KOMAL PATEL AND OTHERS v. CHRIS AU AND OTHERS

HCA 183/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 183 OF 2014

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BETWEEN

(BY ORIGINAL ACTION)

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AND BETWEEN

(BY COUNTERCLAIM)

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DECISION ON AN INQUIRY AS TO DAMAGES

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1.  The 1^st and 2^nd defendants seek an inquiry as to damages in relation to the discharged injunction of 29 January 2014. It was set down for hearing for 1 August 2014 as directed by me on 23 July 2014. I also gave directions for the filing of written submissions by the parties. The 1^st and 2^nd defendants were required to file and serve written submissions by 12pm on 28 July 2014 and the plaintiffs were required to file and serve written submissions by 12pm on 30 July 2014.

2.  Ms Queenie Lau instructed by Herbert Smith Freehills filed written submissions on behalf of the 1^st and 2^nd defendants by the required date.  No material was submitted by the defendants providing credible evidence of any loss suffered by them and the written submissions did not address the issue.  Ms Ebony Ling instructed by Robertsons on behalf of the plaintiffs filed written submissions in which she highlighted the failure by the defendants to identify and provide credible evidence as to loss.  Even though I had urged in my judgment of 11 July 2014 that consideration be given to the 2^nd defendant obtaining separate legal representation, it is rather curious that on 30 July 2014 the 2^nd defendant changed her solicitors, and a notice appointing Smyth & Co as her new solicitors was filed with the court.  In the afternoon of 31 July 2014, the day before the hearing, Herbert Smith Freehills, prompted by the new legal representation of the 2^nd defendant and certain arguments raised by the plaintiffs in their written submission, wrote to Robertsons seeking their consent to adjourn the proceedings and agreement to a range of directions for a hearing at a later date which seemed more designed to create satellite proceedings before the hearing of the merits of the substantive claim.  By return mail, Robertsons understandably refused. 

3.  It was not until the commencement of the hearing on 1 August 2014 that I was informed of the application for an adjournment by Ms Lau for the 1^st defendant.  Mr Gary Yin appeared for the 2^nd defendant.  I inquired as to why an adjournment application was being sought at this late stage.  I was not given a satisfactory answer.  I further inquired what credible evidence was there that the 1^st and 2^nd defendants had suffered loss as a result of the injunction order.  I was again not given a satisfactory answer.  In the case of the 1^st defendant, I was referred to his fourth affirmation where he said no more than he had suffered loss.  I was then given a fairly sketchy and vague account of the 1^st defendant incurring loss by the injunction order in relation to aborted car purchases and the operation of a restaurant.  It was also submitted to me that bank accounts under the 1^st defendant’s control were frozen as a result of the injunction order.  However, upon further inquiry about the bank accounts, little was known or could be provided about them.  In the case of the 2^nd defendant, I was told that the loss she suffered as a result of the injunction order was “mental loss”.

4.  It was apparent that the legal representatives of the 1^st and 2^nd defendants had little if any clear instructions on the loss caused by the injunction order.  This was surprising as the application for an inquiry as to damages featured in a draft set of orders prepared by Herbert Smith Freehills on the same day that I delivered judgment on 11 July 2014 discharging the original injunction order but regranting it on a limited basis.  Furthermore, I had specifically fixed the hearing to deal with this application with directions to the parties for the filing of written submissions.

5.  I stood the matter down to allow the legal representatives of the 1^st and 2^nd defendants to obtain instructions in order to make good their claim that they had credible evidence to show that they had suffered loss as a result of the discharged injunction order.  I required to be addressed on this matter in order to determine whether to grant the adjournment requested or proceed to hearing the applications as fixed.

6.  Ms Lau for the 1^st defendant again referred me to the 1^st defendant’s fourth affirmation which is dated 31 March 2014 where he said that since the injunction order he was unable to complete a number of business transactions and thereby had suffered loss.  This is no more than an assertion by the 1^st defendant and clearly does not constitute credible evidence that he had suffered loss which is prima facie or arguably caused by the injunction order.  Ms Lau then took me to two specific matters to show that the 1^st defendant had suffered loss. 

7.  The first matter was the aborted purchases of luxury cars by the 1^st defendant where the deposits he paid were forfeited and potential profit on the resale of the cars had been lost.  She submitted two sets of documents in relation to two purchases.

8.  The first set concerned a purported purchase of a Ferrari and a Porsche by the 1^st defendant. They consisted of a one-page sales contract dated 21 September 2012 for the two cars with the selling prices redacted, a bank transfer of HK$1,500,000 on 5 April 2013 to the purported named seller in the sales contract and a printout of what appears to be e-mail or text messages, one of which was purportedly made on 10 March 2014 at 8:21 pm where it appears the named seller informed the 1^st defendant that the outstanding balance payment had not been received and that he would wait until 10 March 2014 otherwise the deposit would be confiscated and the car would be sold to another buyer.  I note that the named seller only made reference to a single car.

9.  The second set consisted of a printout of e-mail communications between the 1^st defendant and a seller of a car and two bank transfers to the seller of US $140,000 on 1 August 2013 and HK$260,000 on 30 October 2013.  From the e-mail communications it appears that the 1^st defendant had agreed to complete the purchase of the car by paying a balance of over US$1 million on various dates before the injunction order was served on him on 7 February 2014.  The seller had been given the 1^st defendant a series of extensions to pay the outstanding balance.  The seller stated to the 1^st defendant that the final date for payment was 15 January 2014 but it had been extended to 31 January 2014 when it appears the deposit was forfeited.  It is clear from the 1^st defendant’s communications to the seller that he was relying on the L Capital funds transferred to the 3^rd defendant which are the subject of dispute between the parties in the substantive proceedings.  The funds held by the 3^rd defendant were frozen by the injunction order on 29 January 2014 and continue to be frozen by the regrant injunction order.  There is no application to enforce the undertaking by the 3^rd defendant.  It would appear that the 1^st defendant did not have sufficient funds to meet personal or other liabilities and that he was relying on the funds emanating from the L Capital acquisition.  This is relevant to the second matter that has been raised with me and also illustrated that the loss or losses that he may have incurred could not be attributable to the injunction order but rather to his expectation in receiving the disputed L Capital funds.  It is also apparent that the purchases of these cars and the failure or inability to complete the transactions occurred well before the injunction order was granted.

10.  The second matter was the failure of the restaurant business operated by a Singapore company, Au Chocolat Pte Ltd.  Ms Lau submitted three letters, two of which were dated 8 July 2014 and the other 9 July 2014, from Marina Bay Sands, Singapore addressed to the company for the attention of the 1^st defendant and his brother as directors.  The letters variously referred to a lease of premises at Marina Bay Sands dated 26 September 2011, an amended agreement dated 11 December 2013 and a letter dated 1 April 2014.  It was clear from these letters that the business had been in arrears of rent for some time and repeated arrangements had been made for payment of the outstanding arrears, but the company failed to make the arranged payments, and as a consequence the landlord appears to have repossessed the premises on 9 July 2014.  The first and obvious point is that the business was operated by a separate corporate entity.  The second point is that the company was not the subject of the injunction order.  The third point is that the failure of this business seems to have had its genesis well before the injunction order was granted.  When I mentioned to Ms Lau that this matter concerned a separate corporate entity which was unconnected to the injunction order, and asked her how any loss arising from this business was caused by the injunction order, she said because the 1^st defendant had a beneficial interest in the company concerned.  The business was operated by a separate legal entity in which the 1^st defendant had a beneficial interest. Not only was this matter concerned with a separate legal entity but the business failure had not been caused by the injunction order as shown by the arrears of rent having been outstanding for some time.  See Macaura v Northern Assurance Co Ltd and Others [1925] AC 619; Prest v Petrodel Resources Ltd [2013] 3 WLR 1 as to the separate legal personality of a corporate entity. 

11.  When the injunction was granted on 29 January 2014, the plaintiffs’ prime concern was to secure the funds of nearly SGD 12 million that were expected to be transferred into a Hong Kong bank account of the 3^rd defendant which they feared would be dissipated.  The plaintiffs were alleging against the 1^st defendant that he, with the aid of the 2^nd defendant, had misappropriated and misapplied funds derived from their highly successful joint venture in a restaurant and bar in Singapore.  The 1^st defendant has countered by alleging that these funds were due to him pursuant to an agreement to buy out his 35.5% interest in the venture.

12.  The return date of the injunction order was 14 February 2014.  Exceptions to the order as stated therein provided:

“ (1) This Order does not prohibit the 1^st, 2^nd and 3^rd defendants from spending HK$15,000 per week in total towards their ordinary living expenses and HK$15,000 per week in total towards their ordinary and proper business expenses and also a reasonable sum on legal advice and representation provided that the details of the bank account(s) from which to meet such expenses, the balance of these accounts and the amount(s) of such expenses withdrawn are first communicated to the plaintiffs’ solicitors. For the avoidance of doubt, the defendants must not remove or use any part of the proceeds paid into the DBS bank account until after the return date or further order of the court.

(2) The defendants may agree with the plaintiffs’ solicitors that the above spending limits should be increased or that this Order should be varied in any other respect, but any such agreement must be in writing.

(3) This Order shall cease to have effect if the 1^st, 2^nd and 3^rd defendants provide security by paying sums equivalent to the stated amount into Court or makes provision for security in that sum by some other method agreed with the plaintiffs’ solicitors or approved by the Court.”

13.  I should add that at no stage during the proceedings before me had there been an application to vary the terms of the injunction order granted 29 January 2014 to release any funds that were frozen or permit the sale of any asset to obtain funds to pay for any outstanding debt or liability of the 1^st defendant.  I do not know the net worth of the 1^st defendant and whether he had assets exceeding the sum of the injunction order but I do not have to go that far, as I am of the view that the 1^st defendant’s claim for damages pursuant to the plaintiffs’ undertaking is speculative and remote, and plainly unsustainable.

14.  Mr Yin, after taking instructions from the 2^nd defendant, submitted that her claim was for mental stress and nothing else.  When I asked him whether it was mental stress because of the injunction order or the proceedings generally, he quite properly acknowledged that it was due to the proceedings.  As I stated in my previous judgments in this case, I have found that the 2^nd defendant was the alter ego of the 1^st defendant and appeared to act on his instructions without question.  It seems that recently she filed evidence in proceedings before the High Court of Singapore that now been discontinued claiming beneficial interest in the shares of the 3^rd defendant which was completely contrary to her evidence in these proceedings.  In my judgment of 11 July 2014, I directed that consideration be given to the 2^nd defendant obtaining separate legal representation to address her interests and to avoid any conflict of interest with the 1^st defendant.

15.  After hearing submissions from the parties I decided to refuse the application for an adjournment and proceed to hear the application.  Ms Lau for the 1^st defendant addressed me on the relevant principles and relied on the submissions that she made for the adjournment with respect to the evidence of loss.  She also requested that the inquiry as to damages be dealt with before the trial of the substantive proceedings and be fixed before a judge in the terms of the order drafted by Herbert Smith Freehills.  Mr Yin quite properly in my view withdrew the application on behalf of the 2^nd defendant.

16.  As is the practice an applicant for an injunction is required to give to the court an undertaking to abide by any order for damages which may be made if the defendant suffers loss as a result of the order, and the court is of the opinion that the applicant should compensate him.  The form of the undertaking in the injunction order of 29 January 2014 followed the wording in Practice Direction 11.2, Schedule 2(1). The undertaking in damages is given to the court and it is said that the court obtains the undertaking from the applicant as part of the price of the ex parte relief that has been granted.  See F Hoffman-La Roche v Secretary of State for Trade and Industry [1975] AC 295 at 361 per Lord Diplock; Cheltenham & Gloucester Building Society v Ricketts [1993] 1 WLR 1545 at 1551D-1552D per Neill LJ, Yukong Line Ltd v Rendsbury Investments Corporation [2001] 2 Lloyd’s Rep 113 at paras 33 and 34.

17.  A party covered by the undertaking has the right to ask the court to enforce the undertaking against the applicant, and the court can do so either by awarding damages assessed summarily or by directing that the applicant pay the damages awarded on an inquiry as to the damages.  As helpfully set out in Gee, Commercial Injunctions (5^th Ed) at para 11.017, a court has a number of options available to it when an interlocutory injunction is discharged before trial, and they are as follows:

“ (1) It can enforce the undertaking by awarding damages assessed summarily and payable forthwith.

(2) It can exercise its discretion to enforce the undertaking and order an inquiry as to damages.

(3) It can determine forthwith that the undertaking is not to be enforced.

(4) It can adjourn the application for an inquiry to the trial or further order.

(5) It can adjourn the application to a hearing on the question of discretion whether to enforce the undertaking and, if so, assessment of damages.”

18.  As a matter of principle where it appears that an injunction has been wrongly or improperly granted the undertaking as to damages from the plaintiff ought to be given effect and he should bear any loss that has been caused by it, unless there are special circumstances not to do so.  The first step is to determine whether the undertaking should be enforced.  The injuncted party will need to show that there is an arguable case for damages which may be assessed immediately or upon inquiry.  If an inquiry is directed it would only be concerned with matters of causation and the quantification of damages.  Lord Diplock explained in F Hoffman-La Roche & Co at 361, that the assessment is made upon the same basis as that which damages for breach of contract would be assessed if the undertaking had been a contract between the plaintiff and the injuncted party that the plaintiff would not prevent the injuncted party from doing that which he was restrained from doing by the terms of the injunction. 

19.  The court retains discretion whether or not to enforce the undertaking. It has been held that it is to be exercised in accordance with equitable principles, taking into account all the circumstances of the case, but there may be special circumstances not to order an inquiry as to damages, including the circumstances in which the injunction had been obtained, the conduct of the injuncted party at the time the injunction was obtained and later, the success or otherwise of the plaintiff at the trial, and all the other circumstances of the case. See Cheltenham & Gloucester Building Society (supra), at 1551D per Neill LJ; Yukong Line Ltd (supra), para 34; Financiera Avenida SA v Shiblaq (1991) Times, 14 January 1991, per Lloyd LJ. 

20.  I should emphasise, however, that an inquiry as to damages is concerned with a loss caused by the injunction order and for which compensation should be given. As noted by Sir Donald Nicholls VC (as he then was) in Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840 at 857H to 858C:

“The plaintiff contended that the defendants do not have clean hands. The conduct of the three individual defendants was so outrageous and dishonest that the court ought not to exercise its discretion in favour of awarding them damages under the undertaking. I cannot accept this. Undoubtedly the defendants’ conduct was outrageous and dishonest. In particular, Mr Baldock and Mrs Lawrence stole documents from the plaintiff while continuing to draw pay; and Mrs Hibben instigated or encouraged the thefts, and in her evidence to me was not frank. Nevertheless, I must keep in mind that in this action I am concerned, so far as this can now be done, to protect the plaintiff’s property and rights and to assess fair compensation for loss suffered. Punishment of the defendants is not my function. If the defendants have suffered material loss by reason of excessive width in the terms of the injunction sought and obtained by the plaintiff in July 1990, in my view they are entitled to look to the plaintiff for damages pursuant to its undertaking. Plaintiffs, and those who advise them, ought to know that there is a risk in obtaining interlocutory injunctive relief: the risk is that the plaintiff may have to pay compensation to the defendant if it turns out at the trial that, having regard to the facts and law as established at the trial, the effect of the injunction was to restrain a defendant from activities it ought to have been at liberty to pursue.”

21.  A court’s function is not to punish the injuncted party for any egregious conduct, although it may take into account the conduct of the parties if it is directly relevant to the cause and assessment of damages being claimed, but to determine whether the injuncted party had suffered material loss as a result of the terms of the injunction order for which he should be compensated pursuant to the plaintiff’s undertaking. 

22.  In considering whether to enforce the undertaking, two particularly important factors are whether the applicant has succeeded on the merits of his claim, and whether there was a real risk of dissipation of assets.  If the discretion is exercised after judgment, and the applicant has succeeded in his claim and there was a real risk of dissipation, then ordinarily the court will not enforce the undertaking. In appropriate cases the application for an inquiry as to damages may be adjourned to the trial for this reason.

23.  An inquiry as to damages should not be awarded unless there is at least some reasonably arguable case that the injunction has caused the injuncted party some loss or damage for which compensation ought to be paid.  This will necessitate the injuncted party adducing credible evidence that he has suffered loss as the result of the making of the order.  As stated by Potter LJ in Yukong Line at para 35:

“So far as evidence of loss is concerned, upon an application for an inquiry, the applicant must adduce some credible evidence that he has suffered loss as the result of the making of the order. The court will not order any inquiry if it appears to be pointless to do so because the intended claim for damage is plainly unsustainable. That may be because it is clear that the order is no more than the factual context for loss which would have been suffered regardless of the granting of the order, or it may equally be clear that the damage is too remote. However, at the stage of exercising its discretion whether to order an inquiry, the Court does not ordinarily hear protracted argument on whether the suggested loss will be recoverable. If the defendant shows that he has suffered loss which was prima facie or arguably caused by the order, then the evidential burden of any contention that the relevant loss would have been suffered regardless of the making of the order in practice passes to the defendant and an inquiry will be ordered: see for instance Financiera Armhouse SA v Shiblaq; Tharros Shipping Co Ltd v Bias Shipping Ltd [1994] 1 Lloyd’s Rep 577.”

See also Armhouse Lee Ltd v Anthony Chappell, 1 December 1994, unreported, Civ Div Transcript No 1507/1994.

24.  As rightly submitted by Ms Ebony Ling for the plaintiffs, there is a lack of credible evidence that the injunction of 29 January 2014 against the 1^st defendant had caused him any loss for which he should be compensated.  There is no justification to make an order for an inquiry as to damages.  The injunction order restricted the 1^st defendant from removing assets within Hong Kong or from disposing or dealing with assets within or outside Hong Kong up to the value of SGD16,075,880.  I am unaware as to whether the 1^st defendant’s net wealth exceeds the sum of the injunction order.  Although on the information before me, it would seem that the 1^st defendant had acquired a number of assets and had a substantial source of income from the Kudeta business.  I note that the injunction order against the 1^st defendant specifically covered a fleet of seven luxury cars.  In any event, there is a lack of credible information before me that he suffered any loss as a result of the injunction order.  It would appear that it only affected the 3^rd defendant, as the prime purpose of the injunction was to freeze the funds that were expected to be received by the 3^rd defendant in consequence of the L Capital acquisition.

25.  Ms Ling further submits that equitable principles dictate that the undertaking should not be enforced. Throughout these proceedings, I have taken the view that the plaintiffs have a good arguable case against the defendants on the misappropriation and misapplication of the assets of the relevant corporate entities involved and that there was a real risk of dissipation of assets of the 3^rd defendant.  I found that the 1^st defendant was a person of low commercial morality as shown by the false evidence he gave on oath before the Singapore High Court and the use that he had made of others, including the 2^nd defendant, in his commercial dealings and conduct.  I also found that the 2^nd defendant is the alter ego of the 1^st defendant and that she acted on his instructions in the exercise of her fiduciary duties.  Ms Ling argues that these matters together with my reasons for discharging the injunction and regranting it, albeit on a limited basis, also justified not enforcing the plaintiffs’ undertaking.  In discharging the original injunction order, I found that there was material nondisclosure by the plaintiffs, firstly by misrepresenting the amount of the alleged unpaid dividends due to the plaintiffs which I concluded was as a result of a misreading of an accountant’s report and not deliberate, and secondly by not disclosing the 1^st defendant’s likely claim that he had a beneficial interest of 35.5% in Kudeta BVI.  I disagree with Ms Ling’s submission as they seem to be tantamount to seeking the nonenforcement of the undertaking as punishment against the 1^st defendant for his conduct.

26.  In making my decision, I have applied the relevant legal principles that I have stated with additional guidance from the comments of Sir Donald Nicholls VC in Universal Thermosensors Ltd that I have quoted and the comments of Lord Diplock in F Hoffmann-LaRoche &   Co where he said that the assessment is made upon the same basis as that which damages would be assessed if the undertaking had been a contract between the plaintiff and the injuncted party that the plaintiff would not prevent the injuncted party from doing that which he was restrained from doing by the terms of the injunction.

27.  I should add, however, that my decision to regrant the injunction on a limited basis was primarily influenced by the freezing of the substantial funds in the 3^rd defendant’s bank account together with the restrictions on the 1^st and 2^nd defendants not to dispose of or deal with the shares in the 3^rd defendant, and the continuance of the second injunction order.  I did not see the necessity to continue with the injunction order against the 1^st and 2^nd defendants because funds that were both adequate and relevant to the claim had been frozen against the 3^rd defendant and appropriate restrictions were in place to protect the interests of the plaintiffs in the 3^rd defendant as contained in the regrant injunction order and the second injunction order.  It was because of events subsequent to the grant of the injunction order on 29 January 2014 that I decided not to regrant the injunction order against the 1^st and 2^nd defendants.  I would have otherwise done so if not for the freezing of the substantial funds by the injunction order against the 3^rd defendant and the terms and scope of the second injunction order. 

28.  For the foregoing reasons, I am therefore of the view that no order for an inquiry as to damages is warranted as it appears to me to be pointless to do so because the intended claim is plainly unsustainable.

29.  Ms Ling also submitted that the matters that needed to be assessed and determined in relation to the claim as to damages, bearing in mind the nature of the case and the reasons of the decision to discharge the injunction order, would be best done by the trial judge who would have a full picture of the case.  As a fundamental proposition that is correct, and if it had been shown that the 1^st defendant had an arguable claim I would have taken that approach.  But he has not shown that he has one and I refuse to exercise my discretion to enforce the undertaking.  In contrast, in submissions on behalf of the 1^st defendant, it was argued when the adjournment application was made that these proceedings be fixed before a judge at a later date prior to the trial of the substantive proceedings. 

30.  I make an order nisi that the 1^st defendant pay the plaintiffs’ costs of this application, to be taxed if not agreed.  I have placed the burden of the costs squarely on the 1^st defendant, and have deliberately not included the 2^nd defendant in the costs order, as it seems to me that the 2^nd defendant as the alter ego of the 1^st defendant acts according to his instructions and direction and that more than likely she was brought into these proceedings by him.  That is to some extent apparent by her withdrawal of her application in the course of the hearing through her new legal representatives.