YEN NING LING v. DESCARTES INVESTMENT MANAGEMENT LTD

HCA136/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 136 OF 2009

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D E C I S I O N

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1.  This is an inter partes application by the plaintiff for the continuation of an ex parte injunction granted on 16 January 2009 on revised terms.  The ex parte order restrained the defendant from disposing of a sum of HK$18,397,904 in the plaintiff’s investment account with the defendant.

2.  In short, the defendant holds itself out as an investment manager and adviser and is an associated company of Descartes Global Asset Management Limited.  The legality of the defendant company is in issue but is not relevant to the issues in the present application.  The defendant’s two officers in Hong Kong are Mr Edgar Chuan and Ms Allison Yeh.

3.  The plaintiff opened an account with the defendant in March 2008 in order to subscribe for China Railway Construction Corporation (“CRCC”) shares in Hong Kong.  She deposited HK$43,551,433 into the defendant’s bank account.  Trades were duly made and by 23 June 2008 the account stood at HK$44,178,062.

4.  The plaintiff requested the return of her money.  By 2 October 2008 HK$25,780,280 has been repaid.  Mr Chuan had admitted that due to his “personal problem/fault” he was unable to fully repay.  On 16 and 18 June 2008, he had signed a Security Agreement and Deed of Undertaking by which he personally provided security for his indebtedness to the plaintiff.  That security comprised five landed properties, some shares in Hi Sun (China) Technology and 19 second hand watches.  The two latter items are of relatively small value.  The properties however, free from encumbrances, have considerable value.

5.  When it was signed, the Security Agreement was designed to provide security not only for the balance in the plaintiff’s account (approximately HK$18 million) but also her earlier investment in a fund called the “Athena Fund”; an investment of approximately US$3 million.  This application only concerns the HK$18 million, not the Athena Fund.

6.  The plaintiff’s attempts to recover any further sums from either Mr Chuan or Ms Yeh were unsuccessful.  She therefore commenced proceedings.  It seems that, at that point, her claim was unanswerable.

The defence

7.  However, in his affirmation of 13 February 2009 (wrongly dated 2008) Mr Chuan raises, for the first time, a defence.  He says that in mid May 2008 the plaintiff agreed to invest US$3.5 million in a private equity project in China, referred to as China Material Technology Limited (“CMT”).  He says it was agreed that her CRCC account monies would be utilized for this project.  The plaintiff’s alleged investment was to acquire a portion of Mr Chuan’s own project in which he had already invested in December 2007.

8.  The plaintiff’s case is that she knows nothing whatever about CMT or about any agreement to invest in it.  There is some substance in her claim of ignorance.  The following factors, advanced by Mr J. Mok SC on her behalf, appear to be beyond dispute :

(1)  According to the plaintiff’s account statement of November 2008, her HK$18 million was still there.

(2)  No replies were received to her letters of demand nor the letter before action.  Thus the matter of CMT was never mentioned in any correspondence.

(3)  If the plaintiff had agreed to invest her CRCC balance in May 2008, Mr Chuan would not have signed the Security Agreement and Deed of Undertaking in June 2008.

(4)  Even as recently as 6 February 2009 the defendant’s solicitors, as part of the disclosure exercise, stated that the sum in issue was not in the defendant’s possession but had been invested in “various stocks”.  There was no specific mention of CMT.

(5)  Documentary evidence in support of the alleged investment is lacking.

(6)  The alleged investment with CMT (HK$27.3 million) is greater than the balance due to the plaintiff (HK$18 million).  This arises because even after it is alleged that the plaintiff entered the CMT agreement (May 2008) the defendant continued to make partial repayments to the plaintiff from her CCRC account, bringing the balance down to HK$18 million.

9.  Mr Mok submits that the “CMT defence” is plainly an afterthought.  I accept that the arguments in support of this submission are compelling.  If this shadowy defence founders what remains is an unanswerable claim.

10.  In this context it is now necessary to turn to the sufficiency or otherwise of the securities in the June Security Agreement.

Sufficiency of securities

11.  Mr Charles Wong, counsel for the defendant, submits that there is no need for an injunction because there is already sufficient security in place.

12.  Of the five properties listed in the June agreement there is a dispute between the parties as to whether one of them, “One Silversea”, should still be on the list.  The plaintiff contends it was released; the defendant maintains it should still be on the list.  The issue is important but not determinative.  I deal with it below.

13.  The current market value of all five properties is said, by the defence, to be HK$140,500,000 (of that Silversea represents HK$15,000,000).  According to Ms Yeh’s affirmation, the liabilities owed to the defendant’s bank on these properties is HK$127,034,711.  There are fixed assets of HK$1,643,710 in the bank, so the liabilities are reduced to HK$125,391,001.  Thus, it is submitted, the value of the Security Agreement to the plaintiff is :

(i)  approximately HK$15.1 million in landed property (HK$140.5 million less HK$125.4 million);

(ii)  HK$1.3 million in Hi Sun shares; and

(iii)  HK$1.5 million in second hand watches.

(total approximately HK$17.9 million)

Moreover, the bank valuation of two of the properties is slightly higher than the defendant’s valuation, making a total of HK$19.6 million; enough to cover the debt, just.

14.  This arithmetic is based on the inclusion of One Silversea.

15.  The plaintiff makes two points :

(a)  Even including One Silversea, the reality is that the securities offer virtually no actual current security; and

(b)  without One Silversea, even on the defendant’s analysis, the security is reduced by HK$15 million.

(a)  The reality

16.  The reality is that the Hong Kong property market is falling.  A “market value” only has any meaning if there is a willing buyer at that price.  The number of willing buyers in a falling market decreases as the market decreases.  Moreover, in such a market the “market value” represents the high point of the property’s value.  Negotiations to purchase in a falling market are likely to be below the so-called market value.

17.  Secondly, in each case the 1^st mortgage is in favour of the bank.  If there is to be a forced sale it will be the bank’s decision to do so, not the plaintiff’s.  In such a sale the bank is likely to accept any offer which is (a) reasonable and (b) sufficient to discharge the bank’s debt.  Such a scenario further diminishes the true value of the security being offered by the defendant.

18.  I accept the submission made that if it became necessary to realize the securities in order to repay the plaintiff, it could be a lengthy and unrewarding exercise.

(b)  One Silversea

19.  In spite of the defendant’s claim that One Silversea remains on the list of securities, I find that the events of October/November 2008 support the plaintiff’s position that it does not.

20.  In early October 2008, Ms Yeh agreed to pay US$1 million for the “release and cancellation” of the charge on One Silversea.  The US$1 million has been taken into account before the calculation of the debt owed to the plaintiff (namely the HK$18 million odd).  Ms Yeh’s claim that in spite of this the property remained on the list of five, makes no sense.

21.  The plaintiff’s solicitors informed her, in late October, that they had written to the Land Registry requesting the Security Agreement against One Silversea to be vacated.  The agreement in Chinese upon which Ms Yeh relies, is dated June 2008 and is clearly superceded by the arrangement to “release and cancel” the charge upon payment of US$1 million in October.  There can be no logical benefit to Ms Yeh to pay out US$1 million, which is then credited to the plaintiff’s account with the defendant, and leave the property as one of the securities for the plaintiff.

22.  I accept the argument that the value of the securities are to be assessed without One Silversea.

23.  For present purposes a more realistic view of all the securities offered in the Securities Agreement is a total of approximately HK$4 million (landed properties approximately HK$2 million plus shares and watches approximately HK$2 million).

MATERIAL NON DISCLOSURE

24.  Mr Wong also submits that the injunction should be discharged because of material non disclosure at the time of the ex parte application.

25.  The primary complaint is that the value of the properties was not disclosed to the judge.  Had it been, so the submission goes, the judge might have concluded that there was sufficient security and not made the ex parte order.

26.  Additionally, Mr Wong relies on the fact that the court was not informed that the 2^nd mortgage of the properties had been registered with the Land Registry and that US$1 million had been paid over for vacating the registration of One Silversea.

27.  In the true context of the ex parte application I do not regard these complaints as “material”.  The specific purpose of the application was to secure a specific sum of money, the property of the plaintiff, which should have been in the possession of the defendant.  The judge was informed of the properties in the Securities Agreement but full particulars and valuations were not available at the time.  In particular the plaintiff was wholly unaware of the extent of the indebtedness to the bank by way of the 1^st mortgage.  The concern at the time, honestly held and on good grounds, was that the securities were worth very little.  Hence the application.  Bearing in mind the Securities Agreement was intended to cover, not only the plaintiff’s CCRC account with the defendant, but also the Athena Fund which potentially is an even bigger claim, I am satisfied that the ex parte order was properly made and should not be discharged on this ground.

28.  The receipt of US$1 million in early October 2008 was disclosed.  One Silversea was not specifically mentioned but a true assessment of that transaction is that it diminished the overall value of the security, so it too should not be regarded as a material factor.

SECURITY FOR COSTS

29.  The defendant seeks an order for security for costs on the grounds that the plaintiff is a foreign plaintiff; she being a Taiwanese citizen.  However, she has property within the jurisdiction, namely the money being held on trust for her by the defendant.

30.  Moreover, such an order is always discretionary and in view of all the matters referred to above I would exercise my discretion against making one.

THE ORDER

31.  Mr Mok has submitted a draft order in the event that his application succeeds.  It contains (at paragraph 3) a disclosure order which Mr Wong submits is premature in any event.

32.  I do not agree.  Paragraph 3 is a more detailed version of paragraph 4 of the Order of Deputy Judge Carlson made on 30 January 2009 which has not been complied with.  A separate summons is not necessary.  It is a natural consequence of any non-compliance with paragraph 1 of the Order and is properly included at this stage.

33.  There will be an order in terms of paragraphs 1 to 3 of the proposed draft order save that the reference to “March 6^th 2009” in paragraph 1 and 3 be amended to “March 20^th 2009”.

34.  The defendant’s summons of 16 February 2009 is dismissed with costs to the plaintiff to include costs where previously reserved.