VELATEL GLOBAL COMMUNICATIONS INC. AND ANOTHER v. CHINACOMM LTD AND OTHERS

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1978 OF 2011

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BETWEEN

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REASONS FOR DECISION

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1. There are three summonses taken out by the plaintiffs before me:

(i)  application for disclosure and unless order against the 1^st, 6^th and 7^th defendants;

(ii)  application for disclosure and unless order against the 10^th defendant; and

(iii)  application to vary the injunction order dated 18 November 2011 (“the 1^st Injunction Order”) by prohibiting the 1^st defendant to withdraw money from certain bank accounts to pay for its legal fees.

2. In the hearing on 11 April 2012, the plaintiffs withdrew the first two applications against the relevant defendants.  I allowed the plaintiffs’ application under the third summons and I now give my reasons.

Background

3. This action is essentially a dispute between foreign investors (the plaintiffs) on the one hand and Mainland domestic entities (the 8^th and 9^th defendants) and parties related to them on the other hand over an investment in the 1^st defendant which is a Cayman Islands company.  The 1^st defendant was set up to invest in specified telecom projects in the Mainland.  The funds from the 1^st defendant were supposed to flow to its wholly owned subsidiary, the 4^th defendant, which would then flow to Yunji, a Chinese Wholly Owned Foreign Invested Enterprise engaging in telecommunication business.

4. The main subject matters of the Mareva injunction under the 1^st Injunction Order are two bank accounts in the name of the 1^st defendant and one account in the name of the 4^th defendant at the Standard Chartered Bank (HK) Limited (“the Bank”) in Hong Kong, and it is the plaintiffs’ case that one of such 1^st defendant’s account (“Chinacomm Account 1”) and 4^th defendant’s account (“Smart Channel Account”) in the Bank were subject to a joint-signatories arrangement, ie the accounts had to be operated jointly by Mr Colin Tay of the plaintiffs (“Mr Tay”) and the 6^th defendant.

5. The 1^st plaintiff is a United States listed company engaging in telecommunication business, and the 2^nd plaintiff is a Hong Kong company and is the contracting party in the various agreements with the defendants.

6. The defendants are all interrelated.  The 1^st defendant is used by the 6^th to 8^th defendants as a special purpose company for the implementation of the joint venture project between the plaintiffs and the 8^th defendant.  The 1^st and 8^th defendants share the same business address in Beijing, and the 5^th defendant is the nominee of the 6^th to 8^th defendants.  For the purpose of this Reasons for Decision, I do not propose to go deeply into corporate structures and the interrelationship between the different defendants.

7. The parties agreed to enter into some form of joint venture in respect of telecommunication business in the Mainland.  After a series of negotiations, on 13 February 2009, the 2^nd plaintiff, the 1^st to 3^rd and the 6^th to 9^th defendants entered into a Subscription and Shareholders’ Agreement.  Under this agreement, the 2^nd plaintiff agreed to subscribe for new shares of the 1^st defendant with payment in tranches subject to certain milestones.  The first tranche of US$ 5 million was paid before this agreement with part of the fund went into one of the bank accounts of the 1^st defendant in the Bank (“Chinacomm Account 2”).

8. It is the plaintiffs’ case that, in early 2010, the parties agreed for the plaintiffs to inject another US$ 5 million into Chinacomm Account 1, a joint-signatories account of the 1^st defendant.  The fund was supposed to flow into another joint-signatories account, ie the Smart Channel Account.  According to the plaintiffs, this fund was intended to be used for the joint venture telecom project in the Mainland, and the signatures of both Mr Tay and the 6^th defendant were required to operate these two accounts.  The plaintiffs eventually paid US$ 4.75 million into Chinacomm Account 1 pursuant to such agreement.

9. In November 2011, Mr Tay learnt from the Bank that he was no longer an authorised signatory of Chinacomm Account 1.  It is the plaintiffs’ case that the 1^st to 9^th defendants had wrongfully removed Mr. Tay as an authorised signatory of Chiancomm Account 1 and converted the money therein to their own use.  On 18 November 2011, the plaintiffs obtained an ex parte Mareva injunction against the 1^st to 9^th defendants (the 1^st Injunction Order) from L Chan DHCJ.

10. Upon certain disclosure by the defendants, the plaintiff found that part of the fund was transferred to the bank account of the 10^th defendant.  On 8 December 2011, the plaintiffs obtained from myself an ex parte Mareva injunction order against the 10^th defendant (“the 2^nd Injunction Order”).

11. The substantive hearing for the continuance of the 1^st and the 2^nd Injunction Orders is now fixed on 3 May 2012.  In the meantime, the parties agreed for the injunctions to continue.

Summonses for the disclosure and unless order

12. Prior to the substantive hearing, the plaintiffs took out two summonses, one against the 1^st, 6^th and 7^th defendants and the other one against the 10^th defendant, compelling these defendants to comply with the orders for disclosure contained in the 1^st and the 2^nd Injunction Orders.  According to the said summonses, in the case that the relevant defendants do not comply with the orders for disclosure, leave should be granted to the plaintiffs to apply for orders for committal against them.

13. The sanctions sought in the summonses are quite unusual. It is the plaintiffs’ case that the relevant defendants have failed to comply with the orders for disclosure, and so the plaintiffs can now institute contempt proceedings against these defendants even without the unless order.  Further, if the court finds in favour of the plaintiffs in the present applications and the relevant defendants still refuse to comply with the orders, there is a possibility that the court will have to deal with the defendants’ arguments again in the later contempt proceedings.  Hence, in order to save time and costs, the plaintiffs agreed to withdraw the said summonses and would proceed directly to institute contempt proceedings against the relevant defendants.  I therefore granted leave in the hearing for the plaintiffs to withdraw these two summonses with costs reserved.

Summons for the variation of the 1^st Injunction Order

14. That leaves the plaintiffs’ application for variation of the 1^st Injunction order by prohibiting the 1^st defendant to withdraw money from Chinacomm Accounts 1 and 2 to pay for its legal fees.

15. It was provided in the 1^st Injunction order that the 1^st to 3^rd and the 6^th to 7^th defendants be allowed to spend $20,000 per week for ordinary and proper business expenses and $100,000 on legal advice and representation.  But when the solicitors for the 1^st defendant later asked for the plaintiffs’ consent to withdraw the sum of $100,000 for the payment of the 1^st defendant’s legal fees, the plaintiffs refused and lodged the present application for variation of the 1^st Injunction Order.

16. The plaintiffs’ arguments are simple.  According to their claim, the funds in Chinacomm Account 1 were all contributed by the plaintiffs with the agreement that there would be a joint-signatories arrangement and the funds would be used for the specified telecom projects in the Mainland.  As the defendants wrongfully revoked Mr. Tay’s authority to operate Chinacomm Account 1 and withdrew part of the funds from the account, the plaintiffs are lodging a “proprietary claim” against the defendants for the return of the money paid by the plaintiffs into such account.

17. The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled.  It is an exercise of discretion which involves a two-stage process:

(i)  firstly, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim.  If the defendant fails in this first hurdle, the court need not consider the second stage and the application should be dismissed;

(ii)  secondly, once the first hurdle is cleared, the court in the exercise of its discretion will engage in a balancing exercise to weight the potential injustice to the plaintiff of releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence.  This process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weight the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim.  In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has no right to use the money.  As Millett LJ (as he then was) said in Ostrich Farming Corp Ltd v Ketchell [1997] EWCA Civ 2953 “[no] man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings”.

(see a summary of the principles in Wharf v Lau Yuen How [2010] 1 HKLRD 783, per Au J at §13)

18. Further, in considering whether a particular defendant has the financial resources to pay for his legal fees, the court is not limited to the funds to which the defendant has the legal right if there are reasonable grounds for believing that the defendant can obtain money elsewhere.  In appropriates cases, corporate veil can be lifted to take into account the resources of the defendant’s parent company (see: Atlas Maritime v Avalon Maritime (No 3) [1991] 1 WLR 917).

19. In considering whether the 1^st defendant should be allowed to use the money in the accounts to pay for its legal fees, the plaintiffs submit that the court should take into account the interrelationship between the different defendants and the financial resources of the other defendants.  According to the evidence at this stage, the 1^st defendant is merely a special purpose company set up to implement the telecom projects.  The 8^th defendant, which has registered share capital and paid up capital of RMB 2 million according to its business licence, is the ultimate holding company of the 1^st defendant.  Further, the 9^th defendant, which is a subsidiary of the 8^th defendant, has registered capital of RMB 100 million and paid up capital of RMB 42 million according to its business licence. The evidence also shows that the 6^th and 7^th defendants are the masterminds of the defendants and they should have the means to fund the defendants’ litigation.  Taking into account the financial resources of these other defendants, the 1^st defendant should not be allowed to withdraw the money from Chinacomm Accounts 1 and 2, which is subject to the proprietary claim of the plaintiffs, to pay for its legal fees.

20. I agree.  Based on the evidence available at this stage, there are strong reasons to believe that the other defendants have the financial resources to fund the litigation.  As the 1^st defendant has not even cleared the first hurdle according to the two-stage test summarised by Au J in the Wharf case, the 1^st defendant should not be allowed to use the money in the said bank accounts to pay for its legal fees.

21. Mr. Lam, solicitor for the defendants, argues that the variation is unfair as it would deprive the 1^st defendant of the means to defend the plaintiffs’ claim.  According to the defendants’ case, the sum of US$ 5 million paid by the plaintiffs into Chinacomm Account 2 in 2008 and the sum of US$ 4.75 million paid by the plaintiffs into Chinacomm Account 1 in 2010 were for the acquisition of the 1^st defendant’s shares.  As the 2^nd plaintiff had obtained the shares and the plaintiffs were in breach of the various joint venture agreements between the parties, the defendants have the right to dispose of the funds in the relevant bank accounts.

22. Despite such allegation, there is no dispute that Chinacomm Account 1 was originally subject to a joint-signatories arrangement between the parties.  To a certain extent, the existence of such arrangement does support the plaintiffs’ case that the money paid into such account should only be used for a specified purpose agreed by the parties.  If the money was simply paid for the acquisition of the shares, there was no need to make this sort of joint-signatories arrangement.  That also explains why when the plaintiffs paid the sum of US$ 5 million into Chinacomm Account 2 in 2008, which apparently was for the acquisition of the shares, that account was not subject to any joint-signatories arrangement.

23. There is certainly some evidence to support the plaintiffs’ proprietary claim.  In my judgment, unless the 1^st defendant can clearly demonstrate that it has no financial resources, whether from its own company, its parent or related companies or its shareholders, to pay for its legal fees, the 1^st defendant should not be allowed to use the money in Chinacomm Accounts 1 and 2 to defend the plaintiffs’ claim.

24. In his submission, Mr. Lam also tries to challenge the plaintiffs’ variation application by reason of the following grounds:

(i)  there was non-disclosure of certain material facts when the plaintiffs applied for the 1^st and the 2^nd Injunction Orders;

(ii)  the plaintiffs have failed to prove the sources of the funds paid into the defendants’ accounts and it is doubtful whether the plaintiffs do have the right to maintain the claim against the defendants; and

(iii)  the 2^nd plaintiff has no locus to make a claim against the defendants as it had already transferred all its shares in the 1^st defendant to the 1^st plaintiff.

25. As these arguments would be fully canvassed in the hearing on 3 May 2012, I do not propose to deal with them at this stage. In the case that the defendants succeed in these arguments in the substantive hearing, it is very likely that the Injunction Orders would be discharged and the defendants would then be free to make use of the funds in the relevant bank accounts.  I am very much conscious of the fact that the proposed variation would limit the fund available to the 1^st defendant in preparing the defence in the substantive hearing.  But since all the defendants are going to be represented by one single team of legal advisers, I am of the view that the effect on the 1^st defendant would be minimal.

26. Based on the aforesaid reasons, I allowed the variation application in the hearing on 11 April 2012.  As the costs of such application should follow the merits of the plaintiffs’ claim, I ordered that the costs of the variation application be costs in the cause.