CATHAY PACIFIC AIRWAYS LTD v. LUK SHU KEUNG AND OTHERS

HCA 2895/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2895 OF 2001

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J U D G M E N T

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Introduction

1.  I have before me a summons dated 7 June 2006 taken out by the 1^st Defendant to discharge or alternatively, to vary a Mareva injunction originally made as long ago as 26 June 2001 and subsequently extended and varied in November 2001 and August 2002.

2.  It is essential to understand the background and history of this matter which is as follows.  The 1^st Defendant began his career with the Plaintiff in 1982 when he was employed as a technical clerk.  On 1 June 1994 he was appointed, after a series of promotions, to be the Plaintiff’s Environmental Services Manager.  An important part of the work done by the 1^st Defendant’s department was to co-ordinate donations made by the Plaintiff to charities which foster and promote an improvement in and the preservation of the environment.  As the senior man in this department the 1^st Defendant was authorised to approve donations by the Plaintiff of up to $80,000.  Beyond this amount he needed to refer to his superiors.

3.  The allegations made against the 1^st Defendant are of fraudulent conduct of the worst kind.  It is said that he has defrauded his employer of sums approaching $12.7 million.  Put shortly, it is said that he, on occasions with the assistance of the other Defendants, falsified genuine invoices issued to the Plaintiff by well-known charities in Hong Kong, being the World Wide Fund for Nature, Hong Kong, The Conservancy Association and Friends of the Earth, by the following means:

(1)     Using correction fluid to remove the details of the original genuine invoices;

(2)     Photocopying the altered invoices to produce a blank template; and then

(3)     Filling in these blank invoices with new invoice details (these now being false invoices) which were submitted for payment to the Plaintiff.

The Plaintiff then paid out against these false invoices into bank accounts opened by the Defendants in the names of bogus charities which were appropriated by the 1^st Defendant.

4.  The Plaintiff carried out an investigation in 2001 which uncovered this fraud.  It then brought this action and obtained injunctions to restrain any dealing with the assets of all of the Defendants.

5.  The Plaintiff also reported what had happened to the police which resulted in the prosecution of the 1^st, 3^rd and 5^th Defendants in this action on a single charge of conspiracy to defraud.  They were tried in the District Court before Judge Wright who acquitted them on 28 January 2004.  His verdict is at bundle 1, page 163.  Suffice to observe that he held that as the 1^st and 3^rd Defendants were husband and wife they could not conspire with each other and that, on the evidence called by the prosecution, he was not persuaded that the Defendants before him had acted dishonestly.  This acquittal, although no doubt a matter for favourable comment on behalf of the Defendants in the eventual trial of this action, cannot affect the validity of the injunctions that are currently in place, from which there has been no appeal.

The Consent Order of 28 August 2002

6.  The original Mareva injunction was one made ex parte on 26 June 2001 and continued inter partes byYeung J (as he then was) three days later on 29 June.  This order was subsequently enlarged into a world-wide injunction in the course of 2001.  That is how the matter lay until 21 August 2002 when the Defendants took out a summons to vary the orders that had gone before, to enable them to sell a number of the properties that were held by the injunctions and to have the net proceeds of sale paid into a stakeholder’s account.  The reason for this was that many of these properties were subject to mortgages carrying an obligation to pay monthly installments which the Defendants were not able to maintain.  The summons, at page 1 of the Plaintiff’s hearing bundle, also included an application for an amount in excess of $2,000,000 to be paid to the Defendants solicitors for their legal expenses.

7.  This summons was compromised by a consent order made by Saunders DJ on 28 August 2002.  It is an order of fundamental importance in relation to the present application.  The order starts at page 97 of Bundle 1.  It’s structure was to make a series of detailed orders some of which I will need to come to presently, having adjourned the summons itself to a date to be fixed in consultation with counsel’s diary.  One of the applications before the court which was adjourned without any order having been made was for the withdrawal of legal expenses by the Defendants.

8.  The order varied the previous injunctions then in place to permit the sale of seven properties which I will set out below at minimum prices or, such other prices as may be agreed between the parties.  The properties were the following:

“(a) Flat A, 3^rd Floor and Roof and Balcony, Block 8 and Car Parking Space Nos. 75 and 166 on Lower Ground floor, The Eldorado, 11 Sha Tseng Road, Yuen Long, New Territories, Hong Kong (the ‘Eldorado Property’);

(b) 1632, 180 Avenue E, Bellevua Washington 9800A, United State of America (the ‘Seattle Property’);

(c) Flat H, 32^nd Floor, Block 9, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau, New Territories (the ‘Tung Chung Property’);

(d) Office No. 2, 11^th Floor, Winning Commercial Building, Nos 46-48 Hillwood Road, Tsim Sha Tsui (the ‘Hillwood Road Property’);

(e) Unit 5, 19^th Floor, New Trend Centre, 704 Prince Edward Road East and No. 104 King Fuk Street, Kowloon (the ‘Prince Edward Road Property’);

(f) Flat 6, 15^th Floor, Block B and Car Parking Space No. 43 on Basement 3^rd Floor, Peninsula Heights, 63 Broadcast Drive, Kowloon Tong (the ‘Broadcast Drive Property’); and

(g) No. 55 3^rd Street, Section E, Fairview Park, Yuen Long, New Territories (the ‘Fairview Park Property’).”

The allowable minimum prices were these:

“(a) The Eldorado Property – HK$1,300,000.00;

(b) The Seattle Property – US$480,000.00;

(c) The Tung Chung Property – HK$3,000,000.00;

(d) The Hillwood Road Property – HK$380,000.00

(e) The Prince Edward Road Property – HK$760,000.00;

(f) The Broadcast Drive Property – HK$7,500,000.00; and

(g) The Fairview Park Property – HK$2,600,000.00”

9.  Pursuant to this facility the Defendants sold the first three of these properties from which a net amount of $730,000 has been paid into court.  Property (f) at Broadcast Drive is the most valuable.  It is currently let.  The rent covers the outstanding mortgage of about $3 million.  Its current value may be as high as $10 million, although I have no valuation to that effect, and this would appear to represent the main security that the Plaintiff has from which to enforce any judgment that it may obtain.

The Current Application

10.  From this background I now turn to what is being applied for by Mr Carolan, who appears for the 1^st Defendant, he being the only Defendant who is applying for any order from the court.  The summons at page 66 of Bundle 1 seeks a discharge of all of the existing injunctions alternatively, for a variation to allow for the sale of three of the remaining unsold properties.  Before me this has now been considerably restricted by Mr Carolan to an application for variation of the injunctions only to provide for the sale of property (g) at Fairview Park.

The Nature of the Action against the 1^st Defendant

11.  Given the parties relationship of employer and employee, the Plaintiff contends that the 1^st Defendant is liable as a constructive trustee to account to it for the $12.7 million that it says he and his accomplices have misappropriated.  There is an added dimension to this which is that the Plaintiff is also able to assert a proprietary claim against all the properties, save for the one at Fairview Park.  In respect of these properties it is able to assert that these were purchased with the Plaintiff’s funds that the 1^st Defendant has allegedly misappropriated.  It is able to say this because these purchases were made during the period when these funds were being obtained by virtue of the alleged fraud.  As such it can point to these properties, or the proceeds of the sale of these properties, and say that in whichever form the asset is, it belongs to the Plaintiff.  The position of Fairview Park is that the 1^st Defendant can demonstrate, and the Plaintiff accepts, that this property was purchased before the start of the fraudulent conduct with clean funds, if I can so express it.  As to Fairview Park the Plaintiff only claims an equitable lien.

12.  Mr Carolan submits that because the Plaintiff cannot maintain a proprietary claim against this property his task in persuading the court to withdraw this property and its proceeds of sale from the reach of the injunction is less onerous.  The general position in respect of proprietary claims and the release of funds to pay for legal costs is set out at para.20.057 of Gee-Commercial Injunctions 5^th Edition.  It is this:

“What if there is a proprietary claim by the claimant?  The purpose of an injunction  granted in aid of a proprietary claim is to stop the defendant expending for his own benefit what may be the claimant’s property.  No one has the right to use someone else’s money to pay for their defence and so before there can be any question of allowing a defendant to use funds to which the claimant has a very strong proprietary claim he must show an arguable case for denying that they belong to the claimant.  ‘If he cannot show that there is an arguable claim in his part to the funds, he has no right to use the money … No man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings. 

Where there are assets which may belong to the claimant, the court will not allow those funds to be used for legal costs until the defendant has shown by ‘proper evidence’ that he has no other assets which can be used for this purpose.  If there are such funds, then the defendant must use these first before any question claim.  But once it is shown there are no other assets except those subject to a proprietary claim, the court must make a difficult decision in the exercise of its discretion as to what is to be done.  If, within the reasonable confines of an interlocutory application, the claimant can demonstrate a strong probability that his proprietary claim to the assets is well funded, this must be taken into account in the court’s decision whether, and if so on what terms, any variation is to be permitted.  The same principles apply to permitting living expenses out of assets which are subject to a proprietary claim (see below)”

13.  Whilst in respect of Fairview Park the position cannot be as rigorous I do not believe that Mr Carolan can contend for a carte blanche for the 1^st Defendant to do as he wishes with this property.  It needs to be remembered that this is a perfectly good Mareva in support of a claim by an ex-employer seeking to hold its ex-employee to the duties of a constructive trustee.  This all forms part of the sometimes difficult balancing exercise which the court is required to undertake.  On the one hand not doing a Plaintiff an injustice, particularly where a good proprietary claim can be made out at the interlocutory stage, by allowing its property to be used by the Defendant to pay for legal costs and living expenses, and on the other not depriving a Defendant of the right to mount and pay for a proper defence to the action.

14.  As matters presently stand the 1^st Defendant affirms that he has been living on the generosity of his family and that he does not have the money to instruct solicitors to amend his defence to reflect his case properly and to bring it into line with the evidence that he gave in his criminal trial, including some important admissions of fact.  He now has the benefit of legal aid but only limited to the making of this application.

15.  The Plaintiff, subject to an important matter said to go to jurisdiction which I will turn to shortly, is not unwilling to agree, certainly in correspondence, to the release of funds from the sale of Fairview Park subject to proper control being kept over the level of such expenditure.  Mr Carolan submits that this is wholly unreasonable.  In this regard he has made reference to para.20.060 of Gee (ibid.) which says this: 

“(vi)  Variations to pay legal costs and quantum

Where a variation is to be allowed, in a Mareva case the court will not ordinarily concern itself with the quantum of individual items of costs, although it may well fix a limit to the overall amount to be allowed for this purpose pending further application to the court.  The court is not concerned with whether the defendant might have gone to cheaper lawyers, or whether the lawyers could have spent less time on the case, and will not act as a form of provisional taxing body for the purpose of scrutinising the defendant’s legal fees.  In a case concerning a proprietary claim the position is different because part of the exercise of the discretion involves taking into account the risks of injustice to a claimant in having his own money used to litigate against him.  There the court will act more cautiously so as to ensure that the funds are not wasted.”

What the Plaintiff would seek is that the Defendant should be required to obtain a solicitor and own client taxation from his solicitors, as every client is entitled to, to ensure that he is being charged at an appropriate and reasonable rate.  Nevertheless, before one addresses this sort of issue Mr Barlow for the Plaintiff has submitted that the consent order by Saunders DJ presents a very real hurdle for the 1^st Defendant because it is this order which now regulates the position between the parties and which therefore has the effect of preventing the court from making any of the orders now sought by Mr Carolan under this summons.

The Effect of the Consent Order

16.  Whilst Mr Barlow accepts, as he must, that in interlocutory proceedings no issue estoppel can arise, any attempt to re-litigate an interlocutory issue can amount to an abuse of process.  He further submits that the position is even worse for the 1^st Defendant because he is faced with an order which he had consented to which, in the absence of fraud, mistake or misrepresentation cannot be set aside or varied.  He cites in support of that proposition three cases going back to Huddersfield Banking Co. Ltd v Lister & Son Ltd [1895] 2 Ch 273 (CA) and in Hong Kong, Wong Wai Chun v Chan Yuet Wah [1976] HKLR 69 and Louvet v Modern China Development Ltd [1991] 2 HKLR 200 CA.

17.  His submission goes along these lines.  The 1^st Defendant has signed up to a regime by which all the properties set out in Saunders DJ’s order could be sold at the minimum prices referred to in the order and the net proceeds paid into court.  There is no scope for the 1^st Defendant to try and go behind this order and now require that this one property should be sold (now at a price greater than the minimum referred to in August 2002) and that the net proceeds should go to him to pay for his legal expenses.  This current summons, before the court, is not a competent one to achieve such a result.  At best the 1^st Defendant is restricted to the restoration of the summons before Saunders DJ, it having been adjourned to a date to be fixed, to deal with the outstanding issue of the payment out to the 1^st Defendantfor his legal expenses.  That part to the summons has yet to be litigated upon.

18.  For my part, I find Mr Barlow’s procedural analysis entirely compelling.  This is what the 1^st Defendant’s solicitors should have done on his behalf.  Nevertheless, this having been said, I do not believe that coming in this way, by a fresh summons, is abusive of the court’s processes.  In coming to this view I have had regard to the substance of what Mr Carolan hopes to achieve, which is to enable his client to withdraw monies from the currently frozen assets to pay for his legal representation.  The Saunders DJ order, if not necessarily contemplating or expecting such an application, specifically reserved the 1^st Defendant’s position to enable him to make it in the future, which is what he is now doing.  Whilst I am persuaded by Mr Barlow that the 1^st Defendant has gone about it in the wrong way by issuing a fresh summons, the substance of the application is one that he is able to bring.  There is no jurisdictional impediment which prevents me from entertaining it.  This being my view I must now turn to its merits.

The Merits

19.  In this regard Mr Barlow also has much to say.  Given the Plaintiff’s claim that the 1^st Defendant owes it a liability as its constructive trustee to account to it for what he has done with the $12.7 million, he is liable to restore to it this amount as beneficiary.  He must do this by restoring to it its property (the actual trust property sued for under the proprietary claims) or by restoring the trust estate out of his own assets, for example, from the Fairview Park property.  The way Mr Barlow puts it is to say that because the 1^st Defendant has yet to account to the Plaintiff for the $12.7 million, and until he has done so, it is premature for Mr Carolan to suggest that the Fairview Park property is not amenable to the tracing remedy which the Plaintiff seeks in the prayer to the amended statement of claim.  As is demonstrated in Gee at 20.57 supra and at 20.58 the 1^st Defendant must show by proper evidence that he has no other assets which he can turn to fund his defence.  He must therefore show that unless he is allowed to turn to the disputed assets held by the injunction he will not be able to pay for his legal representation.  Mr Barlow rightly submits that at this stage the test is equivalent to cases in Order 14 proceedings where a Defendant, having been given conditional leave to defend, says that due to impecuniosity he is unable to fulfil the financial condition under which leave to defend has been given.  See, M.V. Yorke Motors v Edwards [1982] 1 WLR 444 CA and the Corol Rose (No. 3) [1991] 1 WLR 917 at 926 and 927 where the analysis appears in the judgment of Lord Donaldson of Lymington M.R.  What is required is for him to show that there are no other sources to which he can reasonably turn in order to provide him with funds.  This is an evidential burden which an applicant needs to carry.  In this case Mr Barlow says that beyond perhaps bald and unsubstantiated statements of fact to this effect the 1^st Defendant has supplied no cogent evidence.

20.  Again as a matter of legal analysis Mr Barlow must be right.  Nevertheless, the evidential picture presented by the 1^st Defendant is, in my judgment, just sufficient to trigger the jurisdiction.  I accept from the evidence that he has filed that he has no other means with which to contest this matter with the assistance of solicitors.  That is enough to set him on his way but, where the rest of his case as to the quantification of his requirements is distinctly lacking, I feel constrained to approach this application parsimoniously.  I believe that the lack of evidence in this regard is the result of the 1^st Defendant’s legal advisors erroneously, in my judgment, believing that because no proprietary claim is asserted against Fairview Park, they are entitled to look to this asset in an unrestricted way.  For my part, I am convinced that the overall nature of the Plaintiff’s claim is such that the court must be slow to unbind the tethers of the Mareva even in the case of this property.  It should only do so when presented with a properly evidenced case.  All I have is a skeleton bill of costs handed up in the course of Mr Carolan’s address to the court for an amount in excess of $1 million.  This has never been shown to the Plaintiff’s solicitors.  It should have been in the course of the negotiations that the parties’ solicitors would be expected to have to see if a draw down can be agreed without the need to come to court.

21.  It was not and it should have been.  The Plaintiff’s solicitors must be entitled to consider it and to comment on it.  Where this has not happened I have seriously considered dismissing the application or at least adjourning it, with the inevitable costs sanction against the 1^st Defendant, for the 1^st Defendant to get his tackle in order.  In the event I have decided on what I hope is a more constructive course which will enable some progress to be made in the litigation straight away by allowing the sale of Fairview Park to proceed as is asked for but only on the terms that would have obtained mutatis mutandis under Saunders DJ’s order as to the conduct of the sale and the contents of the conveyancing documents.  This will mean that a formal valuation will need to be obtained.  I have every confidence that this will show that a price well in excess of the minimum price set out in Saunders DJ’s order will be achieved.  The net proceeds of sale will be paid into court.  From these proceeds I will direct that the 1^st Defendant will be able to withdraw $500,000 to fund his defence.  If he requires more he must come again, if agreement cannot be reached between the parties, with properly presented evidence justifying such an order.  I have selected the amount of $500,000 by trying to have proper regard to my view that the 1^st Defendant now has no further means of funding his defence, and also to the need to maintain the integrity and effectiveness of the Mareva injunction.  Additionally, I have had regard to the general rise in property values since 2002 which will give comfort to the Plaintiff.  At this stage I am not requiring the 1^st Defendant to obtain taxation of his costs before payment out although that may be necessary in future.  $500,000 is a sum that I am satisfied is absolutely necessary at this stage, even without a properly presented case to at least get the 1^st Defendant’s defence moving.  This will be the order.  I will give the parties liberty to apply as to its terms and implementation.

22.  Mr Barlow has invited me to dismiss outright that part of the 1^st Defendant’s summons which seeks a discharge of the injunctions which the 1^st Defendant has, of course, failed to achieve but I do not consider that to be a necessary step.  Clearly I have declined to make such an order having regard to the terms of this judgment and that should suffice.

Costs

23.  Mr Barlow has said more than once; “Why are we here?” — meaning that the 1^st Defendant has always had the necessary authority to sell this property under the consent order.  Having done so he would then be required to pay the net proceeds into court after which, on a properly justified case, go to the Plaintiff and asked to withdraw some of those proceeds to fund his defence, failing which he would be able to restore the summons, which cause before Saunders DJ, under the terms of the consent order in order to apply for his legal expenses.  I have already upheld that analysis which it seems to me must now have some consequence as to costs.

24.  On the one hand the 1^st Defendant has succeeded, albeit in part, by having released to him a relatively modest sum to get him on his way.  Nevertheless, on my finding, he has come by an unnecessary and incorrect procedural route and with deficient evidence which I have been able to overcome or, perhaps better put, to overlook by making a modest order on this occasion.  In my judgment overall the Plaintiff has had very much the better of this particular contest which I should reflect in the order for costs.  Given his, albeit, limited success I do not think that the 1^st Defendant should have to bear these costs outright, whilst at the same time the Plaintiff should be protected from ever having to pay the Defendant’s costs, even in the event that it fails in the action.  The proper outcome in my judgment is to say that the costs of this application should be Plaintiff’s costs in the cause.  Because I have not heard the parties on this, the order will be an order nisi.