GREAT WALL PAN ASIA INTERNATIONAL INVESTMENT CO LTD v. CERVERA HOLDINGS LTD AND ANOTHER

HCCT 13/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 13 OF 2016

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D E C I S I O N

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Background

1.  On 3 June 2015, the plaintiff (“Great Wall”) as buyer and the 1^st defendant (“CH”) as seller entered into an agreement (“Agreement”) for Great Wall’s acquisition of 360 million shares of Hang Fat Ginseng Holdings Company Limited (“Company”), a listed company in Hong Kong.  The shares represented approximately 1.8% of the Company’s issued shares, at a consideration of HK$237,600,000, or HK$0.66 per share (“Purchase Price”).  Under a Put Option Deed (“Deed”) of the same date, Great Wall was granted the option (“Option”) to require CH to purchase shares of the Company held by Great Wall during the specified term of the Deed, at the price of HK$0.671 per share (“Option Price”).  By virtue of a Supplemental Put Option Deed dated 16 January 2016 (“Supplemental Deed”), the term of the Deed was extended for Great Wall to exercise the Option by 28 May 2016. 

2.  By a deed of guarantee also dated 3 June 2015 (“Guarantee”), the 2^nd defendant (“Yeung”) personally guaranteed CH’s performance of its obligations under the Agreement and Deed.  Yeung was at the material time the beneficial owner of 63% of the shares in CH.  Other members of the Yeung family beneficially owned another 37% of the shares in CH.  CH was at the material time (until recently) the controlling and majority shareholder holding approximately 57.14% of the shares in the Company.  Yeung was the founder, Chief Executive Officer, chairman and one of the 3 executive directors of the Company.  His brother and his mother are the other executive directors of the Company, and also directors of CH.  Until recent disposals, Yeung and the Yeung family beneficially held approximately 68.67% and 74.22% respectively of the total issued share capital of the Company.

3.  The Agreement, the Deed and the Guarantee all contain an arbitration clause, whereby the parties agreed to submit their disputes to arbitration in Hong Kong. 

4.  Great Wall claims that after completion and its payment of the consideration for the shares under the Agreement, Great Wall exercised the Option on 29 January 2016, requiring CH to purchase the entirety of the 360 million shares at the Option Price, in the total sum of HK$241,560,000 (“Exercise Price”).  This was as a result of the Company’s share price plummeting on that day from HK$0.395 to HK$0.034, representing a 91.4% drop in a single day.  The Option Notice was served on CH on 29 January 2016, and Yeung acknowledged receipt of the same on the same day. According to Great Wall, CH made a partial payment to Great Wall of HK$20 million on 1 February 2016, but it failed to make payment of the remaining balance of the Exercise Price due. 

5.  Great Wall claims that as evidenced by various transactions in the shares held by CH/Yeung in the Company between 28 January 2016 and 1 March 2016, CH and Yeung had been dissipating their assets.  On 2 March 2016, Great Wall obtained an ex parte injunction (“Injunction”) to restrain CH and Yeung from disposing of their assets, to the value of HK$170,560,000.  These assets include shares in the Company and other properties.  The Injunction was sought in aid of arbitration proceedings to be commenced under the Agreement, Deed and Guarantee. 

6.  The Injunction was amended on 3 March 2016, and continued on 11 March 2016, pending full arguments on the inter partes summons. On 8 March 2016, Great Wall served Notice of Arbitration pursuant to the arbitration agreement.  On 10 March 2016, CH and Yeung applied by summons to discharge the Injunction and for variation of the Injunction to permit payment of further legal costs and living expenses for Yeung. 

Whether there is good arguable case

7.  Extensive evidence has been filed by Yeung as to the matters in dispute.  These include claims made that he had been threatened by Great Wall’s representatives into signing the Supplemental Deed, that the Supplemental Deed was void as it had been obtained from him by coercion, that the Supplemental Deed was not supported by any consideration, that he had not understood what he had been asked to sign, and that he suffered from psychiatric illnesses at the relevant time from at least 12 January 2016, when he was asked to sign the Supplemental Deed, up to his making payment of HK$20 million to Great Wall on 1 February 2016. 

8.  As I have indicated at the hearing, the Court cannot at this interlocutory stage, and based simply on the affirmations filed on behalf of the parties, make any conclusive finding on the facts in dispute, as to (for example): (1) whether the Supplemental Deed was signed by Yeung on 23 December 2015 as Great Wall claims, or on 12 January 2016 (and after the initial term of the Deed had expired) as Yeung claims; (2) whether the Supplemental Deed was signed by Yeung under coercion by Great Wall’s Chief Operating Officer (“Gong”), as Yeung alleges; (3) how CH’s seal was fixed to the Supplemental Deed; or (4) Yeung’s mental state at the relevant time.  This can only be done after cross-examination of the witnesses and (if relevant and necessary) the experts at trial. 

9.  For the purpose of deciding whether the Injunction should be continued, it suffices for Great Wall to establish that it has a good arguable case that CH and Yeung were in breach of the Agreement, the Supplemental Deed and the Guarantee.  In this respect, I am so satisfied.  I do not find the assertions made by Yeung in the affirmations so far filed, as to the Supplemental Deed having been signed by him under duress, or coercion, to be credible.  His declarations of his subjective understanding of the Agreement as an outright sale and purchase, and his subjective intention that Great Wall would not seek to sell the shares back to CH under the Option, are irrelevant and inadmissible as to the meaning and effect of the Agreement and the Option. He had arranged for part payment of the indebtedness to be made on 1 February 2016, and there was an email sent under his instructions on 30 January 2016 to acknowledge the indebtedness to Great Wall under the Option Notice.  I do not consider his denials of responsibility for the Supplemental Deed, the email and the part payment to be reliable evidence.  Yeung claims in these proceedings that he is suffering from psychiatric illnesses which impairs his memory, and that he is unable to deal with complicated matters (nevertheless proceeding to file 3 lengthy affirmations with detailed accounts of his alleged dealings since 2015).  Such a claim shows either that he is capable of making baseless claims if they should suit him and that he is incredible or, if he is indeed to be believed as to his impaired memory, that his evidence in these interlocutory proceedings is unreliable as to what he asserts and dubious as to what he can, or cannot, reliably recall.

Whether there was material non-disclosure regarding the Supplemental Deed

10.  It is claimed that Great Wall had failed to make full and frank disclosure of “all matters in relation to the Supplemental Deed”. So far as it can be understood from Yeung’s evidence and from the submissions made on his behalf by Counsel, it is Yeung’s case that Great Wall failed to disclose that the Supplemental Deed was signed 2 weeks after the term for the exercise of the Option under the Deed had expired, and that it is accordingly void for failure of consideration.

11.  As indicated above, it is not necessary and not possible at this stage to determine the issues in dispute as to when the Supplemental Deed was signed.  Great Wall has a credible and a good arguable case that the parties had orally agreed in December 2015 to extend the term of the Deed, and that pursuant to such oral agreement, the Supplemental Deed was signed by Yeung in December, before the original term of the Deed expired on 31 December 2015.  Between 15 November 2015 and 15 December 2015, the Company’s share price had been trading at a range of HK$0.59 at the lowest (on 16 November 2015) to HK$0.670 at the highest (on 7 December and 16 December 2015), compared to the Purchase Price of HK$0.66, and the Option Price of HK $0.671.  Before 15 November 2015, the share price had reached as low as HK $0.56 (on 2 November 2015), and it was only on 31 December 2015 that the share price of the Company reached HK$0.71.  It is reasonable and credible, as Great Wall claims, that its representatives had meetings with Yeung in November and December 2015, to express their concerns as to the price of the shares, and the possibility of Great Wall exercising the Option, and hence, for Yeung to have sought an extension of the time for CH to make payment for the shares, should Great Wall exercise the Option.

12.  In applying for the Injunction, Great Wall had simply referred to the Supplemental Deed as being made on 16 January 2016, which Great Wall now explains was a typographical error for 12 January 2016.  The copy of the Supplemental Deed exhibited bears the date 12 January 2016, which Great Wall now explains was when Great Wall’s representative had signed the document, after Yeung had signed it on 23 December 2015.

13.  In any event, as the Supplemental Deed was signed by Yeung as a deed, there is no question of it being void for lack of consideration.  I do not accept as credible Yeung’s assertions of his fears for his life and for the lives of his family, and that he somehow lacked mental capacity during the period when the relevant documents were signed or issued in his name.  If his only case is that he had signed the English Supplemental Deed without finding out or knowing what he was signing, then obviously, that is no defence.  Before the Court finally determines that there was no oral agreement for extension of the term of the Deed, and that the Supplemental Deed was not signed by Yeung on 23 December 2015, but on 12 January 2016, it cannot be said that Great Wall had failed to disclose any material fact relating to the circumstances of the execution of the Supplemental Deed, and when it was signed.

Whether dissipation of assets

14.  In support of the application for the Injunction, Great Wall had relied on (amongst other things) the fact that there had been transactions and dispositions of Yeung’s and CH’s shares in the Company.  The affirmation of Meng Xuefeng (“Meng”) referred to various “suspicious transactions” between 2 February 2016 and 29 February 2016.  In Yeung’s affirmation of 28 March 2016 (which was filed in opposition to the continuation and to seek the discharge of the Injunction), he explained that the sales of his shares in the Company were made not by him, but by securities companies to which he had pledged or charged his shares for financing on his trading on margin, or as security for loans made to him personally.  These sales were, according to Yeung, all “forced sales”.  Yeung claims that he had not sold any of his shares (whether held by CH or his other nominee company, Athena Power Limited (“Athena”)) in or after January 2016, other than 3 transactions (“Excepted Transactions”).  These were:

(1)  a pledge by Yeung to Rich Inward Limited (“Rich”) in January 2016 of 5 billion shares in the Company, for a loan to pay off Yeung’s personal indebtedness (“Rich Transaction”);

(2)  Yeung’s transfer of 1.2 billion shares of the Company to Champ Harvest Limited (“Champ”) in February 2016 (“Champ Transaction”); and

(3)  Yeung’s sale of 1.2 billion shares to 2 independent third parties on 29 February 2016 to pay off his indebtedness to Jun Yang Securities Company Limited (“JY Transaction”).

15.  Charging, creating securities over and otherwise encumbering assets would constitute a disposition of one’s beneficial interests in the assets and diminution of the value of the assets, but there is no evidence in this case of when the charges and encumbrances (other than the Rich Transaction) were created by Yeung in respect of his shares.  The statements of Yeung’s share trading accounts (produced after the grant of the Injunction) cannot show the dates when the encumbrances were created, and Counsel for Yeung sought to rely on the fact that they do not support the suggestion that the charges or pledges were made by Yeung after the Option Notice was served, and before the Injunction was applied for. 

16.  Notwithstanding this, it cannot be disputed that the sales of the charged shares did take place in February 2016. At the time of the application for the Injunction, Great Wall cannot be expected to know that the sales were not made by Yeung, but by creditors of Yeung or CH.  Nor can it be disputed that the Rich Transaction, the Champ Transaction and the JY Transaction did take place in late January and February 2016.  All these sales supported Great Wall’s case at the time of its ex parte application for the Injunction, that there was evidence of disposition of a substantial number of the shares of Yeung and CH in February 2016.  It cannot be said that there had been material non-disclosure on the part of Great Wall that these sales were forced sales by Yeung’s creditors, as this only came to light as a result of the explanations made by Yeung after the Injunction was served.  The explanations and the evidence offered by Yeung can only affect whether the Injunction should be continued.

17.  In the submissions made on behalf of Yeung, Counsel only highlighted the fact that all the transactions relied upon by Great Wall in its application for the Injunction were either sales made by creditors and outside Yeung’s control, or were otherwise (in respect of the Excepted Transactions) “genuine” transactions of sales and pledges made by Yeung in an attempt to pay off his own creditors, or to salvage the Company by avoiding further sales which would cause its share price to further plummet.

Applicable legal principles

18.  The principles applicable to the determination of whether there is a risk of dissipation of assets is objective.  In Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft  GmBh (The Niedersachsen) [1983] 1 WLR 1412 at 1422, the applicable test was formulated as:

“ ... whether, on the assumption that the plaintiffs have shown ‘a good arguable case’, the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favor of the plaintiffs would remain unsatisfied.”

19.  It is now clear that there is no requirement for an applicant for Mareva relief to show that the defendant intends to deal with his assets with the purpose of ensuring that any judgment will not be met.  The court is concerned with the effect of the defendant’s conduct, as opposed to the motives underlying it (Ulfar International AS v Miles, Court of Appeal (Civ Div), unreported, 29 August 1991).  It is not necessary to show a “nefarious intent” on the part of the defendant.

20.  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 Yiah Seng Co Ltd [1990] 1 HKLR 235).  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 reality (Hornor Resources (International) Co Ltd v Savvy Resources Ltd [2010] 4 HKC 50, 57).

21.  In TTMI Ltd of England v ASM Shipping Ltd of India [2006] 1 Lloyd’s Rep 401, the following principles are also made clear:

“The purpose of the Mareva jurisdiction is sometimes referred to as the prevention of the ‘dissipation of assets’. Without explanation that phrase is, itself, obscure... The underlying purpose of the jurisdiction is not to provide a claimant with security for its claim but to restrain a defendant from evading justice by disposing of assets otherwise than in the ordinary course of business so as to make itself judgment proof with the result that any judgment or award in favor of the claimant goes unsatisfied. The purpose is not to provide security for the claimant in respect of his claim. It is well established that it is not necessary to establish that the defendant is likely to act with the object of putting his assets beyond reach. What has to be shown is that there is, absent an injunction, ‘a real risk that a judgment or award in favor of the plaintiffs would go unsatisfied’... That formulation cannot, however, be regarded as a complete statement of the law. A defendant may be likely to make perfectly normal dispositions, such as the payment of ordinary trading debts, the effect of which may be that, when any award is made, it is, in whole or in part unsatisfied when, absent those payments, it might have been satisfied or satisfied to a greater extent. Something more than a real risk that the judgment will go unsatisfied is required.

Thus in a case in the Court of Appeal of Ontario - Chitel v Robart [1982] 3 OR (2d) 513 at 532-533, the court said:

“The applicant must persuade the court by his material that the defendant is removing or there is a real risk that he is about to remove his assets from the jurisdiction to avoid the possibility of judgment, or that the defendant is otherwise dissipating or disposing of its assets, in a manner clearly distinct from his usual or ordinary course of business or living, so as to render the possibility of future tracing of the assets remote, if not impossible in fact or in law.”

22.  With these principles in mind, I turn to the transactions complained of by Great Wall, to decide whether there was, at the time of the ex parte application, evidence of dissipation of assets.  I also have regard to the explanations given by Yeung with regard to these transactions, in the consideration of whether the Injunction should be continued.

(1) The Rich Transaction

23.  In respect of the Rich Transaction, what Yeung says (in essence) is that the share price of the Company collapsed on 28 January 2016, and he was facing a grave financial crisis when all his creditors started to call on his loans and began to sell the shares which he had pledged to them on his margin accounts with these creditors.  In his “urgent need of money”, Yeung entered into a short-term loan agreement with Rich on 29 January 2016, for a loan of HK$200 million “to settle the debts arising from the slump of the Company’s share price”.  CH acted as guarantor for Yeung’s loan, and a share charge was entered into between CH and Rich on 29 January 2016, whereby CH charged 5 billion of its shares in the Company to Rich as security.  On the same day, a memorandum of understanding was signed between CH and Rich (“MOU”), for Rich to acquire a majority stake in the Company, but according to Yeung, the MOU was terminated by Rich on 2 February 2016.  The loan advanced by Rich was apparently repayable on 1 February 2016, and when Yeung could not repay, Rich took steps to enforce the share charge and transferred the 5 billion shares charged by CH into its name.

24.  According to Yeung, the Rich Transaction was a genuine transaction entered into to obtain a loan for repayment of his outstanding margin loan.  He claims that the Rich Transaction did not involve any dissipation of money by him, or by CH.  He further claims that the 5 billion shares in question were not disposed of by him in order to frustrate Great Wall’s claims.  They were sold by Rich in exercise of its rights under the share charge.

25.  I reject Yeung’s argument that just because the loan obtained from Rich was used to repay his creditors and “not a single cent had been dissipated by (CH or himself)”, there was no dissipation of assets.  He admits that he had charged and encumbered his shares on 29 January 2016 under the Rich Transaction.  This was a disposal of his beneficial interests in and dealing with his shares.  Nor is it true that he obtained no personal or commercial benefit from the fact that his creditors were repaid - his indebtedness was discharged, in part if not in full.

(2) The JY Transaction

26.  According to Yeung, the sale by CH of 1,217,470,000 shares of the Company on 29 February 2016 was to repay a debt due from CH and himself to Jun Yang Securities Company Limited (“JY”), on the margin accounts maintained with JY in CH’s name.  On Yeung’s case, they were “loan repayment arrangements”, and not dissipation of assets. 

(3) The Champ Transaction

27.  Yeung has given a convoluted and long account of his dealings with one Liu Han 劉漢 (“LH”), the assistant to one Yang Kai (“Yang”) who was the major shareholder and chairman of a listed company known as China Huishan Dairy Holdings Company Limited (“Huishan Dairy”).  According to Yeung, he was coerced and deceived, in the course of various meetings which took place from 2 February to 4 February 2016, into signing bought and sold notes to sell his shares in the Company to Champ Harvest Ltd (“Champ”), a company which was 90% owned by Yang.  Yeung’s account is that he had meetings with various creditors of his and with potential investors in the Company on 2 February and 3 February 2016.  These meetings were held to discuss debt restructuring plans, in the aftermath of the collapse of the Company’s share price on 28 January 2016.  According to Yeung, these potential investors were actually introduced and referred to him by Gong, the Chief Operating Officer of Great Wall, and by one Ms Tang (“Tang”) who worked at CCB International Accept Management Limited (“CCB”) and who is in fact Gong’s wife.  Yeung claims that LH, Tang and Gong had induced him into signing various documents and transferring the 1.2 billion shares owned by Yeung/CH into the name of Champ, under their pretext that the shares would not actually be sold to third parties but would only be held on trust for Yeung, and to be used to pay off amounts due on Yeung’s margin accounts with a securities company, and hence prevent further forced sales of Yeung’s shares by his creditors. 

28.  To summarize Yeung’s account of events, he was given to understand by LH, Tang and Gong at these meetings that (1) the proposal they made would preserve the value of Yeung’s shares in the Company; (2) he could buy back the shares from Champ at the same price if a new investor was found, and sell the shares at a higher price to the new investor; (3) if the debt restructuring plan was not successful, all his shares transferred to Champ would be returned to him; and (4) if he accepted these proposals, the Company would not go bust when trading in its shares resumed, when all creditors would be selling his shares in the Company if there was no debt restructuring.  However, as events transpired, when trading in the Company’s shares resumed on 5 February 2016, Yang sold the 1.1 billion shares transferred to him on the market.  Yang hence made a profit of $55 million, but Champ refused to pay any of the sales proceeds to Yeung.  Yeung claims that Yang and Huishan Dairy were at all material times acting in collusion with Great Wall and CCB, to “deceive him of his shares” in the Company.

29.  As the authorities show, Yeung’s subjective intentions in entering into the Excepted Transactions are not determinative of the question of whether the Excepted Transactions constitute dissipation of assets (Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmBh (The Niedersachsen) [1983] 1 WLR 1412; Ulfar International AS v Miles, Court of Appeal (Civ Div), unreported, 29 August 1991).  They had the objective effect of diminishing the assets of Yeung/CH.  The fact that the Champ Transaction was made allegedly as a result of fraudulent misrepresentations (as Yeung claims) does not detract from the fact that the transfers were indeed made by him to Champ/Yang, as a result of the decision made by him at the relevant time, which had the effect that his shares were disposed of.

30.  In my view, the only possible argument is whether the dispositions, whether they be Yeung’s creation of encumbrances or the Excepted Transactions, constitute dispositions “in the ordinary or usual course” of Yeung’s or CH’s business or living, or were otherwise justifiable. 

31.  Yeung was at the material time the Chairman, Chief Executive Officer and one of the directors of the Company.  On his own evidence, he held about 47.25% of the shares of the Company, through CH and Athena.  The Company is in the business of ginseng import and sales.  CH is an investment holding company beneficially owned and controlled by Yeung and his family.  CH is the controlling shareholder of the Company. 

32.  According to Yeung’s own evidence, he started making investments in stocks of other listed companies and in properties since May 2015, and obtained short-term loans and financing to facilitate these personal investments.  On Yeung’s evidence, he had opened margin accounts with several securities companies to finance these acquisitions, and had pledged a significant number of about 10 billion of his shares in the Company (equivalent to about 50% of the entire issued share capital of the Company) as security for such investments of his.  Yeung stressed that these were all his personal investments, but he acknowledged that when any entity holding Yeung’s shares as security makes sales of the pledged shares as a result of any drop in the Company’s share price, it had a snowball effect on the Company’s shares, as was the case at the end of January 2016 when the share price of the Company dropped over 90% within the single trading day, from HK$0.395 to HK$0.034.

33.  Yeung admits that his share trading and the relevant margin accounts for which his shares in the Company were pledged as security had nothing to do with the business of the Company, of which he is the Chief Executive Officer and director.  The loans Yeung obtained in February were described as being for his personal use.  I have not been referred to any evidence which suggests that CH at any time had any business or trade.  It has simply been referred to as “an investment holding company”, presumably holding the investments and assets of Yeung, and his family.  On the evidence, Yeung’s margin trading in shares was more in the nature of high risk speculation, than ordinary investment.  It was not suggested in his evidence that it was anyone’s normal business.  In any event, in the absence of any credible evidence from Yeung regarding the nature and pattern of his trading in shares prior to the dispositions and pledges in question in February 2016, I do not consider that, on the materials before me, the sales of and charges created over Yeung’s shares in February 2016 can be accepted as dispositions “in the ordinary or usual course” of the business of Yeung, or of CH.  Yeung and his Counsel have not claimed, outright, that they were.  The only documents produced by Yeung are statements dated 31 December 2015 and statements for the end of January and February 2016 which show the status of CH’s accounts with securities companies on those dates.  There is no evidence of Yeung’s/CH’s trading before December 2015, which can show that the volume of the share trades and the substantial encumbrances created over Yeung’s/CH’s shares in February 2016 were consistent with and were part of an “ordinary” or “usual” course of the business, operations or activities of Yeung, or CH.  In the absence of such evidence, there is only evidence of the encumbrances created over the shares of Yeung/CH from February 2016.  Nor has Yeung offered any explanation as to why he had to have recourse to his/CH’s shares as security for any loans he sought and procured in February 2016, as opposed to other assets of his.

34.  I have borne in mind that the mere fact that Yeung’s conduct would risk impairing Great Wall’s ability to enforce a judgment or award does not necessarily mean that the Injunction should be granted.  The conduct in question must be unjustifiable (Mobil Cerro Negro Ltd v Petroleos de Venezuela SA [2008] 2 All ER 1034).  Even if Yeung may have in the past enjoyed the conveniences of engaging in speculative trading on margin, I am not persuaded that there is justification for him to continue such high risk and speculative trading, or to utilise his shares to support such speculative trading, when creditors such as Great Wall are asserting their claims. 

35.  In assessing whether there is a real risk of dissipation of assets, the nature of the assets (whether they are easily disposed of), the nature and financial standing of the defendant’s business, the defendant’s past or existing credit record, the defendant’s behavior in relation to the plaintiff’s claims, are all relevant considerations (para 12.039, Gee on Commercial Injunctions; Mobil Cerro Negro Ltd v Petroleos de Venezuela SA [2008] 2 All ER 1034, at 1046). 

36.  Having considered the entirety of the evidence at this stage, which includes the tenuous claims raised by Yeung in relation to his denial of liability notwithstanding the partial repayment and his written acknowledgment of liability; the irresponsible and incredible claims made that as Chairman of a listed company, he was prepared to and did sign written documents without understanding or having looked at their contents or having them explained to him (and yet could conclude that the document he had signed without looking was the Supplemental Deed); the volume of the shares which he was ready to and did pledge on his margin share trading and dealings over a short period of time, with knowledge that these would have devastating effects on the price of the Company’s shares; evidence of Yeung acting in breach of his contractual obligations under a Share Charge Deed with a lender (“Help U Credit”), just 2 days after entering into the said deed on 27 January 2016; and the ease and frequency with which large volumes of Yeung’s shares had been moved and transferred from one of his securities trading accounts to another;I conclude that there is a realrisk that Yeung (and CH which Yeung controls) will not honour their obligations under any award or order of the court that may be made against them, and that Great Wall may have difficulty in getting the fruits of any award that may be given in its favor, in the absence of the Injunction. 

37.  There is also evidence that on 21 February 2016, Yeung and his family had agreed to the allotment and issue of 31.2 billion new shares of the Company, representing 155.87% of the issued share capital of the Company to a new investor, and to place 8.8 billion shares of the Company to another investor, in each instance at a discounted price of HK $0.01 per share (“21 February Transactions”).  Great Wall claims that there is no commercial rationale for Yeung and his family to have agreed to the significant dilution of their shares in the Company, at such a huge discount of the share price, raising only HK$384 million when the Company had debts of over HK$1.88 billion, and that these transactions were attempts by Yeung to siphon off his shares and assets to parties connected with him, in an attempt to make himself judgment proof against his creditors.  (Yeung’s declared design for entering into the Champ Transaction was for a similar purpose: to have his shares transferred to someone, to be held on trust for him.) Even if the 21 February Transactions were not mere shams (as Great Wall suggests), they do show that Yeung had agreed to transactions which had the effect of substantially disposing of or diminishing the value of his assets.

38.  I conclude from the above that there is a risk that Yeung’s/CH’s shares and assets would be used otherwise than for normal business transactions, particularly given Yeung’s propensity for reckless and speculative share trading, and his apparent disregard for contractual obligations. 

Non-disclosure regarding the Champ Transaction

39.  Whilst I consider that there is sufficient evidence of activities and transactions which constitute dissipation of assets, and that the refusal of the grant or continuation of the Injunction would involve a real risk that a judgment or award in favor of Great Wall would remain unsatisfied, the evidence shows that there was material non-disclosure on the part of Great Wall concerning the involvement of Gong in the negotiations for the Champ Transaction.  In the affirmation in support of the ex parte Injunction, Meng only claimed that on 4 February 2016, CH sold 1.2 billion shares to Champ, at HK$0.0194 per share, at a 57% discount to the closing price of the shares of the Company (at HK $0.034), and that this constituted a reduction of CH’s shareholding in the Company from 54.8% to 48.6%. This was one of the transactions claimed to be evidence of Yeung’s dissipation of assets, through CH.

40.  As summarized in paragraphs 27 and 28 above, Yeung claims that the investors in the Champ Transaction were introduced to him by Gong and his wife, Tang, that Gong was present at the meetings held on 2 February and 3 February 2016 to discuss the shares to be transferred to Yang, and that during these meetings, Gong even had discussions with Liu (assistant to Yang, who ultimately acquired the 1.2 billion shares through Champ).  According to Yeung, the documents for the transfer of the 1.2 billion shares to Champ were signed on 4 February 2016, and a further meeting was held on the same day in relation to how the shares were supposed to be returned by Yang/Champ to Yeung, at which meeting Gong was present.

41.  In the evidence filed by Great Wall in reply, Gong did not deny his presence at the meetings on 2 February to 4 February 2016, nor his knowledge of discussions having taken place of the transaction proposed between Yeung and China Huishan.  He corrected the name of Liu as “Liu Kan” of Huishan Dairy, instead of “Liu Han” as Yeung claimed.  Gong only distanced himself from having been “substantively involved” in the discussions and negotiations between Yeung and Liu, claiming that Great Wall was not a party to nor financially interested in the transaction between Yeung and Yang/Huishan Dairy, and that Yeung was legally advised in his negotiations with Huishan Dairy.  As a whole, Gong has not denied that he was aware of the fact that there was a transaction between Yeung and Huishan Dairy, that there were discussions which resulted in the execution of a bought and sold note between Yeung and Huishan Dairy at the end of the meetings, and that on 4 February 2016, there was a further meeting amongst the parties for the purpose of drawing up the documentation for the transaction proposed for Huishan Dairy to purchase shares from Yeung.

42.  Material to the ex parte judge’s exercise of the discretion whether to grant the Injunction is whether there was evidence of Yeung’s dissipation of assets between 29 January 2016 and 29 February 2016, whether such transactions constituting evidence of dissipation were known to Great Wall, and whether there was delay from the time Great Wall had knowledge of what were claimed to be the transactions constituting dissipation.  Gong’s presence at the meetings on 2 to 4 February 2016, and his knowledge of the Champ Transaction and negotiations for the same should have been disclosed to the Court at the time of the ex parte application.  Bearing in mind Gong’s involvement and knowledge, Great Wall’s failure to disclose such information was intentional and deliberate.

43.  If material non-disclosure is established, the Court will be “estute to ensure that a plaintiff who obtains (an ex parte injunction) without full disclosure ...  is deprived of any advantage he may have derived by that breach of duty” (per Donaldson LJ in Bank Mellat v Nikpour [1985] FSR 87, at 91).  In Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642, the Court of Appeal referred to the main principles which guide the Court in the exercise of its discretion whether to discharge the order, and whether to grant it afresh, which principles were summarized in Arena Corp Ltd v Schroeder [2003] EWHC 1089 (Ch):

(1)  If the court finds that there have been breaches of the duty of full and frank disclosure on the ex parte application, the general rule is that it should discharge the injunction obtained in breach and refuse to renew the order until trial.

(2)  Notwithstanding that general rule, the court has jurisdiction to continue or regrant the order.

(3)  That jurisdiction should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

(4)  The court should assess the degree and extent of the culpability with regard to the non-disclosure.  It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order.  Equally, there is no general rule that a deliberate breach will attract that sanction.

(5)  The court should assess the importance and significance of the outcome of the application for an injunction of the matters which were not disclosed to the court.  In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.

(6)  The court can weigh the merits of the plaintiff’s claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff’s case is allowed to undermine the policy objective of the principle.

(7)  The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

(8)  The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence.

(9)  There are no hard and fast rules as to whether the discretion to continue or regrant the order should be exercised, and the court should take into account all relevant circumstances.

44.  In this case, there was non-disclosure of material facts relating to Great Wall’s participation in and the extent of its knowledge of the Champ Transaction.  Great Wall and Gong have not offered any explanation why Gong’s involvement in and presence at the meetings on 2 to 4 February 2016 were not disclosed to the ex parte judge.  The duty of making full and frank disclosure is paramount in ensuring that the Court’s power of granting ex parte relief is not abused, and is rightly employed only in appropriate and deserving cases, without doing injustice.  However, having regard to the entirety of the evidence of Yeung’s dealings and transactions in the shares, the Injunction could properly have been granted even if full disclosure had been made at the ex parte application with regard to the Champ Transaction.  These are all relevant considerations.

45.  In balancing the risks of doing injustices, I have also taken into due consideration Yeung’s claims and the arguments made on his behalf that the pledges of his shares and the Excepted Transactions were all made by him in an attempt to raise funds to discharge the debts on his margin accounts and to avoid creditors’ sales of his shares.  I have also borne in mind that the Injunction is not intended to provide security for Great Wall’s claims, and that the Injunction has drastic effects on Yeung.  Continuing the Injunction will not prevent genuine creditors of Yeung to exercise their rights under their securities.  It will, however, restrain Yeung and CH from further encumbering their shares.

46.  To uphold the public interest in requiring full and fair disclosure, I consider that the non-disclosure in this case justifies the discharge of the ex parte Injunction.  However, bearing in mind the relative strength of Great Wall’s case under the Agreement, the Supplemental Deed and the Guarantee, the overall evidence of the dispositions made and transactions entered into by Yeung and CH in late January and February 2016, I am of the view that on a balance of convenience (or a balance of the risks of doing an injustice), the Injunction should be granted afresh and continued until further order.

47.  No issue has been raised as to whether it is more appropriate for the interim measure or relief to be dealt with by the arbitral tribunal.

The scope of the Mareva injunction

48.  The Injunction prohibits Yeung and CH, as the named defendants, from disposing of or dealing with their assets, such assets being their shares in the Company and the other companies identified in the Injunction order.  Yeung has not disputed that Athena is his nominee company which holds shares and investments on his behalf.  In the schedule of assets exhibited as “YWY-8”, Yeung has admitted his beneficial ownership of the companies identified in the Injunction, with the exception of Dragon Jump Global Limited (“Dragon”), Candor Limited (“Candor”) and Turbo Profit (Hong Kong) Limited (“Turbo”). 

49.  The Injunction as it now stands expressly prohibits Yeung from disposing of and dealing with his shareholding in Dragon and Candor.  The only evidence furnished by Great Wall as to the shareholding in Dragon and Candor are that Dragon is the registered owner of the shares of Candor, and that Dragon is ultimately owned by Yeung’s brother, who is not a defendant in these proceedings.  The brother has filed an affirmation to the effect that since 6 July 2011, he has been and is the sole shareholder and director of Dragon, and that Dragon is wholly owned and controlled by him.  In the absence of any evidence to contradict that, the references to Dragon and Candor in the Injunction should be deleted.  Great Wall’s application was from the outset, and remains, an application for a Mareva injunction.  It has not been asserted that the Injunction should be extended under the Chabra jurisdiction to any third party, nor is there evidence that Yeung has substantive control over any third party not named as a defendant to which the Injunction should extend.

50.  Yeung’s wife has also filed an affirmation, in which she claims that the property at Fontana Gardens (included in paragraph 1(1)(b)(iii) of the Injunction) is the matrimonial home of the couple, and held in the name of Billion Victor Enterprises Limited (“Billion”), the shares in which are registered in Yeung’s name, but which are held on trust for her under a Declaration of Trust dated 2 March 2009.  There are pending divorce proceedings between Yeung and his wife.  There is no evidence from Great Wall which calls into question the wife’s evidence.  Pending the divorce proceedings and until further order is made by the Court or the arbitral tribunal, I will amend the Injunction by replacing the original paragraph 1(1)(b)(iii) with: “the 1^st defendant’s shareholding in Billion Victor Enterprises Limited”.

51.  Paragraph 1(1)(b)(viii) of the Injunction should be deleted, as there is no evidence of Yeung’s/CH’s ownership or control of Turbo. 

Variation of the Order sought

52.  Yeung seeks the variation of the Injunction, to permit his expenditure of $503,200 per month for his ordinary monthly expenses, HK$330,000 to maintain his wife, children and their expenses, HK$157,155 for payment of salaries tax due, and a further sum of about $3.9 million for legal expenses. 

53.  Ordinary living expenses should be reasonable. A defendant seeking to obtain a variation of a Marava injunction should satisfy the Court, by full and frank disclosed of its assets, that there is no ulterior motive which involves the removal of other undisclosed assets out of the jurisdiction (per Sir John Donaldson MR in Campbell Mussels v Thompson (1985) 81 LS Gaz 2140).  It was also stated by Sir John Donaldson MR in the case of Campbell Mussel that judges should have a very healthy scepticism when they are dealing with parties to whom Mareva injunction apply.

54.  The documents for Yeung’s stay at Four Seasons Place have been exhibited to support his proposed rental payments.  I will permit these monthly rental expenses of $53,200, Yeung’s proposed tax payment of $157,155 and the monthly maintenance of $220,000 for Yeung’s wife and youngest child.  In addition, I will allow an additional reasonable sum of $150,000 for Yeung’s monthly expenses, which will have to include the credit card expenses of himself, his wife and 2 children. 

55.  In Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783 (at p 788), Au J referred to PCCW Ltd v Dixon [1983] 2  All ER 158, and summarized the principles applicable where a defendant seeks the release of funds to pay legal costs, in a case where no proprietary claims are asserted:

“In the case of an ‘ordinary’Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the court’s discretion faced with an application to release the funds, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet the payment; and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff.”

56.  Yeung has given no information whatsoever as to whether he has access to other assets or means to meet the legal (or other) expenses which he seeks. He has not explained how his monthly living expenses of over $500,000 and his rental payments at the Four Seasons have been met since the grant of the Injunction in early March 2016, until the hearing in May 2016. Nor has Yeung accounted for how he was able to engage and pay his solicitors and counsel and to draft and prepare 7 substantial affirmations on the defendants’ behalf in these proceedings, and to appear on their behalf at the hearing before me. I am not satisfied that he has made full and frank disclosure of his means and sources to pay for either his legal costs, or anything else.

57.  I have already made provision for Yeung’s reasonable living expenses.  HK$500,000 was also provided for in the Injunction for legal expenses.  In the exercise of my discretion, I will permit a further sum of HK$800,000 for Yeung’s and CH’s legal expenses.

Orders

58.  The ex parte Injunction is discharged for material non-disclosure, but I grant a new order in the same terms, save as revised above under the heading “Scope of the Mareva Injunction”, with the revisions referred to under the heading “Variation of the Order Sought”. 

59.  Much of the evidence prepared for and most of the arguments for the hearing of the application on 10 May 2016, for discharge as well as the continuation of the Injunction, concern matters relating to the creation of the encumbrances, the alleged dispositions, and the issues raised in defence as to whether there is a good arguable case, all of which I have ruled against Yeung and CH, apart from Great Wall’s non-disclosure of the facts relating to the Champ Transaction.  In the circumstances, I consider that the appropriate order for costs is that 50% of the costs of the applications for the discharge of the Injunction (including its variation) and for the continuation of the Injunction, including the costs of the hearing on 10 May 2016, are to be borne by Yeung and CH, and 50% to be borne by Great Wall - to mark the Court’s disapproval of Great Wall’s breach of its important duty to make full and frank disclosure.  Great Wall should bear its own costs of the ex parte application itself.

60.  The 4^th affirmation of Meng was served after the time period allowed for Great Wall to file evidence in reply. I see no good reason why leave should be given for the late evidence to be filed and to be relied upon at the hearing.