XCHRX PBM (HONG KONG) LTD. v. TANG KAM LUN, ALLAN and Others

1997, No. A13316

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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Background

1. On 12 November 1997, the plaintiff obtained a Mareva Injunction against the first and second defendants and two others. On 28 November 1997, I heard an application by the second defendant and one other for the discharge of that injunction. I granted that application on 3 December 1997. That decision is now under appeal.

2. On 1 December 1997, the plaintiff discovered that the first defendant (Mr Tang) had been given a general power of attorney by the second defendant (Mr Chan) and his wife, the third defendant, to operate a foreign currency account (the account). This was highly relevant to the application for the Mareva injunction, but had not been disclosed by the defendants. On this basis, I continued the injunction in respect of this account and of sale of a proceeds of sale of a property (the property) owned by the fourth defendant (Regent).

3. On 8 December 1997, the plaintiff obtained an ex parte injunction from me in relation to that account and those proceeds. That injunction was continued on 19 December 1997.

4. The defendants have now applied to discharge the injunction. This is the application before me.

The Evidence

5. Mr Tang was employed by the plaintiff from 1 September 1990 until he resigned on 18 July 1997. In 1994, Mr Tang was promoted to the post of financial director of the plaintiff, and he was occupying this post when he resigned.

6. In early May 1997, the plaintiff send an internal auditor to Hong Kong. There is no need, for the purposes of the matters before me, to detail what the plaintiff says was discovered as a result of this visit. It is sufficient to say that, on the plaintiff's evidence, there is a prima facie case that Mr Tang had been misappropriating money due to the plaintiff and paid by a customer - Swiss Time Trading Company in Taiwan. Mr Tang was made aware of the plaintiff's investigations at about this time. Mr Tang does not dispute this evidence. The amount involved is about SFR9.2 million.

7. On about 2 June 1997, Mr Tang and his girlfriend, Ms Chau Sau Lai (Ms Chau), purchased all the shares in Regent, which owned the property. At that time, the first defendant received a salary of $59,000 per month. On about 18 June 1997, Mr Tang and Ms Chau resigned as directors of Regent, and Mr Chan his wife were appointed. On 26 June 1997, Mr Tang and Ms Chau sold the shares and the shareholder's loan account in Regent to Mr Chan and his wife. The consideration was said to be $3,146,447.92. The plaintiff says this sale was a sham and designed to frustrate the plaintiff's rights. On 6 October 1997, Regent sold the property for a price of $14.23 million. The plaintiff alleges that Mr Chan and his wife are constructive trustees of their interests in Regent for the plaintiff.

8. The plaintiff alleges that the account belongs to Mr Tang and was operated with money taken from the plaintiff by Mr Tang so Mr Tang, Mr Chan and his wife are constructive trustees of the plaintiff of this account.

9. In his affirmation filed in the earlier action, Mr Chan says that Mr Tang has been a friend of his since about 1993. He entered into a successful property speculation with him in 1994.

10. Mr Chan seeks to explain how he and his wife came to acquire the shares in Regent. He says that in order to give "the full picture of all the loans" to Mr Tang, he had to start in May 1997.

11. On 30 May 1997, Mr Tang asked him for a loan of $2 million, but he lent only US$120,000, although Mr Tang signed two acknowledgements each in the sum of $1 million. On 3 June 1997, Mr Tang asked him for another $1 million. At the request of Mr Tang, he transferred this money to the account of Ms Chau. These loans were for a period of three months. On 15 June 1997, he lent Mr Tang another $2.3 million. Mr Chan says "On this occasion, I agreed to lend him HK$2.3 million but asked him to give me security for all the money I had lent him". This sum of $2.3 million, Mr Chan says, was paid from his overdraft account, but he could not find the statement relating to this transaction. Before these loans were due for repayment, Mr Tang sold to Mr Chan the entire shareholding in Regent, the only asset of which was the property. The consideration for this was stated to be $3,146,447 already paid. This left Mr Tang still owing about $1 million. On 2 July 1997, Mr Tang repaid US$120,000. At this time, Mr Chan "considered that he had repaid all the money I had lent to him". On 10 July 1997, Mr Tang asked for another loan of $1 m. Mr Chan says he agreed to lend him US$120,000, but "I was too busy even to write any instruction to my banker because I was attending a meeting. I told [Mr Tang] to type out an authorization and fax the same to my office and then send it to my banker." Mr Tang still owes him this sum.

12. In his affirmations filed in this action, Mr Chan says that Regent had a mortgage with Yien Yieh Bank for $8.05 million. When he bought the shares in Regent, Mr Tang told him that "he would sell the said property at its original price, that is $11,500,000.00. He said he needed the money urgently and did not want to pay the monthly mortgage of over HK$70,000 per month." Mr Chan agreed to "take over Regent Trinity at HK$11,500,00,00". Mr Chan seeks to explain how the figure of 3,146,447.92 was reached - by deducting the mortgage of $8,050,000.00 and penalty interest of $303,552.08 from the value of the property of $11,500,000.00. The property was sold on 6 October 1997 for $14.23 million, which yielded a net sum of $4,366,069.45.

13. In his second affirmation, Mr Chan, in relation to the loan of $2.3 million to Mr Tang, produces two cheques dated 8 and 16 April 1997 in the sums of $1 million and $500,000. He says these were part of the $2.3 million lent. Regarding the balance of $800,000, he says that this was the total sum of various cash loans made to Mr Tang during the 1996/97 racing season. On 15 June 1997, they agreed that these loans were about $700,000, and Mr Chan lent him several "10's of thousands in cash to round up the total amount to HK$800,000".

14. In his third affirmation, Mr Chan produces a note signed dated 15 June 1997 by him and Mr Tang in which Mr Tang records that he borrowed $2.3 million from Mr Chan for 3 months using the property as security. This note records that the security also covers another loan of $2 million. When Mr Chan sold the shares to him, Mr Chan said "that his cash flow was very tight and could not then afford HK$70,000 per month for repaying the mortgage loan". He repeats that the sum of $3,146,447.92 was calculated by taking into account the penalty interest, and that he did not need to pay Mr Tang anything because the net value was less than the loans.

15. Regarding the power of attorney, he says he gave this to Mr Tang because Mr Tang was knowledgeable in the foreign exchange market, and he had agreed to assist Mr Chan in speculating. He says that Mr Tang never gave instructions to withdraw money from the account. Mr Chan gives no evidence of how Mr Tang assisted him in speculating.

16. In his fifth affirmation, Mr Chan produces details of transactions concerning the account. This shows that Mr Tang put money into the account on only two occasions: US$90,000 on 18 November 1996 and US$120,000 on 2 July 1997.

17. Mr Tang gave no evidence in the earlier action. In his affirmations filed in this action, he makes no attempt to deny the plaintiff's allegations regarding his misappropriation of the plaintiff's money, and he does not say what has happened to the money. He confirms what Mr Chan says in his evidence. Regarding the purchase of Regent, he says that a mortgage of $8.05 million was raised and "the remaining balance of HK$3,450,000, part of them came from drawing cheques from my bank account (HK$500,000), part of them from a transfer into the bank account of Tang & Lee, solicitors, (HK$1,225,000) and part of them came from depositing cash in the account of Tang & Lee (HK$1,800,000). For the said amount of HK$1,800,000, I remember that it came from the account of my girlfriend, Chau Sau Lai." In his second affirmation, Mr Tang says that the $1.8 million "was withdrawn from the bank account of my girlfriend Chau Sau Lai. Part of the said HK$1,800,000.00 were derived from the loan I borrowed from [Mr Chan]. Part was derived from savings of my girlfriend and I." He cannot say how much came from the loan by Mr Chan. He cannot find records of his repayment to Mr Chan on 2 July 1997.

18. Mr Lui Kit Fong, the solicitor for the plaintiff, points out that on 28 July 1997 and 29 August 1997 two cheques were issued by Ms Chau each for $75,036.56 to pay the mortgage instalments. He also produces two cheques showing that Ms Chau paid the management fees $7,313.40 on 7 July 1997 and $3,656,70 on 25 August 1997. He also points out that Ms Chau paid the penalty interest of $303,552.08. Mr Lui suggests that the sale agreement of the shares to Mr Chan has some peculiar features. The agreement required requisitions to be delivered the day after the agreement, and the agreement was completed on the same day as the agreement itself. The balance sheet attached to the agreement shows a mortgage loan of only $5,651,636. The agreement does say that the consideration was offset against the loans. Mr Lui also notes that there is no evidence that Mr Chan and his wife gave the bank a new personal guarantee when they acquired the shares.

19. Mr Tang confirms that he assisted "the 3rd Defendant" - meaning Mr Chan - to pay the mortgage instalments, management fees and rates in July and August 1997. This, he says, was because he was beholden to Mr Chan and it was inconvenient for Mr Chan to pay. Mr Chan confirms this, saying he was too busy to make these payments, and implies that he could not easily get to the bank to arrange these payments. In September 1997, Mr Tang told him he had cash flow problems, so Mr Chan paid the mortgage instalment himself. Regarding the allegation that Ms Chau paid the penalty interest of $303,552.08, Mr Chan, by implication, admits this, but he makes no attempt to explain how, in that event, the sum of $3,146,447.92 was made up. Mr Chan admits, again by implication, that the bank did not require him to give a personal guarantee. He says this is not a surprise. It is a surprise to me. He seeks to explain the odd requirement regarding requisitions in the agreement of sale by saying that the solicitors were familiar with the title to the property. The implication is that, indeed, the solicitors did not check the title. This is strange. Mr Chan does not adequately explain why the sale agreement disclosed a mortgage of only $5,651,636.

Assessment of the Evidence

20. As the evidence presently stands, the case mounted by the plaintiff, as read in the light of the explanations from Mr Tang and Mr Chan, can be summarised as follows -

i. Mr Tang does not dispute that he has dishonestly appropriated a large sum of money from the plaintiff.

ii. Mr Tang does not explain what he has done with this money.

iii. Mr Tang's salary was $59,000 per month. He does not suggest that he had any other source of income.

iv. In May 1997, Mr Tang knew that the plaintiff had discovered his defalcations.

v. On 2 June 1997, Mr Tang completed the purchase of the shares in Regent.

vi. Mr Tang's explanation of the sources by which he was able to pay the balance over the mortgage is unsatisfactory.

vii. The explanations by Mr Chan and Mr Tang regarding the loans by Mr Chan to Mr Tang raise serious questions. There is the inherent unsatisfactory nature of the explanation regarding the loan of $2.3 million. Mr Chan changed his story about this. Mr Tang does not say why he needed this money. He does not suggest it was all used to pay for the Regent shares; he seems to have no idea how much was used for this purpose. He did not need the money. On the evidence, he had "stolen" plenty from the plaintiff.

viii. On 18 June 1997, only 16 days after he had acquired the shares, Mr Tang took steps to transfer the shares to Mr Chan to repay the loan. This in spite of the fact that the loans were not due for repayment. Mr Tang did this, he says, because he could not afford to make the mortgage payments.

ix. The amount due to Mr Chan was calculated by taking into account the penalty interest, although this was paid by Ms Chau.

x. The value of the property was calculated by under-valuing the property.

xi. The agreement for the sale of the shares to Mr Chan was odd. These oddities have not been adequately explained.

xii. After the purported sale of the shares, Mr Tang discharged responsibilities regarding the property as if he were still the beneficial owner of the shares. He did this in spite of the fact that he says he could not afford to make these payments. The explanation for this from both Mr Tang and Mr Chan raises more questions than it answers.

xiii. Regarding the account, Mr Tang had a full power of attorney to operate this. This was not disclosed by Mr Tang or Mr Chan. I regard the explanation given for giving this power of attorney as suspicious.

The Test

21. After some attempt to argue that this application was one in which the plaintiff sought a Mareva injunction against a defendant who was not a substantive one or a third party, and thus the plaintiff had to show good reason for supposing that the assets were in truth the assets of the defendant, Mr Mayne conceded that this was, in fact, a case where the plaintiff was seeking an injunction on the basis that the assets were, not the assets of the defendant, but, in reality, the assets of the plaintiff because they were derived from the money taken from the plaintiff by Mr Tang. In this event, Mr Mayne conceded that the correct test was whether the suspicions raised by the plaintiff were sufficiently strong to make a serious question to be tried.

22. I have no doubt at all that the matters I have mentioned earlier raise serious questions to be tried. In fact, the evidence goes far beyond this. In my view, the probabilities are heavily in favour of the plaintiff. The balance of convenience, there being a strong smell of dishonesty about the conduct of Mr Tang and Mr Chan, strongly dictates that the status quo should be maintained until trial. There is a strong risk of dissipation. On the evidence before me, Mr Tang and Mr Chan are not to be trusted.

23. Accordingly, the defendants have not made out any kind of case for the discharge of the injunction. The defendants' application is dismissed.

Application by Regent

24. Regent makes an application for the variation of the order to permit $200,000 to be released to finance the defence of Regent in these proceedings. The interests of Regent are identical to those of Mr Tang and Mr Chan. The presence of Regent as a defendant is little more than a formality in these proceedings. It has no active role to play. The fortunes of Regent in these proceedings will rise or fall with those of Mr Tang and Mr Chan. There is absolutely no reason at all why Regent should expend money in these proceedings. Indeed, it does not need to be represented at all.

25. This application is also dismissed.

The Costs

26. I can see no basis at the moment on which it could be argued that the costs should not follow the event. Accordingly, I make an order nisi that the defendants pay the costs of the main application in any event, and that Regent pay the costs of the application to vary the order in any event.