2001, he owned a property in Mainland China which he purchased at the price of $1.6 million odd. Further, he had a saving deposit in Mainland China in the sum of RMB60,000 which he said was for the benefit of his wife. On top of that, based on what was said by Mr Collins in his 2nd affidavit of 11 September 2001 with regard to two workers employed by the 1st Defendant in China (see paragraph 15 of the said affidavit), counsel for the Plaintiff submitted that there are undisclosed business activities carried on by 1st Defendant in Mainland China from which income could be generated. Comments were also made about the 1st Defendant's ability to pay for his legal and living expenses so far and this court was invited to draw an inference that the 1st Defendant has undisclosed means.

14. With regard to the last point, the 1st Defendant has through his solicitors Mr Collins accounted to the court how he has been able to pay for these items. Those explanations were given to me orally at the hearing on 11 October 2001 and were subsequently set out in the 8th affidavit of Mr Collins dated 12 October 2001 filed pursuant to the undertaking given by Mr Collins to the court. That affidavit also referred to the two workers in China. I do not consider it right for me to have regard to what is said in paragraph 9 of the 8th affidavit of Mr Collins because those were not matters which were canvassed before me at the hearing on 11 October 2001. However, I regard what was said by the Plaintiffs in respect of the two employees in Mainland China as wholly speculative in terms of the possibility of income being generated from their activities. On the material before me, even with the exercise of a healthy dose of scepticism in dealing with the evidence of the 1st Defendant bearing in mind his admitted wrongdoings and his transaction with his previous employer, I am not satisfied that the 1st Defendant has concealed from the court information with regard to his finance.

15. The relevant principles with regard to variation application in the context of Mareva injunction has recently been succinctly set out by Recorder Ronny Wong in his Reasons for Decision dated 27 August 2001 in the case of Wang Jian v. Zhang Tien Feng, HCA No. 607 of 2001. Parties are in agreement with the principles set out at pages 7 to 10 in his Reasons for Decision and I respectfully agree that those are the relevant principles. In addition, counsel for the Plaintiffs invited me to have regard to the judgment of Mortimer JA (as he then was) in the case of Assets Investments v. The United Islamic Investments Foundation [1995] 1 HKC 560. The relevant part of his judgment is at page 563C-F:

"The purpose of a Mareva injunction is to prevent a party dissipating its assets by removing or keeping them from the court's control so as to avoid the risk of having to satisfy a judgment. It is trite to say that if a party is in control of assets not frozen by the injunction, he must usually be made to use those assets for his ordinary and legal expenses first. There is no difference in approach if a party who is the subject of a world-wide Mareva is shown to be in control of other assets which he is wrongfully keeping out of the court's clutches in order to avoid the risk of having to use them to satisfy a judgment. As Donaldson MR said at 3F in Mussells v. Thompson (CA1689 and 1690/83, English Court of Appeal, unreported), having set out the general principle: 'that is the principle; and if there is reason to believe that people are asking for money for school fees, doctors' bills, solicitors' costs, or whatever, simply as a means of avoiding bringing free money into this country, or as a means of not having to use other monies which have not been discovered and which they wish to keep out of the clutches of the court, of course they will be refused'."

16. Mortimer JA also emphasised at p. 563F in that judgment that these are not principles of law but of approach. As said by Donaldson MR in Mussells v. Thompson, every case has to be dealt with on its own merits. It is important to bear in mind that the purpose of a Mareva injunction is not to secure priority for the plaintiff. Therefore there has to be a balance to prevent undue pressure being exerted on a defendant who is subject to such an injunction. The overriding consideration is what is just and convenient. In the present case, I have asked myself whether the 1st Defendant is trying to keep assets in the Mainland China out of the court's clutches in order to avoid the risk of having to use them to satisfy a judgment. The answer in my view is "No" because soon after the present action was commenced, he has disclosed his assets in Mainland China. I note that neither the ex parte order of Stone J nor the order of Chu J made on 27 July 2001 require him to do so. I accept that the mere fact that a defendant's purpose in applying for variation is not to frustrate enforcement of a judgment does not in itself mean that a variation is to be permitted. There may be circumstances which make it unjust that a defendant should be able to use its assets within the jurisdiction to pay for living and legal expenses. (see Stephen Gee, Mareva Injunctions and Anton Piller Relief, 4th edition, p. 320 to 321) The property in China is used by the 1st Defendant as his residence in Mainland China together with his wife and child. Notwithstanding that there is a claim against him in Hong Kong, I do not think it can be suggested that he should be required to sell that property and make use of proceeds therefrom before he can apply for variation of the Mareva in Hong Kong. What the Plaintiffs through their counsel submitted was that the 1st Defendant should be able to procure facilities by means of his property. However, the 1st Defendant said there were difficulties in this regard because of the lack of certificate of title in respect of the property at the present moment. Further, the 1st Defendant through Mr Collins told the court that he is willing to give an undertaking in terms of paragraph 21 of the 5th affirmation of Simon Clarke dated 9 October 2001. By that undertaking the 1st Defendant would place the title documents in respect of that Mainland China property in the custody of his solicitors in Hong Kong pending further order of the court. He would further undertake not to sell, dispose or in any way encumber his interest in that property. With these measures in place, I do not regard it as unjust to allow a variation of the Mareva injunction notwithstanding it the 1st Defendant has a property in China. Although Mortimer JA did say that if a party is in control of assets not frozen by the injunction, he must usually make use of those for his ordinary and legal expenses first, I do not think that is an inflexible rule. This is clear from his lordship's emphasis that these are not principles of law but of approach. In my judgment, in the special circumstances in this case, to allow a variation would not be inconsistent with the underlying policy of the Mareva injunction. With those undertakings given by the 1st Defendant with regard to the Mainland property, that property is in effect also subject to the injunction. With regard to the RMB60,000 deposit in Mainland China, I would take that into account in considering the quantum.

17. I am therefore prepared to grant a variation of the Mareva injunction to allow the 1st Defendant to use his assets in Hong Kong to pay for legal expenses and living expenses. As to the quantum, I shall first deal with living expenses. I was asked by the Plaintiffs to deal with the mortgage payment and rate in respect of the Hong Kong property called Laguna Verde separately. There is no objection from the 1st Defendant in respect of that. An agreed provision to that effect has been submitted to me and it reads as follows:-

"This order does not prevent the 1st Defendant from transferring funds in Hong Kong in order to continue to make monthly periodic repayments of the real estate loan advanced by the HSBC in respect of the property known as Flat F, 25/F, Tower 15 of Costas Del Sol, Laguna Verde, Kowloon and registered at the Land Registry at Inland Lot no. 11056 and in order to pay rates due in respect of the said property."

I will grant a variation in those terms.

18. With regard to the other items for living expenses, in paragraph 3 of the 7th affidavit of Mr Collins, the following items were said to be the monthly expenses of the 1st Defendant apart from the mortgage payment and rates,

(a) house-keeping to wife and child in China including child education $12,000

(b) maintenance towards Defendant's parents $10,000

(c) travelling expenses $4,000

(d) personal expenses including clothing, food, drinks, etc. $10,000

(e) life insurance premium $5,500

In respect of the house keeping to the wife and the child, I take the view that there is no reason why as least part of it could not be paid from the deposit in China. I would deduct $5,000 from it as being payable from the deposit in China. That leaves a balance of $7,000. I am also not inclined to allow the sum of $10,000 alleged to be the maintenance of the 1st Defendant's parents. Apart from lack of proper evidence as to these payments in the past apart from the bare assertion of the 1st Defendant through his solicitors, there is no details as to the living standard of the parents and why a sum of $10,000 is necessary. Further, I am sceptical about this because according to the case of the 1st Defendant, he himself borrowed money from his parents. In paragraph 3 of the 8th affidavit of Mr Collins, he refers to the fact that the 1st Defendant borrowed $40,000 from his parents. So the figure I will allow for living expenses apart from mortgage payment and rates would be $26,500 per month.

19. In respect of legal expenses, as I indicated at the hearing, even if I were to allow the variation, I would not at this stage give a variation for the legal costs up to the end of the case. I consider that it is appropriate to give a variation for legal costs to be incurred up to the setting down of the assessment of damages, account of profit, enquiry of monies due, and also the trial of the action. I accept the submission of Plaintiffs' counsel that the figures set out in paragraph 2 of the 5th affidavit of Mr Collins are excessive and that some items are not necessary. However, I am not to conduct a mini taxation and I also bear in mind the principle that a defendant ought to be allowed to choose the legal representative he thought best qualified to present his case and to pay them such charges as may be properly payable as a matter of contract. Doing the best that I can, I will allow a variation in the sum of $300,000 for legal cost with liberty to the 1st Defendant to apply for further variation upon proof of exhaustion of this amount by proper evidence. Since I have estimated this figure by reference to the likely costs incurred up to the setting down, the 1st Defendant would have to provide cogent evidence about his legal costs if he wishes to make a further application before the setting down.

20. In the fax sent to the court on 12 October 2001 it is indicated that parties also consented to a variation in the following terms:-

"This injunction does not prevent Prudential-Bache Securities (Hong Kong) Limited from exercising any rights it may have in respect of the securities trading agreement (non-discretionary) no. 0801912 entered into between Mr Lam Yiu To Joseph and Prudential-Bache Securities (Hong Kong) Limited on 2 July 1999."

I will also grant a variation in those terms.

21. I will leave parties to prepare a draft order in the light of what I have decided for the court's approval. In view of the facts that both parties were partly successful in their applications, I will make an order nisi that each party bears his own costs of the hearing of 11 October 2001. Apart from the costs of the hearing, bearing in mind the shift of Plaintiffs' position, I propose to make the same order nisi in respect of the costs of the summons for judgment; and an order nisi that the 1st Defendant shall bear the Plaintiffs' costs in any event in respect of the summons for security for costs; an order nisi that the Plaintiffs shall bear the 1st Defendant's costs in any event in respect of his summons for variation. I have already dealt with the costs in respect of the summons for account. In respect of the Plaintiffs' summons of 13 September 2001, very little costs have been incurred relating to that and if the Plaintiffs deem those provisions necessary, I see no reason why the matter could not have been dealt with by way of consent by letter. I propose to make an order nisi that there be no order as to costs for this summons.