PACAS WORLDWIDE LTD v. CHINA HEALTH GROUP LTD (formerly known as CHINA HEALTHCARE HOLDINGS LTD)

HCA 2961/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2961 OF 2015

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REASONS FOR DECISION

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Background

1. This was the plaintiff’s application for a Mareva injunction, interlocutory injunction and/or preservation order, and disclosure order.

2. The plaintiff paid the defendant (a listed company) $30,000,000 pursuant to an agreement (“the Agreement”).  In return, the defendant issued Convertible Notes to the plaintiff for 200,000,000 shares in the aggregate principal amount of $30,000,000.  The defendant claimed that the Agreement was void/voidable and refused to allot and issue shares to the plaintiff.  The defendant rescinded the Agreement, offered to pay back $30,000,000 to the plaintiff, and asked for payment instructions, which were never given.  Instead, the plaintiff issued the present action for specific performance of the Convertible Notes, alternatively for damages. 

3. I dismissed the application after the hearing, with costs to the defendant.  Here are my reasons.  Broadly, there was not an existing cause of action to be protected by the injunction and there was no urgency in the application.

Legal principles for grant of Mareva injunction

4. On an application for an interlocutory injunction the court must be satisfied that there is a serious issue to be tried, that damages are not an adequate remedy and that the balance of convenience lies in favour of granting the interlocutory injunction.

5. For the grant of a Mareva injunction, it must be shown that there was a good arguable case on the merits, that there were assets within the jurisdiction and that there was a real risk of dissipation of assets: Hong Kong Civil Procedure 2016, Vol 1, at §29/1/65.

6. Under RHC Order 29 r.2, the court has discretionary power to grant an order for the detention, custody or preservation of any property which is the subject-matter of the cause or matter, or as to which any question may arise therein, on such terms as the Court thinks just.

7. The relevant principles for seeking a preservation order and/or proprietary injunction were summarized in the recent case of Liao Chen Toh v Loyal International Enterprises Co Ltd and ors HCA 2302/2014 (30 March 2016, unreported), Lok J, at §§26-27 as follows:

(1)  There is property which is bona fide the subject matter of the cause or matter.

(2)  Something ought to be done for the security of the property. Part of this inquiry will involve showing that damages may not be an adequate remedy.

(3)  Unlike an application for a Mareva injunction, no risk of dissipation needs to be demonstrated. Further, even if there has been delay in making an application which may lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted.

(4)  An enquiry into the relative merits of rival claims is not necessary.

(5)  In respect of the merits of the claim, the party seeking the preservation order only needs to show that there is a serious issue to be tried on the merits on the normal American Cyanamid principles.

8. In order to support a claim for the interlocutory injunction (whether Mareva type or proprietary under O.29 r.2), there must be a substantive cause of action actionable at the time of the application.  A potential future right or possible future cause of action is not sufficient.  See The Siskina [1979] AC 210 at 256C-F, Lord Diplock:

“A right to obtain an interlocutory injunction is not a cause of action. It cannot stand on its own. It is dependent upon there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened by him, of a legal or equitable right of the plaintifffor the enforcement of which the defendant is amenable to the jurisdiction of the court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action. …

… the High Court has no power to grant an interlocutory injunction except in protection or assertion of some legal or equitable right which it has jurisdiction to enforce by final judgment …” (emphasis added)

9. In Steamship Mutual Underwriting Association (Bermuda) Ltd v Thakur Shipping Co Ltd [1986] 2 Lloyd’s LR 439, Sir John Donaldson MR said this:

“… it is important to remember that s.37(1), which is the section of the Supreme Court Act, 1981, which gives jurisdiction to this Court, speaks of granting an injunction or appointing a receiver in all cases in which it appears to the Court that it would be just and convenient to do so. Justice and convenience in this context is not an abstract conception. It predicates that there is a cause of action in respect of which the Court may make an order and the Court will be unable to enforce its order unless there is security provided by a Mareva injunction. Therefore we asked Mr Kealey what the cause of action was that we were being asked to support. The answer is that the only cause of action that they can conceivably have at the moment is a cause of action for a declaration … It seems to me that no such declaratory relief needs a Mareva injunction to support it.

What the club really wants is security for a future cause of action – a cause of action which will give rise to entitlement to monetary relief. I think that that would be contrary to a long line of authority which says that s.37 is to be used in support of an existing legal or equitable right. I furthermore think that if we extended it to this case, even assuming we have jurisdiction to do so, it would be difficult to see what possible limits there could be to the Mareva jurisdiction, since whenever it was apprehended that someone was likely in the future to commit a breach of contract, and it was further apprehended that if they did and if judgment were given against them they might be unable to meet the judgment debt, it would follow that the fearful plaintiff was entitled to a Mareva injunction. That plainly is not the case.” (emphasis added)

10. If there is no cause of action, the want of jurisdiction cannot be supplied by suspending the operation of the injunction until one exists: The Veracruz I [1992] 1 Lloyd’s LR 353 at 358, 360, Nourse LJ, col 2. 

11. No interlocutory injunction would be granted in an action for specific performance of a put option to acquire shares: Zucker & ors v Tyndall Holdings Plc [1992] 1 WLR 1127. 

“… a Mareva injunction cannot be granted unless there is an existing cause of action which can be immediately enforced. An order for specific performance which is granted before the time of performance has arrived is, as pointed out by Lord Tucker, really in two parts: first of all the declaratory part and secondly the part where consequential directions might be given.” (at 1134H, Neill LJ)

Any existing cause of action to support an interlocutory injunction?

12. There may be serious issues to be tried on breach of the Agreement.

13. The defendant has elected to rescind the Agreement which it considered to be void/voidable and offered to pay back the money. Mr Smith SC submits that this would give rise to a constructive trust in favour of the plaintiff over the money, arguably from the time of the defendant’s election.  Tracing would have been available to see whether there remained an asset upon which the trust could operate where money has been paid under a mistake.  See Falcon Private Bank Ltdv Borry Bernard Edouard Charles Ltd & anor, HCA1934/2011 (14 March 2014, unreported), per Recorder Houghton SC, at §43; Zimmer Sweden AB v KPN Hong Kong Ltd And Another HCA 2264/2013 (2 May 2014, unreported) at §92.

14. I am unable to agree with Mr Smith SC as a matter of law. 

“… before he can pursue a restitutionary claim, the innocent party must first bring the contract to an end. If he does not do so, the contract continues to govern the situation and the plaintiff must seek his remedy on the contract and not in restitution.” Goff and Jones, The Law of Restitution (7^th ed), §20-012.

“Where there is a contract between the parties relating to the benefit transferred, no claim in unjust enrichment will generally lie whilst the contract is subsisting.” Goff and Jones, The Law of Unjust Enrichment (8^th ed) at §3-13.

15. Applying the principles in Goff and Jones, the plaintiff had always treated the Agreement as valid and subsisting, as reflected in:

(a)   Its failure to give payment instructions to the defendant to get back the $30,000,000.  (The defendant’s offer was made as late as in December 2015.)  That acceptance would have dispensed with the need for the present application.

(b)   Its claim for specific performance with damages sought as an alternative remedy, and no claim for restitution of the $30,000,000. 

(c)   The pursuit of specific performance by an Order 86 summons.

(d)   Its failure to accept, even on the day of this hearing, the defendant’s offer to pay back the $30,000,000 (supported by documentary proof that the defendant held $200,000,000 in its bank account). 

16. In the context of showing that damages were unlikely to be an adequate remedy, the plaintiff made adverse criticisms of the defendant’s financial situation and internal management –:

(a)  The defendant’s Interim Report for the 6 months ended 30 September 2015 (“the Interim Report”) indicated that it only had total current assets of about $25 million, with cash or cash equivalents of about HK$30.3 million; that in those 6 months, there has been a decrease of over $70 million in cash and cash equivalents.  Mr Smith SC submitted that there was no guarantee that the defendant would have sufficient financial resources to fulfil any monetary award.

(b)  Comparing 2 announcements dated 14 January 2016 and 11 December 2015 respectively, there was a real concern that the defendant had used part of the $30 million for its own purpose, despite having declared that it ought to be returned to the plaintiff.  Recently, there was evidence of payments made by the defendant as a result of its director acting in breach of his fiduciary duties, which would have led to further depletion of the defendant’s assets.

(c)  There was also concern that the internal turmoil and disputes amongst the management and shareholders of the defendant might cause the defendant’s resources to be used for purposes other than operating the normal and proper business of the defendant.

17. In the context of showing risk of dissipation of assets, the defendant also relied on the following matters:

(a)  Payments in breach of fiduciary duties and lack of proper supervision, being transactions entered into between the defendant (and its associates) and a company controlled and owned by a spouse of one of the directors (Mr Wang).  Such misappropriation was not announced until 9 months after the transactions were entered into by the defendant.

(b)  Numerous statements contrary to earlier announcements to the public were made in order to resist the plaintiff’s claim and to evade the defendant’s obligations.  These comprised announcements in relation to a 2015 Tianjin Agreement, statements in circulars and board letters to shareholders, and statements in application to the Hong Kong Stock Exchange.

18. The plaintiff’s keen pursuit of specific performance was not reduced a bit despite such dim view of the defendant’s situation set out in the 2 preceding paragraphs.  It wanted the shares, not money of the defendant.

19. A recurrent theme in the plaintiff’s submission was to “assume that the Court found that the Agreement and the Convertible Note were voidable”; or “when the party elects to rescind the transaction”.  However, the Court’s jurisdiction for interim injunction should not be exercised for the purpose of any “possible” cause of action which may accrue in future.

20. Applying the principles in paragraphs 8-11 above, no interlocutory injunction (ordinary or Mareva type) should be granted to the plaintiff. 

21. No preservation order would be granted either, as the subject property was unissued shares and Mr Smith SC admitted that there was no proprietary claim pleaded as yet.

Risk of dissipation of assets

22. The plaintiff relied on matters set out in paragraphs 16(b), (c), 17(a) and (b), in support of its averment that there was risk of dissipation of assets.  However, the defendant’s acts in trying to uncover and investigate the misconduct of its directors were not acts in dissipation of assets or in reflection of low commercial morality.  To the contrary its report to the Hong Kong Stock Exchange and the police were acts to reduce the impact of the misconduct on the company.

23. For present purposes, even if I assume that there was risk of dissipation of assets, there was no existing cause of action that warranted the grant of an injunction.  Moreover, there was little to show that the risk of dissipation would be so great as to reduce $200 million to less than $30 million within 12 days before the Order 86 was heard.

Lack of urgency

24. At this call-over hearing, where the defendant has had no full opportunity to put in proper affirmation evidence, the plaintiff hurried the court to hear its injunction application.  Any relief granted would have the consequence of putting the defendant at a very real disadvantageous position from which it may never adequately recover: Re Chau Cham Wong Patrick, HCB 549/2012, 20 June 2014, §30, per Ng J.

25. However, there was no urgency for the injunction application to be heard as the Order 86 summons would be heard in 12 days from this hearing. 

26. The plaintiff’s determination to use litigation to achieve its ends when there was no real need to engage the court could be seen from its failure, twice, to accept the defendant’s offer to repay the $30,000,000. 

27. Further, it was on 15 April 2016 that the plaintiff’s solicitors first raised the issue of security at around 11 am and insisted on having a reply from the defendant’s solicitors on the same day.  When the defendant’s solicitors replied that answers would be provided by 19 April 2016, the plaintiff chose not to wait for the reply and proceeded to take out the application on 19 April 2016.  In the morning on 20 April 2016, the plaintiffs’ counsel team produced a substantial skeleton with 25 authorities.  It was apparent that the plaintiffs were determined to launch this application irrespective of how the defendant replied. Documents were only served upon the defendant’s solicitors at 4.42 pm on 19 April 2016, leaving the defendant with only 2 days for the preparation of this hearing. 

28. The plaintiff seemed to suggest that the present injunction application was triggered as a result of the discovery of the Interim Report: ONC’s letter dated 15 April 2016.  However, it was plain that this could not be the real reason, as the plaintiff was clearly aware of the Interim Report when it took out the Order 86 summons. 

29. Viewing the plaintiff’s conduct before and in this injunction application, I agree with Mr Warren Chan SC that this was an ill-conceived attempt on the part of the plaintiff to seek security before judgment, which was not permissible under the law:  AJ Bekhor & Co Ltd v Bilton [1981] QB 923 at 941-942, per Ackner LJ:-

“The plaintiff, like other creditors of the defendant, must obtain his judgment and then enforce it. He cannot prevent the defendant from disposing of his assets pendente lite merely because he fears that by the time he obtains judgment in his favour the defendant will have no assets against which the judgment can be enforced. Were the law otherwise, the way would lie open to any claimant to paralyse the activities of any person or firm against whom he makes his claim, by obtaining an injunction freezing their assets … The Mareva jurisdiction was not intended to rewrite the English law of insolvency in this way. The purpose of the Mareva jurisdiction was not to improve the position of claimants in an insolvency, but simply to prevent the injustice of a defendant removing his assets from the jurisdiction which might otherwise have been available to satisfy a judgment. It is not a form of pre-trial attachment, but a relief in personam which prohibits certain acts in relation to the assets in question.”

Disclosure order

30. In order to make a freezing injunction effective, the court has a discretion to order the defendant to make a statement of his assets and to give discovery of documents for the purpose of ascertaining the existence, nature and location of assets.  Hong Kong Civil Procedure 2016, Vol 1, at §29/1/74.

31. Further, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court may at the interlocutory stages of the action make orders designed to ascertain the whereabouts of that property.  See: A & anor v C & ors [1981] QB 956; Zimmer Sweden AB v KPN Hong Kong Ltd & anor, HCA 2264/2013 (2 May 2014, unreported), at §§72-75, per DHCJ Kent Yee.

32. It was admitted by Mr Smith SC that there was no proprietary claim over the $30 million as the money was probably mixed with other funds of the defendant.

33. I have declined to grant the injunctions/preservation order sought.  I do not see any legal basis for a disclosure order requiring the defendant to identify the whereabouts of the $30 million and/or its traceable proceeds, or to disclose all of its assets of an individual value of HK$10,000 or more, whether in its own name or not and whether solely or jointly owned.

34. Again, in view of the hearing of the Order 86 summons, and lack of urgency, even as a matter of discretion, there was no reason to grant such a draconian pre-trial disclosure order.

Conclusion

35. For all the reasons given, I dismissed the application. 

36. Costs should follow the event, which were not opposed.  I therefore ordered costs in favour of the defendant with certificates for 2 counsel. 

37. The urgency justified the engagement of 2 fee earners.  I summarily assess the defendant’s costs at $900,000. 

38. I thank counsel for their great assistance and succinct submissions.