NICEKIND HOLDINGS LTD v. D.H. INTERNATIONAL LTD

CACV 93/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 93 OF 1998

(ON APPEAL FROM HCA 1678 OF 1998)

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J U D G M E N T

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Liu, J.A.:

1. Private placements were due to be floated in October 1997. The plaintiff had an opportunity of acquiring shares in these private placements. The defendant, a Cayman Islands Company, was brought in as financier. Depending on the price at different times, the defendant's funds might be sufficient and the plaintiff would not be called upon to contribute. The venture was not strictly a sale and purchase transaction. In the venture which turned out to be less than successful, the defendant had paid $76 m out of the original $85 m which was itself subsequently reduced to $52 1/2 m, and yet the parties were allegedly still in negotiation over the unpaid balance.

2. Payment of the outstanding $6 1/2 m was by cheque which was dishonoured upon presentation. A writ was issued by the plaintiff against the defendant on 4 February 1998, served on 12 February 1998. There did not seem to be any real sense of urgency because an application was made to Sears, J for a Mareva injunction only on 24 February 1998. It was continued in the interim by Yuen, J three days later, and on 25 March 1998, the Mareva was affirmed by Seagroatt, J. The defendant feels aggrieved by the Mareva injunction and from that injunction, it appeals.

3. The venture went through four Agreements. These Agreements principally regulated the defendant's payment to the plaintiff for acquiring a private placement of shares. Under the first Agreement dated 8 or 9 October 1997, $50 m was paid. Under the second Agreement dated 24 October 1997, another $9 m was paid. Under the third Agreement which is described as a variation agreement dated 27 October 1997, it was decided that with or without a joint-name account, the second Agreement was to be carried forward. The $85 m expected to be payable to the plaintiff under the last Agreement dated, I believe, 11 December 1997, was later reduced to $82 1/2 m. The payment schedule was also realigned. I do not propose to go to the fine print of any of these Agreements, nor deal with the contents of each of them. Suffice it to say: of the $23 1/2 m, $5 m was soon to be paid, another $12 m was to follow and the outstanding $6 1/2 m was to be ultimately settled by the defendant. $5 m was accordingly paid by the defendant to the plaintiff on 11 December 1997. Five days later, $12 m was also paid by the defendant to the plaintiff. When it came to the payment of the outstanding amount of $6 1/2 m, the parties agreed to have this sum paid by cheque, the due date of which fell on 9 January 1998.

4. The defendant's allegation is that negotiation was continuing, particularly, as to whether or not this outstanding $6 1/2 m was to come from the defendant. Be that as it may, the due date of the cheque was finally deferred to 14 January 1998. Whilst the defendant claimed that there was continuing negotiation, the plaintiff was adamant that there was none. The cheque was presented for payment. It was countermanded, hence, the writ and the subsequent applications. It is not without interest to note that the application for the Mareva injunction was first made to Sears, J some 20 days after the issuance of the writ and 12 days after it was served upon the defendant.

5. The principles this court follows on appeal are clear. For the granting of the Mareva injunction, this court cannot interfere with the discretion of the judge unless his discretion was exercised under a mistake of law or in disregard of principle, or under a misapprehension as to facts, or after having taken into account irrelevant matters. This court may also interfere if the judge had failed to exercise any discretion at all or if his decision is plainly wrong in the sense that it is "outside the generous ambit within which a reasonable disagreement is possible". See pp 947 & 948, Vol. 1 of White Book, 59/1/59.

6. The defendant complains that the judge failed to give any or any sufficient weight to the large amounts it had already paid the plaintiff. The defendant had US$7.18 m worth of Hong Kong shares as certified by the Singaporean branch of an Austrian Bank. The defendant's 67.69% holdings in Dah Hwa International (348 million shares), a Hong Kong listed company, was to the tune of some $275 m. The extent of incumbrances was left unspecified. There is, however, evidence in this case to show or for the defendant to claim that these 67.69% shares were legally and beneficially owned by the defendant. These assets, counsel submits, the judge had also overlooked. Counsel for the defendant further levels criticism at the undue attention paid by the judge to the absence of registration of a place of business in Hong Kong by the off-shore defendant company, but the defendant's Hong Kong actions had assumed no geographical permanence or recognisability. See Re Oriel Ltd., [1986] 1 WLR 160 at p.183F et seq. But that is not to say that the defendant had no close link with Hong Kong. Apart from the private placement venture, it is said that the defendant had a security account in Hong Kong and a bank account with the Austrian Bank. Counsel for the plaintiff is unable to identify any other activities conducted, in the real sense of doing business, by the defendant in Hong Kong. There was mention, in the documents before the judge, of "a place of business", but as a question of fact, there is no cogent evidence that the defendant had any intention to set up or had set up a place of business here. In the alternative, counsel for the defendant submits that the judge should not have been alarmed by the lack of information which could have been made available by this off-shore Cayman Islands company, if it had registered a local place of business. We are reminded by counsel that even with a registration, no off-shore company with a place of business in Hong Kong need file any financial statements. See s.336(6) of the Companies Ordinance. Only general information such as constitution of the company, its list of officers and local authorised representative would have to be divulged. See s.333(1) of the same Ordinance. An off-shore corporation is a common phenomenon for the commercial sector in this territory. In my view, there is nothing to show that the defendant had established a place of business in Hong Kong within the meaning of the relevant provisions of our Ordinance. It is further argued on behalf of the plaintiff that adverse inferences should be drawn against the defendant from its alleged avoidance, through Mr Tai, of contact with the plaintiff, through Mr Ma. The defendant is quick with an answer that these allegations of avoiding the plaintiff were not sufficiently particularised. After all, during the period, according to the defendant, a final settlement was still being negotiated with Mr Yim. Moreover, the judge did not take this as a matter of any crucial importance. The defendant was not in active trading but was a share-holding entity, described as the "ultimate holding company". Prejudice to the defendant and Dah Hwa International as submitted by counsel, if real and material, does not seem to bear significantly upon the question we have to decide in this appeal. The real issue is: Are there any features, on the whole of the evidence, for concluding that there is a real risk of frustrating the execution of the plaintiff's judgment, when it is obtained? Put another way: Is there any real risk of the alleged debtor removing assets from within the jurisdiction so as to defeat the debt?

7. The defendant is a company which has, time and again, honoured enormous undertakings to the plaintiff. The decision taken to countermand the $6 1/2 m cheque could not be said to be blatantly unmeritorious. The defendant has a close and substantial connection with Hong Kong, albeit itself a Cayman Islands off-shore company. The disclosed shareholdings in Dah Hwa International would at least serve to illustrate the defendant's strong tie to a sizable trading company listed in our market. The defendant's other local shareholdings were impressive. In these, we find indicia of the defendant's long-term involvement with Hong Kong business activities, although in stock and shares. The seeking out of the defendant as a financier through an intermediary in a mammoth private placement venture is some evidence of its dependability. In all the circumstances, it is inconceivable that the defendant would all of a sudden uproot itself or dissipate its assets to evade the payment of a disputed $6 1/2 m's debt, in the last lap of a venture covering over $80 m of which $76 m had been settled. The plaintiff, itself, could not have truly believed in any real risk of dissipation, otherwise it would not have waited, for whatever cause, as long as 20 days to procure the Mareva injunction.

8. The whole matter in this appeal is largely a commercial court question. In the end, I am driven to the conclusion that the judge's decision is plainly wrong. I would allow the appeal and discharge the injunction.

Rogers, J.A.:

9. I agree and would only add a few observations of my own.

10. In two places in his judgment the judge dealt with the test that must be applied in determining whether a mareva injunction should be granted. He said at page 2 that the test should be whether there is a real risk of the Defendant dissipating its assets so as to justify the continuation of the injunction.

11. Mr. Jat on behalf of the Defendant says that when the judge came to his decision at page 8 of the judgment and said that he was satisfied that there is a real risk of the Defendant disposing of its assets he was in fact applying the wrong test by losing sight of the real nub which was the risk that the assets should be dissipated with the result that recovery under a judgment would be avoided.

12. In my view the judge below did apply the right test but in considering the facts he went further in drawing inferences than the evidence warranted. Specifically the judge held that the Defendant had acted in breach of Section 332 of the Companies Ordinance in failing to register itself as an oversea company having established a place of business in Hong Kong. From that it was concluded that the Plaintiff was unable to obtain any information as to the shareholding, the financial position generally or the assets in particular of the Defendant.

13. The judge concluded that the status of the company and its non-compliance with the laws of Hong Kong on its own justified the inference that there was a real risk of the Defendant disposing of its assets.

14. In my view that was going too far. I am not satisfied on the evidence that the Defendant came within the category of oversea company which had established a place of business in Hong Kong.

15. But even if it had, it would clearly have been treated as a private company. As a consequence of that, the information available in the Companies Registry would have been very limited.

16. The other facts taken into account by the judge when he said "The additional evidence in my view shows how very real that risk is" were analysed by Mr. Jat. They consisted of a possibility that there were charges over shares owned by the Defendant and the failure of the Defendant to answer telephone calls and queries from the Plaintiff after 14th January. As a matter of fact, that last matter seems to me was dealt with in the evidence by the Defendant.

17. As to the question of pledging of the shares, even if the shares had been pledged to a bank, that, it seems to me, cannot constitute on its own grounds for the grant of a mareva injunction.

18. In my view, the judge went further in drawing inferences than was justified by the evidence and it is therefore open to this court to review the exercise of his discretion and to exercise its own discretion as to whether a mareva injunction should be granted.

19. This is a dispute between two parties in respect of a substantial deal that turned out to be less lucrative than the parties would have wished or probably anticipated.

20. The Defendant has pleaded a defence. No attempt to strike it out has been made and there have been no Order 14 proceedings. The Defendant has paid substantial sums for the shares in question. More particularly, it has paid $76 million of which $12 million had been paid after it had obtained transfer of those shares.

21. The Defendant appears to have substantial assets albeit retained with an overseas bank. The substantial shareholdings in two public Hong Kong companies revealed in Exhibit MN-27, coupled with the other shares in "Hong Kong Companies" show that there is a considerable connection with Hong Kong and that the location of the bank account overseas must be of minor significance in these days when overseas bank accounts are commonplace.

22. The 2/3 shareholding in the public listed company which has formed the focus of much of the discussion in this Court could not have been disposed of without the Plaintiff becoming aware of it, and it is difficult to imagine any circumstances where such a disposal could take place where the Plaintiff would not have more than adequate time to take action should that happen.

23. There seems to me to be justification in the argument put forward by Mr. Jat that this application was made to put pressure on the Defendant. Whether or not the Plaintiff would have been better advised to direct its attention to Order 14 proceedings, I know not but I would observe that a mareva injunction is very damaging. The consequences of its grant must not be overlooked. The commercial handicap to a party against whom such an injunction has been granted is very real.

24. For the reasons given by Liu J.A., I would agree that no injunction should be imposed.

Nazareth, Atg CJHC:

25. I agree with what both my Lords have said as to the real risk of dissipation and their conclusions. I would only add this.

26. The crux of this appeal, as I see it, is whether there was any evidence upon which the judge could reach the conclusion that there was a real risk of dissipation. I do not also propose to go through relevant aspects of the judgment. I would approach the matter on a slightly different tack. I turn to what Mr Ng proffered in response to my specific enquiry as to what evidence there is that goes to show a real risk of dissipation or from which such a risk can be inferred. He referred to two matters. First, that what we had here was an offshore company. Moreover, one incorporated in a jurisdiction with which Hong Kong apparently does not enjoy reciprocal rights of enforcement. I cannot see from this alone that any risk of dissipation even begins to arise. That there could be a risk does not suggest that there is a risk.

27. The other factor was that the defendant failed to register a place of business. Thereby, it was suggested, there arose the suspicion and risk that this could facilitate concealment if legal action against them were contemplated. First of all, I would simply mention that I am not persuaded that the defendant does have a place of business in Hong Kong. But putting that aside I have to say again that I cannot see that this factor, even in association with the earlier factor contended for, could be evidence of a real risk of dissipation.

28. Mr Ng seemed to recognise that possibility and sought to bolster the effect of those two factors by reliance on supporting inferences that he contended could be drawn from what he termed was the silence of the defendant in failing to respond to the plaintiff's efforts to contact them by telephone, and also from the effect of what he said was the defendant's conduct which fell short in terms of commercial morality. The latter, he said, emerged from the defendant's reliance on an agreement yet totally failing to disclose or assert it at any early stage. Again, I cannot see in the circumstances how this could possibly warrant any supporting inference, much less any that would go anywhere near raising a real risk of dissipation.

29. Upon that basis and for the reasons given by my Lords, it seems to me that the continuance of the injunction cannot be supported.

30. I, too, would allow the appeal.

31. The appeal is accordingly allowed. The order is discharged.

[Having heard counsel]

32. Leave is granted to the appellant for an inquiry into the damages. The costs order below is set aside and the appellant is to have its costs of the appeal and below.