CHEUNG KAM WAH v. CHEUNG HON WAH AND OTHERS

CACV 53/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 53 OF 2004

(ON APPEAL FROM HIGH COURT ACTION NO. 1208 OF 2003)

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J U D G M E N T

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Hon Woo VP (giving the judgment of the Court):

1. This is an appeal by the plaintiff against the judgment dated 24 February 2004 of Deputy High Court Judge Poon whereby the judge discharged the ex parte injunction order granted by Deputy High Court Judge Gill on 2 April 2003. 

2. The appeal is only against the 2^nd to 8^th defendants and relates to two main areas, namely,

(1)   The judge’s discharge of the ex parte order on the ground of material non-disclosure in respect of the plaintiff’s financial position for his cross-undertaking as the damages for the grant of the ex parte order; and

(2)   The judge’s refusal to grant an inter partes injunction order in the same terms.

Background

3. The plaintiff and the 1^st defendant (“D1”) are brothers.  Each of them is and at all materials was a 50% shareholder of Kammy Town Limited, the 9^th defendant (“Kammy Town”), and they were the only two directors.

4. The 2^nd defendant (“D2”) was at all material times under the employ of Kammy Town as a senior executive. 

5. The 3^rd defendant (“D3”) was at all material times under the employ of Kammy Town as a member of the managerial staff. 

6. Each of the 4^th to 6^th defendants (“D4, D5 and D6”) was at all material times under the employ of Kammy Town as a member of the sales teams. 

7. The 7^th defendant (“D7”) and the 8^th defendant (“D8”) are limited companies incorporated under the laws of Hong Kong. 

8. On 2 April 2003, the plaintiff commenced the present action as a derivative action on behalf of Kammy Town against D1 for damages for breach of fiduciary duties as Kammy Town’s director for diverting Kammy Town’s business to D7 and D8, alleged to be corporate vehicles of D1 and D2, and for soliciting Kammy Town’s employees, including D3 to D6, to join D7. 

9. The plaintiff claims against D2 for breach of his fiduciary duties as Kammy Town’s general manager in respect of the same wrong- doings as alleged against D1 and for dishonestly assisting D1 in breach of D1’s said fiduciary duties.

10. The plaintiff claims against D3 for breach of fiduciary duties as a managerial staff member of Kammy Town for soliciting Kammy Town’s employees to join D7. 

11. The plaintiff claims against D3 to D6 for dishonestly assisting D1 and D2 in furtherance of their breach of fiduciary duties in diverting business opportunities to D7 and soliciting Kammy Town’s employees to join D7.

12. The plaintiff claims against D7 and D8, as corporate vehicles of D1 and D2 and under their control, for dishonestly assisting them in breach of the said fiduciary duties. 

13. On 2 April 2003, on the application of the plaintiff ex parte, Deputy Judge Gill made the following injunction orders:

(1)   Against D1, restraining him from soliciting, entering into, performing or continuing to perform any contract with Kammy Town’s ten customers as set out in Schedule C to the order, for the supply of woven garments otherwise than for or on behalf of Kammy Town.

(2)   Against D7 and D8, restraining them from soliciting, entering into, performing or continuing to perform any contract with Kammy Town’s said ten customers, for the supply of woven garments.

(3)   Against D2 to D6, restraining them from assisting or attempting to assist D1, D7 and D8 in the acts prohibited as aforesaid.

(4)   Against D7, restraining it from passing off, attempting to pass off, causing, enabling or assisting others to pass off its company or business as connected in the course of business with Kammy Town by:

(a)   the use of any name or mark deceptively or confusingly similar to the name “Li Wah”, “利華” or any words comprising the words “Li Wah” or “利華”;

(b)   representing that the woven garments marketed or sold by D7 are connected in the course of trade with Kammy Town or Kammy Town’s products; or

(c)   any other means.

14. As usual, the said ex parte order was made against an undertaking given by the plaintiff to the court that if the court later finds out that the order has caused loss to the defendant or any other party and decides that the defendant or that other party should be compensated for that loss, the plaintiff is to comply with any order that the court may make.

15. On 11 April 2003, the return date of the plaintiff’s summons, the defendants gave undertakings in lieu of the injunctions.  The plaintiff’s inter partes summons dated 3 April 2004 for the continuation of the injunctions was adjourned for argument.  

16. The plaintiff’s inter partes summons eventually came before Deputy Judge Poon.  The 1^st defendant did not take part in the hearing before the judge and did not withdraw his undertaking in lieu of the injunction against him.  The other defendants opposed the plaintiff’s application.  This resulted in the judge discharging the ex parte injunctions against these other defendants on the ground of material non-disclosure and misrepresentation on the part of the plaintiff.  The judge also refused the plaintiff’s inter partes application for similar injunctions against D2 to D8. 

Interference with exercise of discretion

17. Since the appeal is against the exercise of discretion by the judge in discharging the ex parte injunction and in refusing to grant a fresh injunction, it is well established that an appellate court will not interfere unless it can be shown that the judge has misunderstood the law or the evidence or that his decision is plainly wrong.  See Hadmor Productions Ltd v Hamilton [1983] 1 AC 191 at 200 B-F, per Lord Diplock; Derby v Weldon [1989] 2 WLR 276 at 283G per Parker LJ; PCCW-HKT International Ltd v New World Telephone Ltd [2001] 2 HKC 416 at 424B-425G per Mayo V-P.

18. It is against this established principle that we now turn to consider this appeal. 

Grounds of appeal

19. The grounds of appeal can be said to consist of attacks on two major fronts only, namely, to contend that the judge erred in discharging the ex parte order and also to challenge his refusal to grant an inter partes injunction.

Material non-disclosure

20. Apart from alleging that the judge had wrongly appreciated various aspects of the facts relating to the financial position of the plaintiff, the main thrust against the judge’s finding of material non-disclosure is that he had erred in inferring that there were realistic doubts as to the plaintiff’s ability to honour the cross-undertaking as to damages and that he had erred in rejecting the basis of explanation for the non-disclosure. 

21. In support of his ex parte application, the plaintiff averred that he had substantial assets within Hong Kong and on the Mainland to make good his undertaking as to damages.  The major asset to which he referred was his 70% shareholding in Caming Development Ltd, a company incorporated in Hong Kong (“Caming”), which held 89% of the share capital in Huangpu Caming Real Estate Development Ltd (“Guangzhou Caming”), and the 70% shares had the value of RMB 62.3 million.  It is in relation to the financial position of Guangzhou Caming that the judge found the plaintiff guilty of material non-disclosure.  The judge said:

“42.   All these undisclosed matters (except the extent of development) shed important light on the overall financial position of Guangzhou Caming as at the ex parte stage.  A fuller picture now emerges.  It could not have been as rosy as the plaintiff had tried to portray before the ex parte judge.  The estimated value of the Project, the only major asset that Guangzhou Caming had, had been overstated, to say the least.  With one third of the premium outstanding, the figure of about RMB100 million could not stand.  On its liabilities, Guangzhou Caming owed some its contractor some RMB4.1 million, being the balance of a judgment debt.  As at 2002, Guangzhou Caming was facing financial difficulty to such an extent that it could not complete the Project and to install the two finished buildings with water and electricity supply.  No evidence has been adduced to suggest any improvement as at April 2003.  Worse still, because of the outstanding premium, it has all along been exposed to potential liability to pay hefty penalty.  All these matters, when taking into account collectively, must have cast serious, realistic doubts on the overall financial position of Guangzhou Caming, which the plaintiff relied principally on to make good his case on his ability to honour the cross-undertaking.  It is therefore incumbent on the plaintiff to make full and frank disclosure of all of them to the ex parte judge.  This is especially so when the judge had expressly raised doubts on the plaintiff’s financial worth and embarked on questioning the plaintiff himself on the financial position of Guangzhou Caming.”

22. The judge also rejected the various grounds raised on behalf of the plaintiff for the non-disclosure, such as the huge volumes of accounts and records of the project which he did not think would help the court in evaluating his worth, that a number of matters omitted his attention because he was making an urgent application for the injunction, or that he misappreciated the importance of those matters not disclosed.  The judge pointed out that in none of the plaintiff’s affirmations filed up to the hearing had the plaintiff explained why he had not made the disclosure to the ex parte judge.  He was merely relying on the explanations given on his behalf by his sister Ms Cheung Lai Ming (in her affirmation) and his legal representative.  To this, the judge’s reaction was:

“47.    In my view, it is not just a case of material non-disclosure of the outstanding premium.  It is a case of misrepresentation.  At the outset of the ex parte hearing, senior counsel had asked the judge not to give weight to the value of the plaintiff’s shareholding in Caming because the value of the company had yet to be ascertained.  Caming owned shares in Guangzhou Caming.  And the only substantial asset that Guangzhou Caming had at the time was the Project.  In short, senior counsel must have the Project in mind when he said they had not yet ascertained the value of Caming.  The value of the Project then became the focus of inquiry by the ex parte judge with the plaintiff.  The plaintiff must be aware that the premium was outstanding and that it had an adverse impact on the value of the Project.  He could not have asserted on oath that it was in the region of RMB 100 million when he well knew that the figure was simply not maintainable.  Yet he chose to do so and had thereby misled the ex parte judge.”

23. The judge concluded:

“51.   For the above reasons, I see no justification at all why the plaintiff did not make disclosure of the matters complained of (except the extent of the Project’s development).  He is guilty of material non-disclosure.  He is also guilty of misrepresenting to the ex parte judge the value of the Project and hence indirectly the value of his shares in Caming.”

24. Instead of going through each of the items of material non-disclosure as found by the judge that is being challenged in the notice of appeal, Mr Ambrose Ho SC, on behalf of the plaintiff, spent over half of his 20 page skeleton submissions in emphasizing the strength of the plaintiff’s claims against D1 for breach of fiduciary duties in diverting Kammy Town’s business to D7 and in inducing Kammy Town’s employees to work for D7.  This, in our opinion, is quite unnecessary for it has never been disputed that there are serious issues to be tried in these areas for the purpose of considering interlocutory relief as established in American Cyanamid Co. v Ethicon Ltd [1975] AC 396.

25. Instead of addressing on the alleged errors made by the judge set out in the notice of appeal, Mr Ho laid emphasis on the point that the plaintiff’s financial position before the ex parte judge, viewed fairly, did not raise realistic doubts as to his ability to honour his cross-undertaking.  He refers us to Wah Nam Holdings Co Ltd v Excel Nobel Development Ltd [2000] 3 HKC 118, that unless the plaintiff was in highly precarious financial position, making it seriously questionable whether he would be able to honour his cross-undertaking, it was not incumbent on him to make full and frank disclosure of his financial position.  In Wah Nam Holdings, at p 129C, Ribeiro J (as he then was) stated:

“It follows that if a Plaintiff's financial position is such that, viewed fairly, it may be said to raise realistic doubts as to the Plaintiff's ability to honour the cross-undertaking, it becomes incumbent upon the Plaintiff to make full and frank disclosure of his financial position to the ex parte judge so as to permit the judge to determine for himself the correct order to make in the light of such disclosures.”

At p 131C, Ribeiro J went on:

“It was sufficient for Yuen J to hold that the evidence raised genuine and realistic doubts as to the Plaintiff's ability to honour their cross-undertaking in damages so that a failure to disclose the material circumstances at the ex parte stage constituted a material non-disclosure.”

26. Mr Ho referred to Elegant Jump Ltd v Tribune Bridge Ltd & Ors [2000] 3 HKC 133, at p 140G-H, as a case showing that where there were no realistic doubts regarding the ability of the applicant for injunctive relief it was held by Deputy Judge Kwan (as she then was) that it was not incumbent on the applicant to demonstrate that he was able to honour his undertaking.

27. Mr Rimsky Yuen SC, for D7, has drawn our attention to another part of Ribeiro J’s judgment, at p 131F, which states:

“In my judgment, so long as the circumstances give rise to a real risk of loss that is substantial and not purely insignificant, the duty of disclosure of a Plaintiff's financial situation bearing on his ability to honour his cross-undertaking in damages remains applicable.”

28. It seems to us clear, therefore, that it is incumbent on an applicant for interlocutory injunction ex parte to make full and frank disclosure of his financial position to demonstrate that he is able to honour his undertaking in damages where on the evidence the applicant’s financial position, viewed fairly, may be said to raise realistic doubts as to his ability to honour his cross-undertaking.  This is particularly so where the circumstances give rise to a real risk of substantial and not purely insignificant loss that may be suffered by the respondent.

29. A lot of arguments have been raised by the parties as to the worth of the plaintiff.  To sum up, what Mr Ho argued is that the plaintiff is at least worth RMB 19 million which is more than sufficient to cover the alleged loss of the defendants.  On the other hand Mr Yuen submitted that the undisputed evidence before the judge was that the loss suffered by D7 as a result of the ex parte order was $800,000 to $1 million per month.  He further pointed out that D7 was in competition with Kammy Town and the market that both of them were in was a limited one.  He stressed that although the ex parte order only covers 10 customers set out in Schedule C to the order, the effect was that D7 was practically driven out of the market.  

30. On behalf of D2 and D8, Ms Alice Mok drew our attention to the precarious nature of the plaintiff’s investment in Guangzhou Caming.  The project to be put up by Guangzhou Caming was to consist of 10 residential blocks, one commercial complex and a club house.  However since the completion of two residential blocks in 1998, the construction of the other buildings in the project had not even commenced.  Permanent water and electricity supply, requiring an expenditure of RMB 15 million, had still not been installed for the two completed buildings.  This had been caused by cash flow difficulties and a lack of funds.  In Guangzhou Caming’s accounts for the year ended 31 December 2001, annual loss of RMB 2.79 million and an accumulative loss of RMB 25.3 million were shown.  Caming and the plaintiff were also shown to owe Guangzhou Caming a total of about RMB 25 million.  The worth of the plaintiff of RMB 19 million is therefore doubtful.  

31. We do not feel it necessary for us to go into the details of the accounts or the lack of them in respect of Guangzhou Caming.  The indisputable fact is that the ex parte judge did ask the plaintiff questions relating to Guangzhou Caming.  Mr Ho drew our attention to the fact that as leading counsel for the plaintiff before the ex parte judge, he pointed out to the ex parte judge at the outset that the plaintiff’s instructions were that the court should not rely on his interest in the Guangzhou Caming project, indicating that the value of the project was “still not ascertained”.  Mr Ho contended that if the plaintiff were deliberately misleading the ex parte judge, as his counsel Mr Ho would not have asked the judge to disregard the worth of Guangzhou Caming.  It follows, therefore, that in the absence of documentary evidence regarding the worth of Guangzhou Caming before the ex parte judge, the figure given by the plaintiff as to the worth of Guangzhou Caming could only be an estimate. 

32. But that was only half of the story.  At the hearing of the ex parte application, the judge allowed an adjournment for Mr Ho to take instructions after expressing that “I don’t have enough evidence.”  About an hour later when the hearing resumed, Mr Ho led evidence from the plaintiff on all his monies and assets.  After going through quite a number of properties which were not of substantial value, the ex parte judge exclaimed:

“What’s in the affidavit is plainly inadequate.  What has so far come out in over half an hour of evidence has not really improved on that scenario.  I need to know, if this man’s application goes bad, that he’s good for the money that the defendants are going to lose because of it.”

33. After the plaintiff had dealt with all his other properties, the judge asked Mr Ho whether he maintained his stance that the property held by Guangzhou Caming should be disregarded.  Mr Ho said that the worth of that company was still not ascertained and so he would not ask the plaintiff about that.  Then the following discourse took place:

COURT:    Well, you haven’t asked him, have you?

MR HO:    Well, my Lord …

COURT:    Because if you weren’t going to ask him, that was what I was going to ask.

MR HO:    I’ll leave it to your Lordship.

34. Then, the judge began to ask the plaintiff about his share in Guangzhou Caming, which the plaintiff agreed to be worth about RMB 62 million.  He also agreed that the project was worth RMB 100 million. When the judge asked him how he knew that worth, the plaintiff said that it consisted of

“the price of the land and the premium grants from the government, and also the tax of the government – or other taxes from the government.”  (Emphasis added)

35. Then the following questions and answers emerged:

COURT:    Do you understand why I’m so interested in knowing what you are worth?

A.    Yes, I understand.

COURT:    Why?

A.    Because if my application for injunction fails, or it it’s found to be wrong, I have to be held liable for the matter.

COURT:    And you’re prepared to put up your property and your wealth to that end?

A.    Yes.

36. It is to be noted that Mr Ho did not stop the questioning or reassert his previous stance.  It is therefore reasonably clear that at the resumed ex parte hearing on 2 April 2003, the plaintiff relied on his interests in the property held by Guangzhou Caming as evidence of his ability to honour his cross-undertaking.  

37. Deputy Judge Poon, who heard the inter partes application, had found that there was material non-disclosure in respect of at least the following matters in respect of Guangzhou Caming, namely,

(a)  over one-third of the premium for the project in the sum of about RMB 7.8 million had not been paid by the time of the ex parte application;

(b) Guangzhou Caming was liable to a penalty charge for late payment of the premium, calculated at the daily rate of 1% of the balance overdue;

(c)  there was an outstanding judgment against Guangzhou Caming in favour of the contractors who constructed the two residential buildings, and at the time of the ex parte application, a sum of RMB 4.1 million was still outstanding; and

(d)  the loss of Guangzhou Caming recorded in its audited financial statement for the year ended 31 December 2001 showing the loss and accumulative loss of more than RMB 25 million, and Guangzhou Caming’s admission therein that it was experiencing financial difficulties.  

38. In the circumstances, we consider that there was ample material for the judge to have come to the conclusion that there was material non-disclosure of the plaintiff’s financial position which the plaintiff principally relied on to demonstrate to the ex parte judge his ability to honour the cross-undertaking as to damages.  The judge was also correct to point out that in none of the plaintiff’s affirmations had he explained why he had not made the disclosure to the ex parte judge.  The plaintiff had filed a total of 10 affirmations between 2 April 2003 and 17 November 2003, but he had not taken the opportunity to put forward any explanation why the aforesaid matters had not been disclosed to the ex parte judge.  The plaintiff had had legal advice available to him right from the commencement of this action.  The endorsement of claim on the writ was settled by counsel and so was the 35 page statement of claim dated 13 May 2003.  His leading counsel was careful enough to ask the ex parte judge to disregard the worth of Guangzhou Caming on the basis that it was still to be ascertained, obviously appreciating the principle that full and frank disclosure should be made.  It would be most unlikely that counsel had not advised the plaintiff of that principle.  The eventual explanation for the non-disclosure was either proffered by the plaintiff’s sister, Ms Cheung Lai Ming, on affidavit or by his counsel in submissions to the court.  The plaintiff has, even up to now, apparently seen fit not to do so himself.  All the reasons proffered were rejected by the judge who found that regarding the non-disclosure of the outstanding premium payable for the project, it was a case of misrepresentation.  Since the matters not disclosed were highly relevant, indicating Guangzhou Caming’s poor financial circumstances, which would cast doubts on its ability to complete the project, which in turn was material in respect of the value of the project, the judge held that the plaintiff was also guilty of misrepresenting to the ex parte judge the value of the project and hence indirectly the value of his shares in Caming.  Indeed, when the plaintiff and D7 went back before the judge on 31 March 2004 to seek to vary the costs order nisi, the judge had this to say:

“4.    In the present case, the injunction was discharged on material non-disclosure and misrepresentation regarding the plaintiff’s financial ability to honour his cross undertakings as to damages.  I do not accept that it is a case of innocence as argued by Mr Chui [for the plaintiff].  It is a case of withholding facts which are material.  The plaintiff must have known that they are material and yet, chose not to disclose them and had thereby misled the ex parte judge.  I do not propose to repeat what I have said already in the judgment handed down on 24 February 2004 in this regard.  Mr Chui argues that the plaintiff has a genuine and lawful complaint against the defendants.  That may well be the case.  But in my view, it is hardly a justification for the material non-disclosure and misrepresentation.”

39. We are not persuaded that the judge was wrong in his conclusions.  From the transcript of the record of the ex parte proceedings, it is clear that the plaintiff knew the purpose of his giving viva voce evidence before Deputy Judge Gill, which was in relation to his obtaining the ex parte injunction and he vouched to the judge that he was prepared to put up his property and wealth towards that end.  He explained to the judge that the worth of Guangzhou Caming in the region of RMB 100 million consisted of price of land and “premium”, but he did not tell the judge that about RMB 7.8 million premium had been long overdue. 

40. Although Deputy Judge Poon did not comment on the penalty that might be charged by the Guangzhou authorities for the late payment of the premium against Guangzhou Caming save to say that it was “hefty”, we consider this aspect as extremely damaging to the worth of the project to Guangzhou Caming and the plaintiff.  Despite Mr Ho’s arguments, we do not accept that the subject of penalty could have escaped the plaintiff’s mind when he mentioned “premium” to the judge.  This penalty was provided as 1% of the unpaid balance per day, which means 365% per annum.  About RMB 21 million premium was payable in 1992, but the first instalment of RMB 12 million was only paid in March 1994, and the final balance of about RMB 7.8 million was only paid in July 2003.  The penalty that Guangzhou Caming was liable to pay was a sum far exceeding the total worth of the project, going into the RMB 300 million area.

41. The evidence relating to this penalty was only to the extent that the Guangzhou authorities had stated in a letter of 23 July 2003 that it was to be dealt with later.  There has not been any agreement to waive the lot or even accept a lesser sum.  In our judgment, not disclosing this matter that might render the whole project worthless is clearly a very serious material non-disclosure affecting the worth of the plaintiff’s cross-undertaking as to damages. 

42. What is also notable is that throughout his voluminous affidavits with exhibits, the plaintiff has up to the hearing before us not disclosed any account of Guangzhou Caming, the 2001 accounts having been disclosed by D1.  Nor has the plaintiff disclosed any account of Caming (which was 70% owned by him) that held 89% of Guangzhou Caming.  This, coupled with the lack of explanation for the non-disclosure offered by himself, does cast very grave doubts on his ability to honour any undertaking in damages that he has offered to give to the court.

Consequence of material non-disclosure

43. It is well settled that upon being satisfied that there was material non-disclosure at the ex parte stage, the ex parte order so obtained should, without more ado, be discharged.  See Manor Electronics Ltd v Dickson and Others [1988] RPC 618, at 623 lines 40 to 45, page 624, lines 3-8; Standard Chartered Securities Ltd v Lai Arthur [1993] 1 HKC 375, at 389B; Bank Mellat v Nikpour [1985] FSR 87, at p 91. 

44. The rationale behind can be found in Balcombe LJ’s judgment in Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1358, where he said:

“The rule that an ex parte injunction will be discharged if it was obtained without full disclosure has a two-fold purpose.  It will deprive the wrongdoer of an advantage improperly obtained: see Rex v Kensington Income Tax Commissioners, Ex parte Princess Edmond de Polignac [1917] 1 K.B., 486, 509.  But it also serves as a deterrent to ensure that persons who make ex parte applications realize that they have this duty of disclosure and of the consequences (which may include a liability in costs) if they fail in that duty.”

45. The importance of maintaining the principle that there should be full and frank disclosure to the court when it is asked to make an order ex parte, contrary to the usual rule that no person should be condemned without having been given an opportunity of being heard, was also emphasised in Tate Access Floor Inc v Boswell [1991] Ch 512 and Behbehani and Ors v Salam & Ors [1989] 1 WLR 723, referred to below. 

46. On the other hand, Mr Ho drew our attention to Arab Business Consortium International Finance and Investment Co v Banque Franco-Tunisienne [1996] 1 Lloyd’s Rep 485.  At 492, Walker J refused to set aside the ex parte leave granted for serve proceedings out of jurisdiction after making the following observation:

“As part of the need to emphasize the duty [of disclosure] it may be necessary to set aside orders to penalise those guilty, but in my view in this case the punishment that would in fact be inflicted on ABCI would be out of proportion to the offence.  If there were a risk that proceedings could not be re-started because of limitation, it would seem to me that that would be too severe a punishment having regard to the fact that if there had been disclosure, it would not have made any difference to the judge who had to deal with the ex parte application.”

47. Mr Ho also referred us to AMD Pack Rack Ltd & Ors v The Barrons Group Ltd & Ors [1992] 2 HKLR 50, where Bokhary J (as he then was), observed at p 53:

“Nevertheless, leaving aside any general rule, I am sure of this.  There is a discretion to decline to intervene to discharge injunctive relief on the ground of inadequate ex parte disclosure where: dishonesty does not appear to be involved; it is by no means obvious that there has been any failure to make material disclosure; it would be necessary to comb through a large body of disputed evidence to discern whether adequate disclosure had or had not been made; and the nature of the alleged failure is not so serious as to demand immediate investigation.”

48. In our judgment, in all the circumstances of this case, there was sufficient material to show that had the liabilities of Guangzhou Caming been disclosed, the ex parte judge, who had apparently placed great reliance on the value of that company in the assessment of the plaintiff’s worth, would have refused to grant the ex parte order.  Moreover, those liabilities would fairly cast the gravest doubts on the project’s worth and even its viability, and thus the plaintiff’s financial ability to honour his undertaking in damages.  Since Deputy Judge Poon had gone through the evidence in some detail and identified the items that had not been disclosed to the ex parte judge, with a certain degree of culpability that could be attached to the plaintiff for the material non-disclosure, it was proper for him to discharge the ex parte injunction, and indeed it was incumbent upon him to do so.

Whether inter partes injunction should be granted

49. This is the area at which the parties’ major efforts are directed. 

50. After discharging the ex parte injunction order, the judge said:

“59.  The next question that I need to determine is whether after discharging the Injunction, I should nevertheless grant a fresh injunction ….  It is only in very exceptional cases that the court will grant a fresh injunction upon discharge of an ex parte injunction on the ground of material non-disclosure.  The plaintiff has failed in the utmost duty required of him.  He is also guilty of misrepresentation.  I do not see any special circumstances that may justify the granting of a fresh injunction.  I will therefore refuse to exercise my discretion to do so.”

51. Mr Ho contended that the judge was wrong in refusing to consider the merits whether a fresh injunction should be granted.  The judge, so he submitted, erred in law in adopting the wrong test.  Mr Ho relied on a number of authorities.  

52. In Pacific Base Services Ltd & Another v Silver Gain Development Ltd & Others [1996] 2 HKLR 26 at 33I, Bokhary JA (as he then was) said:

“And if the required standard is not met, then the proper course in the normal way is to set aside the ex parte order.  But that of course is not the end of the matter.  There is jurisdiction to grant fresh relief inter partes if that appears to be the appropriate course in all the circumstances.”

53. In Shenzhen Universal Enterprises and Trade Company Supplies v Wei Bun Trading Co. Ltd [1989] 1 HKLR 470, at 475 where after referring to the judgment of Browne-Wilkinson, V-C in Dormeuil Frères S.A. and Another v Nicolian International (Textiles) Ltd, The Times 5^th May 1988, Kempster JA said:

“I agree with the Vice-Chancellor that the relevant question at an inter partes stage when the continuation or renewal of injunctions is in issue is, indeed, ‘not what had happened in the past but what should happened in the future’.”

54. Mr Ho also relied on ARMCO Inc. v NPV Ltd, HCA 13169/1998 (12 October 1998, unreported), where after considering a number of authorities, Deputy Judge Z E Li stated:

“45.   As a corollary, all the authorities indicate a compelling trend in favour of granting a fresh injunction following discharge of an ex parte one tainted by material non-disclosure, whenever the merits warrants it.  This is because the relevant question at an inter partes stage when the continuation or renewal of injunctions is in issue is not what happened in the past but what should happen in the future: Shenzhen Universal Enterprises Industry and Trade Company Supplies and Anr. v Wei Bun Trading Co. Ltd & Ors. [1989] 1 HKLR 470 per Kempster JA at p. 475.  Of the four cases in which fresh injunction was refused notwithstanding good arguable case for the applicant, each had its own peculiar circumstances.  In the Siporex case, Bingham J considered it unacceptable that the ex parte injunction remained in force for over two months after grant without any originating process to sustain it.  Due to absence of originating process, grant of a fresh injunction was out of the question.  In the Lloyds Bowmaker case, fresh injunction was refused on the ground of failure to prosecute the main action with diligence two years after the injunction.  In the Behbehani case, an undertaking which was as good as a Mareva injunction was extracted from the defendant so there was no need to tie the defendant with a fresh order.  In the Dubai Bank case, fresh injunction was refused simply because there might not be assets remaining with the jurisdiction.

46.  It should not escape any one’s notice that, although dicta flowed in abundance suggesting a more fluid approach may be taken, the courts have in reality consistently discharged every ex parte injunction tainted by material non-disclosure and granted a fresh one on the merits thereby both upholding the golden rule for disclosure and doing justice to deserving parties.”  (Emphasis added)

55. Indeed, in Brink’s Mat, following the passage cited above, Balcombe LJ continued:

“Nevertheless, this judge-made rule cannot be allowed itself to become an instrument of injustice.  It is for this reason that there must be a discretion in the court to continue the injunction, or to grant a fresh injunction in its place, notwithstanding that there may have been non-disclosure when the original ex parte injunction was obtained: see in general Bank Mellat v. Nikpour [1985] F.S.R. 87, 90 and Lloyds Bowmaker Ltd. v. Britannia Arrow Holdings Plc., ante, p. 1337, a recent decision of this court in which the authorities are fully reviewed.  I make two comments on the exercise of this discretion.  (1) Whilst, having regard to the purpose of the rule, the discretion is one to be exercised sparingly, I would not wish to define or limit the circumstances in which it may be exercised.  (2) I agree with the views of Dillon L.J. in the Lloyds Bowmaker case, at p. 1349C-D, that, if there is jurisdiction to grant a fresh injunction, then there must also be a discretion to refuse, in an appropriate case, to discharge the original injunction….”  (Emphasis added)

56. On the other hand, Ms Mok argued that there has been no compelling trend in favour of granting a fresh injunction following discharge of an ex parte one tainted by material non-disclosure as Deputy Judge Li observed.  She submitted that the judge in the present case was correct to say that it is only in very exceptional cases that the court will grant a fresh injunction upon discharging of an ex parte injunction on the ground of material disclosure.  She relied on “the discretion to be exercised sparingly”, per Balcombe LJ in Brink’s Mat.  She also referred us to Commercial Injunction 2004, page 255 where it is stated that if there has been non-disclosure which was otherwise than innocent, then it would only in the most exceptional circumstances that the court would decline to discharge the order.

57. She cited Tate Access Floor Inc v Boswell at 532H-534D, where Sir Nicolas Browne-Wilkinson VC said:

“No rule is better established, and few more important, than the rule, ‘the golden rule’, that a plaintiff applying for ex parte relief must disclose to the court all matters relevant to the exercise of the court’s discretion whether or not to grant relief before giving the defendant an opportunity to be heard.  If that duty is not observed by the plaintiff, the court will discharge the ex parte order and may, to mark its displeasure, refuse the plaintiff under inter partes relief even though the circumstances would otherwise justify the grant of such relief ….

…. the court has to consider all the circumstances of the failure to make proper disclosure and whether such failure was innocent or deliberate and has to weigh the public interest in maintaining the golden rule as against the requirements of justice in deciding whether or not to grant the plaintiff inter partes relief to which he would otherwise be entitled.”

58. Ms Mok told us that she had not been able to find a case where there was a deliberate material non-disclosure that the court would grant a fresh injunction upon the discharge of the ex parte one.  Quite to the contrary, she referred us to two recent cases in Hong Kong where the Court of First Instance refused to grant a fresh injunction where the non-disclosure was other than innocent or inadvertent, namely, Kiddie Products Co Ltd v Wong Man Kam Patrick, HCA 2008/2002 (17 July 2002, Deputy Judge B Yu, SC) and Kwok Kwok Yu v Wu Nga Mui, HCA 867/2003 (2 July 2003, Deputy Judge Poon).  

59. In Behbehani and Ors v Salam & Ors [1989] 1 WLR 723, at 729C-E, Woolf LJ (as he then was) said:

“… It is preferable, in my view, each case to be considered on its own merits, taking into account the public interest which exists in protecting the administration of justice from the harm that will be caused if applicants for the draconian relief of Mareva and Anton Piller orders do not, on an ex parte application, make disclosure of all material facts, whether the non-disclosure is innocent.  I recognize the strain placed on legal advisers and the pressure under which they have to work, especially in large commercial actions, where prompt steps sometimes have to be taken in order to protect their clients’ interests.  However, if the court does not approach the question of the non-disclosure of material matters in the way that has been indicated in earlier decisions, there will be little hope of solicitors who are subjected to such pressures appreciating the importance of making full disclosure and, more important, bringing home to the clients the serious consequences of non-disclosure.

…. it is most important that the court assesses the degree and extent of the culpability with regard to the non-disclosure, and the importance of significance to the outcome of the application for an injunction of the matters which were not disclosed to the court.”

60. At p 735E, Woolf LJ continued:

“I sought to indicate earlier that in my view there is a considerable public interest in the court ensuring that full disclosure is made on ex parte applications of this sort.  If it is to be sufficient to outweigh that public interest to point to the harm that could befall plaintiffs if an injunction is not re-granted, then the whole policy which has been adopted by the court in this field in my view would be undermined.” (at p 734H)

“If the right approach is one which requires the court to measure the materiality of the non-disclosure looked at cumulatively, then it cannot be right just to sweep that aside on the basis of the strength of the plaintiffs’ case against the defendants.”

61. At p 738G, Nourse LJ had this to say:

“While I take full account of … the requirement that the rule of policy should not become an instrument of injustice, I am in the end satisfied that Rougier J’s decision cannot be sustained.  I certainly do not say that a judge’s view of the general merits of the plaintiff’s case is a consideration which cannot be weighed in the balance, although my clear impression of the cases is that it has never played the same part on an application for discharge as it does not the initial ex parte application.  Indeed, I do not see how it could play such a part if the rule of policy is to be maintained, as it is essential that it should be.  Be that as it may, I am entirely satisfied that, on the facts of this case and on the material before him, the judge was in error in allowing that consideration to outweigh the rule of policy.”

62. In Lloyds Bowmaker Ltd v Britannia Arrow Holdings Plc. [1988] 1 WLR 1337, at 1343H-1344A, Glidewell LJ said:

“… even though a first injunction is discharged because of material non-disclosure, the court has a discretion whether to grant a second Mareva injunction at a stage when the whole of the facts, including that of the original non-disclosure, are before it, and may well grant such a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed.”

63. In Yau Chiu Wah v Gold Chief Investment Ltd, HCA 807/2001 (15 May 2001, unreported), Recorder Ma SC (now Ma, CJHC) said:

“43.   Material non-disclosure is rightly regarded as a serious matter and in certain cases would not only justify the setting aside of an existing order but may also constitute the determining factor in the refusal of a fresh grant.  However, it is important for a court, when considering whether or not to set aside an existing order or to grant a new injunction, to consider all the circumstances of the case to arrive at what is the justice of the situation.  There is of course no doubt that the court does have the residual discretion not to set aside or to grant a fresh court order even in circumstances where material non-disclosure has been shown.

44.  Of the relevant factors that a court would consider in the exercise of its discretion, they would include the following:

1.   Whether the non-disclosure was innocent or deliberate.

2.    The excuse or reason for such material non-disclo

3.    Whether the non-disclosure would in fact have resulted in the original order not having been made in the first place or whether, conversely, even if the material fact or facts have been disclosed, this would have made no difference. 

Here, the court is required to look at the merits and justice of the grant of a Mareva injunction.

4.    Whether the party guilty of the non-disclosure is deserving of a locus poenitentiae.”

64. In Standard Chartered Securities Ltd v Lai Arthur [1993] 1 HKC 375, at 389, the judge said:

“I think that insofar as a serious material non-disclosure, albeit not deliberate one, has been exposed, the court should have no hesitation to discharge the ex parte order and refuse to grant any fresh injunctive relief in favour of the applicant.”

65. In that case, however, having considered that there was no evidence to show that the non-disclosure was a deliberate one and the relevant defendant was of questionable integrity posing a real risk of dissipation of assets, the judge granted a fresh Mareva injunction after discharging the ex parte one.

66. It is therefore clear, according to both English and Hong Kong authorities, that upon the discharge of an ex-parte order for material non-disclosure, the court does have discretion to grant the order inter partes.  Whether it should do so depends on the circumstances of each case, and the factors for consideration include those set out in Yau Chi Wah as well as other relevant factors, depending on where the justice of the case lies.

The present case

67. We are not persuaded by Mr Ho that the judge erred in finding that the plaintiff was guilty of misrepresentation over and above the material non-disclosure to the ex-parte judge.  Apparently, the judge took a very serious view of such misrepresentation which may well have justified him to say that it would take a very exceptional case for the court to grant a fresh injunction.  However, in our judgment, the judge would have placed himself above criticism had he considered all other relevant factors apart from the misrepresentation which he found in deciding how he should exercise his discretion to grant or refuse the injunction sought inter partes.

68. For this purpose, because of three important factors which militate strongly against the exercise of discretion to grant an injunction in favour of the plaintiff, namely, the seriousness of the non-disclosure, his inaction and the continuation of the undertaking given by D1, we do not need to deal with the other factors which are much less weighty in the circumstances.

Culpability of the non-disclosure

69. The first important factor is the non-disclosure of the penalty.  It is a matter that the Guangzhou authorities stated would be dealt with later with Guangzhou Caming.  This clearly shows that the penalty has not yet been waived or even settled.  The large size of the penalty, albeit maintained by Mr Ho as a mere possibility, is a very serious matter that might render the project worthless altogether.  It was closely linked to the late payment of the premium and at the time when the ex parte application was made there was still about RMB7.8 million long overdue.  Just as the plaintiff would probably not have forgotten to mention the unpaid premium to Deputy Judge Gill because he had specifically mentioned “premium” as part of the value of the land under the project, the hefty penalty would similarly not have escaped his memory.  Considering Judge Gill’s remarks at the ex parte hearing that the plaintiff’s affirmations did not show anything adequate for his undertaking in damages, had the unpaid premium and the penalty been disclosed to him, he would most probably have refused the application.  We also take a very serious view of the non-disclosure of these two matters.  Although at this stage, without viva voce evidence it is difficult to decide whether the non-disclosure of these two matters was deliberate, we cannot relegate it to be within the category of innocent non-disclosure.

Fortification

70. In his written reply dated 14 December 2004, Mr Ho sought to rely on para 29/1/23 of Hong Kong Civil Procedure 2004 to contend that the ability of the plaintiff to honour his undertaking in damages should not be considered an obstacle if the case is appropriate for the court to grant an injunction.  Two points are being made.  First, in Allen v Jambo Holding Ltd [1980] 1 WLR 1252, it was said that the court will not deny a legally aided plaintiff an interlocutory injunction to which he would otherwise be entitled simply on the ground that his undertaking in damages would be of limited value, since questions of financial stability ought not to affect the position in regard to what is the essential justice of the case.  That was a personal injuries case where the deceased was killed by the propeller of a foreign registered aeroplane and the English Court of Appeal considered that the circumstances of the case justified the grant of an injunction to restrain the removal of the aeroplane from its jurisdiction in order to ensure that the widow would not have an empty judgment if she succeeded in her claim.  We consider this irrelevant in the present case as it was never the stance of the plaintiff before the ex parte and inter partes judges that the plaintiff was impecunious and he applied for the injunction against the defendants on the basis of not offering an undertaking in damages or his undertaking would be quite futile.

71. The second point advanced by Mr Ho is that the court may order the plaintiff to fortify his undertaking.  This point can be viewed as having two facades.  First, since the plaintiff’s undertaking required by the court can be required to be fortified, the non-disclosure, no matter how material and how deliberate, would have no practical effect because the fortification would fully protect the defendants from damages.  Secondly, such a fortification would relieve the court from considering the financial capability of the plaintiff to honour his undertaking. 

72. While fortification is one of the factors that can be considered by the court in its exercise of discretion to grant or not to grant an injunction, we are of the view that it should not have the first-mentioned effect unless adequate fortification with a reasonable estimation of the respondent’s damages is proffered to the court in support of the application for injunctive relief.  The principle of full and frank disclosure should not be brushed aside as unnecessary for compliance because of a late offer of fortification.  Fortification does have the second suggested effect and is a matter to be considered when the court puts everything into the balance.  However, it cannot affect how this Court considers how the inter partes judge evaluated the matter when refusing the grant of an inter partes injunction, as fortification had not been offered before him.  Nor indeed, are we offered this option during the address of Mr Ho.

The plaintiff’s inaction

73. The other important matter is the plaintiff’s inaction after he has taken out the notice of appeal dated 26 February 2004 against the order of the judge made on 24 February 2004 in discharging the ex-parte order and in refusing to grant the injunction sought.  Ms Mok pointed out that the plaintiff had filed his reply and defence to counterclaim on 17 September 2003, signifying the close of pleadings in this action.  Apart from pursuing the current appeal, the plaintiff has not taken any other step in the proceedings so far.  It has been over nine months from the date of the judgment now challenged.  Ms Mok referred us to Lloyds Bowmaker where Glidewell LJ at p. 1347 said:

“He [counsel for the third party] points out that it is now over two and a half years since the third party proceedings were commenced, and, although the summons for directions was over two years ago, neither the direction nor the third party proceedings had been set down for trial.  I agree with him that this is a most relevant consideration.  A Mareva injunction, as Donaldson L.J. in Bank Mellat v Nikpour [1985] FSR 87, 92, said, is a draconian remedy.  It is intended as an adjunct to the action itself, not as a substitute for relief to be obtained on trial.  In other words, a plaintiff who succeeds in obtaining a Mareva injunction is in my view under an obligation to press on with his action as rapidly as he can so that if he should fail to establish liability in the defendant that disadvantage which the injunction imposes upon the defendant will be lessen so far as possible.  There is no sign that the defendants in the present case had been active in pressing ahead with these proceedings.

… but for my part, I am persuaded that we should not grant a fresh Mareva injunction ourselves, and that we should not, because of the delay, take any other steps to preserve the status quo.”

74. Mr Yuen also placed reliance on the fact that since the ex parte order was discharged some nine months ago, the plaintiff has chosen not to apply for a stay of the judge’s order or apply for an interim injunction pending appeal.  The plaintiff has taken no steps in pursuing his claim so far.  Mr. Yuen asked rhetorically what was the status quo to be preserved by the grant of an interim injunction.  He submitted that the plaintiff’s inaction for the past nine months means that any fresh injunction will “disturb rather than preserve anything that can fairly be called the status quo”. 

75. In Shepherd Homes Ltd v Sandham (No. 1) [1971] Ch 340 at 349 D-F, Megarry J said:

“In the present case the company knew of the erection of the fence by September 11, 1969, but did not launch its notice of motion until over five months later.  In the absence of any explanation, I do not think it unfair to treat this tardiness as some measure of the company’s need for the injunction.  Furthermore, the status quo for any reasonable period prior to the service of the notice of motion is that of the defendant’s fence being in situ, so that the injunction sought will disturb rather than preserve anything that can fairly be called the status quo.  In Agbor v. Metropolitan Police Commissioner [1969] 1 W.L.R. 703, I may say, continuation in possession for four weeks was treated as the status quo that was to be preserved, and a mandatory injunction was granted upon an application made on the very day that this status was disturbed.”

76. In Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130, at 140B, Lord Diplock observed:

“The history of the trading relations between the company and M.M.B., as I have outlined them, make it difficult to identify what was the relevant status quo which it was said in American Cyanamid Co. v. Ethicon Ltd. [1975] A.C. 396 it is a counsel of prudence to preserve when other factors are evenly balanced.  The status quo is the existing state of affairs; but since states of affairs do not remain static this raises the query: existing when?  In my opinion, the relevant status quo to which reference was made in American Cyanamid is the state of affairs existing during the period immediately preceding the issue of the writ claiming the permanent injunction or, if there be unreasonable delay between the issue of the writ and the motion for an interlocutory injunction, the period immediately preceding the motion.  The duration of that period since the state of affairs last changed must be more than minimal, having regard to the total length of the relationship between the parties in respect of which the injunction is granted; otherwise the state of affairs before the last change would be the relevant status quo.”

77. In the present case, the injunction sought by the plaintiff against the defendants is to restrain them from doing business with ten of Kammy Town’s customers.  It is common ground that D7 and Kammy Town have been in the same line of business and are competitors.  It is also common ground that these ten customers, especially Next (Asia) Ltd, are important customers in the trade placing very large orders for woven garments.  D8 is in the same position as D7, albeit on a smaller scale, and also a competitor of Kammy Town.  The other defendants, namely D2 to D6, were former employees of Kammy Town, who are alleged to have assisted D1 and D2 in siphoning off the business of Kammy Town to D7 to D8.  It is clear that as former employees and not directors, there is no implied term for them not to work for competitors of their former employer.  Since the discharge of the ex parte order, the defendants, barring D1 who has been subject to his own undertaking towards the plaintiff, have been free to deal with those customers.  If this court were to grant a fresh injunction order, even if the other factors merits the grant, it would be disturbing the status quo that has been in existence since over nine months ago.  We consider that this matter also bears great weight on the balance of convenience.

78. In his written reply, Mr Ho attempted to distinguish the above authorities by contending that the status quo was that existent between the occurrence of the act sought to be restrained and the date of the application for the injunction, and not the status quo that prevailed after an ex parte injunction is discharged.  There is a certain attraction in this argument, but in our judgment, although any inaction on the part of the complainant after the occurrence of the act sought to be restrained is more damnable than that which prevailed after an ex parte injunction has been discharged, the circumstances after the discharge must be one of most relevant factors for considering what should be the status quo.  Here, the plaintiff had launched the appeal against the discharge over nine months ago and done nothing in the meantime.  D7 and D8 has been operating their woven garment businesses without any restraint for these nine months and D2 to D6 have been working for either one or both of these companies.  Re-granting an injunction against them would certainly create more hardship than if the ex parte injunction had not been discharged.  

79. Mr Ho also argues that it would have been futile had the plaintiff applied for a re-grant of injunctive relief before Deputy Judge Poon, for that application would certainly have been refused.  Applying for a stay of the discharge order would similarly not have a realistic prospect of success.  However, in our view, there was no harm trying in applying for a stay, and if the judge refused it, an application could have been made to this Court.  The inaction of the plaintiff while the appeal is pending has, as a matter of fact, created the hardship to the defendants as mentioned above. 

80. Mr Ho also complained that there was no order for speedy trial.  It does not appear to us that he had sought one from Deputy Judge Poon, and it therefore does not lie in his mouth to complain now.

D1’s undertaking 

81. The other matter is D1’s undertaking to the court in the same terms as the ex parte order against him.  The existence of this undertaking has reduced the risk of harm that may be suffered by the plaintiff if the plaintiff’s allegations against the other defendants are proven correct at trial.  This also militates against the grant of the injunction as sought against the other defendants.

Conclusion

82. For the above reasons, we do not consider it proper for us to grant an inter partes injunction in favour of the plaintiff.  Accordingly, we dismiss the appeal and make an order nisi that the plaintiff pay the costs of this appeal to D2 to D8, to be taxed if not agreed.  We also confirm the costs order made by Deputy Judge Poon.

83. Having considered the issues raised, we consider that this is a case suitable for a speedy trial.  We therefore make an order to that effect.