SUN YAN v. SUPERB JADE LTD AND OTHERS

HCA 813/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 813 OF 2014

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(By Original Action)

(By Counterclaim)

____________

_______________

DECISION
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Introduction

1.  This the hearing of the summons filed on 10 February 2015 by 1^st and 2^nd Defendants by Original Action (“the Applicants”), seeking an order for further fortification against the Plaintiff by Original Action and for discharge of the gagging order in paragraph 4 of the Mareva injunction order made by Deputy High Court Judge Lok, as he then was, on 12 May 2014.  The gagging order was discharged by consent.  The outstanding dispute between the parties is the application for further fortification.

2.  Sun Yan (“Sun”) is the Plaintiff by Original Action and the 1^st Defendant by Counterclaim.  He is married to Zhao Jianwu (“Sister Zhao”) in December 1992. They are resident in Shenzhen in the People’s Republic of China (“PRC”).  On 27 January 2014, Sun obtained a work permit issued by the Hong Kong Immigration Department for employment with Burwill Properties Ltd (“Burwill”) under the Admission Scheme of Mainland Talents and Professionals. 

3.  Sun’s wife, ie Sister Zhao, has two brothers, Lin Li Dong (“Lin”) and Zhao Jianqi (“Brother Zhao”). 

4.  Lin is the 2^nd Defendant by Original Action and the 2^nd Plaintiff by Counterclaim herein.  He is the sole shareholder and director of Superb Jade Limited (“Superb Jade”).

5.  Superb Jade is a company incorporated in the British Virgin Island on 22 July 2009.  It is the 1^st Defendant by Original Action and the 1^st Plaintiff by Counterclaim herein. 

6.  Shenyin Wanguo Securities (HK) Limited (“SWS”) is a company incorporated under the laws of Hong Kong.  It carries on business of regulated activity in dealing in securities as prescribed under Schedule 5 to the Securities and Futures Ordinance.  It maintains a securities trading account for Superb Jade (“SWS Account”).  Shum Lai Na (“Shum”) is an account executive of SWS responsible for the SWS Account.  SWS and Shum are not parties to the Original Action but are respectively the 2^nd and 3^rd Defendants by Counterclaim.

7.  On or about 7 May 2014, while Sun was on a trip in Istanbul, Lin procured Superb Jade to withdraw $14,707,955.54 (the “Misappropriated Sum”) from the SWS Account.  Sun was alerted of the withdrawal by Shum and flew back to Hong Kong immediately.  On 9 May 2014, he was informed by Shum that Lin had successfully transferred the Misappropriated Sum from the SWS Account to Superb Jade’s account with Bank of China (Hong Kong) Ltd (“BOC”).  Upon inquiry with BOC, Sun discovered that the Misappropriated Sum had been subsequently transferred from Superb Jade’s account with BOC to Lin’s personal account with BOC.  Shum also told Sun that Lin was seeking to instruct SWS to set up an electronic account with which Lin could transfer all the shares in the SWS Account to another account with another brokerage firm.

8.  On 12 May 2014, Sun commenced the present action.  He obtained an ex parte injunction from Deputy High Court Judge Lok, as he then was, restraining the Applicants from removing from Hong Kong or in any way disposing of or dealing with or diminishing the value of the assets in SWS Account and its account with BOC.  The court also ordered Sun to pay $1,000,000 into court as fortification.  The payment was duly made.  The injunction was continued by order of Lam J at an inter partes hearing on 16 May 2014 in which the Applicants did not appear. 

9.  As result of further injunction orders against the Applicants, BOC and Hong Kong and Shanghai Banking Corporation (“HSBC”), Sun was able to trace the Misappropriated Sum and/or its proceeds.  It transpired that the Misappropriate Sum was first channelled by Lin from Superb Jade’s SWS Account to Superb Jade’s account with BOC and thence to Lin’s personal account with BOC within 34 minutes.  On the same day, Lin purchased a cashier order for $8,690,000 and paid the same into his personal account with HSBC.  From 17 to 21 May 2014, after procuring a number of substantial transfers amongst his accounts with HSBC, Lin drew two cheques for $3,329,557 and $3,900,000 in favour of Tang Jing, the 3^rd Defendant herein, which were deposited into her account with BOC.  Thereafter, Tang Jing paid a number of substantial sums into Cypress House Asset Management Co Ltd and various sums in United States currency into her account with Bank of America, New York.

10.  Sun filed his statement of claim on 12 November 2014.  The Applicants filed their defence and counterclaim on 10 February 2015.  On the same day, they took out the present summons seeking further fortification and discharge of the gagging order.  The gagging order was discharged by consent as the tracing exercise had been accomplished.

The legal principles on fortification

11.  The legal principles applicable to fortification are well settled.  The court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order[1].  Usually, merit of the parties’ case is not a necessary consideration.  However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant.  The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification[2]. He must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes the plaintiff will be unable to make good that loss[3].  The court will approach these issues by taking a broad view of the evidence, usually without the need of a detailed enquiry.  Whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle adverse inference as to his ability to meet his cross-undertaking in damages to be drawn [4].   

12.  The same principles are applicable to an application for further fortification.  But in addition, a defendant seeking further fortification is usually required to show change in circumstances which justify further fortification.  In the present case, as the original fortification was a ballpark figure offered by the Plaintiff’s counsel in response to questions from the bench and was made in the absence of the Applicants, I do not find it necessary for the Applicants to show proof of change in circumstances.

13.  The Applicants seek fortification in the sum of 40,000,000.  The basis of their application are:

(1) Sun’s case is so flimsy that it is a factor in favour of extending protection to the Applicants;

(2) the original fortification of $1,000,000 was a ballpark figure which does not represent a real starting point for the purposes of computing a proper and reasonable amount;

(3) since the SWS Account consists of highly volatile shares in companies listed in the Hong Kong Stock Exchange, the Applicants are likely to suffer potential significant loss if restrained from trading in the shares; and

(4) there are fundamental concerns as to Sun’s ability to pay damages, given his flimsy connection with this jurisdiction.

Merit of the parties’ case

14.  Usually, merit of the parties’ case is not a necessary consideration.  However, Mr Liang argues that Sun’s case is so flimsy that it would be unjust not to order further fortification for the protection of the Applicants. 

15.  The essence of Sun’s case is that the assets in the SWS Account are held on trust by Superb Jade for his benefit.  At all material times until 30 April 2014 when he joined Burwill, he was a director of Atlantis China Star Fund Ltd.  To avoid unnecessary complication, he instructed Lin to set up Superb Jade as a nominee company to hold assets as trustee for him and nominated Lin as director.  He instructed Lin to open the SWS Account in the name of Superb Jade to hold assets for him.  In that connection, he liaised with Shum of SWS; and Shum knew about the nominee arrangement.  Until May 2014, he had kept the company kit and company chop of Superb Jade under his custody in his residence in Shenzhen.  He conducted transactions for Superb Jade using the SWS Account by giving direct telephone instructions to Shum without involving Lin.  Lin only signed the necessary transaction documents under his instruction and sent the signed documents to him through his secretary.  He would then apply Superb Jade’s company chop on the documents and sent them to Shum.  Third parties whom Sun dealt with would also send documents to Sun for execution by Superb Jade.  Then, on 30 April 2014, Sun discovered that the company kit and company seal of Superb Jade in his Shenzhen residence had disappeared.  He suspected his wife had stolen them because she was unhappy with his having affairs with other women.  Eventually, the company chop was used to execute documents used to effect the transfer of the Misappropriated Sum.  His account of the above arrangement relating to the operation of the SWS Account is fully supported by contemporaneous emails between his secretary, Superb Jade’s company secretary, Shum and Lin.  That Shum alerted Sun on 7 May 2014 of Lin’s transfer of the Misappropriated Sum also corroborates Sun’s evidence that the nominee arrangement had been made known to Shum. 

16.  The Applicants disputed the above trust arrangement and offered an explanation about the operation of the SWS Account. Their case is that shortly before Sun married Sister Zhao in 1992, Brother Zhao entrusted Sun with RMB750,000, which he earned as consultancy fee from a state-owned enterprise.  However, under the then prevailing regulations, the money could not be paid to a natural person.  Hence, with Sun’s agreement, it was paid to Sun’s investment corporation in Daya Bay in Shenzhen to be held on trust for Brother Zhao.  Then Sun used the money to purchase certain employee stocks.  Contrary to Sun’s expectation, those stocks could not be traded in the open market under the then regulations.  In view of Sun’s financial difficulties at the time, Brother Zhao refrained from demanding repayment.  Then, following the relaxation of the relevant rules and regulations in 2006, the price of those stock skyrocketed by 50 times.  Brother Zhao continued entrusting Sun with the said sum of RMB750,000.  In 2011, as a token of gratitude towards Brother Zhao and Lin, Sun proposed to Lin that he would repay Brother Zhao and Lin together with all profits arising from the stock through an investment vehicle, namely Superb Jade, which was owned and controlled by Lin.  Lin agreed to the proposal.  While Sun gave Shum instructions for sale and purchase of shares, they were given under Lin’s authorisation and subject to Lin’s confirmation.  Lin said that the company kit and company chop were left at the matrimonial home of Sister Zhao and Sun for convenience; and were at all material times under the possession and control of Sister Zhao.  That account explains the source of funds in the SWS Account and the arrangement in the operation of the SWS Account which misled Shum to believe there was the nominee arrangement.  In April 2014, Sister Zhao discovered Sun had extra-marital affairs.  Lin and Brother Zhao also suspected Sun was trying to renege on his agreement of repaying the sum of RMB750,000 by way of Superb Jade.  Hence, they took advantage of Sun’s trip to Europe and the sea cruise with his mistress to withdraw the Misappropriated Sum.

17.  Sun did not dispute the receipt of the said sum of RMB750,000 from Brother Zhao, but denied it was trust property.  His case is that the said sum had been fully repaid to Brother Zhao between March 1993 and March 2000 and he gave certain particulars of the repayment.  He also admitted his marriage had broken down but alleged that was as early as 1996. 

18.  Two major issues in this case are the source of funds for acquisition of the assets in the SWS Account and the trust arrangement.  Mr Liang argues that Sun’s case is not supported by documentary evidence.  That is equally true of the Applicants’ case.  The court should not turn an interlocutory application such as this into a mini-trial by affidavit. Indeed, there are so many issues of fact in dispute that it is impossible for me to come to even a provisional view one way or the other. 

19.  Sun has adduced solid evidence of a nominee arrangement which was so understood by Shum.  The applicants have not.  In fact, there are many holes still to be plugged in their case.  On their case, Brother Zhao is the owner of funds, not Lin.  Lin may have no valid defence or locus standi to sue in the counterclaim and Brother Zhao is not a party to the counterclaim.  The Applicants’ case does not fit well with the timing of the incorporation of Superb Jade and the setting up of the SWS Account in 2009, which was three years after the price of the stock skyrocketed 50 times.  There may also be issues of PRC laws involved. 

20.  The Applicants’ conduct is also inconsistent with an aggrieved party whose rights have been infringed and whose property is at stake.  They must have been aware that the SWS Account had been frozen since May 2014. They instructed solicitors to accept service of these proceedings by late October 2014.  Yet, it was not until when they filed their defence and counterclaim in February 2015 that they sought further fortification.  Their conduct suggests that they realised the weakness in their case or that they saw no real need for further fortification.

21.  On the other hand, Sun has established by incontrovertible bank records the surreptitious manner in which Lin dissipated Superb Jade’s assets.  It is inexplicable why, if he were the true beneficial owner and had nothing to hide, he would have adopted such an extremely tortuous route to remove assets which were rightly his.

22.  All these undermine the credibility of the Applicants’ case.  But, as I have said, merit is usually not anything of significance in an application for fortification.  If lack of merit of Sun’s case is to be relied on, the burden of proof is on the Applicants.  As an overall impression, I cannot say that Sun’s case is so thin and flimsy that it could have any significant bearing in an application for further fortification. 

Likelihood of significant loss

23.  I now turn to the first of the two main considerations in deciding whether to grant further fortification.  The SWS Account has a large portfolio of shares which includes 80 million shares in Alibaba Pictures Group Limited (stock code 1060), 423,000 shares in Tencent Holding Limited (stock code 700), 1,500,000 shares Tibet 5100 Water Resources Holdings Ltd (stock code 1115) and 24,100 shares in Poly Culture Group Corporation Limited (stock code 3636).   Depending on the time of valuation, the portfolio is worth between $100 million to $300 million between the time of the Applicants’ application for further fortification and the date of hearing.

24.  Mr Liang depicts two scenarios under which the Applicants would suffer potential significant loss.  First, he submits that the Applicants would suffer significant loss if the value of the shares in the SWS Account plummets during the time in which the Mareva injunction continues to be in force.  Second, the Applicants would suffer loss of making a good harvest even if the value of the shares should surge.  These shares are volatile and their prices fluctuate widely.  The risk of loss under the two scenarios is always there.  The question is how real is that risk and whether the loss is likely to be substantial.  Given the volume of shares involved, the loss, if it occurs, is likely to be substantial.  Just a ten cent change in the price of the Alibaba shares means $8 million.  The remaining question is how real is that risk.  In assessing that risk, the court shall place itself in the shoes of the Applicants with their experience in the dealing of the securities concerned and their intention, ask what the Applicants would have done in the circumstances and then postulate the outcome.  The Applicants shall not be given the benefit of hindsight of the market condition and price movement. 

25.  The Applicants are particularly concerned about the 80 million Alibaba shares.  Lin said he intended to sell those shares or part of them with the proceeds to be paid into court in order to mitigate the Applicants’ loss, but that was refused by Sun.  That was in February 2015 when the share price was in the region of $1.60 per share.  His intention then was to lock-in the profit at that price and have the proceeds of sale paid into court without using them in further trading.  In the subsequent months, the share price went up to just above $4.90 and then fell to about $3.50 at the time of this hearing and has since fallen further to about $2.00 as at the time of this decision, still well above the intended selling price of $1.60. The Tencent shares performed likewise.  The Tibet 5100 and Poly Culture shares did not perform as well, but they carry less weighting in the portfolio.  As at the date of this decision, the parties are much better off not selling the Alibaba shares than selling.  I would not bind the Applicants to their intention of selling the shares at $1.60 had they not been restrained from trading in the shares.  But given their avowed intention to sell, it is most probable that they would not have sold the shares otherwise than below the current market price, which is 25% higher than their target price.  They cannot say, with the benefit of hindsight, they would have sold at peak level or at the level at the time of the hearing or at the current market level.  As matters now stand, the Applicants are much better off not selling than selling. Furthermore, according to historical data, the share prices are now at the lower end of the range.  It is unlikely that there would be much downside from here until conclusion of the proceedings. The likelihood of significant loss as result of plummeting in the value of the shares is not real. The first scenario of the shares plummeting depicted by Mr Liang has not materialised.

26.  In respect of the second scenario, Mr Liang adopts the following argument of counsel in Hui Chi Ming v Koon Wing Yee and Others[5]:

“ Mr McCoy’s real submission is that the 3^rd defendant, who is an experienced, successful investor in securities, has lost “many investment opportunities” as a consequence of the Mareva injunction.  He estimates that had he been able to take those opportunities he would have been $15 million better off net of the profit already realized on the Easyknit shares”.

Deputy High Court Judge Burrell accepted that argument and ordered fortification of $6 million against a frozen portfolio of $3 billion, ie a fortification of 0.2% of the value of the frozen portfolio.

27.  Mr Wong argues that Hui Chi Ming is distinguishable from the present case because in that case the need for fortification was conceded.  The dispute was on quantum.  Besides, the defendant in that case was an experienced investor whereas Lin is not.  I do not think the distinctions have any relevance insofar as the argument that the Applicants are prejudiced by being prevented from making profits which they otherwise could have made.  As for the distinction based on the Applicants’ lack of trading experience, it is only a matter for quantum.  

28.  Next, Mr Wong argues that as the likely loss is impossible of quantification, no fortification should be ordered.  My quick answer is that no court should be deterred from making such an order which it is just to make merely because of difficulties in assessing quantum.  I shall deal with the issue of quantum, if, after due consideration, I consider fortification appropriate. 

29.  The Applicants’ case under this scenario is that they lost the opportunity of making profit by selling at higher level, buying back at lower level and then ride with the surge.  This scenario is premised on a long term rising trend with a significant correction which provides a buy back opportunity.  It is not open to the Applicants to argue with benefit of hindsight what they would have done at what price levels.  As the historical data show, the share price surged from $1.60, peaked at about $4.90 and then declined to the current level of $2.00.  Again, given their avowed intention to sell at $1.60 if not restrained, the Applicants would have sold the shares not much above that level and most probably not above the current level.   The probability is that once sold, the Applicants would have no opportunity of buying back at lower level, whether as the share price soared to the peak level of $4.90 or as it turned south thereafter down to the present level.  The correction which is the basic premise of this scenario never occurred deep enough.  As the current price is already near the lower end of this very extended price range, it is unlikely that there would be much downside from here.  The deeper correction necessary to provide an opportunity to buy back is unlikely to occur.  Thus the likelihood of loss of profit from trading of the shares is unreal. On the contrary, it would be Sun who would suffer significant loss if the Applicants were not restrained and in the event that Sun succeeds in this litigation.  Furthermore, this scenario of selling at high level and buying back at low level is quite inconsistent with Lin’s intention of locking-in the profit and paying the proceeds of sale into court. 

30.  As at this stage of the analysis, I am not satisfied that the Applicants have proved a likelihood of substantial loss as a result of the Mareva injunction.  That would mean the end of the Applicants’ application for further fortification.  All the protection they need is to be protected from the costs of the litigation, in the event that Sun loses.

Sun’s ability to compensate loss

31.  The next major issue is Sun’s ability to compensate for loss in the event that the Mareva injunction should not have been granted.  Sun is a PRC citizen.  He is married and has at least one son.   His wife and child (or children) are staying in Shenzhen.  He maintains his matrimonial home and office in Shenzhen.  Since 27 January 2014, he was admitted into Hong Kong on the strength of a work permit issued under the Admission Scheme of Mainland Talents and Professionals for employment with Burwill.  He spends half of his time in Shenzhen and half of his time in Hong Kong. Prior to 30 September 2014, he stayed in hotel accommodation during his visits to Hong Kong.  Thereafter, he rented his own accommodation in Convention Plaza.  As disclosed in his affirmation which is supported by documentary evidence, Sun holds assets in Hong Kong totalling over $11 million under his personal name and other assets of around $40 million under the name of Crescent Investment Holding Co Ltd of which he is the sole director and shareholder.  He affirmed that he has no intention of removing those assets out of Hong Kong.   

32.  Mr Liang raises two main concerns, namely Sun’s flimsy connection with Hong Kong and the nature and quality of his assets disclosed.  He submits that Sun does not have any real property in Hong Kong.  He finds it suspicious why Sun used Shum’s residential address as his correspondence and usual address in his affirmation in support of his ex parte application for injunction.  He points out an omission of the floor of his present address in his recent affirmation.  He also suggests it was suspicious why it was only until recently that Sun chose to rent his accommodation despite his regular visits to Hong Kong for a long period of time at least since his employment with Burwill in 2010, but prior to obtaining the work permit under the Admission Scheme of Mainland Talents and Professionals in 2014.

33.  Indeed, Sun has been very selective if not secretive in disclosing his employment in Hong Kong.  In his first affirmation, he said he was a director for Atlantis China Star Fund Ltd until 30 April 2014.  He then produced his work permit to work for Burwill since 27 January 2014.  But in his second affirmation, he disclosed that he had been employed by Burwill as early as June 2010.  Though these inconsistencies and his use of Shum’s address are not of much significance, they suggest Sun is selective in telling the truth. 

34.  In my view, Sun’s connection with Hong Kong is very flimsy.  He was born and educated in the PRC.  He has family and connections in the PRC.  He has a son or children in the PRC.  He has a luxurious property and motor car in Shenzhen.   It is not known if he has other real properties elsewhere in the PRC.  If a plaintiff has roots in Hong Kong, such as family, immovable property, employment or business in Hong Kong, it is less likely that he will, in the event he is found liable in damages, uproot himself and abscond to evade his legal liability.  It is more likely that he will honour his undertaking to pay damages, if called upon to do so in order that he may continue his life in Hong Kong.  By way of contrast, all that Sun has in Hong Kong is his employment with Burwill, a rented accommodation, and $51 million worth of assets in his bank account and in Crescent Investment Holding Co Ltd.  As submitted by Mr Liang, his assets are very liquid and could be easily removed out of the jurisdiction.  His roots are in the PRC rather than in Hong Kong.  He is essentially a foreign plaintiff. 

Conclusion

35.  As Sun is essentially a foreign plaintiff with only flimsy connection with Hong Kong, it would be just and proper to order fortification for the protection of the Applicants.  However, as the Applicants have failed to show a real likelihood of substantial loss as result of the Mareva injunction, all the protection they need is to be protected from the costs of the litigation, in the event that Sun loses.  Fortification in the amount of $1,000,000 had been ordered and paid into court.  In my view, the Applicants are adequately protected.  Accordingly, the application of the 1^st and 2^nd Defendants by Original Action for further fortification is dismissed.  I also make an order nisi that they shall pay the costs of the Plaintiff by Original Action.