LUAN GANG AND OTHERS v. CAL DIVE OFFSHORE CONTRACTORS (MAURITIUS) LTD

HCMP409/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 409 OF 2011

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J U D G M E N T

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1.  This is an application to vary a restraint order (“the Order”) granted by Tong J on 15 March 2011 against the seven respondents. The Order restrained the accounts held by the respondents in the Hong Kong and Shanghai Bank (HSBC), Hang Seng Bank, Metro Bank N.A., Amegy Bank N.A. and landed properties in Hong Kong and the United States.

2.  This application was made by Offtech International Limited (the 5^th respondent).  It invited this court to release the fund in its HSBC accounts to pay Cal Dive Offshore Contractors (Mauritius) Ltd (“the Intervener”) for the arbitration award.[1]  It also invited this court to pay the legal costs of the 5^th respondent in various proceedings.[2] 

3.  Before the hearing, the Intervener applied to be joined as a party to the present proceedings.  There was no objection from the 5^th respondent and the Secretary for Justice.  I granted leave for the Intervener to join as a party.

Background

4.  Mr Luan Gang (the “1^st respondent”) was the sole director of the 5^th respondent and the 6^th respondent (Bluewhale Offshore Engineering Technology Co. Ltd).  According to the 1^st affidavit of Inspector Chow,[3] the 1^st respondent imported vessels to the People’s Republic of China (PRC).  The vessels were owned by the Intervener and other companies.[4]  He then chartered the vessels, through 5^th and 6^th respondents, to companies based in PRC[5] at daily charges.

5.  According to Inspector Chow, the 1^st respondent submitted false instruments and made false representation to the PRC Customs claiming that the vessels were for provisional importation and would be used for international navigation.  This scheme evaded substantial amount of import tax.[6]  In addition, he obtained the charter contracts in PRC through bribery.

6.  About USD$186 million rental from the above scheme were remitted to the HSBC accounts of the 1^st, 5^th and 6^th respondents. Part of it[7] was transferred to the accounts of the 1^st and 2^nd respondents in the United States by the 3^rd respondent (Mr LI Sanyue).[8]  The latter subsequently received HK$1.4 million from the 1^st respondent.

7.  The 1^st respondent and 2^nd respondent (Ms Luan Hong)[9] were implicated in money laundering offences which involved a total benefit of about HK$560 million.  However, the restrained assets in Hong Kong and the United States were about HK$470 million.[10]  The Tianjin Procuratorate had issued a warrant to arrest the 1^st respondent on 28 October 2010.

8.  On 8 March 2011, a holding charge of conspiracy to launder HK$186 million against the 1^st, 2^nd and 3^rd respondents and others was laid at the Eastern Magistracy.  Warrants of arrest were issued against the 1^st and 2^nd respondents on 11 March 2011.

9.  The 1^st and 2^nd respondents had absconded by the end of 2010.  They had gone to the United States but their exact whereabouts were unknown.  The 3^rd respondent was in Shenzhen.  The 4^th respondent (Ms TIAN Lingyue) was the fiancée of the 1^st respondent.  She received USD$2 million from the 1^st respondent.  Her whereabout was unknown.

10.  The 1^st respondent claimed to earn a monthly salary of RMB11,000.  The 5^th respondent is a registered company in Hong Kong with no business locally.  The audited profit in 2008 was USD$44,000 and in 2009 was USD$117,000.  The 6^th respondent was incorporated in the British Virgin Islands (BVI).

The submission of the 5^th respondent

11.  Ms Draycott, SC, counsel for the 5^th respondent, put forward the following grounds to support the variation of the Order:

a) The 1^st and 2^nd respondents had absconded.  The criminal proceedings would be long drawn. Eighteen months had passed since the laying of the holding charge in March 2011, there seems to be limited progress in the investigation.

b) According to the Secretary for Justice (“SJ”), the 1^st respondent was suspected of submitting false documents and making false representation to PRC Customs, bribery to obtain charter contracts in PRC[11] and evasion of tax.  There was limited evidence from the SJ to support all these allegations.

c) The companies[12] which chartered the vessels in PRC from the 5^th respondent were major international and national corporations.  It is unlikely that they would conspire with the 1^st and 5^th respondents to defraud PRC Customs.

d) The ‘Expert Report’, on which the SJ relied, was not made on oath.  The calculation of the amount of tax evaded was unclear and inconsistent with that of the SJ.  The allegations made in the report were not supported by any evidence.  It quoted statements made by co-defendants in the holding charge.  It was unclear whether those persons would be witnesses.  The evidential value of this report was doubtful.

e) The claim by the SJ that the 5^th respondent had no business in Hong Kong could not advance their allegation.  It was obvious that the 5^th respondent was set up to circumvent the foreign currency restrictions in PRC.  The payments into its account in Hong Kong were for services rendered.  In fact, the audited profit of the 5^th respondent, as quoted by the SJ, was understated[13].  The use of underground banks by the 5^th respondent was not indicative of bribery or any criminal conduct.

f) The SJ had not produced any further evidence to support that the money restrained was proceeds of crime.

g) The Intervener had supplied vessels to the 5^th respondent.  There was no evidence of corruption.  The evidence which supported the Order was flimsy.  It prohibited the 5^th respondent from paying the Intervener for the services rendered.  The unfairness to the Intervener was substantial.  Given this state of affairs, the balance of interests should be in favour of variation of the Order.

The submission of the Intervener

12.  Mr Barlow, SC, counsel for the Intervener, argued the following:

a) The Order would not have priority over the claim of the Intervener who was a legitimate creditor.  The Order should not be treated as a pre-trial attachment and conferred no proprietary interest on the restrained assets.

b) A court should have discretion to vary the Order at this stage.  This court should adopt the reasoning in Re X.[14]  As there was no existing confiscation order, section 19(6) of the Organized and Serious Crime Ordinance (“OSCO”), which in effect empowered a court to ignore the rights of unsecured creditors, was not applicable.[15]

c) In Serious Fraud Office v Lexi Holdings plc and another  [16], the Court of Appeal in England overruled Re X.  The basis was that the power of s.69(2)(c) of the Proceeds of Crime Act 2002 had been amended to cover the restraint order stage.  However, there was no corresponding amendment in Hong Kong so far.  This court should not directly apply the reasoning of Lexi Holdings in Hong Kong.

d) The SJ alleged that the respondents had conspired to launder money which they had reasonable grounds to believe were proceeds of an indictable offence.  The SJ alleged that the indictable offence was evasion of import tax and value added tax in PRC.  This conduct however would not constitute an indictable offence in Hong Kong.

e) Recently in England, the Supreme Court ruled in R v Waya that a confiscation order must be proportionate to the proceeds of the defendant’s crime rather than being a deterrent[17].  This case should be applicable in Hong Kong.  It would likely reduce the quantum of the future confiscation order in the present case.  Thus, the amount restrained in the Order would be excessive.  It should be released to satisfy the claim of the Intervener.  The future confiscation order would not be affected.

f) There was no power under OSCO to provide for living or legal expenses of a defendant.[18]  Order 117 r.5 was therefore ultra vires.  It did not confer any jurisdiction to vary the Order to pay for the 5^th respondent’s legal expenses.  This court should not allow payment of the legal expenses of the 5^th respondent.

The submission of the SJ

13.  Mr Ho, Acting Assistant Director of Public Prosecution, pointed out that:

a) This case involved investigation in Hong Kong, PRC and the United States. Both 1^st and 2^nd respondents had absconded.  Their whereabouts were unknown.  The SJ would explore all avenues to bring them back for trial.  All these took time and there was no inordinate delay.

b) Under s.15(1), OSCO, a court might make a restraint order against the realizable property of a defendant.  Realizable property included property effectively controlled by a defendant.[19]

c) The 1^st respondent was the sole director of the 5^th respondent and had effective control of the latter’s property.

d) A restraint order would cover all payments into the account of the 5^th respondent being benefits in connection with the commission of an offence.[20]

e) The arbitration award in favour of the Intervener had no priority over the Order.[21]  While the SJ would consider the interests of the Intervener and other unsecured creditors at the confiscation order stage, the Intervener should not be allowed to ‘jump the gun’.

f) For payment of legal expenses, it was well settled in decided authorities[22] that the respondent had the burden to satisfy the court that he had no other assets from which he could use.  There were USD$4.8 million unexplained assets.  Without full and frank disclosure, this court should not allow variation of the Order to release funds for payment of legal expenses.

What evidence is necessary in support of the Order?

14.  On 8 March 2011, the 1^st, 2^nd , 3^rd and 4^th respondents were charged with one count of conspiracy to deal with property, knowing or having reasonable grounds to believe that the said property, in whole or in part, directly or indirectly, represented any person’s proceeds of an indictable offence. [23]

15.  On 11 March 2011, the SJ applied for the Order to restrain the properties in the accounts of the 1^st and 2^nd respondents.  It also restrained the accounts of 5^th and 6^th respondents which were under the effective control of the 1^st respondent.[24]

16.  In granting a restraint order, a court must be satisfied with three conditions, (a) proceedings have been initiated, (b) the proceedings have not been concluded and (c) there is reasonable cause to believe that a defendant has benefited from that specified offence.[25]

17.  Initially, the SJ relied on the following[26] main reasons when applying for the Order:

a) A sum of USD$186 million was remitted to the accounts of the 5^th and 6^th respondents in Hong Kong.  The funds represented the payment of rental in relation to vessels chartered to several mainland companies.  This sum was obtained by defrauding the PRC Customs that the vessels were ‘temporary imports’ and therefore not subject to import tax.  There was bribery in obtaining the charter contracts in PRC.

b) There were dubious transfers from the accounts of the 5^th and 6^th respondents.  They included (1) about USD$23.7 million to the accounts of the 1^st and 2^nd respondents in the United States.  This was done after the PRC authority restrained the accounts of the 1^st respondent in PRC.  (2) about USD$10.9 million via underground banking to companies and individuals in the PRC.  Some of the companies had no business connection with the 5^th and 6^th respondents.  They were owned by individuals in PRC.  Some of them were money changers.

c) In relation to the HSBC account of the 1^st respondent, there were deposits totaling about HK$208 million and USD$34 million.  There were also 9 cash withdrawals and 3 withdrawal transfers of about HK$14.5 million to unknown persons.

d) The 1^st respondent claimed a monthly salary of RMB11,000 from Bluewhale Shenzhen.  While the 5^th respondent had no business in Hong Kong.

e) Both the 1^st and 2^nd respondents had absconded.  The latter jumped bail after she was arrested by the police in connection with this case.

18.  The above circumstances were sufficient to satisfy the threshold for the Order. 

19.  The 5^th respondent rightly conceded[27] that for a charge under s.25 OSCO, there was no need to prove the indictable offence which might be the source of the property mentioned in the charge.  However, the 5^th respondent argued that since the SJ alleged fraud and bribery, they should provide concrete evidence to support the allegations after the lapse of 18 months.

20.  At this stage, the SJ only need to satisfy the court that there is reasonable cause to believe that the respondents benefited from a specified offence, namely, conspiracy to deal with property under s.25 OSCO.  In this regard, the fund flows in the accounts of the respondents and their background are sufficient.  The allegations of fraud and bribery are additional background which is not strictly necessary.

21.  Having said so, this case involves suspected criminal acts in PRC.  It is obvious that Inspector Chow relied on information from the PRC authorities which he believed to be true and correct.  In fact, money laundering offences often involve investigation in other jurisdictions.  OSCO and O.117 allow ex parte application of a restraint order supported by an affidavit.  This is acceptable in order to facilitate the preservation of proceeds of crime which is one of the purposes of OSCO.  In this regard, an ‘Expert Report’ compiled by an officer[28] of the PRC Customs Headquarters is acceptable.

22.  The 5^th respondent doubted the evidential value of the ‘Expert Report’.  A copy of the report and its translation[29] were produced by parties.  It is akin to an investigation report with legal advice.  There is no document attached in support of its content.

23.  The report contains a brief summary of the investigation by the PRC Customs.  In gist, the main allegation was that the 1^st respondent instructed his staff to misrepresent to the PRC Customs that the vessels[30] were temporary import vessels or for international transportation, instead, they were actually chartered to companies[31] in PRC.  This plot avoided assessment of import tax and huge tax money[32] was evaded.  Besides, according to statements of the staff, including the 3^rd respondent, the 1^st respondent had bribed the management of the companies in PRC in order to obtain the charter contracts. [33]

24.  According to the PRC ‘Customs Law’, international transport vessels should be used for transportation of goods and personnel in and out of PRC.  The vessels in question were fully equipped with machinery for petroleum extracting operation in PRC and therefore not qualified as international transport vessels.[34]

25.  For temporary import vessels, the importer had the duty to apply to the PRC Customs for permission.  It would usually be tax free for 6 months or any further period permitted by the PRC Customs.  In other cases exceeding the tax free quota, the importer had to pay tax as assessed according to law.[35]

26.  I appreciate that under the rules of evidence in Hong Kong, the report itself may not be admissible in a trial.  However, the SJ is not relying on the report to prove any offence as in a trial.  It is to support the fact that there is reasonable cause to believe the respondents benefited from the conspiracy.

27.  The question is therefore whether it is reasonable for Inspector Chow to rely on the ‘Export Report’.  This must be assessed with care.  All circumstances should be considered and must guard against mere assertion.

28.  The author of the report was a qualified lawyer in PRC.  He was a deputy investigation and research officer attached to the PRC Customs Headquarters.  He participated in the investigation of the 1^st respondent and related companies.  He confirmed that he had analyzed the statements and exhibits in this case.  He was satisfied that they were accurate.

29.  Given the circumstance in paragraph 17 above, I have no reason to doubt the ‘Expert Report’ at this stage.  Although it was not made under oath, the content is satisfactory for the purpose of supporting the Order.

30.  The 5^th respondent also argued that since the initial charge, it had transpired that the payments to the 5^th respondent arose from genuine commercial transactions.  There was no evidence of any criminal conduct between the 5^th respondent and the Intervener.  This court should vary the Order for the 5^th respondent to pay the Intervener.

31.  So far as I understand, the SJ had not alleged any impropriety on the part of the Intervener and those companies who chartered the vessels in PRC.  The allegation was against the misrepresentation to the PRC Customs by the 1^st respondent and his staff.  There is no evidence that the Intervener or the charterers in PRC entered into contracts with the 1^st, 5^th and 6^th respondents with knowledge of the misrepresentation or fraud.

32.  The 5^th respondent submitted a Forensic Accountant’s Report.[36]  It confirmed that there was no indication of money laundering in the accounts of the 5^th respondent.  I am not surprised by that finding.  The alleged misrepresentation was made by the 1^st respondent directly to the PRC Customs.  It did not concern the Intervener or the charterers in PRC.  Nor did it require their collaboration.  The accounts of the 5^th respondent would only reflect the payments and receipts arising from the genuine charter contracts in the PRC.

33.  I like to make two further observations concerning the Forensic Accountants’ Report.

a) According to the report, there was agreement between the 5^th respondent and its customers that the latter was responsible for paying import tax.  The 5^th respondent was not responsible and unlikely to have evaded tax.[37]

b) However, in the ‘Expert Report’, it was stated that the party, who imported the vessels, should be responsible for paying import tax[38].  This is the requirement of the PRC law.  The responsibility could not be qualified by any private agreement.  Accordingly, it should be the 1^st respondent and the 5^th respondent, who imported those vessels, to pay import tax according to law.

c) The Forensic Accountants’ Report supported the conclusion by Gala who re-audited the accounts of the 5^th respondent. There was an understatement of USD $30.8 million in profit. It pointed out that the original auditor, So & Ho, had only given a disclaimed opinion.

d) In the auditor’s report for the year ending 30 September 2009, So & Ho set out the basis of their disclaimer of opinion,

“The company’s system of control is dependent upon the close involvement of directors who have given that all the company’s transactions have been properly recorded and reflected in the accounts. There were no practicable auditing procedures that we could adopt to confirm independently this representation. In this respect alone we have not obtained all the information and explanations that we considered necessary for the purpose of our audit and we were unable to satisfy ourselves as to the completeness and accuracy of the accounting records.”

e) In paragraphs 126-127 of the Forensic Accountant’s Report, the author pointed out that the understatement of profit mentioned above was related to overstatement of costs of sales and understatement of amount due to the sole director.  The author however indicated that a more detailed review of the adjustments and the financial statements would be required.  There was no explanation why they accepted the overstatement and the understatement.  There was no follow up in relation to the concern raised by So & Ho quoted above.

34.  In my view, the accuracy of the financial position of the 5^th respondent is still doubtful despite the Forensic Accountants’ Report.

35.  All the above must be assessed in the light of the affirmations submitted by the 1^st and 2^nd respondents.

36.  In his affirmation dated 8 March 2012, the 1^st respondent made no attempt to explain the fund flows in his accounts.  Neither did he attempt to supply information to clarify the malpractice alleged by the SJ.  While he indicated that he would return to Hong Kong in mid-March 2012 to face the criminal proceedings, he did not do so.  He also suggested transferring the funds in his US accounts back to Hong Kong.  He had not given his consent.

37.  As to the affidavit of the 2^nd respondent dated 21 June 2011, her explanation in relation to the USD$2,500,000 transfer from the 5^th respondent was found to be highly suspicious.[39]

38.  Given the above, the evidence and the circumstances surrounding this case so far would not shift the balance in favour of the 5^th respondent.  In my judgment, there is no inordinate delay.

39.  In any event, the more important issue is the legal right of the Intervener, being a bona fide unsecured creditor, at the restraint order stage.

The position of 3^rd party unsecured creditors

40.  Mr Barlow, SC, counsel for the Intervener, argued that s. 19(6) OSCO[40] was not applicable.  This subsection empowered a court to disregard the obligations of a defendant if it conflicts with the obligation to satisfy the confiscation order.  However, it only applied after a confiscation order was made.  He relied on the case Re Peters[41].  He urged this court to adopt the reasoning in the case Re X to exercise discretion to vary the Order to satisfy the arbitration award.  He submitted that Re W[42], in which Buckley J held that a restraint order had priority over general creditors, was wrongly decided.

41.  Ms Draycott, counsel for the 5^th respondent, pointed out that in Re W, the value of the restrained assets was greater than the value of the assets to be confiscated.  Buckley J had not varied the restraint order partly because the Crown Court was scheduled to resolve the matter shortly.

42.  Is there any discretion to vary a restraint order to pay a bona fide unsecured creditor?  How should a court exercise the discretion?

43.  A convenient starting point to resolve these issues is the case of Re Peters.  The defendant in that case was arrested for drug trafficking.  His assets were restrained.  The restraint order was first varied to allow payment of the monthly school fees of his son.  Later, in separate matrimonial proceedings, another court made an order that the defendant to pay a lump sum of £25,000 to meet his son’s future school fees.  The value of properties restrained was £95,000 but the Customs and Excise Commissioners assessed the proceeds of his drug trafficking at £540,000.  On the application of his ex-wife, the Registrar varied the restraint order to allow the payment.  The Commissioners appealed.  The Court of Appeal held that the latter variation was contrary to the purpose of the Drug Trafficking Offences Act 1986.  Lord Donaldson M.R. held that s.13(2) (the equivalent of s.19(2) OSCO) of the Drug Trafficking Offences Act 1986 governed the situation[43].  His Lordship stressed that the purpose of a restraint order was the preservation of the assets of the defendant at a time when the court could not know whether he would be convicted or not.  Section 13(6) (the equivalent of s.19(6) OSCO) only applied after a confiscation was made.[44]  His Lordship further held that,

“In so far as there was a conflict between the court order made in the divorce proceedings and the restraint order made under the Act, it should have been resolved in favour of maintaining the restraint order.”[45]

44.  Other members of the Court of Appeal agreed.  Nourse L.J. pointed out that a court had power to set conditions and exceptions in a restraint order, however, that must not be exercised so as to diminish the value of the realizable property available to satisfy any pending confiscation order.  His Lordship commented that,

“…section 13(2) expressly provides that this power, along with others, shall be exercised with a view to making, or perhaps more accurately in this case to keeping, available for that purpose.”[46]

45.  Mann L.J. also stressed that the purpose of a restraint order was to prevent the dissipation of realizable property which might become subject to a confiscation order.  His Lordship said,

“However the making of an exception to a restraint order or the variation of a restraint order must ever be subject to the provisions of section 13(2).”[47]

46.  Mr Barlow relied on Re X, in that case Davis J considered ss. 82(2) & (6) of the Criminal Justice Act 1988.  These sections are equivalent to ss.13(2) and (6) of the Drug Trafficking Offences Act 1986 in the case Re Peters and ss. 19(2) and (6) of OSCO.

47.  In the case of Re X, there was a restraint order against X.  A third party creditor applied to vary the restraint order for payment of its debt. The debt was owed by a company which X controlled.

48.  Davis J ruled that s.82(6) only applied after a confiscation order was made.  His Lordship relied on the decision of Lord Donaldson M.R. in the case of Re Peters.  His Lordship also ruled that the wording in s.82(2) implied a degree of elasticity and a court had discretion to vary a restraint order.  In doing so, maintaining the value of the realizable property would be a highly material and important consideration, it was not a conclusive consideration in all cases[48].  His Lordship held that he had discretion to vary a restraint order to pay a third party creditor even if the order would reduce the restrained assets for a future confiscation order.  He disagreed with the reasoning in the case of Re W.

49.  In Re W, Buckley J pointed out that the object of Mareva Injunction was not to give any priority or advantage to the plaintiff over the creditors of the defendant.  However, His Lordship held that the 1988 Act[49] gave priority to the satisfaction of the confiscation order at least over general creditors.  His Lordship thought that it would be wrong to make any order at an intermediate stage which might thwart such purposes, quite apart from s.82(6).  Buckley J further said that variation of a restraint order to pay a debt would only be permitted if the remaining realizable property was clearly sufficient to satisfy any reasonable confiscation order.  This approach was consistent with s.82(2) and the Mareva jurisdiction[50].

50.  The Court of Appeal in England revisited these issues in the case of Serious Fraud Office v Lexi Holdings plc and another.[51]  By that time, the law in England had been amended by the Proceeds of Crime Act 2002.  Section 69(2)(c) of the 2002 Act (the equivalent of s.19(6) OSCO before the amendment) was amended to apply to an existing confiscation order as well as any future confiscation order[52].  It empowers a court to ignore any debt owed by the restrained person to an unsecured creditor if it is in conflict with the object of satisfying any confiscation order.[53]

51.  It is necessary to mention briefly the facts of Lexi Holdings.  A chartered surveyor was under investigation for fraud together with others including the managing director of Lexi Holdings.  The assets of the chartered surveyor were restrained.  The administrator of Lexi Holdings alleged that its managing director had, in breach of trust, authorized payment to the chartered surveyor a sum of £625,000.  Lexi Holdings obtained judgment against the chartered surveyor to repay that sum.  Lexi Holdings applied to the Central Criminal Court to vary the restraint order for payment of the judgment debt.  Variation was granted but was reversed on appeal in relation to the unsecured portion of the judgment debt.  The Court of Appeal ruled that s.69(2)(c) of the 2002 Act was mandatory and the obligations to unsecured third party creditor should be ignored.

52.  While we do not have similar amendment in OSCO, the reasoning of the Court of Appeal in rejecting the argument of Lexi Holdings is worth noting.

53.  In gist, counsel for Lexi Holdings argued that the object of the 2002 Act was to deprive the criminal of the proceeds of crime and not to enrich the Crown.  Section 69(2)(c) did not apply to bona fide unsecured creditors.  Meeting such debts would not conflict with ‘the object of satisfying any confiscation order’.

54.  In rejecting this submission, Keene LJ stressed that the object of the 2002 Act was to provide sufficient assets to meet the sum identified in any confiscation order.  If a third party creditor was allowed to obtain a variation of the restraint order and so to be paid, the provision (s.69(2)(c)) would have virtually no effect.  Where the defendant had ample assets to meet any confiscation order, a third party creditor could properly be allowed to be paid from the restrained assets.[54]

55.  Later in the judgment, Keene LJ considered the issue in a wider context of the 2002 Act.  His Lordship stressed that a restraint order was a temporary measure to preserve the position pending the result of the criminal proceedings.  A court might grant compensation order to those creditors who had suffered loss arising from the offence.[55]  Further, sufficient preservation of the defendant’s assets would make any subsequent compensation more meaningful.  His Lordship went on to emphasize the following,

“Fourthly, and of the greatest significance, the payment of third party creditors at the restraint order stage seems to us to be inconsistent with the position which obtains at the confiscation order stage…It seems to this court that it would have been wholly illogical for the legislature to have decided to allow third party debts to be paid during the period when assets are supposedly being preserved by a restraint order when such debts are to be left out of account at the stage when the confiscation order is made. We can see no reason why Parliament should have decided to allow unsecured creditors to reduce the assets during the restraint phase when such creditors could not reduce the assets at the confiscation stage. If that were the position, it would put a premium on well-advised creditors getting in quickly during the restraint phase before their opportunity is lost, and we do not accept that that situation is one which was ever intended.” [56] (my emphasis)

56.  In my judgment, the above reasoning in Lexi Holdings also holds true for OSCO. During the restraint order phase, s.19(2) is applicable.  The object is to preserve assets for satisfying the existing confiscation order or any confiscation order that may be made.  A court has discretion to vary the restraint order to pay unsecured creditors only when there are ample assets to satisfy any confiscation order.  The variation should not be allowed to reduce the amount of assets which may frustrate the purpose of the subsequent confiscation order.  This is consistent with the reasoning in Re Peters and Re W.  I disagree with the approach in Re X.

57.  It is necessary to mention here that the total value of assets restrained in Hong Kong is HK$323 million.  The total value of assets restrained in the United States is USD$18.9 million.  It is less than the total benefit of the money laundering offence which is USD$71.8 million[57].

Excessive restraint

58.  Mr Barlow pointed out that the allegation of SJ was based on a charge of conspiracy to deal with property believe to represent proceeds of an indictable offence contrary to s.25 OSCO.  According to Inspector Chow, the indictable offence mentioned in that charge was evasion of import tax or value added tax in PRC.  This conduct did not constitute any offence in Hong Kong.

59.  The charge in question is conspiracy to commit an offence under s.25.  The elements of the offence are, firstly, an agreement to deal with the property.  Secondly, knowingly or having reasonable grounds to believe it is proceeds of an indictable offence.  There is no need for the SJ to prove the indictable offence.[58]

60.  In any event, the allegations include fraud and bribery, apart from evasion of import or value added tax.  The former are indictable offences in Hong Kong.

61.  Mr Barlow drew my attention to the recent case of R v Waya[59].  In that case, the defendant made false statements about his employment to obtain a mortgage loan to purchase a flat.  The loan covered 60% of the purchase price.  About two years later, he remortgaged the flat to another lender for a larger loan as the flat had appreciated in value.  He then fully repaid the first mortgage loan.  Subsequently, he was convicted of obtaining a money transfer by deception in relation to the first mortgage loan. The prosecution applied for a confiscation order under the 2002 Act.  When the application was heard, the market value of the flat had further appreciated.  The court confiscated the sum which was the market value of the flat reduced by the defendant’s contribution to the original purchase price.

62.  The Court of Appeal reduced the confiscated sum to 60% of the market value of the flat as the first mortgage loan covered 60% of the value of the flat.

63.  The Supreme Court ruled that a confiscation order which did not conform to the test of proportionality would constitute a violation of a defendant’s right to peaceful enjoyment of his property as guaranteed by Article I of the First Protocol to the ‘Convention of Protection of Human Rights and Fundamental Freedoms’.  The confiscation order should be proportionate to the benefit that the defendant had derived from his use of the loan.

64.  The Supreme Court further held that after the remortgage, the defendant obtained 60% interest in the flat by his criminal conduct.  The sum to be confiscated should be 60% of the sum calculated as the following:

a) the market value of the flat at the time of the application for the confiscation order,

b) less the mortgage liability,

c) less the original contribution to the purchase price and repayment of the principal.

65.  The important principle set down in the case of Waya is that a confiscation order must be proportionate to the benefit obtained from the criminal offence.  It is to deprive the defendant of the proceeds of his crime, it is not meant to be a deterrent.

66.  For a confiscation order under OSCO, a court shall assess the value of the proceeds of any specified offence committed by a defendant[60].  The standard of proof is on the balance of probabilities[61].  Proceeds of an offence mean, inter alia, any payments or other rewards received by a person ‘in connection with the commission of that offence’[62].  What amounts to ‘in connection with the commission of that offence’ depends on the evidence in individual case.  Even assuming Waya applies to Hong Kong, it is difficult to say what would be its implication on future assessments.

67.  Under OSCO, a restraint order shall cover all realizable property[63].  It covers any property held by the defendant, a gift from the defendant and any property under his control[64].  Unlike a confiscation order, a restraint order is a temporary measure to preserve assets.  There is no need to calculate the exact amount of benefit in connection with the specified offence for the time being.  The case of Waya is not concerned with a restraint order.  Nor did it concern the definition of realizable property.  It is pure speculation to suggest that the case of Waya would reduce the amount of realizable property in future restraint orders. 

68.  In fact, the assets restrained in the present case are mainly funds in various bank accounts.  There would not be fluctuation of price as the flat in Waya did.

69.  In this case there are several pieces of real properties restrained in Hong Kong and the United States, however, there is no application for a confiscation order so far.  It is premature to apply the principles in Waya to limit the Order at the restraint order stage.

70.  In Hong Kong, we do not have an equivalent of Article I of the First Protocol to the Convention of Protection of Human Rights and Fundamental Freedoms.  Strictly speaking, Article I does not apply to Hong Kong.  Mr Barlow cited Article 105 of the Basic Law, the wording of which is very different from Article I.  While the spirit of the latter might be applicable adopting the broadest interpretation, given the observations above, I do not think Article 105 could advance the argument of the Intervener.

Legal costs

71.  Ms Draycott urged this court to vary the Order for paying the legal costs of the 5^th respondent. She pointed out that the payment is in favour of an innocent third party.  The pre-requisite of full and frank disclosure should be relaxed.

72.  Mr Barlow opposed the payment.  He pointed out that O. 117 r.5 is ultra vires.  There is no provision under OSCO which allows the release of restrained funds for paying living or legal expenses.

73.  As Mr Ho for SJ rightly pointed out, the burden is on the 5^th respondent to satisfy the court that it has no other assets from which it can use to pay for the legal expenses.  It is for the 5^th respondent to make full and frank disclosure of all its assets. There are ample authorities on this point[65].

74.  The reality is that the 1^st respondent is the sole director and only signatory of the accounts of the 5^th respondent.  He has effective control of the assets of the latter.  The burden is therefore on the 1^st respondent to make full and frank disclosure.  According to the 1^st and 3^rd affirmation of Inspector Chow, there are USD$4.8 million undisclosed assets controlled by the 1^st respondent.

75.  Mr Ho produced a document from the 1^st respondent.  The SJ received it one day before the hearing.  The document contained draft charts purporting to clarify the transactions in relation to the USD$4.8 million.  The clarification is unsatisfactory, let alone full and frank disclosure.

76.  Section 15(1) OSCO empowers the Court of First Instance to make a restraint order subject to such conditions and exceptions.  The Court may also discharge or vary a restraint order[66].  In my view, this power includes prescribing conditions to and varying the conditions of a restraint order at any time during the restraint order phase.

77.  Section 30 of OSCO extends the power under s.54 of the High Court Ordinance to make rules for the purpose of OSCO.

78.  Section 54 of the High Court Ordinance is in very wide terms.  It empowers the rules committee to make rules regulating and prescribing the practice and procedure to be followed in the High Court in all causes and matters whatsoever in or with respect to which the High Court has jurisdiction and any matters incidental to or relating to that procedure or practice.

79.  The combination of all these provisions leave me in no doubt that the rules committee acted within its power to make rules for the purpose of OSCO, in particular, Order 117.

Conclusion

80.  According to the 3^rd affirmation of Inspector Chow, the total value of assets restrained in Hong Kong is HK$323 million.  The total value of assets restrained in the United States is USD$18.9 million.  Whereas, the total benefit of the money laundering offence is USD$71.8 million. Variation of the Order will further reduce the restrained assets which is already less than the benefit of the offence.

81.  For the reasons discussed above, I make the following order:

a) In relation to the summons filed by the 5^th respondent dated 10 August 2012,

i. Paragraphs 1(a)(i) to (iii) are refused.

ii. Paragraph 1(b) as amended had already been granted on 13 December 2012.

iii. Paragraph 1(c) is refused.

b) In relation to the summons filed by the Intervener dated 11 December 2012,

i. Paragraphs 1 and 2 had already been granted on 13 December 2012.

ii. Paragraph 3 as amended is refused.

c) Costs order nisi of this application in favour of the Secretary for Justice to be borne by the 5^th respondent and the Intervener jointly and severally.