WCL CORPORATION LTD v. ZHOU JIA JIN also known as JACKIE ZHOU t/a BEAUTY FASHION COMPANY

HCA 1442/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1442 OF 2014

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D E C I S I O N

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1.  This is an application by the defendant to discharge the Mareva injunction ordered by Mimmie Chan J on 7 August 2014 pursuant to a Consent Summons filed by the parties on 6 August 2014.

2.  In the Consent Summons a hearing date for the discharge of the injunction had already been set with directions also given for the filing of affidavits and lodging of written submissions by the parties.

3.  The Mareva injunction granted prevents the defendant from inter alia removing from Hong Kong any of his assets within Hong Kong up to the value of HK$6,907,554.85 or from removing any money from a specific bank account with The Hongkong and Shanghai Banking Corp. (“the HSBC Account”).

Background

4.  The plaintiff, set up in Hong Kong on 7 February 2005, is an associate company of the RSL Group, which specialized in the export and supply of high-end fashion accessories and garments. The plaintiff was responsible for the supply chain of the RSL Group and sourced garments for its clients which included since 2008, renowned fashion brands “Helmut Lang” and “Theory”.

5.  The plaintiff acted as agents for its clients and sourced garments (“the Garments”) for them which were to be produced by the original equipment manufacturers (“OEM”) who were also sourced by the plaintiff based on the designs of its clients, with their branding, and with the specific fabric, parts and components (“the Components”) provided by the plaintiff. In so doing, the plaintiff earned agency fees from its clients.

6.  The defendant is a PRC resident with his address in Hubei, China.

7.  “Beauty Fashion Company” was set up by the defendant in 2007. The defendant was introduced to a director of the plaintiff, one Grace Lee, also in 2007, as a manufacturer of garments. The defendant and his wife owned Shenzhen Xing Jin Li Fashion Co. Ltd. which operated a factory in Shenzhen and which produced garments for the defendant.

8.  In 2007 the parties entered into an oral manufacturing agreement (“the Manufacturing Agreement”) whereby the defendant became an OEM of the Garments. The parties agreed that the defendant was not to make use of the Components or sell any of the Garments to anyone other than the plaintiff without authorization as that would amount to serious infringement of the intellectual property rights of the plaintiff’s clients.

The plaintiff’s claim

9.  On 9 April 2014 the plaintiff received an anonymous email suggesting that an entity with a name very similar to the defendant was selling Theory products to the open market in China on the internet. Those Theory products being sold were not even available to the market yet, as they were reserved for the subsequent season.

10.  The plaintiff’s client, Theory, carried out investigation by engaging investigators. The report from the investigators revealed that the defendant had been misusing the Components and the designs provided to him by producing “over-runs” of the Garments without authorization and secretly sold these “over-runs” to the open market for his own profits. The investigation report also showed that the defendant’s wife openly admitted to the investigation agent of having bribed the plaintiff’s PRC staff in order to conceal such wrongdoings from the plaintiff.

11.  As a result the plaintiff terminated the Manufacturing Agreement with the defendant and demanded the defendant to ship the Garments produced before the termination on time, as well as to return the unused Components to the plaintiff immediately.

12.  It is the plaintiff’s case that the defendant did not deny his wrongdoings but asked for continuation of co-operation since the termination of the Manufacturing Agreement would mean that his factory would have to be closed. When the plaintiff made clear that there was no question of continuous co-operation, the defendant refused to co-operate and made various demands including compensation to the tune of HK$13,109,475.43.

13.  After much negotiation and a series of meetings between the defendant and Mr. Barkell-Schmitz in Shenzhen at the end of May 2014, the plaintiff could only secure the release of about 3,000 pieces of Garments produced by the defendant, which were urgently required to fulfill the orders of the plaintiff’s clients, upon payment of HK$5.3 million by the plaintiff.

14.  The defendant admitted to Mr. Barkell-Schmitz at those meetings that a part of the Components were already made into “over-runs” despite the plaintiff’s express prohibition in the oral manufacturing agreement, and that the defendant still had in his possession about 7,000 pieces of the Garments including the “over-runs” which the defendant refused to release to the plaintiff until his further demand of payment was fully satisfied. The defendant also had with him Components worth about US$206,000.

15.  By email dated 6 June 2014, the defendant demanded HK$7,505,182.19 before he would release the balance of the Garments including the “over-runs” and Components. It is the plaintiff’s case that within this sum, only HK$1,730,588.18 were valid demands by the defendant being the price of the remaining Garments.

16.  The plaintiff eventually agreed to pay HK$6 million to the defendant under protest for the release of the remaining Garments and Components. Of that sum, the plaintiff says that HK$4,269,411.82 the defendant had no entitlement to. It is the plaintiff’s case that the plaintiff had no alternative but to make the payment of the HK$6 million because:

1) The plaintiff was in urgent need to fulfill the shipment orders of its clients, failing which it would lose not only the business from its major clients, but face substantial claims by them and that dire consequences will result, including the plaintiff’s liquidation;

2) The “over-runs” had been generated despite the plaintiff’s prohibition, and the defendant had in his possession more Components which may be used to turn into further “over-runs”. If these were allowed to flow into the market, it would amount to continuous and serious infringement of the intellectual property rights of the plaintiff’s clients and the loss of goodwill and reputation would be enormous.

17.  The plaintiff also claimed to have suffered other losses due to the defendant’s breach of the Manufacturing Agreement which included (a) immediate loss of business because the plaintiff’s clients diverted production orders from the plaintiff due to the defendant’s selling of the “over-runs” without authorization; (b) penalties for delay imposed on the plaintiff due to the defendant’s delay in production and shipment; and (c) discounts or late cancellation imposed on the plaintiff caused by the poor quality in the Garments produced by the defendant in several purchase orders.

Bankruptcy Petition

18.  A bankruptcy petition dated 17 June 2014 in HCB 4553 of 2014 was presented by the plaintiff on 18 June 2014 and the defendant filed notice of his intention to oppose the petition on 4 July 2014.

19.  The plaintiff was given leave to withdraw the petition by way of a consent summons dated 6 August 2014 with costs of and incidental to the petition being awarded to the defendant.

20.  On that same day, the consent summons for the Mareva injunction was filed and the order for the injunction was granted.

Stance taken by the defendant

21.  The defendant denies any breach of the Manufacturing Agreement, denies that there had been any “over-runs” produced by the defendant without authorization and therefore denies any infringement of the intellectual property rights of the plaintiff’s clients by the defendant.

22.  The application for the discharge of the Mareva injunction is premised on two grounds, namely:

(a) That the plaintiff has failed to produce any solid evidence which demonstrates that there is a real risk of dissipation of assets; and

(b) The use of the Mareva injunction as a means to preserve assets for the plaintiff in case it succeeds at trial is not permissible and should not be allowed.

23.  In saying that the plaintiff has failed to produce solid evidence of the risk of dissipation, reliance has been put on the decision of Deputy Judge Winnie Tam SC in the case of Eastman Chemical Ltd. v Heyro Chemical Co Ltd. (No. 2) [2012] 3 HKLRD 309 to the effect that the dissipation of asset must be shown to be with an intention or for the purpose of defeating the plaintiff’s claim, or otherwise “improper”. The plaintiff is required to show, at least objectively, the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment. The conduct must be unjustifiable and there must be a risk that the asset will be used otherwise than for normal and proper commercial purpose.

24.  The defendant expanded on the grounds above by submitting that the only evidence produced by the plaintiff of the alleged production and sale of the “over-runs” comes in the form of an anonymous email signed by one as “a Fan of THEORY” and the investigation report, the maker of which is not even named.

25.  It was also submitted that although the plaintiff has produced copies of emails which appear to be from “Theory” referring to discounted orders and cancelled orders, no evidence has been produced which would show that the plaintiff was at risk of being liquidated.

26.  The defendant also relies on the fact that the defendant was willing to and did engage in long and repeated communications with the plaintiff in May and June of 2014 and made no attempt to evade the plaintiff. The court should not infer an intention to improperly dissipate assets by the defendant since such willingness of the defendant to negotiate with the plaintiff demonstrate the defendant’s true intention was to negotiate with the plaintiff.

27.  The parties were engaged in a commercial dispute and the plaintiff made a commercial decision to pay the defendant the sum of HK$6 million when the defendant had calculated that the total amount owing from the plaintiff was as much as HK$13,109,475.43.

28.  It was also submitted by the defendant that it is trite law that a plaintiff should not be allowed to use a Mareva injunction to preserve assets.

29.  The defendant says that the timing of the petition and the application for the Mareva injunction strongly suggests that the plaintiff first attempted to use the petition to prevent the defendant from accessing the sum of HK$6 million which the plaintiff had paid to the defendant and is now using the Mareva to preserve that amount of money in case it succeeds at trial.

30.  The defendant denies having received any statutory demand from Barkell-Schmitz as alleged by him and also relies on the inconsistencies and anomalies as to the date of service of such statutory demand contained in the two affidavits of Barkell-Schmitz.

Decision

31.  A large part of the facts relating both to the background as well as the claim of the plaintiff are disputed by the defendant.

32.  Firstly, there is here a serious question to be tried as to whether the defendant had breached the terms of the Manufacturing Agreement by producing the “over-runs” without authorization, producing the Garments which fell short of merchantable quality, and/or producing and shipping the Garments late, thereby causing loss to the plaintiff.

33.  Secondly, there is also a serious question to be tried whether the defendant is liable to pay damages to  the plaintiff for converting the Components, which belonged to the plaintiff, into unauthorized Garments and selling them in the open market without authorization

34.  Thirdly, a serious question to be tried as to whether the payment made by the plaintiff, (over and above the HK$1.7 million which the plaintiff says that the defendant was entitled to) for the release of the remaining Garments and Components were liable to be set aside on the grounds of economic duress.

35.  These are all factual disputes which can only be resolved at trial after hearing the evidence and cross examination. It is not possible at this interlocutory stage for the court to make findings on such disputed facts upon the affidavit evidence.

36.  In so far as risk of dissipation is concerned, the plaintiff relies on the fact that the defendant is a citizen of Hubei and resides in the PRC. He has no known assets in Hong Kong apart from the HSBC account set out in the Mareva injunction. The plaintiff has been his only client, as alleged by the defendant, and now that the Manufacturing Agreement has been terminated, the defendant has no reason to keep any of his assets in Hong Kong since the defendant has no staff in Hong Kong apart from an accountant. These facts are not in dispute.

37.  The plaintiff also relies on the fact that the defendant had, through his wife, tried to transfer the money in his HSBC account out of the jurisdiction the same date when the HK$6 million was paid to him. The defendant does not dispute this but says in his affirmation that it was to meet payments in China. However, there is no explanation what those payments are since the defendant has stated that he had no other customer apart from the plaintiff.

38.  The plaintiff also relies on the fact that the defendant has displayed a very low commercial standard of morality in his dealings with the plaintiff from which the court can infer a real risk of dissipation of assets. Firstly, the plaintiff says it was openly admitted by the defendant that the defendant had secretly converted the Components and misused the designs of the plaintiff’s clients to produce the “over-runs” and sold them secretly for his own profits. Moreover that the defendant and his wife had bribed the plaintiff’s PRC staff to conceal such wrongdoings from the plaintiff as was stated in the private investigation report. As already stated above, these facts are denied by the defendant and has to be resolved at trial.

39.  The major difference between the parties at this interlocutory stage relates to the conduct of the defendant which the plaintiff relies on to say that such conduct shows a low commercial standard of morality on the part of the defendant and from which the court should infer a real risk of dissipation, namely, the unauthorized used of the Component to make “over-runs” and to sell such “over-runs” without authorization, as well as bribing the plaintiff’s PRC staff to keep such wrongdoings from the plaintiff. On the other hand, the defendant denies such conduct.

40.  I accept the submission of counsel for the plaintiff that the conduct of the defendant above, if true, is sufficient for the court to infer a low commercial standard of morality and from which the inference of a real risk of dissipation can be made.  The approach of the court in dealing with disputed facts at the interlocutory stage is not to make findings of facts but to take whichever course appears to carry the lower risk of injustice if it should turn out that it was wrong (to grant or not to grant the injunction).

41.  In that respect, if the Mareva injunction was discharged or not granted, the plaintiff would end up with an empty judgment should it transpire at the end of the day that the plaintiff was correct in its allegations against the defendant. That is an injustice which cannot be offset since the defendant has no other assets in Hong Kong.

42.  On the other hand, if the Mareva injunction was granted or continued, and it turned out the plaintiff was wrong to have made those allegations against the defendant, the defendant would have lost the use of the money now frozen in the HSBC account up to the time of the decision after trial. Should that happen, the undertaking now given by the plaintiff for the Mareva injunction would kick in and the defendant can be compensated for its loss of the use of those moneys by way of damages. In that way the injustice to the defendant can be lessened or removed by an adequate compensation.

43.  One other factor which swings in favour of the plaintiff is the fact that the defendant, on his own admission, has stated that the plaintiff is his only customer, and it was on that basis that the defendant has demanded the compensation it did from the plaintiff.

44.  Given that, it is difficult to see how the defendant can say that he requires the money now frozen in the HSBC account to meet payments in China, or would suffer loss if he could not utilize that money now.

45.  Dealing now with the second ground relied on by the defendant, namely that the use of the Mareva injunction as a means to preserve assets for the plaintiff in case it succeeds at trial is not permissible.

46.  That can only be a valid ground in the absence of a real risk of dissipation.

47.  In the present case, having accepted that the plaintiff’s evidence, if true, shows the defendant to have conducted himself in a low standard of commercial morality from which it will be inferred that there is a real risk of dissipation, that will be the very basis to justify the preservation of assets in case the plaintiff succeeds at trial.

48.  In that sense the second ground relied on by the defendant is intrinsically linked to its first ground which have been decided against the defendant.

49.  For the above reasons, I have come to the conclusion that the Mareva injunction ought not to be discharged but should continue until decision after trial or until further order of the court.

50.  The application for discharge of the Mareva injunction is therefore refused.

Cost

51.  I can see no good reason why cost should not follow the event.

52.  There will therefore be a cost order nisi that the defendant pays the plaintiff its costs of this application and this hearing forthwith to be taxed if not agreed.

(A R Suffiad) Judge of the Court of First Instance High Court