匯力（天津）股權投資基金管理有限公司 AND ANOTHER v. SUNFUND INVESTMENT & MANAGEMENT CO LTD AND ANOTHER

HCMP 1700/2018
HCMP 2096/2018
(Heard Together)

[2020] HKCFI 236

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1700 OF 2018

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AND

HCMP 2096/2018

MISCELLANEOUS PROCEEDINGS NO 2096 OF 2018

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(Heard Together)

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REASONS FOR DECISION

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Background

1.  This application concerns ex parte injunctions applied for and obtained by the Plaintiffs against the 2^nd Defendant, whereby the 2^nd Defendant was restrained from removing from Hong Kong and disposing of or dealing with its assets in Hong Kong, which assets include its 10,000 shares in a company known as Sunfund Asia Capital Holdings Company Limited (“S Asia”). 

2.  The injunction in HCMP 1700/2018 was made on 8 October 2018, whereas the injunction in HCMP 2096/2018 was made on 23 November 2018, on substantially the same facts, and under the Chabra jurisdiction of the Court.  They are referred to collectively as the “Injunctions”.

3.  The 2^nd Defendant opposes the continuation of the Injunctions and seeks their discharge, and alternatively, fortification of the Plaintiffs’ undertaking as to damages if the Injunctions should be continued.

4.  After hearing the parties on 31 July and 1 August 2019, I refused to continue the Injunctions.  I now set out my reasons for the decision. 

The Injunctions obtained

5.  The Plaintiffs in HCMP 1700/2018 and the Plaintiffs in HCMP 2096/2018 are referred to as “Plaintiffs” collectively.  The Defendants in both proceedings are the same.  The 1^st Defendant is referred to as SIM, and the 2^nd Defendant (which is the subsidiary of SIM) is referred to as SHK.

6.  The injunctions were applied for as relief in aid of the Plaintiffs’ debt recovery proceedings instituted by them on the Mainland against SIM (“Mainland Proceedings”).  The Chabra Injunctions against SHK were sought on the basis that there was good reason to suppose that SHK was a debtor of SIM, such that the assets held in the name of SHK would ultimately be enforceable by the courts and made available to satisfy a judgment against SIM.  It was claimed that the Plaintiffs had good arguable cases for obtaining judgments in the Mainland Proceedings which would be enforceable in Hong Kong.  Judgments had in fact been obtained by the Plaintiffs after the Injunctions, in December 2018.

7.  The principles for the grant of injunctions under the Chabra jurisdiction are not disputed (XY, LLC v Jesse Zhu [2017] 5 HKC 479 adopting PJSC Vsekrainskyi Atsionernyl Bank v Maksimov [2013] EW HC 422 (Comm)).  As summarized and emphasized by the Court in Company A v Company D [2019] HKCFI 367 at paragraph 68, the jurisdiction is exceptional and should be exercised with caution, taking care that it should not operate oppressively to innocent third parties who are not substantive defendants and have not acted to frustrate the administration of justice.

8.  In addition to showing that there is good reason to suppose that the relevant defendant against whom the plaintiff asserts no cause of action (the NCAD) holds or has exercised a power of disposition over or is otherwise in possession of the assets of the defendant who the plaintiff asserts to be liable on his substantive claim (the CAD), or that the assets held in the name of the NCAD would be available to satisfy an award against the CAD, the plaintiff must also establish a real risk of dissipation of the assets, and that it is just and convenient to grant the injunction sought (XY, LLC).

9.  At the ex parte application, the Injunctions were applied for on the basis of 2 essential matters. 

10.  First, it was alleged that SHK was a potential debtor of SIM.  To support this, the Plaintiffs relied on payment records which show myriad transfers made by SIM to SHK which were stated to be “long-term share capital investments”, totaling RMB 117.7 million (“Transfers”).  The Plaintiffs sought to compare these payments to the share capital which SHK was shown to have, by reference to its Annual Return as at 5 June 2017 which recorded SHK holding paid-up shares of a value of RMB 20.6 million, which were all allotted to SIM. 

11.  The Plaintiffs claimed in their ex parte application that the allotment of shares which took place on 17 April 2018, whereby SHK increased its issued shares by 27 million and allotted them all to SIM, gave “a misleading impression” of SIM’s alleged total investment.  The Plaintiffs highlighted the significant time gap between the Transfers of funds to SHK in November 2017, and the allotment of new shares in April 2018, and the “constant stream” of the Transfers which had been made from SIM to SHK since June 2015, suggesting that they would have continued after November 2017.

12.  The Plaintiffs disclosed the fact that according to SHK’s annual return submitted in 2018, its paid-up shares had increased to RMB 206 million, all of which was owned by SIM, which ostensibly tallied with SIM’s alleged total investment.  The Plaintiffs claimed, however, that the allotment of the 27 million new shares and payment therefor had not taken place until 17 April 2018. The submission made to the Court was that on this basis, SIM’s investments up to November 2017 could not, as a matter of course, be translated into the newly allotted capital in April 2018.  As at the date of the 2017 Annual Return on 5 June 2017, SIM owned RMB 20.6 million worth of shares, but had transferred over 5 times that amount into SHK, such that there was good reason to suppose that those funds ought to be accounted for as account receivables owing to SIM as shareholder’s loans, and that there was a good arguable case that SHK was in fact a significant debtor of SIM, to satisfy the requirements for the grant of a Chabra injunction.  All these were made in Counsel’s skeleton submissions to the Court in support of the ex parte Injunctions.

13.  The second essential matter relied upon by the Plaintiffs, and particularly to establish the risk of dissipation, was the fact that Yuan Xulin (“YXL”), the beneficial owner and shareholder of SIM, was a man of low commercial morality, and there had been “an ominous and coordinated scheme” on his part to take control of SHK and its subsidiaries, so as to put himself in a position to dispose of the assets of SHK and its subsidiaries.  To support this claim, the Plaintiffs relied on the fact that they had recently discovered that YXL had been put on the Mainland register of fugitives, and that he was a dishonest man suspected of fraud.  They produced a record which was said by the Plaintiffs’ representative to have been downloaded from the online records of the Beijing Public Security Bureau (“Bureau”) on 29 September 2018 (“Online Record”).

14.  I accept the submissions made on behalf of SHK, that both these bases for the grant of the Injunctions have been shown to be unsustainable.

The Transfers to support the claim of SHK being a debtor of SIM

15.  For the hearing on 31 July and 1 August 2019, Counsel for the Plaintiffs accepted that upon the evidence filed by SHK in opposition to the continuation of the Injunctions, SHK had established that the payments made by the Transfers were not shareholders’ loans from SIM to SHK, but were indeed payments for the subscription price, in respect of the allotment of new shares which were issued to SIM.

16.  On the evidence adduced by SHK, SIM was approved by the Beijing Municipal Committee of Commerce on 19 April 2015 to invest US$3 million (equivalent to approximately RMB 20.6 million) in SHK.  On incorporation, 3 million shares in the amount of US $3 million were issued to SIM, but the price of US$3 million had not been paid.  On 3 June 2016, SIM was further approved to increase its investment in SHK to US$30 million (equivalent to approximately RMB 206 million).  The Transfers made by SIM from 18 December 2015 to 2 November 2017 were for a total sum of US$28.87 million, for the purpose of capital injection, including the payment for the first 3 million shares.  On 17 April 2018, SHK issued 27 million new shares to SIM in respect of the capital injection of US$25.87 million SHK had received.  This was evidenced by the Return of Allotment Form dated 17 April 2018.  SIM still owes US$1.13 million of unpaid capital for the issued shares.

17.  The evidence is corroborated by a Capital Injection Report issued by a certified public accountant who had reviewed the bank account records, accounting records and company records of SHK.

18.  From the evidence, there was no shareholders’ loan from SIM to SHK, and since a sum of US $1.13 million is still owing by SIM as unpaid capital for the issued shares, SIM is a debtor of SHK, and not a creditor.

19.  In view of the evidence, Counsel for the Plaintiffs sought to rely instead on SHK’s own evidence of its draft audit report for the year ended 31 March 2018, which shows that there were “current liabilities” of HK$206.3 million owed to its ultimate holding company, namely SIM.  On that evidence, SIM is a creditor and the Plaintiffs argued that the Court’s Chabra jurisdiction can be exercised.

20.  The evidence relied upon by the Plaintiffs at the time of the ex parte application for the Injunctions was the “long-term share capital investments” of RMB 117.7 million, evidenced by the “constant stream” of payments from December 2015 to November 2017, and not the record of “current liabilities” stated in SHK’s draft audit report for the year 31 March 2018.  The reliance on the latter was only raised and disclosed to the Defendants a few days before the hearing on 31 July 2019.

21.  In Kayden Ltd v SFC (2010) 13 HKCFAR 696, a case concerning the application for and grant of leave under Order 11 to serve proceedings outside the jurisdiction, the Court (in paragraphs 35 and 36 of the judgment) referred to the exceptional and extraordinary nature of the long-arm jurisdiction of the Court under Order 11 (to compel a foreign defendant to submit to adjudication by the court), and the need for a strict approach to be adopted.  Ribeiro PJ referred to Parker v Schuller (1901) 17 TLR 299 and the judgment of the English Court of Appeal:

“… an application for leave to issue a writ for service out of the jurisdiction ought to be made with great care and looked at strictly. If a material representation upon which the leave was obtained in the first instance turned out to be unfounded, the plaintiff ought not to be allowed, when an application was made by the defendant to discharge the order for the issue of the writ and the service, to set up another and a distinct cause of action which was not before the Judge upon the original application.”

22.  The need for a strict approach was explained in the judgment of Riberio PJ.  This includes not only the recognition of the extraordinary nature of the long arm jurisdiction asserted under Order 11, but also the fact that the Court acts on the face of the plaintiff’s representations, made to it ex parte when granting leave for service of process abroad.  Given the extraordinary nature of the jurisdiction which the Court would be asserting, it insists on special care on the plaintiff’s part and full disclosure of the basis upon which the jurisdiction is invoked.

23.  Although the present case does not concern service out of the jurisdiction under Order 11, the Plaintiffs do invoke the exceptional jurisdiction of the Court to grant a Chabra injunction, affecting a third party against which they do not assert a cause of action, which jurisdiction is generally exercised with caution by the Court.  The fact that the Injunctions were obtained ex parte is pertinent and a reason why the same strict approach advocated by the Court of Final Appeal in Kayden should be adopted. 

24.  It is not just to entertain the new basis sought to be relied upon by the Plaintiffs at the hearing to establish the Chabra jurisdiction of the Court. As the Court of Final Appeal also highlighted in Kayden, it is only fair and just that not only the Court, but the defendant must also know the basis of the claim which he has to meet so that he can challenge the order which asserts jurisdiction over him.

The risk of dissipation

25.  Counsel referred to the summary set out in Great Wall Pan Asia International Investment Co Ltd v Cervera Holdings Ltd unreported, HCCT 13/2016, 1 June 2016 on the principles governing the determination of whether there is a risk of dissipation.  In particular, the observation made on evidence of low commercial morality is as follows:

“Further, it is well established that evidence of behavior in the past of a defendant disclosing an ‘unacceptably low standard of commercial morality’ entitles the court to infer and conclude that there is a sufficient risk to justify the grant of a Mareva injunction (Honsaico Trading Co v Hong Yian Seng Co Ltd [1990] 1 HKLR 234). However, the court should scrutinize the evidence with care and should not too readily infer a real risk of dissipation from a defendant’s conduct or commercial morality (Honor Resources (International) Co Ltd v Savvy Resources Ltd (2010) 4 HKC, 50, 57).”

26.  In cases such as Crete Maritime Corporation v Emirates Shipping Line Dmcest [2017] 5 HKLRD 345, the courts have warned against applying Honsaico too readily, highlighting that the task of the court is to assess the risks, and any alleged propensity of a person to dissipate assets to render himself judgment proof, in the light of all the evidence, and to consider whether any inference can be drawn and is properly justified.

27.  As the court rightly pointed out in The Export-Import Bank of China v Liu Qingping [2018] HKCFI 1840, the description of a person as being of an “unacceptably low standard of commercial morality” or “questionable integrity” is a very serious allegation, for which the Court would expect nothing less than cogent proof.

28.  In the present case, the Plaintiffs’ submissions on risk of dissipation at the ex parte stage focused on, firstly, action on the part of YXL to change the directors of SHK and S Asia in what was described by the Plaintiffs as “an ominous and coordinated scheme” to take control of SHK and its subsidiaries, in order to dispose of their assets.  Further, the Plaintiffs highlighted the discovery of the Online Record, and the fact that YXL had become a fugitive for suspected crimes of illegally siphoning of public funds, to bolster their claim of YXL being a man of low commercial morality. 

29.  At the hearing for continuation of the Injunctions, Counsel maintained that as SHK is controlled by YXL, the Plaintiffs are relying on YXL’s commercial immorality.

30.  Dealing first with the Online Record, it was presented at the ex parte hearing as an updated list or register of the Bureau.  A copy of the Online Record was exhibited and described as a copy of the “online record of the Bureau” (從北京市公安局朝陽分局經濟犯罪偵查大隊的網上紀錄的列印本), which was downloaded on 29 September 2018.  The Plaintiffs claimed that they had learnt, at the end of September 2018, that YXL had become a wanted convict.

31.  On behalf of the Defendants, YXL has denied the authenticity and provenance of the Online Record.  As an online record of the Bureau, it should be public information and assessable to the public by search online.  However, lawyers acting for the SHK group of companies had not been able to obtain any official information from any public avenue, including the Bureau’s website, on purported lists or registers of fugitives wanted on the Mainland.  Online searches of the Bureau’s website did not reveal the Online Record.  According to the expert opinion procured by SHK, investigations against criminals on the Mainland are not open to the public.  Information on fugitives and persons under arrest are not public information, but confidential information to which only the Bureau has access.  The experts highlighted the fact that there was no official seal or chop on the Online Record alleged to have been obtained by the Plaintiffs, which casts doubt on its authenticity and reliability.

32.  In reply, the Plaintiffs confirmed that the Online Record was not a document assessable by the public and had not been obtained by them publicly.  For the first time, they explained that the Online Record was downloaded by an unidentified officer of the Bureau from the Bureau’s portal, and provided to the Plaintiffs.  The Plaintiffs believed the information and the record to be accurate, and also affirmed that they had on 7 May 2019 obtained oral confirmation from an officer of the Bureau that YXL was a wanted person.  No written confirmation could be obtained.

33.  Reading the evidence filed by the Plaintiffs in support of the ex parte application, the Court would have been led to believe that the Plaintiffs had printed and obtained the Online Record from the Bureau’s official website, and that it was information which was assessable to any member of the public.  The provenance and authenticity of the Online Record would have been taken by the judge to have been uncontroversial.

34.  YXL’s evidence is that contrary to what was represented by the Plaintiffs, he did not abscond, and did not know that he was a wanted fugitive for the crime alleged against him. 

35.  According to YXL, SIM had invested in a Mainland online platform for moneylending (“Platform”) in 2014, and held 52% of the shares in a Mainland company which operated and managed the Platform (“Mainland Company”). The Mainland Company and the Platform were founded by one Guo Peng (“GP”). After a nationwide collapse of P2P platforms on the Mainland in 2018, SIM decided to sell its interests in the Mainland Company, and disagreement ensued between YXL and GP, who did not want the sale.  While YXL was traveling to the United States in July 2018 to negotiate the sale of SIM’s interests in the Mainland Company and the Platform, GP unilaterally issued an announcement on the Platform’s website, stating that YXL and his wife had gone missing, and invited investors in the Platform to report the matter to the Bureau.  According to YXL, this was all part of GP’s plan to thwart YXL’s attempts to sell SIM’s interests in the Platform.  GP also filed a complaint to the Bureau, which led the Bureau to close down the office of the Mainland Company and of SIM, seize their corporate documents, licences and chops, and caused their operations to come to a halt. 

36.  According to YXL, he had actually sent emails to SIM’s employees and posted an article on the Platform’s website, in August 2018, asking employees to return to SIM to work and to assist him to resume the business of SIM.  He claims that this was all inconsistent with any intention or act of absconding.

37.  Whilst the intricate events leading to the Bureau’s investigations into the Mainland Company which operated the Platform, and/or SIM, and/or YXL may be disputed matters of fact, if the ex parte judge had been informed of the full circumstances of how the Online Record was obtained, he would have been more alert to the reliability and source of the Online Record, and whether the contents were disputable, and would have scrutinized the document in greater detail for verification of the allegations made against YXL, and the Plaintiffs’ claim that he was a person of low commercial morality.  The Plaintiffs should have made full and honest disclosure of how they had obtained the Online Record, as they had begun to do in the affirmations filed in reply to the Defendants’ opposition evidence, instead of just making a short and misleading statement, that what they produced was a printed copy of the record from the Bureau’s website, suggesting that the record was a matter of public information, open to search and verification.  It is trite, that materiality of facts relevant to the application for ex parte relief is to be decided by the Court, and not by the assessment of the applicant or his legal advisors.

38.  The Online Record, even if it was a genuine printout from the internal records of the Bureau as is now apparent, only states that on 24 July 2018, a complaint had been made to the Bureau with regard to a sum of money which had been paid by the complainant to the Mainland Company operating the Platform, that the Platform had been closed down, and that the complainant’s funds had not been repaid.  The Online Record states that the offices of the Mainland Company had been vacated, that 11 complaints had been made that the Mainland Company was suspected of deception, involving RMB 3 million, and that YSL was “one of the persons suspected to have been involved”.  There is then an entry that the person involved (YXL) was a fugitive, or “on the run” (刑拘在逃).

39.  I cannot agree that the Online Record is cogent evidence of any dishonesty on the part of YXL, let alone of any crime or illegal siphoning of public funds having been committed by YXL or suspected against YXL, as submitted by Counsel for the Plaintiffs to the ex parte judge in the application for the Injunctions.  The complaint was made against the Platform. The statement in the Online Record, that YXL was one of the persons suspected to have been involved or implicated in the complaints against the Platform, is unsupported by any facts stated in the Online Record.  This is particularly so when, on the evidence so far available, YXL was only a 52% shareholder of the Mainland Company which operated the Platform.  Nor is there any stated fact in the Online Record to support the assertion that YXL was a fugitive trying to avoid arrest by the authorities, as suggested to the Court.  The Plaintiffs did not produce any evidence, and the Online Record does not state, that the Bureau had informed YXL of the complaint or any charge against him, or that the Bureau had lost contact or been unable to establish contact with YXL, to render him a “fugitive”, avoiding arrest.

40.  There is further dispute as to when the Plaintiffs found out about YXL’s alleged abscondence, whether they had known about the alleged disappearance of YXL by August 2018, since the Plaintiffs admitted that they had by then known of the Bureau’s closure of the offices of SIM, and that the Plaintiffs had been in liaison with the Bureau since then, in their capacity as creditors of SIM.  If they had known of the alleged abscondence by August 2018, there was a delay in their application for the Injunctions made in October 2018.  This is particularly so when the Plaintiffs had submitted to the ex parte judge (paragraph 96 of Counsel’s Skeleton Submissions dated 8 October 2018) that their discovery of the Online Record was the crux of their contention that it was an urgent situation requiring expedited remedy.

41.  In any event, whether or not there was delay, I do not consider the Online Record to be cogent evidence of dishonest propensity or low commercial morality of YXL and SHK. 

42.  Apart from the Online Record, there is only evidence of YXL’s steps to change the directors of SHK and to take over control of SHK and S Asia.  This is by itself innocuous, particularly when regard is given to the history of the corporate wrangling between YXL and (1) the Plaintiffs over the control of the Mainland subsidiaries of SIM, which included (on the evidence of SHK and YXL) the Plaintiffs taking possession of the corporate documents, records and company chops of SIM and its Mainland subsidiaries, which the Plaintiffs chose to withhold from disclosing in their evidence filed in support of the Injunctions; and (2) the former directors of SHK, who (according to SHK and YXL) were working in collaboration with the Plaintiffs and who had attempted to remove YSL as a director of SHK and to sell SHK’s subsidiaries against YSL’s wishes. 

43.  According to the evidence of SHK and YXL, it was the Plaintiffs who had attempted to take over from him SIM and its Mainland subsidiaries.  YXL referred to elaborate measures undertaken by the Plaintiffs since early August 2018, following what has become the usual pattern of multiple physical commotion, false imprisonment and even kidnaps on the Mainland.  According to YXL, the Plaintiffs then worked in concert with the other directors of SHK, in the latter’s actions to remove YXL as a director, to appoint others to the board of SHK and to sell SHK’s subsidiaries.  This led to proceedings being instituted by YXL and an injunction to restrain the directors from proceeding with the sale.

44.  On YXL’s case, the allotment of shares in SHK to his companies, and the appointment of these companies to the board of SHK were all part of the defensive scheme implemented to thwart the attempts of the Plaintiffs to seize control of SHK and to preserve YXL’s control over and his interests in SHK, against the threats from the former directors as well as the Plaintiffs.  On behalf of SHK, Counsel emphasized that these had all been carried out in an upfront manner, with the necessary notification to the SFC, and filings made with the Companies Registry.

45.  The entirety of the evidence presented shows a bigger dispute between members of the board of SHK, and represents an ongoing fight between the Plaintiffs and the Defendants for control of the Mainland subsidiaries of SHK, rather than the picture painted for the ex parte application, of unilateral or surreptitious action on the part of YXL to control SHK and its subsidiaries, in order to dispose of their assets and frustrate any judgment that may be obtained in favour of the Plaintiffs.

46.  I consider that the Plaintiffs had failed to discharge their duty to make full and frank disclosure to the Court at the ex parte application of the entire circumstances of the dispute between the Plaintiffs and the Defendants which led to the corporate steps taken by YXL, and complained of by the Plaintiffs.  This led to an unfair presentation of the facts to the Court of the existence of a risk of dissipation.

Conclusion

47.  The Injunctions should be discharged not only for lack of a proper basis for the Court to invoke its Chabra jurisdiction, for lack of evidence of risk of dissipation, and also for material non-disclosure of the circumstances of the procurement of the Online Record. 

48.  In all the circumstances of the case as outlined in the preceding paragraphs, I declined to exercise my jurisdiction to re-grant the Injunctions. With regard to the material non-disclosure, it was deliberate, and no acceptable excuse has been given.

49.  The order nisi is that the costs of the application for the Injunctions and their discharge are to be paid by the Plaintiffs to SHK, with Certificate for 2 counsel.