ZHAO ZHI QIANG v. ZHAO ZHIGUANG AND ANOTHER

HCA 1614/2019

[2022] HKCFI 3356

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1614 OF 2019

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BETWEEN

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JUDGMENT

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Introduction

1.  There are two summonses before this Court:

(1) A summons issued by the plaintiff (“P”) on 29 November 2021 for default judgment (“Sanction Summons”)

(2) A summons issued by the 1^st defendant (“D1”) on 20 April 2022 for relief from sanction (“Relief Summons”)[1]

2.  P and D1 are brothers and their dispute in this action concerns the beneficial ownership of the 10,000 issued shares of (or the equivalent 100% shareholding) in the 2^nd defendant (“D2”), a company incorporated in Hong Kong.

3.  D2 is a 96.25% shareholder of a Mainland Chinese company Kunshan Hoza Garment Manufacturing Company Limited (“Kunshan Hoza PRC”) which engages in a garment business (“Garment Business”) and owns a piece of land in Kunshan, Jiangsu, value of which was said to be between RMB 50-80 million (“Land”). A factory, buildings and facilities for the manufacturing chain of the Garment Business (collectively “Factory and Buildings”) were built on the Land.

4.  The writ herein was issued by P on 30 August 2019. On 29 August 2019, P obtained an ex-parte injunction against D1 and D2 (collectively “Ds”), which was later amended by K Yeung J on 13 September 2019 and continued by DHCJ MK Liu (“Judge”) on 27 November 2020 (“Injunction”)[2]. Upon continuing the Injunction, the Judge made an ancillary disclosure order (“Disclosure Order”).

5.  P complains of D1’s non compliance of the Disclosure Order. This eventually led to an order made by the Judge on 13 May 2021, that unless D1 made disclosure as set out therein by the stipulated deadline, D1 be debarred from defending this action, D1’s amended defence filed on 6 October 2020 (“Amended Defence”) be struck out, and P be at liberty to enter judgment against D1(“Unless Order”). On 21 June 2021, D1 issued his 1^st summons for relief from sanction. On 6 July 2021, Master Dick Ho granted an extension of time for D1 to comply with the Unless Order , until 4 pm on 13 July 2021[3].

6.  It is P’s case that D1 still has not complied with the Unless Order. P issued the Sanction Summons seeking that the Amended Defence be struck out and to enter judgment against D1 in default of defence. As there has been no defence filed on behalf of D2, in the Sanction Summons, P also seeks judgment against D2 in default of defence, but at the hearing before this Court, Mr Dawes SC has suggested P’s application for default judgment against D2 be adjourned sine die with liberty to restore.

7.  Some 4 months after P issued the Sanction Summons, D1 issued the present Relief Summons.

Brief background

8.  P’s and D1’s respective case in this action has been helpfully summarised in the decision of the Judge on 27 November 2020 (“Injunction Decision”).

9.  Briefly, it is P’s case that the Garment Business was developed by him in the 1990s, initially in New York and then in Shanghai through his group of companies in Hong Kong, the Mainland, the US and the BVI (“Hoza Group”). According to P, he set up a factory in Mainland China in 1994 for the Garment Business and that D1 had since 1994 been working for P as his employee in the Garment Business in Mainland China until in around 2018 when the brothers had a fall out.

10.  D2 was incorporated on 28 September 2001 in Hong Kong and it was acquired as a shelf company via D1 on about 29 January 2002. Upon acquisition, (i) one of the two issued shares of HKD 1 each was transferred to D1, and the remaining one share was transferred to a BVI company Simple Style Limited (“SSL”) which was beneficially owned by P; and (ii) the share capital was increased by D2 issuing 9,998 new shares of HKD 1 each, which were all allotted to D1. Thus, SSL held 1 share and D1 held 9,999 shares in D2. D1 and SSL were appointed as the two directors of D2.

11.  P’s case is that D1’s 9,999 shares in D2 were held on trust for P. On the other hand, D1’s case is that the one share held by SSL was held on trust for D1.

12.  D1’s case is that he acquired D2 initially for his future investment purpose and to pay and/or receive cash flow for the garment business owned and operated by D1, and that D1’s garment business outsourced the manufacturing of garments to fulfil purchase orders from a US company International Direct Group (“IDG”) of which P holds 60% and P’s business partner David Haynes holds 40%.

13.  It is not disputed that about 4 months after D2 was incorporated in Hong Kong, Kunshan Hoza Garment Manufacturing Limited (“Kunshan Hoza PRC”) was incorporated in Mainland China on 9 February 2002. According to D1, upon incorporation, the shares in Kunshan Hoza PRC were registered as to 50% in the name of D1 and the remaining 50% in the name of the brothers’ mother Hong Caizhu (“Mother”). However, according to P, he arranged for Mother to be the registered shareholder of 20% of the issued shares and D1 of 80% and that they both held their shares on trust for P.

14.  The Land was acquired through 3 separate sale and purchase agreements between July 2001 and June 2003 from the Kunshan Zhangpu People’s Government. It is P’s case that the consideration for the acquisition of the rights in the Land was paid by D1 using P’s funds, whereas D1’s case is that those were his funds. Upon acquisition of the rights in the Land, the Factory and Buildings were constructed on the Land, and construction works were completed in about 2005.

15.  On 12 December 2002, 9,900 shares or 99% of D2’s shareholding was transferred from D1’s name to P’s name, with the remaining 100 shares or 1% shareholding remaining in D1’s name. As a result, P became the registered owner of 9,900 shares and D1 became the registered owner of 100 shares in D2. At the same time, P was appointed to be one of the two directors in place of SSL. D1 remained to be the other director.

16.  On 19 August 2004, there was again a restructuring of the shareholding of Kunshan Hoza PRC, in that 10% of the shareholding thereof became held by D1 and the remaining 90% shareholding became held by D2.

17.  According to P, in about 2005, P and his ex-wife Qin Yun Liu (“Ex Wife”) reached a settlement for division of assets and properties for the purpose of a clean break divorce (“2005 Settlement”) but subsequently P’s Ex Wife reneged on the 2005 Settlement. In or about mid 2009, during a discussion with D1, at the office of Kunshan Hoza PRC, D1 suggested to P that P should have D1 or D1’s wife who are Mainland citizens to hold all the shares in D2 (“Shares”) on behalf of P for protection and as precautionary measure, in case P’s Ex Wife, in breach of the 2005 Settlement, was to claim for a share in the Garment Business in future divorce proceedings.

18.  It is P’s case that out of trust for D1, P agreed to D1’s proposal and P executed a bundle of undated documents for the transfer of the Shares to D1. According to P, D1 subsequently effected the transfer by causing all those undated documents to be dated 29 July 2014 in the absence of P’s prior knowledge.

19.  On the other hand, D1’s version is that in about 2014, he had asked P to transfer back to D1 the Shares held by P in trust for D1, after D1 learnt of P’s divorce proceedings with his Ex Wife in 2013 in New York, and that D1 had no trust in Ms Guo Yan (“Guo”) who was then P’s girlfriend and now P’s wife. According to D1, P agreed to the transfer and that it was under such circumstances that the Shares were transferred to D1’s name on 29 July 2014.

20.  Since about mid 2014, D2’s shareholding in Kunshan Hoza PRC has been 96.25%, leaving the remaining 3.75% shareholding held in D1’s name.

21.  To summarise, the corporate structure of D2 and Kunshan Hoza has been as follows:-

Date	Asian Trinity Limited (城泰有限公司)/D2	Kunshan Hoza Garment Manufacturing Company Limited (昆山厚實製衣有限公司) /Kunshan Hoza PRC
28 September 2001	Incorporation in HK
29 January 2002	Acquisition via D1 1 share (0.1%) – SSL (P) 9,999 shares (99.99%) – D1 Directors: SSL                 D1
9 February 2002		Incorporation in Mainland China 50%, or 80% (according to P) - D1 50%, or 20% (according to P) - Mother
July 2001 and June 2003		Land acquired by Kunshan Hoza PRC
12 December 2002	9,900 shares (99%) – P 100 shares (1%) – D1 Directors: (i) P                 (ii) D1
19 August 2004		10% – D1 90% – D2 Legal Representative and Chairman – P
December 2013		P removed as Legal Representative and Chairman
29 July 2014	10,000 shares (the Shares) – D1 Sole Director – D1
Since mid 2014		3.75% – D1 96.25% – D2

22.  In 2018, there was a breakdown in the relationship between P and D1 whereupon according to P, he had repeatedly demanded D1 to return the Shares to him, but D1 refused to do so. Further, according to P, on about 4 August 2019, he discovered that D1 had, without P’s prior consent, attempted to register a change of shareholding in Kunshan Hoza PRC by transferring D2’s shareholding in Kunshan Hoza PRC to D1’s own name.

23.  This led to P to applying ex parte for the Injunction and issuing the writ herein claiming amongst others (1) a declaration of trust over the Shares and D2’s assets; (2) an order to transfer the Shares to P; (3) an injunction; and (4) an account of profits and order for tracing.

24.  The Injunction provides that D1 must not, whether by himself or his servants, agents or otherwise howsoever:-

(1) Act or hold himself out as shareholder of D2 and do any acts qua shareholder including: (a) disposing of or dealing with or diminishing the value of any of the Shares; and/or (b) changing the structure of the board of directors and the management of D2;

(2) Act or hold himself out as director of D2, do any act on behalf of D2 including disposing any assets of D2 including (but not limited to) D2’s 96.25% shareholdings in Kunshan Hoza PRC or any part thereof.

25.  The Disclosure Order[4], ie paragraph 2 of the Injunction, provides as follows:

“[D1] shall file and serve an affirmation on [P] within 7 days of the date of the service of this Order, informing [P] at once of:

(a) all of the assets of [D2], whether in or outside Hong Kong, whether in the name of [D2] or not, and whether solely, jointly owned, giving the value, location and details of all such assets (“DO(a)”);

(b) all of the assets of [Kunshan Hoza PRC], whether in or outside Hong Kong, whether in the name of Kunshan Hoza PRC or not, and whether solely, jointly owned, giving the value, location and details of all such assets (“DO(b)”); and

(c) how the assets of [D2] and Kunshan Hoza PRC respectively have since 29 July 2014 been paid, disposed, or committed to be paid or disposed of by [D1] and/or [D2] and its agents, including to whom and/or to what entities the assets or any part thereof have been paid and/or given to (if paid or given to any entities other than [D2] and/or Kunshan Hoza PRC), when the assets were so paid and/or given, and for what alleged purpose (“DO(c)”).

26.  D1 failed to comply with the Disclosure Order within the stipulated deadline. This led to P issuing his 1^st summons for an unless order on 4 January 2021. According to D1, due to the prolonged and extensive Covid regulations in Mainland China at the time, he was unable to formally attest his affirmation in time, but a finalised draft of his 4^th affirmation was exhibited in the 8^th affirmation of his solicitor Mr Tsui Ming-lun (“Mr Tsui”) filed on 11 January 2021, purporting to comply with the Disclosure Order and exhibiting thereto copies of the annual audited financial statements of Kunshan Hoza PRC (“Financial Statements”) from 2015 to 2018 (“Draft 4^th Affirmation”).

27.  The parties later agreed by consent for D1 to have retrospective leave to serve the Draft 4^th Affirmation. However, P’s solicitors sent a letter to Ds’ solicitors on 18 January 2021, complaining that the purported disclosure by D1 in the Daft 4^th Affirmation was insufficient and that D1 was in breach of the Disclosure Order (“18.01.21 Letter”)[5].

28.  On 13 April 2021, P issued his 2^nd summons for an unless order, which was fixed for a hearing before the Judge on 13 May 2021 (“Unless Summons”)[6]. On 12 May 2021, the day before the hearing of the Unless Summons, without admission to P’s allegation of inadequate disclosure, D’s solicitor Mr Tsui filed a further affirmation exhibiting D1’s finalised draft 5^th affirmation with some supporting documents (“Draft 5^th Affirmation”). P’s Unless Summons was heard before the Judge on 13 May 2021, upon which the Unless Order was made.

29.  Although thereafter the Draft 4^th Affirmation and the Draft 5^th Affirmation were filed, they were later expunged as they were not formally attested and notarised. Both formally attested and notarised affirmations were eventually filed on 13 July 2021 (respectively “4^th Affirmation” and “5^th Affirmation”). Prior thereto, D1’s 6^th affirmation was also filed on 8 July 2021 purportedly to comply with the Unless Order (“6^th Affirmation”).

30.  As said earlier, it is P’s case that D1 has still failed to comply with the Unless Order and this has led P to issue the Sanction Summons, and that D1 issued the present Relief Summons some 4 months later. D1’s 7^th affirmation[7] was subsequently filed (“7^th Affirmation”).

The Issues

31.  D1 contends that:

(1) the Unless Order was just a “time order”;

(2) there had been compliance of the Disclosure Order;

(3) in the event that the Court finds there was non compliance, relief from sanction should be granted.

Whether the Unless Order was a “time order”

The Unless Order

32.  Briefly, paragraph 1 of the Unless Order provides as follows:

“(1) Unless [D1], by noon on 18 June 2021, file and serve a further affirmation which should be made by [D1] himself to make disclosure of the following matters and provide copies of supporting documents evidencing the same in full and proper compliance with paragraph 2 of the [Disclosure Order], D1 be debarred from defending this action, the [Amended Defence] be struck out and [P] be at liberty to enter judgment with costs against [D1]:

(i) The value, location and details of the assets of [D2] including but not limited to monies in bank account, cash in hand and all other assets whatsoever, whether movable or immovable, whether in or outside Hong Kong and whether solely or jointly owned (“UO1(i)”);

(ii) The value, location and details of the assets of [Kunshan Hoza PRC] including but not limited to monies in bank account, cash in hand and all other assets whatsoever, whether movable or immovable, whether in or outside Hong Kong and whether solely or jointly owned (“UO1(ii)”);

(iii) Full details of any disposals of assets of Kunshan Hoza PRC, whether movable or immovable, whether in or outside Hong Kong and whether solely or joined owned, since the financial statement 2018 (“UO1(iii)”);

(iv) Full details of each of the disposals of assets of Kunshan Hoza PRC as disclosed in paragraph 11 of the [Draft 4^th Affirmation] including but not limited to: ……. (“UO1(iv)”)

(a) In respect of the alleged severance payment (see paragraph 11(1) of the [Draft 4^th Affirmation]), the names of those employees receiving the severance payment from Kunshan Hoza PRC, the respective amounts paid and payment records;

(b) In respect of the alleged tax payment (see paragraph 11 (2) of the [Draft s 4^th Affirmation]), the name of entity receiving the tax payment by Kunshan Hoza PRC, the date on which the payment was allegedly made and payment records;

(c) In respect of the alleged transfer of Kunshan Hoza PRC's equipment to suppliers (see paragraph 11 (3)(a) of the [Draft 4^th Affirmation]), an inventory of equipment allegedly to the suppliers with proper description, the name of each such supplier, the respective amounts of payables allegedly due to each of such suppliers and documentary records relating thereto, and the dates on which the equipment was allegedly transferred and delivered to such suppliers; and

(d) In respect of the alleged sale of Kunshan Hoza equipment (see paragraph 11(3)(b) of the [Draft 4^th Affirmation]), an inventory of equipment allegedly sold to Changshu Luohai Garment Manufacturing Company Limited (常熟市羅海製衣有限公司)with proper description, terms of the alleged sale and any written agreement, the amount of sale proceeds, the date on which the equipment was allegedly sold and delivered to Changshu Luohai Garment Manufacturing Company Limited (常熟市羅海製衣有限公司), the amount of the alleged loan lent by the [D1] to Kunshan Haza PRC, the date of the alleged loan, and any written record thereof.

General legal principles

33.  It was held by Chow J (as he then was) in Cosimo Borelli v Allen Tak Yuen Chan HCMP 2174/2014 ,12 Nov 2015 at §11, the appropriate approach when construing a court order is:

“ … the starting point is the natural and ordinary meaning of the words used in light of the syntax, context and background in which those words are used. What additional principles and factors come into play as part of the court’s exercise of interpretation will depend on the nature of the writing to be interpreted and will be highly dependent on the facts of the specific case.”

34.  Counsel for Ds, Ms Liao, has referred the Court to Silver Universe Investments Limited v China Securities Limited & another [2019] HKCFI 834, a case concerning the compliance of an unless order for a disclosure order in aid of an injunction. In his judgment, K Yeung J observed that:

“24. … in the absence of clear wording or history of the proceedings suggesting the contrary, the general position is that an unless order should be construed as a time order, so that a qualitative analysis of the adequacy of the step undertaken is in general not necessary.”

35.  As for “history of the proceedings suggesting the contrary”, K Yeung J referred to China Metal Recycling (Holdings) Ltd (in provisional liquidation) v Chun Chi Wai & Ors HCA 1412/2013,25 June 2014. As noted by K Yeung J, in that case, the unless order in question was construed as an order for compliance in the qualitative sense because it was made earlier by another deputy judge (a) “following protracted argument” and (b) after a positive finding that there had been non-compliance with the underlying disclosure order made in aid of a Mareva injunction[8].

36.  It was also submitted by Ms Liao that once an unless order was construed as a time order, the issue would turn on whether the deadline had been met and not on the adequacy of compliance, unless it could be said that the compliance was not made in good faith or illusory, citing what was said by Lok J in paragraph 34 of his judgment in Top Point Ltd v K & L Gates, HCA 1088/2011, 13 September 2016, a case concerning the compliance of an unless order for discovery.

37.  There is no real dispute on the above general legal principles.

The hearing on 13 May 2021

38.  P has produced a copy of the transcript of the hearing on 13 May 2021 before the Judge (“Transcript”). The hearing lasted about 30 minutes. Counsel Mr Alan Yung appeared for P and Mr Tsui appeared for Ds. Mr Yung had lodged written submissions setting out the details of P’s allegations of D1’s non compliance of the Disclosure Order. It appeared that there had been no written submissions from Mr Tsui.

39.  As seen in the Transcript, Mr Tsui opened by saying that there were a lot of items that had been answered by D1 and there were items P was not entitled to. Upon query by the Judge as to whether D1 had fully complied with the Disclosure Order, Mr Tsui responded that they did not say so but they had provided a further affirmation. The Judge had pointed out that P had set out all the details that P was entitled to, and he asked Mr Tsui whether he was saying that P was not entitled to some of the information set out in the Unless Summons, to which Mr Tsui said yes.

40.  As further seen in the Transcript, Mr Tsui submitted that paragraph 1(i) of the Unless Summons in relation to the assets of D2 had been complied with and that D2 did not have any bank accounts and all assets available had been disclosed[9]. However, the Judge pointed out that as the Draft 4^th Affirmation was only a draft, and that an unless order would still be necessary as even if Mr Tsui was correct that D1 had already disclosed all the assets of D2, the disclosure was made only in a draft affirmation[10]

41.  As for paragraph 1(ii) of the Unless Summons in relation to the assets of Kunshan Hoza PRC, Mr Tsui submitted that information had been disclosed in paragraphs 6 and 7 of the Draft 4^th Affirmation. What can be seen in paragraph 6 of the Draft 4^th Affirmation, D1 disclosed that as of 30 November 2020, Kunshan Hoza PRC’s assets had a total value of about RMB16,409,537.88 (excluding its liabilities). D1 had provided a breakdown of Kunshan Hoza PRC’s assets in a table (“Table A”)[11]:

	Category	Item	Value of About (RMB)
(1)	Real Property	Building and factory	7,579,109.72
(2)	Intangible Asset	Use of land	2,028,647.84
(3)	Other Receivables	流動資產，固定資產清理，在建工程，長期待攤費用	6,801,780.32

42.  The Judge queried about the details of “Other Receivables” in Table A, citing as an example the item “在建工程”[12] / “construction work in progress” and asking what this item was, whereupon Mr Tsui responded by accepting that a breakdown was necessary for “Other Receivables” but said that D1 had provided the breakdown in the Draft 5^th Affirmation[13].

43.  The Judge did not appear to be aware of the Draft 5^th Affirmation, which was contained in a late affirmation of Mr Tsui.

44.  Upon a copy of the Draft 5^th Affirmation being provided to the Judge by Mr Tsui, the Judge had said to save some time, even if Mr Tsui was correct that some parts of the Disclosure Order had been complied with by the draft affirmations, the Judge considered that in any event an unless order would be necessary as the two drafts affirmations were only drafts and that D1 would still need to make formal affirmations to comply with the Disclosure Order[14].

45.  Although Mr Tsui tried to argue that an unless order was not necessary, the Judge had pointed out that Mr Tsui had earlier agreed that the draft affirmation would not be sufficient to fully comply with the Disclosure Order and again cited the example of the item of “在建工程” and indicating that the details of this item were missing in the draft affirmation.

46.  Although it was not clear from the Transcript as to which draft affirmation the Judge was referring to, what is clear is that neither the Draft 4^th Affirmation nor the Draft 5^th Affirmation had contained the necessary details of the item of “在建工程”.

47.  Further, in paragraph 6 of D1’s Draft 5^th Affirmation, all D1 stated under “Other Receivables” was that part of which included (1) cash of about RMB 31,952.61 held at the factory and (2) savings in bank account about RMB 80,289.16. Then in paragraph 7, D1 disclosed a list of 7 bank accounts of Kunshan Hoza PRC[15].

48.  As pointed out by the Judge, Mr Tsui had himself agreed that there had not been full compliance of the Disclosure Order. The Judge had pointed out that the details of “在建工程” were missing and that if Mr Tsui was saying that D1 would only make an affirmation which would be identical to the draft, then it would be very difficult for the Judge to accept that D1 had intention to comply with the Disclosure Order. Mr Tsui then responded that D1 would add that item and the Judge had queried “Only that item?”[16].

49.  When Mr Tsui tried to explain, the Judge reminded him that D1 would have legal advice from Mr Tsui’s firm and that if an unless order was made and D1 filed an affirmation for the purpose of complying with the Disclosure Order and if the Court was of the view that the affirmation in fact was not good as some requested information was still missing, then the unless order would take effect[17]. Thereafter, the Judge gave his decision on P’s Unless Summons, stating that he agreed with P that for the reasons set out in the 18.01.21 Letter sent by P’s solicitors and in P’s counsel Mr Yung’s written submissions, D1 had failed to fully comply with the Disclosure Order, and that P should be entitled to have an unless order, as sought in the Unless Summons (“Finding”)[18]. Although after the Judge gave his decision, Mr Tsui had tried to argue that there were items in the Unless Summons that P was not entitled to, the Judge declined to hear him further on this.

50.  Ds had known about P’s complaints of the inadequacies of the disclosure in the Draft 4^th Affirmation since the 18.01.21 Letter in which P had set out the information which D1 allegedly failed to disclose. Ds had further been served with P’s Unless Summons on the same day it was issued, ie 13 April 2021. Yet, all D1 said in his Draft 5^th Affirmation, apart from making further disclosure, was that he denied what was alleged in P’s 18.01.21 Letter, and that the Unless Summons was premature and that most of the items were set out in his Draft 4^th Affirmation or not entitled to be discovered[19].

51.  First, Ds should have replied to the 18.01.21 Letter properly indicating which of P’s allegations of non disclosure was untrue, or alternatively why P was not entitled to the information set out. Second, it was open to Ds, upon being served with the Unless Summons, to set out in an affirmation in opposition as to why P was not entitled to the information set out in the Unless Summons. It was further open to Ds to lodge written submissions before the hearing before the Judge, and/or to seek a substantive hearing be fixed for the argument on whether P was entitled to the information sought the Unless Summons. Finally, if Ds were dissatisfied with the Unless Order, they could have sought leave to appeal.

52.  Notwithstanding Ms Liao’s submissions, it was clear that Mr Tsui himself had accepted that there had not been full compliance of the Disclosure Order in the Draft 4^th Affirmation and although Mr Tsui had initially tried to argue that there had been further disclosure by D1 in the Draft 5^th Affirmation, he clearly realised that there was still no sufficient disclosure in the Draft 5^th Affirmation of the details/breakdown of say, the item “在建工程” and Mr Tsui was trying to say he would add such details. As said earlier, the Judge had given brief reasons for his decision and he had agreed with P’s then counsel that for the reasons set out in the 18.11.21 Letter and in P’s written submissions that D1 had filed to fully comply with the Disclosure Order.

53.  The Unless Order is not one which requires a mere undertaking by D1 to file the draft affirmations by a specified time.

54.  Having considered all above said, and the Transcript, notwithstanding there had not been protracted argument before the Judge, there was the Finding by the Judge of non-compliance, and I have come to the view that the Unless Order requires compliance in the qualitative sense and it is not a “time order”. Further, the fact that D1 not only formally filed his 4^th Affirmation (as per the Draft 4^th Affirmation) and his 5^th Affirmation (as per the Draft 5^th Affirmation) after the Unless Order, but also his 6^th and his 7^th Affirmations making further disclosure clearly demonstrated that his disclosure in his 4^th and 5^th Affirmations was insufficient.

Whether there had been compliance of the Unless Order

The terms of the Unless Order

55.  Ms Liao complained that P had utilised the Unless Order to embark on a fishing expedition for information and documents of the assets of Kunshan Hoza PRC and that (1) as the Unless Order is formulated in vague and highly uncertain terms, making it extremely difficult for D1 to ascertain the scope of disclosure, D1 should be given the benefit of the doubt of any ambiguity; and (2) the Disclosure Order and the Unless Order were granted to preserve P’s alleged interest in the Shares, they could not have been intended to entitle P to minutiae details of the assets of Kunshan Hoza PRC, which is an entirely separate legal entity.

56.  First of all, there was no date or period of disclosure specified in DO(a) and DO(b) of the Disclosure Order. As the Disclosure Order was made on 27 November 2020, and that D1 was to make the disclosure within 7 days, a reasonable interpretation of the Disclosure Order in my view would be that the disclosure should be of the assets on or around 27 November 2020. As for DO(c) of the Disclosure Order, a reasonable interpretation would be the period covered under that paragraph should be from about 20 July 2014 to about 27 November 2020. The fact that D1 had voluntarily made disclosure of post 27 November 2020 information and/or documents does not mean he was under an obligation to do so. Had P or Ds been in any doubt, they should have sought clarification before the Judge, which neither had done.

57.  What is clear is that UO1(ii) is differently worded as DO(b) of the Disclosure Order. Ms Liao has complained that the words “all other assets” in UO1(ii) to be “extremely ambiguous and imprecise”. Under DO(b) of the Disclosure Order, D1 is under an obligation to disclose the value, location and details of all the assets of Kunshan Hoza PRC, and in my view, UO1(ii) only spells out that such assets should include but not limited to monies in bank account, cash in hand and all other assets whatsoever, whether movable or immovable. However, I do accept that the order is very wide with no monetary value placed on those assets and this could lead to disclosure of assets of insignificant value. As for “location” of the assets, I agree with Ms Liao that “location” does not necessarily mean the exact address.

58.  UO1(iii) and UO1(iv) stem from DO(c) of the Disclosure Order. As pointed out by Ms Liao, UO1(iii) refers to full details of any disposals of assets of Kunshan Hoza PRC without specifying any description of the nature of disposal or a monetary limit of disposal subject to disclosure. I agree that the wording is wide and vague. Also, I agree with Ms Liao that “Full details” does not mean all supporting documentary evidence. UO1(iv) seems to be a follow up on P’s disclosure made in the Draft 4^th Affirmation but appears to be wider in scope than DO(c) of the Disclosure Order. In any event, there is no requirement under UO1(iv)(d), as alleged by P in his 8^th affirmation[20], that “specific details, breakdown and supporting documents” are to be provided in relation to each of the items “周邊配套,機器設備,電子設備及其他,運輸設備,” to explain what they were, where they were located and their respective individual value.

59.  Having considered the above, I accept Ms Liao’s submission that there is ambiguity in the scope of the the Disclosure Order and the Unless Order, and that D1 should be given the benefit of the doubt in such circumstances[21].

Alleged Non-compliance

60.  By the time P issued the Sanction Summons, notarised and signed copies of D1’s 4^th, 5^th and 6^th Affirmations had been filed. As said earlier, after P issued the Sanction Summons, D’s 7^th Affirmation dated 24 March 2022 was eventually filed on 8 July 2022, in which D1 provided further explanation of his disclosure in the 4^th, 5^th and 6^th Affirmations.

61.  It was submitted on behalf of P that even taking into account the 7^th Affirmation, there were still significant outstanding disclosures and these are summarised in a table in paragraph 18 of P’s Skeleton Submissions (“P’s Table”). P’s Table is set out hereinafter:

Category	Outstanding disclosure (taking into account D1’s 7th Aff)
1(a). Real Property	• D1 failed to disclose the lease between Kunshan Hoza PRC and the tenant over the factory and buildings erected on the Land.
1(b). Other Fixed Assets	• D1’s disclosure with regards to “机器设备”，“电子设备及其他”，and “运输设备” remains incomplete and inconsistent. • Specifically, D1 failed to explain: (1) why the corresponding records regarding a “list of inventory and suppliers” in the sum of RMB297,313.74 could not be identified in the New Cashflow Extract (defined below); and (2) the inconsistencies between the New Cashflow Extract and the “明細分類賬” in relation to “固定資產” exhibited earlier by D1 in ZZG-05.[22]
1(d). Other Receivables	• D1 failed to disclose the details of the current status of various bank accounts up to the date of disclosure.[23]
2. Disposal of Assets	• D1 failed to produce a legible breakdown of records of payments by cash and bank transfers.[24] • D1 failed to produce the bank statements of Kunshan Hoza PRC to evidence the bank transfers.[25] • D1 failed to account for several transactions under “辦公費用” and “其他費用”.[26]
3. Undisclosed Assets	• D1 failed to disclose how the 60,000 units of finished women’s knit pants are committed to be paid or disposed of.[27]

Real Property

62.  In relation to the “Real Property”, under UO1(ii) of the Unless Order, as said earlier, “location” does not mean the exact address. In the 7^th Affirmation, D1 stated that in relation to Kunshan Hoza PRC, the dispute all along concerns the Land and the Factory and Buildings, and that relevant contracts for the purchase of the Land, building contracts and land certificates have been disclosed in D1’s List of Documents filed on 18 February 2021 and these documents showed the address and location of the Land. D1 has further confirmed that there are no other real property owned by Kunshan Hoza PRC save the Land, the Factory and Buildings. D1 has also pointed out that P was fully aware of the address of the Factory and Buildings as P had produced photographs of the entrance to the complex[28]. In the 7^th Affirmation, D1 has also reproduced the “Certificate of Right of Use” of the Land. Further, I also note that companies in the Hoza Group did use and/or occupy/use the premises of the Factory and Buildings[29].

63.  As for the lease of the Factory and Buildings erected on the Land, or the tenant/s thereunder, as pointed out by D1 in his 7^th Affirmation, he was not required in the Disclosure Order and/or the Unless Order to explain the occupation status of the Land or of the Factory and Buildings. D1 has explained that Kunshan Hoza PRC had rented out the Factory and Buildings to a tenant who then subleased it to others, and that he has no details on how and to whom the Factory and Buildings were sublet. The rental income received by Kunshan Hoza PRC has been disclosed in copies of the Financial Statements disclosed by D1.

64.  It was submitted on behalf of P that a copy of the lease or its terms is covered by the Unless Order. I think there is ambiguity in the Unless Order. The Unless Order, and/or the Disclosure Order, concerns assets and disposal of assets. D1 has produced the Financial Statements of Kunshan Hoza PRC for the years 2015, 2016, 2017, 2018 and also 2020. As seen in the 2018 Financial Statements[30], there are “Current Assets” and “Non-current Assets”. There are 8 items of “Remarks” in the 2018 Financial Statement[31]. In particular, item 5 are on the explanatory notes to the main items in the accounts/會計報表主要項目注釋 (“Explanatory Notes”)

65.  The Explanatory Notes are divided into 3 categories: (i) those in relation to the main items of “Schedule of Assets and Liabilities”/資產負債表主要項目注釋 (“Category (1)”); (ii) those in relation to the main items of “Schedule of Profit and Loss”/利潤表主要項目注釋 (“Category (2)”); and (iii) those in relation to the items of “Schedule of Cash Flow”/現金流量表項目注釋 (“Category (3)”).

66.  One can see from the Explanatory Notes that “rental income”/房租收入 is under 4. 其他業務利潤/ other business profits under Category (2)[32]. The rental income was stated to be RMB 1,174,668.57. In the Explanatory Notes of the 2020 Financial Statements, the rental income was stated to be RMB 3,862,866.72, against RMB 91.428.57 for previous year, ie 2019[33]. P complained that without the lease and/or other documents evidencing payment of rent, such huge fluctuation was inexplicable. First, the rental income was set out under the Schedule of Profit and Loss, ie Category (2). The rental income was part of “income” and I do not agree that the rental income received or receivable form part of the “assets” or “receivables” under Category (1). Second, the amounts for 2018, 2019 and 2020 have already been disclosed in the Financial Statements.

67.  In any event, in my view, renting out the Factory and Buildings is not a disposal of an asset. I do not agree that obligations (eg maintenance of the Factory and Buildings), if any, in the lease may involve the “disposal” or “committed disposal” of its assets. Such obligations, if any, are only expenses relating to the earning of the rental income.

68.  Having considered the terms of the Disclosure Order and the Unless Order, I find there is ambiguity in the UO1(ii), in that it is not specified that D1 is required to disclose under UO1(ii) the lease or the terms of the lease or tenant/s of the Factory and Buildings, or any breakdown as to which part of the Factory and Buildings was rented to whom, for how long and for how much, or the rental payment arrangement, or to have to provide any other documents evidencing payment of rent. It thus follows that D1 is not required to disclose under UO1(iii) a copy of the lease or the tenant/s, as there is no disposal of asset by renting out the Factory and Buildings and/or any part thereof.

Other Fixed Assets

69.  As for “Other Fixed Assets” under UO1(iii), in D1’s 4^th Affirmation, D1 has disclosed in paragraph 11 the major disposals of assets since the 2018 Financial Statements. In paragraph 11(3), D1 disclosed that in early 2020, Kunshan Hoza PRC has disposed of all of its equipments, with an estimated book value of RMB 404,199.74 by (a) transfer to suppliers for setting off payables due to such suppliers of RMB 297,313.74 and (b) remaining equipments sold as scrap materials to Changshu Luohai Garment Manufacturing Company (“Luohai”), and that the sale proceeds were used to repay the loan D1 lent to Kunshan Hoza PRC.

70.  It appeared from the above that the sale value of the remaining equipment to Luohai was about RMB 106,886 (ie RMB404,199/74 less RMB 297,313.74).

71.  P referred to item 6 of Category (1) of the 2020 Financial Statement in relation to “Depreciation of Fixed Assets”/固定資產累計折舊,減值準備[34], in which the “original price”/固定資產原價 of 4 items thereunder, namely “周邊配套,機器設備,電子設備及其他,運輸設備” came to over RMB 12m. “周邊配套” in fact refers to surrounding facilities relating to the Factory and Buildings. D1 said such was disclosed in the 2020 Financial Statements produced in his 5^th affirmation and also as Item 22 of his Supplemental List of Documents.

72.  Anyway, according to the above item 6 of Category (1), the “original price” of the 3 items 機器設備,電子設備及其他,運輸設備 came to RMB 6,778,594,49 at beginning of the period, but was reduced to “0” at the end of the period. As for depreciation, the amount of those 3 items at beginning of the period was about RMB 4,843,810 but again reduced to “0” at the end of the period. Without further evidence/explanation, these figures may not necessarily reflect the actual value of these equipments or that the book value of RMB 404,199.74 was not correct.

73.  D1 had in his 7^th Affirmation produced an extract of the cashflow in connection with the disposal of the equipments on 31 October 2020 and 31 December 2020 (“New Cashflow Extract”)[35]. P alleged that this was the first time D1 disclosed this document and that P could not find this New Cashflow Extract from any previous account ledgers concerning fixed assets and that this raised doubts whether D1 had withheld any part of any account ledgers from disclosure. Further, D1 failed to explain: (i) why the corresponding records regarding a “list of inventory and suppliers” in the the sum of RMB 297,313.74 could not be identified in the New Cashflow Extract and (ii) the inconsistencies between the New Cashflow Extract and “Breakdown of Other Receivables” produced by D1 in his 6^th Affirmation[36].

74.  In paragraph 12 of D1’s 5^th Affirmation[37], D1 had produced a “list of inventory and suppliers”[38] who received the inventories, the amounts that were deemed as setting off accounts payable due to those suppliers and the dates of disposal/set off (“Suppliers List”). The total amount in the Suppliers List was RMB 297,313.94 and the dates of disposal/set off were between 18 March 2020 and 10 April 2020.

75.  In paragraph 13 of D1’s 5^th affirmation, he then produced a list of equipments sold to Changsha Luohai of a total amount of RMB 90,885[39] (“Luohai List”). Part of the Luohai List with the full description of the equipment cannot be seen on the photocopy produced and no dates of disposal can be seen on the Luohai List, but according to paragraph 14 of D1’s 5^th Affirmation, payment of those items on the Luohai List was made to him in about April 2020.

76.  The amount of factory equipment disposed of as at 31 October 2020 as seen in the New Cashflow Extract was RMB 90,885 and the total amount of the factory vehicles disposed of as at 31 October 2020 was RMB 16,000. There was then another amount of RMB 28,000 for disposal of factory equipment on 31 December 2020 in the New Cashflow Extract.

77.  As the New Cashflow Extract was in relation to “cashflow”, it may not reflect the items and amounts in the Suppliers List, which were set off of amounts owed to the suppliers. As for the disposal of the equipments to Luohai, the amount of RMB 90,885 was reflected but I accept there were some additional items. However, the inconsistency, if any, was not in my view significant. Even if the New Cashflow Extract was a new document, there is no requirement in the Unless Order that all supporting accounting documents and/or ledger accounts have to be provided by D1.

78.  As mentioned earlier, the scope of UO(1)(iv) appears to be wider than DO(c). Under DO(c) of the Disclosure Order, D1 is only required to inform P in an affirmation of how the assets of D2 and Kunshan Hoza PRC have since 29 July 2014 been paid/disposed of by D1 and/or D2, including to whom/to what entities the assets or any part thereof have been paid/given, when and for what alleged purpose.

79.  In any event, UO1(iv) of the Unless Order does not specify that D1 is required to disclose the location and individual value of each of “電子設備及其他,運輸設備”. If P finds the information provided by D1 was inconsistent, or insufficient there is nothing to stop P to issue an application for specific discovery, setting out specifically what information or documents are required by P. At this stage, I find D1 has provided sufficient information to comply with UO1(iv)(c) and UO1(iv)(d).

Other Receivables

80.  P complained that D1 failed to disclose the details of the current status of various bank accounts up to the date of disclosure.

81.  As said earlier, there is no period specified in the Disclosure Order. Further, UO1(ii) of the Unless Order also does not specify the requisite period of disclosure for the assets of Kunshan Hoza PRC. In D1’s 5^th affirmation he has stated that part of the amount of about RMB 6,801,780.32 under “Other receivables” in Table A included (i) Cash of about RMB 31,952.61 held at the Factory and (ii) savings in bank accounts of about RMB 80,289.32[40]. D1 then provided a list of 8 banks where Kunshan Hoza PRC held bank accounts.

82.  Kunshan Hoza PRC had held account/s at the China Construction Bank in Shanghai, and the account/s was/were closed on 19 November 2020[41]. D1 has in the 7^th Affirmation stated that he has not been able to find the bank statement for this account. As for the accounts at the other 7 banks, D1 had provided a printed statement from each of the 7 banks, 4 as at about end of September 2020, and 3 as at about end of November 2020. The 2020 Financial Statements also reflected the cash at the Factory (RMB 41,841.01) and cash at bank (RMB 23,439.26), totalling RMB 65,280.27 as at 31 December 2020.

83.  I am of the view that the present documents provided by D1 are sufficient to comply with the DO(b) of the Disclosure Order and UO 1(ii) of the Unless Order.

Disposal of Assets

84.  P complained that D1 failed to (i) produce a legible breakdown of records of payments by cash and bank transfers, (ii) produce the bank statements of Kunshan Hoza PRC to evidence the bank transfers, and (iii) account for several transactions under “辦公費用” and “其他費用”.

85.  Regarding (i) above, there appeared to be only 3 illegible pages[42] out of a total of some 98 pages of the “breakdown of available records of payments by cash and rom bank transfers from July 2014 to November 2022” produced by D1 in his 6^th Affirmation (“Breakdown”). This cannot be said to be a significant non compliance. The Breakdown was produced by D1 to support paragraphs 9-11 of his 4^th Affirmation, and paragraphs 8-14 of his 5^th Affirmation.

86.  Regarding (ii) above, there is no requirement in the Unless Order that D1 has to provide bank statements to evidence all the bank transfers in the Breakdown.

87.  Regarding (iii), in paragraph 8 of D1’s 5^th Affirmation, D1 has produced a schedule of what he described as “all the other disposals of assets”[43]. However, the heading of this schedule states “昆山厚實製衣有限公司費用支出明細 (2019.1.1-2020.11.30)”, which appears to be a ledger account of the expenses and payments of Kunshan Hoza PRC during those 21 months (“Ledger”). The Ledger consisted of payments for utilities, litigation/legal costs, compensation to employees, taxes, financial expenses (bank charges and interests), depreciation expenses, labour insurance and employee other expenses. The item of office expenses/辦公費用 of RMB1,074,888.55 consisted of payments during the 21 months to companies which appeared to be a materials company, a trading company, a software technology company, a “針車設備公司”, a security services company, a firm of accountants in Suzhou, a lawyer office in Shanghai, and an estate agent company. The item of “其他費用” of RMB587,140.15 consisted of payments to a total of 7 companies such as fire services equipment company, insurance company etc.

88.  As said earlier, DO(c) of the Disclosure Order and/or UO1(iii) and (iv) of the Unless Order has not specified the monetary amount of the assets paid/disposed of/given since 29 July 2014 which are required to be disclosed by D1and/or D2. The words “paid”, “disposed of”, “given” are ambiguous and the period between 29 July 2014 and the date of the Disclosure Order spanned over 6 years. The Ledger appeared to contain normal business expenses and to expect D1 to account for each transaction in the Ledger is far too onerous, and unnecessary.

Undisclosed Assets

89.  P complained that D1 failed to disclose how the 60,000 units of finished women’s knit pants were committed to be paid or disposed of.

90.  The knit pants in question are subject to a legal action in the Mainland between Kunshan Hoza PRC and a company in the Hoza Group called Kunshan Xingjinrong Trading Company Limited/昆山欣锦荣贸易有限公司 (“Xinjinrong”). It is pleaded by D1 in the Amended Defence that from 2015 to 2017, Kunshan Hoza PRC received orders from and manufactured garments for both Shanghai Zhuoyi Garment Company Limited and Xinjinrong, and that Xinjinrong was a company incorporated by P in 2015 in Mainland with P as the sole shareholder and legal representative up to January 2020 and that Xinjinrong was incorporated to gradually take over D1’s garment business operation. In about August 2018, D1 caused Kunshan Hoza PRC to cease manufacturing garments for Xinjinrong as Xinjinrong had defaulted payment for clothings for 3 months and this had also led to a legal action commenced by Kunshan Hoza PRC in 2019 against Xinjinrong[44] (“18151 Action”). According to P, the action has been postponed and no court date fixed todate, pending the determination of the beneficial ownership of the Shares.

91.  The issue in the 18151 Action is whether D1 had the authority to cause Kunshan Hoza PRC to withhold the relevant shipment of the garments, and to demand payment of the full amount without any deduction of the sum already paid and without producing any invoice for payment.

92.  D1’s explanation for failing to account for the 60,000 units of knit pants was that these were made to the specification of Xinjinroung which was controlled by P and were labelled with the names of Xinjinrong’s customers, and that D1 did not consider them to be the assets of Kunshan Hoza PRC.

93.  In any event, I agree with Ms Liao that if P wished to seek specific disclosure in respect of these knit pants, P should have specifically identified such in the Disclosure Order/Unless Order and/or seek specific discovery.

Conclusion

94.  I agree with Ms Liao that the Disclosure Order and Unless Order were granted to preserve P’s alleged interest in the Shares and they could not have been intended to entitle P to seek disclosure of minutiae or microscopic details of the assets and accounts of Kunshan Hoza PRC. Further as said earlier, I find there is ambiguity in the scope of both orders. Having considered the terms of the orders, I am not satisfied that D1’s compliance so far has not been made in good faith, or illusory, or that there is still any significant non compliance on the part of D1. I am satisfied that there has been “literally complete compliance” of the Discovery Order and the Unless Order in the 4^th to 7^th Affirmations.

95.  In the above circumstances, I am not prepared to grant the order sought by P against D1 in paragraph 1 of the Sanction Summons. P’s application against D2 in paragraph 2 of the Sanction Summons shall be adjourned sine die with liberty to restore. As for the Relief Summons, I am prepared to grant relief from sanction to D1 by granting retrospective leave for D1 to file the 7^th Affirmation in compliance with the Unless Order.

96.  As for costs, it was only in the 7^th Affirmation that D1 had provided explanations and further details to further comply with the Unless Order. Having considered the circumstance of this case, I am of the view that D1 should pay P’s costs of paragraph 1 of the Sanction Summons and P’s costs of the Relief Summons, with certificate for one counsel. Costs of paragraph 2 of the Sanction Summons be reserved. This is an order nisi which shall be made final and absolute after 21 days.