TIGER RESORT ASIA LTD v. KAZUO OKADA AND OTHERS

HCA 3017/2017

[2019] HKCFI 1415

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3017 OF 2017

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DECISION

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HEARING NOT OPEN TO PUBLIC

1.  I have been informed that arising out of the facts in the case, certain criminal investigations have been on-going.  For fear of prejudicing any party in any criminal prosecution which might result, I have upon request directed that this hearing be conducted in Chambers and not be open to the public.  The uploading and publication of this Decision will also be embargoed until further order (which embargo I subsequently lifted upon P’s application and in the absence of any submissions to the contrary from D1).

THE SUMMONSES

2.  There were originally four summonses before me.  Two (one by P for leave to re-amend the Amended Statement of Claim and one by D1 for leave to file the 2^nd affirmation of Wong Shiu Sang for the purpose of this hearing) have been consented to, leaving the following two:

(a)   the summons dated 6 June 2018 (the “6/6 Summons”) taken out by the plaintiff (“P”) for inter alia a proprietary injunction with ancillary disclosure order (the “Further Injunction Application”):

(i)   requiring the 1^st defendant (“D1”) to preserve and restraining him from dealing with:

(1)   the sum of JPY 1,002 million (converted to about HK$72.4 million, the “3^rd Sum”) or its fruits or proceeds;

(2)   the sum of US$18 million (converted to about HK$139.7 million, the “4^th Sum”) or its fruits or proceeds; and

(ii)   requiring the 5^th defendant (“D5”) to preserve and restraining it from dealing with the sum of JPY 305 million (converted to about HK$21.2 million, the “5^th Sum”) or its fruits or proceeds; and

(b)   P’s summons of 8 June 2018 (the “8/6 Summons”) for disclosure of details about the artworks (the “Artworks”) purchased by D1 as stated in paragraph 5.2 of his 2^nd affirmation of 8 May 2018 (“D1/#2”), alternatively for cross-examination of D1 on D1/#2.

3.  In his written submissions, Mr Whitehead SC (who together with Mr Steven Kwan and Ms Charlotte Chan appeared for P) indicated thatit was P’s intention to confine at this stage the Further Injunction Application to the 3^rdSum and a sum of HK$22,556,519.38 out of the 4^thSum[1].  I was invited to adjourn sine dine §7(ii) (in so far as the balance of the 4^th Sum is concerned) and §§9 and 10 (relating to the 5^th Sum) of the 6/6 Summons [2].  

THE RELEVANT BACKGROUND

4.  The case has come before me a number of times.  I refer to two Reasons for Decision I handed down on 16 March 2018 and 9 November 2018.  I refer to but will not repeat them. 

5.  According to D1[3], he is a Japanese entrepreneur and art collector.

6.  In 1969, D1 founded Universal Entertainment Corporation (“UEC”), a company listed on the Tokyo Stock Exchange.  It was in the casino resort business and the business of development, manufacturing and sales of Pachislot and Pachinko machines and peripheral devices.

7.  UEC is the parent company of P.

8.  Between 9 March 2011 and 8 June 2017, D1 was the sole director of P.

9.  The 2^nd defendant (“D2”) was a company incorporated in Hong Kong.  It was also founded by D1.  At times material to the present action, D1 owned about 46.38% shares in D2, which in turn held 67.90% of the shares in UEC.  The balance of the shares in D2 were held by D1’s family members.  According to D1[4], save for its shareholdings in UEC, D2 was concerned only with the personal matters of D1 and his family.

10.  According to D1[5], D5 was a private company concerned only with D1’s personal matters.

11.  On 27 December 2017, P took out a Writ against D1 to D4 (D5 was only subsequently added).  Two series of fund transfers were pleaded.  We are here only concerned with the one relating to the sum of HK$135 million (the “HK$135 m”).  In that regard, P averred that:

(a)   D1 caused P to transfer on 2 March 2015 a sum of HK$135 million to an account held by D4 with the HSBC (“the D4 HSBC A/C”), which sum (or at least HK$130 million thereof) was almost immediately afterwards used by D3 to repay a loan he owed to D2 (by seven sums in the total amount of HK$130 million (the “HK$130 m”) remitted between 4 and 13 March 2015 into an account held by D2 with the Bank of China (“the D2 BoC A/C”);

(b)   on about 12 March 2015, D1 procured and caused D2 to transferJPY 887 million (about HK$56.8 million, the “1^st Sum”) to D1 for him to purchase art works and for his own personal use;

(c)   P further claimed that D1, in order to cover up the illegitimacy of this series of transfers, caused P to enter into a purported loan agreement with D4 on 3 March 2015 (“the Loan Agreement”).  The amount of the purported loan was HK$135 million.  D3 was named therein as the guarantor. 

(d)   P averred that it had no (or no legitimate) commercial dealings with D3, D4 and D5;

(e)   As summarized by Mr Whitehead [6], P hence claims against D1 as a former director of P for misappropriating from P the sum of HK$135 million in breach of his fiduciary duties, and against other defendants for their dishonest assistance and knowing receipt in transferring HK$130 million back to D1 for his personal use.

12.  At the stage when the Writ was first issued, without the benefit of some further disclosures which it subsequently had, P was proceeding on the basis that part of the HK$130 m was with D1 (ie the 1^st Sum), and that the balance in the sum of HK$73.2 million (the “2^nd Sum”, HK$130 million − HK$56.8 million = HK$73.2 million) remained in the hand of D2.

13.  On 23 January 2018, P took out an application for a proprietary / Mareva injunction (with disclosure in aid) against D1 and D2.  That application was supported by the affirmation of Lui Kwan Pok bearing the same date.  Amongst other things, Mr Lui stated that on 23 May 2017, upon receipt of an auditor’s report alleging various misconducts committed by D1, UEC appointed a Special Investigation Committee to investigate into the matter (“Special Investigation Committee”).  It consisted of three Japanese attorneys.  The Special Investigation Committee published its Investigation Report on 29 August 2017.  The report was produced.  Its contents and conclusions supported P’s case.

14.  That application came before L Chan J on 26 January 2018.  The material terms of the order (“Chan J Order”) L Chan J granted at the conclusion of the hearing were as follows:

“ …

AND UPON THE UNDERTAKING of [D1] given by his Counsel that [D1] shall preserve and shall not deal with, dispose of or in any way make use of (save with the written consent of [P] or Order from the Court), diminish the value of or part with possession of [the 1^st Sum] or its fruits or proceeds (whether the same is within or outside Hong Kong until after trial of this action or further Order) [7]

BY CONSENT, IT IS ORDERED THAT:

1. [D1] shall disclose to [P] in writing within 28 days as to the whereabouts and what, if anything, has become of the [1^st Sum]. The information to be disclosed to [P] shall be confirmed in an affidavit / affirmation which must be served on [P’s] solicitors.

2.   [D2] shall preserve and shall not deal with, dispose or, or in any way make use of (save with the written consent of [P] or Order from the Court), diminish the value of or part with possession of the sum up to [the 2^nd Sum], to the extent the [2^nd Sum] or any balance thereof is still in possession of and/or under the control of [D2] (whether the same is within or outside Hong Kong) until after trial of this action or further Order.”

15.  On 20 February 2018, for reasons set out in my Reasons for Decision of 16 March 2018, I granted to P a banker’s books order pursuant to section 21 of the Evidence Ordinance (the “s 21 Order”) in relation to inter alia the D4 HSBC A/C and D2 BoC A/C.  Those further records and information obtained as a result showed that:

(a)   in respect of the D4 HSBC A/C, HK$130 m of the HK$135 m was indeed transferred back to D2;

(b)   in respect of the D2 BoC A/C:

(i)   its relevant opening balance (before the transfers into it of the HK$130 m) was HK$44,982,027.14;

(ii)   D4 transferred to D2 the HK$130 m between 4 March and 13 March 2015;

(iii)   on 13 March 2015, the 1^st Sum was transferred to D1;

(iv)   on 8 May 2015 and 26 August 2015, D2 received two sums of HK$100 million odd and HK$49.8 million odd respectively from two sources not related to P’s claim (the “two Intervening Deposits”);

(v)   on 7 June 2016, D2 transferred to D1 the 3^rdSum;

(vi)   on 23 August 2016, D2 transferred to D1 the 4^thSum;

(vii)   on 17 May 2017, D2 transferred to D5 the 5^thSum;

(viii)   net of three other withdrawals (of insignificant amounts),only HK$35,086,356.42 (less than half of the 2^nd Sum) remained in the D2 BoC A/C.

16.  On 8 May 2018, in purported compliance with §1 of the Chan JOrder, D1 filed D1/#2.  The material paragraphs are §§5.1 and 5.2, wherein D1 said:

“ 5.1. On 16 March 2015, a sum of approximately JPY 887 million was deposited in my SMBC account. On 18 March 2015, 2 sums of 500 million JPY and 387 million JPY were withdrawn from the same account (‘the said sums’).

5.2.   The said sums were paid to Gallery Kochukyo and Seiichiro Teramoto in Japan for purchase of artworks on or about 18 March 2015.”

17.  On 6 June 2018, P took out the 6/6 Summons:

(a)   P sought thereby leave to amend the Statement of Claim so as to include as part of its claim certain matters revealed in the information P had by then had access to as a result of the s 21 Order.  I granted leave on 15 June 2018;

(b)   P also made the Further Injunction Application now before this Court.

18.  The Further Injunction Application was supported by the 3^rd affirmation of Yeung Sui Hung.  It principally set out the information gleaned from the further information obtained as a result of the s 21 Order.

19.  On 8 June 2018, P took out the 8/6 Summons.

20.  D1 filed his Defence on 8 May 2018.  It was subsequently amended on 2 October 2018 to plead to P’s Amended Statement of Claim.  His case, as summarized by Mr Pang SC (who together with Ms Pauline Leung and Ms Sharon Chan appeared for D1 and D5), goes as follows:

(a)   P was in the business of operating a casino;

(b)   D3 approached D1 for investment in his junket business in return for which D3 would arrange his customers to gamble at P’s planned casino in the Philippines [8] ;

(c)   Mr Yoshinao Negishi (“Negishi”) was entrusted to undertake all due diligence, negotiation of terms and risk avoidance in relation to the intended loan with D3 for investment in junkets [9] ;

(d)   Unknown to D1, Negishi arranged and executed two separate loans; one between D2 and D3, and the other between P and D3 with D4 acting as its guarantor [10] ;

(e)   D1 denied that he had acted in breach of fiduciary duties and/or breach of trust; and

(f)   the 3^rd and 4^th Sums were unconnected to loans made to D3 but were loans advanced by D2 to D1.  The 5^th Sum was a loan advanced by D2 to D5.

21.  D1 filed his 3^rd affirmation (“D1/#3”) on 13 July 2018.  It was filed in opposition of the Further Injunction Application.  It is a 14-page document (excluding back-sheet) with 33 paragraphs:

(a)   §§1 – 7 were introductory;

(b)   §§8 – 12 were background.  He touched on his worth, which I will come back to;

(c)   §§13 – 15 related to what he described as his ouster of control in D2 and UEC;

(d)   §§16 – 20 related to allegations that the Special Investigation Committee lacked independence.  He claimed at §20 that:

“ … the Special Investigation Committee merely analysed evidence on face value and took UEC’s evidence at face value. I declined to attend any interviews with the Committee knowingthat the purpose of its establishment was pre-determined to smear my reputation. It is now evident that their findings are biased and its conclusions were reached through using threatening tactics on its interview subjects …”

I note and observe that D1’s criticisms were bare assertions that were not supported by any facts or particulars;

(e)   §§21 – 24 related to what D1 described as oppressive litigation tactics by various parties against him, including how he said civil and criminal allegations had been made against him in various countries;

(f)   §§25 – 31 related to the 3^rd, 4^th and 5^th Sums:

(i)   He said, at §26, that:

“ Similar to the allegation [P] made in relation to the First and Second sum [sic], the allegation [P] is making now in relation to the Third, Fourth and Fifth Sum is wholly untrue and I deny these unfounded allegations.”

(ii)   I note however that in D1/#3, D1 chose not to set out and explain his case on the 1^st and 2^nd Sums.  He did not verify on oath what had been pleaded at §§7 – 8 of his Defence.  Nor did he provide any further evidence in that regard beyond the bare facts which one finds at those two paragraphs of his Defence;

(iii)   He pointed out [11] that the 3^rd and 4^th Sums were effected some 12 to 13 months after the transfer of the HK$130 m,and that the 5^th Sum some 26 months afterwards.  He further pointed out that those three sums were effected after the two Intervening Deposits, and as such, they “could not have been part of the sums which [P] claims it was entitled to”;

(iv)   He said at §28 that:

“ The 3^rd and 4^th Sums were loans made by [D2] to me and were intended to be repaid. There is now produced and shown to me marked exhibit ‘KO-9’ being documents I now have possession of in respect of the said sums created by unknown persons.”

(v)   I note that “KO-9”, apart from being “created by unknown persons”, was nothing but a one-page table entitled “Okada Holdings Limited / BOCM Transaction details (Oct 2014 – June 2017)”.  39 entries were set out therein.  Two transactions (34 and 35) with amounts similar to the 3^rdSum and 4^thSum were described as “Loan to shareholder”.  It otherwise gave no particularsin relation to the 3^rd and 4^th Sums.  Not even D1 in D1/#3 cared to provide any explanation on it.  It has very little value;

(g)   §32 concerned the 8/6 Summons.  D1 said therein that:

“ As regards the [8/6 Summons], I crave leave to [D1/#2] and I verily believe that I have complied with the [Chan J Order]. I am advised and verily believe that any further disclosure is unnecessary at this stage. [P’s] claim is in respect of money, even though it is framed as a proprietary claim.It cannot be validly suggested that I would be unable to meet any claim for damages. I shall leave to my counsel to address this Honourable Court further at the substantive hearing of the said summons.”

I note however that no specific evidence has been given on D1’s alleged worth.  I will come back to this point.

22.  In paragraph 2 above, I mentioned D1’s application for leave to adduce the 2^ndaffirmation of Mr Wong Shiu Sang.  Though the application has been consented to, the following matters relating to that affirmation remains relevant:

(a)   Mr Wong is a solicitor of Messrs SSW & Associates who, according to him, has the conduct of these proceedings on behalf of D1.  In paragraph 4 of his 2^ndaffirmation, Mr Wong said:

“ On 5 December 2018, [D1] presented our firm with a sealed envelope addressed to him from [D2]. Upon his instructions, the said envelop was opened. The said envelope contained a demand note from [D2] dated 22 November 2018 for payment from [D1] regarding a schedule of loan involving the sums of JPY3,821,502,427, USD18,000,000, and HKD1,8000,001 (‘the Demand Note’). There is now produced and shown to me marked exhibit ‘WSS-4’ being a copy of the Demand Note dated 22 November 2018.”

(b)   Having produced a copy of the purported Demand Note, Mr Wong then at paragraph 5 volunteered some observations on the same.  He claimed at §6 that the Demand Note was “therefore relevant to these proceedings and [P’s] Summons in that it supports [D1’s] case that the Third and Fourth Sums were loans advanced by [D2] to him.”

(c)   D1 chose to provide no evidence on the purported Demand Note himself.  He chose not even to tell the Court how it was delivered to him.  He clearly could and could have.  The purported Demand Note is dated 22 November 2018, nearly two weeks before D1 allegedly provided the same to his solicitors.  D1 had plenty of time to swear an affidavit on the same had he wanted to.  He chose to try to adduce the same through his lawyer and via the instructions he gave them.  In my view, such factual evidence ought to be given by D1 but not through his lawyer in such a manner;

(d)   In my view, factual evidence given in such a way has little value.

23.  At paragraph 2 above, I also mentioned P’s application for leave to re-amend its Amended Statement of Claim, which I granted in the absence of any objection.  The purpose of the re-amendments, as explained by Mr Whitehead, was to make clear that, given the proprietary nature of its claim, P’s claim covers and extends to:

(a)   any traceable amounts of the Sums involved;

(b)   any gains or profits which D1 had derived from his breach of duties and/or trust which P has alleged;

(c)   account of profits and/or assessment of equitable compensation;and

(d)   “An inquiry what assets in the hands of the Defendants represent the sum of HK$135 million … and the sum of HK$16 million ‌….” [12]

Mr Whitehead further emphasized that given the nature of P’s claim as further amended, P would in law have the option to either assert his beneficial ownership of the proceeds or to bring a personal claim against D1.  He relied in this regard on Foskett v McKeown [2001] 1 AC 102, where Lord Millett explained at page 130A–C that:

“ The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit. In such a case the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. He will normally exercise the option in the way most advantageous to himself. If the traceable proceeds have increased in value and are worth more than the original asset, he will assert his beneficial ownership and obtain the profit for himself.There is nothing unfair in this. The trustee cannot be permitted to keep any profit resulting from his misappropriation for himself, and his donees cannot obtain a better title than their donor. If the traceable proceeds are worth less than the original asset, it does not usually matter how the beneficiary exercises his option. He will take the whole of the proceeds on either basis. This is why it is not possible to identify the basis on which the claim succeeded in some of the cases.” (Original emphasis)

THE FURTHER INJUNCTION APPLICATION

24.  I consider the Further Injunction Application first.

P seeking a proprietary injunction

25.  This Further Injunction which P is seeking under the 6/6 Summons is not a Mareva injunction, but has been proceeded upon as an “interlocutory preservation order and/or proprietary injunction” [13]. The distinction between a Mareva injunction and a proprietary injunction for the present purpose has been succinctly explained by Scott LJ (as he then was) in Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 at 776e, that:

“ Equitable tracing leads to a claim of a proprietary character.A fund is identified that, in equity, is regarded as a fund belonging to the claimant. … The only relevant interlocutory protection that can be sought in aid of a money claim is a Mareva injunction,restraining the defendant from dissipating or secreting away his assets in order to make himself judgment proof. But if identifiable assets are being claimed, the interlocutory relief sought will not be a Mareva injunction but relief for the purpose of preserving intact the assets in question until their true ownership can be determined. Quite different consideration arise from those which apply to Mareva injunctions.” (emphasis added)

26.  The “different consideration” was summarized by Flaux J in Madoff Securities International Ltd & Anor v Raven & Ors [2012] 2 All ER (Comm) 634, at §§127 – 128, that:

“ MSIL seeks a proprietary injunction against the Kohn defendants. It is essentially common ground that there are three elements which the claimant has to demonstrate for the grant of a proprietary injunction, following the approach prescribed by American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504, [1975] AC 396: (1) that the claimant has shown that there is a serious issue to be tried on the merits; (2) that the balance of convenience is in favour of granting an injunction and (3) that it is just and convenient to grant the injunction.

In other words, both the basis for a proprietary injunction and the circumstances in which it will be granted are different from the case of a freezing injunction: see Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 at 787 per Lord Donaldson of Lymington MR.  In particular, unlike in the case of a freezing injunction, it is not necessary to show any risk of dissipation of assets and, even if there has been delay in making an applicationwhich might lead to refusal of a freezing injunction, a proprietary injunction may none the less be granted: see Cherney v Neuman [2009] EWHC 1743 (Ch) at [101]–[102] per Judge Waksman QC sitting as a Judge of the High Court.”

27.  Whether P can have the benefit of a proprietary injunction ordering the preservation, and restraining the disposal, of the 3^rd Sum and the 4^th Sum (or part thereof) will be dependent upon whether the HK$135 m originated from P could be traced to them.

Relevant rules on tracing

28.  Mr Whitehead has in his written submission taken me through a number of principles relevant to the process of tracing.  Whilst those rules were not specifically admitted by Mr Pang, he, upon my enquiry, informed me that he at the same time did not seek to dispute them.

29.  Those rules as submitted by Mr Whitehead in his written submissions[14], which I accept in the absence of any contrary submissions from Mr Pang, may be summarized as follows:

(a)   To preserve the value contributed by the beneficiary to a mixed fund, the order of priority in which the various withdrawals and investments may have been respectively made is wholly irrelevant: Re Oatway [1903] 2 Ch 356, 360 – 361 per Joyce J;

(b)   In Brazil v Durant International Corp [2016] AC 297, the Privy Council (at §38), in the context of a tracing claim, endorsed the view of Richard Scott VC in Foskett v McKeown [1998] Ch 265, 283, that:

“ … the availability of equitable remedies ought to depend on the substance of the transaction in question and not on the strict order in which associated events occur.”

(c)   What is required is a “clear link” between the claimant’s funds and the asset or money into which he seeks to trace.  As explained by Lord Neuberger MR in Sinclair Investments (UK)Ltd v Versailles Trade Finance Ltd [2012] Ch 453, at §138:

“ I do not doubt the general principle, reiterated by Lord Millett in Foskett v McKeown [2001] 1 AC 102, that if a proprietary claim is to be made good by tracing, there must be a clear link between the claimant’s funds and the asset or money into which he seeks to trace. However, I do not see why this should mean that a proprietary claim is lost simply because the defaulting fiduciary,while still holding much of the money, has acted particularly dishonestly or cunningly by creating a maelstrom. Where he has mixed the funds held on trust with his own funds, the onus should be on the fiduciary to establish that part, and what part, of the mixed fund is his property.”

(d)   Whether the “clear link” is established can be a matter of inference;

(e)   Important to the process of tracing is the principle of subordination. As explained by Lord Millett in Foskett v McKeown [2001] 1 AC 102 at 132C, that:

“ The tracing rules are not the result of any presumption or principle peculiar to equity. They correspond to the common law rules for following into physical mixtures (though the consequences may not be identical). Common to both is the principle that the interests of the wrongdoer who was responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied.”

(f)   In the case of a trustee having blended trust moneys with his own, he cannot be heard to say that he took away the trust money when he had a right to take away his own money—this may be called the Hallett rule after the case of Re Hallett’s Estate (1880) 13 Ch D 696, per Jessel MR at 727;

(g)   Where the trustee draws moneys from a mixed fund for investment and then dissipates the balance, he is not permitted to rely on the Hallett rule to maintain that the investment was bought with his own money—this may be called the Oatway rule after the case of Re Oatway, supra, per Joyce J at 361;

(h)   Both the Hallett rule and the Oatway rule resolve evidential uncertainty against the wrongdoer—Bridge, The Law of Personal Property (2018), §31-043;

(i)   As between the claimant and the wrongdoer, the claimant can “cherry pick” the tracing rule most favourable to him— Shalson v Russo [2005] Ch 281, per Rimer J at §144, and Bridge, supra, §31-044;

(j)   Where the trustee mixes trust money with his own, the equities are clearly unequal—see Re Tilley’s Will Trusts [1967] Ch 1179, per Ungoed-Thomas J at 1189A, adopting page 315 of Snell’s Principles of Equity (26^thed);

(k)   Further, as explained by Lord Millett NPJ in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, at §174:

“ Where the absence of evidence is the consequence of the fiduciary’s own breach of duty the court is not without resource, for it can have resort to three principles.First, it may be able to take the fiduciary at his own word and use his falsehoods to establish the facts as if they were true even though they are known to be untrue. Secondly the court is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence. And thirdly the court is entitled to be robust and do rough and ready justice without having to justify the amount of its award with any degree of precision.”

30.  I apply the rules above when considering this application.

Whether serious issue to be tried

31.  I can be brief here, as Mr Pang did not seek to dispute that a serious issue to be tried on merits had been shown.

32.  In the course of his oral submissions, Mr Pang at one stage invited me to consider the cogency of the evidence adduced by P.  He however made it clear that he was not saying that there was no issue to be tried, but that the point was raised in the context of the exercise of my discretion.  I will return to this aspect of the matter later. 

33.  I have considered one point made by Mr Pang in his written submissions[15]which might be regarded as relevant to the threshold question of serious issue to be tried:

(a)   Mr Pang submitted that the 3^rd and 4^th Sums did not stem from P.  He pointed to D1’s evidence and his pleaded defence that they were loans from D2;

(b)   I have commented on the wanting nature of the evidence adduced by D1 in this regard.  I stress in particular the lack of particulars in, and explanations by D1 on, “KO-9”.  I also repeat the highly unsatisfactory way in which the purported Demand Note was produced, which seriously affected its evidential value;

(c)   Mr Pang then referred to the fund flow of the D2 BoC A/C.  He pointed out the time gaps between the depositing of the HK$130 m and the 3^rdSum (12 months) and 4^thSum (13 months).  He also referred to the two Intervening Deposits.  He submitted that “[i]n the premises, the 3^rd and 4^th Sums are not and could not stem from the $130 [m] of P and are thus not the bone fide subject matter of P’s case”;

(d)   In respect of the time gap, I agree with Mr Whitehead’s submissions that lapse of time per se does not defeat equitable tracing; nor would it break any clear link between the funds which the evidence could otherwise demonstrate;

(e)   I add, supported by Madoff Securities, that delay per se also will not be sufficient to defeat a proprietary injunction;

(f)   I note the existence of the two Intervening Deposits.  However,having considered the fund flow of the D2 BoC A/C which Mr Whitehead set out in his written submissions[16], and applying the rules on tracing discussed above, I am satisfied that there was a clear link between the HK$130 m and the 3^rd and 4^th Sums. 

34.  I have considered all the evidence before me.I have considered the Investigation Report prepared by the Special Investigation Committee.  I have considered the criticisms made by D1 against the Committee.  In myview, those criticisms are bare assertions unsupported by any particulars.  Ihave also considered the directions of the remittances and transfers involved,the amounts of those sums, and their time proximity.  I stress that I am not here to try the case on affirmations.  Having considered all the evidence, I am satisfied that a serious issue to be tried on merits has been shown.

Balance of convenience, and whether grant just and convenient

Submissions on behalf of D1

35.  Under these two heads, Mr Pang made a number of points:

(a)   His main point was that as damages is going to be an adequate remedy, no injunction should be granted;

(b)   He further submitted that “It is plainly wrong for the Court to grant interlocutory injunction over the 3^rd and 4^th Sums when faced with competing claims; D1 would be caught in an impossible position if he were to repay the sums as demanded”[17];

(c)   He submitted that P’s present application is clearly part of a messy series of disputes over control of UEC.  He pointed to certain matters which he categorized as the “litigation conduct”of P, and submitted that they are relevant to question as to whether the Further Injunction Application should be granted;

(d)   He criticized the quality of the evidence relied upon by P.

36.  In respect of the adequacy of damages as a remedy, Mr Pang developed his submissions as follows:

(a)   Although P’s claim is packaged and pleaded as a proprietary claim, stripped of the niceties that P is entitled to trace such sum paid out of P’s account, P’s claim is a money claim for HK$120 million [18] ;

(b)   Currently, out of the sum claimed by P, HK$56.8 million (ie the 1^stSum) is covered by D1’s Undertaking, and HK$35 million protected by the Chan J Order.  There is no suggestion by P in its affirmation that damages would not be an adequate remedy for P in the event it succeeds in its claim [19] ; and  

(c)   There is also no suggestion that D1 or D5 would not be able to meet any judgment if adjudged liable [20].

Adequacy of damages—the law

37.  On the question as to whether, in the context of an application for a proprietary injunction, it is necessary for the applicant to show that damages would not be an adequate remedy, I have been cited quite a number of authorities.

38.  Mr Whitehead submitted that it is not necessary to show inadequacy of damages as a remedy.  He relied on Wason Holdings Limited v BHP International Markets Limited [2018] HKCA 113.  In that case, the plaintiff pledged certain shares with the 1^stdefendant as security for a loan.  The 1^stdefendant had subsequently sold them in the market, unlawfully the plaintiff alleged.  An ex parte injunction was obtained preventing the 1^stdefendant from disposing of or otherwise dealing with their proceeds.  The injunction was proprietary in that sense.  In §37 of the judgment, Hon Barma JA held (and Yuen JA agreed) that:

“ Mr Coleman submitted that as the injunction sought was not a Mareva injunction, it was not necessary to demonstrate a risk of dissipation of assets. As we understood it, Mr Barlow did not dissent from this proposition. Mr Coleman further submitted, and I accept, that as the injunction sought was proprietary, it wasalso unnecessary to show that damages would not be an adequate remedy. However, it remains necessary to demonstrate that the balance of convenience favours the granting of the injunction, and that it would be just and convenient to do so.”

In the end, the Court of Appeal allowed the 1^st defendant’s appeal and set aside the order continuing the injunction.  As explained by Barma JA in §38:

“ With respect to the judge, and to Mr Coleman, I am clearly of the view that in the circumstances of this case, the balance of convenience was against the granting of the injunction sought. Given that the shares had been sold, the effect of the injunction could be to secure a sum of money (whether the cash proceeds of the sale of the shares, or the eventual proceeds of any further loan to other customers of the 1^st defendant which could be identified as having been made using those proceeds) to satisfy any judgment the plaintiffs might ultimately obtain. However, given the nature of the business operated by the 1^st defendant, requiring it to set aside a sum of money, which it would be prevented from deploying in its business, would be likely to have a significant adverse impact. On the other hand, from the plaintiffs’ point of view, whatever judgment they may obtain at the end of the day is likely to involve the payment of money to them. Where that money comes from is ultimately of little consequence to the plaintiffs. Although their claim may be characterised as proprietary, in the particular circumstances of this case, it is nonetheless a claim to money. Unless there is reason to think that the 1^st defendant will be unable to meet such a claim, there is no particularly pressing need for money to be kept aside to meet it. With respect to the judge, while he was correct to say that the 1^st defendant did not have much in the way of assets in Hong Kong, it did not follow that the 1^st defendant’s assets overall (although possibly not very liquid) were not adequate to enable the plaintiffs’ claims to be met. The amount of the claim against the 1^st defendant is not simply the value of the shares that were sold—credit must be given for the USD 22,867,382 advanced as a loan to the 1^st plaintiff, which had not yet been repaid. This would substantially reduce any amount payable to the plaintiff, making it all the more likely that the 1^st defendant, would be able to meet the claim if successful.”

39.  Mr Pang on the other hand submitted that it is necessary to show inadequacy of damages as a remedy even when one is concerned with a proprietary injunction.  He relied on the following authorities (some of them submitted by way of a Further List of Authorities filed on 4 January 2019 after the hearing):

(a)   The Guidelines set out at §29/1/11 of Hong Kong Civil Procedure 2019 Volume 1, and in particular, the following passage on how the court may approach the issue of balance of convenience:

“ (1) The governing principle is that the court should first consider whether, if the plaintiff succeeds at the trial, he would be adequately compensated by damages for any loss caused by the refusal to grant an interlocutory injunction. If damages would be an adequate remedy and the defendant would be in a financialposition to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage;”

(b)   Feng Loy Chuen v Lim Yiong Lin [1977] HKLR 471, where Zimmern J refused an application for a preservation order under Order 29, rule 2 on the basis that the plaintiff could be fully compensated by payment if he were successful, and there being no allegation that the defendant would not be good for his money;

(c)   Samtani v Samtani [2012] 4 HKLRD 872, where Deputy JudgeAu-Yeung (as she then was) cited Feng Loy Chuen and observed at §79 that the Court will refuse to grant a preservation order if damages will be an adequate remedy for the plaintiff;

(d)   Wong Man Hon Frederick v China Times Securities Limited HCMP 608/2017 (unreported, 18 July 2017):

(i)   That case was also concerned with an injunction to restrain a collateral agent from disposing of certain shares deposited with it as security, which injunction was therefore in that sense proprietary in nature;

(ii)   In refusing leave to appeal, Barma JA observed at §9 of the judgment that:

“ Where damages are an adequate remedy, it is the settled practice of the court to decline to grant interlocutory injunctive relief. We can see no reason to depart from that settled practice here. Thus, even if the plaintiff were able to make good his grounds ofappeal, this would take him nowhere, as damages would, for the reasons we have just explained, be an entirely adequate remedy for any wrong that the plaintiff may have suffered.That being so, the appeal would be bound to fail. Leave to appeal must therefore be refused.”

40.  I have considered the authorities cited to me.  In my view, the approach of the Courts when approaching an application of an interlocutory proprietary injunction has been consistent:

(a)   Adequacy of damages as a remedy is not relevant to the question as to whether there is any serious issue to be tried;

(b)   It only becomes relevant when the court comes to consider the question of balance of convenience, and whether it would be just and convenient to grant the injunction sought;

(c)   At those stages, the broad discretion of the court is engaged.  Whilst relevant, adequacy of damages remains only one of the relevant considerations to be taken into account.  It is not a necessary element, in the sense that its absence will inevitably dictate how the court’s discretion is to be exercised;

(d)   While the practice of refusing an interlocutory injunctive relief where damages is an adequate remedy is settled, that remains a matter of practice;

(e)   Going hand-in-hand with the question of adequacy of damages is the issue as to whether the defendant is good for the money.  If he is not, it may hardly be said that damages is adequate as a remedy.

41.  I shall apply the above when considering this application.

Discussion

42.  For the following reasons, and subject to the terms of the order which I will return to, I form that view that the balance of convenience is in favour of the grant of the Further Injunction sought, and that it is fair and convenient to do so:

(a)   P’s claim is proprietary in nature.  It is P’s monies and their traceable proceeds which P is claiming.  It is also seeking account of profits and an inquiry.  It has the option as explained by Lord Millett in Foskett v McKeown.  Though P’s claim is ultimately monetary in nature, its proprietary right has to be acknowledged and respected;

(b)   P’s claim is for a very substantial sum.  Depending on what properties its funds could be traced to (eg the Artworks), its claim can at its option be beyond the sum alleged to have been misappropriated by P to start with—see Foskett v Mckeown;

(c)   Mr Pang submitted that HK$56.8 million (ie the 1^stSum) is covered by D1’s Undertaking.  In this regard, I agree with Mr Whitehead that at this stage, D1’s Undertaking has no practical effect in preserving the proprietary interest in the 1^stSum. Despite D1/#2, the particulars or whereabouts of the Artworks have remained unknown;

(d)   In respect of the 2^nd Sum, only HK$35 million remained in the D2 BoC A/C;

(e)   In the circumstances, it is only fair and just that P be afforded escalated interlocutory redress;

(f)   Mr Pang submitted that the 3^rd and 4^th Sums are subject to competing claims.  I repeat paragraphs 21(f)(iv) and (v) above.  I repeat further paragraph 22 above.  I have nonetheless considered the allegations and put them in the balance;

(g)   In relation to the so-called litigation conduct of P, I agree with Mr Whitehead that “it is a nonpoint” [21]. Those assertions are, with respect, of very limited relevance to the application before me;

(h)   In my view, what is of particular importance at this stage of my consideration, and specifically in the context of Mr Pang’s submissions on adequacy of damages as a remedy, is the failure on D1’s part to adduce any evidence on his alleged wealth or worth.  In the course of the hearing, Mr Pang described the quantum of P’s claim as “pocket change” for D1.  I invited Mr Pang to assist me on the evidence showing D1’s worth.  Mr Pang pointed me to §9 of D1/#3.  There, D1 stated:

“ In 1969, I founded what has now become [UEC], a company listed on the Tokyo Stock Exchange and in the casino resort business and the business of development, manufacturing and sales of Pachislot and Pachinko machines and peripheral devices. UEC is the parent company of [P]. As at 31 December 2017, UEC had net assets of nearly JPY260 billion (nearly HKD$18.5 billion). There is now produced and shown to me marked exhibit ‘KO‑2’ copy of the latest publicly available Financial Information of UEC.”

(i)   UEC may be a company with substantial assets.  D1 might have interest in D2 which in turn has interest in UEC.  But that at best is only one aspect of D1’s portfolio.  He has otherwise adduced no evidence as to whether he himself is subject to any liabilities.  At §32 of D1/#3, he barely asserted that “It cannot be validly suggested that I would be unable to meet any claim for damages.” D1 has simply made no attempt to tell the Court his net worth;

(j)   I agree with Mr Whitehead in this regard that if the point that D1 would be good for any judgment which P may get were to be responsibly run, D1 should have adduced evidence on his net worth.  He has not;

(k)   As I have observed above, the question of adequacy of damages goes hand-in-hand with the issue as to whether the defendant is good for the money.  If he is not, it may hardly be said that damages is adequate as a remedy;

(l)   In any event, I also agree with Mr Whitehead that if the quantum of P’s claim is really just pocket change for D1, the imposition of the Further Injunction would hardly inconvenience him;

(m)   Mr Pang then invited me to consider the quality of P’s evidence and in effect the relative strength of the parties’ case.  In the course of the hearing, I raised with Mr Pang the approach summarized at §29/1/16 of Hong Kong Civil Procedure 2019, that relative strength of each party’s case has to be disregarded except as a last resort in some circumstances.  In my view, that factor is not engaged in this case.

Conclusion on the Further Injunction Application

43.  For reasons set out above, I grant the Further Injunction in terms of §1.1 (concerning the 3^rd Sum) and §1.2 (concerning HK$22,556,519.38 out of the 4^thSum) of the draft order annexed to Mr Whitehead’s written submissions.  I also grant the discovery in aid set out at §2 of the draft order.

44.  I will come back to the balance of the 6/6 Summons.

THE 8/6 SUMMONS

45.  In the course of the hearing, Mr Whitehead made clear that his primary application was for cross-examination of D1.

46.  I have set out above the relevant terms of the Chan J Order.

47.  I have also set out above the relevant contents of D1/#2. 

48.  On 6 June 2018, P’s solicitors (“Haldanes”) wrote to D1’s solicitors (“SSW”) and complained about the inadequacy of D1’s disclosure.  It was pointed out that “no details have been given as to the details of the whereabouts of the Artworks”.  The wording of D1’s Undertaking was emphasized, in that the undertaking was to preserve the 1^stSum or “its fruits or proceeds”.  D1 was demanded to disclose “within the next 3 days details of the Artworks and their current whereabouts.”

49.  SSW replied on the same day.  They referred to the wording of §1 of the Chan J Order.  It was asserted that:

“ Nowhere in paragraph 1 of the Order or otherwise in the Order requires [D1] to disclose the details and whereabouts of anything other than the ‘First Sum’ as defined.

We are of the view that [D1] has fully complied with the Order and your request for details of the Artworks and their current whereabouts is therefore misconceived.”

50.  On 7 June 2018, Haldanes wrote back.  They said that both the intention and paragraph 1 of the Chan J Order were clear.  They maintained that the discovery made in D1/#2 was “plainly insufficient”. D1 was afforded the opportunity to file a further affirmation to effect the necessary discovery, failing which an application for cross-examination of D1 on D1/#2 would be made.

51.  D1 did not budge.  The 8/6 Summons was taken out the following day. 

52.  I have also set out above §32 of D1/#3.  Despite the correspondence which I have set out above, D1 said therein that “I verily believe that I have complied with the [Chan J Order].  I am advised and verily believe that any further disclosure is unnecessary at this stage.”

Non-compliance with the Chan J Order

53.  I first consider whether D1 has complied with the Chan J Order.

54.  I come back to the wording of the Chan J Order.  It requires D1 to disclose “the whereabouts and what, if anything, has become of the [1^st Sum].”  The scope of the disclosure demanded is not limited to the 1^stSum, but is expressly extended to what has become of the 1^stSum.  In my view, the meaning of the term “what has become” is by itself plain enough.  If there can be any room for ambiguity, the ambiguity disappears as soon as the wording of D1’s Undertaking is taken into account.  P is not just after the 1^stSum, but also its “fruits or proceeds”.  “What has become” clearly covers the “fruits or proceeds” of the 1^stSum so as to (i) allow D1’s Undertaking to be properly policed; and (2) allow a process of tracing to be conducted in order that the 1^stSum and its “fruits or proceeds” could be preserved.   

55.  I have considered D1’s disclosure.  He disclosed nothing about “Gallery Kochukyo and Seiichiro Teramoto”.  One does not even know whether “Seiichiro Teramoto” is a gallery or a person.  No particulars of the Artworks have been provided.  One does not even know whether they in fact exist.  The information provided is useless when it comes to the policing of the Undertaking or allowing any tracing to be conducted.

56.  I add that P is in this case not simply seeking to obtain discovery to police a Mareva injunction.  It is seeking the disclosure to preserve its assets.  This has to be recognized. 

57.  Mr Pang submitted [22] that D1 had fully complied with the Chan J Order and that he should not be penalized for any deficit in the terms of the Order which P drafted.  I disagree.  I do not agree that there is any deficit in the terms of the Order. 

58.  For the reasons set out above, I am of the view that D1 has failed to comply with §1 of the Chan J Order.  His purported disclosure has been wholly inadequate.

Jurisdiction

59.  The Court has the jurisdiction to order cross-examination in circumstances like what this Court is facing—see Yau Chiu Wah v Gold Chief Investment Ltd [2002] 2 HKLRD 832, per Ma J (as the Chief Justice then was) at §20. 

60.  The existence of the jurisdiction has been confirmed by the Court of Appeal in Motorola Solutions Credit Co LLC v Kemal Uzan & Ors[2014] 5 HKC 96, where Lam VP observed at §18 that:

“ The ultimate test on whether an order for cross-examination should be made in interlocutory proceedings is whether it is necessary in the interests of justice. Though cross-examination is not that frequently allowed in the context of interlocutory applications, we agree with the Judge that the court has an unfettered discretion to allow cross-examination even in such context.”

Ordering cross-examination in the interests of justice

61.  In the present case, the purported disclosure by D1 has been, as I have found, wholly inadequate.  The information is useless for the policing of the Undertaking.  The proprietary nature of P’s claim has also to be borne in mind.

62.  P has made request for further disclosure via correspondence.  D1 has been afforded the chance to file a further affirmation to effect disclosure.  He failed to take that up. 

63.  In D1/#3 at §32, D1 maintained his position that he had complied with the Chan J Order and refused to effect further discovery.  Having done so, he said in that same paragraph further, and I repeat, that “[P’s] claim is in respect of money, even though it is framed as a proprietary claim.  It cannot be validly suggested that I would be unable to meet any claim for damages.”  If D1 were of the view that the Chan J Order ought not to have been made, he was at liberty to seek to have it discharged.  He did not.  It remains binding on him.  It has to be complied with.  D1’s wealth is irrelevant in this regard.

64.  Mr Pang, relying on the same submissions he raised in the course of the Further Injunction Application, argued that as there was no evidence that D1 would not be able to satisfy any monetary judgment made against him, to compel D1 to make further disclosure would be oppressive.  He further submitted that if the Court was to take the view that damages wasan adequate remedy, there would simply be no basis for any disclosure.  For the same reasons I set out in paragraph 42 above, I reject those submissions.

65.  I do not find it oppressive to order D1 to be cross-examined on §§5.1 and 5.2 of D1/#2.  The issue will be clear—what the 1^st Sum has become.  Answering questions in that regard ought not require much information gathering by D1.  It ought not to be a difficult process.

66.  Mr Pang referred to the criminal investigation against D1 over the subject matter of this claim and submitted[23] that “it is trite that D1’s right to remain silent is constitutionally protected in criminal proceedings which will be infringed by any further disclosure orders being granted.”  It was a sweeping submissions not supported by any authority or particulars. I do not accept those submissions.  A mere statement by a witness that an answer may incriminate him is not sufficient to found any claim of privilege against self-incrimination—see China Shanshui Cement Group Ltd v Zhang Caikui [2017] 2 HKLRD 719, per Au-Yeung J at §7.  In any event, I do not see how answering questions on what has become of the 1^stSum is going to incriminate him in any way, having as he has made the claim that he had purchased the Artworks with it.    

67.  I remind myself that non-compliance with a disclosure order will not automatically lead to any order for cross-examination.  It is not frequently allowed during an interlocutory application.  However, in the present case, having balanced the considerations as I have done above, I am of the view that it is necessary in the interests of justice to order D1 to be cross-examined on §§5.1 and 5.2 of D1/#2.  I allow the application in terms of §2 of the 8/6 Summons, save that I order that the cross-examination be confined to §§5.1 and 5.2 of D1/#2 (as opposed to the entirety of D1/#2 as stated at §2 of the 8/6 Summons). 

68.  For the avoidance of doubt, I record that in the course of the hearing, Mr Whitehead sought to expand the scope of the proposed cross-examination to D1/#3.  I refuse to order that. That is not what the 8/6 Summons seeks, and is unjustifiably wide in any event.

69.  I allow parties to, if necessary, seek directions on the conduct of the cross-examination, which directions should be sought on papers first.

THE BALANCE OF THE 6/6 SUMMONS

70.  Mr Whitehead sought the balance of the 6/6 Summons to be adjourned sine dine with liberty to restore after P has obtained and considered the ancillary disclosure which I may order D1 to give as a result of the Further Injunction Application.  In my view, that is a fair and just approach. I so order, despite Mr Pang’s objections.

COSTS

71.  I make a costs order nisi that (1) the costs of the 6/6 Summons in relation to the sums referred to in paragraph 43 be in the cause; (2) the balance of the costs of the 6/6 Summons be reserved; and (3) the costs of the 8/6 Summons be to P.  Any party who seeks any variation should file its submissions within 14 days from the date hereof, submissions in opposition within 14 days of receipt, and reply within 7 days thereafter.