AESO HOLDING LTD AND ANOTHER v. DRAGON SUCCESS ENTERPRISE LTD AND OTHERS

HCA 1737/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1737 OF 2017

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HCMP 1647/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1647 OF 2017

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[Consolidated by Order of the Honourable Madam Justice Lisa Wong
dated 12 October 2017]

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D E C I S I O N

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Introduction

1.  The present applications before this Court are mainly in relation to whether a Mareva injunction obtained by the plaintiffs in the HCA 1737/2017 action against the 2^nd and 3^rd defendants should be continued or be discharged.

2.  The HCA 1737/2017 action has since 12 October 2017 been consolidated with the HCMP 1647/2017 Action (“Consolidated Action”), and that HCA 1737/2017 is to continue as the main action “Main Action”) and HCMP 1647/2017 be continued as a counterclaim in the Consolidated Action (“Counterclaim Action”).  In this decision, “Ps” refer to the plaintiffs and “Ds” refer to only the 2^nd and 3^rd defendants in the Main Action.

3.  The Consolidated Action essentially concerns the validity of a loan facility agreement and a share charge purportedly entered into between the 2^nd defendant (“Jones Chan”) on behalf of the 1^st plaintiff (“Company”) and the 1^st defendant (“Dragon Success”).

4.  In a separate action, HCA 1496/2017, this Court handed down a judgment on 31 August 2017 (“31.08.17 Judgment”).  For ease of reference and save as otherwise indicated, in this decision, I shall adopt the same abbreviations in the 31.08.17 Judgment.

Background

5.  There have been a number of litigations involving the two major shareholders of the Company, one headed by Jones Chan through his company (“Acropolis”) and the other one headed by Liu Chang Kien (“Wilson Liu”) through his company, the 2^nd plaintiff herein (“W&Q”) and the litigations between the two camps mainly commenced after a Disputed EGM held at the requisition by 5 minority shareholders (“Requisitionists”).  It is Ds’ case that there is a conspiracy between the Requisitionists and Liu’s Camp to seize control of the company.

6.  The 3^rd defendant Mr Cheung Hiu Tung (“HT Cheung”) was prior to the Disputed EGM a director of the Company.

7.  The background as to the dispute between Liu’s Camp and Chan’s Camp has been set out in the 31.08.17 Judgment, and will not be repeated here, save as below.

8.  It was 4 days before the Disputed EGM of the Company which took place on 12 June 2017, that Jones Chan on behalf of the Company purportedly entered into an irrevocable loan facility agreement dated 8 June 2017 (“Loan Facility Agreement”) with Dragon Success, for a facility of HK$50m advance to the Company.  The loan facility was secured by a share charge executed by Jones Chan on behalf of the Company on the same date (“Share Charge”) pursuant to which the Company’s one share in a subsidiary, Aeschylus, was charged to Dragon Success.

9.  There had been two versions of the Loan Facility Agreement produced.  In what was said by Jones Chan to be the final version, and the version Dragon Success relied on, there is a provision that in the event of (i) the trading of the Company’s shares being suspended for over 15 business days or (ii) there is any change in substantial shareholding, control or management in the Company, Dragon Success is entitled to immediately demand the repayment of the amounts drawn by the Company and that the Company should settle within 3 business days (“Clause 24.6”)[1].

10.  The trading of the Company’s shares was suspended on 12 June 2017. 

11.  After the Disputed EGM, Acropolis and Jones Chan commenced the action HCA 1496/2017 on 26 June 2017 to seek, amongst other things, declarations that the acquisition of shares in the Company by W&Q and the Requisitionists and others was null and void and that the Disputed EGM and the Disputed EGM Resolutions were null and void.  On the same day, Acropolis and Jones Chan issued a summons for an injunction to restrain Liu’s Camp, the Requisitionists and the New Directors (save Jones Chan) from relying on the resolutions purportedly passed at the Disputed EGM.  They failed to obtain any “interim” interim relief before Queeny Au-Yeung J on 30 June 2017, although as seen in the 31.07.17 Judgment, this Court eventually granted the interim injunctions sought by Acropolis and Jones Chan, subject to certain exceptions.  This matter is now subject to appeal.

12.  On 3 July 2017, Dragon Success demanded repayment of the amounts advanced to the Company in the total sum of $34,804,119.55 (“Loan Proceeds”) on the basis that the trading of the Company’s shares had been suspended by more than 15 days and there had been a substantive change in management or control[2].  On 21 July 2017, Dragon Success issued the originating summons in the Counterclaim Action against the Company, seeking to enforce the Share Charge. 

13.  This was followed by the Company and W&Q issuing the writ in the Main Action on 24 July 2017 seeking, amongst other things,  declarations that the Loan Facility Agreement and the Share Charge were null and void and seeking a full account of the Loan Proceeds, and claiming damages and/or equitable compensation against Jones Chan and HT Cheung for breaches of directors’ fiduciary duties and common law duties, and also damages against Dragon Success and Ds in respect of their wrongful conspiracy to defraud the Company and W&Q by unlawful means.

14.  On the same day, L Wong J granted an ex parte injunction (“24.07.17 Injunction Order”) in favour of Ps restraining Dragon Success, amongst other things, to take out or apply for any interlocutory relief for the purpose of enforcing the Loan Facility Agreement and the Share Charge, and restraining Jones Chan from dealing with the Loan Proceeds (“Preservation Order”), and further restraining Jones Chan and HT Cheung, amongst other things, from removing from Hong Kong any of their respective personal assets within Hong Kong up to the value of HK$35m (“Mareva Order”), subject to an undertaking by W&Q to pay a sum of HK$1m into Court for fortification of Ps’ undertaking as to damages.  The 24.07.17 Injunction Order also contained a disclosure order namely that Jones Chan must within 3 days disclose, amongst other things, the whereabouts of the Loan Proceeds with various supporting documents (“Loan Proceeds Disclosure Order”).

15.  The amount in the 24.07.17 Injunction Order was subsequently amended to HK$28,798,000 on 28 July 2017, and further, the 24.07.17 Injunction Order was discharged against Dragon Success subject to an undertaking by Dragon Success to serve on the Company any ex parte orders that might be obtained by Dragon Success.  The Preservation Order and Mareva Order as against Ds were ordered to continue pending the substantive hearing. (“28.07.17 Continuation Order”).

16.  In the meantime, on 1 August 2017, Dragon Success issued a summons in the Counterclaim Action for interim receivership in respect of the Company’s share in Aeschylus which was subject to the Share Charge.  On 4 September 2017, Queeny Au-Yeung J handed down a decision granting the application and appointing interim receivers but limited to only receiving the share in Aeschylus and all rights, dividends and benefits arising thereunder (“Receivership Decision”).

The present applications

17.  There were altogether 4 summonses before this Court issued in the Main Action:

(i) Summons issued by the Company and W&Q on 25 July 2017 to continue the 24.07.17 Injunction Order (“Continuation Summons”), and to seek ancillary disclosure orders against Jones Chan and HT Cheung in respect of their respective personal assets of HK$10,000 or more whether in Hong Kong or not (“Ancillary Disclosure Order”);

(ii) Summons issued by Jones Chan and HT Cheung on 10 August 2017 for leave to adduce unredacted copies of 3 documents in a sealed envelope and to be perused by the Court only (“Disclosure Summons”), the 3 documents being in relation to 3 new projects said to be taken on by Aeso HK (“New Projects”) for which surety bonds were said to have been issued against HK$28,798,000 of the Loan Proceeds;

(iii) Summons issued by Jones Chan and HT Cheung on 24 August 2017 for leave to file and adduce Jones Chan’s 3^rd affirmation exhibiting a copy of an affidavit filed on 14 August 2017 by Howe on behalf of Anglo Chinese in HCA 1496/2017;

(iv) Summons issued by Jones Chan and HT Cheung on 31 October 2017 to discharge and/or set aside the 24.07.17 Injunction Order and the 28.07.17 Continuation Order (“Discharge Summons”).

18.  There was no objection to Ds’ summons issued on 24 August 2017, and leave was so granted.

19.  The Continuation Summons and the Discharge Summons are essentially two sides of the same coin and the main issue is whether the 24.07.17 Injunction Order, as continued under the 28.07.17 Continuation Order, should be further continued until trial or should now be discharged/set aside. As for Ds’ Disclosure Summons, this is in relation to the documents Ds are required to disclose under the Loan Proceeds Disclosure Order.

20.  Counsel Mr Ronny Tong SC, Mr Anson Wong SC and Ms Tara Liao appeared for the Company and W&Q, Mr Clifford Smith SC and Mr Kerby Law appeared for Jones Chan and HT Cheung.

Ps’ claim against Jones Chan and HT Cheung and the orders sought 

21.  Essentially, Ps’ claim against Jones Chan is based on :

(i) breach of directors’ fiduciary and common law duties in, amongst other things, entering into the Loan Facility Agreement and the Share Charge and in actively assisting Dragon Success in enforcing the purported transactions and the use of Loan Proceeds without authorization of board of the Company and, putting such out of reach of the Company (“Breach of Duties”); and

(ii) further or in the alternative, wrongful conspiracy to defraud Ps and/or to injure Ps by unlawful means by Dragon Success, Jones Chan, and HT Cheung, namely to strip the Company of its only operating subsidiary and cash cow (“Conspiracy”).

22.  Ps’ claim against HT Cheung is based on :

(i) Breach of Duties and/or dishonest assistance in assisting Jones Chan’s Breach of Duties;

(ii) Conspiracy.

23.  In the present applications, Ps seek to continue the following orders in the 24.07.17 Injunction Order:

(1) As against Jones Chan:

(i) To freeze Jones Chan’s personal assets with a ceiling of HK$28,798,000 (“Mareva Order”);

(ii) To restrain Jones Chan from disposing of, or dealing with, or diminishing the value of all or any of and/or their traceable fruits or proceeds of the Loan Proceeds (“Preservation Order”);

(iii) To continue the Loan Proceeds Disclosure Order.

(2) As against HT Cheung, the Mareva Order against HT Cheung’s personal assets with a ceiling of HK$28,798,000

24.  Further, as mentioned, Ps also sought against both Jones Chan and HT Cheung the Ancillary Disclosure Order.

Material Non-Disclosure

25.  Ds had sought a discharge of paragraphs 2 to 4 of the 24.07.17 Injunction Order on the ground of material non- disclosure in that Ps had failed to draw the Court’s attention at the ex parte hearing to, amongst other things, (i) the lack of concrete evidence showing collusion between Jones Chan and Dragon Success; (ii) the statements in the Prospectus regarding the use of the Placing Proceeds; (iii) Ps’ intentions that the 24.07.17 Injunction Order would prevent the use of funds by Aeso HK in its bank account.

26.  In particular, for (iii) above, Ds had wanted to rely on a letter from the Bank of East Asia dated 12 October 2017 to show that the bank accounts of Aeso HK were frozen as a result of the 24.07.17 Injunction Order[3].

27.  Mr Tong submitted that the complaint of material non-disclosure was never raised in Jones Chan’s affirmations in opposition and was clearly an after thought, and therefore it was unfair for Ds to raise it without affording Ps an opportunity to file evidence in answer thereto.  In particular, Ps objected to Ds relying on the letter from BEA which was not produced by way of affidavit evidence, and threatened to seek an adjournment so that instructions could be taken from Ps and for Ps to file affirmations in reply.

28.  In the end, Ds agreed not to rely on that letter.

29.  So far as (i) is concerned, in Zhang’s affirmation filed in support of the ex parte application, she had referred to the potential defence that Ds would allege that they had innocent explanations for the transactions in question.  In any event, even if there were insufficient evidence to prove collusion or conspiracy between Dragon Success and Jones Chan, there would still be Ps claim on Breach of Duties.

30.  As for (ii), Zhang did not state in her then supporting affirmation that the transfer of the Placing Proceeds from the Company to Aeso HK was in line with the statements in the Prospectus.  What she in fact said was the transfer of HK$10m of the Placing Proceeds was not a permitted use of the Placing Proceeds stated in the Prospectus, and as for HK$5.9m for acquisition of a warehouse/showroom, there was no immediate need. She had said that the total transfer of $15.9m served no useful purpose.

31.  Jones Chan in his 1^st affirmation filed in relation to the present applications had pointed out this out and had explained that the transfer of HK$15.9m from the Company to Aeso HK in about March 2017 was in line with the use of the Placing Proceeds stated in the Prospectus. 

32.  Jones Chan’s 1^st affirmation was placed before L Wong J at the return hearing on 28 July 2017.  It did not appear that at the time Ds had raised any issues over material non-disclosure on the part of Ps.

33.  The non-disclosure in (ii) would not be in my view material or relevant.  I am not prepared to discharge paragraphs 2 to 4 of the 24.07.17 Injunction Order, based on material non-disclosure as alleged by Ds. 

The Mareva Order

Legal Principles

34.  The requirements for a Mareva injunction are trite and are summarise in the paragraph 29/1/5 of the Hong Kong Civil Procedure 2018 Vol 1 as follows:

“29/1/65

Requirements for Mareva injunction—For a domestic Mareva injunction, the plaintiff must show:

1. that he has a good arguable case on a substantive claim over which the court has jurisdiction;

2. that there are assets within the jurisdiction;

3. that the balance of convenience is in favour of grant;

4. that there is a real risk of dissipation of assets, or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effect;

5. the plaintiff must comply with a strict duty of full and frank disclosure; and

6. in the case of “worldwide” Mareva injunctions, additional factors become relevant as explained in paras 29/1/76 et seq below.”

Conspiracy

35.  I will first consider Ps’ case on Conspiracy.

36.  According to Ps’ Skeleton Submissions of 24 July 2017  submitted to L Wong J at the ex parte application, it was Ps’ case that there was a strong prima facie case that the transactions relating to the Loan Facility Agreement and the Share Charge were part of a fraudulent conspiracy between Dragon Success, Jones Chan and HT Cheung perpetrated for the purpose of taking the only operating subsidiary and cash cow out of the hands of the Company, rendering the Company a worthless shell[4].

37.  The  evidence relied on by Ps for their case on fraudulent conspiracy were summarized under section C10 of Ps’ then Skeleton Submissions[5], which included the following:

(i) The New Projects were suspicious;

(ii) The Loan Facility Agreement and the Share Charge were   never discussed by the board before their execution;

(iii) Dragon Success, which had no prior dealings with the Company, executed the Loan Facility Agreement and the Share Charge without seeing any evidence of approval from the Company’s board;

(iv) The two sets of ratifying board minutes were demonstrably a forgery;

(v) The documentation of the Loan Facility Agreement and the Share Charge was inconsistent;

(vi) Dragon Success did not appear to have the means to fund the loan, and despite request, it refused to disclose the source of its funding;

(vii) Despite the change of management and the suspension of trading since 12 June 2017, Dragon Success advanced the 3 trances of the loan between 16 and 30 June 2017;

(viii) At the same time, Jones Chan stonewalled the New Board and despite repeated request, refused to provide documents concerning the New Projects and bank statements showing the whereabouts of the Loan Proceeds;

(ix) After receipt of the demand letter, Jones Chan and HT Cheung did not explore with the New Board options to arrange repayment of the loan and instead admitted liability and inability to repay, and actively assisted Dragon Success to register the Share Charge without the approval/authorization of the New Board;

(x) Jones Chan assisted Dragon Success to commence an action  to restrain the Company, Aeschylus and Aeso from changing the composition of their respective board of directors[6].

38.  Ps’ Leading Counsel had then submitted that in light of the above evidence/matters and in view of the track-record of Ds, there was every reason to believe that they would continue to collude with Dragon Success to take the Company’s sole operating company and cash cow out of the hands of the Company in pursuance of their fraudulent scheme.

39.  At the time, Ps also relied on the above matters for their case on there being at least a serious issue to be tried and a good arguable case for the Mareva Order for Breach of Duties.

40.  Mr Smith submitted that there has been a shifting of Ps’ case in that in Ps’ present Skeleton Submissions, a greater emphasis is now being placed on the claim based on Breach of Duties and that there had been an “amalgam of going back to fraud and bringing in matters of corporate governance and to weave them together”.  Mr Smith submitted that this shift on the part of Ps was in light of comments made by Au-Yeung J in the Receivership Decision.

41.  Au-Yeung J was of the view that the Company had no defence to the claim for repayment of the loan principal of about HK$34.8m, and that the Company in the Main Action was seeking to set aside the Loan Facility Agreement but if it was set aside, the Company would be unjustly enriched if it were allowed to keep the money from Dragon Success[7].

42.  One of the Company’s grounds for opposing receivership in the Counterclaim Action was the alleged fraud between Dragon Success and Jones Chan to strip the Company of its cash cow and to frustrate the New Board’s control over the Company’s business.  However, as pointed out by Au-Yeung J, even if Jones Chan might have his own agenda when entering into the Loan Facility Agreement and Share Charge, and even if Dragon Success had in reality assisted Chan’s Camp in the shareholders’ war, there was nothing to show that Dragon Success was acting in collusion with Jones Chan[8].  This was notwithstanding the ten years’ friendship between Mr Ho Hiu Ling (“Mr Ho”) of Dragon Success and Jones Chan.

43.  Mr Tong submitted that Au-Yeung J’s above comments were only in relation to the involvement of Dragon Success in the Conspiracy and that Au-Yeung J did not say there was no collusion or conspiracy between Jones Chan and HT Cheung, and that so far as the present applications were concerned, Dragon Success was out of the picture.  Mr Tong argued that there has not been a change or shift of case on Ps’ part.  

44.  As seen from the writ in the Main Action, and further in the earlier Ps’ Skeleton Submissions, the alleged fraudulent scheme was between 3 parties, Dragon Success, Jones Chan and HT Cheung.  Whatever, Ps’ present case would appear to emphasise on an alleged collusion or conspiracy between Jones Chan and HT Cheung. 

45.  Ps’ case was that it was around late June 2017, they  discovered on the Company’s website an announcement dated 21 June 2017 titled “Latest Business Update”[9] concerning (i) the 3 New Projects of a total contract sum of approximately HK$280m obtained by the Company after the financial year ended 31 March 2017, two of which were said to be from new clients; (ii) the Company was to provide surety bonds up to around HK$28m; and (iii) the Company had difficulty in securing banking facilities and had acquired new loan facilities from a new source (“21.06.17 Announcement”). 

46.  Ps said the matters in the 21.06.17 Announcement were never discussed or resolved at any board meetings, and when the New Board requested Jones Chan for information, he refused to provide any.

47.  Ps further said that prior to the 3 July 2017 letter (received on 4 July 2017) from KLG, solicitors acting for Dragon Success, demanding repayment of the loan, they had no knowledge of the Loan Facility Agreement or the Share Charge, and without discussing with the New Board, Jones Chan purportedly to acknowledge the loan and indicated that the Company was unable to repay.  Furthermore, Jones Chan signed an Instrument of Transfer purportedly on behalf of the Company to transfer its sole share in Aeschylus to Dragon Success and also instructed lawyers purportedly on behalf of Aeschylus to register the transfer, without authorisation of the New Board, or the new directors appointed by the New Board to the board of Aeschylus.  Jones Chan was thus actively assisting Dragon Success to enforce the Loan Facility Agreement and Share Charge.

48.  So far, Ds have only produced the following redacted documents in relation to the 3 New Projects, blocking out, amongst others, names of the employers and/or main contractor, contract correspondence or scope of work or the site of works :-

(i) A letter of nomination dated 25 May 2017 in relation to a nominated sub-contract for fitting out works for a sum of HK$57,980,000, for which Aeso HK had to provide a surety bond in a sum of HK$5,798,000[10] (“25.05.17 Letter of Nomination”);

(ii) A memorandum of understanding dated 6 June 2017 to establish the requirements for Aeso HK to provide the design and renovation works at the “premises” to the “Client” for contract sum of HK$80,000,000 – HK$ 150,000,000, for which a 10% on-demand surety bond was required[11] (“06.06.17 MOU”);

(iii) A memorandum of understanding dated 7 June 2017 to negotiate, discuss and establish the requirements for Aeso HK to proved the filling out works at the “premises” to the “Client for contract sum HK$60,000,000-HK$80,000,000, for which a 10% on-demand surety bond was required[12] (“07.06.17 MOU”).

49.  Jones Chan had also produced 3 redacted documents each titled “Form of Bond” and all dated 26 June 2017 (“ Surety Bonds”)[13], again with no names of the employers or details of works, as follows :-

(i) One in relation to the project in the 25.05.17 Letter of Nomination for the sum of HK$5,798,000;

(ii) One in relation to the project in the 06.06.17 MOU for HK$15m;

(iii) One in relation to the project in the 07.06.17 MOU for HK$8m.

50.  The total amount required for surety bonds under the 06.06.17 MOU and the 07.06.17 MOU would be HK$14m at the lower contract sum and HK$23m at the higher contract sum.  Since the total amount of the two Surety Bonds for these two projects paid to JS Finance was HK$23m, these were at the higher contract sums for the two MOUs.

51.  There appeared to be no explanation from Jones Chan at the moment as why the higher contract sums for the two MOUs were used for the issue of the two related Surety Bonds.

52.  Mr Tong referred to the minutes of a board meeting of the Company held on 23 March 2017 (“23.03.17 Minutes”).  There appeared to have been further board meetings on 18 April, 1 May, 12 May and 19 May 2017, but not all the minutes were produced at this stage[14].  In any event, it can be seen from the 23.03.17 Minutes that Jones Chan did report to the then board of the Company, details of potential new projects of Aeso HK, and Mr Tong therefore submitted thus Jones Chan was fully aware of his duty to do so, namely to report to the board of the Company details of the New Projects.

53.  There was a board meeting on 5 June 2017 and from the draft minutes thereof (“05.06.17 Minutes”)[15], in which it can be seen that Jones Chan reported that there was “no material effect on the new potential business development as at the date of the meeting” although he had said he could not predict the situation after the conclusion of the Disputed EGM[16]. He also reported that his personal guarantee was released and that in view of the Requisition, the banks withheld the banking facilities and/or requested for the repayment of the outstanding bank loan of approximately HK$6m.   He further reported that in case the resolutions were voted down and the Requisition had not ended (sic), he had to consider another source of funding to finance the operation. 

54.  Although Jones Chan did mention new potential business development, there were no details given.  Jones Chan had set out a table in his 1^st affirmation in these applications in relation to the various facilities and limits which Aeso HK had and according to him, the majority of these facilities were terminated by the banks owing to the chaos caused by the Requisition and the consequential legal actions[17].

55.  In particular, there was previously a facility for a total of HK$50m from Bank of East Asia to Aeso HK under 2 facility letters dated 15 June 2016, and there was a further facility granted by Bank of East Asia under a facility letter dated 10 March 2017 for HK$6.5m.  There was also a facility from HSBC of HK$15m to Aeso HK, and another facility of HK$16m from DBS to Aeso HK.  As of 23 March 2017, it would appear that the total ceiling of the facilities was some HK$87.5m.

56.  It was stated in the 2 facility letters from BEA that the facility HK$50m was subject to review by 24 April 2017. The letter from HSBC in relation to HK$15m was stated to provide Aeso HK with debts purchase services based on the terms of Invoice Discounting/Factoring Agreement entered into between HSBC and Aeso HK and subject to review at any time, and in any event by 1 October 2017.  As for the DBS facility letter for HK$16m, this was subject  an undertaking from Aeso HK, amongst other things, to immediately inform the bank of any change of the borrower’s directors[18]. The facility letter from BEA issued on 10 March 2017 for HK$6.5m was stated to be for “corporate tax loan” and subject to review by 2 April 2017 (sic)[19].

57.  The facilities from BEA for HK$50m were secured by, amongst other things, Jones Chan’s personal guarantee and/or mortgage over his property.  Jones Chan also provided a personal guarantee of an unlimited amount for the facility from HSBC and for the facility from DBS.  

58.  Jones Chan had produced an email dated 26 July 2017 from the Relationship Manager of Bank of East Asia to the Chief Financial Officer of Aeso HK confirming that the General Banking Facility of HK$50m to Aeso HK was cancelled on 20 April 2017[20], and further an email dated 1 June 2017 from the same Relationship Manager attaching a form for Jones Chan to sign for early withdrawal of time deposit on 5 June 2017, for early repayment of the tax loan[21].  There was also an email dated 26 June 2017 from DBS indicating that any new factoring application could not be processed for the time being until clearance of the court case[22].

59.  Ps had raised a query on the email from BEA, namely it disclosed no explanation as to reasons or circumstances of the cancellation or at whose request was the cancellation, and that there was no discussion by the board regarding the cancellation of the HK$50m facility.  Ps also pointed out that in the 23.03.17 Minutes, it was noted that banking facilities were granted by HSBC and BEA of HK$30.3m and HK$40m respectively. 

60.  However, according to Jones Chan, those facilities mentioned in the 23.03.17 Minutes were new potential facilities discussed by the Company with HSBC and BEA at the time, but after the commencement of the chaos arising out of the Requisition, the two banks decided not to proceed with those potential facilities.

61.  Further, according to Jones Chan, it was at the request by BEA that the Company had to make early repayments of a total of HK$5,968,431.48 on 6 June 2017 towards the tax loan, as seen earlier.  

62.  Ps had suggested this early repayment was in fact to release Jones Chan’s personal guarantee as foreshadowed in the Prospectus.

63.  It can be seen from the 23.03.17 Minutes that HK$10m out of the Placing Proceeds were to be transferred to Aeso HK by 31 March 2017 as cash deposits with the banks for surety bonds and for release of Jones Chan’s personal guarantee, and another HK$5.9m was to be transferred to Aeso HK for acquisition of premises as warehouse and showroom.  As said earlier, all such transfers were said by Jones Chan to be pursuant to the use of the Placing Proceeds stated in the Prospectus, although Zhang appeared to dispute this.  However, as pointed out in the 31.08.17 Judgment, W K Law, the other director of Liu’s Camp, in fact voted for the resolution in relation to the transfer the sum of HK$10m[23]. Anyway, HK15.9m was transferred to Aeso HK from the Company around March/April 2017.

64.  As seen in the 05.06.17 Minutes, Jones Chan had reported that his personal guarantee was by then released and that in view of the Requisition, the banks withheld the banking facilities and/or requested for the early repayment of the outstanding tax loan of approximately HK$6m and this was on 6 June 2017.  Thus, at this stage, the evidence showed that the earlier transfer of HK10m was for release of Jones Chan’s personal guarantee.  Anyway, there was no sufficient evidence to say that the repayment of HK$6m was for release of his personal guarantee as suggested by Ps[24] .

65.  Jones Chan had produced the bank statements of accounts of Aeso HK at BEA, DBS, HSBC from April – June 2017[25] in his 1^st affirmation.  However, these appeared to be all current account statements and did not show any fixed deposits for those banks to issue surety bonds for the operations of Aeso HK, as seen in the 23.03.17 Minutes and also the facilities letters from the banks.

66.  In any event, the present evidence showed that Jones Chan was trying to re-negotiate facilities for Aeso HK around March/April 2017 before the Requisition.  However, there was no sufficient evidence to contradict what was said by Jones Chan, that the bank facilities had all been withheld by 5 June 2017 as reported by him to the then board of directors in the 05.06.17 Minutes.

67.  By the time of the board meeting on 5 June 2017, Jones Chan would have signed the 25.05.17 Letter of Nomination, and was about to enter into the 06.06.17 MOU and the 07.06.17 MOU, and yet there was no disclosure by him to the then board of any details of the New Projects, only a vague reference to “new potential business development”.  Nor did he report that he was about to execute on behalf of the Company the Loan Facility Agreement and the Share Charge.  All he reported to the then board was that he had to consider another source of funding to finance the operation.

68.  Digressing here, in response to what Jones Chan said about considering another source of funding, Zhang had said that she could refer some banks to obtain banking facilities to the Company.

69.  However, notwithstanding what Zhang had said at the board meeting on 5 June 2017, and notwithstanding that Liu’s Camp was informed that the then banking facilities had been withheld, there was no sufficient evidence at this stage that Liu’s Camp had indeed managed to secure facilities from any banks to provide loan facilities to the Company or Aeso HK whether at that time or after the Disputed EGM. 

70.  One of the complaints of Liu’s Camp was that Jones Chan had failed to explore with the New Board any other source of funding, and had acknowledged the debt without any board authorization.

71.  Subsequently, at the hearing of the application by Dragon Success for appointment of receivers for Aeschylus in the Counterclaim Action, Ps had again claimed that the Company had the means and resources to pay off the loans from Dragon Success and had mentioned a HK$50m loan facility offered by a New Century Credit Services Co Ltd at an interest rate of HIBOR plus 7% per annum against a corporate guarantee by the Company[26].

72.  Jones Chan pointed out that according to the Companies Registry record, this company is a “two- dollar company” with two shareholders living respectively in a Tin King Estate (public housing estate) and Waldorf Garden in Tuen Mun.  As with Liu’s Camp questioning the ability of Dragon Success, he in turn cast doubt on the ability of this company New Century to provide the loan facility.

73.  In fact, at the return hearing of the 24.07.17 Injunction Order, L Wong J had already suggested Ps pay off the principal and interest to Dragon Success with loans from New Century.  In any event, as seen in the Receivership Decision, Au-Yeung J did give the Company a further opportunity to raise funds, indicating that this would cause the least disturbance for the Company, and receivers were only ordered to be appointed when the Company failed to do so by the deadline imposed by Au-Yeung J.  The New Board did not raise the funds by the deadline.

74.  As for the various suspicious features alleged by Ps, namely :-

(i) The version of the Loan Facility Agreement produced by Dragon Success was different from the version that Jones Chan produced in that Clause 24.6 in the Jones Chan’s version did not contain a provision that Dragon Success would be entitled to demand immediate repayment when “there is any change in substantial shareholding control or management in the Borrower”;

(ii) The explanation given by Jones Chan, namely that he inadvertently produced an earlier version and that there was re-negotiation afterwards, was not consistent with Mr Ho’s evidence in his affirmation, in that Mr Ho did not mention any re-negotiation;

(iii) Further, Ps pointed out the “peculiar timing and circumstances” of the advancement of the loan, in particular the last tranche of the advancement was on 3 July 2017 for HK$10,798,000, since by then the trading of the Company’s shares had been suspended for 15 days and in fact KLG’s letter of demand was dated 3 July 2017.

75.  Jones Chan had explained his inadvertence in producing what he said was an earlier version of the Loan Facility Agreement but pointed out that in this version, amongst other things, the repayment period was 95 days, but after re-negotiation, it was 365 days.  The parties did not sign on every page of the version produced by Jones Chan.  Mr Ho in his 1^st affirmation filed in the Counterclaim Action had said he had no idea why the Loan Agreement which Jones Chan circulated internally within the Company was different in wording to the Loan Family Agreement, and this was none of his business.

76.  It would appear what he was saying was that he had no idea why Jones Chan circulated another version, and he was trying to detach himself from the “deep-rooted conflict” between the two camps.

77.  In any event, Clause 24.6 in both versions contained a provision to the effect that over 15 business days of suspension of trading would trigger off early repayment. 

78.  Mr Smith pointed out that the drawdown notice for the last tranche was in fact sent by Jones Chan on behalf of the Company to Dragon Success on 30 June 2017 and was endorsed for payment by Dragon Success on 30 June 2017[27]. 30 June 2017 was a Friday, and that the transfer seemed to have only effected by the bank on Monday 3 July 2017.  On 30 June 2017, the suspension was not yet over 15 business days.  A “business day” is defined in the Loan Facility Agreement to be “a day on which banks are open for normal business in Hong Kong other than a Saturday, Sunday or public holiday”[28].  Thus, Mr Smith argued that Dragon Success was obliged under the terms of the Loan Facility Agreement, namely clause 4.2, to make the advance.

79.  Mr Ho in his 1^st affirmation had said that he was aware of the conflicting announcements made on behalf of the Company on 11 and 12 June 2017 and that he had discerned from the announcements the Company’s board was divided into two camps.  At that time, trading had only just been suspended.  It can be seen from Mr Ho’s affirmation that Dragon Success only instructed KLG to send the demand letter on 3 July 2017 after trading had halted for 15 business days[29]. 

80.  Jones Chan had acknowledged on behalf of the Company the indebtedness to Dragon Success two days after receipt of KLG’s demand letter  and further executed an instrument of transfer on behalf of the Company to transfer its one share in Aeschylus to Dragon Success (“Instrument of Transfer”)[30]. Also, as sole director of Aeschylus, Jones Chan gave instructions on behalf Aeschylus to the Company’s registered agent Harneys Corporate Services Limited (“Harneys”) to register a statement as to the Share Charge on register of members.  All of this was done without the prior approval or authorisation of the New Board.  There was however no sufficient evidence that Jones Chan had assisted Dragon Success to commence the Counterclaim Action or to apply for an order restraining the Company from changing the composition of the board.  

81.  Normally in a commercial transaction, a lender would require security for a loan.  The loan facilities letters from BEA and HSBC indicated that securities required by banks had included personal guarantees, assignment of account receivables, charge on “Cash Deposit and/or Shares and Securities to secure Third Party Obligations”, a legal charge on personal properties, letter of undertakings containing indemnities etc.

82.  It would appear from Mr Ho’s 1^st affirmation that when Jones Chan sought a loan on behalf of the Company from Dragon Success in about late May 2017, Jones Chan had informed Mr Ho that the Company was prepared to put up as security its shareholding in Aeschylus as collateral[31].  Mr Ho was also informed that whilst several large and promising construction projects were open to the Company at the time, there was an impediment as the employers of those projects required on-demand performance bonds to be issued, but the Company could not obtain sufficient loan facilities from banks to issue on-demand performance bonds as required.

83.  Mr Ho had said that he understood the Company was a listed company and was regularly engaged by several well-known local developers and that he was convinced that once those construction projects were secured, the Company’s temporary cash-flow would be solved.

84.  It was stated in the Loan Facility Agreement that it was in consideration of the Company executing a share charge in a prescribed form to the satisfaction of the Lender in favour of the Lender that the Lender entered into the Loan Facility Agreement[32].

85.  There was no sufficient evidence at this stage to suggest that the proposed share charge as security was anything unusual.  The Share Charge appeared to be in a prescribed form of the lender Dragon Success.

86.  The evidence indicated that there was a loan advanced by Dragon Success and as said by Q Au-Yeung J, the Company has no defence to the claim for repayment of the principal of the loan of about HK$34.8m. 

87.  In Jones Chan’s his 1^st affirmation of 27 July 2017 filed the day before the return date of the 24.07.17 Injunction Order, he had set out a table  and explanations as to the whereabouts of the Loan Proceeds[33]. Save for the 3 amounts totaling HK$28,798,000 paid to a money lender JS Finance, the rest of the Loan Proceeds were about HK$6m, and according to Jones Chan, HK$3m was deposited into Aeso HK’s account at Bank of East Asia, for working capital for Aeso HK, and 3 other payments were paid to sub-contractors against their respective sub-contractor payment certificates, copies of which were produced by Jones Chan.  

88.  There was no contradictory evidence produced by Ps at this stage in respect of the amount of about HK$6m used for the purposes stated by Jones Chan.  In any event, based on Jones Chan’s explanations.  Ps were willing to lower the amount in the Mareva Order at the return hearing[34].  In the 28.07.17 Continuation Order, the amount of HK$35m in the 24.07.17 Injunction Order was thus reduced by L Wong J to HK$28,798,000, namely the 3 amounts paid to JS Finance.

89.  Ps’ main challenge is really over the whereabouts of the sum of about HK$28.8m, the suspicious features of the New Projects and of the Surety Bonds and the two ratifying board minutes ratifying and approving the Loan Facility Agreement and the Share Charge. 

90.  As can be seen later in this decision, I accept that there has not been proper compliance with the Loan Proceeds Disclosure Order and there has not been proper disclosure of information pertaining to the New Projects to the former board and/or the New Board on the part of Jones Chan and there were irregularities with the two ratifying board minutes.  Notwithstanding the same, I am of the view that the matters/evidence relied on by Ps would not be sufficient to show that there was the Conspiracy or a fraudulent scheme between Jones Chan and HT Cheung, whether including Dragon Success or not, to strip the Company of its operating subsidiary.  There was in particular no evidence that HT Cheung was in any way involved in the discussions between Jones Chan and Mr Ho in relation to the loan and the proposed share charge.  Further, it was stated in Ps’ own Skeleton Submissions at the ex parte hearing that there was no evidence of HT Cheung assisting Dragon Success to take control of the Company’s share in Aeschylus[35].

91.  Anyway, having considered all the present evidence, I have come to the view that there is no sufficient evidence at this stage that Jones Chan and HT Cheung are parties to the Conspiracy or a fraudulent scheme, whether with Dragon Success and/or others, to strip the Company of its operating subsidiary.   

92.  Ps had also complained that Jones Chan was trying to destroy the Company by filing a petition in HCCW 218/2017 seeking essentially the same relief in HCA 1496/2017 but also seeking an alternative relief for just and equitable winding- up of the Company.  As I have said in the 31.08.17 Judgment that, so far the evidence indicated that Jones Chan has been trying to keep the operations of Aeso HK going and thus to keep the Company alive, rather than destroy it. 

Breach of Duties

93.  Having said the above, I am, however, of the view that the evidence does show that Ps have at least a good arguable case as to their claim against Ds based on Breach of Duties based on amongst others, the following:

(i) There was no evidence of any report by Jones Chan and/or HT Cheung to the then board of the details of the New Projects or the signing of the 05.25.17 Letter of Nomination and the two MOUs, notwithstanding the size of those projects;

(ii) There was no prior board approval or authorisation to Jones Chan obtaining on behalf of the Company of a loan facility from Dragon Success, nor to the execution of the Loan Facility Agreement and the Share Charge on behalf of the Company;

(iii) There were irregularities in relation to the 2 ratifying minutes of board meetings allegedly held on 9 June 2017;

(iv) There was no prior board approval or authorisation for Jones Chan to acknowledge the indebtedness on behalf of the Company or to execute the Instrument of Transfer on behalf of the Company to transfer its one share in Aesychlus to Dragon Success;

(v) There had been failure on the part of Jones Chan to comply with the Loan Proceeds Disclosure Order and failure to provide sufficient information on the New Projects to the New Board.

94.  As seen earlier, in relation to (i) and (ii) above, that there was no prior report to the then board of the details of the New Projects and at best only a vague reference to new potential business, and that there was no prior approval or authorisation by the board to the execution of the Loan Facility Agreement and the Share Charge.

95.  As mentioned , there were two sets ratifying minutes and they were purportedly passed at two board meetings said to have been held on 9 June 2017 at the Company’s office on 18 floor, Pemberton, Sheung Wan (“Pemberton Address”), the day after the execution of the Loan Facility Agreement and the Share Charge (respectively “1^st 09.06.17 Minutes” and “2^nd 09.06.17 Minutes”)[36].

96.  The 1^st 09.06.17 Minutes were produced by the Cayman lawyers Nelson & Co acting for Dragon Success in a letter dated 11 July 2017 to Harneys for the registration of the Share Charge[37].  Jones Chan had explained that this set of minutes were executed to authorise the registration of the Share Charges as requested by Dragon Success[38].

97.  Mr Tong pointed out that according to the 1^st 09.06.17 Minutes, the board meeting referred therein took place at 10am-10:30am that day at the Pemberton Address.  However, according to Jones Chan’s 1^st affirmation, on 9 June 2017, he had meeting with the other members of the board at the Pemberton Address from around 3pm to 12 midnight.  Further, at 10am on 9 June 2017, according to Jones Chan’s own case, Zhang and Law would still be directors of the Company and that no notice of any board meeting was given to them in relation to the alleged meeting held at 10am. It was thus Ps’ case that the 1^st 09.06.17 Minutes were forged or false.

98.  As for the 2^nd 09.06.17 Minutes, this referred to a meeting held at 11pm on 9 June 2017 at the Pemberton Address.  According to Jones Chan, these minutes were executed to ratify, approve, and confirm the Loan Facility Agreement and Share Charge[39].  Mr Tong submitted that these minutes were also clearly false, since this set of minutes was produced only after the Company’s solicitors issued a letter to Dragon Success on 18 July 2017 pointing out various suspicious features of the purported transaction including those of the 1^st 09.06.17 Minutes, and had they existed earlier, then they would have sent to Harneys by Nelson & Co.

99.  Jones Chan’s own explanation in his 1^st affirmation of the 2^nd 09.06.17 Minutes was that the resolution therein was passed by him and HT Cheung after all the other directors had left the meeting, and that he suddenly recalled the need to ratify the Loan Facility Agreement and the Share Charge, and therefore he and HT Cheung then passed the resolution in the 2^nd 09.06.17 Minutes.

100.  Although the Company Secretary of the Company did give notice on 8 June 2017 (“08.06.17 Notice”) for a board meeting to be held at the Pemberton Address on 9 June 2017, this was to be held at 7:30pm, and the agenda in the 08.06.17 Notice only consisted of 3 items, namely (i) to update the litigation status, (ii) to note the business update and (iii) to transact any other business[40].  The agenda made no reference or mention in relation to ratifying, approving or the Company having entered into the Loan Facility Agreement or the Share Charge. 

101.  In any event, prior to the board meeting which was supposed to be held at 7:30pm, there was an email sent by one Julienne Cheng for and on behalf of Jones Chan at 7:27pm on 9 June 2017 notifying Zhang and Law of their removal as directors of the board pursuant to Article 106(h) of the Articles of Association of the Company[41].

102.  What transpired was that on 9 June 2017, W&Q had issued another action, namely HCA 1357/2017 and around 5pm W&Q had obtained an injunction from DHCJ Seagroatt restraining Jones Chan, HT Cheung, Lee (the remaining Initial INED), Wang and Ye (the two new INEDs appointed on 8 June 2017 after the 2 of the Initial INEDs resigned on 7 June 2017) from exercising any of their powers as directors until the conclusion of the Disputed EGM (“Seagroatt’s Injunction”)[42].  It was Ps’ case that hard copies of Seagroatt’s Injunction were served on Ds at the Pemberton Address at 7:16pm and thus, the purported removal of Zhang and Law as directors at 7:27pm was in breach of Seagroatt’s Injunction. Liu’s Camp had also disputed the earlier appointment of Wang and Ye. 

103.  In any event, there was no evidence that Zhang and Law had turned up at the Pemberton Address at 7:30pm to attend the board meeting for which it was undisputed that they were given notice.  There was no sufficient evidence that there was any board meeting held at 7:30pm, apart from what was said by Jones Chan.  There were no minutes at this stage as to whether any board meeting was held at 7:30pm and if so what matters were transacted/resolved.

104.  As for the 2^nd 09.06.17 Minutes for the purported meeting held at 11pm, there was no sufficient evidence at this stage that apart from the 08.06.17 Notice, any other notice for this board meeting had been sent to all directors of the Company, together with copies of the Loan Facility Agreement and/or Share Charge or that all the directors had declared that none of them had any personal interest in the matters discussed at the meeting, as stated in the 2^nd 09.06.17 Minutes.   Since it was Jones Chan’s evidence that by 11 pm, apart from him and HT Cheung, all other directors had left, it is not clear at this stage as to how all the other directors could have declared no interest in the matters discussed.

105.  So far as the 1^st 09.06.17 Minutes were concerned, Mr Smith submitted that at most the complaints meant that the description of the timing/date recorder on the minutes were not accurate and were inadvertently overlooked.  As for the 2^nd 09.06.17 Minutes, Mr Smith submitted that Jones Chan’s evidence as to the timing and date of the meeting was consistent throughout, and that there had been the 08.06.17 Notice given.   

106.  At this stage, it would appear that there was no notice given to at least members of Liu’s Camp on the board as to the 1^st meeting, and although there was the 08.06.17 Notice, there is a question as to whether that constituted a valid notice for the 2^nd meeting at 11pm.

107.  Having considered the evidence at this stage, I am of the view that there appears to be at least irregularities in relation to both sets of minutes, and raises doubts as to whether the board meetings were indeed held at the respective times stated and whether the resolutions in the two alleged board meetings were validly passed.  This does not in my view necessarily mean that no board meetings were actually held or that the board minutes were forged or false.  In any event, I do not find that there was sufficient evidence at this stage to say those minutes were forged or false.

108.  It was further not really disputed that there was no prior board approval or authorisation for Jones Chan to acknowledge the indebtedness on behalf of the Company or to execute the Instrument of Transfer on behalf of the Company.

109.  Ps’ case was that there were suspicious features of the New Projects and the Surety Bonds.

110.  The New Projects were entered into on 25 May, 5 June and 7 June 2017, all before the Disputed EGM, and there was no dispute in relation to the board composition at those times, but as mentioned earlier, there was no evidence that the details of the New Projects were raised at by Jones Chan at any board meeting of the Company, and further the use of the Loan Proceeds for the purpose of purchasing the Surety Bonds were also never discussed or approved by the New Board.

111.  Ps pointed out that the 25.05.17 Letter of Nomination and the two MOUs were vague documents and it was inconceivable that any one would issue or accept a surety bond based on those documents.

112.  Ps also claimed that the Surety Bonds for the New Projects were highly suspect, and that JS Finance is a subsidiary of a publicly listed company AMCO United Holding Limited, which is an infamous “penny stock” on the warned-list of renowned investor David Webb, and that it is doubtful as to whether the amounts paid to JS Finance would be recoverable.

113.  At this stage, what the banking documents showed was a total sum of about HK$28.8m came from Dragon Success to the Company and then transferred to JS Finance.  There was no sufficient evidence that JS Finance was in collusion with Ds or Dragon Success, as seemed to be suggested by Ps, or that the Surety Bonds were not authentic or genuine. 

114.  Notwithstanding all the suspicions raised on JS Finance as early as at the return hearing, JS Finance was not a party in this action, nor had Ps sought any injunctive relief against JS Finance.

115.  Having said this, the total contract sum for the New Projects is HK$280m, which is a very substantial amount, and one would have thought there would be documentary evidence, at least to support what was disclosed by the Company in the 21.06.17 Announcement, such as the estimated date for commencement of work and completion, and also the expected incoming revenue. In fact, under the 25.05.17 Letter of Nomination, there were also references to “Nominated Sub-Contract Documents”, and correspondence and documents.  As for the two MOUs, they were very brief, each of 2 pages and they were, as they were called, a memorandum of understanding only.  It is not clear whether further contracts were signed.

116.  The Loan Proceeds Disclosure Order is quite wide.  This seemed to be accepted by L Wong J at the hearing on 28 July 2017.  It was Jones Chan’s case that he had complied with it.  In any event, it was not continued in the 28.07.17 Continuation Order.  However, P’s case was Jones Chan had not complied with it.

117.  The issue was over paragraph 4 (2)(b).  Under paragraph 4 (2)(b), insofar as the Loan Proceeds or any part thereof have been transferred to any “third parties (whether through the Company, Aeschylus and/or Aeso HK or otherwise)”, Jones Chan also had to disclose “all bank statements, deposit slips, banks advices, invoices, receipts, vouchers, emails, letters, surety bonds, commercial contracts pertaining to such surety bonds and legal documents evidencing or showing such transfer(s) and also the commercial purpose (s) of such transfer(s).”

118.  In my view, “third parties” would include JS Finance, and the documents which Jones Chan should have disclosed would include documents showing the commercial purpose of the transfers which in turn should include documents to show that the Surety Bonds were indeed necessary to be issued to and also accepted by the “employers” in the New Projects, and in my view the order was not limited to merely disclosing the Letter of Nomination and the two MOUs and the Surety Bonds (whether redacted or not), and cheques and deposit slips.

119.  Having considered the disclosure so far, it is my view at this stage that Jones Chan had not complied in full paragraph 4 (2) of the Loan Proceeds Disclosure Order.

120.  Further, whether Jones Chan had complied with the order in full or not and irrespective of the validity of the Disputed EGM or the Disputed EGM Resolutions, Jones Chan has remained a director of the New Board of the Company, and in my view he continues to owe director’s and common law duties to the Company.  Although Jones Chan gave some further information in the New Project in his 2^nd affirmation, it is not clear whether further contracts were signed for the New Projects, whether the Surety Bonds were accepted by the employers, whether there would be part payment of the contract sum once work has commenced.

Conclusion on Ps’ case

121.  Having considered the above, as said earlier I am of the view that Ps have satisfied this court that at this stage there is at least a good arguable case that Jones Chan has been in breach of his fiduciary duties and/or common law duties by, amongst other things, failing to disclose sufficient details of the New Projects to the former and/or the New Board and failing to comply with internal management rules of the Company and/or corporate governance.  As a result of such breach, the amount of the Loan Proceeds of about HK$28.8m may have been misapplied since the use of which was not approved or authorised by the New Board, and that Ps may not be able to recover the funds deposited with JS Finance.

122.  So far as HT Cheung is concerned, he had signed on the two sets of ratifying minutes, but he had been removed as a director since the Disputed EGM.  I am of the view that Ps have a good arguable case that, as with Jones Chan, HT Cheung may have breached his director’s or common law duties by signing on the two sets of minutes, or in any event had at least assisted in Jones Chan’s Breach of Duties.

Assets within jurisdiction

123.  There was no dispute that both Jones Chan and HT Cheung have assets within jurisdiction.

Risk of dissipation

124.  As seen in Akai Holdings Ltd v Ho Wing On Christopher HCCL 37&40/2005, 9 February 2009, evidence of behaviour in the past of a defendant disclosing an “unacceptably low standard of commercial morality” entitles the Court to infer and concluded that there is a sufficient risk to justify the grant of a Mareva injunction, and that the Court may be more willing to infer a real risk of dissipation upon evidence of low commercial morality and/or where a good arguable case is established on a claim for fraud or dishonesty[43].

125.  Mr Tong submitted that there was strong prima facie evidence that Jones Chan is a “dishonest and unscrupulous individual with low commercial morality”, and the risk of dissipation can be inferred from the fact that Jones Chan showed no respect to the law and the Court.

126.  I have said earlier that Ps have a good arguable case on their claim of Jones Chan’s Breach of Duties.  I am not satisfied that there is sufficient evidence to support Ps’ allegations of fraud and/or falsification of documents against Jones Chan and/or HT Cheung at this stage. 

127.  As for Ds’ alleged breach of the Seagroatt’s Injunction, as seen from the affirmation of the service clerk, a copy of the “sealed order” was served on Wang, Ye and the Company at the Pemberton Address and a staff inside the Pemberton Address had received the same at 7:16pm on 9 June 2017[44].  Zhang also claimed she had sent an email at 7:19pm that day attaching a copy of Seagroatt’s Injunction to Jones Chan, HT Cheung, Lee and others[45].  Liu’s Camp’s solicitors also sent an email to Jones Chan and HT Cheung and others attaching the sealed order at 8:05pm[46].

128.  Ps complained that in breach of the Seagroatt’s Injunction, Jones Chan and HT Cheung had purported to remove Zhang and Law as directors at 7:27pm on 9 June 2017 and had caused announcements to be published on behalf of the Company on 11 and 12 June 2017 attempting to, amongst others, postpone the Disputed EGM.

129.  In fact, as seen earlier, Jones Chan and HT Cheung had also passed the resolutions in the board meeting at 11pm to ratify the Loan Facility Agreement and the Share Charge, as stated in the 2^nd 09.06.17 Minutes.

130.  Seagroatt’s Injunction was not in fact properly sealed and filed in Court until 12 June 2017.  Anyway, it was not quite clear why the service clerk would serve Wang and Ye at the Pemberton Address with a copy of Seagroatt’s Injunction when W&Q applied and obtained leave to serve the Seagroatt’s Injunction on Wang and Ye out of jurisdiction.

131.  Mr Tong submitted that as seen in a letter dated 13 June 2017 sent by Jones Chan’s then solicitors, Jones Chan should have been aware of  Seagroatt’s Injunction latest when he read the announcement published by Zhang on 11 June 2017 at 7:55 pm[47].

132.  However, what was said in the above letter was that Jones Chan learnt of the existence of Seagroatt’s Injunction when he read the announcement, but he only first came to know about the terms of Seagroatt’s Injunction when the terms were read to him by a staff of Hong Kong Stock Exchange over the phone in the morning of 12 June 2017.

133.  Jones Chan maintained that the terms of Seagroatt’s Injunction were only brought to the attention of both him and HT Cheung on 12 June 2017.  Although he and HT Cheung were at the Pemberton Address from 3pm 12 midnight having a meeting with other members of the board, there is no sufficient evidence at this stage that he or HT Cheung were checking their emails during the meeting.  There was also no sufficient evidence at this stage that the staff who was said to have received a hard copy of the order on behalf of Wang, Ye and/or the Company from the service clerk was aware of the contents of the document or that he/she was to bring it immediately to the attention of Jones Chan or HT Cheung.  

134.  Jones Chan had complained that Liu’s Camp had misled the Court by failing to highlight the material facts in obtaining the Seagroatt’s Injunction ex parte[48].  He had taken out a summons to set it aside.  The injunction was subsequently discharged on 16 June 2017 without prejudice to subsequent arguments on whether it should or should not be granted in the first place.  Jones Chan’s setting aside application was fixed for hearing on 30 November 2017.  

135.  In any event, even if as alleged by Ps, Jones Chan and HT Cheung were aware of the terms of Seagroatt’s Injunction earlier than 12 June 2017, I do not think in the circumstances of this case, this would necessarily mean that Jones Chan and/or HT Cheung are individuals with low commercial morality.

136.  However, as I have said earlier, there had not been full compliance by Jones Chan of the Loan Proceeds Disclosure Order and/or up to date, Jones Chan had failed to disclose sufficient details of the New Projects to the New Board, and in my view a risk of dissipation can be inferred against Jones Chan.

137.  As for HT Cheung, as mentioned earlier, he had been removed or had ceased to be a de jure director since the Disputed EGM. Ps conceded that there was no clear evidence of his involvement in the misapplication of the Loan Proceeds, subject to discovery and interrogatories. The only matters which P relied on were the two ratifying minutes.  However, as said earlier, I am not satisfied that they were false or forged, and in my event, in my view by signing those minutes, it would not necessarily mean that HT Cheung was privy to Jones Chan’s scheme, if any, to devise the purported transaction in breach of fiduciary duties to the Company and to injure the Company.  

138.  There is no sufficient evidence to say that HT Cheung shows little respect to the law at this stage.  Ps have not satisfied this Court that there is a risk of dissipation on the part of HT Cheung.

Balance of convenience

139.  Mr Smith submitted that it is trite that the Court will not allow an applicant to take advantage of his own dishonest conduct, and must come with clean hands and in good faith.  Mr Smith reminded this court of what was said in the 31.08.17 Judgment, namely that I had agreed with Mr Smith that the evidence overwhelmingly pointed towards the Requisition was really a device in a larger fraudulent scheme.

140.  However, irrespective of whether the shares placed to the Placees were sham transactions or not, the Company was publicly listed, and there may have been other innocent investors, and Jones Chan has remained a director of the Company. 

141.  Without the Mareva Order, if it is eventually found that the New Projects do not exist or the sum of HK28,798,000 was misapplied, Ps and other investors in the Company may suffer the loss of the sum.  On the other hand, if Jones Chan is found to be innocent and the Mareva Order is wrongly granted, the only prejudice to him will be inconvenience and monetary loss, which can be adequately compensated by damages.  Both Ps have given the usual undertaking as to damages and W&Q has already paid HK$1m into court in support of such undertaking.  I have also inferred from Jones Chan’s non disclosure and/or lack of disclosure a risk of dissipation.  

142.  Having considered the above, and the evidence so far, I am of the view that the balance of convenience lies in favour of continuing the Mareva Order against Jones Chan.

143.  As said earlier, I am not satisfied that there is a risk of dissipation on the part of HT Cheung or that such risk can be inferred. Ps have not satisfied this Court that the balance of convenience is in favour of continuing the Mareva Order against HT Cheung. 

Preservation Order

144.  There was no dispute in relation to the legal principles in relation to granting of a preservation order.  It is trite that there is a sharp distinction between (a) an injunction to preserve the assets over which a proprietary claim is asserted and (b) a Mareva injunction to prohibit dealings with general assets in order to keep them available for possible future execution of a monetary judgment[49].

145.  The Preservation Order in the 24.07.17 Injunction Order, under paragraph 2(3) thereof, was against Jones Chan only, namely that without prejudice to restriction imposed by paragraph 2(1) in relation to his personal assets, Jones Chan “must not remove from Hong Kong or in any way dispose of or deal with or diminish the value of all or any of the loan proceeds… (“Loan Proceeds”) and/or their traceable fruits or proceeds (if any)”.

146.  Although the value of the Jones Chan’s personal assets subject to the injunction has been reduced to HK$28,798,000 in the 28.07.17 Continuation Order, this does not affect the amount of Loan Proceeds subject to the Preservation Order, the total being drawndown was some HK$34.8m.

147.  Mr Tong submitted that there is at least a serious issue to be tried that Jones Chan had without any knowledge or authorization of the New Board, misapplied the Loan Proceeds and putting the Loan Proceeds out of the Company’s reach in breach of his fiduciary duties and that he had further failed to adequately account for the Loan Proceeds.

148.  However, the present evidence in my view clearly shows that the 3 sums totaling HK$28,798,000 had been paid to JS Finance by cheques drawn on the Company’s HSBC bank account.  As said earlier, Ps seemed to be now alleging that JS Finance was/is a party in the Conspiracy because no finance company would have issued the Surety Bond in such vague terms[50].  However, also as mentioned earlier, JS Finance had not been joined as a party in the present action and no preservation/mareva injunction order had been sought against JS Finance.

149.  Whether Jones Chan had misapplied the total sum of HK$28,894.000 or not, at this stage, there was no sufficient evidence to show that the total sum of HK$28,894,000 had gone to anyone else apart from JS Finance.

150.  Ps were only doubting the reliability of JS Finance or the recoverability of the sum from JS Finance if the New Projects were not genuine projects.  This issue was raised at the hearing on 28 July 2017, when L Wong J had indicated that questions could reasonably be raised then as to the reliability of JS Finance, and that one suggestion from P’s Counsel Mr Laurence Li at the time was to seek confirmation from JS Finance as to whether they were still holding the money, and further he had said he would need to take instructions on how much more information Ds could procure about JS Finance.  Jones Chan had in his 2^nd affirmation provided further information on JS Finance being in the process of renewing its money lender’s licence but there was no confirmation as to whether JS Finance was still holding the sum of HK$28,894.000.

151.  Having said this, the Preservation Order was sought against Jones Chan personally.  There was no sufficient evidence at this stage to show any of the Loan Proceeds had gone to, received by or retained by Jones Chan personally, or that Jones Chan had derived any personal profits from the Loan Proceeds, nor did Ps identify the location of assets which were allegedly held on trust for the Company. In light of all this and what has been said earlier, that I am not satisfied that Ps have a good arguable case on their case on Conspiracy, I accept Mr Smith’s submission that there could not be any proprietary claim at this stage against any personal assets held by Jones Chan.  In my view, the Preservation Order against Jones Chan should be discharged.

Ancillary Disclosure Order

152.  The Ancillary Disclosure Order was sought to police, administer, and/or enforce the Mareva Order.

153.  As I am prepared to continue the Mareva Order against Jones Chan, I am of the view that the Ancillary Disclosure Order should also be granted against Jones Chan, namely that he must inform Ps in writing within 7 days of all his assets of an individual value of HK$10,000 or more, whether in Hong Kong or not, whether in his own name or not, and whether solely or jointly owned, giving the value and location and details of all such assets, and that such information and documents disclosed and/or produced must be confirmed by Jones Chan in an affirmation which must be served on Ps’ solicitors within 14 days after the date of this order.

Disclosure Summons

154.  In the Disclosure Summons, Ds sought leave to adduce unredacted copies of 3 documents in relation to the New Projects in a sealed envelope for the perusal of the Court only. 

155.  In Jones Chan’s 1^st affirmation, he had given details of harassment of himself and his legal advisers including his then Counsel Mr Laurence Li by allegedly Liu’s Camp and reasons for his genuine fear that Liu’s Camp would further intimidate his family, friends, clients and business partners and disrupt the ongoing projects of Aeso HK, and that was why so far he had only provided redacted documents in relation to the New Projects and the Surety Bonds[51].

156.  During the hearing on 28 July 2017, Mr Laurence Li confirmed that the harassment took place at his chambers and the office of Ds’ then solicitors, and that the harassment took place the very next day of Acropolis issuing the petition under HCCW 218/2017, and that at that time the identity of both Mr Li and those instructing him were not public information, there not having been any judgment published.  In Jones Chan’s 2^nd affirmation, he gave evidence as to further harassment against customers of Aeso HK.

157.  On the other hand, Zhang had said that the hearing on 16 June 2017 in HCA 1357/2017 and the hearing on 30 June 2017 in the Main Action were both open to public and those unknown persons who carried out the harassing acts could have learnt the identities of Jones Chan’s legal representatives there.

158.  There was no sufficient evidence that identities and chambers of Counsel were disclosed to the public at the above hearings.  Anyway, I am satisfied that at the moment, the available evidence indicates that Jones Chan has cause for concern.

159.  I understand that Ps had offered at the return hearing on 28 July 2017 that if Jones Chan agreed to disclose all unredacted documents to Ps’ legal representatives for inspection, Ps’ legal representatives would be prepared to undertake not to disclose such information to Ps, and that this was along the lines of a similar undertaking endorsed by L Wong J as a condition of discovery in HCMP 1724 of 2017.  However, this was not accepted by Jones Chan.

160.  The two camps obviously have a deep mistrust of each other and understandably this would extend to each other’s legal team.

161.  Simply providing unredacted copies of the 3 documents, namely the 25.05.17 Letter of Nomination and the two MOUs and also the Surety Bonds to this Court would not be helpful, since this Court would have no means of verifying or carrying out any investigation as to the New Projects, the genuineness of which has been questioned by Ps.

162.  Subject to the parties’ further submissions, I am of the preliminary view that unredacted copies of all the documents which Jones Chan has to disclose under the Loan Proceeds Disclosure Order should be disclosed to a jointly appointed independent professional who will be able to verify or carry out investigation of the genuineness of the New Projects.

163.  If this is accepted by the two camps, then I would need to hear from the parties as to who would be the suitable independent professional.  I will therefore direct that unless otherwise agreed, the Disclosure Summons be adjourned to a further date for argument, and that the parties should lodge further written submissions as directed hereinbelow.

Orders

164.  The Loan Proceeds Disclosure Order was not continued by L Wong J.  It was not necessary to continue it anyway as the question was whether Jones Chan had complied with it.  I see no need to revive or re-grant it.

165.  Hence, the effect of my orders is as follows :-

(1) In respect of the summons issued on 25 July 2017 issued by Ps and the summons issued on 31 October 2017 :-

(i) Paragraphs 2(1), (2), (4) and (5) of the 24.07.17 Injunction Order shall continue as against Jones Chan, save that the amount be amended to HK$28,798,000 as in the 28.07.17 Continuation Order;

(ii) An Ancillary Disclosure Order is made against Jones Chan as indicated earlier;

(iii) Paragraph 2(3) of the 24.07.17 Injunction Order is discharged;

(iv) Paragraph 3 of the 24.07.17 Injunction Order is discharged;

(2) In respect of the summons issued on 10 August 2017 by Ds, leave to Ds to file further written submission within 21 days, and Ps to file submissions within 21 days thereafter, and if necessary, Ds to file any reply submissions within 14 days thereafter.  The summons to be adjourned to a date to be fixed for further argument (estimated length: 2 hours).

(3) Costs of the summons issued on 25 July 2017 and the summons issued on 31 October 2017 be costs in the cause, with certificate for two Counsel.  This is an order nisi which shall be made final after 21 days.