XCHRX CHINA MERCHANTS BANK v. I-CHINA HOLDINGS LTD. AND ANOTHER

HCA 7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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J U D G M E N T

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Introduction

On 28 December 2000 Suffiad J granted a Mareva injunction on application made ex parte by the plaintiff against the first and second defendants.

1. The order concerned a pending sale by the second defendant of its property being on the 15th floor Euro Trade Centre, 13-14 Connaught Road and 21-23 Des Voeux Road Central. The defendants were ordered not to dispose of the sale proceeds (less deposits already paid) of $24.12 million save for the payment of the mortgage and costs of sale, and to pay the balance proceeds into court. The second defendant was further ordered not to dispose of or otherwise reduce its assets below the value of US$10 million, but without restraining it from spending up to $10,000.00 per week towards business expenses and a reasonable sum for legal expenses.

2. On 29 December 2000 the sale in question was completed. The net sale proceeds came to $6,482,500.00. On 5 January 2001 the second defendant paid this sum into court.

3. By summons dated 28 December 2000 the plaintiff has applied inter partes for an injunction on like terms. By summons dated 3 January 2001 the first and second defendants seek a dismissal of the plaintiff's summons, a discharge of the injunction and an inquiry into damages for loss sustained by the first and second defendants because of the injunction.

Background

4. The plaintiff is the China Merchants Bank, a joint stock commercial bank constituted under the laws of Peoples Republic of China and licensed to carry on the business of a bank. The first defendant is called I China Holdings Limited. It is listed on the Hong Kong Stock Exchange and is the holding company of a large group of companies collectively known as the Seapower Group. Through a wholly-owned intermediary the first defendant is the parent of the second defendant, called Seapower Consortium Company Limited. The second defendant's primary purpose is to hold investment properties in the Group. It is itself the sole or principal shareholder of numerous other companies in the Seapower Group.

5. As at December 1998 two Hong Kong registered companies, called Rich China International Limited (RCI) and Minvest International Limited (MI) were indebted to the plaintiff in the sums of US$16.5 million and US$6 million respectively. By a deed dated 30 December 1998 called a loan assumption deed (the LAD) the first defendant assumed liability for the total indebtedness of US$22.5 million in return for debts and certain other property of RCI and MI.

6. By agreement of the same date called a loan agreement (the LA) the plaintiff agreed to advance to the first defendant the sum of US$35 million on terms therein recorded under which the first US$12.5 million was designated for the purpose of reducing its indebtedness to the plaintiff under the LAD by this amount to US$10 million.

7. By debenture of the same date (the debenture) made by the second defendant in favour of the plaintiff the second defendant guaranteed the due performance by the first defendant of its obligation under the LAD to meet the balance of that debt of US$10 million. Under the debenture the second defendant charged all its assets and undertaking save for what was described as the mortgaged property and any interest therein and related thereto. The mortgaged property was defined as (i) offices A, B and C on 2nd floor of Gold Union Commercial Building, nos. 70, 71 and 72 Connaught Road West, Hong Kong and (ii) the entire 15th floor Euro Trade Centre, 13, Connaught Road Central Hong Kong (the Euro Trade Centre property).

8. Under the LAD the first defendant was committed to repay the balance of US$10 million by two instalments; the first falling due on 31 December 1999 of US$2.5 million, the second falling due on 31 December 2000 of US$7.5 million, by post dated cheques.

9. The first defendant defaulted in meeting the instalment of US$2.5 million. The following is a chronology of that event and what happened afterwards:-

31 December 1999 -	the first defendant's cheque for US$2.5 million in favour of the plaintiff matured.
4 January 2000 -	the cheque having been presented was dishonoured.
6 January 2000 ) 8 March 2000 )	the plaintiff demanded from the first defendant the amount of the cheque.
17 April 2000 -	the cheque was presented again and dishonoured again.
31 May 2000 -	the plaintiff demanded from the first defendant repayment of the full amount due under the LAD of US$10 million.
10 July 2000 -	the plaintiff demanded from the second defendant the sum of US$10 million under the debenture.

10. During the course of this time frame the first defendant defaulted in meeting interest due under the LA and the plaintiff called up that advance of US$35 million and interest. By 20 July 2000 there having been no payment or other satisfaction the plaintiff issued a writ against the first and second defendants, seeking recovery of the sums of US$35 million and US$10 million with interest and costs. On 5 October 2000 the first and second defendants filed a defence and counterclaim. In their pleadings they have joined RCI and MI and two affiliates alleging against the plaintiff and these parties fraudulent misrepresentation, rendering the LAD voidable. On 22 November 2000 the plaintiff filed a reply denying such allegation.

11. What suddenly brought matters to a head was a chance land search conducted by the plaintiff's solicitors in December 2000. That revealed that the second defendant had sold the Euro Trade Centre property. Deposits of $2.68 million had been paid and received and the balance of $24.12 million was due to be paid on 29 December 2000, the agreed date of completion of the sale. A further search revealed that the Hong Kong Stock Exchange had released a notice made by the first defendant, giving details of the sale, in October 2000, in which it stated under heads Reasons for the Disposal, and Use of Proceeds, as follows:-

"Reasons for the Disposal

The Board of Directors of the Company (the "Board") believes that the terms of the Disposal are fair and reasonable in the current market conditions, and it is in the best interests of the Company and its shareholders as a whole. The Board also considers that the Disposal represents a good opportunity for the Company to realise its investment in the Property and increase the funds available for general working capital.

Use of proceeds

The net proceeds of the Disposal will be used for repayment of bank borrowings and for general working capital purpose."

12. In the context the company refers to the first defendant.

13. The plaintiff formed the view that this action demonstrated an intention to transfer funds out of the second defendant reducing thus its worth to the prejudice of the plaintiff, should it succeed in its action against the second defendant.

14. Against this background the application for the Mareva injunction was made and granted.

15. To complete the picture, on 2 January 2001 the plaintiff filed an application for summary judgment against both first and second defendants. There has been a directions hearing and that matter is pending.

The Ex Parte Order

16. Two points arise from the form of the order made.

17. The first is that it was made to last until the return date, and by extension to the date of this judgment. The defendants' application for it to be discharged is thus redundant. However I accept that it is their case that the order should never have been made and would not have been made had there been full and frank disclosure, and having been made the second defendant has suffered loss. It was thus appropriate to apply to discharge whilst it was in operation to preserve the right to damages in the event that I find the ex parte application was deficient.

18. The second point is that the order purports to bind both the first and second defendants. No doubt the application was so framed because of the relationship between the parties and because of the way the Stock Exchange release was framed. In fact the net sale proceeds of the Euro Trade Centre property are funds wholly owned by the second defendant, and otherwise the order restrains only the second defendant's right to trade in its own assets. The first defendant is not, in fact, affected at all.

The essential ingredients of a Mareva injunction

19. It is trite law that before a Mareva injunction will be granted three matters must be established as follows:-

(a) the plaintiff must have a good arguable case against the defendant;

(b) there must be a real risk that judgment will go unsatisfied by reason of the disposal by the defendant of its assets unless it is restrained by court order from disposing of them;

(c) it would be just and convenient in all the circumstances of the case to grant the relief sought.

20. In addition, where the initial application is made ex parte, there is a duty on the plaintiff to make full and frank disclosure.

The case for the second defendant

21. Mr Ng, counsel for the second defendant, puts his arguments under four heads, as follows:-

1. No good arguable case.

The second defendant's liability under the debenture as the first defendant's guarantor to perform its obligations under the LAD depends on the validity of the LAD. It is the second defendant's case as pleaded that because of fraudulent misrepresentation there is no such liability.

2. Exclusion of the Euro Trade Centre property from the debenture.

That exclusion gave the second defendant the freedom to sell the Euro Trade Centre property without reference to the plaintiff and to utilize the sale proceeds as it chose.

3. Material non-disclosure.

In its ex parte application there was almost no mention at all of the defendants' pleaded case and certainly no reference to the fraud both parties claim to be victims of. Further, the judge's attention was not specifically drawn to the exclusion clause in the debenture concerning the Euro Trade Centre property.

4. No dissipation of assets.

There is not and never has been the intention to reduce the worth of the second defendant's assets to defeat the plaintiff's claim. As disclosed in the Stock Exchange release the proceeds were intended for expenses of the Seapower Group, including the legal costs of these proceedings. The sale of the Euro Trade Centre property was no more or less than the operation of the second defendant's normal business activity of buying and selling investment properties.

Determination

22. I shall deal with the second defendant's arguments in term.

1. I am satisfied the plaintiff has made out a good arguable case. The chronology reveals that the first defendant defaulted under the LAD in January 2000 and that default has persisted. Demand was made of the second defendant under the debenture in July 2000 without result. The first defendant defaulted under the LA in June 1999 and that default has persisted. On the face of it US$45 million plus interest is due; more than $351 million. The defence of fraud was not raised until the pleadings. On the papers there is clear evidence of liability, it being for the defendants to establish the fraud pleaded. Certainly there is sufficient before me to achieve the necessary burden of a good arguable case.

2. The exclusion of property from the charged assets in a debenture will permit the sale of the same without reference to the debenture holder in a situation where there has been no default. But in this case there has been apparent default and there is potential liability for nearly $78 million. The issue of whether or not the sale proceeds of the Euro Trade Centre property are caught under the debenture is something of a red herring. The plaintiff is not estopped from exercising its right as a creditor to protect its claim simply because it has no charge over the property the subject of a sale.

3. I am not satisfied there has been material non-disclosure; certainly not of the kind that would have influenced the judge when he granted the injunction ex parte. The pleadings referring to fraud were on file and before him. These allegations post-dated by several months the default. And I have already indicated that the exclusion of the Euro Trade Centre property from the charged assets in the debenture is not in the circumstances a material factor.

4. Notwithstanding the second defendant's assertion to the contrary, I am satisfied release of the sale proceeds and otherwise freedom of the second defendant to trade outside the terms of the injunction would result in a dissipation of assets. It is declared policy of the Seapower Group to move funds freely through the various companies; that is how it proposed to deal with the sale proceeds. The size of the plaintiff's claim relative to the worth of the second defendant would render such activity prejudicial to the realization of the debt if its claim succeeds.

Conclusion

23. In the circumstances I am satisfied that the plaintiff has made out a case entitling it to a Mareva injunction ex parte at first instance and now inter partes.

24. There will be an order in terms of its application of 28 December 2000, save for clause 8, as this has already been dealt with.

25. The application of the first and second defendants is dismissed, with costs of the plaintiff in the cause. This order as to costs is nisi at first instance.