XCHRX BEIJING URBAN DEVELOPMENT GROUP CO. LTD. v. CHARTSHING PROPERTIES LTD.

HCA 16787/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16787 OF 1999

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J U D G M E N T

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1. The plaintiff has obtained an ex parte Mareva injunction against the defendant restraining it from removing its asset out of Hong Kong, and in particular the funds in its account with Hong Kong Bank.

2. The plaintiff and the defendant entered into a joint venture agreement to develop property in China in November 1992. They formed a joint venture company called Beijing Jing Cheng Real Estate Development & Management Company Limited (hereinafter called the "Beijing JV". The plaintiff and defendant each have 50% shares in Beijing JV. Decisions of Beijing JV have to be made jointly by both parties and authenticated by directors of both the plaintiff and defendant. Ms Hon of the defendant is the chairman while Mr Yang of the plaintiff is the vice chairman of Beijing JV. Beijing JV built two commercial buildings, the Jin Cheng Zhong Xin and the Jin Hui Zhong Xin. The former project was completed while the latter project was suspended.

3. In order to market the office units of Jing Cheng Zhong Xin in Hong Kong, Beijing JV entered into an end-buyer's finance agreement with Hong Kong Bank. Under that agreement, Hong Kong Bank would lend to end-buyers of office units in Hong Kong up to an aggregate of HK$25 million against a legal charge over the property financed by the bank and against a written undertaking from Beijing JV to buy back the mortgaged property(ies) in case of default by the borrower(s). In addition, the defendant furnished a corporate guarantee supported by a charge over a deposit of HK$25 million with Hong Kong Bank to guarantee the due performance by Beijing JV of its buy back undertaking. There is no dispute that this deposit of $25 million was provided by the defendant. There was a similar arrangement for end buyers of office units in Jing Hui Zhong Xin against the defendant's guarantee in the sum of $52.5 million. However on 25 February 1994 Beijing JV resolved, with the concurrence of the defendant, including its director Hon, that the deposit will only be released to Beijing JV against the signatures of both a director from the plaintiff and a director from the defendant. This resolution was sent to Hong Kong Bank. This purported "mandate" is problematic from point of view of our banking law and company law.

4. The joint venture worked well until 1998, the cause for which I need not go into. In August 1999, the plaintiff received an execution order from the Wei Zhou Intermediate People's Court that the 50% shares of the defendant in Beijing JV were to be frozen as a result of a civil action between the defendant and the Guangdong Wei Zhou City Real Estate Company. Beijing JV wrote to Hong Kong Bank to inform them of the order from the Wei Zhou Intermediate People's Court. In reply, they were informed that the defendant had sought to change the signing mandate to permit Hon to operate the account solely and had taken legal action against the bank for refusing to accept the change in signing mandate. The plaintiff then applied for the Mareva injunction restraining the defendant from disposing of its assets.

5. One important and material fact disclosed by the plaintiff in their application for the Mareva injunction is that Beijing JV could not operate an account in Hong Kong and in order that purchasers could deposit purchase moneys in Hong Kong, the defendant opened an account for that purpose. This account is therefore a trust account and the funds there were trust money, i.e. proceeds of sales of office units in Beijing. As there is no other Hong Kong Bank account involved, hence by inference, this account is the very account in which the defendant deposited the money as security for the guarantee under the end-buyer's finance agreement with Hong Kong Bank.

6. This is now shown to be incorrect. Firstly, the purchase moneys were deposited into the account of the solicitors for Beijing JV, Siao Wen and Leung. Secondly, the source of the funds in the Hong Kong Bank account came from the defendant.

7. In Yang's second affirmation prepared after obtaining the ex parte injunction, he explained that by July 1994 the defendant had only injected US$3 million as its capital fund in Beijing JV, which was short of US$5.2 million. At the time there were mortgage security funds standing in the defendant's account with Hong Kong Bank and Nanyang Commercial Bank Limited totalling $70 million. This is in accord with Hon's affirmation. Then on 4 August 1994, it was decided that the defendant would treat $46.6 million of the mortgage facility security funds in the two banks as the defendant's capitalisation fund. This is supported by a written minute of the directors' meeting of Beijing JV, in which Hon and other members of the defendant signed. Yang further explained that the balance of $23.4 million was then booked as loan by the defendant to Beijing JV but $13.74 million had been repaid, leaving $9.66 million outstanding. However, according to Yang, as not all the sales proceeds have been accounted for, the defendant is still indebted to Beijing JV after setting off the $9.66 million. He further explained that three amounts totalling approximately $45 million remitted to Beijing JV on 13 and 30 September 1993 and on 13 October 1993 referred to in the accountant's report as the defendant's capital contribution were in fact proceeds of sales. The arrangement was to alleviate the then financial situation of the defendant and to satisfy the PRC authorities of the defendant's capital requirement.

8. Counsel for the defendant submitted that Yang's explanation about the $45 million as being proceeds of sales is incredible because according to the payment instructions from Siao Wen and Leung, the proceeds of sales were remitted to China during the period from 1995 to 1997 and not in September and October 1993 as stated in the accountant's report. Counsel for the plaintiff explained that the plaintiff does not have all the documents available, until after discovery. The payment instructions were exhibited as examples showing the practice of having joint signatures to operate bank accounts and to give instructions to solicitors. I think the explanation is a plausible one because the end-buyer's finance agreement was entered into with Hong Kong Bank in May 1993 presumably when the flats were about to be sold. Hence it is possible that proceeds of sales or downpayments would start to be remitted to the PRC in September or October 1993.

9. On the other hand, Hon produced an accountant's report dated 13 August 1993, certifying that the defendant had by 19 October 1993 paid up their share of the capital fund. She explained that as the PRC authorities were pressing hard for evidence of the defendant's capitalisation, in order to ease the pressure, the plaintiff suggested to treat the deposits in the two banks as the defendant's contribution to the share capital of the joint venture. Without the benefit of the accountant's report, she signed the minute dated 4 August 1994 acknowledging the arrangement.

10. Counsel for the defendant submits that the injunction should be discharged because of material non-disclosure and mis-information. He referred me to the case of Brink's-MAT Ltd v. Elcombe and Others, [1988] 3 All E.R. 188. The plaintiff's case as disclosed by Yang's first affirmation is that the money standing in the defendant's account with Hong Kong Bank is trust money being proceeds of sales of flats belonging to Beijing JV. But as it transpires, it is not. Counsel for the defendant also attaches great importance to the fact that the money in fact came from the defendant.

11. Yang explained that he came to Hong Kong urgently to handle the matter and did not have all the documents with him and that he never intended to mislead the court. Despite the non disclosure as to the source of the money and its mis-description as proceeds of sales, it is nevertheless, on the plaintiff's account, trust money. In view of the complication at one stage in treating sales proceeds as capital funds to satisfy the PRC authorities' capital requirement, I am satisfied that the non disclosure or mis-information was innocent. In Brink's-MAT Ltd v. Elcombe and Others, Gibson LJ held at p. 193 that the court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, when the whole of the facts, including that of the original non-disclosure, are before it, the court may well grant such a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed. As I am satisfied that the non-disclosure or mis-information was innocent, I shall therefore consider the merit of the application for injunction.

12. On the face, both accounts are credible. Yang's account is somewhat convoluted in explaining the accountant's report and their monetary transactions and cover up. It is, however, supported by documents signed by Hon and the other directors of the defendant. They wrote to Hong Kong Bank and Nanyang Commercial Bank on 25 February 1994 instructing the banks that when releasing the deposit to Beijing JV the transfer shall be signed by one director from the plaintiff and one from the defendant. Impliedly, in February 1994, the parties acknowledged that the funds in the accounts belonged to Beijing JV. Two months later, on 4 August 1994, they passed a resolution confirming that the money in the two banks shall be treated as if they were the defendant's capital contribution. If that resolution were just a paper exercise to satisfy the PRC authorities, the defendant would not have instructed the banks two months ago about releasing the money to Beijing JV, thereby impliedly admitting that the money belonged to Beijing JV.

13. On the other hand, the defendant's account is simple and supported by the accountant's report. However, it is contradicted by their own documents signed by Hon and the other directors of the defendant.

14. It is not for me in this sort of proceedings to decide on the basis of affidavits whose account is more credible. In order to succeed in continuing the injunction, the plaintiff only need to show a good arguable case and not one which will entitle them to an Order 14 judgment. The following dicta of Lord Denning M.R. in Rasu Maritima S.A. v. Perusabaan [1978] 1 Q.B. 644 at 661, is instructive:

"They (the defendant) say that they have a good defence or, at any rate, a defence which is plainly arguable: and they say on that account no injunction should be granted. I would not myself limit the discretion of the court to cases so plain that the plaintiff can get judgment under Order 14. We have all had experience of summonses under Order 14. The defendant may put in an affidavit putting forward a specious defence sufficient to get him leave to defend, conditional or unconditional. But when the case actually comes to the court for trial, he throws his hand in. It is then seen that the affidavit was simply filed in order to gain time. So under this new procedure a defendant may put forward a specious defence, just so as to remove his assets from jurisdiction. The weakness of the defence may not appear until later. So I would hold that an order restraining removal of assets can be made whenever the plaintiff can show that he has a "good arguable case." That is a test applied for service on a defendant out of the jurisdiction: see Vitkovice Horni a Hutni Tezirstvo v. Korner [1951] A.C. 869: and it is a good test in this procedure which is appropriate when defendants are out of the jurisdiction. It is also in conformity with the test as to the granting of injunctions whenever it is just and convenient as laid down by the House of Lords in American Cyanamid Co. v. Ethicon Ltd [1975] A.C. 396."

On the basis of the plaintiff's affirmation, after taking into account its explanation of the defendant's affirmation, I must say the plaintiff has disclosed a good arguable case that the money standing in the account of Hong Kong Bank is the defendant's capital contribution in Beijing JV and is therefore held by the defendant on trust for Beijing JV.

15. It is the defendant's case that the money was borrowed from Best Base Properties Limited ("Best Base") wholly own by Hon. As the defendant is trying to change the signing mandate without informing the plaintiff, the inference that it is seeking to dispose of the money to the exclusion of the plaintiff or Beijing JV could readily be drawn. Even by repaying Best Base, the asset would have disappeared. There is therefore in my view a real risk of dissipation unless restrained. On balance of convenience, there is no reason not to continue the injunction.

16. Counsel the defendant asks for a security for the undertaking of damages in the sum of $10 million. He could not offer any basis for the amount claimed. As the plaintiff is a company out of the jurisdiction, an undertaking without any security is meaningless. The amount they are seeking to restrain is $21 million standing in the account of Hong Kong Bank. The defendant is being deprived of its use of the money for which it may have to obtain finance elsewhere and pay interest. I consider a realistic security would be the interest differential between best lending rate and fixed deposit rate on the said amount for half a year, say $300,000. This amount would adequately cover the defendant's damages before the matter is finally disposed of. Accordingly, I make an order that the injunction shall continue on similar terms until further order conditional upon the plaintiff giving security for the undertaking of damages in the sum of $300,000 to be deposited with the Court within 21 days, and there be liberty to apply. I also order that costs be reserved.