HONG KONG LIFE INSURANCE LTD v. FUNG SIU CHEUNG MICHAEL AND OTHERS

HCA 1164/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1164 OF 2012

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J U D G M E N T

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Introduction

1.  Before this court is an application by the 9^th defendant to vary a Mareva injunction to allow her to withdraw sums for “living expenses” and/or legal costs.  There had been a similar application by the 12^th defendant, but during the hearing, the parties were able to reach an agreement in relation to his application.

2.  The 23 defendants will be referred to D1 to D23 respectively.

3.  The Mareva injunction was obtained by way of an ex parte application by the plaintiff (“P”) against D1 to D12 and DHCJ L Chan, as he then was, granted the order on 5 July 2012 (“Ex Parte Order”).  The Ex-Parte Order was later continued at the inter-partes hearing on 13 July 2012 by To J at which D9 was absent.

4.  Subsequent thereto, there were three occasions when the Ex Parte Order was varied:

(i) On 17 September 2012, an order by consent was made to allow D9 to sell a property (“South Horizons Property”) subject to the payment of the net sale proceeds into court (“1^st Variation Order”)[1]; A sum of HK$2,860,400.80 was subsequently paid into court[2] (“Net Sale Proceeds”).

(ii) On 11 September 2013, an order was made by consent to allow, among other things, HK$10,000 be released to D9, and others, to be paid into the client account of the solicitors acting for D9, to enable her to settle legal costs for  preparing her affirmation of assets under paragraph (25) of the Ex Parte Order (“2^nd Variation Order”)[3];

(iii) On 25 October 2013, an order was made by consent to allow  HK$28,050 be released to D9, to be paid as before and to enable her to settle legal costs for preparing her defence(“3^rd Variation Order”)[4].

5.  On 8 October 2013, an order by consent has further made respectively for stay of proceedings herein against D9 until she has given evidence or elected not to give evidence in a criminal case referred to later in this judgment, or until such criminal case has been discontinued as against D9[5] (“Stay Order”).  As a result of the Stay Order, D9 had withheld filing her defence.

6.  Thereafter, the present summons for variation was issued by D9 on 12 November 2013.

Background

7.  P was/is a life insurance company incorporated in Hong Kong.

8.  D1 was employed as a Senior Accounting Officer in P’s Accounts Department from 10 June 2008 until his dismissal.  D2 was his wife at all material times.

9.  P had/has no relationship at all with any of the other 22 defendants.  

10.  It was P’s case that since January 2012, D1 seldom returned to work claiming that his father was diagnosed with cancer.  Eventually, on 2 May 2012, P terminated D1’s employment with immediate effect due to his absences from work.

11.  After D1’s dismissal, P discovered that D1 had engaged in various wrongful acts which were part of an alleged fraudulent scheme with intent to injure P and/or cause loss to P.

12.  As part of this fraudulent scheme, D1 had issued a total of 75 cheques (“75 Cheques”) purportedly on behalf of P to D2 to D12 inclusive.  The 75 Cheques were issued from P’s accounts, and it was P’s case that as those 12 defendants had no relationship with P, it must be well known to them that they were not entitled to receive any of those 75 Cheques. It was P’s case that D1 had misappropriated funds from P totalling about HK$73.8m (“Misappropriated Funds”).

13.  It was not disputed that D9 received 4 out of the 75 Cheques in a total sum of HK$4,550,000.90[6].

14.  P issued the writ in this action on 5 July 2013 and on the same day obtained the Ex Parte Order.

15.  The matter was also reported to the police by P, and D1to D12 were arrested and were subsequently charged, save that D4 and D7 had absconded.  On 8 November 2013, D1 had pleaded guilty to the charges against him, including the issuance of the 75 Cheques and the payment of the Misappropriated Funds to D2 to D12.

16.  So far as D9 was concerned, she was charged with the offence of “Dealing with property known or believed to represent proceeds of indictable offence”, contrary to section 25(1) and (3) of the Organised and Serious Crimes Ordinance, Cap 455 in DCCC 879/2013[7] (“Criminal Case”).  The Criminal Case was adjourned on several occasions for mention and is now scheduled to be heard on 18 March 2013, pending the outcome of the hearing before this court.  No trial dates have been fixed yet.

D9’s Case

17.  D9 filed three affirmations, the 1^st one was in compliance with paragraph (25) of the Ex Parte Order to disclose her assets of over HK$20,000, and her 2^nd and 3^rd affirmations in support of her present application.

18.  P said she was born in Hunan in Mainland China and is now aged 37 years.  She said she only received education up to primary level.  She moved to reside in Hong Kong in about 2004/2005 and seemed to have met D5 soon afterwards.  According to D9, D5 was/is a sophisticated businessman.  They have been cohabiting since they met, and have a daughter who was born in July 2009, and is now 4 years old.

19.  D9 bought a property in Ming Yuen Western Street, Hong Kong in about August/September 2007 at a consideration of HK$1.8m for the residence of D5 and herself (“Ming Yuen Property”).  After she became pregnant, she decided to sell the Ming Yuen Property in order to purchase a larger property.  The Ming Yuen Property was later sold in about May/June 2009 at a price of HK$2.32m.

20.  On 19 August 2009, D9 then bought the South Horizons Property and she said she paid the down payment and related purchase costs out of the sale proceeds from the Ming Yuen Property, with a mortgage, and thereafter, she and D5 and their daughter moved to reside in the South Horizons Property.

21.  D9 further said after giving birth to the daughter, she ceased her employment and became a full time mother and all their living expenses including the mortgage instalments on the South Horizons Property were paid by D5.

22.  According to D9, the South Horizons Property was put up by her on the market for sale in about May/June 2012, and a preliminary agreement for sale and purchase was successfully entered into between her and the prospective purchaser in July 2012 for the consideration of HK$5m, and in order not to be in breach of the contract of sale, she instructed her former solicitors to apply for the 1^st Variation Order in order to complete the sale.  The sale was subsequently completed on about 27 September 2012 with the Net Sale Proceeds paid into court that day[8].

23.  D9 said in August 2012, she, D5 and their daughter moved to a property in Ap Lei Chau (“Sham Wan Property”) where they have been living with a domestic helper.  The Sham Wan Property was rented in name of D5.  D9 claimed her monthly living expenses were HK$49,235 per month, inclusive of rent.

24.  In her 1^st affirmation, D9 disclosed that she had no income, and the total bank balances in August/September 2013 came to just under HK$847,000.  Apart from the Net Sale Proceeds, she had said she had no other assets of over HK$20,000.

25.  According to D9, the estimated legal costs of the Criminal Proceedings until conclusion of the trial are HK$1,178,000.

26.  She sought a release of funds from the Net Sale Proceeds to meet her living expenses, to pay her legal costs of the Criminal Proceedings, and also to pay HK$150,000 for her legal costs for the present application.

The Ex Parte Order

27.  The Ex Parte Order contains an exception in paragraph (28) that each defendant is not prohibited from spending HK$1,000 per month towards living expenses and a reasonable sum on legal advice and representation, which as mentioned earlier was varied by consent on two occasions under the 2^nd and the 3^rd Variation Order for release of funds for legal costs.

28.  Mr Chan, Counsel for D9, had submitted that as P had agreed to the above exception in the Ex Parte Order and the subsequent variations and as the present application was only an application for further variation, the only question to decide would be whether the funds sought were reasonable.

29.  As Mr Chan has not produced any authorities to support his proposition, I intend to approach the application by applying the relevant legal principles set out below.

Relevant Legal Principles

30.  The purpose of a Mareva injunction is to prevent a defendant from dealing with or disposing of assets which the plaintiff wishes to preserve to satisfy a potential money judgment[9].

31.  For a domestic Mareva injunction, the plaintiff must show[10]:-

a. The plaintiff has a good arguable case;

b. The defendant has assets within the jurisdiction;

c. The balance of convenience lies in favour of a grant;

d. There is a real risk of dissipation of assets, which would render any judgment of no effect; and

e. The plaintiff must comply with a strict duty of full and final disclosure.

32.  In determining whether funds subject to a Mareva injunction should be released to the defendant for legal or other expenses, two situations are to be distinguished, the first being where the plaintiff is claiming a proprietary interest in the funds or property in question and the second being where there is no such proprietary claim[11].  In respect of the first situation, the court will apply a more stringent test since it would be clearly unsatisfactory for the defendant to be granted recourse to the plaintiff’s money or property for the purpose of defending himself against the plaintiff’s claim to that money or property.

33.  For the first situation, it has been held in Ostrich Farming Corp Ltd v Ketchell [1997] EWCA Civ 2953, applied in Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33 and followed in Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783, HCA 1535B/2008, 21/1/10 that where the injunction involves a proprietary claim by a plaintiff, the court has a discretion to enable a defendant to use assets subject to the injunction to pay legal expenses.  In deciding whether to exercise that discretion, the court will adopt a two-stage process:-

a. The defendant applying for the release of assets has to demonstrate with full and frank evidence that there are no other available assets that can be used to pay his legal expenses.  If the defendant fails at this hurdle, then that is the end of the application and it will be dismissed.

b. If the defendant succeeds in demonstrating the lack of other available assets, the court must balance the potential injustice to the plaintiff of releasing the assets against the potential injustice to defendant of depriving him of legal assistance to advance what may ultimately be a successful defence. The process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim to the assets and the defendant’s defence to that claim.

(“Proprietary Test”)

34.  In the second situation, where the plaintiff is not asserting a proprietary claim to the assets in questions, the court should consider whether the defendant has shown by sufficient evidence (a) that he does not have other assets available to meet the legal fees or other expenses and (b) the purpose of the application is not an attempt to dissipate the asset (which prima facie are the defendant’s) to frustrate the execution of judgment by the plaintiff[12].  In other words, the defendant must show an arguable case for his having recourse to the funds in question[13] (“Non-Proprietary Test”).

35.  With the above general principles in mind, I now turn to the present application.

Whether P has a proprietary claim against D9

36.  Mr Chan submitted that P’s claim was not a proprietary claim, and as set out in his 1^st skeleton submissions this was based mainly on D’s case as follows[14]:

(i) All the funds in her bank accounts and Net Sale proceeds  did not belong to P but belonged to her;

(ii) The periodical maintenance to support her and her daughter, as well as the monthly mortgage instalments of the South Horizons Property or part thereof were discharged by D5, and there was no cogent evidence adduced by P to prove that D5 had definitely made use of the Misappropriated Funds to discharge the monthly instalments.  It was further D9’s case that she was not informed by D5, nor was she aware that those periodical maintenance and monthly mortgage instalments came from the Misappropriated Funds.

(iii) As for the proceeds in the bank accounts of D9, there were substantial amounts of various deposits/transfers from different sources and as such, P’s money, if any, had been mixed up with other sources of moneys, and that it would be hard to say that the remaining balance in the bank accounts came from or belonged to P, or that P had any priority over the remaining balance.  Thus, the ownership of the amounts in the bank accounts of D9 was in dispute, and it would be a question of fact which ought to be tried and it would be inappropriate, unfair and unsafe to determine this issue on affidavit evidence alone.

37.  It was not clear as to why (iii) above was relevant since D9’s application only concerned the Net Sale Proceeds.  Anyway, it was common ground that a sum totalling HK$4,550,000.90 from P was credited into D9’s Hang Seng Bank Account 210-132882-668 as follows:

Date	Amount
11 March 2010	HK$1,034,161.70
24 March 2010	HK$1,136,602.94
5 May 2010	HK$1,194,618.13
22 June 2010	HK$1,182,618.13
Total	HK$4,550,000.80

38.  Given D1’s guilty plea, there could be no dispute that the 75 Cheques were issued fraudulently and the above sums received by D9 came from the Misappropriated Funds.

39.  In the statement of claim, P is claiming against D9, among other things, as constructive trustee, the allegation being she dishonestly assisted and/or knowingly received the respective sums.  Alternatively, P has pleaded that the sums were monies had and received by D9, and this is in addition to the general claim for damages. It is the submission of P’s Counsel, Ms Lam, that the more stringent Proprietary Test should apply.

40.  Ms Lam had also referred this court to the case of Foskett v McKeown and Others [2001] AC 102.  The House of Lords held, by majority, that where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled, at his option, either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money; that it was immaterial whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments, either simultaneously or sequentially, out of the differently owned funds to acquire a single asset; that volunteers deriving title otherwise than for value could be in no better position than the wrongdoer notwithstanding their innocence of any wrongdoing[15].

41.  The critical factor in the Foskett case, as said by Lord Brown-Wilkinson was that the purchasers were claiming a proprietary interest in the policy moneys and that such proprietary interest was not dependent on any discretion vested in the court, as the claim was based on the assertion by the purchasers of their equitable proprietary interest in identified property[16].  Further, the critical question, as stated by Lord Browne-Wilkinson was whether the assets subject to the express trusts of the purchasers trust deed comprised any part of the policy moneys, a question which depended on the rules of tracing.  He went on to say “If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys.  There is no discretion vested in the court”[17].

42.  In the Wharf case, the plaintiff discovered that its assistant payroll manager, the first defendant, had between May 2004 and June 2008 falsified documents and diverted about $9m to himself.  On 1 August 2008, the manager’s wife, who was the second defendant, sold for about $2m a property she bought in 2005.  The plaintiff obtained a Mareva injunction against the wife who then applied for the release of the sale proceeds to finance her defence in a parallel criminal trial, and she denied any proprietary claim, essentially claiming she had purchased the property with her own money.

43.  It was held by Au J in the Wharf case that as the plaintiff had asserted proprietary claims against the defendants, and the wife had failed to demonstrate that the sale proceeds of the property came from her own source and was not in any way linked to the misappropriated funds, the Ostrich 2-stage test applied in that case[18].

44.  The facts of the present case are, however, different.  In the Wharf case, the property in question was purchased during the period of misappropriation, but in the present case, the South Horizons Property was purchased on 19 August 2009, about 18 months before the first of P’s 4 cheques was credited into D9’s above mentioned Hang Seng Bank account.

45.  The South Horizons Property was purchased with a mortgage loan from the Wing Lung Bank at the time of the sale.  D9 said the amount of the down payment was paid from her own source of funds, but the monthly mortgage instalments were paid by D5.  It appeared from the copy of a page of her Wing Lung Bank Savings Account passbook covering the period from 30 December 2011 until 13 September 2013, monthly instalments of HK$10,206 were being withdrawn from a balance of HK$158,284.81 as at 30 December 2011 until 20 August 2012[19]. The source of HK$158,284.81 was not clear.

46.  The South Horizons Property was sold on 27 September 2012 for HK$5m, and the Net Sale Prodeeds paid into court were HK$2,860,400.82.  The then outstanding mortgage was about HK$2m which was discharged upon sale[20].  This would be about 3 years after the purchase.

47.  Although there was no information from D9 as to the exact amount of down payment which she said she paid, Mr Chan calculated that the purchase price being HK$3.25m, after deducting what seemed to be about HK$2m mortgage,  a sum of at least HK$1.1m would have come from D9’s own source of funds, and given the value of the South Horizons Property having gone up about 1.5 times,  thus a sum of HK$1.65m should be from D9’s own funds,  and such funds could not have come from, traced to, or had any link with the Misappropriated Funds.

48.  In my view, this must be right, and this was also accepted by P’s Counsel, Ms Lam, namely that the down payment for the South Horizons could not have come from the Misappropriated Funds.  Thus, I would accept that for the sum of HK$1.65m, the test may be the less stringent one, namely the Non Proprietary Test.

49.  However, the monthly mortgage payments would be different.  It was D9’s case that these were paid by D5 and did not come from her.  Those mortgage payments or at least a large part of them would fall within the period of the 75 Cheques and there was no clear evidence at this stage that such payments were not in any way linked to the Misappropriated Funds.  In my view, the Proprietary Test would apply at least to a sum of HK$1.21m, namely the Net Sale Proceeds less HK$1.65m.

50.  As pointed out by Ms Lam, which I accept, whichever test this court is to apply, Stage 1 in the two tests is not that different, in that the court has to consider whether D9 has shown that she does not have any other assets available to meet the payments; and that the main difference between the two tests is in Stage 2.

Stage 1

51.  The burden is clearly on D9 to demonstrate that she has no other available means or assets save as disclosed, whether by “full and frank” evidence under the Proprietary Test, or by “sufficient” evidence under the Non Proprietary Test.

52.  Ms Lam pointed out D9 had only stated that she did not have any assets, capital securities or income the value of which was HK$20,000[21] or more.  Ms Lam pointed out that D9 had not given information on those assets which were below the value of HK$20,000. Further, D9 had failed to provide full details as to what she had done with all the monies from P.

53.  D9 had said that apart from those 4 bank accounts disclosed by her, she had no other bank accounts or deposit accounts in Hong Kong or elsewhere either in her sole name or joint name with any other person, or of any company, firm or business of which she was a shareholder or the sole proprietor or a partner thereof[22].

54.  D9 had further said that the living expenses of the family were discharged by D5, and since from about October 2013 onwards D5 had failed to pay towards the living expenses of the family, and that by virtue of the Ex Parte Order, all her banks accounts had been restrained and the Net Sale Proceeds having been paid into court, she had no means to support the living expenses of the family and continued to engage legal representation in these proceedings[23].

55.  D9 did not, however, provide any supporting evidence to verify what she said above.  D9 had given very little information about D5, and there was no supporting evidence from D5 to support what D9 had said.  There was no explanation from D9 as to why the financial support from D5 had stopped.  Although the Ex Parte Order covered the amounts received by D5 from the Misappropriated Funds, that was made in July 2012, some 15 months before the alleged financial support to D9 had stopped.

56.  It was also not clear whether D5 had been paying D9’s living expenses in cash, or whether he was crediting monies into D9’s bank accounts.  The bank statements produced by D9 were isolated statements for August/September/October 2013, save for the page from the Wing Lung Bank savings account passbook.  On the October 2013 statement of D9’s Hang Seng Bank Integrated Accounts[24], I note that there was one “account transfer” withdrawal, or 轉賬支出of HK$10,000 which appeared to be pursuant to the 2^nd Variation Order on 30 September 2013.  The amount did not appear to have been withdrawn by cash, but there was no information from D9 as to whether it was transferred to one of her bank accounts and if so, which one.

57.  D9’s 3^rd affirmation was filed on 3 January 2014, and there was no information as to how she supported herself and her daughter from October 2013 onwards.

58.  D9 received the total sum of HK$4,550,000.90 from P between 11 March 2010 until 22 June 2010.  According to D9, it was D5 who arranged for those cheques to be credited into her bank account and that they were debts owed by his trade debtors to him.  D9 had said that she had not seen those cheques credited into her account, and that she had trusted D5 that those deposits were genuine settlement of debts by his trade debtors.

59.  However, the evidence from P showed that after P’s 4 cheques were paid into D9’s bank account in March, May and June 2010, during a period of 4 months from 15 March 2010 to 12 July 2010, a total sum of HK$1,689,000 was transferred from D9’s bank account to D10’s bank account[25]. All D9 said was that these transfers to D10 were made at the request of D5 and that she simply followed D5’s instructions and was not told by him the reasons or purposes of those transfers[26]. There was no information from D9 as to the relationship between her, D5 or D10.

60.  Further, between 15 March 2010 and 7 April 2010, within a period of 3 weeks, a total of about HK$2,921,000 was transferred from her earlier mentioned Hang Seng Bank Account into D9’s own Intergrated Accounts with the same bank[27].  In her 1^st affirmation, D9 disclosed that she had only HK$774,119.48 in the Intergrated Accounts on 13 September 2013.  There was no explanation by D9 as to what happened to the rest of some HK$2.14m.  All she had said was that these inter-bank transfers amongst her bank accounts were done by her or at the direction of D5 to facilitate the banking arrangements and/or investments (emphasis added)[28].  There were no details/particulars as to what banking arrangements or investments she was referring to.

61.  Under paragraph (25) of the Ex Parte Order, all the defendants must provide full details as to what he/she has done with all the monies transferred from D1 from P’s bank account to their respective bank accounts, but it is stated therein the defendants may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate them[29]. D9 had relied on this privilege and stated in her 1^st affirmation that she was entitled to refuse to provide all of this information on the ground of self-incrimination[30].

62.  The Disclosure Order in the Ex Parte Order was to allow P to trace the whereabouts of the HK$4.55m received by P, but so far, D9 had given no sufficient information on the whereabouts of all of this amount.  It was Ms Lam’s submission that D9 could not have it both ways.  As D9 had sought to hide behind this privilege of self incrimination, she had failed to provide sufficient information and thus failed to satisfy Stage 1 under either of the tests.

63.  Ms Lam had referred the court to the case of K&L Gates v NavinAggarwal, HCA 1061/2011, unreported judgment dated 18 August 2011.  In that case the defendant had sought release of funds to meet his legal costs for various proceedings, and this was opposed by the plaintiff and one of the grounds of opposition was that the defendant had not complied with the disclosure order.  The defendant had not sought to hide behind the privilege of self incrimination, but said given the limited access to documents and information while he was in custody, he had done what could practically be expected of him.

64.  DHCJ Au-Yeung, as she then was, refused the defendant’s application.  She had said in her judgment:-

“19. Apart from a bare averment that all his assets have been frozen under the Injunction Order and that there is no other available asset for him to utilize for the payment of legal costs, there is no evidence in support. The Defendant has not disclosed whether he has assets below the value of $50,000. It was just impossible to assess his current means. …

21. Further, initial investigations of the Plaintiff shows that the Defendant has transferred substantial sums of money from the firm’s clients’ accounts to people who are believed to be family friends or relatives of the Defendant for no apparent legitimate reasons. There was no evidence from the Defendant as to whether he had tried to recover sums from these people or approached them for financial assistance.

22. In the light of such evidence, the first hurdle is not met and the court need not even consider the second stage.”

65.  Having considered the evidence of D9, I agree with Ms Lam’s submissions, that D9 had not provided sufficient evidence to show that she had no other available assets than disclosed.

66.  Thus, Stage 1 of either test has not been met, and I do not really need to consider Stage 2.

Stage 2 of the Non-Proprietary Test

67.  I accept that for the sum of HK$1.65m arising out of D9’s down payment for the South Horizons Property, the less stringent test should apply.

68.  Had I been satisfied that D9 had met Stage 1 of the test, I would accept that the purpose of her application was not an attempt to dissipate the assets to frustrate the execution of judgment by P and that she had demonstrated an arguable case for her having recourse to at least HK$1.65m in question.

Stage 2 of the Proprietary Test

69.  Under Stage 2 of the Proprietary Test, this court is entitled to look at all relevant circumstances, and in particular to weigh the relative strengths of the P’s proprietary claim to the assets and D9’s defence to that claim and to balance the potential injustice to P in releasing the assets against the potential injustice to D9 of depriving her of legal assistance to advance what may ultimately a successful defence.

70.  Due to the Stay Order, no defence has yet been filed by D9, and so far her case seemed to be she was merely following D5’s instructions.

71.  As she had not explained the final destinations of those amounts transferred to her Intergrated Accounts, I am of the view that P has a very strong proprietary claim against at least a large part of the sum of HK$1,210,400 of the Net Sale Proceeds, which was supported by a clear admission of misappropriation and a guilty plea by D1.

72.  In my view, so far as this part of the Net Sale Proceeds were concerned, D9 would have failed in Stage 2 of the Proprietary Test as well.

Conclusion

73.  In light of my above conclusions, D9’s application is thus dismissed.

74.  I order D9 to pay P’s costs.  This is an order nisi which will be made final after 21 days.  P has submitted its statement of costs for summary assessment.  D9 is to submit her grounds of objections within 14 days after the final order.  Summary assessment will be on paper.

75.  Lastly, I thank both Counsel for their assistance to this court.

(Bebe Pui Ying Chu) Deputy High Court Judge