CHINA MERCHANTS BANK v. I-CHINA HOLDINGS LTD. AND ANOTHER

HCA7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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(By Counterclaim)

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J U D G M E N T

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1. This is an application by the first two defendants to vary a Mareva injunction made by Judge Gill, sitting as a Deputy High Court Judge, on 7 February last year. His order appears in the Core Bundle ("CB") 34-36. The net effect of the order is that the 2nd defendants have paid into court HK$6,482,500 which they did on 5 January last year pursuant to the terms of an ex parte order of Suffiad J of 28 December 2000. This accounts for the present position although more has occurred since Judge Gill's order which I will need to refer to presently. Now, before me, these two defendants invite me to return to them HK$2,910,000 so that they may meet, what they say are, pressing legal and business expenses.

2. Before I turn to the nature of the action it is helpful to recite the steps which have been taken since the writ has issued in December 2000. I am the 5th judge who has been required to make an order, and notwithstanding the 21 months that have elapsed since the action started there is no sign that a trial is imminent.

3. This all started when the plaintiffs learnt of the pending sale by the 2nd defendant of premises that it then owned on the 15th Floor, Euro Trade Centre, 13-14, Connaught Road, Hong Kong. The plaintiffs made an ex parte application to Suffiad J on 28 December 2000 to prevent the 2nd defendant from disposing of the proceeds of sale of the property which amounted to HK$24.12 million save for payment of the outstanding mortgage on the property and the costs of sale. There was also an application directing the 2nd defendant not to dispose of or reduce its assets to below US$10 million save that it was permitted to spend up to HK$10,000 a week on business expenses, together with a reasonable sum for legal expenses. The judge made that order. The sale was completed on the following day. The net proceeds of sale amounted to HK$6,452,500 which, as I have already mentioned, was paid into court by the 2nd defendant on 5 January 2001.

4. The matter then came before Judge Gill inter partes on 30 January. The plaintiff sought to have the order continued and the defendants applied for its discharge. On 7 February the judge continued the injunction. See his judgment, CB24-32.

5. On 2 January 2001, the plaintiffs also took out an Order 14 summons for summary judgment. That came on before Judge Longley, also sitting as a Deputy High Court Judge, on 14 May 2001. He gave judgment on 15 June dismissing that summons (See CB42-50).

6. For the following year not much has happened. The plaintiff took no steps to prosecute the action to trial. The 2nd defendant then took out a summons on 28 May this year to have the injunction discharged or, in the alternative, to vary it by releasing part of the amount presently in court. The 2nd defendant's case on the application to discharge the injunction was essentially based on the fact that the plaintiff had "sat" on the matter, done nothing to bring the action on for trial, and that in the circumstances it was wrong for the 2nd defendants to be deprived of their money where nothing was being done by the plaintiff to have the matters tried. Judge Saunders who heard the application gave judgment on 27 June (CB292-303) and, whilst he had some sympathy for the 2nd defendant's position, he felt unable to discharge the order. He put over the question of whether the injunction ought to be varied and it is this which is now before me.

7. So much for the route by which the matter comes before me. I now need, albeit briefly, to describe the nature of the claim and the counterclaim. Judge Gill has found that the plaintiffs have made out "a good arguable case" justifying the retention of the injunction, whilst Judge Longley has not found it so overwhelming to justify summary judgment in their favour. The claim by the plaintiffs is for US$45,000,000. The amount in court is therefore modest by comparison. The nature and basis of this claim has been described by Judge Gill in his judgment, see CB25-26. The plaintiff sues under a Loan Assumption Deed and a Loan Agreement together with interest on the outstanding amounts. There is a counterclaim by the defendants to the effect that by virtue of fraudulent misrepresentation by the plaintiff, the defendants were entitled to rescind and have rescinded the Loan Assumption Deed and that, consequently, there can now be no liability under the Deed or the Loan Agreement. All of this remains to be decided at the trial and on the merits for the purposes of the present application I am really unable to go beyond what has been decided by Judge Gill and Judge Longley against whose orders there has been no appeal.

8. The basis of this application for the release of a little over HK$2.9 million appears in the 5th affidavit of Shirley Choi ("Ms Choi") (CB63). The first discrete amount required is HK$497,000 to pay for the defendants' legal costs in contesting this action. This amount is supported by an estimate prepared by their solicitors in this matter and is "Ex SCSL43" to Ms Choi's 5th affidavit (see CB104). There is said to be a further requirement for the release of HK$880,000 to another firm of solicitors, Messrs Tang, Tso, Lau & Co., who have been advising the defendants, who are publicly listed companies, on a number of other matters not directly related to this litigation. This has been described at paragraph 17 of Ms Choi's 5th affidavit (see CB63) as follows :

(i) simplifying the corporate structure by dissolving redundant, dormant and inactive subsidiaries;

(ii) restructuring debts owed to banks and other financial institutions by surrendering charged properties to them;

(iii) compiling and presenting business development information to potential investors;

(iv) handling a High Court Action No.1318/2001 between Peregrine Brokerage Limited and Fordit Limited, a subsidiary of the 2nd defendant; and lastly

(v) dealing with other lesser litigation in two District Court actions.

These solicitors are on a retainer of HK$80,000 a month and their fee note for HK$880,000 is exhibited as "SCSL44". Additionally, the 2nd defendant is indebted to its auditors, Deloittes, to the tune of HK$422,880 for the preparation of an audit of its financial statements. This account is exhibited as "SCSL45" and is now becoming pressing. The 1st defendant, as a public company, is liable to pay an annual listing fee. The amount is HK$145,000 each year. These fees have not been paid in 2001 and 2002 (see SCSL46). The total comes to HK$290,000. A claim is also made for subscription fees to the Dynasty Club which is for just under HK$20,000. I can indicate now in what is a balancing exercise that even if I were to allow a variation, this item which must occupy a lowly position in the hierarchy of priorities would not be allowed. Lastly the 2nd defendant also needs to satisfy the two District Court judgments which relate to the actions which I have referred to. These judgments come to HK$800,259.57.

9. The breakdown of the required amount is at paragraph 26 of Ms Choi's affidavit, CB66.

10. Before I relate Mr Wong's objections to the variation, it is helpful to briefly consider the law as it bears on applications of this sort. Mr Wright for the defendants has helpfully drawn my attention to the relevant cases and to Mr Stephen Gee's text on Mareva injunctions. Not surprisingly, both counsel are agreed on the principles that shall apply.

11. The leading authority to which Mr Wright draws attention is Iraqi Ministry of Defence v. Arcepey Shipping Co. S.A. (The "Angel Bell") [1981] QB 65. The effect of the decision by Robert Goff J (as he then was) is sufficiently reproduced in the headnote to the report :

"...., the purpose of the Mareva jurisdiction was not to improve the position of any claimants to the property of the insolvent debtor but rather to prevent the injustice of a foreign defendant .... causing assets to be removed from the jurisdiction in order to avoid the risk of having to satisfy a judgment in pending proceedings .... as the plaintiffs had not yet proceeded to judgment but were merely claimants for an unliquidated sum, the defendants should not be prevented from using their assets to pay their debts as they fell due ...."

This approach was followed by Lloyd J (as he then was) in PCW v. Dixon [1983] 2 All ER 158 and then approved by the Court of Appeal in Avant Petroleum Inc. v. Gatoil Overseas Inc. [1986] 2 Lloyds Rep. 236 where Neill LJ, in delivering the main judgment, whilst holding that this type of injunction should not be used to prevent the payment of trade creditors in the ordinary course of business, approving the decision in The Angel Bell (supra), also made clear (P242) that the party that is the subject of the injunction; "In summary, if not in most cases .... will therefore have to show that he has no other free assets which can be used to make the relevant payment." (See, for example, A & B v. C (No. 2) [1981] 1 Lloyds Rep. 559.) The effect of these principles has also been discussed in Gee on Mareva Injunctions and Anton Pillar Relief (4th Edition), from pages 318 to 321.

12. The effect of this therefore is to strike a balance between upholding the purpose of the injunction, which has been validly obtained, which is to prevent dissipation of the defendants' assets, and the defendants' legitimate right to be able to continue trading and to meet his proper liabilities.

13. Whilst accepting these principles as being those which must apply in the exercise of my discretion, Mr Brian Wong, in a series of careful submissions, has sought to demonstrate that on the evidence no variation should be allowed. Firstly, he submits that the defendants have simply failed to demonstrate that they have no other funds with which to meet their liabilities and, secondly, that there is more than a suspicion that they have failed to make full disclosure of their position and therefore as a matter of discretion they are undeserving of the court's assistance.

14. On the question of the requirement to make full disclosure he relies on the judgment of Ackner LJ (as he then was) in A.J. Bekhor & Co. Ltd. v. Bilton [1981] 1 QB 923C to 945A. This all relates to what Mr Wong says is a failure by the defendants to show their true financial circumstances. Mr Wong draws attention to what he says are discrepancies in Ms Choi's affidavits as to the source of income of the group of companies and the 2nd defendant's role in that group. In support of this he has helpfully prepared a schedule at page 5 of his written submission, showing the alleged discrepancies between Ms Choi's 5th and 6th affidavits and her previous affidavits. He then supports this by the auditors' comments in respect of the 1st defendant's audited financial statements for the years 1999, 2000 and 2001 which is to the effect that they had not obtained all the information and explanations that they considered necessary for the purpose of the audit and that they were therefore not able to determine whether proper books of accounts had been kept. Such comments must be viewed with great concern when made of a public company and one that is required in this application to come clean, if I can so express it, in showing its true financial position and thereby discharging the further burden of demonstrating that there are no other funds with which to meet its liabilities.

15. Mr Wong then presses on by referring to the accounts themselves which, he says, demonstrate that funds are indeed available. Alternatively, he submits that if the court is not of that view that it should find that the accounts leave sufficient unanswered questions to amount to a failure by the defendants to make out its case on lack of funds.

16. Most of this has been picked out from Mr Xia's affirmation of 22 June this year, the relevant part of which starts at CB168. The matters particularly relied on relate to the financial relationship between the 1st and 2nd defendants, the former being the latter's holding company. In her 5th affidavit, Ms Choi has deposed that the 1st defendant did not hold any significant amount of cash so that it relied on the 2nd defendant, the main operating company, to meet its liabilities. These payments would be treated as inter-company loans. This line is persisted in her 6th affidavit. Mr Wong then contrasts these statements with some of her earlier affidavits, for example, her 1st affidavit which says that the 1st defendant has from time to time advanced funds to the 2nd defendant to cover the group's operating expenses. Such advances are repayable on demand and are interest fee. Ex SCSL141 of the Bundle of Documents shows such a loan for HK$278,719,137.60. These unexplained contradictions and the auditors' remarks form the basis of Mr Wong's submission on this part of the application.

17. True enough Ms Choi has sought in her 6th affidavit dated 5 August 2002 to provide a detailed rebuttal of what Mr Xia has said on the accounts.

18. There is no doubt that there are many unanswered questions and issues that can only be resolved by live evidence and not on conflicting affidavits. I have had to work through this unresolved conflict and arrive at a view more by instinct and intuition rather than a firm view based on findings of fact that a judge arrives at following a trial with live evidence. My sense is that the defendants have just about persuaded me that at present they lack the funds to pay for these liabilities.

19. I am persuaded that these are all genuine debts which they are liable to pay. Nevertheless, this does not mean that they should use the funds in court to pay for all of these debts. This is a balancing exercise in the way contemplated by Neill LJ in Avant Petroleum (supra). To go all the way in favour of the defendants would unjustifiably undermine the purpose of the injunction. I have already indicated that the fees due to the Dynasty Club are not sufficiently important to be paid from the money in court. I propose to release the following amounts. It seems to me that the judgment debt in the District Court should be met in full - HK$800,259.57, so should the listing fees of HK$290,000 as well as Deloitte's audit fee of HK$422,880. These are pressing and unavoidable. They should be met. I will also allow HK$400,000 for King & Co.'s account because this relates to the fee for the conduct of this action. Other arrangements will need to be made as to the balance. As to Messrs Tang, Tso & Lau's retainer, I only feel able to release HK$400,000 for their expenses. I have had to come to a view about this matter and whilst a large group such as this clearly needs to spend for legal advice of the sort provided by their solicitors, in all the circumstances and in an effort to maintain a proper balance in this matter, that is, as far as I am prepared to go. The total released amounts to HK$2,213,139.57. I will release it on the terms that the individual items of expenditure which make up this total are paid out in the sums that I have allowed for. To this extent, the injunction granted by Judge Gill will be varied. I hope the parties will be able to agree the form of the order, otherwise the matter can be referred to me. As to costs, I propose to say costs in the cause. Neither party has been entirely successful, I suspect the matter had to come to me for resolution and whoever is ultimately successfully will get these costs. This order for costs will be an order nisi in the usual way.

20. I am grateful to both counsel for their assistance.