CHINA METAL RECYCLING (HOLDINGS) LTD (In Liquidation) AND ANOTHER v. CHUN CHI WAI AND OTHERS

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2013

________________________

_______________________

___________________________________

REASONS FOR DECISION

___________________________________

Introduction

1.  There were two summonses before this court:

(i) A summons issued on 2 June 2015 by the provisional liquidators (“PLs”) of the two plaintiff companies for essentially (a) a Mareva injunction freezing the shareholdings of the 1^st to the 3^rd respondents, namely daughters of the 1^st defendant (“Daughters”), in Chung Shing Finance Holding Limited (incorporated in Belize) (“Chung Shing Belize”) and assets of a number of subsidiary companies in Hong Kong, PRC and Singapore, and (b) ancillary disclosure order (“Disclosure Order”) in relation to 2 specific sums injected into 2 of those subsidiary companies (“PLs’ Summons”);

(ii) A summons issued by the Daughters on 31 July 2015 seeking: (a) leave to transfer the legal title of their shares in Chung Shing Belize to one Fung Kwok Leung/Andy Fung (“Fung”) to hold as trustee for the Daughters and to exercise all rights and powers as shareholder of Chung Shing Belize subject to all orders made by and undertakings made to the court, and (b) for Fung to be joined in the present action as respondent in replacement of the Daughters OR as 4^th respondent in addition to the Daughters (“Rs’ Summons”).

2.  At the previous hearing before Ng J, the Daughters had already given an undertaking in terms of above (a) of PLs’ Summons.

3.  Senior Counsel Ms Linda Chan appeared for the PLs at the hearing before this court, and Counsel Mr Martin Wong appeared for the Daughters.

4.  At the hearing, I declined to grant the orders sought in the Rs’ Summons.  There was no real opposition to the Disclosure Order of PLs’ Summons, and I made an order in terms of paragraphs 2 and 3 of PLs’ Summons, save that I allowed the Daughters until 5 pm on 31 August 2015 to comply with Paragraph 2 and 5 pm on 7 September 2015 for paragraph 3.

5.  I ordered costs of both PLs’ Summons and Rs’ Summons be to the PLs, to be by way of summary assessment, the PLs to lodge their statement of costs within 7 days, and the Daughters to lodge their list of objections within 7 days thereafter, with time to run during the summer vacation.

6.  I give my brief reasons hereinafter for dismissing Rs’ Summons.

Reasons

7.  The relevant background of this action had been set out in the Decision of A Chow J dated 17 November 2014 for which I will adopt and will not repeat here.  I only add the following.

8.  Massive frauds were said to have been committed by D1 (former Chairman, CEO and majority shareholder) against P1, a Hong Kong listed company and P2 (P1’s main operating subsidiary in Macau), and that such frauds were uncovered by the Securities and Futures Commission 2012.  As a result, P1 and P2 had been wound up by the court on public interest grounds and the PLs were appointed.

9.  In brief, it was the case of the PLs in the present action that fictitious transactions were conducted by the former management of P1 and P2 through two “round robin” schemes, one between 2007-2009 and a further one between 2012-2013, with various companies named as D3-D10 in the action.

10.  D1 is the sole shareholder and sole director of D13, a BVI company and D13 is the registered holder of some 52.1% of the issued share capital of P1.  

11.  PLs obtained Mareva injunctions against D1/D13 to the extent of some HK$1.68 billion at the commencement of the present action, and those injunctions imposed ancillary disclosure orders on D1/D13 which they were said to have repeatedly failed to comply.  This had led to a number of orders and unless orders made against D1/D13 for which this court is not at this moment concerned with.

12.  It was the PLs’ case that they had found evidence showing there was good reason to believe that 13 companies in the Chung Shing group of companies, as shown in the Appendix, being #1-13 in Schedule 5 to the Mareva injunctions, including the Companies[1], in fact belonged to and/or were substantively controlled by D1.  I understand that it was on the basis of such evidence that Ng J had extended the Mareva injunctions against D1/D13 to expressly include, among others, the Companies.

13.  D1 had, however, denied that he had any information concerning the Companies.  It was PLs’ case that D1/D13’s failure to disclose had resulted that to date, 2 years after the grant of the Mareva injunctions and one year after the extension to cover the Companies, the whereabouts of a sum of US$82m and the assets of the Companies had remained unclear.  The said sum of US $82m was said to be a loan to Chung Shing Finance (Holdings) Ltd (“Chung Shing HK”) which in turn, was said to have injected the loan into 2 PRC sub-subsidiaries in the above mentioned Appendix.

14.  The Daughters are the only shareholders of Chung Shing Belize which wholly own the rest of the Companies[2].

15.  There was no challenge that this court has jurisdiction to make the Disclosure Order, and as I have mentioned earlier, there was no opposition to the court making the Disclosure Order.  In any event, I find it was both necessary and appropriate for this court to make the Disclosure Order against the Daughters.

16.  As for Rs’ Summons, this was issued under Order 15 rule (6) of the RHC and/or inherent jurisdiction of the court.

17.  The eldest daughter Ms HM Chun had made an affirmation in support of Rs’ Summons on behalf of her siblings. 

18.  The Daughters are aged respectively 20, 18 and 17 and they are all full time students studying in England.  Ms Chun had said that the Daughters’ shareholdings in Chung Shing Belize were something they did not even know until about June this year, and that it was a “secret gift” from their father, namely D1. They were further told by D1 that the business of Chung Shing Belize and its subsidiaries in PRC were managed by a Mr Li Jinquan (“Li”), the sole director of Chung Shing Belize.

19.  Ms Chun had said that the Daughters were not capable to deal with the Disclosure Order and the potential follow ups because being students, they had no commercial or financial know-how or experience.

20.  Ms Chun had further said that the Daughters had been advised that it would be much more effective and meaningful to have a professional accountant, namely Fung, to handle the proceedings and all that might follow on their behalf.  Ms Chun had also said that the Daughters had written to Li, and that Li had replied favourably to their letter, expressing his understanding of the situation and willingness to work with Fung.

21.  Mr Wong submitted that Rs’s Summons was to provide a sensible and realistic solution to problems the Disclosure Order would otherwise cause.

22.  Mr Wong had also submitted that at no times did the Daughter manage the affairs of Chung Shing Belize or any of its subsidiaries, or exercised any shareholder rights or powers.

23.  Fung had filed an affirmation in support of Rs’ Summons but he only mentioned his own professional qualifications and experience.  PLs’ solicitors had on 6 August 2015 wrote to Rs’ solicitors, and among other things, pointing out that it was highly unusual that a professional accountant would be prepared to take on potentially very serious  personal consequences of any failure to comply with the court’s orders or undertakings, and PLs’ solicitors had asked for whether there had been any connection or prior dealings between Fung and the Chun family, and companies including Chung Shing Belize and/or its direct/indirect subsidiaries.

24.  There was no reply to the above letter.  So far, there was no evidence that Fung was related to Chung Shing Belize or any of its subsidiaries, or that he had ever managed the affairs of Chung Shing Belize or any of its subsidiaries previously, and in this respect, he would appear to be in the same position as the Daughters.

25.  It was argued by Mr Wong that it would be utterly unrealistic for the Daughters to come to grasp the finances of all those companies and to respond meaningfully and astutely to the Disclosure Order, and it was also unrealistic for them to spend the time and effort required to deal with the Disclosure Order, when they had to study abroad.

26.  In my view, there was no reason why the Daughters could not simply instruct a professional accountant, such as Fung, to deal with the Disclosure Order.  This would be the same as instructing a firm of solicitors to deal with legal matters.  I am not convinced that they would need to transfer the “legal title” of their shares to Fung as trustee for them in order for Fung to deal with the Disclosure Order.

27.  Mr Wong had also argued that the Daughters came into the scene innocently or ignorantly as they did not know they had been given the shares in Chung Shing Belize by their father.  There was no evidence to contradict this, but as I had commented during the hearing if the Daughters did not wish to accept the gift, they could disclaim it or give it back to their father, but if they decided to accept the gift, then they would have to accept it subject to all duties, liabilities and/or encumbrances which came with it.

28.  There was no evidence that Li would not be willing to work with the Daughters.  There was no reason why the Daughters, being the sole owners of the Companies would not be able to procure Li to co-operate with PLs and to provide disclosure.  If Li were to refuse to obey the direction given to him by the Daughters, the Daughters would have the power to remove Li as director and to appoint new ones who would comply with their direction. 

29.  The Daughters are represented by solicitors, and their physical absence from Hong Kong will not prevent them from discharging disclosure obligations through their solicitors or any directors or staff of the Companies, or professionals, such as Fung, whom they may wish to instruct to assist them.  There was no sufficient evidence of any hardship to the Daughters if the Disclosure Order was to be made against them as they would be assisted by their legal advisers.

30.  Ms Chan had described Rs’ Summons an “extraordinary” application and was in effect a retraction of the undertakings the Daughter had previously given to Ng J and to “immunize” the Daughters from consequences for any (anticipated) breach of undertakings and disclosure orders.

31.  It was clear that the purpose of Rs’ Summons was really to shield the Daughter, so that they would not have to bear the bull brunt of the Disclosure Order and any ancillary disclosure orders. 

32.  Mr Wong conceded that he was unable to produce any legal authority to support his arguments.  

33.  Having considered both Counsel’s submissions and the circumstances of this case, I saw no legal basis nor any ground for leave to be granted for the Daughters to transfer the legal title of their shares in Chung Shing Belize to Fung as trustee.  I was also not satisfied that Fung should be a person to be joined under Order 15 rule 6(2), whether as a respondent to replace the Daughters or in addition as the 4^th respondent in this action.

34.  For all the above reasons, I declined to grant the orders sought in Rs’ Summons and dismissed the same.