CHUNG PUI TAK AND ANOTHER v. TAM CHI LEUNG NOLAN AND OTHERS

HCA 1439/2012

[2022] HKCFI 3027

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1439 OF 2012

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DECISION

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1.  After trial, this court handed down judgment in favour of the plaintiffs. Pending finalisation of the relief and order in respect of the 2^nd plaintiff’s (“P2”) claim against the defendants upon the parties’ further submissions, the plaintiffs apply for a Mareva injunction against the 1^st defendant (“D1”).

Background

2.  The background was set out in detail in the judgment dated 27 January 2021 (“the Judgment”)[1], which will not be repeated here.  The same definitions and abbreviations in the Judgment are adopted for the present purpose.  Finalisation of the relief and order to be granted in respect of P2’s claim against the defendants has been adjourned pending further submissions of the parties.  This the parties did subsequently, and further judgment was pending.

3.  In the interim, by summons filed on 26 July 2021 (“the Summons”), the plaintiffs apply for a Mareva injunction against D1 restraining him from disposal of or dealing with or diminishing the value of his assets up to HK$14,374,797.94, which is the amount the plaintiffs say they should be entitled to in terms of relief which was then pending.

4.  The injunction sought specifically covers a residential property at Taikoo Shing, Hong Kong (“the Property”), which was then the residence of D1 and his wife, co-owned by them as joint tenants.  By the time of the Summons, the Property has been contracted to be sold at HK$11,800,000 but pending completion.  Hence the terms of the injunction restraining the disposal of half of the sale proceeds to which D1 as a joint tenant would be entitled. The injunction sought also specifically covers the property and assets of D1, including his business in D2 and D3[2] or, if sold, their proceeds up to the value of the plaintiffs’ claimed entitlement in monetary terms.

5.  At the first hearing on 30 July 2021, D1 gave undertaking essentially to pay into court half of the deposit received from the sale of the Property and the balance of the net sale proceeds to be received upon completion of the sale representing D1’s share of interest in the Property.  The two respective sums of HK$590,000 and HK5,247,075 were subsequently paid into court.  D1 also gave undertaking, until further order of the court, in terms similar to those sought under the injunction up to the specified value mentioned above while the Summons was adjourned for substantive argument.

6.  In view of the payments into court, the plaintiffs now adjust the value of the assets of D1 to be subjected to the injunction down to HK$8,537,722.94 (ie HK$14,374,797.94 – 590,000 – 5,247,075).

The principles

7.  The parties proceed on the basis that this is an application for a post-judgment Marvea injunction in aid of execution of the judgment, which the court has power to grant: see Menno Leendert Vos v Global Fair Industrial Ltd HCA 4200/1995 (25 March 2010)(at §9).  The principles remain that the plaintiffs have to demonstrate that they have good arguable case in their claim against D1, viewed in the light of the judgment already obtained.  The plaintiff must demonstrate by evidence a real risk of dissipation of asset on the part of D1 if not restrained.  The order will be granted if the balance of convenience between the parties tilts towards the grant of the injunction.

Merit of the claim

8.  This has to be considered in the light of the fact that first, there is the Judgment on P1’s claim against D1 and D3 as well as second, the findings against the defendants which form the basis for the pending finalisation of the relief and order in respect of P2’s claim against them.

9.  The plaintiffs project a good arguable case that P2, as it is indeed seeking, would be granted a judgment/order whereby the defendants will have to compensate P2 by paying a total sum of HK$14,374,797.94 as mentioned above or alternatively a substantial part of on the basis of the findings in this respect in the Judgment.

10.  The Summons is directed against D1 only.  D1 does not dispute his liability to account on the Items but the quantum.  He argues that he should not be ordered to pay substantial part of the amount projected by P2 on the ground that no loss to P2 is proved or in any event substantial part of such claim is time barred.

11.  At the same time of handing down of this decision, this court is also handing down the further judgment in respect of the relief and order between P2 and the defendants.  Yet even considering the present application, assuming that such judgment were still pending, I would say that the plaintiffs’ case is not short of being good and arguable.

Real risk of dissipation

12.  The following matters prompted the present application.

13.  An extraordinary general meeting of the shareholders of D2 (ie P1 and D3) was held on 30 April 2021, which was attended by D1, his wife and the wife of P1 (as his representative because P1 now spends most of his time in the Mainland).  One recalls that P1’s 40% beneficial interest in D2 was disputed by D1, but was found by this court in the Judgment and now acknowledged by D1.  At the meeting, D1 explained the dire financial situation of D2, said to be attributable to the impact of the economic downturn since the COVID-19 pandemic on the business of D2.  To maintain, D2 required a monthly budget of about HK$510,000 or a total of HK$2.5 million liquidity.  However, no decision to resolve the problem was reached.

14.  Another extraordinary general meeting of the shareholders of D2 was held on 18 June 2021.  Similar financial difficulty of D2 was discussed.  D1 then proposed injection of HK$1 million into D2 by the shareholders (P1 and D3) in the form of capital investment or shareholders’ loan.  P1’s wife did not agree.

15.  During the above two meetings, P1’s wife observed that there was not much operation at the factory of D2.  She also had distinct impression that D1 and D2 were indeed in dire financial situation, and the viability of continuing D2’s business was doubtful.

16.  The plaintiffs’ solicitors have apparently been monitoring possible dissipation of assets on the part of the defendants with focus on the status of the Property, which was D1’s asset known to them.  Their search in this respect on 23 July 2021 revealed the sale, which was contracted after the first extraordinary general meeting of D2 mentioned above.  The provisional sale and purchase agreement was dated 6 June 2021 and the formal sale and purchase agreement was dated 22 June 2021 (ie 4 days after the second meeting of D2).  The latter was lodged for registration on 2 July 2021 but registration has apparently been withheld.

17.  Whilst the business of D2 has slowed down and was in dire financial situation, D1 was adamant that he intends to maintain D2, which he describes is his sole source of earning.  He is also reluctant to lay off the employees.  Sale of the Property, according to him, was the only way out to raise the necessary liquidity for such purpose as well as his other family needs.

18.  Sale of the Property, without more, does not connotes real risk of dissipation.  The circumstances have to be looked at for an objective view of the matter to be formed: see for instance Lam Sik Ying v Lam Sik Shi & Anor HCA 4713/2001 (14 January 2011) (at §11); Chan Fai Cheung v Ho Chi Wing t/s Hanson Engineering Co & Anor [2018] HKCFI 399 (23 February 2018) (at §§5-6).  It is the burden of the applicant to establish by evidence such circumstances suggesting a real risk of dissipation: see Re Chau Cham Wong Patrick (a bankrupt) [2016] 2 HKLRD 278 (at §43); Gee, Commercial Injunctions (7^th ed) at §12-041.

19.  By way of affirmation in opposition, D1 revealed that apart from putting the Property for sale, he has also made other financial arrangement during the first two weeks of June 2021.  He closed 2 out of his 3 personal bank accounts, and transferred the closure balances of the 2 accounts (about HK$221,000 and HK$2,110 respectively) to D3’s account.  He revealed that he had about HK$2.6 million cash in his remaining personal bank account at that time.

20.  Prior to the meeting on 18 June 2021, D1 provided D3 with funds by way of personal loan of HK$1.6 million.  Part of such loan came from the balance retrieved by D1 after closing his bank accounts earlier in the same month as mentioned above.  Seeing that his proposal at the 18 June 2021 meeting for injection of HK$1 million by way of shareholders’ loan or capital investment failed, D1 caused D3 to lend to D2 a sum of HK$1 million as shareholder’s loan on the same day.

21.  After scrutinising D1’s explanation above, the plaintiffs question the timing of the decision to put the Property on sale and to put D3 in funds, when first, D1 admittedly had sufficient cash on his own case by mid-June 2021, and second, the stance and reaction of P1, through his wife, to the proposal of cash injection into D2 was not even known until after the 18 June 2021 meeting.  Yet D1 must have put the Property on sale earlier than June 2021 or else the provisional agreement would not have been concluded in the first week of that month.

22.  On his behalf, it is submitted that D1 could not be expected to exhaust his personal cash liquidity before making any arrangement for the necessary finance.  He also objects to the suggestion of the plaintiffs that the timing of the putting the Property on sale and that of the filing of further written submissions for formulating the order between P2 and the defendants pursuant to the Judgment were somehow associated.  Relevantly, the pretext was partly to inject money into D2 which did happen.

23.  That said, it is also true that the injection of funds into D2 is not shown to have been enabled or facilitated by the sale of the Property.  By then, completion of the sale of the Property was still pending.  Further, the scrutiny of the explanation by D1 has also caused the plaintiffs to raise the issue of whether D1 has withheld from the court the true state of his assets.  In this connection, the plaintiffs, with the assistance of accountant scrutinising the audited financial statements of D2 between 2004 and 2020 previously obtained from D1, found that substantial earnings of D2 have been tapped out of D2 to D1 and/or D3 for the ultimate benefits of D1 and his wife over the past years.  Such observations were set out in the plaintiffs’ affirmation in reply.  On this basis, the plaintiffs question the credibility of D1’s reliance on the alleged dire financial situation of himself and D2 as the reason for the sale of the Property.

24.  D1 complains that the plaintiffs’ reply and related evidence went beyond their case for the present application.  Indeed, when it came to the plaintiffs’ affirmation in reply, they adduced evidence beyond what they said in their affirmations in support of the application. However, that was their evidence in response to D1’s explanation of his alleged asset status and financial situation as well as his alleged financial arrangement concerning himself, D2 and D3, which were unknown to the plaintiffs and first revealed by D1 in his affirmation in opposition.  The plaintiffs should not be criticised for coming up with a relevant reply.  In these circumstances, D1 could have sought leave to adduce further evidence to address the plaintiffs’ further evidence.  That has not happened, notwithstanding the filing of the plaintiffs’ affirmation in reply on 23 August 2021.  That could only be taken to be the conscious decision of D1, as he is legally represented.  This court shall therefore proceed on the basis of all the materials before it as summarised above.

25.  What the plaintiffs have discovered and deduce is the factual basis for believing that the true state of assets which D1 owns and controls should exceed what is represented by D1 in his affirmation, namely the cash balance in his personal bank accounts and his interest in the Property. This has bearing on the credibility of D1’s case that the alleged financial situation drove him and his wife to sell the Property as the only option.  Of course, these findings and deduction of the plaintiffs may be rebutted. Alternatively, even if true, these findings and observations of the plaintiffs from the evidence may not necessarily reflect the current situation of D1 and D3. However, the true state of asset owned and controlled by D1 now is within his own knowledge to tell if he wants to rebut the plaintiffs’ suggestion.  The plaintiffs raise a factual issue not without basis, and this is not about shifting the burden in this application or argument about duty of voluntary disclosure on the part of D1.  It is a matter of whether and, if yes, what D1 seeks to put forward in opposition.  As mentioned, D1 chose not to seek leave to adduce further evidence to address such matters notwithstanding ample time before the hearing.

26.  In these circumstances, the intention to salvage D2, which is supported by some evidence, is not the answer.  It is whether the sale of the Property, according to D1, was the only option for such purpose. As the state of evidence now stands, the objective view is that there is basis for believing that the sale of the Property was not so actuated as alleged, and hence the real risk of dissipation remains.

Balance of convenience

27.  The injunction sought would be to aid the execution of judgment.  In terms of inconvenience, D1 argues that the injunction will cause hardship.  However, the above discussion cast doubt on that. The injunction also contains express exception allowing not unreasonable amounts towards the ordinary household and living expenses as well as legal advice and representation respectively, which is also in line with the exceptions to the interim undertaking of D1.  D1 is not prevented from continuing the business of D2 and further consideration will still be possible on the ground of change of circumstances.

Other considerations

28.  In the course of the argument, the plaintiffs purportedly invoked the court’s so called Chabra jurisdiction insofar as the assets of D2 and D3 are concerned.  What gave rise to such argument was the parties’ difference in respect of the provision that no fixed assets in D2 and D3 may be disposed of by D1, which the plaintiffs then sought.

29.  The court has such jurisdiction, ie the so-called Chabra jurisdiction, to grant an injunction against a party against whom the plaintiff has no cause of claim, but on the basis that such party’s assets either belong to or controlled by the defendant in reality.  If such jurisdiction is invoked, the application for injunction should as well be directed against such party as a respondent.  In the present case, the Chabra jurisdiction of the court is not properly invoked against D2 or D3 so as to target the assets under their names.  The present application is directed against D1 only.  D1’s assets in the form of his interest, directly or indirectly, in these parties are already caught by the main terms of the injunction.

30.  At one point, issue was also taken as to some other terms of the injunction sought.  In its original form, the injunction (at §1(1)(b)(iii)) seeks to restrain D1 from dealing with or disposing of “the property and assets of D1’s business in D2 and D3” or the sale money if any of them have been sold.  D1 argues that the reference to “the property and assets of D1’s business in D2 and D3” is highly ambiguous and uncertain.

31.  I tend to agree.  The fact that similar reference exists in the undertaking given by D1 on 30 July 2021 (at §3) does not make it correct or justify the retention of such wordings.  As mentioned, D1’s assets, including his beneficial interest in the assets under the names of D2 and D3, should already be caught by the main terms of the injunction.  It is noted that the same has been removed from the terms actually sought at the time of the hearing on 2 November 2021.  I therefore say no more.

D1’s undertaking

32.  As mentioned, in place is the interim undertaking of D1 given at the first hearing of the Summons on 30 July 2021.  D1 has complied with that to make the payments into court.  Since then, the parties have corresponded with each other exploring if the Summons could be disposed of upon appropriate undertaking of D1 instead of an injunction.  Both sides seek to refer to such correspondence at the substantive hearing, and counsel confirmed their consent to doing so as some were marked “without prejudice”.

33.  What happened was that D1 offered, on top of the payments into court, further undertaking essentially in terms of the injunction sought for the balance of the value of P2’s claim projected (ie HK$8,537,722.94) as well as the ancillary asset disclosure order.  The undertaking would last until further order of the court.  The single disagreement that stood in the way arose out of the plaintiffs’ insistence on retaining the wordings discussed under §§30-31 above, which they now agree to remove. Subject to that, counsel for D1 confirmed during the hearing that his client would stand by such undertaking, even if he succeeds in resisting the injunction. On this basis, he argues that the injunction would in any event be unnecessary.

34.  In line with the discussion in this respect above, I agree with D1.  His undertaking in terms as offered until further order of the court would have sufficed in disposing of the present application.  Whilst the case of the plaintiffs for a Mareva injunction is made out, I would have made no order.  As D1 stands by his undertaking as offered until further order of the court, this will also be the way forward now and upon the handing of the judgment on the relief and order in respect of P2’s claim against the defendants.

35.  In view of the judgment in respect of the relief and order between P2 and the defendants, which entails orders for payment by the defendants to P2 of a total sum of HK$7,096,720.04, the undertaking in terms of value of D1’s assets on top of the payments now in court will also be adjusted to that amount.

Order

36.  Insofar as the Summons is concerned:

Upon D1 having paid into court the total sum of HK$5,837,075 pursuant to his undertaking to the court on 2 August 2021

And upon the further undertaking of D1 to the court that until further order of the court, he will not in any way, or cause others to, dispose of, or deal with, or diminish the value of, any of his assets in any way which are within Hong Kong, whether in his own name or not, and whether solely or jointly owned, up to the sum of HK$1,259,645.04

And upon the further undertaking of D1 to the court to disclose to P2 by way of an affidavit/affirmation within 28 days from the date hereof of all his assets of an individual value of HK$200,000 or more in Hong Kong, whether in his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets.  D1 may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate him.

(1)  No order is made in respect of the Summons.

(2)  The terms of the undertaking mentioned above do not prohibit D1 from:

(a)  Spending HK$24,000 per month towards his ordinary household expenses;

(b)  Spending HK$20,000 per month towards his ordinary living expenses;

(c)  Spending HK$120,000 per month towards legal advice and representation.

(3)  D1 may agree with the plaintiffs’ solicitors that the above spending limit should be increased or that the terms of this undertaking should be varied in any other respect, but any agreement must be in writing.

(4)  There be liberty to apply.

Costs

37.  As counsel indicated during the hearing, costs will probably have to be argued depending on the outcome.  The parties must now consider this court’s conclusion that the plaintiffs have made out a case for the Mareva injunction sought, but that an order would not have been and is not made given the undertaking of D1 which if the plaintiff has accepted, as they should have, the Summons could have been disposed of at a certain point of time by November 2021 without substantive argument. On that note, if the parties still fail to resolve the costs of and occasioned by the Summons by consent, the plaintiffs shall lodge written submissions on costs within 14 days, and D1 to lodge his within 14 days thereafter.  Written submissions, inclusive of appendix or enclosure, if any, shall be succinct and not exceed 2 pages of A4 sized paper in no less than 14 font size and in no less than 1.5 line-spacing.  The issue of costs will be ruled on paper without oral hearing, unless otherwise directed.