CHINA METAL RECYCLING (HOLDINGS) LTD AND ANOTHER v. CHUN CHI WAI AND OTHERS

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1412 OF 2013

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DECISION

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1.  This is an application of Mr Chun and Wellrun Limited (collectively “Ds”) for a stay of the ex-parte order granted by this court on 19^th February 2016 (“the Receivership Order”).

2.  This matter has a long history and many other courts have disposed of various applications in this action before. For present purposes, I shall only give a brief summary of the relevant background facts as follows.

3.  China Metal Recycling (Holdings) Limited (“China Metal”) is now in compulsory liquidation. It was incorporated in the Cayman Islands with its principal place of business situated in Hong Kong. It is the holding company of a number of subsidiary companies in the PRC, Macau, Taiwan, Singapore, Hong Kong and the British Virgin Islands (“the China Metal Group”). The China Metal Group carried on a worldwide trade in scrap metal with the major operations being vested in the subsidiaries in the Mainland.

4.  Central Steel (Macao Commercial Offshore) Limited (“Central Steel”) is also in compulsory liquidation. It was incorporated in Macau and was purportedly the sourcing arm of the China Metal Group.

5.  The scrap metal recycling business of the Group was said to be on a grand scale in the Mainland. On 22 June 2009, the shares of China Metal were listed on the Main Board of the Hong Kong Stock Exchange and about HK$1,685 million was raised by the initial public offering.

6.  Mr Chun and Madam Lai, husband and wife, founded the China Metal Group. Mr Chun was the Chairman and CEO of China Metal and its controlling shareholder.

7.  The investigation of the Securities and Futures Commission (“SFC”) in late 2009 lifted the lid on the alleged misdeeds of Mr Chun and Madam Lai leading to the present proceedings. The SFC found out that Mr Chun had committed fraud on a massive scale on China Metal, Central Steel and the Stock Exchange. As a result, more than HK$5 billion were misappropriated from these two companies mainly by means of a number of fictitious transactions over the years with the assistance of all other defendants.

8.  On 26 July 2013, in a winding-up petition commenced by SFC under HCCW 210/2013, Mr Borrelli and Ms Chi were appointed provisional liquidators in respect of China Metal and on 8 August 2013, they were appointed provisional liquidators in respect of Central Steel.

9.  On 30 July 2013, the provisional liquidators obtained an ex parte Mareva injunction against Mr Chun and Madam Lai and all other defendants in this action except Wellrun Limited (“Wellrun”) up to the value of HK$1,682,198.420. Wellrun, a corporate vehicle of Mr Chun, was joined as the 13^th defendant in this action and an ex parte Mareva injunction in respect of the like amount was granted against Wellrun on 7 August 2013.

10.  On 4 June 2014, Ng J extended the Mareva injunctions to 13 companies which Mr Chun allegedly held substantial assets through his relatives and close associates. Among these companies, the three daughters of Mr Chun own Chung Shing Finance Holding Limited (Belize) (“Chung Shing Belize”), which holds Chung Shing Development Pte Limited (Singapore) and Chung Shing Investment Pte Ltd (Singapore), the second respondent (“R2”). R2 holds Chung Shing Finance (Holdings) Limited (HK), the 1^st respondent (“R1”). R1 holds 4 PRC subsidiaries which include the 4^th respondent (“R4”), Zhongjin Goldman (Jiangsu) Investment Co Ltd (“the Jiangsu Company”), the 3^rd respondent (“R3”) and the 5^th respondent (“R5”).

11.  The provisional liquidators allege that Wellrun purportedly loaned a sum of US$82 million to R1. The purported loan was transferred to R3 and the Jiangsu Company subsequently. As mentioned, Mr Chun’s three daughters have become the shareholders of Chung Shing Belize. The purported loan is suspect.

12.  On 26 February 2015, Harris J ordered that China Metal be wound up. On 14 May 2015, Mr Borelli and Ms Chi (hereinafter “the Liquidators”) were appointed as liquidators in respect of China Metal and on 10 July 2015 in respect of Central Steel.  

13.  In the present action, China Metal and Central Steel (hereinafter collectively “Ps”) claim against both Mr Chun and Madam Lai for an indemnity for any claims against China Metal arising from the IPO, equitable damages and/or compensation for breach of trust and/or fiduciary duty and /or damages for conspiracy. They also claim against Wellrun for an identical indemnity and equitable damages and/or compensation for dishonest assistance and/or damages for conspiracy.

14.  Default judgment has been entered against the 3^rd, 4^th, 7^th 8^th, 9^th and 10^th defendants. The 5^th defendant has been debarred from defending this action pursuant to the order of Saunders, J dated 25 June 2014. Ps discontinued this action against the 11^th and 12^th defendants.

15.  On account of their failure to comply with the disclosure obligations in aid of the Mareva injunctions despite its being enforced by the unless order of Chow J dated 17 November 2014, DHCJ Anita Yip SC ordered that the defence of Ds be struck out without entering default judgment against them on 12 October 2015.

16.  On 5 February 2016, DHCJ Keith heard and disposed of an inter partes application of Ps for an appointment of interim receivers (“the 1^st Receivership Application”) over the assets of all the five respondents. The deputy judge accepted that there is a triable issue over whether the liquidation of the Jiangsu Company and the current whereabouts of its assets were deliberately concealed from the Liquidators and whether the Mareva injunctions were breached.

17.  The deputy judge also accepted that there is a triable issue as to whether there is a risk that there will be further breaches of the Mareva injunctions unless drastic action of some kind is taken. The deputy judge opined that the appointment of interim receivers over the assets of the R1, R2 and R5 would be a proportionate response to the need to protect the assets of the Jiangsu Company from further dissipation subject to the personal undertaking of Mr Fung who is a certified public account in his executive control of the relevant respondents that he would ensure none of their assets would be disposed of in breach of the Mareva injunctions. On that basis, the deputy judge agreed to place trust in Mr Fung and adjourned the 1^st Receivership Application so that it could be renewed at the same time as the application as against the R3 and R4 which Ps had not been able to effect service of their summons.

18.  After this lengthy narrative of the background facts, I now come to the subject matter of this stay application, i.e. the Receivership Order. On 19 February 2016, Ps applied to this court on an ex-parte without notice basis for the appointment of interim receivers in aid of the Mareva injunctions (“the 2^nd Receivership Application”). The underlying complaint was the recent discovery of the Liquidators (on 15 February 2016) of the dissolution of Zhongjin Goldman (Tianjin) Equity Investment Fund Partnership (“the Partnership”).

19.  Mr Chun had 99.98% interest in the Partnership and R4 had the remaining 0.02% interest prior to its dissolution. On 13 July 2015, as its 99.8% owner, Mr Chun signed a resolution to dissolve the Partnership and eventually the Partnership was dissolved on 23 October 2015.

20.  In any view, Mr Chun did cause one of his assets being his interest in the Partnership to be dissipated and arguably this was in breach of the Mareva injunctions. Alarmingly, he did not disclose the dissolution of the Partnership to the Liquidators and no mention was made about this when the parties argued about the liquidation of the Jiangsu Company before DHCJ Keith.

21.  At the ex-parte hearing, Ms Sit appearing for Ps highlighted to this court the following matters in support of Ps’ application:

(1) The registered capital of the Partnership in the amount of USD500m;

(2) The salient observations of DHCJ Keith in the 1^st Receivership Application and in particular his conclusion that a case for appointment of interim receiver including further breaches of the Mareva injunctions and dissipation of assets was prima facie made out;

(3) The concealment of the dissolution of the Partnership even in the course of Ds’ assertion of their non-involvement in the liquidation of the Jiangsu Company before DCHJ Keith;

(4) The repeated breaches of the Mareva injunctions and their ancillary disclosure obligations leading to the striking out of his defence, the dishonesty of Mr Chun and his cynical disregard of previous court orders; and

(5) The departure of Mr Chun from Hong Kong and his failure to answer his police bail.

22.  Against this backdrop, Ms Sit submitted that an urgent appointment of receiver was warranted without any forewarning to be given to Mr Chun so that he could not have any opportunity to further dissipate his remaining assets.  

23.  On the evidence, I was satisfied that a prima facie case of an appointment of interim receiver had been made out. I nevertheless expressed my concern about the necessity and propriety of the application to be made on an ex parte and without notice basis given the fact that the 1^st Receivership Application was argued at an inter partes hearing. At last, I was persuaded by Ms Sit and thus made the Receivership Order whereby Messrs John Horward Batchelor and Roderick John Sutton as receivers (“the Receivers”) with the usual ancillary disclosure obligations. For the avoidance of doubt, the Receivership Order does not concern R1, R2 and R5.

24.  Prior to the return day fixed on 26 February 2016, upon receipt of the summons of Ps dated 22February 2016 for their application to continue the Receivership Order (“the Continuation Application”), this court indicated by letter dated 23 February 2016 that should Ds intend to discharge the Receivership Order with their own evidence, the parties should try to agree on the timetable for filing of their respective evidence and adjourn the intended discharge application and the Continuation Application to a date to be fixed. This court also indicated to the parties that this court would be available on 3 March 2016 to deal with their urgent applications, if any.

25.  On the following day, Ds issued a summons for their application to discharge the Receivership Order (“the Discharge Application”) and a stay pending determination thereof (“Stay Application”).  

26.  Absent agreement on directions to be sought, the parties came before this court on the return day. On that occasion, Mr Johnny Mok SC (with Mr Alexander Tang and Mr Val Chow) appearing for Ds proposed certain directions which were by and large agreed by Ms Linda Chan SC for Ps. This court hence made an order mostly in terms of the proposed directions whereby, among other things, directions for filing evidence for the Discharge Application and the Continuation Application were given so that the two applications could be dealt with in a 2-day hearing at the same time before this court (“the Return day order”).

27.  Mr Mok indicated to this court that Ds would proceed with their Stay Application on 3 March 2016. He lastly made an application for an interim stay pending the determination of the Stay Application. Ms Chan opposed the application and eventually I made my ruling against Ds with reasons orally given.

28.  I should mention that I agreed to allow an extension of time for Ds to comply with the ancillary disclosure obligations in the Receivership Order until 10 March 2016, i.e. the intended date of my determination of the Stay Application in the Return day order.

Stay Application

29.  Mr Man SC (with Mr Alexander Tang and Mr Val Chow) for Ds at the outset of the hearing suggested that this court should adopt the following approach for the purpose of the Stay Application. He submitted that it should be treated to be made at the very first inter partes hearing after the grant of the Receivership Order notwithstanding the return day. As such, Ds should be entitled to argue that the Receivership Order should be forthwith discharged and this court should refuse to make any regrant. Naturally this suggestion attracted the strong objection of Ms Sit.

30.  I accept in certain situations where there are strong reasons to discharge an ex-parte order on the return day even without any opposition evidence filed, the court can discharge the ex-parte order when it feels certain of its impropriety upon the submissions of the party at the receiving end. However, I am unable to accept Mr Man’s suggestion given the position previously indicated by the parties as reflected in the Return day order. The parties had already agreed to argue both the Discharge Application and the Continuation Application together at a 2-day hearing with full evidence filed by both sides. Ds could not take Ps by surprise and ask for an immediate discharge of the Receivership Order outright on this occasion though the effect of a stay might be akin to a temporary discharge.   

31.  This court then asked for assistance as to the applicable test to be adopted in the Stay Application. Ms Sit was right to point out that Mr Man was unable to provide any authorities setting out the applicable test and she went on to submit that the use of interim stay was entirely inappropriate in light of the lack of proper legal basis for the court to exercise such discretion in these circumstances.

32.  In my judgment, this court must have inherent jurisdiction to accede to the Stay Application and suspend the operation of the Receivership pending the determination of the Discharge Application and the Continuation Application to do justice in the particular circumstances of the present case. This Ms Sit agreed and stressed that any exercise of power by this court must be done judicially and on a principled basis.

33.  Mr Man urged this court to bear in mind that the Receivership Order was granted arguably in breach of natural justice and Ds should not be saddled with any extra heavy burden to prove its invalidity since this was the very first time they had the opportunity to mount such a challenge. I cannot fully accept his submission.

34.  I believe the correct analysis is this. This court accepted the substantive merits and appropriateness of Ps’ ex-parte application and hence the Receivership Order was made. Unless there is shown an arguable case of discharge supported by evidence and/or legal submissions advanced on behalf of Ds, this court has no reason to deviate from its previous conclusion that an interim receiver should be appointed and to suspend the operation of the ex-parte order pending the determination of the Discharge Application and the Continuation Application.  

35.  In assessing whether there is an arguable case of discharge, it is true that Ds may argue for a discharge of the Receivership Order by way of legal submissions without adducing their own evidence. However, Ds have agreed to have their Discharge Application to be adjourned pending filing of evidence and there is no reason why they should now be allowed to argue on legal principles alone for a stay, which is a discharge in effect before the Discharge Application is heard.  On the other hand, I do not think that it is appropriate for this court to embark on a thorough investigation into the merits on affidavit evidence and form any definitive view in the absence of full evidence and before the substantive hearing of the Discharge and Continuation Applications.

36.  If it appears to this court that it is an open and shut case that the Discharge Application is doomed to failure, the Stay Application should be dismissed without further ado.

37.  However, if this court is satisfied that there is an arguable case of discharge, this court should proceed to consider the balance of convenience. In particular, the court has to consider whether the greater injustice might arise from refusing a stay which it subsequently turns out that the Receivership Order ought not to have been granted, or from the suspension of the Receivership Order which it subsequently turns out ought to have remained operative.

Ds’ case of discharge

38.  Mr Man advanced three main grounds for the Stay Application. First, Mr Man argued that there is no justification for Ps to have proceeded the 2^nd Receivership Application ex parte without notice. He argued that there was no urgency or confidentiality of their application given the worldwide Mareva injunctions in place.

39.  Mr Man highlighted to me the fact that even the 1^st Receivership Application was proceeded inter partes before DHCJ Keith and there is no reason why the 2^nd Receivership Application was made on a different basis.

40.  Mr Man further argued that if the Mareva injunctions could not stop Mr Chun from dissipating his assets, the Receivership Order could not be of any additional assistance.

41.  Mr Man pointed out that the acquisition of Mr Chun’s assets by the Receivers would take some time and so would their investigations, hence the Receivership Order could not add anything to the Mareva injunctions immediately. Put bluntly, Mr Chun could still dissipate his assets before the Receivers are able to lay their hands on his assets and so there is no reason why the 2^nd Receivership Application should be made on an urgent basis without giving any notice to Ds.

42.  I am not impressed by this submission. One of the general functions of an appointment of receivers is to ensure compliance with Mareva injunctions. As rightly pointed out by Ms Sit, a receivership order may be granted where a Mareva injunction is breached, or there is a real risk of such a breach: Akai Holding Ltd v Ho Wing On Christopher, unreported, HCCL 37/2005 at §41.

43.  Whilst I may accept that receivership has its inherent limitations to ensure immediate cessation of dissipation of assets, it does not follow that it should never be granted on an urgent and without notice basis.   

44.  Mr Man next submitted that the dissolution of the Partnership being the last straw that breaks the camel’s back was completed months ago before the 2^nd Receivership Application and has already become a stale event. Thus, he submitted that there was neither urgency nor confidentiality in this matter.

45.  I cannot accept this submission. The last straw contended by Ps is actually the late discovery of the secretive dissolution of the Partnership apparently in breach of the Mareva injunctions, which is indicative of an imminent danger or risk of further dissipation of their assets in the absence of effective measures taken against them. 

46.  The second broad ground is that there was material non-disclosure about the paid up capital of the Partnership. Mr Man pointed out that this court was given a false picture that the registered capital of USD 500M was actually paid up and in fact Chun has never paid any capital to the Partnership. This court was misled into equating the dissolution of the Partnership with an evaporation of a substantial asset of Mr Chun.

47.  Mr Man submitted that to begin with, the official records and documents of the Partnership in the possession of the Partnership should show that the information of the registered and actual paid up capital was inconsistent at best. It is apparent that Mr Chun was only required to pay up the capital he subscribed by 1 August 2016. Indeed Mr Borrelli, one of the Liquidators, said so in his 7^th Affidavit dated 3 June 2014.

48.  Furthermore, Mr Chun’s solicitors by letter dated 9 June 2014 informed Ps that in the Partnership, Mr Chun’s interest is below HK$50,000.

49.  Mr Chun himself in his 14^th Affirmation dated 26 August 2014 positively asserted that the Partnership was dormant with no substantial assets and due to the fact that the investment plan did not materialize, no capital has ever been paid into the Partnership.

50.  A letter of R4 to Mr Chun dated 27 April 2015 was exhibited to the 5^th Affirmation of Anthony Siu filed for the Stay Application and it explained that due to the non-payment of any of the registered capital and the lack of any assets, the Partnership was unable to operate. R4 demanded Mr Chun to comply with the investment plan and make contribution within 30 days lest R4 should terminate the partnership and dissolve the Partnership. There is no evidence that the Liquidators had any knowledge of this letter and I do not think it assists in Ds’ allegation of material non-disclosure.

51.  Mr Man submitted that Mr Chun’s explanation should have been drawn to the attention of this court at the ex-parte stage so as to give this court a balanced view of the matter.

52.  Ms Sit explained that the Liquidators should be entitled to rely on the information contained in the two official annual check reports of the Partnership for the years of 2011 and 2012 prepared by apparently independent professionals for the submissions to the authorities and it should prevail over other information in the pre-formation records or documents. She pointed out that the dissolution documents are dubious and the reliability of the three persons who prepared them is very much questionable by reason of their affinity to Mr Chun.

53.  I can well see the force of Mr Man’s submission on the alleged material non-disclosure but I cannot say that the validity of the allegation is so overwhelming that I can find full justification to discharge the Receivership Order or suspend its operation without further ado. Suffice it to say, I would for present purposes accept that there is an arguable case of material non-disclosure to be further tested/argued at the hearing of the Discharge Application.

54.  I nevertheless continue to explain Mr Man’s third broad ground in brief. It was centered around the well-known draconian, intrusive and less reversible nature of the appointment of receivers. He submitted that receivers should only be appointed as the last resort in light of an imminent risk of dissipation of assets. A fortiori, only in exceptional circumstances such a remedy should be allowed when the application is proceeded ex parte without notice. Mr Man then went on to submit that the evidence of Ps failed to meet the threshold.

55.  I do not think there is any argument about the general principles and I need not refer to the relevant authorities cited to me in this Decision. I am just not persuaded that Ps plainly failed to justify the appointment on their evidence.

56.  Before leaving the merits of Ds’ case of discharge, I should make it clear I make no reference to the additional allegations contained in the 7^th Affirmation of Ms Chi filed on 26 February 2016 for this hearing. I do not believe that it is relevant to the Stay Application.

Balance of convenience

57.  Having accepted that there is an arguable case of discharge, I proceed to consider the balance of convenience. In this balancing exercise, general complaints about the undesirable effect of a receivership order do not assist Ds. They have failed to adduce any evidence to show that the appointment of the Receivers did or would cause any serious disruption to the business of those companies concerned including Wellrun. There is no suggestion that any of these companies are a going concern and have genuine business operation. Nor is there any allegation that any of their assets, commercial transactions or contracts would ever be jeopardized or prejudiced by the Receivership Order and as a result they would suffer any irreparable loss. The failure of Ds to adduce such evidence is inexcusable after I already pointed this out in my refusal of the interim stay application on the return day.

58.  Mr Man submitted that Ds may be prejudiced in their defence to this action if they are subject to the Receivership Order in the meantime.

59.  I am not persuaded. The Receivers are officers of the court and they should know very well their mandates and duties of their appointment. I do not, in the absence of evidence, believe that they would in any way impede Ds’ preparation of their defence.

60.  On the contrary, I am satisfied that there is an arguable case that Ds would dissipate their assets prime facie in breach of the Mareva injunctions. I am of the view that if the Stay Application is granted, Ps would be exposed to this genuine risk and suffer irreparable loss.

61.  In the premises, I am driven to the conclusion that I should not exercise my discretion to grant a stay of the Receivership Order. Nor do I find any legitimate ground to allow Ds a suspension of their disclosure obligations thereunder.

Conclusion and Orders

62.  For the reasons given, I dismiss the Stay Application in paragraph 3 of Ds’ summons. I order that the Receivership Order be continued until the determination of the Discharge and Continuation Applications or further order of the court. I allow Ds more time to comply with the disclosure obligations in the Receivership Order by extending the time to comply with paragraph 2 of the Return day order from 10 March 2016 to 21 March 2016.

63.  Costs should follow the event and I make a costs order nisi that Ds do pay Ps costs of this application forthwith, to be taxed if not agreed.

64.  Lastly, I thank counsel for their helpful assistance rendered to this court in this matter.