SOCIÉTÉ GÉNÉRALE, SINGAPORE BRANCH v. INTER PACIFIC GROUP PTE LTD AND OTHERS

HCA 1617/2019

[2019] HKCFI 2947

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1617 OF 2019

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D E C I S I O N

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Introduction

1.  On 30 August 2019, the plaintiff bank obtained a Mareva injunction/preservation order against the 1^st to the 7^th defendants.  Discovery in aid was ordered on 6 September 2017, when the said injunction/order was continued. 

2.  The plaintiff claims that it was defrauded into providing banking facilities and is seeking to recover funds paid under the facilities.

3.  From the disclosure, it appears that some of the funds which the plaintiff is now seeking to recover had been transferred to inter alios the 8^th defendant (US$24.96 million odd) and the 9^th defendant (US$6.65 million odd).  The plaintiff therefore sought a further Mareva injunction/preservation order against the 8^th, the 9^th and the 10^th defendants(the last of which was also apparently transferred some of the relevant funds). On 13 September 2019, DHCJ M K Liu granted, ex parte, the further Mareva injunction/preservation order against the 8^th, the 9^th and the 10^th defendants.

4.  The injunction/order granted was continued by K Yeung J on the return date (20 September 2019), with amendments ordered by the learned Judge, which was subsequently further amended on 27 September 2019 by Mr Recorder Eugene Fung SC (the further amendment apparently does not concern the 8^th and the 9^th defendants).  I shall call the injunction/ order as amended (twice) the “2^nd Injunction”. 

5.  The 2^nd Injunction restrained the 8^th defendant from removing or in any way dispose of or deal with the sum of US$24,963,178.64 paid into its bank account during the period 1 June to 31 August 2019, or the traceable substitute(s) thereof.  The order against the 9^th defendant is in essentially the same terms save that the amount is US$6,652,507.63.

6.  The 2^nd Injunction contains the usual exception for legal and business expenses:

“This Order does not prohibit (i) each of the 8^th, 9^th and 10^th Defendants from spending HK$60,000 per month towards its ordinary and proper business expenses; (ii) in the case of each of the 8^th and 9^th Defendants, from spending HK$150,000 on legal advice and representation until the final determination of the Plaintiff’s summons to be taken out seeking continuation of the present Injunction Order; (iii) in the case of the 10^th Defendants, from spending HK$300,000 on legal advice and representation until the final determination of the said summons to be taken out by the Plaintiff.”

7.  The hearing for substantive arguments on the continuation of inter alia the 2^nd Injunction is now fixed for 5 February 2020.  From the 8^th affirmation of Mr Lee Man Kwong (“Mr Lee”), a director of the 8^th and the 9^th defendants and of their parent (which wholly owns them), made in opposition to the continuation, the 8^th and the 9^th defendants are challenging whether the plaintiff has a good arguable case against them, whether the balance of convenience is for or against the continuation of the 2^nd Injunction, and material non-disclosure.  It does not appear that the lack of any risk of dissipation is stated as a ground, although under “balance of convenience” that is briefly mentioned.

8.  However, on 19 November 2019, the 8^th and the 9^th defendants issued a summons seeking a variation of the 2^nd Injunction (“the Summons”).  The Summons asks for the following orders:

“1. The 8^th Defendant do cause the sum(s) totaling HK$3,445,888.78 (being the available bank balances as held in its bank accounts as of 26^th September 2019) to be paid into Court (subject to the deductions of reasonable legal costs for legal advice and representations and the ordinary and proper business expenses as proposed in (4) & (5) below;

2. The 9^th Defendant do cause the sum(s) totaling HK$6,783,017.52 (being the available bank balances as held in its bank accounts as of 26^th September 2019) to be paid into Court (subject to the deductions of reasonable legal costs for legal advice and representations and the ordinary and proper business expenses as proposed in (4) & (5) below;

3. By reason(s) of the payment into Court as proposed in (1) & (2) above, the ex parte order to the extent of USD24,963,178.64 (against the 8^th Defendant) and USD6,652,507.63 (as against the 9^th Defendant) as granted by Deputy High Court Judge M K Liu (the ‘Ex Parte Order’), which was continued and amended by the Honourable Mr. Justice K Yeung on 20^th September 2019, and Mr. Recorder Eugene Fung SC on 27^th September 2019 (‘the Inter Partes Orders’) (collectively, the ‘Injunction Order’) be discharged;

4. Leave be granted for the 8^th Defendant and the 9^th Defendant to jointly withhold and deduct HK$3,767,795.00 out of the said sum(s) stated in (1) and (2) above for seeking legal advice and representation;

5. Leave be granted to the 8^th and the 9^th Defendant to jointly withhold and deduct HK$3,898,483.00 out of the said sum(s) stated in (1) and (2) abtowards [sic] the ordinary and proper business expenses;

6. Alternatively, the Injunction Order be varied that the 8^th Defendant be permitted to use its bank account number 239-562226-883 maintained with Hang Seng Bank Limited for the ordinary and business transactions.

7. Alternatively, the Injunction Order be varied that the 9^th Defendant be permitted to use its bank accounts number 239-401540-001 and 239-401540-883 maintained with Hang Seng Bank Limited, 517-0-002353-7 and 517-1-003445-7 maintained with Nanyang Commercial Bank Limited, 344-0-005-964-9 and 344-1-011004-3 maintained with Standard Chartered Bank (Hong Kong) Limited for the ordinary and proper business transactions.

8. Costs of the Plaintiff’s Summons dated 16^th September 2019, including costs of this application be to the 8^th Defendant and the 9^th Defendant (to be taxed forthwith if not agreed)”.

9.  When the 2^nd Injunction was granted by DHCJ M K Liu, and continued by K Yeung J, their Lordships were of course satisfied that, on the evidence then before them, that there was a good arguable case against the 8^th and the 9^th defendants and that there was a risk of dissipation.[1]  At the hearing of the Summons, Mr Kenneth C L Chan[2], for the 8^th and the 9^th defendants, clarifies that his case is that with more evidence now filed on behalf of his clients, it is clear that there is no risk of dissipation and so the 2^nd Injunction, in so far as it is a Mareva injunction, ought to be discharged.  It is not the case that he accepts that a risk of dissipation exists but is addressed by the proposed payment in.  In so far as the 2^nd Injunction is also a proprietary injunction (which I think it is) in that the plaintiff is seeking to restrain disposal of monies held by the 8^th and the 9^th defendants being from the original funds or traceable proceeds thereof, Mr Chan says that, even on the plaintiff’s case that all the monies in his clients’ bank accounts came from the plaintiff, they are now proposing to pay all the monies (in the sums stated in §§1 and 2 of the Summons) into Court (subject to the deductions being asked for) and that would offer sufficient protection for the plaintiff.  Before me, while Mr Chan does not accept the plaintiff’s case against the 8^th and the 9^th defendants, he does not make submissions on the merits of the plaintiff’s proprietary claim to the monies in the bank accounts of his clients.  However, he denies that any future sums that may be received by the 8^th or the 9^th defendants, the use or disposal of which will not be restrained if I discharge the 2^nd Injunction, are traceable by the plaintiff and thus would not fall within the proprietary injunction in any event.

The application to discharge

10.  In his Decision of 20 September 2019, K Yeung J summarised the nature of the plaintiff’s case:

“1. P is a bank. It is its case that as a result of a conspiracy amongst D1 to D7, P has been defrauded into providing banking facilities to the IP Group (which term P uses to denote D1 to D3). The alleged business transactions involved D2 receiving orders for marine bunkers and fuel oils from its customers, and then placing back‑to‑back purchase orders with D6. D2 then paid D6, with the facilities obtained from P, by making payments into a specific account D6 holds with the Bank of China (‘D6’s BoC A/C’). P says that the underlying business transactions said to have been financed by those facilities in fact did not exist. Forged documents and instruments were employed to give the impression that they did. The monies were routed back to the IP Group for its own use. P further says D4, a director of D2 and sole director of D3, has made clear admission to P about the fraud. Loss to the extent of USD89.8 million has been claimed (the ‘Facility Funds’).

...

3. Information disclosed by D6 and D7 as compelled by the 1^st Injunction reveals that some of the Facility Funds had been transferred from the D6’s BoC A/C to, relevantly, D10 (USD44.85 million odd), D8 (USD24.96 million odd), D9 (USD6.65 million odd) and D3 (USD3.05 million odd).  Armed with those disclosures, P obtained from Deputy Judge MK Liu on 13 September 2019 a further Mareva injunction/preservation order against D8 to D10 (the ‘2^nd Injunction’).”

11.  The plaintiff’s case is therefore that it had been defrauded out of the Facility Funds by forged documents.  As far as I understand, the plaintiff paid the 6^th defendant directly.  From the disclosed documents, it appears that the 6^th defendant paid some of the funds to the 8^th and the 9^th defendants, which then paid some of the funds to the 11^th and the 10^th defendants respectively.  While no statement of claim has been filed yet, the re-amended indorsement of claim, in so far as it relates to the 8^th and the 9^th defendants, seeks the following, which is clearly a proprietary claim:

“11A.   A declaration that the 3^rd, 8^th, 9^th and 10^th Defendants are respectively liable to the Plaintiff as a constructive trustee with regard to the respective sums of USD3,045,282.75, USD24,963,178.64, USD6,652,507.63 and USD44,850,512, which were received and/or dealt with by them unconscionably, dishonestly and/or wrongfully;

11B.   An injunction restraining the 3^rd, 8^th, 9^th and 10^th Defendants from disposing of or in any way deal with the sums of USD3,045,282.75, USD24,963,178.64, USD6,652,507.63 and USD44,850,512 (or the traceable substitute thereof);

11C.   An order compelling and/or directing the 3^rd, 8^th, 9^th and 10^th Defendants to return the respective sums of USD3,045,282.75, USD24,963,178.64, USD6,652,507.63 and USD44,850,512 (or the traceable substitute thereof) to the Plaintiff and to account to the Plaintiff in respect thereof;

11D.   Equitable compensation and/or damages against the 3^rd, 8^th, 9^th and 10^th Defendants for the respective sums of USD3,045,282.75, USD24,963,178.64, USD6,652,507.63 and USD44,850,512 based on knowing receipt of trust properties under the aforesaid constructive trust and/or dishonest assistance in breach of fiduciary duties on the part of all the Defendants as constructive trustees.”

12.  In his 8^th affirmation, Mr Lee says that the payments by the 6^th defendant to the 8^th and the 9^th defendants, and by the 8^th and the 9^th defendants to the 11^th and the 10^th defendants, were payments under bona fide and genuine transactions, being back-to-back sales of marine fuel oil.  He produces various agreements, invoices, and bills of lading evidencing the same.

13.  Mr Chan argues that from such evidence, it is clear that the payments were for genuine commercial transactions and no risk of dissipation could be inferred. Further, in so far as it is alleged that the 4^th defendant was the mastermind behind the alleged fraudulent scheme against the plaintiff, she had, as from 4 September 2019, ceased to be one of the three directors of each of the 8^th and the 9^th defendants (the other two being the younger sister of the 4^th defendant, and Mr Lee).  Any risk of dissipation to be inferred from the fact that the alleged mastermind of fraud was a director of the 8^th and the 9^th defendant would have gone with the ceasing of the 4^th defendant’s directorship.

14.  With respect, I disagree.

15.  I agree with K Yeung J that the evidence demonstrates a good arguable case of a deliberate fraud on the plaintiff with forged documents over a protracted period of time and a risk of dissipation can properly be inferred therefrom. Even assuming the transactions between the 6^th defendant on the one hand and the 8^th and the 9^th defendants on the other, and between the 8^th and the 9^th defendants on the one hand and the 11^th and the 10^th defendants on the other, were bona fide and genuine transactions in the buying and selling of fuel oil (which I note the plaintiff is not accepting), that does not detract from the good arguable case of the plaintiff that such transactions were effected with the use of the plaintiff’s monies defrauded out of it, or the roles of the 8^th and the 9^th defendants.  A fraudster, after obtaining money by fraud, may very well then enter into bona fide businesses with it.  That does not affect the victim’s cause of action or any risk of dissipation to be inferred from the low commercial morality of the fraudster.  That is, the good arguable case of the plaintiff as against the 8^th and the 9^th defendants, in effect as knowing participants in the fraudulent scheme masterminded by the 4^th defendant, does not appear to me to be affected by the supposed genuineness of the transactions. 

16.  As for the 4^th defendant ceasing to be a director, while that apparently happened on 4 September 2019, Mr Kwong, for the plaintiff, points me to a letter dated 12 September 2019 addressed to the solicitors for the plaintiff, in which the 4^th defendant signed as director of the 9^th defendant.  This shows, he submits, that she was still “pulling the strings” despite the apparent ceasing.  I agree and in any event if there was an elaborate fraudulent scheme over a period of time involving different individuals and entities, on which there is a good arguable case, it is unlikely that the alleged mastermind would walk away suddenly and completely. 

17.  I find that the inference of risk of dissipation is not affected by the matters relied on by Mr Chan.

18.  With the risk of dissipation still exists in so far as the 8^th and the 9^th defendants are concerned, I do not think that it is appropriate to discharge the 2^nd Injunction by reason of the offer of payment in.  Since the amounts to be paid in are far less than the amount claimed and restrained, the plaintiff would not be protected if and in so far as the 8^th or the 9^th defendants received any sums in future which are traceable substitutes of the sums they had received from the 6^th defendant.  The plaintiff ought to be protected by way of a Mareva or a proprietary injunction in relation to those sums.  If and in so far as any such sums are not such traceable substitutes, as Mr Chan claims, they do not fall within the 2^nd Injunction and the 8^th and the 9^th defendants are not affected thereby.

19.  Mr Chan argues that the effect of the maintenance of the 2^nd Injunction is that the businesses of the 8^th and the 9^th defendants have come to a complete standstill.  However, I note that the hearing for the continuation of the 2^nd Injunction, with full arguments to be made on all disputed issues which raise further grounds for non-continuation to be argued, is to take place on 5 February 2020 and the proper question before me now is whether the 8^th and the 9^th defendants have shown to me a good reason to discharge the 2^nd Injunction right away and not to wait for full arguments on 5 February 2020, which is just a little over two months away.  On this, as Mr Kwong submits, there is no evidence from the 8^th and the 9^th defendants that there are any pending, urgent transactions that they want to enter into but cannot in the meantime by reason of the 2^nd Injunction.  If and when such transactions come up, the 8^th or the 9^th defendants can always seek the plaintiff’s permission or to apply to the Court.  The balance of convenience favours the maintenance of the 2^nd Injunction with the hearing on 5 February 2020 in sight.

20.  I therefore dismiss the application for discharge.  Since all relevant issues are going to be fully argued on 5 February 2020, I do not think I should say more than necessary.  I therefore say no more on the application to discharge in so far as the 2^nd Injunction is a proprietary injunction.

The application for expenses

21.  I now deal with the application by the 8^th and the 9^th defendants for payment out for the legal and business expenses.  I am not sure if this is still pursued in the light of my dismissal of the application to discharge but I assume that it is.  In effect the 8^th and the 9^th defendants are asking for a variation of the 2^nd Injunction.  Again, what I have to consider is the position pending the hearing on 5 February 2020.

22.  I note that the claimed expenses totaled HK$7,666,278, which is almost 75% of the total of HK$10,228,906.30 said to be all that the 8^th and the 9^th defendants now have. 

23.  There is no evidence before me as to whether the parent of the 8^th and the 9^th defendants, which is a listed company, is able and willing to fund their legal costs and the business expenses or not.  There is only a statement from Mr Lee that there is no other viable source of funding for the 8^th and the 9^th defendants.  Nothing is said about the parent specifically even though Mr Lee is also a director thereof.  There is, however, evidence from Mr Lee himself that the profit made by the parent for 2018/19 was HK$100,466,000.

24.  If there is a reasonable ground to believe a defendant can obtain funding from a third party, even though that party has no obligation to do so, that would be a most material factor against any variation to allow legal costs to be paid.[3]  Since it is the 8^th and the 9^th defendants which are seeking a variation of the 2^nd Injunction, the burden is on them to show by proper evidence that there is no such funding from the parent, and in my judgment there is no such evidence.  As stated in Gee, Commercial Injunctions [4] :

“Once the claimant has obtained a Mareva injunction the burden of persuasion for a variation to the injunction is on the applicant. A consequence is that the applicant normally should put in evidence to justify the variation.”

25.  Further, in so far as the 2^nd Injunction is a proprietary injunction, as stated in Gee [5] :

“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”.

26.  The problem before me is that no submissions are made on the strength of the proprietary claim by the plaintiff.  Not only have the 8^th and the 9^th defendants not raised any issue on good arguable case before me, save to argue the lack of risk of dissipation because the transactions between the 6^th, 8^th, 9^th, 10^th and 11^th defendants were genuine, the case of the 8^th and the 9^th defendants before me is argued on the basis that even if the monies in their bank accounts belonged to the plaintiff, the position can be dealt with by the payment in.   There is thus no basis for me to say that the 8^th and the 9^th defendants have made out a case for the use of the monies to which the plaintiff has a proprietary claim which for the purpose of the Summons is not denied.

27.  As for the business expenses, essentially the same considerations apply.[6]

28.  In all the circumstances, I do not think that the 8^th and the 9^th defendants have made out a case for variation to allow the claimed expenses with proper evidence.

Disposition

29.  For reasons above, I dismiss the Summons with an order nisi that costs be to the plaintiff.

30.  I thank counsel for their assistance.