CAC Brake Co. Ltd. Zhuhai v. Bene Manufacturing Co. Ltd. and Others

1998, No. 94
(Civil)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

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J U D G M E N T

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Rogers, J.A. :

Introduction

1. This is an appeal from an order of the Deputy Judge of the 7th April, this year whereby he discharged a Mareva injunction which had been granted ex parte by the duty Judge and had been continued inter partes with a slight amendment.

2. The Plaintiff is a car parts manufacturer in the southern P.R.C. It claims in this Action in fraud. In a nutshell, it says the fraud was perpetrated with the internal help of one of its former managers who had enabled Letters of Credit and various other documents including signed Bills of Lading to be issued. It is said that as a result of that money was transferred first to a company by the name of Erbal and thereafter dissipated. That included sums, which I shall refer to in a moment, to the Defendants herein. The central figure as far as this case is concerned is the 2nd Defendant. He is a 50% shareholder and said to be the leading light of the 1st Defendant which is a company which apparently is now dormant. He also was a leading light of the 3rd Defendant although his interest in that company has now been transferred to his sons; there has been some discussion as to whether that actually has taken place or not.

3. The case against the Defendants is that they, and in particular the 1st and 2nd Defendants, knowingly assisted in this fraudulent use of the Letters of Credit to defraud the Plaintiff of some US$1.8 million. Significant for this case is that it is conceded on behalf of the Defendants and was conceded in the Court below that there is a good arguable case of fraud. No doubt for that reason, the evidence on the Defendants' behalf could be said to be a little sketchy as to their involvement and as to their business activities.

4. The question which exercised the Judge in the Court below was whether the Mareva injunction should be continued and he was troubled by the question of whether there was a sufficient risk of dissipation of assets. He said at page 5 of his judgment :-

"The question is - and here I refer to para. 11 of Mr. Lamplough's skeleton argument - whether I can draw a reasonable inference pointing to dissipation from the mere allegations of fraud, which fraud has yet to be proved."

And then later in that page, he said :-

"It seems to me that what Mr. Lamplough is seeking to persuade me to do is not to resolve disputed questions of fact - but to assume that the Plaintiff's view of those facts is correct and then proceed to draw from those facts - an inference of dissipation. That it seems to me is, with respect, to endeavour to put the cart before the horse and what I require to persuade me that there is a real risk of dissipation is something more than a detailed synopsis of an alleged fraud - something along the lines suggested by the 9 factors to which I have made reference."

5. Dealing with that aspect, first of all, the 9 factors to which the Judge referred were 9 factors to be found in the work "Mareva Injunctions and Anton Piller Relief" by Stephen Gee. It appears that the Deputy Judge below had before him the first edition which now seems to be a scarcity as the researches of counsel have been unable to locate it. They have however located the fourth edition. Whatever the first edition said in addition to the 9 factors relating to risk of dissipation of assets, Mr. Gee's work now contains this after those 9 factors :

"Good grounds for alleging that the defendant has been dishonest is relevant. Dishonesty is not essential to the exercise of the jurisdiction and there is no need to show an intention to dissipate assets. But if there is a good arguable case in support of an allegation that the defendant has acted fraudulently or dishonestly (eg being implicated in an ingenious scheme for the misappropriation of funds belonging to the plaintiff), or has acted unconscionably, then it is unnecessary for there to be any further specific evidence on risk of dissipation for the court to be entitled to take the view that there is a sufficient risk to justify granting Mareva relief."

6. In my view, this encapsulates one aspect of Mareva injunction law. Our attention has been drawn to a number of authorities and included in that is a judgment of the Court of Appeal comprising Lord Justices Hirst and Phillips in Norwich Union Fire Insurance Society Ltd v. Eden on 25th January 1996. In that case, Lord Justice Phillips said this :

"It seems to me that when the court considers whether there is a good arguable case it is at that stage that it considers whether the likelihood of a judgment in favour of the plaintiff is sufficient to justify the grant of Mareva relief. If it is so satisfied, the question then arises :- if such a judgment is given, what is the risk that there will be no assets there to satisfy it? If the judgment in question being considered is a judgment in which allegations of fraud are made, then it seems to me that it is open to the court to conclude from that fact alone that there is sufficient risk of dissipation of assets to justify the grant of relief. For myself it does not seem to me that there would be any prospect of persuading this court that the learned Judge had erred in principle in so concluding."

7. Finally on this aspect, turning back to what was said by the Deputy Judge in the Court below, he referred to the question of whether fraud had yet been proved. It is almost universal in Mareva injunction applications that although fraud may be alleged, it is still yet to be proved. Certainly in an Action, unless it is a post-judgment Mareva, the fraud would still fall to be proved and it is unlikely that any criminal proceedings might have taken place before the Mareva injunction were applied for.

8. In my view, the Judge below clearly misdirected himself as to the law. It is not to be said that the risk of dissipation of assets is an unimportant factor for a Judge to take into account. It is a factor which a Judge must take into account when deciding whether or not to grant a Mareva injunction. It is not to say that in all cases of fraud, the Court will necessarily come to the view that because fraud is alleged, there would be a risk of dissipation of assets. But the Court must look at all the factors in the case, the type of fraud involved and the individuals and personalities including the Plaintiff and the Defendants and their relationship to each other and their business activities outside the Action itself. In my view, there is ample here for the Court to consider a risk of dissipation of assets.

9. It follows therefore that the Judge below in so directing himself has misdirected himself as to the law. It would therefore follow that it is open to this Court to exercise its own discretion as to whether a Mareva injunction should be granted.

10. Mr. Mitchell, S.C. on behalf of the Defendants, who are the Respondents in this case, has submitted strongly that the use of a Mareva injunction in this case is to be likened to a sledge hammer being taken to crack a nut. He says that the sums involved in the Mareva injunction are out of all proportion to the benefit which the Defendants can be shown to have received. He points further to the fact that the 1st Defendant is now, as I have already said, a dormant company and the 2nd Defendant on his own evidence is a man of very modest means living on a very small income. The 1st Defendant admittedly received $626,130 of the proceeds of the Letters of Credit. That money has been dissipated but it is alleged that the 2nd Defendant received some of that money directly and some of it indirectly. The involvement of the 3rd Defendant is simply as the recipient of some $200,000 of the money received by the 1st Defendant. The injunction granted against the 3rd Defendant was limited to $430,000 being made up of sums to include likely interest and costs to be incurred by the conclusion of the Action.

11. The evidence recently filed by the Defendants shows that the 3rd Defendant has approximately just that sum of $430,000 or thereabouts in a bank account. Mr. Mitchell submits that not one of the cases which have been cited to this Court showed that the risk of dissipation of assets in a Mareva injunction case was established simply by showing a good arguable case of fraud. Mr. Mitchell goes on to submit the damage to the Defendants caused by a Mareva injunction is out of all proportion to the benefit to be gained by the Plaintiff.

12. In this respect, I do not wish to belittle the effect, often devastating, which a Mareva injunction can have on a Defendant. But in this case, there is no real evidence as to what that effect is likely to be. As I have said, the 1st Defendant is not trading and the 3rd Defendant appears to have sufficient funds in its bank account to satisfy the Mareva injunction.

13. In my view, the facts of this case would cry out for the grant of a Mareva injunction. It seems that this is, on the face of the facts, a plain case of a blatant fraud. The 2nd Defendant and through him the 1st and 3rd Defendants have become mixed up in that fraud and specifically knowingly assisted the execution of that fraud. Certainly the 1st and 2nd Defendants have therefore put themselves at risk for damages for the full extent of the fraud and the 3rd Defendant, at least, for the sum of money which it received as a result of any wrongful activity.

14. For my part, I would have no hesitation in granting a Mareva injunction because looking at the facts of this fraud, it seems to me, that there must be a risk of dissipation of assets.

15. I would therefore allow this appeal and reinstate the Mareva injunction as amended by Barnett, J.

Mortimer, V.-P.:

16. I agree that the appeal must be allowed.

17. The judge was demonstrably in error in thinking that it was necessary for the fraud to have been established in order that he could go on to consider whether - as he put it - there was an intent on the part of the defendants to dissipate the assets.

18. It has long been the principle that if there is a strong arguable case of fraud established, then that may be sufficient for the judge to infer that there is a risk of dissipation. It is said to be a principle but perhaps it is more properly put that that is the way the evidence can be considered. It does not follow that because there is a strong arguable case of fraud, that there is necessarily a risk of dissipation. The judge must look at the whole of the evidence.

19. Here, for the reasons that have been set out by Rogers JA, I agree that we must now exercise our own discretion. For the reasons he has given, this Mareva injunction should be re-instated.

Nazareth, V.-P.:

20. I also agree for the reasons given by my Lords that the appeal should be allowed.

21. It is not disputed before us that upon the fact alone that there is a good arguable case of fraud, it is open to a court to conclude that there is a real risk of dissipation of assets (see e.g. Norwich Union Fire Insurance Society Ltd v Eden CA, 25 January 1996 per Phillips LJ). But plainly from the text of his judgment, the judge considered that that was not so, and that fraud had to be proved or that there had to be evidence of intention on the part of the defendants to dissipate assets. Clearly, therefore, the exercise by the judge of his discretion was flawed by his misdirection and it falls to this Court to exercise that discretion.

22. Having regard to the facts and considerations which Rogers JA has detailed, I have no doubt that the proper exercise of the discretion requires the Mareva order to be re-instated. I would accordingly allow the appeal and re-instate the Mareva order discharged by the judge below.

23. [Having heard counsel]

24. The appeal is allowed and there will be orders in terms of those sought in the Notice of Appeal.