HUI CHI MING v. KOON WING YEE AND OTHERS

HCA1479/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1479 OF 2009

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BETWEEN

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JUDGMENT

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Introduction

1.  On 24 June 2009, the plaintiff applied ex parte for a Mareva injunction against each of the four defendants.  After the application was supplemented by letter on 25 June 2009, on that day an injunction was granted by Tong J.

2.  The claim, to which the injunction was ancillary, arises out of the alleged blackmail or illegitimate coercion and unlawful intimidation of the plaintiff by the defendants in respect of the transfer of a parcel of shares from a Mr Zhao to the 3^rd defendant, but where the purchase price of HK$135 million was paid by the plaintiff as a result of the alleged coercion and intimidation.

3.  The “ceiling” figure of the Mareva injunction is the sum of HK$135 million, and for the grant of the injunction the plaintiff gave the usual cross-undertaking in damages in the standard form of words provided for in the relevant Practice Direction, namely:

“If the court later finds that this Order has caused loss to the Defendants or any other party and decides that the Defendants or the party should be compensated for that loss, the Plaintiff will comply with any order the Court may make.”

4.  In his Affirmation leading the application for the injunction, the plaintiff offered his cross-undertaking (at paragraph 49) as follows:

“I am willing to give an undertaking in damages in the event it is so ordered by this Honourable Court. I believe I have sufficient means to honour my undertaking since the value of my unencumbranced [sic] shareholding in the Company alone is worth about HK$3.06 billion as at 22nd June 2009.”

5.  The “Company” in question is Sino Union Petroleum & Chemical International Limited, a company incorporated in Bermuda but listed for public trading on the main board of the Hong Kong Stock Exchange.  At the time the plaintiff made his affirmation, he was the Chairman and an Executive Director of the Company.

6.  The Mareva injunction was continued on the 3 July 2009 by Mr Recorder Fok SC (as he then was).  On 8 and 9 September 2009, Poon J heard the defendants’ application for discharge of the Mareva injunction.  The grounds for that discharge sought included that there was no arguable case, no real risk of dissipation of assets, delay and material non-disclosure.  These arguments were rejected by Poon J, and he continued the Mareva injunction until trial or further order.

7.  It is to be noted that there was no challenge to the injunction on the basis that the plaintiff was not “good” for his cross-undertaking, and there was no application for fortification of the cross-undertaking.

The application

8.  By summons dated 30 September 2010, the 1^st defendant (only) applies for fortification of the cross-undertaking in damages, by payment into Court of such amount (or by some other means) as the Court thinks fit.

9.  That application is led by the 5^th Affirmation of the 1^st defendant.Although directions have been given permitting the plaintiff to file evidence in response to the application, no such evidence has been filed.

10.  I should point out that, prior to the issue of the application, fortification had been sought from the plaintiff in solicitors’ correspondence.  Although the proper basis for the need for any fortification was denied, the plaintiff nevertheless offered to provide a bank guarantee in the sum of HK$5 million.

11.  This sum was refused as being insufficient, though neither the summons, nor the Affirmation of the 1^st defendant, nor the skeleton argument filed by Mr Gerard McCoy SC (appearing for the 1^st defendant) suggested what sum would be sufficient fortification, or precisely what sum of fortification was to be sought.

12.  As to this point, by a supplemental skeleton argument filed shortly before the hearing, Mr Bernard Man (appearing for the plaintiff) submitted that the first question to address must be the quantum of the fortification sought by the 1^st defendant.  He argued that if the offered HK$5 million is thought by the Court to be reasonable, then the whole hearing would be unnecessary.  If any higher figure were to be sought by the 1^st defendant, Mr Man argued that it should be identified for the plaintiff to be able to consider it.

13.  At the beginning of the hearing, I asked Mr McCoy SC if there was a particular figure of fortification being sought, and the basis for any such figure.  He told me (as I think he had shortly before told Mr Man) that the fortification was sought in the sum of HK$8 million.   This was said to be calculated by reference to a combination of fixed numbers and variables, essentially seeking to establish some reasonable estimate of profitability in relation to the 1^st defendant’s use of his assets, were that not to be restrained by injunction.

14.  Mr McCoy SC further submitted that the 1^st defendant’s potential losses extended well beyond the opportunity costs and the ability to have carried on normal commercial business, to the effect on his reputation which is directly linked to the ability to create wealth.

15.  As it turned out therefore, the “battleground” on the application was as to the difference in the amounts of fortification between the HK$5 million offered by the plaintiff and the HK$8 million sought by the 1^st defendant.

The law

16.  Apart from one aspect, there is not, nor can there be, much dispute as to the applicable principles on this application.

17.  In a proper case of an application for a Mareva injunction, the Court may impose a condition to the effect that the plaintiff’s undertaking should be fortified by his giving some form of security.  Should such a condition be imposed, but the plaintiff is not willing and able to provide the security, the injunction would not be granted, or if granted would not take effect.

18.  Ordinarily, a defendant should apply for security at the time when the injunction is first granted and the undertaking is given.  But the question might arise as to whether or not the Court has power subsequently to impose an additional term as to fortification.

19.  In Note 29/1/25 of the Hong Kong Civil Procedure 2011, it is suggested that:

“A defendant should apply for the security at the time when the injunction is granted and the undertaking is given. The court has no power subsequently to impose such an additional term on the grant of an injunction (Commodity Ocean Transport Corp v. Basford Unicorn industries Ltd; ‘The Mito’ [1987] 2 Lloyd’s Rep 197). It would seem, however, that since the court could later discharge an injunction in appropriate circumstances, it might permit the continuance of the injunction, in an appropriate case, on the giving of security.”

20.  It is unfortunate that this note remains in the 2011 version of this text.  First, the note is at least not entirely borne out by the authority of “The Mito”.  Secondly, this fact was pointed out as long ago as June 2000 by Deputy Judge Susan Kwan (as she then was) in Elegant Jump Limited v. Tribune Bridge Limited [2000] 3 HKC 133 (at 137I).

21.  In that case, neither counsel—in my view, entirely correctly—suggested that the Court would not have jurisdiction to entertain the relevant application, and (at 138I), the Deputy Judge stated:

“In my judgment, the court does have power to order fortification be given subsequently notwithstanding that no application for security was sought when the injunction was granted and the cross-undertaking in damages given as part of the inherent jurisdiction of the court to exercise control over process.”

22.  The Deputy Judge then went on to consider the circumstances in which that power is to be exercised.  She agreed (at 139A) that the objections in principle stated in “The Mito” are powerful considerations that a defendant should not be given a second bite of the cherry, and she accepted the submission that there is a distinction to be drawn between the situation where an interlocutory injunction had already been discharged by the time the subsequent application for security was made and the usual case where the interlocutory injunction or the undertaking given in lieu of the undertaking is still in force.

23.  The distinction apparently suggested is that where there is no injunction in force at the time of the application for security or fortification of the cross-undertaking, the imposition of the condition of security enables the plaintiff to know at once what is the burden he might face so that he can decide whether or not to put up the security or instead not to pursue the injunction, whereas the position is different if the plaintiff already has the benefit of an injunction and he is subsequently asked to fortify his cross-undertaking.

24.  I am not sure I see that distinction.  Indeed, the Deputy Judge herself recognized the point (at 139D) that in a case where the injunction or undertaking is still in force, it is possible for a plaintiff faced with a late application from the defendant either to fortify his undertaking in damages or to let go the injunction.

25.  But the Deputy Judge then stated (at 139D–E):

“Nevertheless, in that kind of situation, it is still ‘an important and substantive extra burden over and above the undertaking in fact given’ if the court were to order fortification when no security was sought at the time the plaintiff provided his cross-undertaking in damages. In my view, the objections in principle in The Mito are nonetheless relevant and pertinent considerations in an application of this kind in the usual situation where the injunction or undertaking in lieu is still in force.”

26.  She concluded (at 139I–140A) that:

“In view of the objections in principle set out in The Mito, I am inclined to think a subsequent application for fortification when no security was sought in the first place will not usually be entertained, unless the circumstances are compelling.”

27.  In support of that conclusion she relied also on the observations of Buckley LJ in Chanel Ltd v. FW Woolworth & Co. Ltd [1981] 1 WLR 485, at 492H–493A that:

“Even in interlocutory matters a party cannot fight over again the battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter.”

28.  The question which then seems to me to rise is this: is the search for “some significant change of circumstances” or “compelling circumstances” limited to establishing whether or not the late application for fortification should be entertained at all, or should that search also colour the approach to the application if it is entertained?

29.  Mr McCoy SC argued for the former approach, and Mr Man for the latter.

30.  The test to be applied at the time of an original application for an injunction and the offering of the cross-undertaking in damages appears settled. 

31.  In the case of Chatwani v. Bhimji (No. 2) [1992] BCLC 387, at 404, it was held that:

“Where a company against whom an injunction is granted wishes to obtain fortification of a cross-undertaking in damages, it must show the likelihood of a significant loss arising as a result of the injunction, and to demonstrate why it believes the other party will be unable to make good that loss”.

32.  (In passing, I would note that the reference to the earlier reported decision of Chatwani v. Bhimji [1991] 1 WLR 989, as also appears in Note 29/1/25 of the Hong Kong Civil Procedure 2011, also seems misplaced as that decision is not concerned with the point in the note.)

33.  In Chow Chor-Leung trading as Rayontex Trading Co. v. Rafaella Sportswear Inc [1990] 1 HKLR 449, at 453 it was held that:

“The court will order fortification where it appears just and proper to protect the defendant by making such an order; and in arriving at the amount to be put up by way of fortification, the court has to take a broad view. Indeed, there have been cases where the courts have said that if a detailed enquiry were necessary, that may be a very good reason for not ordering fortification. That is not to say that the party seeking fortification does not have to make out a case for fortification and provide the court with some material for the purposes of selecting a figure. What it does mean is that if there are arguments and counter-arguments on the amount, the court has to take a broad view without resolving all those arguments.”

34.  In essence, at least where there is an application for fortification at the time of the original grant of the injunction, a court can order the fortification where it appears just and proper to protect the defendant by making such an order, and it falls to the defendant to show that there is a likelihood of a significant loss arising as a result of the injunction granted, and that there is a basis for the belief that the plaintiff would be unable to make good the loss.

35.  I cannot see why the test should be any different upon an application for fortification made subsequent to the grant of the original injunction and the giving of the cross-undertaking.

36.  I readily understand why there may be a burden facing a late applicant for fortification to establish some reason why the late application should be entertained, hence the need to show “some significant change of circumstances” or “compelling circumstances”.  But it seems to me that once a Court has been persuaded that it should deal with the application, albeit ‘late’, the test to be applied is the ordinary test as to the grant or refusal of an order of fortification.

37.  If the circumstances which have subsequently arisen were the circumstances pertaining at the time of the original injunction and giving of the cross-undertaking, there is no doubt that the ordinary test would have applied.  That test would have been considered against those circumstances, and fortification would only have been ordered by a Court had the Court been satisfied that it was necessary for the protection of the defendant. 

38.  I cannot see why the defendant should face some higher burden than the ordinary test simply because the circumstances have arisen, or been discovered, at some later stage.  Either those circumstances are such as require or justify fortification, or they are not.  Whether or not those circumstances require or justify fortification does not seem to me to be determined by reference to when those circumstances arose or were reasonably discovered.

39.  If circumstances exist as make the order for fortification just and proper, it should make no difference that those circumstances have only recently arisen, or could not reasonably have been earlier discovered, so that the Court (proceeding on the basis of different circumstances) has so far been content to allow an injunction without security for the cross-undertaking.

40.  In both scenarios, it seems to me, the plaintiff faces the same choice as to whether or not to provide the security which the Court considers fit and proper for the existence of an injunction.  If the plaintiff is willing and able to provide the security, the injunction will either come into existence, or continue in existence.  If the plaintiff is not willing and able to provide the security, the injunction will either not come into existence or effect, or will cease to have effect.

41.  Insofar as it might be thought that I have differed from the approach of the Deputy Judge (as she then was) in the Elegant Jump case, I do not necessarily read her judgment in that way.  It seems to me that she decided on the need for “compelling reasons” or a “significant change of circumstances” to be able to entertain the application, but she then went on to determine the application before her on its merits.

42.  It is not clear that she did so applying any higher test than would have been applied at an application for fortification upon the original grant of an injunction.  But if I have differed from her approach, I have done so with diffidence, and for the analytical reasons I have identified.

43.  Two other principles of law might also be usefully highlighted.  They seem to be correct as a matter of argument from first principles, but they can also be taken from the authorities to which I have already referred.

44.  First, the burden of showing the need for fortification and the appropriate quantum of any fortification falls on the defendant seeking that fortification.

45.  Secondly, there is no obligation on a plaintiff to give full and frank disclosure of his own financial circumstances so as to oppose an order for fortification (or to argue for a lesser amount of security than is being sought).  Nevertheless, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle the drawing of an adverse inference as to his ability to meet his cross-undertaking in damages.

Significant change in circumstances?

46.  In the light of the offer of security in the sum of HK$5 million already made, Mr Man for the plaintiff was content to argue this application by reference to quantum only.  Nevertheless, it seems to me that I should satisfy myself that there is a proper basis for entertaining this application at this time.

47.  The significant changes of circumstances relied upon by the 1^st defendant in his 5^th Affirmation are as follows.

48.  Whereas at the time of the original grant of injunction and giving of the cross-undertaking the plaintiff was Chairman and an Executive Director of the Company and held shares in the Company of the value in excess of HK$3 billion (representing over 56% of the issued shares), in July 2010 the plaintiff resigned from his posts as Chairman and Executive Director, and he has since January 2010 continually disposed of large parcels of the shares in the Company reducing his current shareholding to zero.

49.  Although Mr Man is strictly correct in his submission that all that has occurred is that the plaintiff as changed an asset in one form (shares) to another (cash), I am prepared to accept that this is a sufficiently significant change in circumstances as would justify the Court in entertaining the application now made for fortification.

50.  I take into account that it was this holding of shares in particular upon which the plaintiff relied as identifying his sufficient means to honour his cross-undertaking.  I accept that this was the only specific asset identified, which does not mean that the plaintiff did not have other assets which might be relied upon for meeting any award of damages on the cross-undertaking, but the Court has not been told of any other specific assets or their value or location.  Further, though I do not think it necessary to draw the kind of adverse inference invited by Mr McCoy—particularly when the plaintiff sold his shares with full disclosure to the regulatory authorities and in the public eye—there is some force in his submission that the Court has been left deliberately in the dark as to the reasons why the entire shareholding was sold, and what might have become of the proceeds of sale.

51.  On the other hand, even on Mr McCoy’s own calculations, the proceeds of sale were around HK$2.8 billion, against which figure the sum of security sought seems almost trivial.

52.  It is also suggested by the 1^st defendant that the plaintiff has become the subject of an investigation by the SFC on charges of manipulating share prices, and that the plaintiff is as a result preparing to dispose of all or most of his assets within the jurisdiction and to flee Hong Kong to avoid criminal prosecution.

53.  In the light of the fact that I have already found sufficient change of circumstances to deal with this application on its merits, I do not intend to comment much on this suggestion.  Suffice it to say, however, that I am not persuaded that there is enough evidence for me to form any proper view as to the nature of any “involvement” of the plaintiff in any investigation by the regulatory authorities, or that the plaintiff is about to abscond from Hong Kong.

54.  I should point out that I do not take against the plaintiff any delay in the progress of this action, albeit that most civil actions in which a Mareva injunction has been obtained should be progressed with vigour.  In this case, the defendants are yet to file a Defence.  This is no doubt for reasons similar to the reasons which led to their not raising positive matters in their own defence before Poon J in September last year, for fear that whatever might be said in the civil claim context might impact their position in the criminal proceedings.

Amount of security

55.  As I have already pointed out, the real contest in this application turned out to centre on the quantum of any security as might be ordered in fortification of the cross-undertaking.

56.  Strictly, therefore, I do not need to decide whether fortification of any amount ought to be provided.  Nevertheless, I am persuaded that this is a case on and against its current circumstances as would justify the provision of some amount of security in fortification of the plaintiff’s cross-undertaking.

57.  The 1^st defendant suggests he has already suffered significant losses as a result of the injunction being in place.  These losses are said to have come from missed opportunities to have purchased various properties in deals which, by virtue of the increase in property prices, would have yielded a profit of some HK$428.8 million.

58.  I note that the 1^st defendant does not say that he would have sold any such properties purchased, or when he might have done so, as the calculation of claimed lost profit is by reference to “today’s value”.  There is no independent evidence either which supports the assertion that the particular properties had in fact been “offered” to him, nor as to the asserted “today’s value”.

59.  In any event, on this aspect, I accept Mr Man’s submission that by reference to the asset disclosure provided by the 1^st defendant as discovery under the Mareva injunction, it is at least extremely difficult to see how the 1^st defendant could actually have been able to take advantage of these offers if they had been made. 

60.  Further, no real reliance was placed in Mr McCoy’s arguments on this alleged earlier loss.  Particularly by reference to the amount of security as was sought at the hearing, namely just HK$8 million, the assertions in the 1^st defendant’s evidence would appear to be extravagant.  Such claims do not do much to establish the bona fides of the application as it was originally framed.

61.  Against the “ceiling” figure of the Mareva injunction, and by reference to the assets disclosed by the 1^st defendant, it might be thought that there is not a vast difference between the sums of HK$5 million and HK$8 million, and that neither sum is (independently viewed) necessarily unreasonable.

62.  But I have to resolve the contest, and to choose what seems to me to be the reasonable figure, whether it is one of those offered or neither of them.

63.  In doing so, I take the broad view indicated by the authorities, and I bear in mind the burden is on the 1^st defendant.

64.  I have set out above the broad basis on which Mr McCoy seeks to justify the figure of HK$8 million.  Mr Man seeks to justify to the figure of HK$5 million by rough arithmetic.  He says that the assets disclosed by the 1^st defendant total approximately HK$13 million, of which HK$9 million has been released to him to provide for legal fees in the criminal proceedings arising out of the incidents giving rise to this civil claim.  Assuming that the 1^st defendant must have spent some of the other assets, and without knowledge as to his income stream, it would be fair to consider that he might have available assets in the order of HK$2 or 3 million.  Were he to be an investor of that sort of sum, a more than reasonable return might generate something in the order of HK$5 million.

65.  Taking a broad view, and taking into account all the circumstances as have been outlined to me, I am not persuaded that the 1^st defendant has made out his burden of showing his proffered figure of HK$8 million is the appropriate figure for any security I would order.  In all the circumstances, I am prepared to accept the figure of HK$5 million as being just and proper for the protection of the defendant in fortification of the cross-undertaking in damages given by the plaintiff.

66.  I therefore order the plaintiff to provide HK$5 million as security to fortify his cross-undertaking, and to do so within 14 days, failing which the Mareva injunction shall lapse.  The security has been offered in the form of a bank guarantee, and I assume that is acceptable to the 1^st defendant.  If there is any argument as to form of security, that matter can be listed before me at short notice.

[Argument on costs]

67.  Having heard the parties on costs, and where there is consensus as to the correct approach, I order the 1^st defendant to pay the plaintiff the costs of the application as were incurred after 25 October 2010.  I assess those costs on a gross sum basis in the agreed amount of HK$92,000, which is to be paid (by consent) within 14 days. The remainder of the costs of the application is to be in the cause.