JIU RONG HOLDINGS LTD v. SIU CHI MING

HCA 1331/2023 and
HCA 1333/2023
(Heard Together)

[2024] HKCFI 1674

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1331 OF 2023

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1333 OF 2023

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D E C I S I O N

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  A. INTRODUCTION

1.  This is the substantive hearing of an application by the plaintiffs in HCA 1331/2023 and HCA 1333/2023 against the defendant, Siu Chi Ming for continuation of two Mareva injunction orders (“Injunction Orders”).

2.  Subject to a variation of the monetary limit to the Injunction Order in HCA 1333/2023 to give credit for a sum of HK$3,039,840 (see paragraph 16(3) below), the plaintiffs contends that this is an appropriate case to continue the Injunction Orders until trial or further order of the court. 

B.   RELEVANT FACTUAL BACKGROUND

3.  The two underlying actions herein are commenced by the plaintiffs against the defendant for breaches of director’s duties:

(1)  HCA 1331/2023 was commenced by Jiu Rong Holdings Limited (“Listco”):

(a)  Listco is a company whose shares are listed and traded on the Hong Kong Exchange (Stock Code: 2358).  Listco’s main business is in the areas of digital video, new energy vehicles, cloud ecological big data, property development, properties investment and general trading.

(b)  The defendant was a former executive director of Listco between 9 February 2012 and 30 June 2023.

(2)  HCA 1333/2023 was commenced by Ace Earn Limited (“Ace Earn”):

(a)  Ace Earn is a wholly owned subsidiary of the Listco, whose business is in the field of trading electronic applications and applications in support of the Listco.

(b)  The defendant was a former director of Ace Earn between 28 June 2013 and 9 June 2023.

4.  In mid-2023, the defendant terminated his tenure with the plaintiffs.

5.  When the plaintiffs’ new management, headed by an incoming director Mr Chen Yunxiang, took over the management of the plaintiffs, they discovered that, during the defendant’s directorship at the plaintiffs, the defendant directed a series of transactions which are commercially inexplicable and financially detrimental to the plaintiffs:

(1)  First, between 3 March 2021 and 9 July 2021, the defendant purportedly acted for Ace Earn in entering into various contracts for sale and purchase of rice (collectively, the “Rice Contracts”), which:

(a)  concerned a field of trade (ie, rice trade) with no relevance to Ace Earn’s existing scope of business;

(b)  involved counterparties with no historical relationship with the plaintiffs, and in any event, of doubtful origins and credit-worthiness;

(c)  were not even documented by a single shred of board resolution, minutes, bill of ladings and delivery record;

(d)  resulted in significant financial losses to the tune of HK$23,275,641.38.

(2)  Second, in around 2017 to 2018, the defendant (together with another former director, Mr Yin Jianwen (“Mr Yin”)) signed off 6 cheques (collectively, the “Innomind Cheques”) drawn on Listco’s account and thereby transferred a total of HK$21,000,000 to a BVI company called Innomind Investments Ltd (“Innomind”).  It appeared that:

(a)  the advancement was originally justified as a loan;

(b)  when the loan was not repaid, the defendant procured the Listco to engage Innomind as its “consultant”; and overnight, the loan repayable by Innomind became consultancy fees payable to Innomind;

(c)  there is not a shred of evidence showing any performance of consultancy work, or Innomind’s credentials to act as a consultant.

(3)  Third, just before he left, the defendant procured the plaintiffs to pay out a sum of HK$8,244,000 of “gratuity” and/or retrospective“salary” to himself to be paid out of the plaintiffs’ account.

6.  Having learned that the defendant shall be emigrating to Australia (and hence fearing that the defendant may dissipate his assets out of jurisdiction), the plaintiffs moved ex parte. 

7.  On 16 August 2023, upon the plaintiffs’ application, DHCJ D Yau granted the Injunction Orders.

8.  On 25 August 2023, the Injunction Orders were continued by DHCJ Winnie Tsui.

9.  On 11 September 2023, the Injunction Orders were further extended by DHCJ H Au-Yeung, who gave directions for substantive argument to take place.

10.  This is the substantive hearing of the plaintiffs’ application to continue the Injunction Orders.

C.  DEFENDANT’S FAILURE TO DISCLOSE HIS ASSETS

11.  Pursuant to DHCJ H Au-Yeung’s Order dated 11 September 2023, the defendant was obliged to:

(1)  inform the plaintiffs in writing on or before 25 September 2023 “of all his assets of an individual value of HK$50,000 or more in Hong Kong”.

(2)  confirm the above information by way of affidavit on or before 9 October 2023.

12.  The defendant flouted both deadlines:

(1)  25 September 2023 deadline to disclose assets: On 25 September 2023, the defendant (via his solicitors) sent a letter in purported satisfaction of this order.  The letter stopped short of informing the plaintiffs as to the position in a bank account and a securities account.  The defendant’s solicitors said that “for the value of assets in the two bank accounts, we are still liaising with the relevant banks and will update you when we ascertain the exact value of assets in the bank accounts”.  Contrary to this promise, the defendant has not provided the information.

(2)  9 October 2023 deadline to file affidavit confirming disclosure:  This was eventually only complied with on 14 February 2024 (4 months after the deadline) by way of the 1^st Affirmation of Siu Chi Ming (“Siu 1^st”).  The values in the two bank accounts were still stated to be “(To be ascertained)”, and the defendant still claimed to be “still awaiting for the confirmation of the relevant banks of the value of assets within the bank accounts”: Siu 1^st §§3 & 6.  It appears that the defendant has not made any serious attempt to disclose such information.

13.  The plaintiffs submit that the Injunction Orders should be continued on the basis that:

(1)  There is a good arguable case that the defendant breached his director’s duties: Section D below.

(2)  There is a real risk of dissipation of assets: Section E below.

(3)  The balance of convenience lies in favour of continuing the Injunction Orders: Section F below.

D.  THE PLAINTIFFS HAVE GOOD ARGUABLE CASE AGAINST THE DEFENDANT

D1.  Relevant legal principles

14.  As explained in Huang Chang Fa v Tong Yuk Ping [2023] HKCFI 1894 §23 per Au Yeung J, for the purpose of establishing a “good arguable case”:

(1)  Even if the defendant can show a good arguable defence, this does not necessarily negate a good arguable case.

(2)  It is sufficient to demonstrate a case “which is more than barely capable of serious argument.  And yet not necessarily one which the judge believes to have a better than 50% chance of success.”

(3)  At the interlocutory stage, both the claim and the defence may be more than barely capable of serious argument and not necessarily having a better than 50% chance of success.

(4)  There is no requirement that the plaintiff shows that he has a “much better” case or argument than the defendant.

15.  In relation to directors’ duties, in China Metal Recycling (Holdings) Ltd v Chun Chi Wai [2021] HKCFI 378 §§47-63, the court explained that a director owes duties to, amongst others:

(1)  act bona fide in the interests of the company;

(2)  exercise his power solely for a proper purpose;

(3)  not misapply or misappropriate corporate assets or funds; and

(4)  not place himself in a position where there would or may be a conflict between his own personal and separate interests/duties and the interests of the company.

D2.  The Rice Contracts

16.  First, in relation to the Rice Contracts, their effect has been summarised by the plaintiffs as follows:

(1)  Ace Earn incurred an expense of around HK$26,315,481.38 in purchasing rice from the various upstream sellers (“Upstream Sellers”). 

(2)  On paper, Ace Earn was expected to earn a very small net profit.  It was only expected to receive around HK$26,709,895.97 for the sale of rice to the downstream buyer, Luen Yick Food Products Company (“Luen Yick”) and Smart Pacific International Trading Limited (“Smart Pacific”).

(3)  However, despite the “sale” of the rice on paper, neither Luen Yick nor Smart Pacific had discharged the bulk of their repayment obligations to Ace Earn, save for a sum of HK$3,039,840 paid and settled by Luen Yick.  In this regard, the plaintiffs point out that:

(a)  At the time of the ex parte application, Ace Earn was under the impression that the HK$3,039,840 cheque had not been successfully cleared. 

(b)  It was subsequently found that Luen Yick had made a payment of HK$3,039,840 to Ace Earn. 

(c)  Ace Earn will give credit to this sum.  The limit of the Injunction Order in HCA 1333/2023 should be amended accordingly.

(4)  Be that as it may, in the end, Ace Earn still suffered a loss in the sum of around HK$23,275,641.38.

17.  The plaintiffs submit that the evidence discloses a good arguable case that the Rice Contracts were not even genuine or real arm’s length transactions at all:

(1)  First, neither the Upstream Sellers nor the downstream buyers, ie, Luen Yick and Smart Pacific, had any prior relationship with Ace Earn.  There is no reason why Ace Earn would enter into contracts of such significant value with these parties (when some of them did not even have a valid business registration in Hong Kong).

(2)  Second, Ace Earn’s new management could not locate any written evidence concerning the actual delivery of rice, such as bill of ladings or delivery notes.  None have been produced by the defendant in his affidavit in opposition. 

(3)  Third, the “shamness” of the transaction is evidenced further by the fact that there was never any genuine attempt to recover payment from the downstream rice buyers, Luen Yick and Smart Pacific, even though the defaulted sum was substantial:

(a)  Whilst Luen Yick had apparently provided cheque payments to Ace Earn, the cheques were not even deposited: 1^st Affirmation of Chen Yunxiang (“Chen 1^st”) §21 and 2^nd Affirmation of Chen Yunxiang (“Chen 2^nd”) §19(a). 

(b)  Smart Pacific wrote a cheque in the sum of HK$7,908,790 to Ace Earn on 10 June 2022.  This was dishonoured.  Subsequent action for enforcement was left completely dormant. 

18.  Even if the Rice Transactions were genuine transactions (which is denied by the plaintiffs), the plaintiffs submit there is a good arguable case that they were not entered into bona fide in the interest of Ace Earn.  Particularly, the plaintiffs submit that:

(1)  The trading of rice was not even within the scope of Ace Earn’s business: Chen 1^st §22(a).

(2)  It was also not the defendant’s role to participate in negotiating deals and/or transactions on behalf of Ace Earn: Chen 1^st §15.

(3)  Worse still, the defendant had not sought any board approval or even to have the matter tabled before the board before entering into the Rice Contracts.  No such record or minutes of discussion can be located: Chen 1^st §22(c).

(4)  The Rice Contracts were highly risky transactions.  The profits expected to be earned by Ace Earn were only around HK$394,000, whilst Ace Earn was assuming disproportionate risks of losing up to HK$26 million.  There was no reason why Ace Earn should enter into such contracts with such risks: Chen 1^st §22(b).

(5)  There is evidence which further shows that, on or about 20 June 2023, when Mr Chen of Ace Earn’s new management confronted the defendant for an explanation of the Rice Contracts, the defendant orally indicated (inter alia) that the two purported buyers (ie Luen Yick and Smart Pacific) were the defendant’s acquaintances, and the reason why the defendant procured Ace Earn to enter into the Rice Contracts was so that the defendant could help Luen Yick and Smart Pacific with their financial difficulties by providing the rice to them and allowing them to defer payment: Chen 1^st §22(g).

19.  In defence, the defendant submits there is no basis whatsoever to suggest that the Rice Contracts were false.  The lack of evidence of delivery of rice (such as bill of ladings or delivery notes) does not support the plaintiffs’ suspicions but boils down to Mr Chen’s unfamiliarity with the logistic arrangements of the Rice Contracts (and other payment-in-advance services).  It is clear that Ace Earn was not providing pick-up/delivery service but a payment-in-advance service.

20.  The defendant goes on to submit that there was at most a factual quarrel on the commercial judgement of the Rice Contracts between the new board (consists of Mr Chen and Ms Chen) and the old board (consisted of, inter alios, the defendant and Mr Yin).  This factual quarrel however does not support a good arguable case of “not genuine or real arm’s length transactions” coordinated by the defendant to injure the plaintiffs.

21.  As such, the plaintiffs have not and cannot implicate the defendant in the allegedly suspicious Rice Contracts when it is at most (with the benefit of hindsight) a commercial misjudgement.   

22.  I do not agree with the defendant’s contentions.

23.  The defendant’s alleged “defences” does not negate a good arguable case put forward by the plaintiffs:

(1)  The defendant alleges that the Rice Contracts were a provision of “Payment-in-Advance” service to Luen Yick and Smart Pacific.  However, such allegation does not negate the good arguable case of the plaintiffs, there are nonetheless issues to be tried:

(a)  When was this negotiated and agreed upon?

(b)  Why would Ace Earn provide such a “favour” to Luen Yick and Smart Pacific?

(c)  How is this transaction bona fide and in the interest of Ace Earn?

(2)  The defendant also alleges that he had performed due diligence on Luen Yick and Smart Pacific. However:

(a)  No due diligence report has been located by Ace Earn: Chen 1^st §22(d) and Chen 2^nd §18. 

(b)  None has been produced by the defendant either.

(c)  Further, according to the defendant, he did not conduct due diligence on the Upstream Sellers.  Even in relation to the buyers, the defendant’s “due diligence” consisted merely of a visit to Luen Yick’s factory.  It is unclear what he had done in relation to Smart Pacific. 

(d)  The defendant is no amateur.  He is an accounting professional with 18 years of experience in Hong Kong’s finance industry.  He could not possibly have been satisfied with the so-called “due diligence”.

D3.  The Innomind Transactions

24.  Second, in relation to Innomind, the issuance of the Innomind Cheques out of Listco is not disputed by the defendant.  The total sum transferred was HK$21,000,000.

25.  The plaintiffs submit that there is at least a good arguable case that the Innomind Cheques were not issued bona fide in the interest of Listco, and were instead issued by the defendant in breach of his duties.

26.  In this regard, the initial justification of the Innomind Cheques was that they were loans. However, this explanation does not withstand scrutiny because:

(1)  The total sum of the Innomind Cheques (HK$21,000,000) did not even tally with the total sum advanced under the relevant Loan Agreements (HK$25,000,000). 

(2)  More fundamentally, the lending of money was not even within Listco’s principal scope of business. Listco is and was never a licensed money lender.  There was no reason why the defendant would procure Listco to lend money to third parties such as Innomind (not least when it is an offshore entity whose ability to repay is unknown). 

(3)  The advancement of the loan was not even discussed with the board of directors.  No minutes or record of any board approval in relation to the advancement of loans to Innomind can be located: Chen 1^st §27(a). 

(4)  There is no evidence of due diligence conducted on Innomind, nor any guarantee or security for the loan: Chen 1^st §27(b).

27.  When the loan was not repaid:

(1)  There was no evidence to show that Listco has ever demanded repayment of the sums from Innomind.

(2)  Instead, inexplicably, the defendant executed a number of Supplemental Loan Agreements with Innomind to extend the repayment date.  Yet, there was no written record that the defendant and/or the board was satisfied that there was good reason to justify an extension: Chen 1^st §27(a).

28.  Further still, when the loan was still not repaid despite extension, two purported consultancy agreements (respectively dated 31 December 2018 and 30 September 2019) were signed whereby Innomind became a consultant of Listco.  This is extremely hard to believe or accept because:

(1)  There is no evidence of any discussion at the board level regarding the need to engage any “consultant”, what “consultancy” services might be needed, or the suitability of Innomind to assume such a role: Chen 1^st §31(a).

(2)  There is, likewise, no evidence that Innomind had the relevant expertise or resource or manpower to provide (or did provide) consultancy services to Listco.  To the contrary, no consultancy report, records of performance, time sheets, or proof of work done by Innomind had been located: Chen 1^st §31(b).

(3)  The two purported invoices issued by Innomind were also completely devoid of particulars as to what work has been done.

29.  Sometime later, a Termination Agreement dated 1 July 2020 was signed by the defendant.  It provided that Innomind shall provide a refund of HK$16,500,000 to Listco.  Once again:

(1)  There is no evidence that such repayment had ever taken place: Chen 1^st §29. 

(2)  There is also no evidence that the defendant had ever demanded payment.

30.  Drawing these threads together, there is a good arguable case that the alleged “paper trail” are but mere “cover ups” put up by the defendant to write off the indebtedness of Innomind (when funds were drawn from Listco’s account in favour of Innomind for no legitimate purposes in the first place).   

31.  This is indeed consistent the plaintiffs’ evidence on the defendant’s oral admission.  It is the plaintiff’s evidence that, when confronted by Mr Chen of Listco’s new management on or about 20 June 2023, the defendant orally admitted that the consultancy agreements were fake agreements executed to set off Innomind’s indebtedness due to Listco: Chen 1^st §33.

32.  Against this backdrop, I agree that the defendant’s alleged “defences” cannot negate the good arguable advanced by the plaintiffs:

(1)  The first “defence” is for the defendant to point fingers at Mr Yin, and to say that it was Mr Yin who orchestrated the Innomind loans: 2^nd Affirmation of Siu Chi Ming (“Siu 2^nd”) §§41-44.  There is, however, no documentary evidence to support such a claim.  Instead, all the key transaction documents with Innomind were signed by the defendant: Chen 2^nd §23(a).  Further, even if Mr Yin had been involved, this does not absolve the defendant of his duty to exercise independent judgment. 

(2)  The second “defence” is the defendant’s claim that there had been “many projects” introduced by Innomind to Listco under the Purported Consultancy.  Strikingly, the defendant has neither offered particulars nor tendered paper evidence in support of his claim.  In contrast, Listco had located no record of any such “projects” introduced by Innomind.

D4.  Purported gratuity and retrospective salary

33.  Third, just prior to leaving tenure at the plaintiffs, the defendant paid himself a total of HK$8,244,000 on the basis of “gratuities” and retrospective “salary”.

34.  The plaintiffs submit and I agree that there is at least a good arguable case that such payouts were not made bona fide in the interest of the plaintiffs, and were instead made in breach of the defendant’s duties to the plaintiffs.

(1)  There were 3 payments out of the plaintiffs on 10 May 2023: (i) the purported director gratuity of HK$4,092,000 (“Payout 1”); (ii) the purported retrospective salary of HK$3,180,000 (“Payout 2”); and (iii) the purported company secretary gratuity of HK$972,000 (“Payout 3”).

(2)  There is evidence to suggest that no valid resolution had been passed at the purported meeting on 4 May 2023:

(a)  There were two “absentee Directors” at the Purported 4 May 2023 Meeting, both of whom had confirmed that they were not given notice of such meeting: Chen 1^st §40 and Chen 2^nd §27(a)(i).

(b)  In any event, it is Listco’s policy that all proposed changes to the defendant’s salary and bonuses should be approved by Listco’s Remuneration Committee.  However, the Purported 4 May 2023 Meeting was not a meeting of the Remuneration Committee: Chen 1^st §39.

(3)  Indeed, the circumstances of the generous “golden handshake” raises more questions than answers:

(a)  The payouts in effect represents a significant pay-rise of around 30% (compared to his initial salary of HK$1,300,000 per year) operating retrospectively for a period of nearly 10 years (totalling millions of dollars).  

(b)  It is inexplicable and/or wholly uncommercial for Listco to suddenly offer the defendant a significant retrospective salary, in the absence of any discussion regarding the matter.

(c)  There is still less commercial justification for Listco to do so at a time after the defendant has already resigned.

35.  The defendant claims that the basis of granting him gratuity harks back to his “then boss” who asked him to take up the tasks for a company secretary: Siu 2^nd §50.  It can be noted that the alleged agreement is completely verbal in nature.  It is hard to believe the defendant (an accountant by training and sophisticated) would be content with an oral agreement on such a significant issue.

E.  RISK OF DISSIPATION

E1.  Relevant legal principles

36.  In Convoy Collateral  Ltd v Cho Kwai Chee [2020] HKCA 537, it was held that:

(1)  The claimant must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets.  In this context dissipation means putting the assets out of reach of a judgment whether by concealment or transfer: §35.

(2)  There must be solid evidence to support an inference of risk of dissipation, which may depend on a holistic consideration of all the circumstantial materials that are indicative of risk including matters that point to such risk or matters which raise an inference that the respondent cannot be relied upon: §§37-41.

(3)  In some cases, the strength of the underlying substantive claims could also be regarded as supporting a case of real risk of dissipation: §42.

(4)  In particular, evidence of dishonest and fraudulent conducts or other serious wrongdoings which form the basis of the claims, and which reflect adversely on the integrity of the defendant could point powerfully towards an inference of such risk: §§47, 53.

37.  There is no strict need to establish a “nefarious intent” to establish a risk of dissipation.  After all, the exercise of the jurisdiction is not to punish a defendant for his or her improper intent or motive.  Instead, the test is an objective one on whether there is a risk of unjustified dealing with assets: China Citic Bank Corporation Ltd v Li Kwai Chun [2018] HKCFI 1800 §§23-25 per DHCJ Keith Yeung SC (as he then was).

E2.  Real risk of dissipation

38.  Applying the above legal principles, I accept that the risk that the defendant would dissipate his assets unless restrained by this court is real and continues to exist. 

39.  First, the defendant has confirmed that he had emigrated to Australia: Siu 2^nd §§55-56.  Indeed, the defendant declared in his affidavits his address to be in the New South Wales. 

40.  Second, the fact that the defendant has emigrated to Australia has to be considered together with the fact that the defendant’s disclosure of assets in Siu 1^st remains incomplete and unsatisfactory.  For example:

(1)  First, the disclosed materials are on the face incomplete despite a lapse of some 9 months.  The defendant did not disclose the balance in his bank accounts maintained with the Bank of Communications and the Bank of China: Siu 1^st.  This is clearly evasive. After all, it is not difficult for one to check his bank balances.  This certainly would not require 9 months. 

(2)  Second, there may also be other undisclosed materials.  Although the defendant had deposited cheques from Ace Earn into his HSBC account totalling $7,272,000 on 10 May 2023, the HSBC account was not disclosed in Siu 1^st.  Moreover, the defendant has not explained the whereabouts of these funds.  Even more alarmingly, the defendant now claims in paragraph 61 of his Skeleton Submissions that the balance in his HSBC account is less than HK$50,000.

F.   BALANCE OF CONVENIENCE

41.  Exceptions are made for ordinary living expenses and legal expenses of the defendant, hence balancing the impact of the Mareva injunction against him.

42.  In Siu 2^nd, the defendant complains that due to the Injunction Orders, he had difficulties in settling his credit card, mortgage and tax bills, resulting in his creditors commenced legal action and obtained default judgement against him, and may even “incriminate” him for his failure to pay salary tax.

43.  If there is a genuine need to adjust the same, it is for the defendant to seek the plaintiffs’ agreement to do so (with reasons and adequate disclosures).  The plaintiffs have never received any request from the defendant to increase the spending limit: Chen 2^nd §29(a).

G.  ALLEGED MATERIAL NON-DISCLOSURE

44.  In Siu 2^nd §§63-65, the defendant complains that the plaintiffs had not made full and frank disclosure at the ex parte stage.  It appears to be the defendant’s case that the plaintiff had failed to disclose documentation of the plaintiffs which may be germane to the plaintiffs’ claims. 

45.  This complaint is unfounded: Mr Chen had deposed that, to his knowledge, all relevant documents of the plaintiffs have already been disclosed: Chen 2^nd §32.  The answer on oath that the plaintiffs do not have the documents is conclusive: Re: The Prudential Enterprises Ltd HCCW 594/1999 (Unrep, 10/08/2001) §6 per Chu J (as she then was).  In any event, the defendant did not identify what precisely constituted the materials that the plaintiffs has failed to disclosed.

H.  CONCLUSION

46.  For the reasons set out above, I make the following orders:

(1)  The Injunction Order in HCA 1331/2023 be continued until trial or further order of the court;

(2)  The Injunction Order in HCA 1333/2023 be continued until trial or further order of the court, save that the upper limit on the restriction of disposal of assets be reduced by HK$3,039,840;

(3)  Costs of and occasioned by the application (including all costs reserved, if any) be paid by the defendant to the plaintiffs, such costs are to be taxed if not agreed.

47.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

48.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.