EXCEL NOBLE DEVELOPMENT LTD. AND OTHERS v. WAH NAM GROUP LTD. AND OTHERS

HCA 12439/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12439 OF 1999

(consolidated with HCA 6210/1999 and HCA 6211/1999)

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J U D G M E N T

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1. This is an application by the Applicants ("A") who are the 2nd and 3rd Plaintiffs in this action for an order of committal and sequestration against Matthew Chan Kwok Choi (second alleged Contemnor "C2"), a director of the Wah Nam Group Ltd (1st Defendant and 1st alleged Contemnor "C1"), in respect of Wah Nam Group Ltd's alleged refusal or neglect to comply with a Disclosure Order dated 17 December 1999. C1 has been wound up compulsorily and A is not proceeding against C1 in this application. The application is made under RHC O. 45 r. 5(1)(a)(ii) and (iii) and O. 52 r. 3. A made it clear that its case is not based on C2 aiding and abetting C1.

Chronology

2. On 17 December 1999, a Mareva injunction was granted on A's application against C1, but stayed on C1 giving undertakings as to payment. This was done in the presence of Matthew Chan Kwok Choi. On 13 January 2000, the stay on the Mareva injunction was lifted and the Disclosure Order was perfected. On 26 January 2000, the injunction was served on C1's solicitors; on 24 January 2000 there was service on C1 at its registered office and on 28 January 2000, the injunction was served on Matthew Chan. The service on Matthew Chan was not personal service; it was effected by a clerk leaving the document at the registered office which had been recorded in the company documents as Matthew Chan's usual address.

3. The deadline for compliance with the Disclosure Order was 19 February 2000, but no affirmation was supplied until 11 March 2000. On 23 June 2000, the Applicant issued a Notice of Motion for Contempt. Matthew Chan Kwok Choi was served personally with a copy of the Notice of Motion, the supporting statement and the affidavit on 10 July 2000. The Wah Nam Group Ltd, C1, was wound up with effect from 26 July 2000.

4. On 6 November 2000, a summons to amend the Notice of Motion was heard. This was in response to an order of the Court of Appeal made on 18 October 2000 requiring the Notice be amended to give proper particulars of the alleged breach to the Respondents.

5. Accordingly, A applied to amend the Notice of Motion. That application was heard on 7 November 2000 as a preliminary to the substantive hearing of the contempt. The amended particulars were

(1) that the C1 served on the Plaintiffs' an affirmation sworn by C2 dated 11 March 2000;

(2) in purported compliance with the Disclosure Order the offending affirmation recited certain direct assets of C1, namely its shareholding in Wah Nam Infrastructure Investment Limited (WNII) and WNII's interest in 2 joint venture projects;

(3) the offending affirmation contained a representation to the effect that C1's interest in the projects through WNII had, an unencumbered value of HK$48 million;

(4) that representation was false to the knowledge of C1 in that C1's shareholdings in WNII were pledged to secure its indebtedness to the extent of at least HK$37 million as at 11 March 2000;

(5) in the circumstances, the affirmation did not reveal all C1's assets to an individual value of HK$200,000.00 or more, to a total unencumbered value of HK$61 million.

(6) Further the offending affirmation failed to disclose the value of

(1) any directly owned asset of C1, as opposed to asset owned by C1's subsidiaries

(2) any directly owned assets of C1 up to a total unencumbered value of HK$61 million

6. The Applicant's case is comparatively simple. It complains that the C2 breached the Disclosure Order in two ways, first because the disclosure affirmation was filed out of time, in fact, almost three weeks late, on 19 February 2000 and, secondly, that the disclosure affirmation does not disclose any directly owned assets of the first of the Wah Nam Group Ltd at all. There is no dispute by C2 that the affirmation was filed late.

7. The Applicant accepts that the burden lies on it to prove these alleged breaches beyond reasonable doubt. In respect of the failure to file the affirmation when required, A contends that the time for filing expired at the end of 28 days after 22 January 2000, namely 19 February 2000.

Delay

8. As the disclosure affirmation was not filed until 11 March 2000, the affirmation was three weeks out of time. During that three week period, A had reminded C2 of the obligation to comply with the order. The A says that those three weeks can't be said to be trivial or de minimis as the lapse of time was such as would, or could, have allowed the company assets to have been dissipated, thereby defeating the purpose of the Mareva injunction and the Disclosure Order. In so submitting A referred to the situation which was apparent at the time the Mareva injunction application was granted, namely that William Chan, a director of C1 had been treating the company's money as if it was his own and not that of the publicly listed company C1 was.

9. Further a debt due to C1 from Wah Nam Holdings Ltd, a private company of William Chan, was seen to increase by HK$32 million between 13 December 1999 and 31 December 1999. Further still, C1 had advanced the completion date of an agreement for Sale and Purchase of a subsidiary company in China by 6 months and had applied the sum of HK$40, million supposedly frozen by the Mareva injunction, towards completion of the acquisition of the company around 30 December 1999.

10. In relation to the point of delay, C2 contended that the Court should look at the question of whether or not C2 had proper notice particularly in view of the fact that the Disclosure Order had not been personally served on C2. It was submitted that A could not rely on the fact that Public Announcements of the company were made in December 1999 and January 2000, as although they noted the existence of Mareva injunction, they did not refer to the Disclosure Order, or to the time limit for filing the affirmation.

11. It was submitted that it could not be said that the Respondents had notice of Disclosure Order beyond reasonable doubt. However, leave had been given at the outset of this hearing, in terms of O. 45 r. 7(7) for personal service to be dispensed with and as noted in my brief ruling on that matter, I was satisfied that C2 had had notice of what he was required to do. There was no explanation given for the delay, in fact it was conceded that C2's affirmation was late.

Non-Disclosure of Directly Owned Assets

12. The amended particulars assert that the offending affirmation failed to disclose the value of: (1) any directly owned asset of C1 as opposed to assets owned by C1's subsidiaries; or (2) any directly owned assets of the C1 up to the total unencumbered value of HK$61 million.

13. The Disclosure Order required C1 to supply the value, location and details of all its assets of, or over, an individual value of HK$200,000.00 up to a total unencumbered value of HK$61,000.00. A reading of the affirmation filed in purported compliance with this requirement indicated that no directly owned assets of C1 were referred to. Reference was made instead to indirectly owned assets, in particular, joint ventures which operated projects in Mainland China. The main asset of C1, the value of its shareholding in WNII, was not adverted to.

14. The first asset disclosed in C2 affirmation was the interest of C1's wholly owned subsidiary Wah Nam Infrastructure Ltd (WNII), in 2 joint ventures with Mainland companies to operate road and bridge concessions.

15. WNII's shareholdings in the joint ventures was said to be 45% and its attributable interest to be HK$45 million. C2 stated that C1's interest was unencumbered to the best of his information knowledge and belief.

16. The Applicant was concerned because Wah Nam Infrastructure Investment Limited (WNII) was heavily indebted and its shares had been pledged to third parties. That was not revealed in Applicant's affirmation. The audited report of Hangzhou Huanan Engineering (HHED) dated 31 December 1999 showed that WNII owed it RMB$56 million. Reference was made to the fact that WNII had pledged 60% of its shareholding in HHED to secure bank loans of RMB$35 million in both the C1's Annual Report dated 1998, as well as a letter from its board dated 7 October 1999. Promissory Notes had been made by the C1 in favour of a company called HCK China Investments Limited and Investment Austasia Limited. The indebtedness represented by those notes was the basis of the Winding Up petition against C1, in HCCW 1666/2000, in respect of which Deputy Judge S. Kwan made a Winding Up Order on 26 July 2000. The shares in WNII had been pledged to both HCK China Investments Limited and Austasia Limited.

17. The disclosure affirmation referred to C1's interest in a parcel of land in Xinhui City. However, that land was in fact owned by Summit Mass Limited, not C1. Summit Mass Limited was in turn owned by Great Strategy Property Limited as a result of a Sale and Purchase Agreement dated 23 November 1999 and Great Strategy Property Limited was a wholly owned subsidiary of C1. Thus it was not accurate to say that the land was an asset of C1; this was the basis of A's claim that C1 had failed to disclose any asset belonging to it to the requisite value.

18. The Applicant submitted that the letter and spirit of the Disclosure Order required the disclosure of the C1's directly owned assets. What was disclosed in fact was only C1's interest in 2 joint ventures which operated projects in China, but neither the project nor the 2 joint ventures, nor WNII's shareholding in those 2 joint ventures was a directly owned asset of C1.

19. The Applicant submitted that the only relevant asset of C1 was the value of its shareholding in WNII, but no such value was included in the affirmation.

20. The Applicant pointed out the Mareva injunction was only directed against C1. The operative part of the injunction referred separately to "its assets", "the 1st Defendant's assets" and "its subsidiaries' assets".

21. No specific reference was made to "the group" or "subsidiaries" as defined in the interpretation clause, which could have been done. The A submitted that it made no sense for the court to require C1 to disclose indirect assets where their value might be heavily discounted or where the intermediate subsidiaries could be indebted, or have their share capital charged to a 3rd party as they took their place in a chain of assets.

22. The A it could not have enforced judgment against the China project or the China joint ventures, and therefore, it was not of any assistance to A for C2 to reveal only the value of those companies or assets. The A's concern was not a technicality.

23. After receiving this unsatisfactory affirmation, A's solicitors wrote pointing out that the affirmation did not comply with the Disclosure Order and requesting an affidavit which did comply. They asked that any such affidavit be filed before/by 1 June 2000 otherwise they would revert to the Court. No further affirmation, nor any supplementary affirmation was ever received.

24. The A submited in support of its application that this breach is not a technical or non-blameworthy breach but clear defiance of the Court's authority.

25. In respect of the direct or indirect assets point, C2's counsel argued that the terms must be clear and unambiguous and that the form in which C2 filed the affirmation had sufficiently complied. C2 argued that "its assets" must mean all assets including the assets of subsidiaries and as the term assets "directly owned" had never appeared in the order it was suggested that the only reason A was making a distinction was so they could proceed with contempt proceedings.

26. The order has to be looked at in terms of the background of the case and it was quite obvious from that background that A was interested in the assets of Wah Nam Group Limited and clearly interested moreover in the value of the assets and whether or not those assets were in a position to be attacked by the Applicant.

Conclusion

27. Having considered the evidence in this case and the arguments presented for the Applicant and C2, I am satisfied beyond reasonable doubt that contempt has been established by the Plaintiff against C2, Mr Matthew Chan Kwok Choi, in terms of non-compliance with the order of disclosure made on 13 January 2000. I am satisfied beyond reasonable doubt that the affirmation filed in purported compliance with the Disclosure Order was late by 3 weeks.

28. In the context of the proceedings generally, this delay cannot be considered as "technical" only. The Mareva injunction was granted to freeze C1's assets at a time when it appeared that depredations were being made on a publicly listed company, either by, or with the connivance of, or through the negligence of, its then directors. Large sums of money had been moved and the application was granted because of a real risk that the company's assets would have been dissipated if such order was not made.

29. Delay in complying with the order was one way of, possibly, negativing its effect, as well as a flouting of the Court's authority.

30. Despite valiant efforts by C2's counsel to convince the Court that reference to the assets in the disclosure affirmation was reference to assets of C1, these were semantic arguments only. While I accept the assets of a subsidiary could be included in the phrase "its assets", I do not consider that in the context of this order that phrase as the sole reference to assets satisfies the order.

31. The Mareva injunction was directed solely against C1 and refers separately to "its assets", "the 1st Defendant's assets" and "its subsidiary's assets". It would have been possible to confine the disclosure to C1's subsidiaries' assets. That was not done and there could have been no doubt in the mind of anyone reading the Disclosure Order, what was required of C1.

32. An order of the Court, as long as it exists, must be obeyed unless it is bad on it face, and however critical any subsequent court might be of the making of that order. No application to discharge the order was made by C1, nor was any appeal lodged.

33. I am aware of the delicate balance to be maintained in the imposition of the penalty for civil contempt between the strong public interest in ensuring that the orders of Hong Kong Courts are not flouted and the evaluation of the individual circumstances in each case.

34. I am satisfied that the affirmation did not comply with the requirements of the Disclosure Order and that it was late. I am satisfied beyond reasonable doubt that the Applicant has established that C2 was in contempt of the Disclosure Order.

35. Having considered the matters put before me and weighing the importance of ensuring that orders of the Court were obeyed, I am satisfied that such contempt would be dealt with properly in this case by imposition of a sentence of imprisonment. I will hear counsel on that matter.