RACP PHARMACEUTICAL HOLIDINGS LTD v. LI XIAOBO

HCA 490/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 490 OF 2007

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Dates of Hearing: 18-19 March 2008

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REASONS  FOR  JUDGMENT

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1.  This application to set aside leave granted ex parte for issue of a notice of motion for committal for alleged breach of a Mareva order brought into focus two important principles.

2.  The first is that court orders are made to be obeyed.  They are not guidelines, to be ignored or paid lip service to at the behest of the parties affected.  They are the building blocks by which the administration of justice is made workable.  Litigants who wilfully breach orders at the expense of their opponents to their advantage do so at risk of losing their liberty for being in contempt of court.

3.  This leads to the second principle, for the power of a judge of the civil jurisdiction to imprison a litigant is by any account one of his most draconian, branding the contemnor who is found guilty a criminal, for contempt of court is a criminal offence, and the case against a contemnor must be proved to the criminal standard of beyond reasonable doubt.

4.  That leave has to be asked for and granted before committal proceedings can issue recognises the need at an early stage to filter out oppressive or unfounded applications.  The leave application must be supported by a statement giving full particulars of the person sought to be committed and the grounds on which his committal is sought, with an affidavit verifying the facts relied on.  This is laid down in O.52 r.2 RHC.  It is said of the statement that it should read as if an indictment.  The affidavit may contain only such facts as the deponent by his own knowledge is able to prove; per O.41 r.5.

5.  The application being made ex parte it behoves the applicant to make full and frank disclosure of all pertinent issues.  If there is material non-disclosure that will amount to strong grounds for setting aside leave already granted, the more so in the case of an application for leave to bring committal proceedings.  This also applies to the situation where information comes to light post the application and before the substantive hearing; for instance, where the threat of disposition has been removed by steps taken by the contemnor to purge his contempt.

6.  Wherever there is a reasonable alternative to aid execution of a civil process that should be taken.  As has been stated often — “committal orders are remedies of last resort”; see for example G v S (2001) 4 HKCFAR 419, and the comments of Nazareth NPJ at p.427.

7.  In this case I granted leave asked for ex parte by the plaintiff (RACP) to issue contempt proceedings against the defendant (Mr Li) and the respondents his wife Marisa Guan (the wife) and his father Li Ren (the father).  These latter two are not and have never been parties to the proceedings, but it was said of them that they had knowingly aided and abetted Mr Li in breach of the Mareva order to the prejudice of RACP and were thus implicated.

8.  The statement under O.52 r.2 was dated 27 August 2007.  It was supported by an affirmation made by a director of RACP called Eric Wei Hon Chuen.  In fact Mr Wei has all along played a primary role in these proceedings.  This affirmation was labelled his fourth.  He swore it on 25 August 2007.

9.  Leave was applied for in late August 2007, granted ex parte on 17 September and the notice of motion was filed on 25 September and served personally with supporting papers on the alleged contemnors at their homes in Canada later that month.  That was set down for hearing before me on 18 March 2008.

10.  By summons filed on 13 March the alleged contemnors applied to have the leave of 17 September set aside, for hearing on the same date.  It was agreed that I should deal with this application first and I did so.

11.  At the outset of the hearing Mr Westbrook SC leading Mr Maurellet conceded that they had no case against the father so that it concerned only Mr Li and the wife.

12.  Following argument I ruled that leave be set aside in respect of Mr Li and the wife as well as the father, with reasons and a costs order nisi to be handed down later.

13.  These are my reasons.

The Action

14.  RACP purchased from Mr Li a pharmaceuticals factory and ongoing business that he owned and operated in the PRC.  I believe it was no secret that Mr Li was selling up because of an intention, since implemented, to emigrate with his family to Canada.

15.  Closing was scheduled for 12 June 2006, by which date US$10.25 million on account of the sale and purchase price was due and paid, the balance of US$1.9 million to be met a year later.  But that remains unpaid.

16.  RACP claims to have been deceived by Mr Li as to the true worth of the enterprise by relying on accounts which were distorted.  It filed this action in June 2007 seeking a rescission and recovery of what it had paid; alternatively, damages.

17.  Mr Li is defending the claim, denying deceit or other breach and counterclaims for the balance of the purchase price.

18.  The trial date has been put off for reasons that are not pertinent to this matter.  Suffice to say, the issues remain unresolved.

The Mareva and Disclosure Orders

19.  The nature of the allegation coupled with Mr Li’s departure to Canada may have been significant factors in the granting of a Mareva order applied for ex parte on 9 March 2007.  It was in usual terms, freezing assets in Hong Kong up to the value of US$6 million and, if insufficient, then worldwide up to that figure.

20.  It also provided, as is usual, for discharge if the money were to be paid into court, or if Mr Li were “to make provision for security in that sum by another method as agreed with the plaintiff’s solicitors.”  I read into that sub-clause by implication these further words “which agreement shall not be unreasonably withheld.”

21.  On the return date, being 30 March by which time the matter was inter partes and Mr Li was represented, the Mareva order was extended, this time incorporating a disclosure order, requiring him to disclose assets exceeding HK$100,000 worldwide, by 13 April 2007.

22.  Mr Li obliged by affidavit disclosing assets of around HK$81 million, principally property and shares in the PRC and Canada.  

23.  By order of 13 April 2007 the cap on the injunction was increased to US$10 million.

24.  To complete the picture, Mr Li applied for a discharge of the Mareva order.  On 27 June, after a hearing lasting three days, that application was dismissed.

Proceedings in the US and Canada

25.  The Mareva order in its various forms having been granted on RACP’s undertaking that it would not without leave issue proceedings against Mr Li in any other jurisdiction, RACP then applied for leave to do so in Canada and the US.  This was granted on the express undertaking that these proceedings were to be limited in form for the purpose of seeking enforcement of the Hong Kong injunction. 

26.  As a black mark against RACP and its advisors the proceedings were in fact issued as substantive proceedings thus without leave.  That was, I was told, made necessary because the courts would not allow proceedings to be filed without there being a substantive claim.

27.  This gave rise to those representing Mr Li filing an application for leave to bring contempt proceedings for breach by RACP of its undertaking.  This came before me.  I declined leave for the primary reason that I did not regard this omission as being sufficiently serious to warrant the extreme sanction of an order of contempt.

28.  Nevertheless there was a lapse, which reflects on RACP riding roughshod over its own obligations whilst looking to hold Mr Li and his relatives to theirs.

29.  And so to the committal application.

Application for Leave

30.  The statement in support, dealing with the grounds upon which committal was sought, dated 27 August 2007, stated:

“4.

The Defendant breached the Mareva Order by dealing with his assets by transferring his assets to the Wife and the Father after the Mareva Order was served on him personally on 14th March 2007.  The Defendant breached the Disclosure Order by failing to disclose his assets faithfully and frankly by overstating the value of his assets and failing to disclosing the encumbrances on his assets.

5.

The Wife and the Father breached the Mareva Order by receiving the Defendant’s assets through their various bank accounts in the People’s Republic of China, the United States of America and Canada, knowing that the Defendant is restrained from disposing of his assets worldwide under the Mareva Order.  By receiving and dealing with the Defendant’s assets as their own funds, the Wife and the Father knew or ought to have known through proper inquiry that they were not legally and/or equitably entitled to do so, and they attempted to put the Defendant’s assets or any part thereof beyond the reach and to the detriment of the Plaintiff, with an intent to defeat the purpose of the Mareva Order.”

31.  Mr Barlow SC who led Mr Li representing Mr Li and, informally, speaking for the wife and father as well, commented that as an indictment it was long on rhetoric and short on particulars; I have to say that one could hardly disagree with that.  But as it turned out it was Mr Wei’s sworn testimony in support that was, some time later, particularly to engage my attention.

32.  In the meantime however, and on the face of it, he seemed to provide sufficient to get past the first hurdle of needing leave.

33.  Mr Wei deposed that RACP came to learn of significant movements of funds in bank accounts held in Mr Li’s name at HSBC Canada in the second half of March 2007, just after service of the Mareva order on him.

34.  RACP or its advisors then engaged private investigators to investigate bank accounts in Canada, the US and the PRC, apparently in the names of Mr Li and the wife and the father.  Their reports disclosed what Mr Wei said were numerous examples of new accounts being opened through which millions of dollars had passed.  Mr Wei said of this: “It was in order to defeat the effect of the Mareva injunction order;” and he implicated all three of the alleged contemnors.

35.  Mr Wei also deposed to Mr Li having breached the disclosure order by seriously over-valuing assets he had disclosed held in the PRC, Canada and Hong Kong; for instance, by failing to show that certain properties were subject to mortgages or were not wholly in his name.  Of this he said:

“21.

Due to the above, the aggregate value of the Defendant’s assets is substantially less than the value he claimed in his affidavit, and he deliberately omitted to disclose important information pertaining to his assets which would substantially affect the value of the same.  By deliberately overstating the value of the Defendant’s assets in the form of an affidavit and failing to disclose the encumbrances, the Defendant breached the Disclosure Order by failing to comply with the same faithfully and honestly.”

36.  I was satisfied on the face of this evidence that there was sufficient to warrant the issue of contempt proceedings and granted leave.

The Application to Set Aside

37.  Mr Barlow addressed me at length on matter of material non-disclosure, want of jurisdiction, misrepresentation and mala fides, to the effect that leave should never have been granted in the first place and warranting setting aside that leave at this time.  Mr Westbrook was forthright in justifying the stance taken by RACP in mounting and then pursuing the application.  He said the evidence coupled with subsequent admissions from Mr Li were sufficient to merit this course.

38.  Given that I have found against that premise, I propose not to deal with all the matters raised by Mr Barlow and countered by Mr Westbrook.  Some of the issues are serious and imperative, some less so.  I propose to concentrate only on those that amounted, in my view, to material shortcomings in the manner in which RACP began and then continued with its contempt proceedings, and upon which my decision to set aside leave rested.

39.  There were two separate examples of serious non-disclosure; the first concerning the garnering of evidence prior to the application, the second the efforts expended by Mr Li at and after the date of the application to purge any contempt he might have been found guilty of, by which he effectively removed all risk of dissipation prior to judgment.

40.  I deal with these in turn.

The Investigations

41.  Mr Wei had deposed to having engaged the services of a former captain in the LAPD who became a private investigator based in California.  His name is Thomas Elfmont.

42.  Mr Wei said of this at para.14:

“The investigator, Mr Thomas Elfmont, discovered that, since the making of the Mareva Order, the Defendant has been transferring his assets by setting up numerous accounts with the aid of the Wife and the Father, and transferring millions of dollars from one account to another in order to defeat the effect of the Mareva Injunction Order.”

There were no further particulars.

43.  Mr Wei also produced an affidavit by an attorney called Ms Pineda giving evidence of the movement of US$4.5 million through an account in the name of Marisa Guan.  Clearly he was impressed by what they disclosed, for he drew this conclusion at para.15:

“15.	Mr Elfmont’s findings and Ms Pineda’s affidavit prove beyond reasonable doubt that the Defendant has blatantly ignored the effect of the Mareva Order and continued to dissipate his assets with the assistance of the Wife and the Father.  Accordingly they are all in breach of the Mareva Order.”

44.  In fact Mr Elfmont had made an affidavit sworn on 3 August 2007 for the purpose of the proceedings in Canada.  This came before me for the first time at this the hearing to set aside.

45.  Mr Elfmont deposed to people called Xiaobo Li and Marisa Guan, apparently thus Mr Li and the wife, having opened a number of accounts in various banks and financial institutions between March and July 2007 through which accounts flowed significant amounts of money.  Many of these transactions were recorded.  Of these he commented:

“It is my experience in investigating numerous fraud claims that persons attempting to launder money or evade significant creditors will open multiple accounts.  These accounts are often opened with nominal funds and then used as pass through accounts while funds are broken into smaller pools and transferred from institution to institution.”

46.  Clearly, then, Mr Wei was deposing to this report and this investigation.  What he did not say was how Mr Elfmont came by this information.

47.  Mr Elfmont revealed all in the following paragraphs:

48.  This of course puts at obvious risk the veracity of the information supplied; further, it is apparent that Mr Wei’s fourth affirmation offended O.41 r.5, and Mr Wei’s failure to admit to that was a material non-disclosure.

49.  But there are yet more damaging omissions.

50.  The solicitors in Vancouver representing RACP in the Canadian proceedings had written to the Bank of Montreal to ask for details of various numbered accounts that Mr Elfmont had deposed to as being in the names variously of Mr Li, the wife and the father, listed by him in what he called Schedule B.  The responses in letters of 10 and 17 August 2007 were rather startling.  I reproduce excerpts from both letters hereunder:

“Finally, we bring to your attention that we have been unable to locate any of the accounts listed in Schedule ‘B’.  The first 4 digits are the transit number for this branch, but those are the only numbers we can match to anything.  Perhaps you can advise us of the source of those account numbers.”

“There are accounts at this branch but the approximate total of all balances does not approach what is indicated in the listing of Schedule ‘B’ accounts …

The long list of bank account numbers appended as Schedule B to the Statement of Claim means nothing to the Bank of Montreal.  These are not typical Bank of Montreal account numbers — the sequencing is offside and it may be these numbers are fabrications or at the very least the numbers are somehow misstated.  We would be interested in seeing any source documents which bear these numbers.

The Bank did search for accounts under the names of the defendants and that is how the Bank located some accounts.  If the Bank had the amounts on deposit referred to in Schedule B, accounts for those amounts or approximately those amounts should have come up during name searches even if the numbers are incorrect.”

51.  Given the manner in which Mr Elfmont gathered the information which he then deposed to believing it to be accurate, which on any view is quite an extraordinary way of undertaking an enquiry, the Bank of Montreal letters effectively rendered all of his findings, whether the information at Schedule B or otherwise, as without merit and valueless.

52.  Mr Elfmont’s affidavit was dated 3 August 2007 and the Bank’s two  responses were of 10 and 17 August 2007; dates so close to that of the application for leave to issue committal proceedings it cannot be otherwise but that RACP’s legal representatives in Canada and thus RACP and doubtless Mr Wei himself would have come to realize that Mr Elfmont could not be relied on at all.  Yet Mr Wei allowed himself to include the highly prejudicial reference to Mr Elfmont’s discoveries in his paragraph 14 I have already reproduced, and his own conclusion at paragraph 15, without any reference at all to how he acquired his knowledge or what the Bank of Montreal had to say on the topic.

53.  This, I regret to say, is a failure to disclose material information that is so gross and obvious that it borders upon deceit. 

54.  That is the first ground; now the second.

The Mareva Injunction Ceases to Have Effect

55.  On 23 August 2007 Mr Li’s solicitors in Canada wrote to those representing RACP offering security in the sum of US$10 million in order to discharge the Mareva injunctions in the three jurisdictions.  This offer was incorporated in an affirmation (Mr Li’s sixth affirmation) filed in these proceedings. 

56.  He deposed that the offer was first presented in the Canadian jurisdiction because the security offered comprised Canadian property.  As I have earlier stated, the opportunity to do away with the Mareva order in this way was expressly provided for in the Mareva order.  The affirmation was dated 4 September 2007.  There was, by that date, no response to the offer from RACP.

57.  There was no reference to this offer, or RACP’s reaction to it, in Mr Wei’s fourth affirmation.  Nor, if at the time of his making it he was unaware of the offer, did he subsequently depose to it.

58.  This is yet a further material non-disclosure. 

59.  As history records, the matter of Mr Li offering security came before the Supreme Court in Vancouver on 7 November 2007 when the court made a conditional order.  That came into effect as a discharge of the Mareva order in Canada on 2 January 2008.  As a consequence of that Reyes J of this court made a similar conditional order on 5 December 2007, and the Mareva order in this jurisdiction ceased to have effect on 2 January 2008 as well.

60.  And yet, with this significant development, no reference to it in an updated affirmation in the months prior to the date set down for hearing of the committal was handed in to this court.

61.  This is an important omission, with RACP and its advisors failing to alert the court to information material to the outcome of the committal proceedings.  After all, a cornerstone to the original application was RACP’s fear that Mr Li and his close relatives were doing all that they could to protect his assets from a writ of execution post a judgment in favour of RACP.

62.  The following excerpts from Mr Wei’s fourth affirmation make this clear:

“9. The Defendant breached the Mareva Order by concocting with his family members and putting his assets beyond the reach of the Plaintiff.

…

13.    It is apparent to me that, upon the Mareva Injunction Order being served upon the Defendant, the Defendant took steps to move his assets to put those beyond the Plaintiff’s reach.  This was a blatant attempt to defeat the effect of the Mareva Injunction Order and demonstrates the Defendant’s intention to disobey the terms of the Mareva Injunction Order.”

63.  Given Mr Li’s concerted efforts to have the Mareva order replaced by his giving adequate security, which in fact found the approval of both the Canadian and Hong Kong courts, it should have become clear to RACP and its advisors that with the perceived threat of dissolution no longer present, the court may well have been inclined to take no further steps against Mr Li, even were he to have been found to have been in breach prior to taking this step; as I have said, the purging of contempt is an important mitigation.

64.  In this instance it might be argued that a judge in Hong Kong having ruled that the Mareva order was no longer effective was information on file, putting me thus on notice.  But the file is voluminous, with different judges having been involved on different occasions, and there was no reference to the order by Reyes J; a copy of it was not even in the bundle prepared for the hearing before me.

The Result

65.  RACP materially failed to meet its strict obligation to ensure that all material evidence was before the court, as well prior to the granting of leave and thereafter, to ensure no injustice.

66.  Thus the order setting aside that I made on 19 March 2008. 

67.  The order of costs I now make is nisi.  The conduct I speak of warrants not only costs against RACP but that they be on an indemnity basis.  Thus in respect of the application to set aside leave and matters in the contempt application the alleged contemnors shall have their costs on the indemnity scale, with certificate for two counsel, taxed and payable forthwith.