SAIF PARTNERS II L.P. AND ANOTHER v. JOE ZHIXIONG ZHOU

HCMP 208/2020

[2021] HKCFI 3072

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

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DECISION

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1.  This is the sentencing of the Defendant (“Zhou”)  following the finding of contempt of court by him pursuant to the Judgment of this court dated 29 March 2021 (“Judgment”).

2.  Zhou did not appear at the hearing[1]. He had filed with the court on 17 September 2021 an affirmation which purported to advance his mitigation (“Affirmation”).  At the hearing, Zhou was represented by his team of lawyers led by Mr Barlow SC, who appeared with Mr Chan.  

3.  Under the Judgment, it was found that :

(1)  Zhou had deliberately read down the Account Order[2] to evade his obligations thereunder (Judgment, §§69-70);

(2)  Zhou never tried to identify all the income which fit the prescriptions in the Account Order (Judgment, §71); 

(3)  Zhou had failed to account for the amount he received due to his vested “carried interest” paid to the General Partner of KPCB (Judgment, §72(1));  

(4)  Zhou did not account for the management fee received by Keytone Management (of which Zhou was the controlling shareholder)  from which he was paid salaries and possibly further payment by way of distribution of “remaining funds” (Judgment, §72(2)).

4.  There is no dispute over the applicable principles for sentencing.  There were summarised in in Arboit v Koo Siu Ying (No 2) [2016] 3 HKLRD 154 :

“2. The starting-point is to acknowledge that contempt of civil court orders is a serious matter and that court orders are made to be obeyed. A prime consideration of the court in sentencing contempt is to “signal importance of demonstrating to litigants that the orders of these courts are to be obeyed”. By “litigants”, it is clearly referring to litigants in general and not just the contemnor himself. …

3. The object of the sentence is both to punish conduct in defiance of the court’s order and to serve a coercive function by holding out the threat of future punishment as a means of securing the protection which the order was primarily there to do … The court has to balance the 2 objects.

4. The sentence for contempt may range from a fine to a term of imprisonment.  The UK Contempt of Court Act 1981 imposes a maximum term of 2 years’ imprisonment but Hong Kong does not have that statutory limit.

5.  Imprisonment should be regarded as a sanction of the last resort.  Any custodial sentence should be as short as possible consistent with the circumstances of the case.  …

6.  The court may suspend a term of imprisonment for such period or on such terms as the court deems fit … This is an “absolute discretion” but it would be difficult to think of circumstances where a suspended order should be made when nothing further remains to be done to comply with the order …

7.  The court will consider if there are:

(a)  Aggravating factors …;

(b)  Mitigating factors …; and

(c)  Acts to purge the contempt, ie acts to atone for a contempt, eradicate it or cleanse it of its previous ill-effect which, in the case of a mandatory order, may be fulfilled if the contemnor thereupon does the act or causes it to be done …

8.  Relevant factors (which are not exhaustive)  include:

(a)  The nature of the order and breach in question, and the extent of the breach …

(b)  Whether the contempt was contumacious or unintentional, the reasons, motives and state of mind …

(c)  Whether the claimant has been prejudiced by virtue of the contempt and whether the prejudice is capable of remedy ...

(d)  Whether the contemnor appreciates the seriousness of the deliberate breach …

(e)  Whether the contemnor has cooperated …”

5.  Mr Barlow took issue with the finding of contempt against Zhou.  I must confess to having difficulty in understanding the argument that paras 3(1)  and 3(2)  above did not constitute any finding of contempt against Zhou, and that such finding was limited to paras 3(3)  and 3(4). 

6.  With the Judgment properly read, it was clearly found that Zhou had evaded his obligations under the Account Order by failing to identify all the income prescribed in the same.  What was required under the Order was perfectly clear (see para 66 of the Judgment).  Instead, Zhou deliberately read down the Order to limit his compliance.  Such finding of contempt was reflected in para 1 of the Order of this court dated 29 March 2021.

7.  For completeness, it is equally clear from para 72 of the Judgment that the failure to account for the “carried interest” and management fee were evident from Zhou’s own evidence (Zhou 4^th). Such failure served to fortify the finding that Zhou had not fulfilled his obligations under the Account Order. 

8.  In the Affirmation, Zhou said that :

(1)  The reading down of the Account Order was not deliberate.  He found the Order “confusing”, and he reasonably relied upon clarifications provided by DHCJ Field and his lawyers (§45);

(2)  He disagreed with the court that he had made no attempt to identify all the income under the Account Order in compiling Zhou 4^th. In his effort to comply with the Order, he had sought information from third parties such as KPCB.  If the complaint was that he did not put his information in tabular form, he did so in the Affirmation (§§50, 52, 54-62);

(3)  As a KPCB General Partner, he did not in fact receive any “carried interest”.  However, he did received (i)  remuneration between US$1.2 million and US$1.5 million for 1 year and (ii)  “separation payment (described as a “performance bonus”)” of approximately US$300,000 (§§22-24 and 26);

(4)  Based on the “best [he] can now recall or guess”, Zhou had received a total of US$5.25 million as management fees from 2008 to 2012 (§38).

9.  I regret to say that the court is unable to accept the Affirmation as a genuine attempt by Zhou to purge his contempt by providing the relevant information required under the Account Order.

10.  First and foremost, Zhou is plainly a sophistication person, engaged in the business of investment funds and earning a very handsome income.  Plainly, he was (and is)  able to read the Account Order.  There was nothing confusing about it.  At all material times, he was assisted by an experienced team of lawyers led by a senior counsel. 

11.  Repetitively, the Affirmation suggested that Zhou was misled by (a)  something said by DHCJ Field at a hearing on 11 January 2019 (see Judgment, §§25-26), which was related to him by his lawyers; and (b)  the advice of his lawyers.  However, there was nothing in the Affirmation as to what was said by the lawyers which could have led Zhou to misunderstand an Order which he was well capable of reading.  There is no reason to believe that DHCJ Field had said anything which could have misled Zhou.

12.  In para 73 of the Judgment, it was held that :

“For completeness, I do not believe that Zhou was in any way misled by his lawyers. There is no suggestion to that effect, and even if that were the case, the erroneous advice would have been corrected in light of the Plaintiff’s strong and continuing objection, as well as the views expressed by the Court, over the purported compliance of the Account Order by Zhou.”

13.  The repetitive suggestion of having been misled is baseless, flies in the face of the Judgment and only serves to fortify the finding that Zhou is a recalcitrant party who resorts to playing litigation games to deny justice to the Plaintiffs (Judgment, §91).

14.  If Zhou was genuinely remorseful and wanted to purge his contempt, he could easily have (a)  set out (preferably in a table the use of which would be helpful to both him and the readers)  ALL the income which he and the entities owned or controlled by him had received from (i)  KPCB and its related entitles and (ii)  Keytone Ventures LP and its related entities down to 31 December 2012; (b)  identify the entitlement under which each item of income was received; and (c)  disclose the supporting documents which were within his power or control (Judgment, §§66-67).

15.  The Affirmation did not do that.  Notably, the Affirmation did not address whether any of the entities owned or controlled by Zhou had received any income provided under the Account Order[3]. The burden is not on the court to wade through the purported compliance of Zhou with a fine toothcomb to see what may be missing.  If Zhou failed to comply fully with a perfectly plain Order despite the many opportunities opened to him to do so[4], he must live with the consequences. 

16.  When asked whether Zhou had disclosed the income which might have been received by entities owned or controlled by him, Mr Barlow took the court back to Zhou 4^th.  That was an unhelpful exercise because Zhou 4^th was considered in the Judgement and found to be deficient.  In particular, it was made on the basis of Zhou’s deliberate reading down of the Order (Judgment, §§27-32 and 35). 

17.  Further, Mr Pow SC, who appeared with Mr Tang for the Plaintiffs, rightly pointed out that there was no suggestion in the Affirmation that Zhou had made any attempt to produce any supporting document for the disclosure he made in the Affirmation, especially the documents from Keytone, which was under his control.

18.  The management fees disclosed in the Affirmation were in excess of US$5 million.  The payment of US$1.2 million in 2012 was only made 6 years before the Account Order was granted on 26 June 2018.  The court would require a good deal of persuasion to believe that Zhou had no supporting document for such payment.  As an example, he should have declared and paid tax on the income.  The tax record could have been produced.

19.  I reject Zhou’s suggestion that his failure to comply with the Account Order had caused no prejudice to the Plaintiffs.  It was found otherwise in the Judgment (§92).  The plain fact is that without the requisite disclosure by Zhou the Plaintiffs will not be in a position to advance a case based on proper evidence (as opposed to estimates)  at the hearing for the taking of the Account (due to take place in March 2022). 

20.  I agree with Mr Pow that the bare assertions contained in the Affirmation does not alleviate the unfairness on the Plaintiffs.

21.  I also agree with Mr Pow that the breach of the Account Order by Zhou is contumacious and cynical.  Such breach is continuing. Zhou had been forewarned that he might be cited for contempt of court (Judgment, §35).  

22.  I can find no mitigating circumstances before the court.  Zhou’s apology to the court was made on the basis of any appearance of evasiveness, which was allegedly not intended (Affirmation, §§44 and 46). It was not a demonstration of genuine remorse but paying lip with the hope of getting a lenient sentence. 

23.  The seriousness of these matters calls for an immediate custodial sentence.  Mr Barlow sought to dissuade the court from imposing a custodian sentence on Zhou by submitting that such a sentence would mean that Zhou will unlikely come to Hong Kong for the Account proceedings. With respect, it was a surprising submission.  Zhou cannot profit from his contempt of court, nor can the court be held to ransom. 

24.  For these reason, I sentence Zhou to a term of imprisonment of 2 months.  It is the shortest term of imprisonment which the court can impose bearing in mind the gravity of these matters.  There is no issue that costs should be awarded against Zhou on indemnity basis. 

25.  The draft Order of Committal and draft Warrant of Committal provided by Mr Pow are approved with the necessary modifications to reflect this Decision.

26.  Finally, I am grateful for the assistance rendered to the court.