MING HSIEH v. XU ZHE AND OTHERS

HCMP 3072/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3072 OF 2014

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DECISION

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1.  There is an application by the 1^st and 2^nd Defendants to enforce the undertaking as to damages after the discharge of a Mareva injunction. There is also a corresponding application by the Plaintiff for payment out of the sum of US$1,000,000 which has earlier been paid by him into court as fortification of his undertaking as to damages (“the Fortification Money”).

BACKGROUND

2.  On 6 November 2014, the Plaintiff commenced an action in California against the 1^st to 4^th Defendants (“US Proceedings”), alleging that:

(i)   the 1^st and 2^nd Defendants had made certain false misrepresentations to induce the Plaintiff to invest some RMB¥350,000,000 in a Chinese company called Antu Wangmin Changfu Agricultural Development Co Ltd (“WMCF”) in exchange for 10% shareholding in WMCF;

(ii)  in reliance of the said misrepresentations, a corporate vehicle owned by the Plaintiff (Antu Zelong Trading Ltd) entered into a Share Subscription Agreement dated 23 February 2011 with WMCF, and the Plaintiff paid US$54,000,000 for investment into WMCF.

3.  On 7 November 2014, the Plaintiff obtained a temporary protective order, the equivalent of a Mareva injunction, in the US Proceedings in respect of the Defendants’ California assets up to the value of US$54,000,000.

4.  On 21 November 2014, the Plaintiff made an application before me and obtained a Mareva injunction in aid of the US Proceedings pursuant to s 21M of the High Court Ordinance, Cap 4 (“the Injunction Order”).  The Injunction Order restrained the Defendants from dealing with their Hong Kong assets up to the value of US$54,000,000.  Amongst the assets being frozen were various listed shares (“the Shares”) kept in the 2^nd Defendant’s bank accounts.

5.  The Injunction Order contained the usual undertaking as to damages.  As part of the Injunction Order, the Plaintiff also undertook to pay a sum of US$1,000,000 into court as fortification for the undertaking, which the Plaintiff did on the same day.

6.  At the return date hearing on 28 November 2014, M Chan J ordered that the Injunction Order be continued until the disposal of the inter partes summons.

7.  On 23 January 2015, by consent, the court made an order (“the Consent Order”) to vary the Injunction Order to the effect that the 2^nd Defendant would be at liberty to sell the Shares, but that the proceeds of sale shall be deposited back into the same accounts and continue to be subject to the Injunction Order.

8.  At the hearing of the inter partes summons on 10 April 2015, M Chan J found that the Plaintiff was guilty of material non-disclosure when applying for the Injunction Order.  The learned judge therefore discharged the Injunction Order, but re-granted a new order in the same terms against the 1^st, 2^nd and 4^th Defendants.

9.  The relevant Defendants appealed to the Court of Appeal.  On 3 June 2016, the Court of Appeal:

(i) allowed the appeal and discharged the injunction order re-granted by M Chan J;

(ii) held that there was no good arguable case that the Plaintiff had suffered loss in the sum of US$54,000,000, since jewellery with a book value in excess of RMB¥790,000,000 had been pledged to the Plaintiff as security;

(iii) observed that the Plaintiff’s non-disclosure was one that “went to one of the fundamental questions that needed to be considered” and so “was a serious matter which was not lightly to be overlooked”.^[1]

10.  By reason of the discharge of the Injunction Order, the 1^st and 2^nd Defendants now seek to enforce the undertaking as to damages.

THE 1^ST AND 2^ND DEFENDANTS’ CLAIM FOR DAMAGES

11.  Mr Dawes SC, counsel for the 1^st and 2^nd Defendants, confirms that his clients are only seeking the following damages:

(i)   Had the Defendants’ assets not been frozen, the 2^nd Defendant would have sold the Shares and used the proceeds to fund the 1^st Defendant’s investment in a mine in Tajikistan.  As a result of the Injunction Order, the 2^nd Defendant was unable to sell the Shares and the 1^st Defendant was unable to participate in the said investment, which in turn led to the 1^st Defendant becoming liable to make a default payment of US$2,000,000 (“the Default Payment Claim”).

(ii)  The Shares depreciated in value between the date of the Injunction Order (21 November 2014) and the date of the Consent Order (23 January 2015) in the sum of HK$3,508,600 (“the Depreciation in Value Claim”).

12.  In an application to enforce an undertaking as to damages, there are two separate questions to consider:[2]

(i)   As a matter of discretion, should the court order that the undertaking be enforced?

(ii)  If so, what loss has the defendant suffered in terms of money, was it caused by the injunction and was it too remote?

13.  As regards the first question, it is settled law that where it is determined that the injunction should not have been granted, the usual course is to enforce the undertaking.[3] As stated in Gee: Commercial Injunctions:[4]

“once it is established that the injunction was wrongly granted, even though without fault on [the claimant’s] part, the court will ordinarily order an inquiry as to damages.”

14.  There is no reason why the court should depart from such general principle.

15.  As regards the second question, the aim of enforcing the undertaking is to put the respondent into the same position as if the injunction had not been granted.  In other words:

“The assessment is made upon the same basis as that upon which damages for breach of contract would be assessed, if the undertaking had been a contract between the plaintiff and the defendant that the plaintiff would not prevent the defendant from doing what he is prevented from doing by the terms of the injunction.”[5]

16.  As observed by Lord Clarke NPJ in MGA Entertainment Inc v Toys & Trends (Hong Kong) Ltd^[6], while a party enforcing a cross-undertaking in damages has the burden of proving its loss, the court should not be overeager in its scrutiny of the claimant’s evidence.  Damages should be liberally assessed and the court should approach the issue in a broad common-sense way. The loss must be such that it would not have been sustained but for the injunction, though the injunction need not be the sole cause of the loss.

17.  Mr Lung, counsel for the Plaintiff, submits that the court should not order an inquiry since there is no basis or insufficient evidence to support either of the Default Payment Claim or the Depreciation in Value Claim.

18.  Mr Lung originally also sought to argue that there was undue delay on the part of the 1^st and 2^nd Defendants in enforcing the undertaking as to damages.  However, Mr Lung, quite sensibly, does not pursue such argument in the hearing.  In fact, the 1^st and 2^nd Defendants took out the application for inquiry as to damages about 2.5 months after the Court of Appeal handed down the reasons for allowing the appeal.  Given such a short period of time, there is simply no merit in the undue delay argument.

(i)  The Default Payment Claim

19.  In support of the Default Payment Claim, the 1^st and 2^nd Defendants produce the investment agreement for the mine in Tajikistan signed by the 1^st Defendant dated 17 March 2014 (“the Investment Agreement”).  Clause 10 of the Investment Agreement provides that if the 1^st Defendant failed to pay the counterparty US$10,500,000 by 31 December 2014, he must pay the counterparty US$2,000,000 as a default sum.  Though such default payment has not been made, the 1^st Defendant claims that he had earlier received a call from the Chinese embassy at Tajikistan, informing him that the counterparty of the Investment Agreement had been in contact with the embassy with a view to enforce payment of the default sum against the 1^st Defendant.

20.  I agree with Mr Lung that the court should not just accept the 1^st and 2^nd Defendants’ allegations on face value, and the Plaintiff should be allowed to investigate the genuineness of the claim.

21.  There are still a lot of unanswered questions to the claim:

(i)    Was there alternative source of funding for the alleged investment other than the frozen assets?

(ii)   Were there other partners who would be able to offer financial assistance at that moment?

(iii)  Did the 1^st Defendant conduct any negotiation with the counterparty to delay payment or to arrange for alternative funding?  For example, the counterparty might agree to accept late payment because of changing market condition.

22.  Further, although legal liability to make the default payment may, in certain circumstances, justify an award of damages for such payment, there are certain unusual features in the present case which warrant further investigation.  Despite the call from the Chinese Embassy of Tajikistan, the counterparty does not seem to have taken any steps to enforce the Investment Agreement or to claim the default payment.  This is odd in view of: (i) the 1^st Defendant’s evidence that the counterparty had cash flow issues; and (ii) almost 3 years have passed since the alleged “debt obligation” arose by the end of 2014.

23.  I agree that damages resulting from the discharge of a Mareva injunction should be liberally assessed and the court should approach the issue in a broad common-sense way.  However, if there are so many unanswered questions and unusual features about the claim, it is only fair that the paying party should be given the opportunity to investigate the claim including obtaining discovery and cross-examining the relevant parties.

24.  For the above reasons, there should be a formal inquiry to investigate and assess the Default Payment Claim.

(ii)  The Depreciation in Value Claim

25.  Mr Dawes, very sensibly, has no serious objection for a formal inquiry to be held for the Default Payment Claim.  However, he asks the court to deal with the Depreciation in Value Claim differently. According to him, such claim is a simple one and can be determined summarily. I agree.

26.  The listed Shares dropped in value in the sum of HK$3,508,600 in the period from the date of the Injunction Order to the date of the Consent Order (“the Relevant Period”).  This should be regarded as the natural loss flowing from the making of the Injunction Order.

27.  Mr Lung submits that the 2^nd Defendant is not entitled to make such claim because, despite the Consent Order allowing her to sell the Shares, the 2^nd Defendant had held onto the Shares at least until the end of 2016 and possibly up till now.  As a matter of fact, the value of one of the Shares, Summit Ascent Holdings Limited, went as high as around $5.38 per share in May to June 2015. This was even above the share price as of the date of the ex parte injunction ($5.04) and also above the price during the period when the 2^nd Defendant was restrained from selling the Shares under the Injunction Order.  Had the 2^nd Defendant decided to sell the Shares during May to June 2015 (she was at liberty to do so under the Consent Order), she would in fact have made a profit (as compared to the share price on the date of the ex parte injunction).  This also runs against her contention that she decided to hold onto the Shares and wait for a price rebound in order to mitigate her alleged loss.  Further, since the Shares have apparently remained unsold, any alleged loss has not been realized or crystalized.  It is possible that by the time she decides to sell the Shares she would have made a profit.

28.  Mr Lung also submits that, even when the Injunction Order was in place, if the 2^nd Defendant had wished to sell the Shares, she could have sought consent from the Plaintiff which would have been forthcoming in a matter of days.  She would then not have suffered any loss at all.

29.  I cannot accept these arguments.  By holding onto the Shares, the 2^nd Defendant has to take the risks associated with the fluctuation of the Shares after the Consent Order.  If the price of the Shares were to drop further after the Consent Order, she should not be allowed to make any claim for such loss because it was caused by her decision not to sell the Shares.  However, it is an undisputed fact that the 2^nd Defendant was not allowed to dispose of the Shares in the Relevant Period.  Given that the 2^nd Defendant intended to sell the Shares to raise fund for the Investment Agreement, this would be the loss naturally flowing from the wrongful granting of the Injunction Order.

30.  In fact, whether the 2^nd Defendant has demonstrated her intention to sell the Shares in the Relevant Period is quite immaterial.  The 2^nd Defendant had been restrained to deal with the Shares in that period of time, and so there should appropriate damages awarded to her for the loss of opportunities relating to the disposal of the Shares. In my judgment, the depreciation in value of the Shares in the Relevant Period should be regarded as the proper loss reflecting the loss of such opportunities.

31.  Further, the Plaintiff cannot possibly argue that there was delay on the part of the 2^nd Defendant in seeking consent from the Plaintiff to sell the Shares.  The court should allow reasonable time to the Defendants to seek proper legal advice, in particular they had faced different proceedings both in the United States and Hong Kong at the same time.  Given such circumstances, it would be unrealistic for the Plaintiff to suggest that the 2^nd Defendant should have made the request earlier.

32.  In respect of the Depreciation in Value Claim, I agree that the dicta of Lord Clarke in MGA Entertainment Inc v Toys & Trends (Hong Kong) Ltd[7] are applicable here.  It is clear that the 2^nd Defendant has lost the liberty to deal with the Shares in the Relevant Period, and she should be properly compensated for such loss.  In this regard, the damages should be liberally assessed and the court should adopt a common sense approach in dealing with the matter.  Hence, I agree to deal with the Depreciation in Value Claim summarily and award damages in the sum of HK$3,508,600 in favour of the 2^nd Defendant for such claim.  The damages would be paid out from the Fortification Money.

33.  In the hearing before me, the Plaintiff is seeking to adduce two affirmations with a view to show the following:

(i)   the Plaintiff has made an application in the Mainland to invalidate the notarizations obtained by one Madam Du (the 1^st Defendant’s mother) who is suspected to have bribed an officer at the notary office in the Mainland; and

(ii)  the 1^st and 2^nd Defendants have been detained in the Mainland for criminal investigation.

34.  In my judgment, these matters are irrelevant as to whether the court should order inquiry as to damages resulting from the discharge of the Injunction Order.  Whether the 1^st and 2^nd Defendants are persons of low morality or whether they have committed other crimes should not affect their rights to claim for damages resulting from the wrongful granting of the Injunction Order.

35.  After the hearing, the 1^st and 2^nd Defendants through their solicitors write to the court indicating they would not proceed with the inquiry for the Default Payment Claim.  Hence I only make an order for inquiry in respect of the Depreciation in Value Claim and award damages in favour of the 2^nd Defendant in the sum of HK$3,508,600.  The parties have not addressed me on the issue of interest and so I reserve my decision on such matter.  The parties are directed to inform the court within 14 days as to whether the 2^nd Defendant is claiming for interest.  After dealing such issue, I will give further directions on the disposal of the Fortification Money kept in the court.

36.  I also make a costs order nisi that the Plaintiff do pay to the 1^st and 2^nd Defendants: (i) 75% of the costs of their application to enforce the undertaking as to damages; (ii) 75% of the costs of the Plaintiff’s application for payment out of the Fortification Money; and (iii) all the costs of the Plaintiff’s application to adduce two new affirmations.  The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.