XCHRX EDITAL SA v. CREATIVE CONSULTANTS LIMITED

1995 No. A10273

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. This is an application in an action which is now one of a series of actions commenced by the Plaintiff against the Defendant. This application is for leave to cross-examine a director of the Defendant upon an affidavit filed in response to an order ancillary to a Mareva injunction.

Background

2. By action No. A8913 of 1995, the Plaintiff in this action commenced an action against the Defendant. Action No. A8913 was for specific performance of a contract whereby the Defendant agreed to sell its shares in a company by the name of Voice Information Systems Ltd. (referred to below as VISL). It is unnecessary to examine the detailed history of the shareholding other than to say that the Plaintiff is the owner of 200,000 shares of VISL and until shortly before the commencement of these proceedings, the Defendant was the owner of 300,000 VISL shares.

3. Action No. A8913 commenced with an injunction to restrain the Defendant from disposing of its VISL shares to anyone other than the Plaintiff. The basis of that action was a pre-emption right. The injunction was sought specifically with a view to preventing a sale of the Defendant's VISL shares to Cruzen International Ltd. which had offered to purchase the Defendant's shareholding in VISL for HK$3,000,000 plus the sum of HK$6,500,000 which was the amount which the Defendant had loaned to VISL. As an alternative to the cash payment, 25 shares in Ortona Group Ltd., which is a British Virgin Islands company, were offered. Little is known of Ortona Group Ltd. other than the fact that it is a British Virgin Islands company.

4. On the return date of the injunction in A8913, the restriction to prevent the Defendant disposing of its VISL shares was continued by consent. However, within a comparatively short space of time, the Plaintiff had reached the conclusion that it was not commercially advantageous to purchase the Defendant's VISL shares and hence on 22nd September 1995, 2 weeks after the consent injunction, that injunction order was discharged by consent.

5. This Action, which is between the same parties, was commenced on 10th October 1995. By it, the Plaintiff seeks specific performance of an agreement made in July 1994 under which it is alleged that the Defendant has become obliged to purchase the Plaintiff's shareholding in VISL for a price of FF52,330,00 which I am told is equivalent to about HK$18,795,000. In view of the fact that the only assets of substance known to be owned by the Defendant were its VISL shares and its loan to that company, it occurred to the Plaintiff that it was likely that after the lifting of the previous injunction on 22nd September, the Defendant might take steps to dispose of its VISL interests and loans. However, it appears that the Defendant's VISL shares were registered in the name of Cruzen International Ltd. on 26th September 1995. Whether the registration of Cruzen International Ltd. as a shareholder in VISL is a matter which was in breach of the rights of the VISL shareholders inter se is a matter which will have to be determined hereafter. Again, somewhat surprisingly however, the transfer of shares took place not for payment in cash but it would seem in consideration of a transfer of 25 Ortona Group Ltd. shares.

6. These matters became known to the Plaintiff because on 9th October 1995 the Plaintiff applied before the Duty Judge and was granted a Mareva injunction in the following material terms:

"The Defendant must not:-

(i) remove from Hong Kong any of its assets which are in Hong Kong whether in its own name or not and whether solely or jointly owned up to the value of HK$18,795,000 or

(ii) in any way dispose of or deal with or diminish the value of any of its assets whether they are in or outside Hong Kong whether in its own name or not and whether solely or jointly owned up to the same value SAVE THAT the Defendant shall be at liberty to sell its 300,000 shares, or any of them, of and in Voice Information Systems Limited but in the event that it does so then it shall cause the proceeds of such sale to be paid into an account with a licensed bank in Hong Kong and to notify the Plaintiffs of such payment within 24 hours thereof.

(2) The prohibition set out in (i) and (ii) above shall include in particular the following asset, namely the proceeds of sale of the Defendant's 300,000 shares, or any of them, of and in Voice Information Systems Limited."

7. The matter came before me on the summons day on 13th October 1995. The Defendant who was represented by solicitors did not oppose the making of an order which comprised an injunction in substantially the same terms as I have recited and included a further order as follows:

"The Defendant by its proper officer do within 7 days make, file and serve an affidavit identifying the nature, value and location of his (sic) assets, whether inside or outside Hong Kong including assets held jointly with others and/or in the name of another but under the control of the Defendant and/or held on trust for the Defendant."

8. The order was thus made unopposed although not in the strict sense a consent order.

9. An affidavit by Mr. Andrew Wilson, who is a director of the Defendant, was filed on the 19th October, in compliance with that order, it gave details of the cash held at the bank in the total sum of HK$43,397.07. It then set out its equity investments which comprised the 25 shares in Ortona Group Ltd. All that the affidavit says about it is that it is a British Virgin Islands company and that the issued share capital is US$100 divided into a hundred shares of $1 each. The affidavit then sets out loans to related companies and there is still outstanding a loan to VISL of HK$417,121.

This application.

10. The Plaintiff drew the Defendant's attention by letter to the absence of any identification of the value of the Ortona Group shares. By a letter of 8th November 1995, the Defendant's solicitors replied indicating that they considered the identification of the par value of the shares to be sufficient. They considered it neither necessary nor appropriate to give opinion evidence as to the net asset or realisable value of the shares. Issue was further taken as to the relevance of that information as regards this Action.

11. In default of a further and better affidavit by the Defendant indicating the value of the asset, the Plaintiff wishes to cross-examine Mr. Wilson as to the value of the Ortona Group shares. Mr. Bleach QC, on behalf of the Plaintiff, drew my attention to the case of House of Spring Gardens Ltd. v. Waite 1985 FSR173. It is clear from that case that when a Court grants a Mareva injunction, it is able to grant any ancillary order that is just and convenient for the purpose of insuring that the Mareva injunction is effective. The power is a power under section 21L of the Supreme Court Ordinance. Whilst I might otherwise have had my doubts as to the possibility of cross-examination on an affidavit when strictly speaking there was no issue between the parties, I am persuaded by the authority of this case that there is indeed power to order such cross-examination. As indicated by Slade L.J. in the House of Spring Gardens case, that power should be exercised where it is necessary to ascertain whether or not the obligations imposed in respect of disclosure have been complied with, and in so far as they have not been complied with, to elicit the missing information. In so saying I, of course, approach the exercise of any discretion on the basis that such an order should only be made in cases where it is necessary to police the Mareva injunction order.

12. The order is sought in this case because it is said that if the US$1 per share par value of the Ortona Group shares is a fair reflection of the actual value, the disposal by the Defendant of the VISL shares was not merely at a gross under value but for practical purposes for no value. In those circumstances, it is said that the swap transaction is voidable at the instance of the Plaintiff, and whilst Cruzen may be the registered owner of the VISL shares, it is not the beneficial owner which remains the Defendant and therefore the shares would still be covered by the Mareva injunction in the present case.

13. A number of points have been taken on behalf of the Defendant, the first being that the word "value" in the order has no precise meaning when applied to shares in an unquoted company. There is, first of all, par value. Any other value which could be placed on the shares might be a matter for expert evidence and it would be wrong to force the Defendant to give expert evidence in relation to the valuation of one of its assets.

14. The next point taken on behalf of the Defendant is that the order sought is not necessary to police the Mareva injunction order. Indeed the Defendant goes further and says that the purpose of it is so that the Plaintiff can seek to establish that the transfer of shares was made with intention to defraud creditors. It is said that what the Plaintiff is seeking to do is to discover information relating to an earlier transaction and not to preserve assets under the Mareva injunction.

15. The hearing exceeded the original alloted time of half a day and on the second morning, the Defendant raised the point that in view of a further Mareva injunction in yet a third action in which Cruzen itself was a party which is now subject to a Mareva injunction which covered the VISL shares in question, there was now no need for the Plaintiff to take any further steps to police this injunction.

16. I accept entirely that there is no tracing claim in this case. The Plaintiff's cause of action in this case is one which turns upon a monetary claim. The VISL shares and the proceeds thereof are relevant only in that they constitute or did constitute the major asset of the Defendant and therefore would have been the source from which the Defendant could have satisfied any judgment that might be obtained.

17. To that extent, therefore, the Plaintiff has no tracing claim against the VISL shares. Whilst the swap transaction of the VISL shares for the Ortona Group shares may on its face seem surprising, nothing is known as to the assets of the Ortona Group and as to the worth of those shares.

18. In my view, the par value may well not be any valid indication of the value. In most cases par value is hardly a meaningful guide to the real worth of a share. Since, however, there is no injunction to prevent the Defendant from disposing of the Ortona Group shares, on any footing it seems to me to be relevant for the Plaintiff to be aware at this stage of what would be the approximate value of those shares. If there were to be any disposal, it would be necessary to establish in the future that the disposal was for an appropriate consideration. I appreciate entirely that the valuation of shares in a private company may be difficult but if the Defendant were a Hong Kong company it would, nevertheless, have to put some value for accounting purposes on those shares in preparing its accounts. Again, I appreciate too that different rules apply in relation to different forms of investment and where the particular investment consists of a substantial holding in another company that investment may be quoted in the accounts on a historical basis which might not be reflective of the actual value of the investment.

19. Nevertheless, Mr. Wilson's affidavit in this case makes no attempt at all to put any value on the Ortona Group shares other than par value. Neither does his affidavit say that he cannot do so nor give the reasons for being unable to do so. In my view, he should in his affidavit have put a value on those shares as best he could. If in the course of disclosing the value, it came to light that there were grounds for saying that there had been a fraudulent transfer then that is a consequence of the policing of the Mareva injunction.

20. Whilst I see the force in the Plaintiff's submission, as I have outlined, without actual proof that there was a fraudulent transfer, it does not assist to say that the cross-examination is designed to investigate the possibility of it since that argument is circuitous.

21. I am not prepared to accede to the Defendant's request that the order of 13th October be amended since in the first place it is in the standard form for Mareva injunctions and it was made without opposition. In the second place it seems to me to have been a proper order to have been made. The Defendant has not formulated the form of order which it says should be made other than to say that it should be restricted so that the word "value" has, as I understand it, little more than the meaning "par value".

22. Any oppression from the order for cross-examination can, in my view, be alleviated by a strict control of the examination which is permitted, restricting it simply to the value of the Ortona Group shares. That, of course, would have to be as of the date of the Mareva injunction order and as of the date of the cross-examination. The Defendant itself can take steps to alleviate any perceived oppression by volunteering the evidence, perhaps in a further affidavit, which may obviate the need for further cross-examination.

23. I should mention that the Defendant obliquely raised the question of self incrimination. However, the matter was not pursued in argument in the face of an attack by the Plaintiff that the Defendant had not identified precisely what the self incrimination constituted nor was the claim properly formulated.

24. I therefore propose to grant an order for cross-examination of Mr. Andrew Wilson on his affidavit filed on 17th October 1995, the cross-examination to be limited to matters relating to the value of the Ortona Group Ltd. shares owned by the Defendant. The matter of costs can be dealt with at the hearing when the cross-examination takes place.