CHUN MAN TIMBER DEVELOPMENT LTD v. KWAN CHIA CHENG

HCA 2531/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2531 OF 2002

____________

____________

_______________

J U D G M E N T

_______________

1.  This is a dispute between different sides of a family.  On the one side, behind the plaintiff company, is the Fu family.  On the other side, Mr Kwan, whose wife is a daughter of the Fu family.

2.  The plaintiff company, Chun Man, trades in timber.  It has a close association with a company established in the mainland, Sam Hing Timber.  Chun Man supplies Sam Hing with timber.  The supply is on open unsecured credit terms.  Business between the two companies operated quite uneventfully until early 2002.  Problems arose at that time when Sam Hing failed to pay Chun Man for timber supplied.  There is a backlog of debt owing by Sam Hing to Chun Man of US$3.28 million.

3.  There is a dispute as to who owns Sam Hing.  Chun Man says that Sam Hing is its wholly owned subsidiary.  Mr Kwan says that at least Sam Hing is owned 50% by him, and 50% by the Fu family.  Mr Kwan is a director of Sam Hing, and also a director of Chun Man.  Chun Man’s claim against Mr Kwan is based upon breach of fiduciary duty in his capacity as a director of Chun Man, and seeks an accounting for the proceeds of sale of timber supplied, and payment of the proceeds of sale, and profits made by Sam Hing.

4.  Chun Man now says that it supplied timber to Sam Hing, in China, as its agent and that consequently the timber remained the property of Chun Man, and so the proceeds of any sale of the timber received by Sam Hing was the property of Chun Man.  The proprietary claim to the actual proceeds of sale of the timber is not pleaded.

5.  Chun Man made a complaint to mainland authorities in relation to non-payment for timber supplied to Sam Hing.  As a result of that complaint the accounting documents of Sam Hing were seized by mainland authorities.  Following an investigation of the affairs of Sam Hing by certified public accountants in the mainland it was determined that six particular remittances were allegedly made by Sam Hing, apparently in part payment to Chun Man for timber supplied.  Chun Man says that it did not receive these payments.  Of the 6 payments, two are complained of in this interlocutory application by Chun Man.  They are a payment of US$546,175.75 made on 8 April 2002 and a payment of US$550,000 made on 29 April 2002.  Both are payments which were ultimately received by a company called K & F International.  It is not in dispute that K. & F. International is owned by Mr Kwan and his wife.

6.  The essence of Chun Man’s complaint appears to be that Mr Kwan, in his capacity as a director of Chun Man, knowing that Sam Hing owed money to Chun Man, ought to have procured Sam Hing, apparently in his capacity as a director of Sam Hing, to pay Chun Man before it paid anyone else.  Mr Yau says that as a matter of law, and he is correct, that a director of the company is a trustee of the company's property.  Bu Mr Yau takes the argument further.  He says that consequently monies in the hands of Sam Hing, and consequently under the control of Mr Kwan as a director of Sam Hing, were monies held by Mr Kwan on trust for Chun Man.

7.  He then says that any use by Mr Kwan of that money for his own purposes is a breach of trust and a breach of Mr Kwan’s fiduciary duty to Chun Man as a director of that company.  He says that as a matter of law, Chun Man therefore has a proprietary claim in respect of the payments made by Mr Kwan to K. & F. International.  The claim being a proprietary claim, it is then argued that an injunction should issue to secure the funds in K. & F. International’s account, as being trust funds, the beneficiary being entitled to the proceeds of any use to which the trust funds have been put, including any profit earned thereon.  I repeat that although this claim is now made before me, it does not appear in this form in the amended statement of claim.

8.  Chun Man now seeks an order restraining Mr Kwan from dealing with those two sums of money, which it says are its assets.  The relief sought is in the nature of a Mareva injunction, and a tracing exercise in respect of the two payments.  Specific discovery is also sought.  Chun Man accepts that the principles in American Cyanamid v Ethicon [1975] AC 396, are to be applied in the grant of such relief.

9.  When considering an injunction under American Cyanamid principles, the applicant for the injunction must establish first that there is a serious question to be tried.  There is clearly a dispute between the parties, both as to the ownership of Sam Hing, and as to whether or not Sam Hing was an agent of Chun Man, or whether they dealt as principal to principal.  If the dealing was as principal and agent then it is arguable that property in the goods remained at all times with Chun Man and that the actual monetary proceeds of a specific sale is the physical property of Chun Man.  If however the dealing was on a principal to principal basis and property in the goods passed to Sam Hing on delivery.  Thus, on the on-sale of those goods by Sam Hing, Chun Man would have no greater claim than any other unsecured creditor.

10.  I do not propose to analyze the evidence in any detail.  There are arguments to be made on both points both ways.  Each party is able to point to various aspects of documents to support their argument.  I am satisfied that there is a serious question to be tried.

11.  There being a serious question to be tried I turn now to consider the balance of convenience.  In this case that involves a consideration of the strength of Chun Man’s case in relation to the specific sums claimed, a consideration as to whether or not damages will be an adequate remedy, whether there is a real risk of dissipation of funds by Mr Kwan, and issues of delay on the part of Chun Man.

12.  For Chun Man to be able to claim a proprietary interest in the specific sums paid to K & F International it must be able to establish not only that Sam Hing was an agent who never took title to the timber that was sold, but also that the timber that was sold to produce the specific monies paid to K. & F. International was timber belonging to Chun Man.  The evidence does not identify at all precisely which timber was sold to produce the funds that ultimately found their way to K. & F. International.  Mr Yau was obliged to accept that on the evidence Sam Hing obtained and sold timber from other sources.  The best that he was able to say was that no other supplier was complaining that he had not been paid.  It is a quantum leap to draw the inference from that fact that the timber sold which produced the funds must have been timber from Chun Man.

13.  While I accept that there is a serious issue to be tried it must be said that the preponderance of the evidence as I presently see it, and I put it no higher than that, is that Chun Man and Sam Hing dealt on a principle to principal basis.  The entire basis of Chun Man’s assertion that there was an entirely undocumented “internal understanding” between the two companies that they dealt on an agency basis appears to rest upon the allegation that Chun Man owned 100% of Sam Hing.  That is a contention itself which is in real dispute between the parties, and appears to be at odds with the documents produced so far.  That, together with a complete absence of evidence as to the source of the timber sold to produce the funds at issue, means that the case for Chun Man cannot be said to be strong.  I am not satisfied that Chun Man’s case could even be put as high as being a case with a good prospect of success.

14.  Whether an injunction is considered under American Cyanamid principles or Mareva principles, an applicant for an injunction must establish that damages would not be an adequate remedy should he succeed at trial.  It is right that where an injunction is sought in order to protect rights to a particular fund of money, or some other chose in action, damages are not usually considered an adequate remedy: see Spry The Principles of Equitable Remedies, 6^th Ed, p. 386.  Although that statement is made in the context of perpetual injunctions it is clear from one of the authorities cited, London City Agency (JCD) Ltd & Anor v Lee & Ors [1970] 1 Ch 597, that Megarry J granted an ex parte injunction in respect of a specific fund, in circumstances where there did not appear to be any proprietary claim to the specific fund.  The only basis upon which Mr Yau was able to contend that a specific fund ought to be protected, was that as it was argued that it was a fund held on trust, in a tracing exercise, the beneficiary would be entitled to the profits of any use of the fund.  But it must be remembered that the basis for the case that the fund was held on trust is tenuous.

15.  Chun Man concedes that Mr Kwan has the resources to pay back the sums allegedly misappropriated.  That concession was made in earlier Mareva proceedings when a sum in excess of US$3 million was sought to be protected.  The claim now for the injunction relates to a sum of a little over US$1 million.  It may well be, as Mr Yau argues that Mr Kwan or K. & F. International have used the funds to purchase valuable property which has increased in value, but there is no suggestion that any increase in value could not be met by an award of damages.  The case is not strong enough to justify the detention of specific funds, or the tracing of those funds and the subsequent detention of assets acquired, where a defendant has adequate resources to meet any judgment, including any profit allegedly made, as on the plaintiff’s own case this defendant does.

16.  Mr Yau says that Chun Man cannot be criticised as to the absence of evidence as to where the funds are or what use has been made of them.  But as the proprietary claim has not been pleaded, and no discovery has yet been sought by Chun Man, it is not surprising that nothing yet has been said by Mr Kwan on these aspects.  So far, he has been under no obligation to say anything.

17.  This is not the first time Chun Man has sought a Mareva injunction in respect of these payments.  The matter came before Suffiad J on 24 September 2004, where a Mareva injunction was sought not only in respect of these two payments, but also in relation to the other four remittances disclosed by the mainland accounting report.  It is right that the scope of the injunction that was sought on that occasion was greater than that sought before me today.  On that occasion the application for a Mareva injunction was rejected on the grounds of delay, that there was no risk of dissipation, and of ulterior motive on the part of Chun Man.

18.  In my view the reduction of the scope of the injunction sought does not improve Chun Man’s position.  An extra-territorial Mareva injunction is an extraordinary form of relief.  It is highly onerous in nature and is granted only as a result of the exercise of judicial discretion.  The attempt here to trace the funds and to restrain any assets acquired by the funds makes the injunction sought even more onerous.  A Mareva injunction is usually granted on an ex parte basis, as a matter of urgency, and on the premise that the defendant is about to dissipate his assets to make himself judgment proof, or is about to dissipate assets which belong to the plaintiff.

19.  There is nothing in the evidence before me to indicate that Mr Kwan or K. & F. International are likely to dissipate their assets in such a way as to leave Chun Man empty-handed should a judgment be obtained.  There is nothing in the evidence to indicate that a judgment, even a judgment including profits made by K. & F. International, would not be met.

20.  There is no doubt that there is a long delay in this matter.  The two cash transfers took place in April 2002, over three years ago, but the application before me was not filed until 20 December 2004.  The writ was issued in July 2002, with a statement of claim annexed, but the amended statement of claim which gave substantive particulars of claim was not filed until July 2003.  Apart from the pleadings, and the two interlocutory applications for Mareva injunctions, no substantive step has been taken by Chun Man to prosecute this action.  There has been no discovery.

21.  The remittances of which Chun Man complains were first identified to it in December 2003, and their ultimate destination has been known since May 2004.  The application before me was not filed until 20 December 2004.

22.  There is no evidence before me to suggest that there is any issue of urgency in this matter.  Indeed Chun Man’s leisurely approach to the litigation demonstrates that there is in fact no urgency.  Even if it is argued that Chun Man did not become aware of the remittances until early 2004, it has still not acted sufficiently promptly in seeking interlocutory relief, but rather has delayed many months, thereby giving the clear impression that it did not consider interlocutory relief was necessary.  That is entirely consistent in proceedings against a defendant who has adequate funds to meet any judgment.

23.  The whole of the circumstances point to this application as simply being a means by which Chun Man seeks to put pressure on Mr Kwan.  Indeed in paragraph 4 of the affidavit of Ng Ge Bun, filed in support of Chun Man’s application, Chun Man acknowledges a deliberate intention of putting pressure on Mr Kwan, so long as it is what Chun Man describes as “legitimate pressure”. Mr Ng makes the following extraordinary statement in his affidavit:

“Further, (Chun Man) did not see anything wrong of putting pressure on the Defendant so long as it was legitimate.  The Defendant was after all the Plaintiff’s adversary.” (sic)

If drafted by solicitors, this is a sorry statement as to the manner in which they consider litigation ought to be conducted.

24.  The situation in this case is quite different to that in Law Wai Duen v Boldwin Construction Co Ltd [2001] 4 HKC 403.  There the plaintiff had a right at law of inspection of the company's books and consequently any motivation of vindictiveness or an intention to discover misfeasance did not affect his right of inspection.  Here the plaintiff seeks a remedy which is at the discretion of the court, and not as of right.  While a step may be technically legitimate in the prosecution of litigation, if its sole purpose is not to further the resolution of the litigation, but merely to put pressure on a defendant, it is unlikely that the step will find favour from the court in the exercise of a discretion.

25.  In the whole of the circumstances of this case, in the exercise of my discretion, I am satisfied that the balance of convenience is against the grant of the interlocutory injunctions sought.  In my view, Chun Man would be well advised to stop trying to resolve this matter by putting pressure on Mr Kwan, whether in Hong Kong or in the mainland, and instead put its house in order by completing the pleadings, concentrating on the real issues between the parties, and bringing the matter on to a speedy trial.

26.  In the summons before me Chun Man sought specific discovery in relation to the two sums about which it now complains.  Mr Chan contends that it is too early for such orders.  At the present time Chun Man’s claim, as set out in the amended statement of claim, is a claim for accounting and payment of profits.  Whilst relying upon breaches of fiduciary duty on the part of Mr Kwan it does not assert any proprietorial claim for the two sums above which specific discovery is sought.  I accept Mr Chan’s submission that until there is a claim before the court in relation to specific funds the extent of the discovery sought in the summons goes beyond that required to dispose of the issues in the case.

27.  The applications contained in Chun Man’s summons of 20 December 2004 are dismissed.

28.  Following the delivery of judgment in this matter, I heard counsel in relation to costs.  Both counsel accept that in the normal course of events, the usual order would be Defendant’s costs in the cause.  Mr Chan for the Defendant, however, seeks Defendant’s costs to be taxed and paid forthwith.

29.  I accept that the court is not restricted to the usual order for the reasons set out in Hong Kong Practice, 2004, Paragraph 29-1-44.  Mr Chan says that there are two reasons particularly why the Defendant should have his costs forthwith.

30.  The first is that the business operated by the Defendant is, he says, being run down.  It is right that the accounts show that from a turnover of $60 million in the year ended March 2003, the turnover reduced to zero in the following two years.  Although the matter was not canvassed in submissions, I do not quite understand why, if Chun Man says it still has a business, it cannot find somebody else to sell its timber in China and quite why it is necessary, apparently, to stop completely all trading.  I accept that it contends that as a result of Sam Heng’s activities, it suffered a loss of $26 million in the 2002, year but it is still a company that is not insolvent and still able to carry on. 

31.  The second matter Mr Chan raises is the speed with which the litigation is being conducted.  He says - and I think it is a realistic statement - this is litigation which may never come to a real conclusion before the court and consequently an order for Defendant’s costs in the cause may be an order which will never be enforced. 

32.  There is a third reason why, in my view, the defendant ought to have its costs forthwith in this matter.  It has elected to make this application for tactical purposes and not to further the purpose of the litigation which is to resolve the issues between the parties.  If a party elects to take tactical steps such as have been taken here, and to seek the exercise of the discretion of the court, not to further the litigation but to try and gain a tactical advantage, and fails to secure the exercise of the court’s discretion, it must know that it is at risk of immediate costs. 

33.  Finally, this is, in effect, a second bite at a cherry which has already been denied to the Plaintiff.  Suffiad J rejected the earlier application for Mareva injunction.  I have rejected this application on additional grounds, but also on the same grounds as the judge did. 

34.  In the whole of the circumstances, I am satisfied that the proper order for costs is that the Defendant is to have his costs of and occasioned by the application to be taxed on a party-and-party basis and paid forthwith.