HENGSHI INTERNATIONAL INVESTMENTS LTD v. BAYSPRING INTERNATIONAL LTD AND ANOTHER

HCMP 1916/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1916 OF 2015

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D E C I S I O N

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A.  Introduction

1. This hearing concerns 3 applications:

(1)  The plaintiff’s application for continuation of an interim injunction (“the Injunction Order”) in aid of proceedings, with a mirror application by D2 for its discharge;

(2)  D2’s application for fortification of the plaintiff’s undertaking in damages;

(3)  The plaintiff’s application for disclosure of bankers’ records.

2. D1 has not filed any evidence in opposition.  Its solicitors appeared at this hearing and expressed that they adopt a neutral position.

3. The following analyses will concentrate on D2, but the reasoning equally applies to the case against D1.

B.  BACKGROUND FACTS

4. The plaintiff is a company incorporated in the British Virgin Islands and a substantial shareholder of Hengshi Mining Investments Limited (“HMI”), a listed company on the Hong Kong Stock Exchange. D1 (Bayspring) and D2 (III Dune) are companies incorporated in the Bahamas.

5. The plaintiff held HMI shares which have been pledged to D1 and D2 as securities for 2 loans, details of which are tabulated below:

Table

It is to be noted, of course, that the “pledge” of shares did not involve physical share certificates as the HMI shares are shares under the Central Clearing and Settlement System (“CCASS”).

B1.  Case against D1 under the Bayspring Loan Agreement

6. It transpired that D1 had been selling part of the Bayspring HMI shares before the loan was advanced to the plaintiff on 25 July 2015 and before any event of default.  (i) A total of 50,397,000 Bayspring HMI shares have been sold to Delton as from 15 July 2015; (ii) the sale proceeds are held in an account with Deutsche Bank; and (iii) there are 22,083,000 unsold Bayspring HMI shares held in a Deutsche Bank account.  The plaintiff says this was a breach of the Bayspring Loan Agreement. 

B2.  Case against D2 under the III Dune Loan Agreement

7. The material terms of the III Dune Loan Agreement are as follows:

(a)  Clause 2.2(a): As general and continuing security for the due, prompt and complete performance and satisfaction of the Obligations … the Borrower hereby mortgages, pledges, charges and grants to the Lender a security interest, by way of a fixed and specific mortgage, pledge, charge and security interest, to and in favour of the Lender, in an aggregate of 88,596,572 [HMI shares] ….

(b)   Clause 2.3(b): Unless and until an Event of Default has occurred, the Lender shall not trade the Pledged Securities, provided that the Lender may … take the necessary actions to hedge the Pledged Securities (or any of them) irrespective of whether or not an Event of Default has occurred … and irrespective of whether or not an Event of Default has occurred, the Lender shall, subject to the terms hereof, have full control of the Pledged Securities.

(c)  Clause 3.2(a): Within 10 banking days of full repayment of all the Obligations to the Lender, the Lender shall return all the Pledged Securities, or an equivalent number of [HMI shares], to the Borrower.

(d)   Clause 4.1(1): The Plaintiff represented and warranted that it had no knowledge of any material non-public or insider information which it had not disclosed.

(e)  Clause 4.2(h): The Plaintiff agreed promptly and in any event within 48 hours to provide D2 with written notice of any trade and/or dealing of the HMI shares.

(f)  Clause 5.1: Notwithstanding anything else herein contained to the contrary or otherwise, the liability of the Borrower hereunder and the recourse of the Lender for payment and performance of the Obligations shall be limited to the Pledged Securities, and the Lender shall not have, under any circumstances, any right hereunder to any other assets of the Borrower.

(g)   Clause 6.1: All amounts due from the Borrower would immediately become due and payable upon the happening of an Event of Default.  Events of default included: failure to perform any term; representations and warranties proved to be false; there was an unremedied Share Price Default; if the Plaintiff took any steps to interfere with the Pledged Securities or D2’s rights therein.

(h)   Clause 6.2(a)(ii): To the extent that an Event of Default remained uncured in any period provided, the agreement would terminate automatically and D2 would be entitled, without notice to the Plaintiff, to exercise all its rights against the Pledged Securities, as if D2 were an absolute owner thereof.

(i)  Clause 6.2(a)(v): In consideration of the Lender entering into the agreement, the advance of funding and the non-recourse aspect of the Loan, the Plaintiff irrevocably forfeits the equity of redemption.

  (all underline added)

8. By a Control Agreement dated 30 June 2015 made between the plaintiff, D2 and Beaufort as depository broker, D2 may direct Beaufort to transfer, pledge, hypothecate, any funds or other property in the account, “provided that the Lender may not provide such notification in respect of a transfer, nor shall the depository broker act on any such Entitlement Order relating thereto” unless D2 had given prior notice to the depositor broker of termination of this agreement.

9. D2 had advanced a total of US$10 million in 2 tranches to the plaintiff. As a result, 62,035,733 HMI shares became pledged (“the III Dune pledged shares”), and 27,964,267 shares remain unpledged (“the III Dune unpledged shares”).

10. It transpired that D2 entered into a repo transaction with Delton, whereby the III Dune HMI shares were pledged or hypothecated to Delton. Delton assigned its rights and obligations to Makalu Capital Limited (“Makalu”). D2 had given an “Entitlement Order” to Beaufort to pledge or hypothecate all of the pledged shares to Makalu. On each occasion, Beaufort gave notice to the plaintiff. I will come back to this notice later.  These transactions with Delton and Makalu took place in the absence of an event of default. 

11. The plaintiff first discovered the unlawful transactions of D1 and D2 on 28 July 2015. 

12. On 6 August 2015, the plaintiff gave notice to commence arbitration in the Bahamas.  It obtained the Injunction Order restraining the Defendants from disposing of the HMI shares; and a disclosure order requiring the Defendants to disclose the whereabouts of the HMI shares and proceeds of sale.

13. On 12 August 2015, D2 issued a notice of default and termination to the plaintiff.

C.  PLAINTIFF’S CASE

14. According to Mr Lo (“the securities expert”) engaged by the plaintiff, based on public trading information, it was extremely likely that about 30,000,000 Bayspring HMI shares were transferred to SCB which held the III Dune HMI shares, on about 7 August 2015.  There was reason to believe that D1/Delton had assisted D2 to “replenish” the shares wrongfully transferred, and to give the false impression that D2 had not been in breach of the III Dune Loan Agreement.  Although D2 claims that none of the III Dune HMI shares were sold, the plaintiff submitted that that was untruthful. 

15. It is the plaintiff’s case that there was a close connection between D1, D2 and Delton.  D1 and D2’s unlawful dealings in the HMI shares were part of an orchestrated unlawful scheme which potentially involved other related entities like Delton, Makalu and BHP International Markets Ltd (“BHP”).  The plaintiff’s bases are as follows:

16. Firstly, D1 and D2 are inextricably linked. 

(a)  They share the same 3 directors (“the common directors”).

(b)  The common directors were involved in the loan transactions between the parties, from executing the various Agreements as D1’s directors to acknowledgement of receipt of documents in the present proceedings on behalf of both Defendants.

(c)  The Bayspring Loan Agreement was virtually identical in content to the III Dune Loan Agreement.  Both Defendants were incorporated in the Bahamas, had the same address for service and used the same corporate service providers.  These were all admitted by Mr Greenspoon (D2’s General Counsel). Given his position, he must have clear knowledge of the relationship between D1 and D2 and the existence of the Bayspring Loan Agreement. 

(d)  D2 was keen to distance its relationship with D1.  The late affirmation of Mr Rieden (of D2) maintained that it had no relationship with D1 and that the common directors were just nominees. It was clearly contrary to the objective circumstances – that D2 wanted the outside world to believe that the nominees were real directors. 

17. Secondly, D1 and D2 were closely connected to Delton and Makalu. The circumstances spoke of collusion amongst these entities with a view to transferring away the HMI shares. 

(a)  D1 and Delton entered intoan agreement on the same date on which D2 and Deltonentered into their first agreement.

(b)  D2 has withheld disclosure of its agreement with Delton from the plaintiff, whereas Delton has only selectively disclosed (through Deacons’ letter dated 21 August 2015) its agreement with Bayspring to the plaintiff.

(c)  The Agreement between Bayspring and Delton contained provisions which suggested that it was not in substance an arms-length loan and securities pledge agreement.  The “loan” had an unusually short duration of less than 1 month and was interest free.  The Agreement purportedly granted Delton the right to dispose of the HMI shares by sale and enforce the rights to the shares as absolute owner, irrespective of any event of default(Cl. 1.2(b)). 

(d)  The Agreement between Bayspring and Delton mentioned the Bayspring Loan Agreement and Control Agreement, and pledge of shares by the plaintiff to D1.  Delton should have been aware that D1 had no right to sell.

(e)  Delton was to hold the purportedly pledged HMI shares in the same account used by D2 to hold the Bayspring HMI shares.

(f)   Further, Delton had purportedly entered into an Assignment with Makalu with respect to the III Dune pledged shares.  The Assignment was agreed to by D2.  D2 has withheld disclosure of this Assignment despite the plaintiff’s request for a copy.

18. Thirdly, D1 and D2 have been closely associated with BHP, an entity that unlawfully dealt with pledged shares of a number of listed companies. BHP had at least been involved in 4 sets of proceedings in Hong Kong where similar reliefs were sought against BHP.  See eg Wason Holdings Ltd & ors v BHP Intl Markets Limited, HCA 1692/2014, 20 March 2015.  BHP was also the subject of allegations of fraud in relation to shares of a Singapore listed company pledged to it.  BHP has the common directors and the same registered office as D1 and D2.  Mr Greenspoon has not denied D2 or his own association with BHP. 

D.  CONTINUATION OF THE INJUNCTION ORDER

19. The applicable legal principles are not in dispute.  Under s.45(2) of the Arbitration Ordinance, Cap 609, the court may grant an interim measure in aid of arbitral proceedings outside Hong Kong. 

20. The court has to consider whether there is a serious issue to be tried; whether damages would be an adequate remedy and if not, where the balance of convenience lies.

21. In the context of showing a serious issue to be tried, “it is irrelevant whether the court thinks that the plaintiff’s chances of success in establishing liability are 90% or 20%”: AXA China Region Insurance Co Ltd v Pacific Century Insurance Co Ltd [2003] 3 HKC 1, at §24, DHCJ To (as he then was).  The test is not “a very steep hurdle”: Re Full Billion Shipping Ltd [2003] 2 HKLRD 674,at §28, Chu J.

22. At the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose or the party who has been refused one, may win.  The court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041, at §12(d), Ma J (as he then was).

E.  SERIOUS ISSUES TO BE TRIED

E1.  Nature of the Loan Agreements

23. The nature of the plaintiff’s share pledge to D2 is:

(a)  As contended by the plaintiff: security interest, so that the giver retains the equity of redemption and proprietary rights; or

(b)  As contended by D2: under a title transfer collateral agreement, so that the collateral giver disposes of the entire interest in the shares, retains no property right and can only enforce a personal obligation against the collateral taker to return the equivalent security upon discharge of the collateralized obligation.  See Benjamin, Financial Law, (2007 ed) §13.03.

24. Mr Beresford accepts that there is a serious issue to be tried on whether the III Dune Loan Agreement constituted an equitable mortgage or equitable charge.

25. The mortgagor’s right to redeem is an equitable estate which is an inseparable incident of a mortgage: Common Luck Investment Ltd v Cheung Kam Chuen (1999) 2 HKCFAR 229, at 235E-F.  It exists from the outset of a mortgage, and such proprietary interest “pre-dates the contractual redemption date”: see Fisher and Lightwood’s Law of Mortgage (14^th ed), §47.2. 

26. This right remains exercisable even after default and after the mortgagee has possession of the mortgaged assets: Bridge, M, et al, The Law of Personal Property, §§7-054–7-056.

27. The right cannot be taken away even by express agreement of the parties: Common Luck, at 235C & E.

“Any provision inserted to prevent redemption on payment on performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption, and is therefore void.”

28. I find there to be a serious issue to be tried on the nature of the plaintiff’s pledge of the HMI shares. 

E2.  Serious issues to be tried as against D1

29. D1 has not filed any evidence in opposition to the plaintiff’s applications.  There are the clearly serious issues to be tried as against D1 on breach of contract in selling the Bayspring HMI shares in the absence of an event of default.  The sale proceeds now in an account with the Deutsche Bank gives rise to constructive trust and hence a proprietary claim: Wason Holdings, §39, Chow J. 

30. By reason of the nature of the share pledge, the plaintiff has a right to redeem the HMI shares.  In entering into the Agreement permitting Delton to dispose of the Bayspring HMI shares and/or to enforce the Bayspring HMI shares as absolute owner, D1 had breached the Bayspring Loan Agreement.  Any provision in the Bayspring-Delton Agreement purporting to prevent the plaintiff from redeeming the shares is clog on the equity of redemption and is thus void.

31. D1 had conspired with D2, Delton and/or Makalu to take a series of actions which infringed the plaintiff’s right of redemption of the HMI shares, breached the Bayspring Loan Agreement or III Dune Loan Agreement and converted the plaintiff’s HMI shares.  Such acts caused injury to the plaintiff.  These are serious issues to be tried.

32. The plaintiff has accepted D1’s repudiation and terminated the Bayspring Loan Agreement in writing on 3 September 2015.

E3.  Serious issues to be tried against D2

33. With regard the III Dune unpledged shares, no loan had been advanced in respect of them.  The mortgage is of no effect: Fisher and Lightwood’s Law of Mortgage (14^th ed), §1.3 & fn. 3.  Alternatively, there was total failure of consideration on the part of D2: Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, at §§74-80.

34. In any case, even if the III Dune unpledged shares did form security under the III Dune Loan Agreement, that Agreement had been terminated in writing on 20 August 2015.  The security ought to be returned to the plaintiff.

35. With regard to the III Dune pledged shares, the serious issues to be tried as against D1 equally apply to D2.   

E4.  Defences of D2

36. D2 raises the following defences to the claim:

(1)   the unpledged shares defence;

(2)   the hedging defence;

(3)   the waiver defence;

(4)   the no conversion defence;

(5)   the eod defence;

(6)   the conspiracy defence.

37. In addition, D2 says that the plaintiff was guilty of material non-disclosure at the ex parte stage.

38. In respect of the unpledged shares defence, Mr Beresford submits that all III Dune HMI shares, including the unpledged shares, have been pledged to D2 as general continuing security for satisfaction of the amount owed: clause 2.2(a) of the III Dune Loan Agreement.

39. However, he could not explain why, if his proposition is correct, the III Dune Loan Agreement had to make a distinction between “Listco shares” (as meaning all the HMI shares), and “pledged securities”.  Apparently, the parties’ intention was that shares deposited with D2 would only become pledged upon advance of a tranche of the loan.  Therefore, on a proper interpretation of clause 2.2, the unpledged shares defence is quite unsustainable.

40. In respect of the hedging defence, Mr Beresford submits that the word “hedge” in clause 2.3(b) of the III Dune Loan Agreement should be construed as including the right to “pledge” or “hypothecate”.  Accordingly, D2 was not in breach of the III Dune Loan Agreement when it sub-pledged the III Dune pledged shares to Delton or Makalu.

41. In my view, the correct interpretation of the word “hedge” forms a serious issue to be tried.  However, regardless of the meaning of “hedge” and whether an event of default had occurred, clause 2.3(b) of the III Dune Loan Agreement clearly provides that D2 should have “full control” of the pledged shares.  There is a serious issue to be tried as to whether D2 was still in full control of those shares if there had been a sale or sub-pledge to Delton or Makalu. 

42. Mr Beresford objects to the evidence from the securities expert on the ground that the plaintiff has adduced expert evidence without leave, nor is Mr Lo’s opinion a matter legitimately the subject of opinion and within the expertise of the witness: Fu Kor Kuen Patrick & anor v HKSAR [2012] 5 HKC 189 at para 48.

43. With respect, this is an interlocutory application and no expert directions are required.  Even if expert evidence is inadmissible, I see no reason why the court cannot take into account the publicly available information adduced through Mr Lo in coming to a view on whether there had been a sale. 

44. Mr Beresford then submits that the III Dune Loan Agreement being a title transfer collateral, D2 is only obliged to re-deliver equivalent shares: clause 3.2(a).  There is no equity of redemption.  It is a personal obligation and does not give rise to a right which attaches to the collateral assets.  The plaintiff has never sought to redeem the HMI shares.  It only offered to repay the principal but not the whole of the obligations under the III Dune Loan Agreement.  No equity of redemption could arise prior to the maturity date of 24 June 2018.

45. To these defences, I repeat paragraphs 25-26 above.  There can be no clog to the plaintiff’s equity of redemption unless there was foreclosure or sale of the HMI shares.  Such equity pre-dates the redemption date.  That the plaintiff has not sought to redeem the shares does not undermine its proprietary claim. In any case, the plaintiff is ready and willing to repay the loan in exchange for the HMI shares.  There was no foreclosure and the sale was unlawful.  

46. Next, Mr Beresford submits that even if the issue of construction of the word “hedge” was resolved in favour of the plaintiff, there would remain the issue of authorization under the Control Agreement.  Again, this is a serious issue to be tried as to whether that authorization could be validly given.

47. In respect of the waiver defence, D2 relies on emails dated 15 and 22 July 2015 to allege that the plaintiff was notified of D2’s sub-pledging to Delton/Makalu and that the plaintiff had waived its objection to such arrangement.

48. Those emails only mentioned that Beaufort had hypothecated the HMI shares without reference to sub-pledging to a third party.  The plaintiff’s understanding that it meant a pledge by the plaintiff to D2 instead of a pledge to a third party was not an incredible explanation.  The effect of these emails clearly forms a serious issue to be tried.

49. D2 further relies on an email sent by Mr Greenspoon to Mr Chen dated 28 July 2015 to suggest that the plaintiff was deemed to be informed of D2’s sub-pledging or sub-mortgaging.  However, there is clearly an issue as to whether or not this email from Mr Greenspoon, and the one actually received by the plaintiff had been tempered with. 

50. The waiver defence is clearly an issue to be tried.

51. With regard to the no conversion defence, Mr Beresford submits that an injunction does not lie to restrain transfers that have already taken place.  The plaintiff has no immediate right to possession of any relevant HMI share certificate or chattel.  There is no cause of action for conversion of a chose in action: OBG Ltd & anor v Allan & ors [2008] 1 AC 1, §271, Lord Walker; §321, Lord Brown.

52. This is a triable defence, in my view.

53. In respect of the eod defence, D2 asserts that there had been the following events of default:

(a)  Failure of the plaintiff to notify D2 of the Bayspring Loan Agreement, in breach of clause 4.2(h) of the III Dune Loan Agreement;

(b)  The plaintiff had knowledge of material insider information, namely profit warning of HMI, in breach of clause 4.1(1);

(c)  Share price default in breach of clause 6.1(d);

(d)  Interference with the pledged shares (in the sense of obtaining the Injunction Order) in breach of clause 6.1(q).

54. On item (a), as D1 and D2 were controlled by the common directors, there is a serious issue to be tried as to whether D2 had actual, constructive or imputed knowledge of the prior Bayspring Loan Agreement at the time the III Dune Loan Agreement was entered into.

55. On item (b), the relevant profit warning was about HMI, not the plaintiff. There was no basis to suggest that the plaintiff knew of the same at any time earlier than it was announced on 28 July 2015.  In any case, the plaintiff would be prohibited by the Listing Rules from disclosing the same to D2.

56. Further, in the email of Mr Greenspoon to Mr Chen on the following day, D2 had not sought to terminate the III Dune Loan Agreement despite noting such profit warning announcement.  Accordingly, it is arguable that D2 had waived the alleged breach of the plaintiff.

57. On item (c), the closing price of HMI shares dropped more than 25% from the collateral share price, thereby constituted a share price default.  It was never cured by 10 August 2015. 

58. There is no dispute that D1 had sold Bayspring HMI shares since 15/7/2015.  D1 and D2 had common directors.  There is a serious issues to be tried as to whether the Defendants had acted in concert so that D2 (through D1) brought down the share price to enable D2 to trigger the share price default provisions. 

59. Further, D2’s sale of part of the III Dune pledged shares since 20 July 2015 was before the alleged share price default on 10 August 2015.  Such sales in breach of contract would have the effect of suppressing the HMI share price as well.  There is a serious issues to be tried as to whether or not D2 should be allowed to take advantage of its own wrong: Kensland Realty Ltd v Whale View Investment Ltd & anor [2002] 1 HKLRD 87, at 115E-122E.

60. On item (d), Mr Beresford submits that the Injunction Order would prevent D2 from discharging Makalu’s interest in the HMI shares and thus from redelivering the HMI shares to the plaintiff unencumbered.

61. With respect, the plaintiff plainly has a legal right to seek redress in court.  D2 cannot be heard to complain about any alleged “interference” by the plaintiff, when it was D2’s own breach of contract that caused the plaintiff to institute proceedings.

62. In any case, as a general answer to the eod defence, the equity of redemption applies even if the plaintiff was in default: paragraph 26 above.

63. With regard to the conspiracy defence, a pleading must set out:

(a)  The agreement between two or more persons and the means of carrying out the agreement, whether lawful or unlawful;

(b)  The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy);

(c)  The acts that were carried out pursuant to the agreement and the stated intention;

(d)  The damage caused to the plaintiff.

Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, §17.

64. Mr Beresford criticizes the plaintiff for founding its ex parte application on a cause in conspiracy, relying on the “suspicious behaviour of D2” and “the suspicious nature of the Defendants” but without evidence of an intention to injure.  Looking at the similar terms of the Bayspring Loan Agreement and III Dune Loan Agreement, the disposal of shares in breach of those Loan Agreements, and the close relationship between the Defendants, although the pleadings/affirmations may not be perfect, there is a serious issue to be tried on conspiracy.  I am, however, content not to rest my decision on this tort.

E5.  Material Non-Disclosure

65. A plaintiff has the duty to make full and frank disclosure to the judge at the ex parte stage.  If there has been a breach of this duty, the general rule is that it should discharge the order obtained in breach. Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order: Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642, §§56-57.

66. However, the applicant at the ex parte stage “is not obliged to put before the Court every conceivable fact relevant to the action. He is only obliged to disclose facts ‘material for the judge to know in dealing with the application as made’ ”: Hung Ka Ho v Polytek Supply Ltd HCA 9946/1991 per DHCJ Tong QC at para 20.

67. What facts are material is determined by “whether the facts not disclosed, being relevant, should have been put in the scales by the ex parte judge”: Wilson International Trading Private Ltd v Rejesh Nambudumada Cariappa & ors HCA 1798/2010 at para 6, per DHCJ Mimmie Chan (as she then was).

68. In assessing the test of materiality the Court “must not be influenced by what has since been known subsequent to the ex parte application”. “Hindsight here is not necessarily a benefit”: Sino Wood Investment Ltd v Wong Kam Yin HCA307/2002 (unrep., 23 December 2002), §24, perDHCJ A Cheung (as he then was).

69. Mr Beresford alleges that there was material non-disclosure by the plaintiff in failing to draw to the ex parte judge’s attention:

(a)  The hypothecation notifications;

(b)  The events of default on the part of the plaintiff;

(c)  That the plaintiff got full value for the HMI shares from D2 whereas any sale on the market would immediately depress the share price;

(d)  The plaintiff’s relationship communications with Mr Vic Chan; and

(e)  The plaintiff’s relationship with TDC.

E5.1  The hypothecation notifications

70. I repeat the analyses in respect of the waiver defence in paragraphs 47-50 above.  Given the plaintiff’s explanation, the waiver defence could not have been anticipated as material at the ex parte stage. There could not be any complaint of delay in seeking injunctive relief.

E5.2  Failure to disclose events of default on the part of the plaintiff

71. I repeat my analyses under the eod defence in paragraphs 53-62 above. 

72. Moreover, D2’s notice to the plaintiff of the termination of the III Dune Loan Agreement based on events of default only came 6 days after the grant of the Injunction Order.  The plaintiff could not have anticipated the eod defence at the ex parte stage.  The alleged events of defaults are hotly disputed anyway.

E5.3  Failure to disclose that the plaintiff got full value for the HMI shares from D2 whereas sale on the market would immediately depress the share price

73. Mr Beresford submits that the plaintiff ought to have disclosed to the ex parte judge that its use of the HMI shares as collateral for loans would be a better way of “monetising” the plaintiff’s stake in HMI than selling the shares.  This was because the plaintiff could get full value for the shares from D2 whereas any sale on the market would immediately depress the share price.  D2 was an innocent victim and was left to hold rapidly declining collateral with exposure to risk of further decline.

74. However, as pointed out by Mr Wong SC, the plaintiff has made known to the ex parte judge the full terms and provisions of the III Dune Loan Agreement and all payments which it had received from D2 thereunder.  The plaintiff had also expressed concern that the sale or disposal of the HMI shares by D2 could give rise to a fall in HMI share price. 

75. The plaintiff had in fact all along intended to use the shares as securities rather than to sell them.  There is a serious issue to be tried as to the nature of the III Dune Loan Agreement.  There was no material fact withheld from the ex parte judge. 

E5.4  Failure to disclose the plaintiff’s relationship with Mr Chen

76. Mr Chen (or Mr Vic Chan) was referred to by the plaintiff as an intermediary through whom the plaintiff negotiated the loans and Mr Chen had signed as solicitor for the plaintiff.  However, in Li-2^nd filed on behalf of the plaintiff, the plaintiff said that although Mr Chen held himself out as a solicitor for the plaintiff, he was neither an employee nor a legal adviser.

77. Mr Beresford submits that the plaintiff was purporting to distance itself from everything D2 told or heard from Mr Chen and that was unbelievable.

78. As pointed out by Mr Wong SC, it was never the plaintiff’s position before the ex parte judge that Mr Chen was an employee or legal adviser of the plaintiff.  Rather, the evidence in Li-2^nd was in response to D2’s affirmation.  Mr Beresford has not explained how this evidence on Mr Chen’s status could have affected the ex parte judge’s decision.  Whether the plaintiff’s position was unbelievable is a matter for trial.  There was no material non-disclosure.

E5.5  Failure to disclose the plaintiff’s relationship with TDC

79. The plaintiff disclosed that it had entered into 2 agreements with TDC for consultancy services in which the plaintiff was described as “principal” and TDC as “solution provider”.  The plaintiff agreed to engage TDC to provide unspecified offshore services at substantial fees.

80. Mr Beresford submits that it is surprising that the plaintiff contends that it treated TDC as the agent of the defendants; and that the plaintiff could not be taken to know what was known to Mr Chen to whom it had entrusted its negotiations.  Mr Beresford submits that such contentions had no evidential bases and could not properly found an injunction against D2.

81. With respect, Mr Beresford’s submission simply fails to identify what material facts the plaintiff had failed disclosed to the ex parte judge and how it might have affected his weighing exercise.

82. Overall, I am not satisfied that there had been material non-disclosure. In any case, the plaintiff has a strong case on the merits against D2.  The alleged non-disclosure would not have prevented the court from regranting the Injunction Order.

83. In summary, I find there to be serious issues to be tried on the nature of the III Dune Loan Agreement, whether D2 had acted in breach of contract, whether there was a constructive trust over the sale proceeds and conspiracy. There are defences raised which need to be investigated.  There was no material non-disclosure before the ex parte judge.

F.  BALANCE OF CONVENIENCE

84. The plaintiff has a proprietary claim over the HMI shares and any sale proceeds.  It can trace into other assets held by the Defendants as representing the proceeds of sale.  This is a significant factor in favour of the continuation of the Injunction Order: Wason Holdings, §39.  

85. In respect of the III Dune unpledged shares, D2 does not even appear to have a defence. 

86. For the cause of action in breach of contract, damages may be adequate remedy.  The shares are publicly traded on the Hong Kong Stock Exchange and there would be no difficulty in getting replacement shares or assessing the plaintiff’s loss.  However, it is arguable that further unlawful disposal of the plaintiff’s HMI shares would adversely affect the plaintiff’s controlling interest in HMI, in which case, damages may not be an adequate remedy. 

87. Mr Greenspoon tried to distance D1 and D2 despite evidence of their close connection and/or collusion between them.  There was selective disclosure by D2 of its dealings in the III Dune HMI shares despite the disclosure order. Despite the plaintiff’s assertion as to share movements, D2 has only given a bare statement that the shares are still with Beaufort.  D2 did not disclose its agreement with Delton.  There is clear risk that the HMI shares and the sale proceeds would be dissipated in the absence of an injunction order.

88. I am aware that the present application is not for a Mareva injunction.  Proof of risk of dissipation of assets in not essential.  However, the existence of such risk is clearly a factor that weighs heavily in favour of the plaintiff.

89. The Defendants do not appear to have substantial assets in Hong Kong. There is plainly a risk that they may not be able to satisfy any monetary award that the plaintiff may obtain in the arbitration against them: Wason Holdings, §38.

90. On the other hand, Mr Beresford submits that damages under the cross-undertaking would not be an adequate remedy for D2 because of the likely claims from Beaufort or Makalu.  It may also suffer damage to reputation and relationships with counterparties which may be hard to quantify.  A total of 62,035,733 HMI shares had already been hypothecated and most of the proceeds have been paid to the plaintiff in the form of a loan.  The 90,000,000 HMI shares frozen by the Injunction Order are not sufficient to cover D2’s loss given the steady fall in trading price and profits of HMI shares.  The Injunction Order will deprive D2 of the opportunity of promptly taking action to protect itself against loss arising from the plaintiff’s breaches. 

91. In my view, the HMI shares were provided as security for the loans advanced by D2 to the plaintiff.  The Injunction Order merely continues the status quo pending the arbitration.  Damages will be an adequate remedy to D2, especially since the plaintiff is willing and able to repay and has offered to repay the loans to the Defendants in exchange for the HMI shares.  Accordingly, the balance of convenience is in favour of the continuation of the Injunction Order and would carry the lowest risk of injustice: Music Advance §12(d).

92. Mr Beresford submits that where D2 has transferred the HMI shares to a third party, the relief claimed against D2 can be no more than a declaration and an injunction against interference with the plaintiff’s assets. Ultimately, the proprietary right must be enforced against the person in possession of the HMI shares, ie Makalu.  He relies on Republic of Haiti & ors v Duvalier & ors [1990] 1 QB 202, 213H-214C.

93. It is D2’s case that there was no sale but only sub-pledging, D2 would have retained some rights in the HMI shares.  Accordingly, I agree with Mr Wong SC that D2 still have rights on which the plaintiff could found a proprietary claim.

G.  FORTIFICATION OF THE CROSS-UNDERTAKING AS TO DAMAGES

94. A defendant seeking fortification of an undertaking must show a likelihood of a significant loss arising as a result of the injunction and a sound basis for belief that the undertaking will be insufficient (ie the plaintiff would be unable to make good the loss).  Although the loss itself, and its quantification, will lie in the future, the court is nonetheless required to make an intelligent estimate of the likely amount of the loss that would be caused by grant of the injunction.  Hong Kong Civil Procedure 2015, §29/1/24.

95. As to causation, it is sufficient for the court to be satisfied that the making of the injunction was a cause without which the relevant loss would not have been suffered: Energy Venture Partners Ltd v Malabu Oil and Gas Ltd, [2015] 1 WLR 2309, §54.

96. The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification and there is no obligation on a plaintiff to give full and frank disclosure of financial circumstances to oppose an order for fortification (or to argue for a lesser amount): Hui Chi Ming v Koon Wing Yee & ors [2011] 2 HKC 185, §§44-45.

97. Usually, merits of the parties' case are not a necessary consideration. However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant: Felix Tschudi v Million Miles Global Ltd, HCA 318/2013, 12 February 2014, at §26, To J.

98. D2 seeks fortification in the amount of US$19.4 million (excluding interest).  It is said to be made up of sums relating to the 2 tranches of the loan together with default interest and exit fees.  However, despite demands, D2 has refused to disclose the underlying documents regarding its dealings with Delton and Makalu.  Accordingly, there is simply no basis to estimate D2’s likely loss. 

99. Leaving aside the HMI shares deposited with D2, the plaintiff still remains the owner of 962,520,000 HMI shares, representing 63.83% shareholding in HMI.  Based on the closing price of the HMI shares of HK$1.93 per share as of 2 September 2015, this amounts to an aggregate value of HK$1,857,663,600. The loan owed to D2 is only US$7.8 million.  Even accepting that the HMI shares were thinly traded and the share price has been falling dramatically, there is no basis to assert that the plaintiff will be unable to honour its undertaking as to damages.

100. There was mention in Li-1^st, §75, about possible suspension of trading in HMI shares as a result of the plaintiff giving formal notice to HMI of the Injunction Order.  However, by the time of this hearing, there is nothing to show that such suspension had taken place.

101. In the premises, I decline to make an order for fortification.

H.  DISCLOSURE OF BANKERS’ RECORDS

H1.  Legal principles

102. On the application of any party to any proceedings, the court or a judge may order that such party be at liberty to inspect and take copies of any entries in a banker’s record for any of the purposes of such proceedings: s.21 of the Evidence Ordinance (“EO”), Cap 8.

103. The “proceedings” means proceedings in Hong Kong: Beyonics Technology Ltd & anor v Goh Chan Peng & ors, CACV 244/2014, 12 August 2015, Chu and Barma JJA, at §50.

104. “Banker’s record” includes any document or record used in the ordinary business of a bank: s.21 EO.

105. If the case involves a proprietary claim where the plaintiff seeks to trace property which in equity belongs to him, the court has jurisdiction to ‘make orders designed to ascertain the whereabouts of that property.  In particular, it may order a third-party bank to give discovery of documents in relation to the bank account of a defendant who is alleged to have defrauded the plaintiff of his assets: Pacific King Shipping Holdings Pte Ltd v Huang Ziqiang [2015] 1 HKLRD 830 (CA) at §29.

106. Following CTO(HK) Ltd v Li Man Chiu & ors [2002] 2 HKLRD 875, at §13, the Court of Appeal held that there are 3 limits to the court’s jurisdiction:

“First, the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim.”

“Second, the jurisdiction is more restricted than a request to a party for general discovery on an issue. When documents are required to be disclosed, the third party should be entitled to the same specificity in the documents he is asked to produce as he would be served with a subpoena.”

“Third, even if the application is prima facie falling with the Bankers Trust principle, the court needs to balance the potential advantage against the detriment to the person against whom the order is sought, not merely in terms of costs (for which he is ordinarily compensated on an indemnity basis by the terms of the order) but by way of invasion of privacy and requiring breach of obligations of confidence to others.”

107. If there is no proprietary claim, the court will not permit s.21EO to be used for a fishing expedition: Pacific King, §37.

108. The jurisdiction to make a disclosure order against bankers, extends to injunctions in aid of foreign proceedings: Beyonics, §56.

H2.  Application of the legal principles

109. The plaintiff seeks an order for disclosure of records kept by Deutsche Bank, Standard Chartered, and JP Morgan.  It meets the 3 limits to jurisdiction:

(a)  1^st limit: It is likely that there had been transfers of the HMI shares in and out of the SCB, Deutsche Bank and JP Morgan.  Share reductions from JP Morgan represented unlawful sales of the HMI shares deposited by the plaintiff.  The bankers’ records sought will thus lead to location or preservation of the III Dune HMI shares and any proceeds, the subject of the plaintiff’s proprietary claim. Regardless of form (ie CCASS shares or physical share certificates), there cannot be any doubt that the subject matter of the s.21 application is shares held in custodian accounts of SCB and its sub-custodians.  SCB is closely connected with D2 and the evidence obtained from SCB can be used against D2: Chan Wai Sun & anorv Law Shiu Kai [2003] 3 HKLRD 954, §9.

(b)  2^nd limit: The scope of disclosure is not vaguely for “bankers’ records” but is restricted to specific bank accounts and for a limited period from the time the HMI shares were deposited into the banks to the date of service of the court order.  There cannot be any complaint that it is a fishing expedition.

(c)  3^rd limit: For a proprietary / tracing claim, it has been recognised that the plaintiff is entitled to “lift the latch of the banker’s door”, and D2 cannot “bolt the door against him”: see Banco Ambrosiano Andino SA v Banque Nationale De Paris &anor [1985] HKLR 72, at 74D-E.  This is particularly so where the court has found that the balance of convenience is in favour of the grant of an injunction.

H3.  Grounds in opposition

110. Mr Beresford opposes the s.21 application on the following grounds:

(a)  That approval of the arbitrators ought to be first obtained;

(b)  That the arbitration proceedings are to take place outside Hong Kong and this application is not for a Mareva injunction;

(c)  This application fails to satisfy the 3 requirements for relief under Pacific King and the CTO case;

(d)  This application is too wide and is a fishing expedition; and

(e)  There will be serious and irreparable damage to D2 in the arbitration.

111. With regard to (a), the jurisdiction is discretionary and the question of whether approval of the arbitrators ought first to be obtained is an important factor which the court takes into account: The Lady Muriel [1995] 2 HKC 320, 324F-G, 325I, 326C-E.  However, with respect to Mr Beresford, that was the position before the Civil Justice Reform in 2009.  The principles currently applicable are those set out in section H1.

112. In any case, the Lady Muriel is distinguishable on the facts. There, the arbitrator had been appointed.  Here, the plaintiff had just issued a notice of arbitration, and no arbitrator has been appointed at the time of this application.  The court clearly has jurisdiction to entertain the application.

113. With regard to (b), the court has power to make such order in aid of proceedings outside Hong Kong: paragraph 108 above.

114. With regard to (c), Mr Beresford, submits that the HMI shares are CCASS shares.  SCB is a CCASS participant and has been appointed sub-custodian by State Street.  SCB’s books can only be expected to show what it holds for State Street.  Beaufort’s interest ought to be reflected in the books of the State Sreet (account of Cortland Capital, FBO Beaufort), not SCB.  According to Beaufort, State Street’s records indicated that it holds 100,000,000 HMI shares for Beaufort.  That exceeds the 90,000,000 deposited with Beaufort by the plaintiff. The fact that SCB’s holding may have fallen below the number of 90,000,000 does not imply that State Street’s holding fell below 90,000,000 as State Street may use more than one sub-custodian.  Moreover, State Street holds the shares for Beaufort and not the plaintiff.  It is Beaufort’s and not SCB’s books that the plaintiff’s interests are to be found.  It follows, so Mr Beresford submits, that the plaintiff cannot demonstrate any prospect that the information sought under s.21 may lead to the location or preservation of assets to which the plaintiff is making a proprietary claim. 

115. I repeat the analyses under paragraph 93.  I also agree with Mr Wong SC that it is irrelevant whether State Street (as custodian bank) used more than one sub-custodian bank (other than SCB).  If it is the case that the HMI shares entrusted to eg SCB under the 2 Loan Agreements have left SCB’s account, that can be stated by SCB.  The banker’s records from SCB would assist in the tracing of the III Dune pledged shares which have been or are being held by sub-custodians down the line. As such, it would lead to locating the HMI shares and the sale proceeds.

116. With regard to (d), Mr Beresford submits that the order sought is aimed at finding out if the plaintiff’s “suspicions” are well-founded and not to support allegations.  I do not agree, having regard to my findings that there are serious issues to be tried on various causes of action.

117. With regard to (e), Mr Beresford submits that the court still retains discretion not to grant the order because of the serious and irreparable damage to the position of the applicant in the arbitration.  There is a heavy burden which the plaintiff cannot discharge: The Lady Muriel, at 326B.

118. The bankers’ records sought are for the limited purpose of the proceedings against D2 in Hong Kong and elsewhere, but not otherwise.  In any event, the law imposes an implied undertaking that the bankers’ records sought under S.21 EO would not be used save for the proceedings in question: Bhimji & ors v Chatwani & ors (No.2) [1992] WLR 1158, at 1164G-H.

119. I am not satisfied that any of the grounds in opposition should bar the plaintiff from relief under s.21 EO. 

120. The plaintiff has obtained a disclosure order against the defendants, but was met with selective and incomplete disclosure.  D1 only provided a letter via its solicitors dated 21 August 2015 purporting to explain the daily sale of HMI shares during 2 July 2015 to 6 August 2015.  It was in breach of the disclosure order, in being late and not by way of affirmation.  It did not disclose any detail of the sales or the contact details of parties holding or controlling the HMI shares.

121. D2 purportedly complied with the disclosure order by serving Greenspoon-1^st dated 13 August 2015.  However, that affirmation was not supported by relevant exhibits.  Despite the requests of P’s solicitors after the Injunction Order, D2 has failed (a) to provide the documentation regarding its Agreement with Delton, and the Assignment to Makalu; and (b) to clarify the physical whereabouts of the 90,000,000 HMI shares which were said to “all remain in the Beaufort Account”.  The plaintiff has already demonstrated through the securities expert that (b) might not be true.

122. The defendants cannot be relied on to give proper disclosure as to the whereabouts of the HMI shares and the proceeds of sale. 

123. The potential advantage to be gained from a s.21 EO order would far outweigh any detriment that the Defendants may suffer in terms of invasion of privacy or breach of obligations of confidence to D1 or D2 who have acted in blatant disregard of the plaintiff’s proprietary and contractual rights.

124. The fact that there is evidence of the mixing of the HMI shares and the sale proceeds thereof provides “all the more reason” why this Court should allow disclosure be made, such that the plaintiff could trace its assets effectively upon its ultimate success in the arbitration: Wason Holdings Ltd, §63.

125. In summary, the bankers’ records sought against Deutsche Bank, SCB and JP Morgan are specific, limited in time and restricted to no more than are necessary and relevant to the present dispute.  The request is not a fishing expedition.  An order as sought under s.21 EO should be made.

J.  CONCLUSION

126. I order as follows:

(1)  In respect of the plaintiff’s summons dated 7 August 2015:

(a)  there be continuation of the Injunction Order until further order;

(b)  there be an order nisi that there be costs to the plaintiff in the cause of the Originating Summons.

(2)  In respect of the plaintiff’s summons dated 12 August 2015 under s.21 EO:

(a)  there be an order in terms;

(b)  costs of each bank in complying with the order be borne, in the first instance, by the plaintiff;

(c)   costs, inter partes, shall be reserved to the trial judge.

(3)  In respect of D2’s summons dated 13 August 2015:

(a)  The application for discharge of the Injunction Order be discharged; costs, on a nisi basis be the plaintiff’s costs in the cause of the Originating Summons;

(b)  The application for fortification of the undertaking in damages be dismissed; costs, on a nisi basis be to the plaintiff, to be taxed if not agreed, upon disposal of the Originating Summons.

127. I thank counsel for their able assistance.