XCHRX PECONIC INDUSTRIAL DEVELOPMENT LTD. v. CHIO HO-CHEONG AND OTHERS

HCA 16255/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16255 OF 1999

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R U L I N G

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1. Before the court are applications by the Plaintiff to continue the Mareva injunction against the 2nd, 4th and 5th Defendants first granted by Stone J on 13 November 1999 and continued by the orders of Yeung J on 15 October and 5 November 1999 and an application by the 4th Defendant to discharge the injunction.

2. In accordance with directions given by Yeung J on 5 November 1999 submissions in relation to the 4th Defendant were heard on 8 March 2000 and in relation to the 2nd and 5th Defendants on 9 March 2000.

3. Since these applications have a common background I am making my rulings together.

4. The principal issues in so far as the applications by the Plaintiff to continue the injunctions are concerned have been in each case:

(1) whether the Plaintiff has a good arguable case against that particular Defendant and

(2) whether there is a real risk of dissipation of assets so that a judgment in favour of the Plaintiff against that Defendant would remain unsatisfied.

In so far as the 2nd and 5th Defendants are concerned submissions have been made on their behalf that there is no undertaking by the Plaintiff to pay damages for any loss they may suffer as a result of the injunction.

5. In so far as the 4th Defendant is concerned submissions have been made on her behalf that the injunction against her should be discharged because of material non-disclosure by the Plaintiff when applying for the injunction before Stone J.

The Background

6. The background to this case is the setting up of the Plaintiff company pursuant to a joint venture between the 1st Defendant and the Guangdong branch and Foshan sub-branch of the Agricultural Bank of China to purchase parcels of land in Mai Po and develop them as a villa development or as a golf course. It is alleged that this joint venture was instigated by the 1st Defendant as a result of false representations to his joint venture partners in particular as to the ownership of the land in question as well as its development potential. It is further alleged that, in breach of his fiduciary duty to the Plaintiff as a director, he in complicity with his co-defendants used another recently incorporated company, Asiagreat Ltd, as a vehicle to buy up the properties in question and then cause Asiagreat Ltd to resell them as confirmor to the Plaintiff within a short period at grossly inflated prices.

"A good arguable case"

7. It has been the evidence of the involvement of the 2nd, 4th and 5th Defendants with the activities of Asiagreat Ltd that has been the subject of submissions as to whether the Plaintiff can show "a good arguable case" against each of them.

8. I have all along borne in mind that while a good arguable case is the minimum threshold which the Plaintiff must cross before the court will exercise its discretion to grant an injunction the ultimate test for the exercise of the court's jurisdiction is whether in all the circumstances of the case it appears to the court "to be just and convenient" to grant the application: per Mustill J in Ninemia Maritime Corporation v. Trave Schiffahts gesellschalft mbhund co KK ("the Niedersachsen") 1983 2 Lloyds LR 600 at 614.

9. The Defendants face criminal proceedings instituted by the ICAC in relation to their activities. Those proceedings have not reached the stage of committal. I am of course mindful of the fact that I must decide the applications before me on the basis of the evidence adduced in the current proceedings.

10. An issue which is relevant to the applications in respect of all 3 Defendants but which was only raised in the submissions made on behalf of the 2nd and 5th Defendants is the admissibility of certain parts of the affirmation of Huang Zhi Yong on behalf of the Plaintiff.

11. It is argued that while the court can act on the statement of Chen Jun Yi exhibited to that affirmation it cannot act on other "information and material" emanating from the ICAC contained in Huang's affirmation because it does not comply with O. 41 r. 5(2) Rules of the High Court which provides that

"an affidavit sworn for the purpose of being used in interlocutory proceedings may contain statements of information of belief with the sources and grounds thereof".

12. It is argued firstly that paragraph 18 of Huang's affirmation does not contain the information provided by the ICAC but rather the Plaintiff's understanding having perused the information and material supplied by the ICAC.

13. While I consider it important to distinguish between conclusions [such as paragraphs 18(1), (2) and (4)] and statements of information received from the ICAC and to disregard anything that may fall in the former category I do not consider that information which clearly falls within the latter category should be disregarded simply because Mr Huang has used the form of words that he has (i.e. "from the information and materials supplied by the ICAC, the Plaintiff understand that the case against the Defendants to be as follows"). It is clear that what he is recounting comes from what he and Mr Robert C C Ip were told and the documents they were shown on their visit to the ICAC. (see 3rd affirmation of Robert C C Ip of 8 March 2000).

14. It is further argued that even though the information may have come to Huang from the ICAC the original source is not identified. In many cases however it is possible to infer the sources of information. It is apparent for instance that the ICAC is in possession of the declarations of trust referred to in paragraph 18(3) of Mr Huang's affirmation and documents relating to the Defendants' bank accounts (see paragraph 4 of Robert C C Ip's affirmation of 8 March 2000).

15. There is conflicting authority as to whether the original source of the information must be disclosed (see Savings and Investment Bank Ltd v. Gasco B.V. 1984 1 WLR 271 and Deutsche Ruckversicherung v. Walbrook Insurance 1995 1 WLR 1017).

16. Having considered the two cases I prefer the more recent decision of Phillips J in Deutsche Ruckversicherung v. Walbrook Insurance Co.. As Phillips J said (at page 1025) a Plaintiff may not in a situation of urgency have had time to identify or trace evidence which will be admissible at trial. He went on "If he has learned of facts via an intermediate source which there is good reason to believe will itself have had access to primary sources of information, I can see no reason for precluding the Plaintiff from relying upon that intermediate source as a ground for seeking interlocutory relief. Perhaps the most important form of interlocutory relief is the injunction. It seems to me that the power of the court to grant an interlocutory injunction is one that should be flexible and not fettered by the technical rules of admissibility of evidence that apply at a trial". In this case for instance it appears that the ICAC has refused to disclose the Defendants bank accounts (see para. 7 of Robert C C Ip's affirmation of 26 November 1999). It does not appear to me to be just that the Plaintiff should be precluded from relying on the information given to it by the ICAC as a result of the ICAC examining the bank accounts just because those representing the Plaintiff have not seen the documents themselves and are unable to identify the precise sources of particular information.

17. The Plaintiff's case against the Defendants at its highest is that they were parties to a conspiracy to defraud the Plaintiff. The conspiracy included the 1st and 4th Defendants and was to use Asiagreat Ltd as a vehicle to buy up properties and then cause Asiagreat Ltd to resell them as confirmor within a short period of time to the Plaintiff, of which the 1st Defendant was a director, at greatly inflated prices.

18. Even if it fails to establish the Defendants' involvement in such a conspiracy, the Plaintiff contends that the Defendants are personally liable to account as constructive trustees if they dishonestly assisted in a breach of fiduciary duty by the 1st Defendant either having suspicions that there may be some such dishonest breach which they unlawfully shut their eyes to (what Underhill refers to as "Nelsonian" knowledge) or wilfully or recklessly failing to make such enquiries as an honest or reasonable person would make (what Underhill refers to as "naughty" knowledge: see Underhill and Hayton "Law Relating to Trusts and Trustees" 15th ed page 410). The circumstances in which liability can arise under the latter head were explored by Mance LJ in the unreported case of Gropo Torras SA and another v. Sheik Fahad Mohammed Al-Sabah 1999 QBD.

19. As a background to examination of the case against each of the 3 Defendants to whom these applications relate I am satisfied that there is a strong arguable case against the 1st Defendant that in branch of his fiduciary duty as a director of the Plaintiff by fraudulent misrepresentations he induced the Plaintiff to buy the properties in question concealing his interest in Asiagreat Ltd which acted as confirmor thereby securing profits of over $364 million on the confirmor sales.

20. The evidence that he was interested in Asiagreat Ltd comes not merely from the fact that among those who were interested in Asiagreat were those related or closely associated with him but also from the evidence of the transfer of over $100 million of the deposits received from the Plaintiff by Asiagreat's solicitors in respect of the transactions to him personally (see paragraph 18 of Huang's affirmation and paragraph 5 of the affirmation of Leung Siu Hung dated 27 October 1999).

21. Against that background, I turn to the case against the 2nd, 4th and 5th Defendants individually.

The 2nd Defendant

22. Mr Allen Lam for the 2nd Defendant conceded that if I found paragraph 18 of Huang Zhi Yong's affirmation admissible then there was a good arguable case against her. I did find that paragraph admissible subject to disregarding what appeared possibly to be conclusions rather than statements of information.

23. I am satisfied that there is a good arguable case against the 2nd Defendant. There is evidence that she was the girlfriend of the 1st Defendant and involved in meetings when the joint venture was being discussed. These included accompanying the 1st Defendant and representatives of the potential partners in the joint venture to the site at Mai Po on two occasions. On one she pointed out the area of land to be brought. These also included a meeting at a restaurant in Wanchai with the representatives of potential joint venture partners when the project was discussed. She was the beneficial owner of the shares in Asiagreat Ltd upon its incorporation shortly before the transaction occurred. Nominees were put forward as shareholders which concealed her ownership. Her assistant, the 3rd Defendant became a director of Asiagreat Ltd. More than $45 million representing part of the deposit received from the Plaintiff by Asiagreat Ltd was channelled through her bank account (see paragraph 18(9) of Huang's affirmation). On this evidence alone, which is not all that disclosed on the evidence, I am satisfied there is a good arguable case against the 2nd Defendant.

The 4th Defendant

24. I am also satisfied that there is a good arguable case against the 4th Defendant. There is evidence that she was the 1st Defendant's sister-in-law and became a director of Asiagreat Ltd on its incorporation in July 1991 shortly before the first of the transaction. From all the circumstances including the fact that subsequently the shares in the company were assigned to her and the 5th Defendant (the 2nd Defendant's mother) upon their executing a deed of trust in favour of the 2nd Defendant (the 1st Defendant's girlfriend) a court might reasonably infer that the 4th Defendant's involvement in Asiagreat Ltd was procured by the 1st Defendant as a "front" to conceal who was exercising real control over the company. A court could also reasonably infer that this would have been apparent to the 4th Defendant.

25. The 4th Defendant subsequently signed a considerable number of legal documents, being either Head Agreements, Assignments of Head Agreements or Sub-sale Agreements relating to transactions which form the basis of the Plaintiff's case.

26. A court might reasonably infer that it would have been apparent to the 4th Defendant that these transactions involved enormous sums of money, that the sums of money Asiagreat Ltd were paying the vendor was a fraction of the price it was to receive from the Plaintiff and, significantly, that the person who had signed the document on behalf of the Plaintiff was the 1st Defendant, her brother-in-law. If the 1st and 4th Defendants did not sign the documents together, which appears to have been the case from the fact that different witnesses witnessed their signatures, then the transaction must have been completed by solicitors' undertaking which would have meant that the 1st Defendant's signature on behalf of the purchaser would have been on the document before the 4th Defendant signed it. This latter fact together with the other circumstances of the transaction could reasonably lead a court to infer the 4th Defendant at least wilfully or recklessly failed to make such enquiries an honest or reasonable person would make.

27. These other circumstances included the fact that the 4th Defendant open a bank account with OTB on 15 October 1991, the sole purpose of which appears to have been in relation to these transactions, into which the sum of $81,807,351.00 was received from Asiagreat's solicitor, being deposits received under sub-sale agreements between Asiagreat Ltd and the Plaintiff. Of that sum $81,265,000.00 was transferred by the 4th Defendant to the 1st Defendant and a sum of $500,000.00 was withdrawn by the 4th Defendant personally. In the absence of other evidence, a court might well infer that the $500,000.00 was a reward to the 4th Defendant either for her participation in the conspiracy or at least not asking any questions about highly questionable transactions, particularly as when she made her affirmation in compliance with the order of Stone J it could be inferred that she was less than frank, making no reference to this sum and the fact that, despite the terms of paragraph 2(1)(b) of Stone J's order and a reminder in a letter from the Plaintiff's solicitor that she received the sum, she has given no explanation as to the use and purpose to which that sum was put.

28. I find that the Plaintiff does have a good arguable case against the 4th Defendant.

The 5th Defendant

29. In so far as the 5th Defendant, the mother of the 2nd Defendant, is concerned the evidence is not as extensive in that there is no evidence that she was aware that the 1st Defendant, her daughter's boyfriend, was a director of the Plaintiff company.

30. Proof of knowledge of the existence of a fiduciary relationship or the facts giving rise to a fiduciary relationship is not however necessary to give rise to a liability on her part for "dishonest assistance" providing that four conditions are established: (i) a breach of trust or fiduciary duty by someone other than the Defendant (ii) in which the Defendant assisted (iii) dishonestly with (iv) resulting loss: see Gropo Torras v. Sheik Fahad Mahammed Al Sabah 1999 QBD. The Defendant's dishonesty must have been towards the Plaintiff in relation to property held on trust which in this case was a proceeds of sale of the property received from the Plaintiff.

31. There is ample evidence to satisfy requirements (i) and (iv). In so far as requirement (ii) is concerned there is evidence that the 5th Defendant assisted early on in the transactions by receiving sums totalling more than $55 million, the vast majority of which represented money received as a deposit by Asiagreat's solicitors from the Plaintiff, from the 2nd Defendant and then made various payments to Asiagreat's solicitors to enable them to pay the deposits to the vendors under the principal agreement. Later in the transactions after she had become a nominee shareholder in July 1992 she signed the relevant documents in relation to the final transaction as purported "chairman" of Asiagreat Ltd.

32. In my view there is sufficient evidence for which a court might reasonably infer dishonesty in the absence of any evidence from the 5th Defendant herself. She had attended a dinner meeting with her daughter, her husband, the 1st Defendant and the representatives of potential joint venture partners in a restaurant in Wanchai at which the purchase of the land at Mai Po was discussed. In October 1991 it was she who received the sums of $27,800,000.00 and $27,841,816.43 from her daughter and made various payments to Asiagreat's solicitors which enable them to purchase the property in Mai Po when she had no obvious connection with Asiagreat Ltd and there was no obvious reasons why she should make these payments.

33. In July 1992 she became a shareholder of Asiagreat Ltd and executed a declaration of trust in favour of her daughter. She would therefore know that the object was to mask her daughter's involvement with the company.

34. In January 1993 she then executed the documents in relation to the final transaction relating to land at Mai Po purporting to act as chairman of Asiagreat Ltd. She executed these documents in front of a solicitor therefore it might be reasonable to infer that she was aware of their effect. If that inference was drawn then she would have known that she was signing documents which on the same day enabled Asiagreat Ltd to buy land at Mai Po for $58 million odd and sell it for $68 million odd to the Plaintiff.

35. Secrecy is the badge of fraud. I consider it would be open to the court to infer, in the absence of any credible explanation from her, that she had knowledge that she might be involved in a fraud in relation to these transactions.

36. I find therefore there is a good arguable case against the 5th Defendant.

Dissipation of Assets

37. I have considered the cases of the 2nd, 4th and 5th Defendants separately.

38. In each case I am satisfied that if the injunction is not granted that there is a real risk of the Defendants dissipating their assets to avoid a judgment.

39. In reaching this conclusion I have been influenced by my finding that there is a good arguable case of fraudulent conduct on the part of each of them. In the case of the 4th Defendant her affirmation in response to the original injunction suggests lack of frankness on her part.

40. I have taken into account that there is no evidence of any dissipation of assets before the granting of the injunction by Stone J despite the fact that the Defendants had been arrested by the ICAC some considerable period before and, being on bail, had been in a position to dissipate assets. Particularly in the case of the 5th Defendant substantial sums of money had been paid into her account. It must be remembered however that the ICAC investigations involved no financial claim against the Defendants. Moreover a defendant under investigation for criminal matter might well wish to give an impression of normality in his or her financial affairs.

41. The granting of the injunction coincided with the issue of civil proceedings against the Defendants. That would probably mark the first time at least the 4th and 5th Defendants would have been aware of their huge potential civil liability.

42. A claim has been made by Mr Chan Wing Chan Lawrence, the husband of the 5th Defendant and intervenor, that he is entitled to certain sums in the bank accounts to which the injunction relates. It was agreed between counsel that this court should not deal with that application but that Mr Chan should take out a separate summons specifying the reliefs he seeks.

The Plaintiff's Undertaking in Damages

43. It has been said on behalf of the 2nd and 5th Defendants that the Plaintiff has provided no undertaking to pay damages to the 2nd and 5th Defendants for any loss that they may suffer as a result of the Mareva injunction. That is not correct. It is also being said that the Plaintiff must provide proper evidence that they are able to satisfy their undertaking in damages. I was informed by Mr Ling that the Plaintiffs were satisfied that their land holding in Mai Po as a result of these transactions was worth the $150 million odd that Asiagreat Ltd had paid for it. On that assurance coupled with the undertaking given by Star Glory Investments Ltd I am satisfied that the Plaintiff has sufficient assets to satisfy its undertaking.

Alleged Non Disclosure

44. The 4th Defendant's seeks the discharge of the injunction against her on the basis of material non disclosure by the Plaintiff in his application to Stone J.

45. It is said that the Plaintiff failed specifically to draw attention to the fact that in the statement of Chen Jun Yi exhibited to the affirmation of Huang Zhi Yong he had said that he did not know the 4th Defendant. It is also said that the Plaintiff had failed to disclose matters in relation to the 4th Defendant's bail in particular that she had been allowed to travel overseas which was relevant to the question of dissipation of assets.

46. I am not impressed by these submissions. The fact that one witness did not know the 4th Defendant, while not wholly immaterial evidence, was not a significant part of the Plaintiff's case against the 4th Defendant which is based upon the role she played in Asiagreat Ltd the vehicle for the alleged fraud, in relation to the transactions in question and her receipt of $500,000.00. The omission specifically to draw attention to this part of evidence does not justify discharge of the warrant.

47. I am satisfied that the Plaintiff had no knowledge of the details of the Defendants' bail history and in particular the fact that she was permitted to travel overseas. I do not consider it was incumbent upon the Plaintiff to do more than disclose to the court that the 4th Defendant had been on bail which it did. The fact that she had been on bail would have indicated that she had had the opportunity to dissipate assets.

48. As a result of my findings I order that the order of the Honourable Mr Justice Stone made herein on 13 October 1999 and extended by the order of the Honourable Mr Justice Yeung on 15 October 1999 and 5 November 1999 do continue until the conclusion of the trial herein or further order. Costs of the applications to continue the injunction to be in the cause.

49. I order that the 4th Defendant's application to discharge the injunction be dismissed. I order that the Plaintiff costs attributable to the 4th Defendant's application for discharge be paid by the 4th Defendant. (For the assistance of the Taxing Master I would estimate 1/5 of the hearing on the 8 March 2000 attributable to this issue).