ROBERT VON PALACE KOLBATSCHENKO AND ANOTHER v. LEE, IO VAI IVAN AND ANOTHER

HCA 402/2020

[2020] HKCFI 2650

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 402 OF 2020

________________________

________________________

______________

J U D G M E N T

______________

A. Introduction

1.  On 6 April 2020, the Plaintiffs (“P1 and P2”) obtained an ex parte Mareva Injunction Order from Marlene Ng J. against the two Defendants (“D1 and D2”).  P1 and P2 now apply for a continuation of the said injunction order until it is varied or discharged by a further order of the Court[1]. On the other hand, D1 and D2 apply for the said injunction order to be set aside and discharged[2]. This is the hearing of these two applications.

B.  Background

2.  Pl and P2 are husband (aged 72) and wife (aged 69) respectively and are both South African nationals.

3.  D1 is a certified public accountant in Hong Kong, practising as a sole proprietor under the name of Neuberg CPA & Co. (ie D2, “CPA”).

4.  P1 is an ex-Swiss Banker. According to P1, in 2008, he engaged one Mr Diekmann (“Diekmann”) to act as his trustee in managing his assets in Hong Kong.  In the course of performing his duties, Diekmann established Chase Fund Limited (“Chase”), a company incorporated in Hong Kong, to act as the vehicle for holding P1’s assets in Hong Kong.

5.  Initially, Diekmann was the sole shareholder and director of Chase.  He also executed a Declaration of Trust in favour of P1 in respect of the only issued share of and in Chase.

6.  At the instructions of P1, Diekmann caused Chase to maintain various bank accounts for different currencies with Wing Lung Bank (“Chase WLB A/Cs”).

7.  In around March 2009, P1 sold one of his investments[3] through one Mr Berthold, who was P1’s ex-employer.  The sales proceeds amounted to around CAD10.8m.  Between January and March 2009, Mr Berthold (acting on P1’s behalf) paid into Chase WLB A/C a total sum of CAD5,950,000 (approximately US$5,980,115).

8.  Mr Berthold and D1 had known each other for almost 20 years.  They were business associates and shared an office in or around 2011.  P1 was introduced to D1 by Mr Berthold in around 2008.  D1 had advised P1 on certain business ventures in China. As their business relationship developed, P1 began to trust D1.

9.  Eventually, in around mid-2010, it is Ps’ pleaded case[4] that they entered into an oral trust arrangement with D1 (the “Trust Arrangement”) whereby:-

(1)  D1 was appointed as their accountant and trustee to handle their financial affairs and manage their monies and assets that may be in or transferred to Hong Kong from time to time and any profits derived from such monies and assets in accordance with their instructions from time to time;

(2)  such monies, assets and/or profits would be held in accounts established in the name(s) of Chase and/or any other company(ies) to be established, so as to facilitate D1’s discharge of his duties as trustee; and

(3)  it was agreed that such monies, assets and/or profits held in accounts established in the name(s) of Chase and/or any other company(ies) to be established for the purpose of holding Ps’ funds and/or other assets beneficially belonged to Ps at all material times, and that Chase and such other company(ies) were merely asset-holding vehicles or devices used and/or to be used by D1 to discharge his duties as their trustee under the Trust Arrangement.

10.  It is Ps’ case that pursuant to the Trust Arrangement, D1 owed various fiduciary duties towards Ps, including the duty not to benefit himself and not to “misappropriate any monies, assets and/or profits held on trust under the Trust Arrangement”[5].  Under the Trust Arrangement, it was also agreed that D1 would be paid US$5,000 per month for his services.  In addition, D1 would be entitled to some commissions on income collected by P1 from his projects in Namibia.

11.  On or about 25 August 2010, one additional share in Chase was issued to D1.  Between August 2010 and 2016, D1 and Diekmann were the two shareholders and directors of Chase. Similar to the situation of Diekmann, D1 also executed a Declaration of Trust in favour of P1 in respect of this share of Chase issued to D1[6].

12.  In or around late 2010 or early 2011, D1 was appointed as an authorized signatory of Chase WLB A/Cs.

13.  According to Ps, in around 2012, D1 presented a written “trust agreement and/or engagement letter” to Ps for signing which put the terms of the Trust Arrangement in writing.  Ps signed the said documents.  When they later asked for a copy, D1 said he could not locate the original and must have lost it when he moved out of Mr Berthold’s office.  No such document or a copy thereof appears in the hearing bundles.

14.  Between 2016 and 15 January 2020, D1 was however the sole shareholder and director of Chase, Diekmann having transferred the only other share to D1 and resigned from his directorship.

15.  On D1’s recommendation and advice, Ace Direct Investments Limited (“ACE”) was incorporated in the British Virgin Islands on 23 September 2011.  Two ordinary shares were issued to D1. D1 executed two Declarations of Trust, one in favour of P1 and the other in favour of P2.  From 23 September 2011 to 15 January 2020, D1 had been the sole shareholder and director of ACE[7].

16.  Around this time, at the instructions of Ps, D1 caused ACE to open a bank account with HSBC (“ACE HSBC A/C”).  It was later discovered by Ps in 2014-2015 that D1 also caused Chase to open a bank account with HSBC (“Chase HSBC A/C”)[8].  D1 explained that it was for the convenience of administering Ps’ monies. At all material times, D1 was the authorized signatory of both the ACE HSBC A/C and the Chase HSBC A/C.

17.  In or about February 2012, P1 worked with Diekmann and earned commission over a deal called “Kalahari Mineral Deal”. The portion of commission belonging to P1 was US$9,320,160.26.  D1 assisted in causing US$2m to be transferred to Chase WLB A/C and US$7,320,160.26 to be transferred to ACE HSBC A/C[9].

18.  In or around 2012, Ps also had securities trading accounts with Chelsea Securities Limited (“Chelsea”). These accounts were opened in the name of Chase and another company of Ps named Benway International Limited (“Benway”).  In March 2012, Ps closed the Benway’s securities account.  Upon Ps’ instructions, D1 arranged the transfer of the remaining money (about HK$19m) and securities into the securities account of Chase[10].

19.  On 30 March 2012, P1 was detained at the Bangkok International Airport at the request of the Italian authorities.  It related to P1’s activities in 1980s when he worked as a banker in Switzerland.  He was accused by the Italian authorities of money laundering for the Sicilian Mafia.  In 1992, he was acquitted by a court in Rome of any association with the Mafia. Yet in 2009, P1 was sentenced in absentia by another Italian court for 9 years imprisonment.  By that time, P1 had already emigrated to South Africa.  P1 lost in the extradition proceedings in Thailand and was deported to Italy in about December 2013 to serve his sentence in Italy.  P1 was released on parole in about February 2018.

20.  In late 2012 or early 2013, P2 decided to close the Chase securities account with Chelsea. All securities were realized and the proceeds, amounting to around HK$18m to 19m were paid into Chase WLB A/C.

21.  Apart from assisting in the receipt of funds of Ps, Ps would also instruct D1 to pay for their personal expenses and to make payments to various parties from time to time.  Whilst D1 would not provide bank statements to Ps, he would provide so-called “reconciliation statements” to Ps from time to time.  In due course, these reconciliation statements would be examined in greater detail.  It is Ps’ case that between 2009 and 2012, around US$17.8m of their funds had been paid into the bank accounts of Chase and Ace.  According to a statement provided by D1 to P2 on around 22 December 2012, Ps should have US$17.03m worth of cash and securities[11].

22.  Between 2012 and 2019, P2 visited Hong Kong once or twice a year.  D1 would provide her with some statements showing the status of Ps’ monies and securities[12].  The last set of such statements was dated 2 & 3 April 2018[13] indicating that as of 29 March 2018, Ps had assets in the total value of US$12,455,363.60.  These assets were kept in the bank accounts of Chase and Ace as well as D2.

23.  The parties’ relationship apparently began breaking down between June and December 2019. On around 23 November 2019, P1 came to Hong Kong.  It was his first visit to Hong Kong after being released from prison.  P1 met D1 on around 28 November 2019 at the office of Messrs. Hoosenally & Neo (“H&N”), a law firm that had been involved in handling Ps’ assets over the years.  P1 asked D1 to make a declaration on certain fund transfer made to P2’s bank account in Bangkok some years ago for the paying of P1’s legal costs in Thailand.  It was because the Thai authorities required P2 to explain the sources of these transfers before releasing her money in her Thai bank account.  On this occasion, P1 found D1 evasive.

24.  There was a meeting between P1 and D1 on 5 December 2019 at the office of H&N and in the presence of lawyer Mr Neo.  According to P1, D1 worked out a reconciliation statement[14] of what were left in the bank accounts and discussed how to transfer Ps’ money and shares back to Ps.  At the advice of Mr Neo, a letter of acknowledgement (the “Letter of Acknowledgement”) was drafted for D1 to sign[15].  D1 thereby confirmed that all the money and shares recorded in the March 2018 Valuation Statements[16] were still subsisting as at 5 December 2019.  On Ds’ case, however, D1 said that he signed the Letter of Acknowledgement under duress.

25.  Thereafter, when P1 sought to arrange through emails for another meeting with D1, D1 failed to reply.  On 9 December 2019, P1 accordingly threatened in his email that he would report D1 to the Police and take legal action if D1 did not respond. Thereupon, D1 responded by email on 10 December 2019:-

“Robert,

Thank you for entrusting me to hold assets on your behalf. It has been a very difficult task for me over the past years and I finally disappoint you. Very deep apologies!

The following proposal is something I believe to be able to deliver:

30.6.2020 USD 1 million

31.12.2020 USD 1 million

30.6.2021 USD 2 million

31.12.2021 USD 2 million

At the same time; all trust documents will be cancelled retrospectively such that any subsequent fund coming from me is of new source.

If you accept this, 1 hope you will keep this arrangement confidential so that I can continue my work normally.

Best regards,

Ivan”

26.  P1 continued to pursue D1 through emails. Eventually, on 13 December 2019, D1 emailed P1 the screenshot of a message that D1 had typed on his messaging app in the following terms:-

“I don’t want to waste your time anymore and need to tell you the truth. I can only deliver a $6 million promissory note. If you can accept it, let Wilbert draft the papers for us to sign. Otherwise, we will have to face the painful legal proceedings. Very sorry!

I am in lawyer office surrendering myself.

If you don’t accept it, please let me have your lawyer contact and leave this matter to the lawyers to handle.”

27.  P1 did not find it acceptable and thus instructed his solicitors Messrs.  King & Wood Mallesons and Robertsons (“KWM”) to issue a demand letter dated 13 December 2019. D1 became represented by Messrs. Robertsons (“Robertsons”).  By a letter dated 17 December 2019, Robertsons indicated that D1 was interested in a settlement negotiation and would put forward some terms after the holidays.  No explanation was given as to the whereabouts of missing monies nor were any statements provided to the KWM as demanded in KWM’s letter dated 13 December 2019.

28.  By a letter dated 19 December 2019, Robertsons informed KWM that they could not take instructions from D1 as the latter was out of town. Since then, neither Ps nor KWM heard anything from Robertsons or D1.

29.  Through KWM, P1 requested HSBC to stop any withdrawal from the bank accounts/securities accounts of Chase and Ace.  In a letter dated 2 January 2020, HSBC told KWM that it was only in a position to act on a customer’s account (including any disclosure of account information or freezing of an account) pursuant to a valid court order or otherwise as required by any applicable law or regulations.

30.  Consequently, P1 instructed his present solicitors Messrs Tan & Co (“Tan & Co”) to take control of Chase and Ace using the blank transfer forms previously executed by D1.  D1 was removed as director of Chase and Ace. P2 was appointed instead as the sole director of Chase and Ace.

31.  Steps were then taken to stop any further withdrawal from the bank accounts of Chase and Ace and to obtain the bank statements.  Ps discovered around 11 February 2020 that the Chase HSBC A/C and Ace HSBC A/C had in fact been closed by D1 back in August 2018[17]. On 3 March 2020, HSBC provided copies of the bank statements of the said two bank accounts for the periods from January 2013 to August 2018.  On 9 March 2020, WLB provided copies of the bank statements of the Chase WLB A/C and some payment vouchers for the period from July 2012 to November 2018 when D1 caused the WLB A/C to be closed.  It was through examination of these bank statements that Ps discovered the various alleged misappropriation of funds since December 2012.  P1 explained his discoveries in his first affirmation[18] which was used at the ex parte application hearing.  In particular:-

(1)  Since December 2012, very little money was left in Chase WLB A/C;

(2)  For the Chase HSBC A/C and Ace HSBC A/C:-

(a)  In January 2013, there was only about US$4 million in the accounts, despite D1’s reconciliation statement provided in December 2012 showing US$17.03 million worth of trust assets[19];

(b)  By the time the accounts were closed in around August 2018, there was nothing left in the HSBC accounts - despite D1’s Letter of Acknowledgment;

(3)  Most of the monies misappropriated were paid into D2’s bank accounts with HSBC, which were further transferred to D1, his wife Yao Hiu Chu Edith (“Yao”), and various companies owned or controlled by, or otherwise associated with the D1 and D2.

(4)  Hong Kong and overseas shares were bought using the nominee accounts and appreciated over the years.  The shares were sold, and proceeds were withdrawn and paid to D2.  This was also the case with substantial dividends received from such shares.

32.  Following the above discoveries, Ps applied for and obtained the ex parte Mareva Injunction Order on 6 April 2020.

C.  APPLICATION OF DISCHARGE

33.  Ds’ application for discharge of the ex parte Mareva Injunction Order and their opposition for its continuation are based on the following grounds:-

(1)  First, Ps do not have a good arguable case because:

(a)  the Trust Arrangement is factually and legally unsustainable;

(b)  in any event, the claims are barred by the rule against recovery of reflective loss.

(2)  Second, Ps failed to make full and frank disclosure at the ex parte hearing.

D.   Good arguable case

34.  Mr Chen, counsel for Ds, argued that Ps case is factually unsustainable as there was no evidence of the oral Trust Arrangement:-

(1)  The four affirmations filed by Ps merely asserted that in around 2010, they “engaged Lee as our accountant and trustee to take care of our financial affairs and bank accounts in Hong Kong”, and “from around 2010 Lee was indeed acting as my wife’s and my trustee when administering the Chase WL Account and other trust assets in Hong Kong, including other bank accounts”.

(2)  The documentary evidence merely evidenced D1 being the trustee of the shares in Chase and Ace.

(3)  By contrast, there is no documentary evidence evidencing the Trust Arrangement.

(4)  To bolster their case on the Trust Arrangement, the Ps asserted that P1 signed a written trust agreement which put the terms of the Trust Arrangement into writing.  Ds deny (i) the existence of the Trust Arrangement; (ii) that the D1 requested P1 to sign such an agreement, and (iii) that the written agreement existed.  The fact is that Ps are unable to produce this written instrument.

(5)  Strikingly, in KWM’s letter dated 13 December 2019, Ps did not assert the existence of the oral Trust Arrangement or the written agreement allegedly signed by P1 in 2012.  D1 was merely described as a trustee holding only the shares of Chase and Ace.  It was not asserted that D1 held on trust “monies and assets that may be in or transferred to Hong Kong” which belonged to Ps.

(6)  In the circumstances, there is no evidence to show, and there is no good arguable case, that the Trust Arrangement existed. It was simply an ex post facto fabrication by Ps.

35.  Mr Chua, senior counsel for Ps argued that the essence of Ps’ case is that since around 2010, D1 acted as Ps’ trustee, in administering funds and assets belonging to and sent from Ps.  The bank accounts in the names of Ace and Chase were mere vehicles for such funds and assets management.  The Trust Arrangement is supported by the following contemporaneous documents:

(1)  A Declaration of Trust executed by D1 dated 27 August 2010 for the one share of Chase in P1’s favour, together with a blank and undated instrument of transfer.  Yet, prior to that, Diekmann had already been using Chase and its bank accounts as vehicle for the management of P1’s funds and assets.

(2)  Two Declarations of Trust executed by D1 both dated 18 February 2012 over the two shares of Ace in favour of P1 and P2 respectively, together with blank and undated instruments of transfer.

(3)  A document signed by D1 before a notary public on 28 November 2019 declaring inter alia that he has been “entrusted by [P1] to administer the bank account of [Chase] in 2011 for the well-being of [P1’s] family members and himself and P1 had authorized his wife [P2] to give [D1] instructions to disburse his funds”[20]. This document is important for a number of reasons:-

(a)  there is no allegation that this document was executed by D1 under duress.

(b)  the “entrustment” related not to the shares of Chase. It referred to “P1’s fund” and “administering the bank account of Chase”.  The beneficiaries were P1 and his family members, clearly including P2. Furthermore, D1 recognized that P2 had the power to give him instructions although the authority seemed to stem from P1.

(c)  it seems that not only were the bank accounts of Chase or Ace used in discharging his duties.  D1 would also utilise D2’s bank account to carry out his duties.

(d)  sources of fund in Chase’s bank account was explained as belonging to P1 as his finder’s fee entitlement under a certain project.

(e)  in the premises, this is strong evidence that is more consistent with the Trust Arrangement than the sheer trust over the shares of Chase and Ace as argued by D1.

(4)  Various reconciliation statements and summaries[21] provided by D1 from time to time from 2012 to 2019, reporting to Ps in respect of the status of their funds and assets.  It is not in dispute that these were documents compiled and provided by D1 to Ps. A number of points can be made:-

(a)  It can be seen from the “summary”[22] that funds were received and then dispatched to various persons.  It also referred to “allocation to Chase”. It also referred to various payments of expenses including remittances to P2 and their son Pietro.  It also referred to acquisition of paintings and “plane maintenance”.  It is common ground that Chase did not carry on any business at all, neither did it own a plane.  If D1 was merely a trustee of the shares in Chase, one would expect D1 to discharge his duties merely by providing Ps with a copy of the audited financial statement of Chase.  This manner of reporting is more consistent with a wider scope of trust as described by Ps under the Trust Arrangement.

(b)  In a table dated 18 November 2012[23], D1 was reporting in a consolidated fashion the funds and assets held in the various bank accounts of Chase and Ace. Moreover, the document referred to a sum of 810,000 Euro kept in a “Bank of China Safe box”. There is no evidence that it was maintained by either Chase or Ace.  This document is again more consistent with a wider scope of trust as described by Ps under the Trust Arrangement.

(c)  In another table dated 10 December 2012[24], D1 referred to US$3m kept in the HSBC bank account of D2. It seems that D1 was also using his own bank account (D2 being a sole-proprietorship of D1) to hold funds for Ps.  The same document also referred to certain stocks held in a securities account in the name of P1.  It also referred to a “safe” in which Euro 0.8m was kept.  This document is again more consistent with a wider scope of trust as described by Ps under the Trust Arrangement.

(d)  In a document entitled “Summary of assets”[25], D1 again reported on the status of funds and assets in a consolidated fashion.  Apart from being kept in the bank accounts of Chase and Ace, it is important to note that USD funds were also kept in the bank accounts of D2.

(e)  There were also reports[26] provided by D1 on the amounts of dividends received in respect of stocks and the valuation of such stocks.

(f)  Specifically, D1 had provided Ps with several “Summary of receipts & payments via [D2’s] account”[27]. These documents were wholly inconsistent with D1’s version that he was merely a trustee of 2 shares in Chase and one share in Ace.  This document is supportive of a wider scope of trust as described by Ps under the Trust Arrangement.

(5)  The Letter of Acknowledgment executed by D1 on 5 December 2019[28] was in the following terms:

“I, LEE IO VAI, IVAN, hereby acknowledge and confirm that all the assets as particularised in a Summary of Assets prepared, by me on 2nd April 2018 and as annexed to this Letter, subject to any duplication by reference or adjustments to be agreed, are subsisting as at the date hereof and held by me as a trustee for and on behalf of and for the benefit of Robert von Palace-Kolbatschenko pursuant to certain Declarations of Trust executed by me in his favour. I acknowledge and confirm that subject to adjustments, that I shall transfer or otherwise deal in accordance with the instructions of Robert von Palace-Kolbatschenko, subject to all applicable laws; and that subsequent to such transfer or dealing, I shall have no liability whatsoever owed towards Robert von Palace-Kolbatschenko in respect of the same.”

Mr Chua SC submitted that this document supports Ps’ pleaded case as it referred to D1 holding “all the assets as particularised in a Summary of Assets prepared by me on 2 April 2018 and as annexed to this Letter…for the benefit of P1”. The Summary of Assets mentioned was one of the reconciliation statements and summaries admittedly provided previously by D1 to Ps in the course of his periodic reporting[29].  As mentioned above, this summary of assets indicated that part of Ps fund was held by D2 and is thus supportive of a wider scope of trust consistent with Ps’ pleaded case.  Furthermore, this summary of assets (identifying the total value of assets and funds as US$12,455,363.60) was the basis of the limit set in the Mareva Injunction Order.

On the other hand, Mr Chen emphasized on the words “…pursuant to certain Declarations of Trust executed by me in his favour” and submitted that this document did not refer to an oral trust arrangement, hence supportive of D1’s case that he was merely a trustee in relation to the shares in Chase and Ace.

On top of these differences in interpretation, there is a factual dispute as to whether this document was executed under duress, which can only be resolved by the trial judge after hearing all relevant evidence.

(6)  Admission contained in the following exchanges of emails:-

(1)  By an email dated 9 December 2019[30], P1 wrote to D1:-

“I have been waiting for your reply according to our latest meeting at the lawyers office. I have sent few messages to your telegram address and to your protonmall.

I have asked your friend Mr, Berthold to locate you and to find out if and when you will be coming to our scheduled meeting at Wilbert Neo offices.

Unless I don't hear from you by close of business day today I have no option than to report you to the Police and take further legal action to recover my funds.”

(2)  D1 replied by his email dated 10 December 2019 as set out in paragraph 25 above.  Mr Chua submitted that the apologetic attitude of D1 was wholly repugnant to the allegation of duress on 5 December 2019.

(3)  On 13 December 2019, after P1 sent him an email stating that “Today is your last day to come clean”, D1 replied in words set out in paragraph 26 above.

36.  Basing on these contemporaneous documents, Mr Chua SC submitted that the existence and precise terms of the Trust Arrangement are questions of fact for trial.  Summary determination of such issues is inappropriate, especially given the D1’s own pleaded case that funds were applied “in accordance with the Plaintiffs instructions and/or ... benefit”[31] - rather than the companies’ instructions and/or benefit.  It is a question of fact, whether the subject matter of the trust was merely the shares in Ace and Chase, or whether it was in fact the funds and assets held in the companies’ bank accounts as mere repositories.  It is also a matter of factual finding on whether the Declarations of Trust and the appointments of D1 as sole shareholder/director and authorized signatory were merely part and partial of the Trust Arrangement.  It is neither possible nor appropriate for this Court to resolve summarily, such disputes on affidavits, especially on an application to discharge an injunction : Derby v Weldon [1990] 1 Ch 48 (C.A.), at 58E-F.

37.  In the current state of the evidence, I prefer the submissions of Mr Chua SC than those of Mr Chen.  The affirmations of P1 and his evidence about the Trust Arrangement should be read in context as well as in the light of the undisputed contemporaneous reports provided by D1 to Ps from time to time in relation to his administration of funds and assets.  I accept Mr Chua’s submission that the contemporaneous documents are, to say the least, arguably consistent with the oral Trust Arrangement.  I note Mr Chen criticisms over the discrepancies discernible from KWM’s demand letter.  These are however matters that can only be resolved after due cross-examination at trial.  I am unable to conclude that Ps did not have a good arguable case on facts before the ex parte judge or before me today.

E.  Whether the Trust Arrangement is legally sustainable

38.  Mr Chen made the following submissions:-

(1)  It is of the essence of a trust that property is vested in the trustee. Underhill and Hayton, Law of Trusts and Trustees (19th ed) at §§1.1-1.2;

(2)  Under the Trust Arrangement, however, the subject assets were “held in the accounts established in the name(s) of Chase” and other companies such as Ace which were “asset-holding vehicles or devices”.  It is trite that D1 being a shareholder of Chase and Ace had no right to any item of their properties: Terrain Ltd v OrientalPeer Co Ltd [1988] 1 HKLR 246 at 254I-J.

(3)  It follows on Ps’ own pleaded case, D1 could not possibly have been a trustee holding those assets for Ps.

(4)  Following from above, the subject matter of these proceedings are the funds held by Chase and Ace in their bank accounts.  As a matter of law, D1 was not the legal owner, and therefore could not have been the trustee. Properly analysed, the correct factual and legal position was simply that D1 held the shares in Chase and Ace on trust for the Ps.

39.  Mr Chua made the following submissions in reply:-

(1)  Ps do not dispute that legally and technically, Ace and Chase should also be regarded as the Ps’ nominees or bare trustees. That however, does not mean the Trust Arrangement is legally unsustainable.  In particular, properly analysed, Ps contend that D1’s fiduciary duties as trustee towards Ps under the Trust Arrangement, required him to properly administer funds and assets using his control over the bank accounts of Ace and Chase which were mere repositories of funds and assets. He was empowered to do so as a director and authorised signatory of those bank accounts. Such empowerment (including the execution of various Declarations of Trust) was part and partial of the Trust Arrangement.

(2)  Therefore, while D1 was strictly not the legal owner of the monies and assets in the said bank accounts, that does not legally prevent or exclude the imposition of duties on him as trustee, to procure and cause Ace and Chase (which were at all material times, pure shell companies which necessarily acted through D1 as their director) to hold such monies and assets pursuant to the Trust Arrangement in accordance with Ps’ instructions and for their benefit.

(3)  In other words, D1’s exercise of powers as a director of Ace and Chase was pursuant and subject to his trustee and fiduciary duties owed to Ps under the Trust Arrangement.

(4)  In this regard, Ds cannot dispute that Ps had “caused funds to be deposited into the companies’ bank accounts from time to time” and that such funds belonged originally to P1.  The funds were applied in accordance with Ps’ instructions. D1 periodically reported to Ps on how the funds and assets were held and/or applied for the benefit of Ps and their family.  It is striking that D1 as those companies’ director for many years, has not adduced evidence of those companies’ accounts and audited financial statements.  It is also clear from the various “Summary of Assets” produced by D1 that funds/assets were not merely held by Chase and Ace. Funds were from time to time held by D2 as well.

40.  Again, I accept the submissions of Mr Chua. In my view, Mr Chen’s arguments are based upon an unreasonably narrow interpretation of the nature and scope of trust as pleaded under the Trust Arrangement.  It is Ps’ case, and arguably supported by contemporaneous documents analysed above, that the use of repositories (including the bank accounts of Chase and Ace) was part of a wider Trust Arrangement whereby D1 was placed in the role of a trustee and fiduciary towards Ps in the administration and management of those funds and assets originated from P1.  I cannot conclude that Ps have no good arguable case in law, whether before the ex parte judge or before me.

F.   Reflective loss argument

41.  Mr Chen raised an interesting argument based on the “Reflective loss” principle.  He argued that according to Ps’ case, D1 unlawfully caused or procured monies, assets and/or profits held under the Trust Arrangement to be transferred from the bank accounts of Chase and Ace to himself, his nominees and/or D2, thereby misappropriating them.  Mr Chen thus argued that Chase and Ace would have a viable cause of action against D1 (being a director) for breach of fiduciary duties by misappropriating company assets, and against D2 as an accessory. Based on the various Declarations of Trust, P1 was the beneficial shareholder of Chase and Ace. If Chase and Ace made recovery, Ps’ loss, namely in the diminution of the value of the shares in Chase and Ace, would be made good completely.  In the circumstances, Ps’ loss is merely reflective of the loss suffered by Chase and Ace and is thus not recoverable under the rule against reflective loss.

42.  Mr Chen referred me to Topping Chance Development Ltd v CCIF CPA Ltd [2020] HKCA 478 in which the Court of Appeal recently reviewed the relevant principles at §§ 18-24, per Kwan VP.  Mr Chen then referred me to Gardner v Parker [2004] 2 BCLC 554 in which Neuberger LJ said:

“[39] In my view, the contention that a claim, which would otherwise be defeated by the rule against reflective loss, is not so defeated because it is brought for breach of fiduciary duty must be rejected. That contention was considered and rejected by this court in Shaker v Al-Bedrawi [2003] 1 BCLC 157, [2003] Ch 350….

[41] While allowing the claimant’s appeal on this ground, the Court of Appeal, in their judgment, also considered another argument raised on behalf of the claimant. Peter Gibson LJ said ([2003] 1 BCLC 157 at [73], [2003] Ch 350 at [73]):

‘The question which therefore arises is whether the [rule against reflective loss] also applies in circumstances where a beneficiary with an equitable interest in a company’s shares which are held in trust by a trustee sues the trustee for an account of the profit taken by the trustee, that profit being moneys in respect of which the company may have a prior claim against the trustee in his capacity as a director of the company for breach of fiduciary duty.’

[42] The Court of Appeal answered that question, where Peter Gibson LJ said ([2003] 1 BCLC 157 at [81] and [83], [2003] Ch 350 at [81] and [83]):

‘[81] ... We agree ... that if the claim by [the claimant] for an account is in substance a claim to moneys to which [the company] has a claim against [the defendant], then consistently with the reasoning in Johnson v Gore Wood & Co (a firm) the [rule against reflective loss] would bar [the claimant’s] claim for what in effect reflects part of the loss suffered by [the company], and it matters not that the causes of action of [the claimant] and [the company] are different. Nor does it matter that [the company] has not yet brought proceedings against [the defendant]: the ... principle still bars a claim reflective of the company’s loss ...

[83] In our judgment the [rule against reflective loss] does not preclude an action brought by a claimant not as a shareholder but as a beneficiary under a trust against his trustee for a profit unless it can be shown by the defendants that the whole of the claimed profit reflects what the company has lost and which it has a cause of action to recover. As the ... principle is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to e bar the claimant’s action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts ...’ (Emphasis added.)

[43] Thus it appears clearly to have been determined in Shaker’s case that, even when the claim is brought by a beneficiary against a trustee for breach of fiduciary duty, it can be barred by the rule against reflective loss. In that connection I would refer to the passages I have quoted from the judgment in that case ([2003] 1 BCLC 157 at [81] and [83], [2003] Ch 350 at [81] and [83]), delivered by Peter Gibson LJ. My reliance on para [81] is, I think, self-explanatory. So far as para [83] is concerned, it seems to me to be borne out by the words I have emphasised at the end of the first and third sentences of my citation of that paragraph…

[49] It is clear, from the analysis and discussion in the cases to which I have referred, that the rule against reflective loss is not concerned with barring causes of action as such, but with barring recovery of certain types of loss. On that basis, there is obviously a powerful argument for concluding, as this court did in Shaker’s case, that, whether the cause of action lies in common law or equity, and whether the remedy lies in damages or restitution, should make no difference as to the applicability of the rule against reflective loss. Furthermore, given that the foundation of the rule is the need to avoid double recovery, there is a powerful case for saying that the rule should be applied in a case where, in its absence, both the beneficiary and the company would be able to recover effectively the same damages from the defaulting trustee/director.” [emphasis added]

43.  Mr Chen submitted that in Hong Kong, the rule against reflective loss had been applied in a trust context where the trust asset comprised of shares in a company. He relied on Hotung v Hillhead Ltd [2008] 3 HKLRD 200.  He further referred me to the dictum of Peter Gibson LJ in Ellis v Property Leeds (UK) Ltd [2002] 2 BCLC 175 at 183 [17]:

“It is clear that if a [...] beneficiary under a settlement the trustees of which are shareholders in the company suffers a loss which merely reflects the loss suffered by the company, for which it can sue, that[...] beneficiary cannot as a matter of policy be allowed to bring proceedings to recover his loss, but it must be left to the company to take proceedings to recover its loss.”

44.  In response, Mr Chua made the following submissions:-

(1)  Once this Court accepts there is a good arguable case on the existence of the Trust Arrangement (as submitted before the ex parte judge), the reflective loss argument is a complete red-herring.  Neither Ace nor Chase beneficially owned the monies and assets deposited in the bank accounts, such accounts being mere repositories of Ps’ funds and assets. Ace and Chase at all material times were not trading ventures, and had no real business or operations.  They were mere vehicles, through which funds belonging to Ps were sent to them as nominees.  As Ace and Chase at all material times did not beneficially own, and were not beneficially entitled to, the sums and assets in those accounts, they have suffered no loss.  The reflective loss principle is simply inapplicable, and such companies are not necessary nor proper plaintiffs.

(2)  In any event, the loss suffered by Ps as a result of D1’s breach of trust/fiduciary duties under the Trust Arrangement is not identical to the alleged loss suffered by Chase and Ace on account of D1’s alleged breach of duties as a director of Chase and Ace.  As the contemporaneous documents show, some of Ps’ funds/assets which D1 misappropriated were kept in D2’s bank account and a safe deposit box apparently not owned by Chase and Ace.  There was also an allegation by P1 that he had instructed D1 to use his funds to purchase certain stocks and shares which D1 lied about having complied with such instruction when in fact he did not.

(3)  Furthermore, the application of the reflective loss principle concerning trusts is unclear on the authorities, and remains unsettled: Zhang Hong Li and Others v DBS Bank (Hong Kong) Ltd and Others [2018] HKCA 435, (CACV 139/2017, 27.7.2018) at §28 per Yuen JA:

“Even under English trust law, the application of the reflective loss principle in relation to trusts is unclear on the authorities, and is fact-specific. For all the above reasons, it is clear that this court should not permit this point to be argued for the first time on appeal.”

(4)  In the recent UK Supreme Court decision of Marex Financial Ltd v Sevilleja [2020] 3 WLR 255, the Court disapproved the line of UK Court of Appeal cases including Gardner v Parker.

45.  In an attempt to explain that the uncertainty of application identified by Yuen JA does not apply to the situation of this case, Mr  Chen referred me to Lewin on Trusts which was mentioned in the footnote of the above dictum of Yuen JA.  There are certain passages[32] which are of importance in my view:-

“Two further points are to be noted, which may assist the beneficiaries. First, the reflective loss principle does not apply if the defendant’s action is such as to prevent the company from pursuing its own claim by denuding it of funds. This may be the case where the directors of the company are all employees or directors of the trustee and, because of their position as such, no consideration is given to the company making a claim against its directors. There is no reason why this limitation on the reflective loss principle should not apply in the trust context. Secondly, in a case where the company is wholly owned by the trust, and the trustees as its sole shareholders authorise the company to enter into a transaction which prejudices the company and which, apart from such authority would have generated a claim by the company against the directors or others, the beneficiaries may, in our view, maintain a claim against the trustees since the company has never had a claim at all…

In the uncertain state of the authorities concerning the application of the reflective loss principle in relation to trusts, beneficiaries are well advised, in a case where the company does or may have a claim in respect of the subject-matter of the loss, to give consideration to the prospects of a claim by the company against its directors rather than a claim by them against the trustees. And this course may, in any event, be expedient in the common case where an “anti-Bartlett” clause impedes a claim by the beneficiaries against the trustees but not a claim by the company against the directors, whether or not also the trustees (or associated with them). It may be easier said than done for the beneficiaries to ensure that a claim is brought by the company. That is because the trustees, not the beneficiaries, are the shareholders with power to cause the company to bring proceedings against the directors. And the trustees are likely to be obstructive if the directors are the trustees or their employees or associates. Even so, appropriate trust proceedings might, if necessary be brought against the trustees to ensure either that the requisite proceedings are taken by the company or, in a case where a claim by the company is doubtful, that the trustees concede that the company has no claim so that no reflective loss defence is raised in the beneficiaries’ claim against the trustees. In Freeman v Ansbacher Trustees (Jersey) Ltd, it was acknowledged that the application of the no reflective loss rule to claims against trustees is uncertain, and the court refused to strike out a claim for breach of trust by the object of a discretionary trust.” [emphasis added]

46.  In my view, the application of the rule against reflective loss in a trust context is fact specific and far from being certain and settled.  In the present case, D1 was the sole shareholder and director of Chase and Ace at all material times when the alleged “misappropriations” took place. Such “misappropriations” must have been authorized by D1 as the sole shareholder and it is doubtful, to say the least, whether Chase and Ace could maintain a claim against D1 on the basis of “breach of fiduciary duty as director”.  This is at least the view shared by the learned author of Lewin on Trusts and must at least be reasonably arguable.  I certainly cannot dismiss Mr Chua’s other submissions as plainly unarguable.  In the circumstance, it is inappropriate for this Court to conclude that Ps have failed to establish a good arguable case even, at the same time, acknowledging that Mr Chen might have raised a reasonable argument based on the reflective loss principle.  I accept Mr Chua’s submission that the existence of a good arguable defence does not necessarily negate a good arguable case.  There is however no requirement that the plaintiff has to show that he has a “much better” case or argument than the defendant, see Kazakhstan Kagazy plc v Arip [2014] 1 CLC 451 (CA) at §25.

G.   MATERIAL NON-DISCLOSURE

47.  Mr Chen argued that there were 3 material non-disclosures before the ex parte judge:-

(1)  failure to mention the potential defence based on the principle of reflective loss;

(2)  failure to warn the ex parte judge that some of the exhibited emails between P1 and D1 could be covered by “without prejudice communication privilege”; and

(3)  non-disclosure of P1’s conviction and sentence of 3-year imprisonment by the Swiss Criminal Court in September 1985 for money laundering after a trial where he pleaded not guilty.

48.  In relation to (1), Mr Chua relied on New Asia Energy v Concord [2000] 2 HKC 681 which adopted the following statements from Gee, Mareva Injunctions and Anton Piller Relief (4th Ed):-

“The plaintiff must also identify any defences, which, although not yet taken, would have been available to be taken by the defendant had he been present at the application, provided that:

(1) the defence is one which can reasonably be expected to be raised in due course by the defendant;

(2) the defence is not one which can be dismissed as without substance or importance ...”

The Court then referred to Fenn Kar Bak Lily v Goh Kim Lay & Anor [1995] 3 HKC 313 in which Mortimer JA (as he then was) said at 317B-C:

“... the plaintiff must put before the judge the grounds for his claim, the amount of the claim and any obvious matters of fact or law which could be raised by the defendant against the making of an order.” [Emphasis added]

49.  In his skeleton submissions, Mr Chen originally submitted this non-disclosure was deliberate when Ps’ counsel submitted to the ex parte judge that there was “no defence”.  In the course of oral submissions, Mr Chen no longer insisted that the non-disclosure was deliberate.  In my view, Mr Chen’s concession was fair. It cannot be said that his arguments based on the reflective loss principle was an obvious point of defence that Ps’ counsel could reasonably have anticipated. I find that there was no material non-disclosure on this point.

50.  In relation to (2), the applicable principles are not in dispute between counsel.  They are stated by K Yeung J in Yu Man Fung Alice v Chiau Sing Chi Stephen [2019] HKCFI 1549:

“19.  For a claim of “without prejudice” privilege to succeed, the party claiming it must show that the communication was made:

(a)  in a bona fide attempt to settle a dispute between the parties; and

(b)  with the intention that, if negotiations failed, the communication could not be disclosed without the consent of the parties making the communication.

20.  In establishing that there was a bona fide attempt to settle a dispute (§ 19(a) above), the asserting party must show that, at the time of the communication concerned:

(a)  a dispute existed between the parties;

(b)  that dispute was one in respect of which legal proceedings had commenced or were contemplated; and

(c)  the communication was made in an attempt to further negotiations to settle that dispute.”

51.  It should be noted that in Yu Man Fung’s case, his Lordship referred to Bradford & Bingley plc v Rashid [2006] 1 WLR 2066 in which the House of Lords said:-

“ ... [the debtor’s] acknowledgment was not protected [by the without prejudice rule] for two reasons: ..., and there was no dispute as to liability to be compromised, the only element of negotiation being directed to obtaining time for payment (any reduction in the amount to be paid, as suggested in the agent’s second letter, would have been a matter of pure indulgence on the part of the lender).” (per Lord Walker at §39, emphasis added)

“The existence of a dispute and of an attempt to compromise it are at the heart of the rule whereby evidence may be excluded (or disclosure of material precluded) as ‘without prejudice’.... The rule does not of course depend upon disputants already being engaged in litigation. But there must as a matter of law be a real dispute capable of settlement in the sense of compromise (rather than in the sense of simple payment or satisfaction).” (per Lord Mance at §81, emphasis added)

His Lordship also referred to Avonwick Holdings Ltd v Webinvest Ltd [2014] EWHC 3322 (Ch), where Richard J (at §19) explained Bradford’s case in this way:

“For a document to be inadmissible on the grounds that it is ‘without prejudice’, it must form part of a genuine attempt to resolve a dispute. There needs to be both a genuine dispute to be resolved and a genuine attempt to resolve it. If there is no dispute about a liability, but only a negotiation as to how and when it should be discharged, the negotiations, and documents produced in the course of them, are not covered by the ‘without prejudice’ exception to the admissibility of relevant evidence.” (emphasis added)

52.  Accordingly, a negotiation as to how and when a liability should be discharged only would not by itself qualify as a “dispute” to trigger the “without prejudice” principle.  In the present case, what Mr Chen argued to be covered by the without prejudice privilege were the email from D1 to P1 dated 9 December 2019 as set out in paragraph 25 above and D1’s last email to P1 on 13 December 2019 as set out in paragraph 26 above.  Mr Chen submitted that litigation was contemplated because P1 had threatened to report D1 to the police and take legal action.  He submitted that it can be inferred that D1 intended the communication to be kept confidential and not to be disclosed without his consent if the negotiation failed because D1 expressly asked P1 to keep the arrangement confidential.

53.  Mr Chua submitted that the matters and correspondence from 10 to 13 December 2019 should be read together with the earlier Letter of Acknowledgment dated 5 December 2019 which is not alleged to be “without prejudice” and signed by D1 around that time. From these contemporaneous documents, D1 expressly “acknowledged and confirmed” that all the funds/assets as particularised in the attached summary of assets prepared by him on 2 April 2018 (subject to duplication/ adjustments to be agreed) in the sum of USD 12,455,363.60 were subsisting as at the date thereof and held by him “as a trustee for and on behalf of and for the benefit of [P1]”. As such, the subsequent correspondence from 10 to 13 December 2019 followed up on the express admission and confirmation of liability by D1.  In particular, they merely dealt with when, and to what extent, he could make repayments to P1. Such correspondence was not made in any “genuine attempt to further negotiations to settle the dispute”.  On the contrary, as liability was admitted, there was no dispute, let alone any statement or offer to settle a dispute.  Furthermore, Mr Chua pointed out that when D1 asked P1 to keep the arrangement confidential, it was on the basis of P1 accepting his repayment arrangement rather than in the case of the negotiations failing. Mr Chua submitted that on a fair reading of the emails, they were not made with the intention that they could not be disclosed or relied upon in the litigation.

54.  I again prefer the submissions of Mr Chua.  I appreciate that D1 will be arguing in his Defence that the Notarized Declaration, the Letter of Acknowledgement and his emails dated 10 and 13 December 2019 were not admissions of liability and I wish to avoid expressing my views on the merits of his case which shall be a matter for the trial judge. Suffice to say that Ps’ counsel cannot, in my view, be criticized for not interpreting and treating D1’s said emails as bona fide negotiation for settlement of a dispute.  In the course of oral submissions, Mr Chen again fairly conceded that he cannot argue there was deliberate non-disclosure on this point.  In my view there was no material non-disclosure on this matter and even if there were, I can see no culpability on Ps’ part.

55.  In relation to (3), Mr Chua acknowledged that the Swiss conviction was not disclosed to the ex parte judge. He submitted however that P1’s personal background and conviction have no material effect on the merits of Ps’ claim.  The fact that P1 was previously detained and imprisoned due to allegations of association with the Italian Mafia had been disclosed in P1’s 1^st Affirmation.

56.  Mr Chen submitted that the non-disclosure must have been deliberate. This conviction by the Swiss Criminal Court was reached after a trial where P1 pleaded not guilty.  P1 failed to disclose this conviction, but only informed the ex parte Judge of his conviction by the Italian court stating that he was accused by the Italian authorities of receiving and laundering money for the Sicilian Mafia and specifically mentioned that he cleared of the allegation of association with the Mafia. P1 then stated that he was somehow sentenced to imprisonment by another Italian court in absentia.  P1 stopped short of saying that he had been wronged but the general tone was exonerative.  Mr Chen stressed that there was no explanation as to why the conviction after trial by the Swiss Criminal Court was conveniently left out.  This could plainly affect the Judge’s assessment of the P1’s credibility, which was material given the nature of Ps’ case.

57.  On this point, I accept the submissions of Mr Chen.  The foundation of Ps’ case is built upon an oral Trust Arrangement. Credibility of P1 was thus one factor relevant and material to the weighing exercise of the ex parte Judge.  That was why P1 mentioned his incarceration in Italy as part of his duty to make full and frank disclosure in the first place.  Yet, his disclosure was selective and did not present the entire picture.  I am satisfied that such omission was not accidental and there was deliberate non-disclosure.  The ultimate question is whether I should exercise my discretion to discharge the injunction.

58.  It is trite that ultimately, the Court has a discretion whether to discharge an injunction for material non-disclosure, and the Court will consider factors including: whether the non-disclosure was innocent or deliberate; the excuse or reason for the material non-disclosure; and the importance of the omitted fact to the issues which were to be decided by the judge, in particular whether the non-disclosure would have resulted in the original order not being made in the first place.  Where there has been non-disclosure of material facts at the ex parte application for a Mareva injunction, but full disclosure is made at the hearing inter partes, the court has a discretion to continue the ex parte injunction or to discharge it and immediately re-grant substantially the same injunction.  [See Hong Kong Civil Procedure 2020 at §29/1/51]

59.  In the present case the real issue between the parties is in the scope of the trust.  D1 does not dispute that he was a trustee towards P1. His case is simply that he is a trustee of the shares in Chase and Ace and that he administered the funds and assets in his capacity as a director of Chase and Ace.  Although Ps’ case on a wider scope of trust is based on the oral Trust Arrangement, and hence dependent on the veracity of P1’s evidence, it is in my view strongly arguable that P1’s evidence has been corroborated by the various contemporaneous documents analysed in paragraph 35 above.  In the circumstances, the omitted fact (which only affect the court’s assessment of P1’s overall credibility) could only have very little impact on the ex parte Judge’s assessment of Ps’ ability to establish a “good arguable case”.  In my view, the omitted fact would not, if disclosed to the ex parte Judge, result in the order not being made in the first place.  Accordingly, I exercise my discretion not to discharge the ex parte Injunction Order.  I will continue the Injunction Order until trial or further order. Alternatively, I would no doubt exercise my discretion to order a re-grant.  It is in my view wholly disproportionate and unjust to discharge the injunction and refuse a re-grant in all the circumstances of this case.

60.  I further make an order nisi on costs that the Defendants do pay to the Plaintiffs costs of the Plaintiffs’ summons for continuation dated 7 April 2020 and costs of the Defendants’ summons for discharge dated 28 April 2020 with certificate for counsel, to be taxed on party-and-party basis if not agreed.  This order nisi shall become absolute if no application for variation is made within 14 days from the date hereof.