KING FUNG CONSTRUCTION WORK CO LTD v. YIP KWAI CHOR AND ANOTHER

HCA 2183/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2183 OF 2004

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J U D G M E N T

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Introduction

1.  This is the Defendant’s application to discharge a Mareva injunction made ex parte by Sakhrani J. on the 25 September 2004 and then continued by Reyes J. on the 30 September 2004 at a short inter partes hearing where, by agreement, the order was continued until it came on for hearing before me.  The jurisdiction is commonplace but it is useful to begin by setting out the test to be applied when deciding whether to grant such an order.  This is succinctly recited in the headnote to the report of the English Court of Appeal’s decision in Ninemia Maritime Corporation v. Trave Schiffahrtsgesellschaft mbh & Co. K.G. “The Niedersahkn” (1984) 1 All ER 398 as follows:-

“The test to be applied by the court when deciding to exercise its statutory discretion to grant a Mareva injunction to a plaintiff pursuant to s.37 of the Supreme Court Act 1981 whenever it ‘appears to the court to be just and convenient to do so’ is whether, after the plaintiff has shown that he has at least a good arguable case and after considering the whole of the evidence before the court, the refusal of a Mareva injunction would involve a real risk that a judgment or award in the plaintiff’s favour would remain unsatisfied because of the defendant’s removal of assets from the jurisdiction or dissipation of assets within the jurisdiction.

A Mareva injunction will not be granted merely for the purpose of providing a plaintiff with security for a claim, even when it appears likely to succeed and even when the granting of the injunction will not cause hardship to the defendant.”

2.  This is a dispute between a Mr Lau Kai Yam who owns 70% of the Plaintiff company and the 1^st Defendant, Mr Yip Kwai Chor who owns the remaining 30% and who is also the controlling shareholder of the 2^nd Defendant, the other shareholder being his daughter.

3.  Both men are involved in the building industry as sub-contractors specialising in the erection of formwork into which concrete will be poured, out of which the particular building which is being erected will take shape.  Before he incorporated his business, Mr Lau traded as a firm bearing the name King Fung.  He had grown his business to the extent that the value of the sub-contracts awarded to him ran into tens of millions of dollars.  He took advice and formed the Plaintiff Company on the 9 March 2001.

4.  Mr Lau came to know Mr Yip, who was also carrying out formwork sub-contracts, in his case through the 2^nd Defendant, when they both obtained work from Sino Land at their large Park Avenue development close to Olympic Station in Kowloon.  Mr Yip impressed him as a person of substance in this type of work with a capacity to invest sums of $2 to $3 million, at short notice, into formwork contracts.  In 2002 Mr Lau obtained two contracts at Kings Park and Ma On Shan to the value of $80 million which were to be both time-consuming and capital intensive.  In those circumstances he invited Mr Yip to become a shareholder in the Plaintiff expecting that he would be able to inject needed capital into the business.  These injections of capital would come as a shareholder’s loan as opposed to equity capital given the fact that the Plaintiff’s issued share capital was only $10,000.

5.  Mr Yip agreed and in May 2002 Mr Lau had transferred to him the 30% shareholding that had been in the name of a dormant shareholder.  Mr Lau says that in doing so he had no intention to ‘gift’ Mr Yip a share in the Plaintiff’s future profits and success if he contributed nothing to those profits.  He describes it in his affirmation of 23^rd September 2004 as a “business co-operation based on mutual trust and confidence.”

How the parties fell out

6.  Mr Lau says that shortly after becoming a shareholder, Mr Yip showed himself to be unreliable.  He rarely attended the building sites to supervise or offer guidance to the Plaintiff’s foreman or staff.  Complaints were received from the principal contractor at King’s Park that he was not up to the job.  As to the hoped for monetary contributions that Mr Lau had expected, these never materialised.  In fact the contrary was the case and according to Mr Lau he was asked for and lent Mr Yip $2.5 million on five occasions in the course of 2003.  These payments are particularised in paragraph 7 of the Statement of Claim and form an important element of the claim against Mr Yip (as 1^st Defendant).

7.  The next aspect of the claim concerns what are described as “the back-to-back contracts”.  The background to this is that in April 2003 Mr Lau obtained a sub-contract for the Plaintiff for a building project at Kam Chin Village, Fanling from the principal contractor Hong Kong Construction Company Ltd.  Mr Lau says that he told Mr Yip that as the projects at Ma On Shan and King’s Park had taken up much more time and resources that he, Yip, should do his share as his partner by taking on the Kam Chin Village work himself.  Mr Lau reasoned that if he did not do this work Mr Yip would take 30% of the profits without doing anything to earn them.  Mr Lau suggested that he do this contract as the Plaintiff company’s sub-contractor at 90% of the price that the main contractor would be paying the Plaintiff, thereby giving the Plaintiff a 10% profit margin.  According to Mr Lau, Mr Yip agreed to this proposal provided that he involved his company the 2^nd Defendant to carry out the work, which Mr Lau was agreeable to.  On this basis the Plaintiff company sub-contracted this work to the 2^nd Defendant.  These works, he says, started in April 2003.

8.  Mr Lau obtained a further sub-contract from China Overseas Building Contraction Company Ltd. for works above Hang Hau MTR station which he also sub-let to the 2^nd Defendant on identical terms.  These works started at the end of May or early June 2003.

9.  In relation to these contracts Mr Lau complains that Mr Yip’s and therefore the 2^nd Defendant’s performance was ‘extremely disappointing’.  He says the 2^nd Defendant did not fulfil its financial obligations to its own staff and trade creditors.  He says that as a result of this the Plaintiff was, from time to time, required to settle invoices from the 2^nd Defendant’s materials suppliers and other trade creditors as well as making cash advances to the 2^nd Defendant.  In paragraph 11 of the Statement of Claim there is particularised an amount of $3,547,828 paid to or on behalf of the 2^nd Defendant for Kam Chin Village and Hang Hau [pages 29-30 of the main bundle].

10.  To compound matters, according to Mr Lau’s evidence, the Plaintiff would transfer interim payments that it would receive from the principal contractor to the 2^nd Defendant soon after it received these payments so as to enable the 2^nd Defendant to meet its obligations to its workman and trade creditors.  In this way $9,635,742 was paid to the 2^nd Defendant in addition to the $3.5 million which I have just described.

11.  Mr Lau says that on 9^th September 2003 he had a meeting with Mr Yip and confronted him about these payments and asked when he proposed to repay the personal loan $2.5 million and re-imburse the amounts advanced to the 2^nd Defendant for the two sub-contracts.  Mr Lau affirms that Mr Yip told him that the $2.5 million and the $3,547,828 would be repaid by the end of October 2003.  At paragraph 13[page 31] he says that Mr Yip signed an acknowledgement of these two amounts and the following day a repayment of  $300,000 was made to the Plaintiff.  This in fact is the only payment received from either defendant.

12.  Mr Lau therefore quantifies the claim as $2.5 million owing from Mr Yip (1^st Defendant) to the Plaintiff and as surety for the 2^nd Defendant’s performance of its sub-contract $3,247,828 (being 3,547,828 less $300,000).  The 2^nd Defendant is said to owe the $3,247,828 as principal debtor.

13.  As will emerge more fully in a moment, Mr Yip was detained in the Mainland over civil dispute from October 2003 until June 2004.  Mr Lau’s case therefore is that the Plaintiff company had to take over the two back-to-back contracts and had to incur further expenses including the 2^nd Defendant’s workmen’s wages.  The claim against 2^nd Defendant is for the difference between the 90% of the value of the contracts that the Plaintiff would have had to pay the 2^nd Defendant on the back-to-back basis and the excess over the 90% that it actually paid which comes to $5,647,441.

14.  The summary of the claim is at page 34, being the prayer to the Statement of Claim.  As against the 1^st Defendant (Mr Yip) $2.5 million for the personal loan; $3,247,828 for payments on behalf of the 2^nd Defendant for which he said to have stood as surety and $5,647,441 being the claim as explained in the previous paragraph, again as the 2^nd Defendant’s surety.  As against the 2^nd Defendant the claim is for $3,247,828 and the $5,647,441.

The 1^st and 2^nd Defendants’ response

15.  Whilst the Plaintiff’s case as put in Mr Lau’s evidence may appear to be well documented and compelling a real feature of the evidence is that Mr Yip has put up an equally trenchant defence to this action and in fact got in the first shot, as it were, by presenting a winding-up petition in the Companies Court on 29^th July 2004 which has yet to be resolved.  This action was not started by the Plaintiff until 21^st September 2004.  The petition (now amended) appears at page 375 of the bundle.  The Plaintiff is the company that is sought to be wound up by Mr Yip under sections 168A and 177 of the Companies Ordinance on the ground that the company is being operated in a manner unfairly prejudicial to himself including his removal from his directorship, and his right to inspect the company accounts.

16.  Mr Yip’s main affirmation starts at page 211to 228 of the bundle.  Presently, I will need to refer to the main points made by Mr Yip, but by way of general observation it is important to note that much is in dispute.  In his affirmation he seeks to paint Mr Lau as the villain in the piece, with him as victim.  An assessment will therefore need to be made in order to conclude whether the Plaintiff company has established a good arguable case as a pre-requisite to the grant of the injunction.  The disputes as to fact are largely incapable of resolution on paper.  Most of the factual disputes can only be resolved at the trial.  Nevertheless, that having been said the Plaintiff should not be deprived of its interim relief just because factual disputes are incapable of definitive resolution.  A ‘good arguable case’ does not require the applicant for an injunction to go that far.

17.  Of the two of them Mr Yip wishes to present himself as the bigger player in this type of work with better connections.  He says it was he who obtained the Ma On Shan and King’s Park contracts through his contacts with China Overseas Building Construction Company Limited (“China Overseas”), the main contractor.  He signed those contracts and makes the serious charge that Mr Lau then signed copies in order to hold himself out as the one who had obtained them.  He then goes on to affirm that the reason why he was asked to become a shareholder was not because he was expected to inject capital but because of his connection with China Overseas for whom he had done work in the past.

18.  As to the general thrust of Mr Lau’s evidence that he would not expect Mr Yip or the 2^nd Defendant to share in the Plaintiff’s profits without earning those profits he says that he had done much in securing no less than five sub-contracts and supervising the completion of works until his detention in the Mainland in October 2003.  He says without his having secured those contracts this work would not have come the Plaintiff’s way.  He points to the fact that he owned 30% of the company and that Mr Lau had in fact gone as far as promising 50% of the profits.

19.  As to the loan of $2.5 million his case is that far from being a personal loan they had both agreed that the time had come for them to distribute profits amongst themselves.  This was just before Chinese New Year 2003.  They both drew $2.5 million.  He says Mr Lau could have drawn even more but he has no way of checking on this.  He also says that if this has to be a loan it does not comply with s.157A Companies Ordinance because there was no resolution in general meeting to provide for this.  As to the narrative on the photocopies of the cheques and the cheque stubs, these are entirely self-serving having been written on there by Mr Lau to help make out his case that these payments were a loan.

20.  As to the conduct of the contracts Mr Yip strongly challenges the version put forward by Mr Lau and says that these contracts were properly performed by him until his detention on October 2003 which occurred out of spite by local officials, relating to the construction of a primary school at Mr Yip’s ‘native’ village.  He suggests that Mr Lau then took advantage of his enforced absence and has now concocted an account of misconduct by him in the completion of the back-to-back contracts.  His case is that it is only after discovery has taken place and a proper enquiry is conducted that the truth with emerge and will show that in fact nothing in owing to the Plaintiff.  He has now been unlawfully removed from the company and this is why he has applied to the Companies Court to seek redress.

Conclusion

21.  This summary of the evidence in sufficient to show how sharply contested the matter has become.  It is quite impossible to arrive at any reliable view of which side in his be believed without the evidence being tested.  Nevertheless, some tentative conclusions can be ventured even at this stage.  The matter in fact conveniently divides itself into the dispute over the alleged personal loan of $2.5 million and the other parts of the claim which are inter company, disputes save for the fact that Mr Yip is also said to be personally liable as surety for the 2^nd Defendant’s performance.

The Claim for $3,247,828 and $5,647,441

22.  I have come to the conclusion that these elements of the case are far too much in the air for me to say to the Plaintiff has made a good arguable case at this, perforce, paper stage of the litigation.  There are allegations and cross allegation going to and fro although I appreciate that the Plaintiff has produced what is said to be voluminous supporting documentation.  The Defendant has made strong comment about this evidence.  It is much too premature to think in terms of a Mareva injunction with the evidence in this state.  At best there is an equality of argument – both sides have a perfectly respectable case well short of being compelling without the weight and conviction that sworn oral evidence tested by cross-examination can bring to a case which is at present only on paper.  I do not consider that this can properly be described as a good arguable case, with the result that this part of the Plaintiff’s application falls at the first hurdle.

The 1^st Defendant as surety

23.  This aspect does not arise for consideration where I am declining to grant the Plaintiff an injunction against the 2^nd Defendant but I should observe that, even if I was so inclined, I would not have felt able to say that Mr Yip should be enjoined as surety.  The evidence is simply not there to trigger the Mareva jurisdiction.  There is no written document evidencing Mr Yip’s suretyship.  All I have is Mr Lau’s word for it.  As it stands at present this is simply not good enough.  This part of case must therefore fail, no proper basis having been established.

The personal loan for $2.5 million

24.  This is a discrete matter between the Plaintiff and Mr Yip as 1^st Defendant.  Mr Lau is more clear-cut and impressive in this regard.  The payments are very clearly documented and there is what purports to be a contemporaneous narrative on the cheques, as photocopied, and the cheque stubs.  Mr Yip says that this is just the two of them drawing down profits.  This needs to be finally determined but I am far more confident as to the Plaintiff’s evidential platform.  This evidence really does have the ring of a good arguable case of a loan.  The first hurdle has been cleared with something to spare but short of final proof, which must remain for trial.  Where this has been accomplished I must now turn to the second stage which is to decide whether the refusal of the injunction would involve a real risk that a judgment in the Plaintiff’s favour would remain unsatisfied because of the Defendant’s removal of assets or dissipation of those assets within the jurisdiction.

25.  Mr James Cheng, for the 1^st Defendant, submits that the Plaintiff has failed to make out this limb of the case.  At best it is highly speculative.  The 1^st Defendant is serious about this litigation and it was he who came to the Companies Court before this action was started against him which is a mere reaction to the winding-up petition.

26.  It needs to be remembered that before judgment a plaintiff is free to do as he likes with his assets and that this jurisdiction, which restricts that right, should only be exercised where all the conditions are shown to exist.  These orders cannot be made as a matter of course.

27.  On the Defendant’s side of the argument is the fact that he has dealt with the action in a most conscientious way by providing detailed instructions to his solicitors and it was he who went on the offensive first by bringing the winding-up petition.  He also says that he continues to reside at his home, which he owns, and he continues to operate his business in Hong Kong.  Against this the Plaintiff merely recites the incantation that the Defendant “…is unlikely to keep his assets which may be used to satisfy the judgment.  There is accordingly, a real risk of dissipation of assets in his case.”

28.  Whilst, I suppose, such a risk must always exist in every case, more than a bare appreciation of that risk is required.  The cases call for a ‘real risk’.  Such a finding usually involves something in a defendant’s conduct in the past, either connected with the particular case, or in his previous commercial dealings which would create a sense of alarm or a warning that if unrestricted such a thing might happen.  I have no such sense of apprehension in this case which might persuade me to order the 1^st Defendant to preserve assets of $2.5 million in Hong Kong.

29.  I appreciate that the Plaintiff has fortified its’ undertaking in damages to the extent of $1 million and as much as $2 million by way of fortification is offered on the papers, but where the Plaintiff has failed to show a real risk of dissipation, the question of fortification does not arise.  The Plaintiff has failed to get to the stage of fortification which is entirely related to the balance of convenience.  That is the ultimate stage of the enquiry which the court will not be troubled with until the applicant for the injunction demonstrates that it is entitled to the injunction on the merits and, if that is achieved, that the injunction should be ordered because of a real risk of dissipation.  The Plaintiff has failed at this second stage on this part of the claim.

30.  Accordingly, the ex parte order will be discharged and the matter must now proceed to trial in the usual way.

Costs

31.  As I have not heard argument I propose to make an order nisi that the costs, to include costs previously reserved, should be the Defendants’ costs in the cause, so that if the Defendants’ ultimately succeed in the action they will get these costs and if they fail they will only have to bear their own costs of the injunction application before the previous judges who have heard this matter as well as the costs before me.