SIME WINNER HOLDINGS LTD AND ANOTHER v. TAN WAN HONG AND ANOTHER

 HCA 793/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 793 OF 2005

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(By Original Action)

AND BETWEEN

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(By Counterclaim)

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REASONS  FOR  DECISION

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The proceedings:

1.  In these proceedings the plaintiffs, (collectively Sime Winner) sue Mr Tan for breach of fiduciary duty in his capacity as an officer/employee of Sime Winner, and CM2 for breach of fiduciary duty in its capacity as an agent of Sime Winner.

The Mareva Injunction:

2.  Prior to the commencement of the proceedings Sime Winner obtained a Mareva injunction against Mr Tan and CM2 preventing both from removing or dealing with a sum of US$1.6 million held in a bank account of CM2.  The Mareva injunction permitted Mr Tan to spend HK$20,000 per week from that sum on his ordinary and proper living expenses, and both Mr Tan and CM2 to pay HK$100,000 per week towards legal advice and representation.  The order was to cease to have effect if either defendant paid into court sum of HK$107 million.  No payment into court has been made.

3.  The terms of the order in respect of the expenditure on legal expenses were subsequently varied by Reyes J., to permit HK$1 million to be withdrawn in the first 10 weeks and thereafter HK$100,000 per week.  This enabled the delivery of briefs to counsel.  The secured fund has been depleted by the permitted payments to the extent that it now stands at approximately HK$3.5 million.

The application to vary the Mareva injunction:

4.  By a summons dated 30 December 2008, Mr Tan and CM2 sought to vary the Mareva injunction to permit the withdrawal of a sum not exceeding HK$3.5 million to meet the costs of defending the proceedings at trial.  I heard that application on 2 January 2009, and dismissed it, on the basis that Mr Tan and CM2 had failed to put before the court any evidence to justify the variation.

5.  On 3 February 2009, Mr Tan and CM2 filed a new application in which the same order for variation was sought.  Subsequently, an affidavit by Mr Tan was prepared, and although signed by him had not been sworn because he is presently in China, and had no access to a notary public.  On an undertaking that the sworn affidavit would be filed, Mr Yu offered no objection to it being read.  Following argument I dismissed the application to vary the Mareva injunction with reasons to follow.  These I now give.

Discussion:

6.  The Mareva injunction had been granted on the basis that Sime Winner had an arguable claim to the restrained sum, in relation to Mr Tam on the basis of breach of fiduciary duty, and CM2 on the basis of agency.  That is plain from the judgment of Reyes J. given on 21 December 2005, (see paragraphs 11 & 13).

7.  Mr Yu resists the application for variation, arguing that Sime Winner has a strong proprietary claim to the restrained fund and that in those circumstances the fund ought not to be made available to Mr Tan or CM2 to defend the proceedings, as to do so would be permitting a defendant to use a plaintiff’s funds to defend the action in which the plaintiff sought to recover those very funds.  Reyes J had not gone so far as to hold that there was a very strong proprietary claim to the fund by Sime Winner, he being merely satisfied that Sime Winner had an arguable case.

8.  Both counsel referred to the following passage from Commercial Injunctions, Steven Gee, 5^th Ed, para 20.057:

“What if there is a proprietary claim by the claimant?  The purpose of an injunction granted in aid of a proprietary claim is to stop the defendant expending for his own benefit what may be the claimant’s property.  No one has the right to use someone else’s money to pay for their defence and so before there can be any question of allowing a defendant to use funds to which the claimant has a very strong proprietary claim he must show an arguable case for denying that they belong to the claimant: Ostrich Farming Corporation Ltd v Ketchell (Unreported) December 10, 1997.  “If he cannot show that there is an arguable claim on his part to the funds, he has no right to use the money…. No man has the right to use somebody else’s money, for the purpose of defending himself against legal proceedings.” Ostrich Farming Corporation; Cogent Nominees v Anthony [2003] NSWSC 804

Where there are assets which may belong to the claimant, the court will not allow those funds to be used for legal costs until the defendant has shown by “proper evidence”; Ostrich Farming Corporation; p 7,  that he has no other assets which can be used for this purpose; Fitzgerald v Williams [1996] QB 657 at 669G-H.  If there are such funds, then the defendant must use these first before any question arises of his having access to the funds which are the subject of a proprietary claim: PWC (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158.  But once it is shown there are no other assets except those subject to a proprietary claim, the court must make a difficult decision in the exercise of its discretion as to what is to be done:Fitzgerald v Williams at 669G-H .”

A very strong proprietary claim:

9.  Reyes J. was dealing with the matter at the beginning of the proceedings and did not have the advantage that I have, of having read counsel’s opening prepared for the trial, and reading into the 21 lever-arch files of pleadings, affidavits, witness statements, and exhibits prepared for the trial which is to begin in four days time, on Monday 15 February.  Having had that advantage, I have formed the view, for the following reasons, that Winner has a very strong proprietary claim over the restrained sum. 

10.  The unchallenged evidence establishes that CM2 was incorporated in May 2001, and was acquired shortly thereafter by Winner, on the instructions of Mr Tan, in his capacity as the managing director of Sime Darby China, the holder of 60% of the shares in Sime Winner, and in his capacity as a director of Sime Winner.  The fees for setting up CM2 were paid by a wholly owned subsidiary of Sime Winner ultimate parent company.

11.  There is significant, unchallenged evidence, that the reason CM2 was established was to enable Sime Winner or their ultimate parent companies to attempt to position themselves in order to legally protect themselves from potential breaches of customs or other regulations in the PRC.  The case for Mr Tam and CM2 is that this attempt was ineffective and any transactions undertaken by CM2 for Sime Winner in importing cars into the Mainland were illegal, principally as being in contravention of Mainland customs and revenue provisions.  This potential illegality is a matter to which I will later refer.  Irrespective of any illegality, there is no doubt that CM2 became involved to serve a purpose of Sime Winner.

12.  The chartered accountants, whose subsidiary company had been responsible for the incorporation of CM2, were also Sime Winner’s accountants.  They sought from Mr Tan, in their capacity as Sime Winner’s accountants, details as to the shareholding in CM2.  Mr Tan, on the evidence, strongly arguably, deliberately avoided supplying that information to the chartered accountants.  There is no apparent reason, and Mr Tan does not suggest any, for the chartered accountants to seek that information unless it was intended that CM2 be nominally independent, but in reality a benign puppet of Sime Winner.

13.  There is a substantial body of unchallenged evidence which establishes that, with the exception of the sums now sought to be recovered from Mr Tan and CM2, all of the money received by CM2 was paid, on a regular basis, to Sime Winner, that evidence demonstrating CM2’s role as a mere agent of Sime Winner.

The argument as to illegality:

14.  Mr Bartlett, for Mr Tan and CM2, places reliance upon the fact that CM2 is a company, a separate legal entity, which on the face of it has no connection with Sime Winner.  He says that because CM2 was established to be interposed between Sime Winner and the ultimate distributors of motor vehicles in the PRC.  Consequently, Mr Bartlett says, it must have been intended that CM2 was completely independent with no obligation to Sime Winner.  Only in those circumstances, Mr Bartlett says, could purpose be achieved.  For Sime Winner to argue that CM2 was established merely as an agent of Sime Winner must mean, Mr Bartlett says, that CM2 was established to carry out an illegal purpose, namely the evasion of PRC Customs duties.  Mr Bartlett referred me to the decision in Scott v Brown, Doering, McNab & Co [1892] 2 QB 724.

15.  This proposition was put to Reyes J. in an application to discharge the Mareva injunction upon the basis that Sime Winner had failed to disclose to the court the true purpose of the establishment of CM2.  Far from leading Reyes J. to infer that CM2 was intended to be completely independent of Sime Winner, and to conclude that there had been material nondisclosure, the judge found that these facts made the case for agency even more convincing; see paragraph 9, judgment of Reyes J. 21 December 2005.

16.  I accept that the argument as to illegality is open, but the much stronger argument is that any conduct on the part of Sime Winner and CM2 in their transactions with PRC Customs, which might arguably be illegal, is merely a matter of background, and not a fact that Sime Winner need rely upon in its contentions against both Mr Tan and CM2 the breaches of fiduciary duty alleged.  All that Sime Winner need rely upon in these proceedings is the fact of Mr Tan’s position with Sime Winner to raise a fiduciary duty, the fact of CM2’s agency to raise a fiduciary duty, and the existence of funds in the hands of CM2 which ought otherwise to be paid to Sime Winner.  How CM2 came to be in possession of those funds is very strongly arguably, merely a matter of background.

17.  Mr Yu referred me to the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340, in which Lord Browne-Wilkinson, the only judge to refer to Scott, did not find that decision to be any bar to the conclusion that an illegality in the background is irrelevant.  Tinsley v Milligan is important in establishing the principle that an illegality in the background of a set of facts, which illegality need not be relied upon to establish a plaintiff’s claim, will be irrelevant and will not impact upon that claim.

18.  Mr Yu also referred me to the Hong Kong decision in Peconic Industrial Development Ltd & Anor v Chio Ho Cheong & Ors, (unreported, HCA 16255, 16255B/1999, 1 June 2006, A Cheung J,) from which it is clear that if the claim made does not necessarily involves the illegality, then the illegality becomes merely a part of the background.  The following passage from Peconic, at para 537, illustrates the position:

“In my view, the essence of the test of “necessary involvement” is that it draws a distinction between the core facts of the claim and its background facts.  An illegality that “necessarily” follows from, or leads to, facts crucial to a claim may logically and rationally be regarded as part and parcel of those facts.  An illegality that may or may not follow from, or lead to, facts crucial to a claim should, on the other hand, be treated simply as part of the non-essential background of the claim.  In the former case, it is right that the illegality should affect the claim because it forms part and parcel of the facts crucial to it.  In the latter case, the background illegality should not be allowed to affect the claim.”

19.  In the present case Sime Winner sues Mr Tan and CM2 for breach of fiduciary duty in relation to money in the possession of CM2.  The argument that the manner in which CM2 came to be in possession of that money, (the circumstance in which the potential illegality arises), is entirely irrelevant to the duties owed by Mr Tan and CM2 to Sime Winner in respect of any money held by CM2, is a very strong argument.  It is strongly arguable that any illegality is merely part of the background.

20.  All in all there is a very strong argument now on the evidence that, as Reyes J. delicately put it (at para 8): “…. in actuality CM2 was intimately connected with the Plaintiffs”.  Reyes J. went on to say: “The agency may have been camouflaged (to use Mr Bleach’s word) by making it clear that CM2 was an independent entity, but that cannot affect the reality at law”. 

21.  While on the evidence available to Reyes J., he could not put it higher than to say the case was arguable, on the evidence before me, I am satisfied that there is a very strong proprietary claim on the part of Sime Winner, that could not be defeated by the illegality argument.

Is there proper evidence as to lack of funds:

22.  Having taken the view that Sime Winner has a very strong proprietary claim over the fund, I must consider whether it has been shown by proper evidence that neither Mr Tan nor CM2 have other assets which can be used to the purpose of meeting the legal expenses of the trial.

23.  Now, Mr Tan has filed an affidavit in which he asserts that he has no funds from which to meet his legal expenses. 

24.  Mr Tan says nothing in the affidavit as to his own present occupation or earnings, nor does he refer to any other affidavit which he puts forth, support or not, any evidence as to his present income.  I was told by Mr Yu that Mr Tan says that he is employed by a mainland company on a salary of $90,000 per month.  Mr Yu handed to me papers which indicate that Mr Tan is in fact the Chief Operating Officer of China Yuchai International Ltd, a company which is listed on the New York Stock Exchange.  There was no dispute from Mr Bartlett to that evidence.  In the light of that evidence, the evidence put to the court as to Mr Tan’s employment falls far short of being proper evidence as to his income and employment.

25.  Mr Tan asserts that his wife and he jointly own a property in Malaysian which is unencumbered, and is not used by either of them as a residence.  Its self assessed value is HK$1 million, but there has been no attempt to put a proper valuation of the property to the court, whether by way of an estate agents assessment or a valuer’s report.  Mr Tan offers no explanation as to why this unencumbered property may not be used to raise funds to the defence of the proceedings.  He makes no assertion as to whether his wife has any means which could be used to support the litigation.  In this respect also the evidence put to the court as to Mr Tan’s personal and family circumstances fall far short of being proper evidence.

26.  On Mr Tan’s own case CM2 has advanced significant sums to his girlfriend Ms Loh Poi Yuan.  Mr Tan has in the past been a director and 48% shareholder of a company called Glarner Investments Pte Ltd in Singapore.  In e-mails to people not associated with these proceedings he has in the past described that company as his own investment company.  In these proceedings he has asserted, but without any evidence, first that he held his shares in the company in trust for Ms Loh, and secondly that he has now disposed of those shares and is no longer a director of that company.  Yet on his instruction funds from CM2 were used to discharge liabilities of Glarner at a time when Mr Tan personally was being pressed by the creditor.  On any basis, the evidence put to the court by Mr Tan of his relationship with Glarner, and the ability of that company to provide funds to assist Mr Tam in the defence of the proceedings fall far short of being proper evidence.

27.  In so saying I recognise that Glarner’s assets fall within the scope of the Mareva injunction.  But it could not be argued, with the exception of funds belonging to CM2 used to repay Glarner’s liabilities, that any other assets of Glarner could be subject to a proprietary claim by Sime Winner.  Such assets consequently fall within quite a different category, and would much more readily be released from the Mareva injunction to enable the defence of the proceedings.

28.  CM2 itself files no affidavit in support of its application for funds to defend the proceedings.  Throughout the proceedings Mr Tan asserts as to “Chinese Partners” who he says the beneficial owners of the shares in CM2.  On the one hand he says that those partners “want absolutely nothing to do with the company”, and consequently would not fund the defence, but on the other hand he says that he has been giving instructions to solicitors in relation to these proceedings for CM2, instructions which can only have come from the Chinese Partners. 

29.  It appears that the Chinese Partners wish to defend the proceedings and not distance themselves from the company at all.  At the same time they make no assertion as to their own personal assets which might be made available to CM2 to fund the defence they wish to have promoted, nor do they make any assertion as to any other assets CM2 might have.  As Mr Yu put it, the essence of what CM2 says is that it wishes to defend the proceedings, but it does not wish to use any separate funds or assets it might have, or have available to it from its shareholders, to finance the litigation.  Mr Yu’s submission, rightly in my view, was that the court will have none of that.

30.  The evidence establishes that CM2 has advanced to Ms Loh sum of approximately US$2 million.  That debt is a an asset in CM2’s hands which it apparently either chooses not to pursue in order to make funds available, or has pursued and recovered, but chooses not to inform the court of that fact.  Again, it is right that any funds recovered from Ms Loh by CM2 would fall within the scope of the Mareva injunction, but it must be remembered that CM2’s position is that those funds belong to it, and ultimately beneficially, to the Chinese Partners, and so there is no reason at all why the repayment of the loan, apparently advanced nearly 6 years ago, should not now be pursued.  The failure of CM2 to make any assertion as to this debt due to it, leads inevitably to a conclusion that CM2 has failed to put proper evidence before the court as to its position.

31.  The case for CM2, apparently advanced by Mr Tan on the instructions of the Chinese Partners, is that CM2 is an independent entity with its own business.  In those circumstances, for there to be no affidavit whatsoever from CM2 as to its position, nor any evidence from any director or shareholder of CM2 in the proceedings, again leads inevitably to the conclusion that the evidence supporting the assertion that CM2 is unable to fund the proceedings, falls a long way short of constituting proper evidence.

32.  I have accordingly concluded that that there is no proper evidence before the court that either Mr Tan or CM2 have no other assets nor access to other funds which might be used to the purpose of funding the defence of the proceedings. 

33.  At a late stage in the course of argument I expressed the view that the argument had led me to the difficult decision referred to by Mr Gee.  That was plainly not position, as that position arises only where the party seeking funds has established on proper evidence that he has no funds available.

34.  Where there is a very strong proprietary claim over the enjoined funds, as there is in this case, the party seeking to use those funds for legal expenses in a trial must show on proper evidence that he has no funds to meet those expenses.  Both Mr Tan and CM2 have failed to discharge that burden.

35.  In reaching that conclusion I have not disregarded the offer made by Mr Tan to have funds due to him from his pension fund with his former employers, Sime Darby Berhad, held as security against any costs that might be awarded against him should he lose the litigation.  I accept Mr Yu’s submission that this is no offer at all, because by virtue of the provisions of the pension scheme the former employers may retain any sum due to Mr Tam, against any dishonesty on the part of Mr Tan.  That sum is already secured against the substance of the action, and is not available to be offered a security in respect of costs.

36.  The application to vary the injunction must accordingly be dismissed.

Costs:

37.  Mr Bartlett accepted that he could not oppose an order for costs.  There will be an order that Mr Tan and CM2 must pay Sime Winner costs of and incidental to the application to vary the Mareva injunction.