TAIHAN ELECTRIC WIRE CO LTD AND ANOTHER v. LEE CHI YUEN ARCTIC AND OTHERS

HCA 454/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 454 OF 2013

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D E C I S I O N

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1.  The remaining parties to this case are P2 (“TGH”), D1 (“Lee”), D3 (“Yuanzhi”), D4 (“Winful”), D5 (Lee’s company), D6 and D7 (both being companies of Mrs Lee, the former D2).

2.  TGH relies on Lau, a self-confessed fraudster and co-conspirator of Lee, to found this case.  TGH has failed twice, on ex parte and ex parte on notice bases, in its application for an interim Mareva injunction.  This is the inter parte hearing of the application for injunction against D1, D5 to D7 only.  D1, D5 to D7 will be collectively called “the defendants”.

THE PLAINTIFF’S CASE

3.  The former P1 (“TEC”) is a Korean manufacturer of copper rods and TGH is its wholly owned Hong Kong subsidiary.  In November 2008, TGH took over from TEC a majority of TEC’s sales business in Hong Kong and Southern China (“the Sales Business”).

4.  Lee is a director and shareholder of Yuanzhi and Winful.  He had full control of their bank accounts.  He is also the sole director and shareholder of D5.   D6 and D7 are property holding companies.

5.  Lau was a sales agent appointed by TGH under a contract of employment.  He had full responsibility in finding customers and was in complete control of sales documentation. 

6.  Yuanzhi was wholly owned by Lee since incorporation until 31 March 2010, and thereafter by Lee and Lau in equal shares.  Winful was controlled and run by Lee.

7.  Lau and Lee started off running the agency business through one Smart Resources.  They subsequently moved the agency business to Yuanzhi and Winful.

8.  Yuanzhi and Winful were said to have “acted as” sales and/or collecting agents for the Sales Business (paras 3.2 and 4.2 soc). It was the “expectation and impression” of TEC and TGH that payments received by Smart Resources, Yuanzhi and Winful (“the Pass Through Sale Proceeds”) would be paid over to TEC/TGH immediately subject to deduction of commission (para 21.3 soc).

9.  TGH would supply copper rods to Hong Kong based on estimates prepared by Lau each month.  In the meantime, Lau would search for customers.  When customers were found, Lau would request TGH to release the stored copper rods.  The end customers would arrange for shipment by L/C (with TEC/TGH as beneficiary) or T/T.  Lau would prepare Monthly Payment Records for TGH (para 22 soc).

10.  TGH pleaded that by reason of the arrangement, it was to be inferred that each of Lee, Smart Resources, Yuanzhi and Winful was appointed as a sales agent of TEC, since November 2008, of TGH (but not Smart Resources) (para 34 soc).

11.  Further or alternatively, each of Lee, Smart Resources, Yuanzhi and Winful was appointed a “sub-agent” of TEC/TGH “in privity of contract with [TEC/TGH] on terms that they would share the commission with Lau” (para 35 soc).

12.  Further, each of Lee, Lau, Smart Resources, Yuanzhi and Winful “stood in a position of an agent and/or fiduciary in respect of [TEC/TGH]” (para 36 soc).

13.  Each of Lee, Lau, Yuanzhi and Winful were trustees of the Pass Through Sales Proceeds in their control or under their names from time to time (para 37 soc).

14.  Lee and Lau took advantage of the 21-day free storage period of the container yard in Hong Kong to try and find end-customers.  Lee and Lau then diverted part of the sale proceeds to their own money making venture and shared the profits.  They also took advantage of the 30-60 day credit period given by TGH to end-customers to delay payments to TGH and disguise their misappropriation of money.

15.  Lau was said to have provided false information in the Monthly Payment Records so as to give the false impression that the shipments were sold and paid for within 30-45 days of shipment.  This included assigning payments made by end customers for the shipment of the present month to settle the outstanding receivables for the previous month (para 43 soc).

16.  Because of its own defective system of recording sales by reference to shipment instead of to specific customers, TGH was unaware of the misappropriation. 

17.  The scheme worked well when the sales increased significantly.  In 2009, in order to obtain significant cash flow to meet the drop in demand and prices, a cargo finance arrangement (“the REPO arrangement”) was made between Winful and SBP but Lau left the details to Lee.  What happened was that SBP would hold the copper rods that Winful purchased from TGH/TEC Leadings as security. TGH would be paid partly by SBP and partly by Winful.    

18.  By March 2010, TEC/TGH had started to ship copper rods directly to customers and required the agents to pay TEC/TGH directly.  The cash flow for Yuanzhi and Winful significantly reduced.  Winful entered into further mortgages with SBP to maintain the cash flow.

19.  The relationship between Lau and Lee fell apart towards the end of 2010.  Lau claims to be concerned that Lee was taking too much money.  Lau also felt that Lee was using the money for his own benefit instead of for both of them.

20.  In September 2011, the representatives of TGH and TEC came to Hong Kong to discuss with Lau their concerns over the proceeds of sale but Lau became uncontactable. 

21.  By October 2011 the fraud was exposed as the significant reduction in supply from Korea created cash flow problem for the cover-up.  TGH claims to have suffered loss of about US$36m.

22.  TGH instituted HCA 1687/2011 (“the 2011 Action”) on 4 October 2011 against Lau, Yuanzhi, Winful and one Kar Yue (a trucking company engaged by Lau).  There is an existing Mareva injunction against those defendants.

23.  Lau was prosecuted on 3 counts of using a copy of a false instrument but was acquitted on 5 October 2012.  On 22 January 2013, Lau entered into a settlement agreement with TEC/TGH (“the Settlement Agreement”) whereunder he admitted liability and agreed to entry of judgment against him in the 2011 Action.  The plaintiffs agreed not to enforce the judgment in exchange for Lau’s assistance in the present case. 

24.  The plaintiffs issued a writ on 14 March 2013 to sue the defendants in conspiracy to defraud and to injure, constructive trust on the grounds of knowing receipt and dishonest assistance, conversion of property and breach of contract.  D5, D6 and D7 are said to be nominee companies incorporated for the primary purpose of hiding proceeds of fraud and are holding properties on trust for TGH. 

25.  Four days after the writ was issued, 4 properties (belonging to Lee, D6 and D5 respectively) were mortgaged.

26.  TGH seeks an injunction restraining the defendants from disposing of assets up to US$36m (about HK$285m).

THE DEFENDANTS’ GROUNDS IN OPPOSITION

27.  The defendants contend that the statement of claim is not sustainable.  The loss to TGH arose, not from the wrongdoings of the defendants, but of the TGH group.  That was with the aid of Lau and other individuals (including Oh, HK Lee, Seol and Ahn) in the Overseas Sales Team (“the OST”) of the TGH group.  It was Lau who manipulated the copper rods transactions with the consent and active participation of the OST in order to cover up the loss of the TGH group.    Lee was not involved in Yuanzhi.  He just followed Lau’s instructions.  Winful was Lee’s own trading company but it was Lau who handle copper rod trading.

28.  The defendants say that Lau and Oh are not reliable.  It would have been impossible for anyone to have committed the fraud as alleged to the tune of US$36m through the fraudulent scheme in the shortness of time.  The latest allegations have been reverse-engineered to construct a fictitious claim against the defendants.  TEC/TGH themselves are investigated by law enforcement agencies for serious crimes in Korea.  The present claim might be a cover up of their own unlawful behaviour and/or to recoup a loss that they themselves created.

THE LEGAL PRINCIPLES

29.  There is no dispute on principles.  To obtain a Mareva injunction, the plaintiffs must show a good arguable case on the merits; real risk of dissipation of assets in such a way that a future judgment would go unsatisfied; and that it is just and convenient to grant the injunction: Akai Holdings Ltd v Ho [2009] HKCU 172 at para 35.

30.  A good arguable case is one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success: Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG (‘The Niedersachsen’) [1983] 2 LLoyd's LR 600, at 605.

31.  There is no requirement to prove nefarious intent per se.  “The test is whether, on the assumption that the plaintiff has shown at least 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 favour of the plaintiff would remain unsatisfied.” see Kerr LJ in The Niedersachsen, at 617. 

32.  Evidence of an unacceptably low standard of commercial morality or questionable integrity, particularly in connection with the transaction in question and after disputes have arisen, will entitle the court to conclude that there is a sufficient risk to justify a Mareva injunction: Honsaico Trading Co v Hong Yiah Seng Co Ltd, [1990] 1 HKLR 235 at para 24; Standard Chartered Securities v Lai Arthur & ors [1993] 1 HKC 375, at 394.

33.  When considering whether there was unacceptably low commercial morality upon which to infer a real risk of dissipation of assets, the Court should scrutinize the evidence with care and should not too readily infer such a risk from the defendant’s conduct or commercial morality: Honour Resources (International) Co Ltd v Savvy Resources Ltd [2010] 4 HKC 50, at 57.

34.  Dishonesty is not essential to the exercise of the jurisdiction and there is no need to show an intention to dissipate assets.  But if there is a good arguable case in support of an allegation that the defendant has acted fraudulently or dishonestly (eg being implicated in an ingenious scheme for the misappropriation of funds belonging to the plaintiff), or has acted unconscionably, then it is unnecessary for there to be any further specific evidence on risk of dissipation for the court to be entitled to take the view that there is a sufficient risk to justify granting Mareva relief.  Once this is shown, the limit of the Mareva relief will take into account claims for which the plaintiff has a good arguable case, including those which do not involve such an allegation.  The fact that a defendant is experienced in intricate, sophisticated, international transactions involving movements of large sums of money may also indicate that there is a real risk of dissipation. Akai Holdings, at para 53; Gee, Mareva Injunctions and Anton Piller Relief (4^th ed) 198.

GOOD ARGUABLE CASE ON THE MERITS

35.  I will first deal with the defendants’ attack on the statement of claim before analyzing the evidence. 

Whether the statement of claim is sustainable

36.  Mr Barlow SC draws to my attention that the statement of claim was filed after filing of evidence in the injunction application was closed.  The statement of claim no longer pleads fraud or conspiracy, which were the core allegations in TGH’s affidavit evidence.  Instead, the causes of action were (as against Lee, Yuanzhi and Winful) in dishonest assistance in breach of trust and breach of contract; (as against D5-D7) in constructive trust.

37.  Mr Barlow SC submits that there is a mismatch between the affirmation evidence and the statement of claim.  He relies on a passage in the case of Tam Chi Kok cited in Hong Kong Civil Procedure 2013, Vol 1, para 18/19/10, page 422:

“[This] is a case where a plaintiff commences an action when he does not know how to formulate his case. In other words, he sues before he knows what to sue, or before he can make up his mind as to the subject matter of his complaint. In this regard, the plaintiff must be equated with his counsel and solicitors. In other words, in the present case, the four Children commenced the present action before they and their legal advisers were ad idem and thus knew what they wanted to sue about, and of course it is the function of a statement to set out precisely what a plaintiff wishes to sue and ask the court to grant him relief about.”

38.  Without disrespect to the pleader, there is some truth in Mr Barlow SC’s complaint.

39.  First, the cause of action for breach of contract against the defendant is unsustainable.  The only pleaded contract was one of employment between TGH and Lau which Lau did not dispute and under which no relief is claimed.

40.  Secondly, (unlike Lau) Lee, Yuanzhi and Winful were not agents by express appointment but they only “acted as” agents through the “Sales Business” and by inference.  The plea that they were “sub-agents” does not particularize the circumstances giving rise to the appointment arose and the terms thereof.

41.  Thirdly, Lee, Yuanzhi and Winful’s status as agents did not sit in well with other parts of the statement of claim.  TGH allegedly gave Lau complete control and to sell to one Eco (run by one Alex Yip), a trader of copper rods.  Smart Resources was a trader doing the same as Eco.  So was Yuanzhi and Winful.  It appeared to be a case of trading on a principal to principal basis and TGH would have known from the Monthly Reports that the goods were sold to Yuanzhi and Winful on that basis.  TGH, however, carved out Smart Resources.   

42.  Fourthly, the statement of claim also negates agency as TEC/TGH were aware that the agency business was run jointly by Lau and Lee in 2007 and approved of the arrangement.  TEC/TGH also approved of Lee incorporating Yuanzhi and Winful and using them to carry out the agency business, taking over from Smart Resources.  (See para 30 and 31 soc.)

43.  Fifthly, it was incomprehensible why TGH’s only had an “expectation and impression”, as opposed to a legal right, that the Pass Through Sale Proceeds would be paid over to it.  That really raised a question of who the principal legally entitled to receive the money was – TGH or Smart Resources, Winful or Yuanzhi?  If it were the 3 companies, TGH would have a claim in contract but not trust.

44.  Sixthly, the question continues as to how “an expectation and impression” could be elevated into a case of constructive trust.

45.  Seventhly, there was no sufficient plea of dishonesty and knowing assistance in Lau’s breach of trust within the statement of claim. 

46.  Eighthly, in respect of D5 or D7, it was not pleaded that they had taken anything belonging to TGH.

47.  At this hearing, Mr Manzoni SC makes clear that:

(i)   His case was based on Lee and Lau being agents and that they received sales proceeds on behalf of TGH. There was no written agreement.

(ii)   Smart Resources was carved out because TGH were then not aware of its misappropriation.

(iii)   It was not TGH’s case that there was principal to principal type of trading between it and Yuanzhi or Winful. 

(iv)   Under paragraph 32 of the statement of claim, if Lee and Lau were sales agents, then the sale proceeds "are to be regarded to be received" by them through Yuanzhi and Winful. If, on the other hand, Yuanzhi and Winful were themselves agents, they would be regarded as receiving proceeds on their own behalf qua agent and needed to account to TGH. 

(v)   TGH has pleaded a case of Lee's dishonesty, breach of fiduciary duties and dishonest assistance.

(vi)   D5 to D7 were nominee companies holding assets.  P2 is seeking proprietary remedy against them. Mr Manzoni SC  submits that once TGH establishes that its money has been paid into these companies, the burden will be on D5 to D7 to show that they were bona fide purchasers of the relevant property for value without notice: Foskett v. McKeown [2001] 1 AC 102, at 108F – 109E. TGH does not run a case of dishonest assistance against D5 to D7 and it is not necessary to prove that they had knowledge of TGH’s equity: Chan Chun Chung v. PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178 at para 14.

48.  There is an application to strike out the statement of claim to be heard on 12 November 2013 by another judge.  I make no comment on it as the focus of arguments before me is not based on Order 18, rule 19.  Rather, my duty is to consider whether the statement of claim and the evidence constitute sufficient bases to show a good arguable case. 

49.  I have to say that there is much room for improvement of the statement of claim.  What TGH is purporting to do is to sweep every purchaser of its goods under the umbrella of Lee and Lau’s agency so that all proceeds of sale should go to TGH as principal.  This is despite the fact the pleader himself used distinct terms for agent, sub-agent, trader and end-customers.  At this stage, I can only say that the statement of claim is capable being read in the way advanced by Mr Manzoni SC.  The bone of contention lies in whether Lee, Yuanzhi and Winful acted as agents or were trading as principals.  That is a matter of fact and law that cannot be resolved in an interlocutory application like this.  Paragraphs 50 to 52 of the statement of claim did plead dishonest assistance.  I do not think it can be said that reading the statement of claim with the evidence, there is no sustainable cause of action and hence no prospective judgment to which a Mareva injunction may possibly attach.  The defendants’ first line of contention fails.

Analyses of the evidence to see if there is a good arguable case

50.  There is a mismatch in the evidence and the statement of claim, which was filed subsequently.  However, the question of Lau’s credibility aside, there is sufficient evidence from Lau’s affidavit in this Action to support the pleaded case.

51.  To counter the grounds in opposition, Mr Manzoni SC puts forth 3 pieces of evidence which came to light since the ex parte hearings which, he submits, turn a good arguable case into a strong case.  They are (i) a REPO transaction; (ii) what is known as the Everlong transaction; and (iii) the defendants’ failure to make complete disclosure of bank documents pursuant to my order dated 5 July 2013.

The REPO transaction

52.  According to Lee, upon receipt of money under the REPO arrangement, Winful would, in accordance with Lau’s instructions, instruct SBP to remit the money to one of TGH’s accounts as payment for the copper rods.  An aggregate sum of US$54.78m has been paid to TGH according to the summary of 59 REPO transactions[1]. A sum of US$793,000 was, however, missing in between items 34 and 35.   

53.  The US$793,000 concerned goods sold to SBP under the REPO arrangement but TGH has never received payment.  Lee claimed that the sum was never due to be paid to TGH. Rather, Lee said that US$750,350 was applied to satisfy an earlier loan Winful had made to TGH on Lau’s instruction.  The loan was effected by way of payment pursuant to a letter of credit, which Lau had instructed Winful to obtain from the Bank of China. 

54.  On the face of documents, the letter of credit appeared to be issued for an ordinary trading transaction.  Goods were delivered, as evidenced by a bill of lading.    The letter of credit had been drawn upon by the beneficiary TGH.  There was no loan. 

55.  Mr Manzoni SC’s submission on this REPO transaction is supported by bank documents obtained pursuant to the disclosure order.  It shows that Lee was trying to hide the fact of receipt of the US$793,000 from TGH.  It also supports, so Mr Manzoni SC submits, TGH’s case on the REPO transactions – that Lee and Lau’s scheme had difficulty in cash flow, so they used the REPO arrangement to generate cash to pay back TGH to keep the scheme running.   

The Everlong transaction

56.  Yuanzhi received US$381,644 from a customer Everlong and paid it out to Winful, who then, paid it out on the same day to an unknown destination.  These were confirmed by an outgoing chats advice, a consignee invoice of Kar Yue showing delivery to Everlong and bank statements obtained from the defendants. 

57.  The money was not received by TGH or SBP.  Apart from a denial that the money was not due and payable to TGH, Lau could offer no other explanation in the light of the objective evidence.  His denial had no weight when his case was that he was not in control but that Lau was. 

Incomplete disclosure of bank documents

58.  TGH also relies on incomplete disclosure of bank documents in breach of this court’s order dated 5 July 2013.  An example is that the statements for Yuanzhi’s US dollar account at HSBC for November 2009 to December 2010 are missing.  Mr Manzoni SC submits that those “missing” statements of this active account must have contained evidence of the money stolen under the fraud. 

59.  Mr Rhoda, solicitor for the defendants has denied the non-disclosure.  He explained, on instructions, that there was no account activity for those 13 months and monthly statements were not issued.  The closing balance appearing on the last statement for October 2009 matched the opening balance for January 2011.

60.  Mr Manzoni SC accepts, rightly in my view, that at this stage he is unable to go behind Mr Rhoda’s explanation.  He describes that this was Lee’s “catch-me-if-you-can” attitude. Unfortunately, this is not something I can place weight on at this stage. Still less can I place weight on alleged non-disclosure of an account in breach of the disclosure order in the 2011 Action. 

 Other defences

61.  It is said that Lee was not involved in Yuanzhi or Winful.

62.  Yuanzhi was incorporated on 9 October 2007. In Lee’s own words, it was intended to be a joint business venture with Lau to engage, inter-alia, in the trading of copper rods which Lau would procure from TEC and other suppliers.  The undisputed facts are that Lee was the sole director and shareholder of Yuanzhi.  Yuanzhi rented Lee's apartment in Shenzhen as its office. It would be unusual if Lee would have just incorporated this company for Lau’s use.  Upon Lau becoming a 50% shareholder, it was also unusual that Lee continued to remain in sole control of the bank accounts.   Added to these is Oh’s evidence that during his business trips to the Mainland with Lau, the sales staff of Yuanzhi reported directly to Lee and only followed clerical instructions given by Lau.  These facts refute any suggestion that Lee was not involved in Yuanzhi.

63.  With regard to Winful, it was incorporated in May 2007, with a different business from that of Yuanzhi.  Lee was the major shareholder and one of the three directors.  Lau had never been a shareholder or director. Winful had a limited copper aspect and it was operated by Lau.       I find it difficult to accept that Lee would have entered into the REPO arrangement involving tonnes of copper rods worth millions of dollars for no apparent benefit to Winful, and did it solely on the ground of goodwill.              

64.  If matters had stopped there, TGH has shown a good arguable case on the merits against Lee, Yuanzhi and Winful even only based on the REPO transaction and Everlong transaction.  The questions to be tried include: whether Lee, Yuanzhi and Winful were agents of TGH, whether there had been misappropriation of proceeds belonging to TGH, whether Lee, Yuanzhi and Winful had knowingly assisted in breach of trust.  There was, however, no question to be tried on contract as against these 3 defendants. 

Credibility of Lau

65.  Lau, on whom TG places heavy reliance, is a self-confessed fraudster. He has explained how his Christian faith has caused him to turn himself in to TGH.  That may not be surprising for someone turning a new leaf who tries to reduce the damage to victims of his fraud.  But there are other matters that have a negative impact on his credibility.

66.  Firstly, Mr Barlow SC informs this court that Lau has been prosecuted but Lee has not.  He has been acquitted but that was because the prosecution witnesses were not believed or were found wanting that the case was not proved beyond reasonable doubt.  Lau has elected not to give evidence in the criminal trial. 

67.  Secondly, Lee has asserted on affirmation that what Lau had been doing was with the knowledge and consent of TEC.  Lee even exhibited Lau’s Confession Statements.  Whilst Mr Oh has in his reply affirmation purported to deny Lee’s allegations, Lau has conspicuously declined to file an affidavit in reply.  That was despite a term in the Settlement Agreement that Lau would “cooperate fully to assist the plaintiffs with their efforts to recover losses they have suffered due to the fraud that is at the heart of this application and the proceedings against the defendants”: Georgiou-1^st, para 6.  (TGH also expressed uncertainty as to whether Lau would give evidence at the trial.  However, injunctions are often granted well before a trial is in sight.  I therefore place little weight on this uncertainty.)

68.  The Confession Statements are not something relevant only to the 2011 Action.  They are detailed statements, prepared, signed and revised by Lau in 2012 contain supporting documents.  I highlight some important allegations of Lau as follows:

(i)   TEC lost big money in overseas investment projects. Winful set up the REPO arrangement with the knowledge and full authority of HK Lee and the OST.  It was to aid in boosting sales and getting in money quickly for TEC.

(ii)   In August 2010, pursuant to an order of the OST, Lau allocated a lot of cargoes and payment to TEC Leadings who had financial difficulties. It created a cargo shortage problem for clients who paid by letter of credit.  Lau therefore had to buy back SBP warehoused cargo using Yuanzhi's money. But cargo was delivered to TEC/TGH’s clients. When those clients received goods, L/C payments would be opened to TEC/TGH but TEC/TGH did not paid back Yuanzhi.

(iii)   The funding settlement between TGH and Yuanzhi for SBP warehoused cargo used a cargo exchange system. For example Yuanzhi bought SBP cargo through Winful. Clients would pay back Yuanzhi or if TGH did not pay back Yuanzhi, Lau would arrange for TGH’s cargo to be delivered to Yuanzhi in settlement.   

(iv)   Enormous funds had been paid by SBP to the TEC group for covering their loss in local/overseas investment.  OST has ordered Lau to allocate payment from TGH’s clients to TEC first, and then pay TGH later.  That was why payment period got longer, from 30 to 60 days.  

(v)   Oh told Lau that the fund allocation to TEC Leadings was a serious illegal act. 

(vi)   TEC/TGH worked together with Seda Line (a shipping forwarder of TEC, not a real ocean carrier) to set up an abnormal cargo release system without presenting a full set of 3/3 bills of lading to clients. Clients would be given 2/3 sets for bank negotiation whilst TEC/TGH held rights over the cargo by retaining 1/3 sets.  This meant that clients did not have full cargo rights even though L/C payments were effected.  TEC/TGH ordered Lau to release cargo through Seda Line.  Clients never obtained the full set of bills of lading but could get the cargo.  So, according to Lau, the original bill of lading would be fraud documents in order to receive quick payments from banks opening L/Cs. 

(vii)        Winful was a buyer from TGH and not an agent.  The warehouse cargo handling was not handled by Yuanzhi.

(viii)      In September 2011, the OST requested Lau to create fake customers outstanding payment tables, fake sales documents for hiding about US$30m or more outstanding payments for their roll over use. For fear that he would be asked to prepare fake debts settlement plan, Lau went into hiding and declined to meet Oh in September 2011. 

69.  Thirdly, the defendants have compiled a table showing the key inconsistencies in Lau’s affidavits filed in both Actions.  To highlight a few significant matters:

(i)   In the 2011 Action, Lau explained the misappropriation of TGH’s proceeds through a complex cargo allocation scheme.  There was no mention of a scheme of diversion of sale proceeds.  Lee was never implicated, unlike the present Action where he was said to be an agent diverting proceeds of sale with Lau for their own benefit.

(ii)   In the 2011 Action, TEC/TGH asserted that Yuanzhi had not purchased any copper rods from the plaintiffs since the commencement of 2011.   However, in the present action, TEC pleaded that Yuanzhi and Winful acted as its sales agents and received sales proceeds from end customers.

(iii)   In the 2011 Action, Lau was said to have provided many instructions as to payments in and out of the accounts. This contradicted Lau's assertion in the present action that the bank accounts were fully controlled by Lee.

(iv)   In the 2011 action, Lau asserted that TEC must have known where the copper rods were actually delivered and to whom. They knew and were in fact familiar with the owners of these customers. Yet in their present action, it was stated that TEC never raised query as to whom the cargo would be delivered and almost always authorized the release solely on Lau's request.

70.  Given the inconsistencies in Lau’s affidavit evidence, he must have perjured himself in some aspects.  Lau has not identified which part of the version in the 2011 Action was untrue and how he could have come up with the details in that untrue version. 

71.  I remind myself, of course, that the 2011 Action was targeted at Lau who was then believed to be the culprit.  As admitted by TGH, it did not possess enough information to claim against Lee in 2011.  TGH’s case changed as a result of Lau’s change.  Judging from the evidence so far, Lau and Lee had once been on good terms. It was understandable that Lau did not implicate Lee in the 2011 Action.

72.  Fourthly, Mr Barlow SC relies on the inconsistencies between a table prepared by Oh and that prepared by Lau in terms of monthly shipping quantities and sale proceeds between October 2008 and September 2011.  At this stage, it is impossible to go into the underlying documents in support of these tables.  The table appears to be for different purposes: Oh’s to show sales, receipt and receivables; Law’s to show volume of sales.  In any case, these tables do not affect my overall view of this application.

73.  Fifthly, Mr Barlow SC points out that there is no causal connection between the alleged missing US$36 million and the defendants. Nor is there any documentary evidence to show that the money belonging to TGH was diverted from either Yuanzhi or Winful.   It is part of TGH’s case that not all shipments were paid through Yuanzhi or Winful and that many payments were made directly to TGH. The lack of evidence of a causal connection is even more striking given that the bank accounts of these companies have been disclosed and inspected TGH. These bank accounts do not reveal any evidence of any alleged diversion of TGH’s money or even any money movements of the kind alleged by TGH.  

74.  Mr Barlow SC might be right.  However, at this stage, the court will not go into detailed examination of the bank statements.  This aspect does not affect my decision on the overall merits of this application anyway.

75.  The court of course does not need to resolve the inconsistencies in Lau’s evidence at this stage.   What is troubling is that Lau has never disclaimed the contents of his Confession Statements or his previous affirmations.  His failure to file an affidavit in reply starkly poses the question as to why he would have done so, risking the breach of the Settlement Agreement?  Was it because there were some unlawful acts of TEC/TGH that he wanted to hide?  Paragraph 68(iii) as to the allocation of goods and payment to TEC’s group may undermine TGH’s case on the REPO transaction referred to above and give weight to the “loan” that Lee alluded to.  Oh’s mere denial on affidavit on behalf of TGH does not dispel my doubts.

76.  Further, Lee's 2^nd affirmation mentioned that on 27 October 2012, Lau had filed a police report alleging that Lee had misappropriated US$381,644.34 from Yuanzhi's HSBC account (808-649412-274). However, that complaint was withdrawn on 19 November 2012.  Lau’s failure to explain the withdrawal of the complaint undermines TGH’s case on the Everlong transaction.

77.  In summary, the failure of Lau to file a reply affidavit and withdrawal of Lau’s report to the police create doubt in my mind as to the truthfulness and strength of TGH’s case.  The Confession Statements, if true, would mean that TGH had been involved in unlawful conduct in allocating funds or unlawfully collecting payment under letters of credit.  It suffered loss for reasons unconnected to Lee or Lau.  There is no reason why the court should lend its assistance to such a plaintiff.  I am of the view that TGH has not shown a good arguable case to justify the grant of a draconian relief against Lee, Yuanzhi and Winful. 

Case against D5 to D7

78.  TGH pleaded that D5 to D7 are liable to deliver up all properties in their names or possession derived directly or indirectly from the misappropriated funds.  It was to be inferred that since 2007, income derived from misappropriated funds represented Lee’s only source of income.  Mrs Lee was a housewife without substantive income on her own.  In the premises, D5 to D7 hold the properties and proceeds of sale on constructive trust for TGH.  (paras 58-61 soc)

79.  Lee had incorporated D5 on 15 October 2010 immediately before its purchase of a property.  The office used by Winful and owned by Lee was sold at the same time on 19 October 2010.  Likewise, D6 and D7 were incorporated immediately before purchase of properties in March and August 2012 respectively. 

80.  Mr Manzoni SC submits that the timing of the purchase of properties and incorporation of companies provide strong evidence to demonstrate that those entities were incorporated to try to cover up money taken by Lee, Yuanzhi and Winful under the fraud. 

81.  To say that Lee could not have the money himself to buy those properties is to ignore Lee’s past employment and his commission income from sale of the copper rods.   

82.  I note there is no averment about D5 to D7’s trading of TGH’s copper rods or receiving its sales proceeds. TGH is not running a case of knowledge of fraudulent scheme or knowing assistance in breach of trust against them.  The evidence is only sufficient to show serious issues to be tried against D5 to D7.

RISK OF DISSIPATION OF ASSETS

83.  In case I am wrong on my conclusion of there being no good arguable case, I proceed to consider the risk of dissipation of assets. 

84.  If TGH’s case is accepted, there is evidence of Lee’s concealment of misappropriation of TGH’s sale proceeds.  He denied his misappropriation despite proof from banking documents.  He displayed dishonesty in international transactions involving movements of large sums of money and cargoes.  Such dishonesty is sufficient for the court to find a risk of dissipation of assets.

85.  Mr Manzoni submits that Lee lied about not having a relationship with SBP until 2009.  I am not satisfied that Lee had lied in that respect.  On a proper reading of SBP’s email dated 19 August 2013, Lee had only set up a trade financing account with SBP in 2007 but there was no real business until 2009 when the REPO arrangement was made. 

86.  However, Lee has lied that apart from 2 insurance policies, Winful had no assets of an individual value of HK$50,000 or more.  In fact, Winful had other bank accounts with SBP with a balance of US$6m on 4 October 2011, which increased to US$7.39m on 14 October 2011.  Winful also held a bank account with SBP with a balance of US$12,620 between 16 September and 17 November 2011. 

87.  In addition, there was an actual disposal of Lee’s Sheung Wan office on 12 December 2012 to an unrelated party.  There was Lau’s hearsay evidence as to disposal of Lee’s property in Shenzhen and Macau.

88.  Moreover, mortgages have been taken out 4 days after the failed ex parte injunction application in favour of one Full Faith Asia Inc (“Full Faith”), which was incorporated in the Republic of Vanuatu.  The mortgage was for general banking facilities repayable on demand.  The mortgage deeds were on virtually identical terms with no indication of what the credit facilities were.   

89.  Lee explained that the loans from Full Faith was to counter the cash flow problems caused by the Mareva injunction in the 2011 Action.  The loans were arranged in January, not in the 4 days since issue of the writ.  Mr Mui (director and sole shareholder of Full Faith) has affirmed to the circumstances for setting up Full Faith (a special purpose vehicle) and the credit facility to Lee in the amount of US$6.7m, of which US$5.5m.  The actual advance of US$5.5m has been fully documented.

90.  I accept the explanation given by Lee – that he and other defendants were not aware of the writ until service on 9 April 2013, weeks after the mortgages have been arranged for. 

91.  However, as Mr Manzoni SC pointed out, the defendants have failed to provide copies of land searches which would have assisted in proving the assertions.  In addition, the amounts which Mr Mui purportedly advanced to Lee were made to a New Voyager Investment Holding Pte Ltd instead of to D5 for no apparent reason.  There was no information as to who the shareholders and directors of New Voyager were.  These throw in doubt the purpose of the loan from Mr Mui.

92.  I have considered that litigation has started since 2011.  In the 2011 Action, the plaintiffs alleged that Yuanzhi and Winful were corporate vehicles used by Lau and/or Lee to divert the copper rods and proceeds of sale.  Lee was said to have full knowledge of Lau’s breach.  Lee’s knowledge was in turn imputed to Winful.  Lee has filed some 14 affirmations and hence fully aware of the progress of the 2011 Action.  Lee would have expected that at some stage the plaintiffs would make him a defendant and freeze his assets.  Yet Lee has made limited disposal  in the meantime.  Instead, he resumed his career of trading in metals, despite the ruining of Winful.  He was creating (through D5) further assets within the jurisdiction. 

93.  If Lee has divested proceeds of sale whilst running Yuanzhi and Winful, one cannot exclude the possibility that he will divest the mortgage monies through D5’s business.  Considering all the circumstances, there is in my view risk of dissipation of assets. 

BALANCE OF CONVENIENCE

94.  Mr Barlow SC complains about the delay in taking out this injunction against Lee.  In Dorshare Ltd v Shun Pong Ltd HCA1823/2012, 4 January 2013,at para 13-16, Mr Justice Anthony Chan explained why delay can be fatal to an application for injunctive relief:

(i)   Delay reflects the lack of irreparable damage.  In King Fung Vacuum Ltd v Toto Toys Ltd [2006] 2 HKLRD 785, para 20, it was said that “promptly” in the circumstances of interlocutory injunctions has been commonly understood to be a period of 6 weeks or so of unexplained delay and 3 months with an explanation given for the delay in making application for an injunction.

(ii)   Delay may cause prejudice to the person who will be affected by the injunction: Wong Chung Ming Development Fund Co Ltd v Profit Surplus Ltd [2009] 3 HKC 19, para 30.

(iii)   Delay can render it unreasonable or unjust to grant an interlocutory injunction.

(iv)   Unexplained inordinate delay can constitute an abuse of process.

95.  I do not blame TGH for its “delay” of about 1 ½ years since September 2011.  A responsible litigant has to secure sufficient evidence before seeking a Mareva injunction.  Until his acquittal, Lau had been prevented from speaking to TEC/TGH who were witnesses for the prosecution.  TGH has acted promptly in entering into the Settlement Agreement within 3 months of Lau’s acquittal.  The writ in this Action was filed in another 2 months’ time.  There was no inordinate delay on the part of TGH.    

96.  I have alluded to the doubts created as a result of Lau’s failure to file an affidavit in reply.  On that ground alone, the balance will be tipped against the granting of a Mareva injunction.

97.  In relation to D5, Mr Barlow SC draws to my attention that the Mareva injunction in the 2011 Action has ruined Winful’s business by destroying its access to credit facilities.  Any injunction against D5 may have similar effect.   This would be doubly cruel to Lee who has tried to rebuild his business.  I agree. 

98.  Mareva injunctions put the recipient party in a seriously disadvantaged position right from the start, from which it may never recover. It is therefore essential for the court to carefully and critically scrutinize the materials placed before it before making such an order. Stone J in Deiulemar Shipping SpA v Transfield ER Futures Ltd [2011] 1 HKLRD 75, at paras 54-55; followed in Eastman Chemical Ltd v Heyro Chemical Co Ltd (No 2) [2012] 3 HKLRD 307, at para 26. 

99.  It is not every risk of a judgment being unsatisfied which can justify Mareva relief: Gee, Commercial Injunctions (5^th ed), para 12.037.

“12.037 A defendant may be faced with insolvency if the claimant’s claim succeeds. However, regardless of whether this is so, in the meantime the defendant is entitled to carry on business, and it would be contrary to principle for Mareva relief to be granted for the purpose either of preventing the defendant from doing so, or preserving some assets for the claimant in case he succeeds at trial. …

Because Mareva relief pre-judgment is not granted for the purpose of interfering with ordinary business transactions it follows that even if there is some element of speculative risk in such a transaction the court will still not interfere with it.”

100.  These authorities are applicable to D5.

101.  Insofar as D6 and D7 are concerned, there will not be much convenience caused by an injunction to these property holding companies.

102.  Balancing all parties’ interest, I would not have imposed a Mareva injunction against D5 even if there is a good arguable case.

FORTIFICATION OF UNDERTAKING AS TO DAMAGES

103.  Lau is unable to state the quantum of loss except to say that it was over US$30m.  Oh estimated the loss suffered by TGH to be in the sum of US$36.97m, equivalent to HK$288m, roughly equally to the sales in July and August 2011.  In the draft injunction order, TGH limits its claim to HK$285m. The different between Lau and Oh is substantial.

104.  TGH is a shell company.  Its parent company (TEC), has its financial ability questioned by auditors in its latest available financial statements and its affairs are currently investigated by the Korean police.  Deputy Judge Lok doubted in the 2011 Action the ability of TEC/TGH   to make good the potentially substantial loss of US$8.5m to US$11.5m to Winful by the ex parte injunction.  He ordered TEC/TGH to fortify its undertaking further by increasing the sum from HK$200,000 to US$3m. (See the decision in HCA 1687 of 2011, at para 14-16, 19, 20 and 22.)

105.  If an injunction is granted, it is appropriate to order fortification, given the amount to be frozen and the potential ruin to D5.  It is not uncommon in an injunction for the court to impose fortification for eg a reasonable sum that represents the costs for arranging alternative funds for running a business. 

106.  Mr Manzoni SC makes reference to Akai Holdings wherethe injunction for US$500m was requested for but Stone J granted it for US$200m.  The amount for fortification at the interim stage was HK$50m but it was not adjusted when the injunction was imposed.  He submits that 1% of HK$285m will be the costs of obtaining a bank guarantee and suggest HK$25m for fortification.  

107.  In Akai Holdings, there were bona fide liquidators involved.  Here, to impose fortification at HK$25m is woefully inadequate.  Lee has demonstrated the difficulty in borrowing funds from financial institutions such that he has to turn to a personal friend Mr Mui to lend him US$6.7m. 

108.  Taking all circumstances into account, if I were to grant a Mareva injunction, there should be a fortification in a sum of US$8m.

CONCLUSION

109.  I am not satisfied that a good arguable case has been made out, without Lau’s evidence in reply.  There are inconsistencies in his Confession Statements and affirmations in 2011 Action.  Even if there is a good arguable case, the balance of convenience is against making an injunction, and the potential damage to D5’s business.  I dismiss TGH’s application.

COSTS

110.  Costs of this application as between TGH and the remaining defendants should, on a nisi basis, be borne by TGH, with certificates for 2 counsel.

111.  I thank counsel for their able assistance.