XCHRX MACY'S CANDIES LTD. v. CHAN MAN HONG and Others

1996, No.A13060

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H E A D N O T E

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MAREVA INJUNCTION - WHETHER COURT HAS POWER TO GRANT A MAREVA INJUNCTION WHICH WAS UNLIMITED IN AMOUNT

CIRCUMSTANCES IN WHICH SUCH AN INJUNCTION MAY BE GRANTED - WHETHER INJUNCTION APPROPRIATE WHERE EFFECT IS TO DEPRIVE DEFENDANT OF THE OPPORTUNITY OF MAKING A LIVING

1996, No.A13060

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. This is an inter partes summons for a Mareva injunction to freeze the assets of the 1st Defendant which are in Hong Kong. The inter partes summons was issued on 6 December 1996. On the return date, various directions were given. The summons stood adjourned for hearing which took place on 3 and 23 January and 17 February 1997.

2. On 15 November 1996, the Plaintiff issued a writ endorsed with a claim, inter alia, for :

(a) an injunction to restrain the 1st Defendant until 31 July 1997 from engaging, entering, carrying on or being interested either directly or indirectly in any capacity whatsoever, the business of or related to the sale or manufacture of chocolates and other confectioneries and food products ("the Products"); and

(b) an injunction to restrain the 1st Defendant from competing or endeavouring to compete with the Plaintiff's business or from using or disclosing any confidential information of the Plaintiff relating to its customers and suppliers, and in particular, from inducing or attempting to induce :

(i) the Plaintiff's customers to buy the Products from

(ii) the Plaintiff's suppliers to supply ingredients for the Products to

any business of or related to the sale or manufacture of the Products in which the 1st Defendant engages, enters, carries on or is interested in.

On 22 November 1996, an injunction was granted by Rogers J. in the terms sought.

3. On an ex parte application made on 4 December, the Plaintiff obtained a Mareva injunction until further order upon its undertaking to issue and serve on the 1st Defendant the inter partes summons which is before me. On the first return date, 13 December 1996, the Mareva injunction was continued until the further hearing which was adjourned, with directions relating to the filing of further evidence. The 1st Defendant was given liberty to sell the property known as Flat D on the second floor of Block B, Mountain Court, No.5 Homantin Road, Kowloon ("the Property") at an estimated value of not less than HK$8 million, the net proceeds after deducting indebtedness secured in the property to be held by the 1st Defendant's solicitors. The 1st Defendant was also granted leave to expend a sum of $500,000 on meeting his legal expenses, his credit card payments and his wedding-related expenditure. In addition, the 1st Defendant was granted liberty to expend up to $10,000 per week towards his ordinary and proper expenses and up to $10,000 per week on legal expenses and to agree with the Plaintiff's solicitors to increase or vary those sums.

The Plaintiff's claim

4. The Plaintiff, incorporated in Hong Kong in 1985, is the manufacturer, supplier and retailer of the Products. These products are sold in Hong Kong through the Plaintiff's retail outlets and in chain stores as well as overseas markets. The 1st Defendant was the "founding" member and majority shareholder of the Plaintiff in 1985. In 1992, he sold 70% of the Plaintiff's then issued share capital to Mutual Success, a company controlled by David Ho the Plaintiff's Chief Executive and Stanley Ho Sau Nan both of whom are shareholders and directors of the Plaintiff. The 1st Defendant was a director of the Plaintiff until 18 November 1996. He was an executive director until 30 August 1995 and from early September 1995 he became a non-executive director and marketing consultant. The 3rd Defendant is a company owned and controlled by the 1st Defendant. The 4th Defendant is a company controlled by the 5th Defendant who is the husband of the 2nd Defendant. The 2nd Defendant was a director of the Plaintiff between 1992 and 1994 and prior to joining the 4th Defendant, had worked for the 3rd Defendant.

5. In August 1995, the 1st Defendant was summarily dismissed by the Plaintiff for various breaches of duty, in particular in competing with the Plaintiff and being interested in the 3rd Defendant. On 7 September 1995, the 1st Defendant and the Plaintiff entered into a Deed of Settlement under which the Plaintiff forebore to take action against the 1st Defendant and the 1st Defendant admitted his breaches of duty and undertook to serve the Plaintiff as a non-executive director and marketing consultant. The Plaintiff's case is that shortly after September 1995, the 1st Defendant committed further breaches of duty by competing with the Plaintiff, soliciting its customers and suppliers and of being interested in the 3rd and 4th Defendants whether directly or indirectly. The breaches alleged are of (i) express and implied terms of the employment contract; (ii) fiduciary duties; (iii) confidence; and (iv)copyright.

Value of the 1st Defendant's assets

6. At the adjourned hearing on 3 January 1997, the 1st Defendant was directed to file an affidavit to disclose his assets. As a result, the only assets that can be the subject matter of a Mareva injunction are : (i) the 1st Defendant's shareholding of 12.5% in the Plaintiff; and (ii) the net proceeds of sale of the Property which, pursuant to the Order dated 13 December 1996, are held by the 1st Defendant's solicitors. The net proceeds amount to some $2.5 million.

7. So far as the 1st Defendant's 12.5% shareholding is concerned, there is no consensus as to its value. The 1st Defendant's position is that it is worth at least $3 million. In October 1996, there was, according to the 1st Defendant, an expression of interest from two interested buyers to acquire the Plaintiff for $30 million. On the basis, 12.5% would yield $3.75 million. At that point, the majority shareholders indicated that they were not interested as they considered that their then 75% shareholding in the Company to be worth $40 million. The majority shareholders do not dispute that such a discussion with the 1st Defendant did occur. Rather, their explanation for their then valuation of their 75% shareholding (resulting in a valuation of over $50 million for the Company) was that it was an opening gambit, inflated for the purposes of negotiation. Based on the latest available audited financial statements of the Plaintiff dated 14 November 1996 for the year ended 31 March 1996, the majority shareholders put the Plaintiff's net asset value at just over $9 million.

8. On the evidence before me, the 1st Defendant's estimate is to be preferred : first, it would appear from those audited financial statements that in computing the net asset value of the Company, the fixed assets are taken at a net book value basis. That would not reflect the real value of the Company's assets especially its property holdings. Note (2) to the financial statements indicates that only one of the properties was revalued in 1992. That valuation would itself be out-of-date having regard to the trend of property prices since 1992. The rest which were not even revalued would be even more out-of-date. For this reason, the Plaintiff's valuation of the Company based on its net asset value is plainly unreliable. Second, as Mr Chain for the 1st Defendant submitted, if the Plaintiff's valuation were to be heavily discounted, say by 50%, to allow for the fact that the majority shareholders' estimate of the value of the Company in October 1996 was inflated, the Company would still have a value in the region of $25 million and the 1st Defendant's 12.5% share must, at a minimum, be worth $3 million.

9. It is common ground that the 1st Defendant cannot effectively deal with or dispose of his shareholding in the Plaintiff. The net result is that the continuation of the Mareva injunction arises only if on the evidence the Plaintiff's claim is likely to exceed $3 million.

Value of the Plaintiff's claim

10. The injunction sought is unlimited in amount. The Plaintiff's primary submission is that it is not an essential requirement in a Mareva injunction that a maximum sum be inserted. Counsel for the Plaintiff relied on the English Court of Appeal's decision in McDonald v. Graham [1994] RPC 407 at 438 lines 31-32. Ralph Gibson L.J. stated that view after citing Lord Denning M.R.'s comments on a passage in the judgment of Kerr L.J. in Z Ltd. v. A-Z [1982] 2 QB 558 at 585F. Lord Denning said :

"I would draw attention ... to one or two remarks which Kerr L J made : 'In my view, Mareva injunction should be granted, but granted only, when it appears to the court that there is a combination of two circumstances. First, when it appears likely that the plaintiff will recover judgment against the defendant for a certain or a proximate sum.' I think that is putting it too high. If there is a good arguable case for damages - not necessarily for a certain of a proximate sum - a Mareva injunction can be granted."

Lord Denning's observations were made in Darashah v. UFAC (U.K.) Limited CA 30 March 1982, The Times. From that report, Lord Denning's observations appear to be obiter in that the only point that arose in Darashah was whether the goodwill of a company was an asset sufficient to be caught by a Mareva injunction.

11. The point as to unlimited orders in Mareva injunctions has been considered in very few cases. Apart from McDonald v. Graham and Darashah, there is the Hong Kong Court of Appeal's decision in Ng Chun-fai Stephen v. Tamco Electrical and Electronics (HK) Limited [1994] 1 HKLR 289 which is binding on this court. In that case, the court granted the plaintiff an ex parte Mareva injunction for an unlimited amount. On the 1st defendant's application to discharge or vary the Mareva injunction, the judge varied the order to specify the amount. On appeal to the Court of Appeal, Mortimer J.A. in delivering the judgment of the court stated (at p.293) as follows :

"The original Mareva injunction was unlimited in amount. Whereas the court has power to make such an order it would only be made in wholly exceptional circumstances. There were never such circumstances in this case."

12. So, whilst the court has power to grant an unlimited order, the position is accurately stated in Gee on Mareva Injunctions and Anton Piller Relief (3rd Ed. 1995) at p.37 :

"It is now rare for a Mareva injunction to be granted without a financial limit."

The rationale behind this is clear : it is to avoid unnecessary interference with the defendant's freedom to use his own assets, there being no justification for freezing assets over and above the ceiling established by the amount of the plaintiff's claim since the purpose behind the order is simply to preserve sufficient assets to satisfy the judgment. See Z Ltd. v. A-Z (supra) at 576C-D.

13. Are there wholly exceptional circumstances in the present case to justify an unlimited order?

14. The Plaintiff says that it is not able to establish with any certainty the amount of its claim for breaches, inter alia, of trust and confidence. Moreover, there is now a breach of copyright claim. But the present case is not a tracing case as would fall within the discussion on unlimited orders in Gee (supra) at p.39 and, on the evidence, the scale of breach of copyright is limited. In the context, the Plaintiff's claim under that head is insignificant.

15. As Ralph Gibson L.J. pointed out in McDonald v. Graham [1994] RPC at 438-439 :

"The mere asserted inability of the plaintiff to calculate the extent of damages will not necessarily justify a decision not to insert a maximum amount in a Mareva injunction. It must be rare for the nature of the plaintiff's business to be such that a realistic maximum could not be proposed which would effectively protect the plaintiff. Further, the mere fact that a defendant does not have assets which are likely to be in excess of his potential liability will not necessarily justify a decision not to insert a maximum amount; if only because a person trading in a business of the nature of that of the plaintiff and of the defendant may in one transaction gain a large profit; and the defendant should not be prevented from using any part of that profit save to the extent that it is just and convenient to impose a restriction." (emphasis added)

16. In the present case, as will become apparent, the computation put forward in Schedule B to the Amended Statement of Claim (disregarding the factors that affect the reliability of the figures) belies the alleged inability to state a maximum sum.

17. Turning first to its claim for damages, it amounts to over $11 million and that is particularised in Schedule B to the Amended Statement of Claim. There is an alternative claim for an account of profits and it was submitted that the amount under this alternative head cannot as yet be fully ascertained.

18. So far as the Plaintiff's estimate of loss and damage is concerned, there are two parts to its computation. The first relates to the period from early September 1995 to 22 November 1996. Its estimated loss of profit on lost sales of approximately $4.25 million is based on transactions between the 4th Defendant and Japan Travel Bureau Ltd. ("JTB") and Tomoe Corporation for the month of October 1996. By using a net profit margin of 30% which the Plaintiff asserted was its own profit margin, it proceeded to estimate the profit which the 1st Defendant would have made from these transactions. The second part is an estimate of loss of future prospects for two years from 22 November 1996, this being the length of time the Plaintiff says is required to win back lost customers. The calculation is again based on the October 1996 figure.

19. There are a number of unsatisfactory aspects to the figures put forward and the computation in general. First, whilst the figure of $11 million has been put forward on the basis as an estimate of damages recoverable by the Plaintiff, the first limb of $4.25 million is in fact no different from an account of profits because the base figure used in the calculations is in fact an estimate of the profit which the 1st Defendant would have made from the transactions. Second, there is simply no evidence to support the Plaintiff's assertion that it will take at least two years for it to win back lost customers (viz. Tomoe and JTB). The figure of $6.78 million is thus questionable. Third, and more fundamentally, the base figure itself is problematic :

(i) The underlying transactions relied upon are not transactions to which either the 1st Defendant or the 3rd Defendant is party. They were transactions involving the 4th Defendant. There is again no evidence (as opposed to mere assertion) that the 1st Defendant controls or has any interest in the 4th Defendant.

(ii) The profit margins used in the Schedule in para.5 of the 6th affirmation of David Ho, the Chief Executive of the Plaintiff, are represented to be "equivalent to the Plaintiff's profit margin on similar transactions". A uniform profit margin of 30% was in fact applied to each transaction. As Mr Chain pointed out, the assertion of a net profit margin of 30% is simply not borne out by the audited financial statements of the Plaintiff which are in evidence. According to the audited financial statements for the year ended 31 March 1996, the operating profit before taxation was $2.25 million against a turnover of $65.5 million. On this basis, the net profit margin would be under 3.5%. Whilst I have reservations as to whether that is the correct way of ascertaining the net profit margin, in all probability, the margin is appreciably lower than the 30% claimed for the reasons appearing below.

A more accurate approach would be to deduct from the gross sales the cost of sales and to add to the cost such elements of selling and administrative expenses as are directly related or attributable to additional sales. Apart from the audited financial statements, there are profit and loss accounts for the same period for "Uanagement information purposes only". These show that the gross profit comes to about 20.4% of gross sales. Selling expenses average 3%. The largest item of administrative expenses is a management fee for $4.7 million. This accounts for some 50% of the administrative expenses. Presumably this is directly related to the volume of business and represents some 7.5% of gross sales. What is puzzling is that in the audited financial statements, this item does not appear : the closest is "Management and Consultant Fee paid to the Holding Company" of $3.125 million.

In the absence of evidence to explain these differences, it is not possible to take matters further but it would appear that, at the very least, it would be appropriate to deduct from the gross profit margin of 20.4% an aggregate of 10.5%, to reflect selling and administrative expenses (3% plus 7.5%) to arrive at a net profit margin of, say, 10%.

(iii) In his 3rd affirmation, David Ho deposed to a net profit of 20% in relation to chocolate products. There is thus a discrepancy of 10% even on the Plaintiff's own evidence. Although counsel for the Plaintiff attempted to explain away the discrepancy by saying that it depended on the Product, the Schedule clearly shows that a uniform rate was applied across the board regardless of the type of Product. Even if this discrepancy were to be disregarded, the net profit margin appears to be double that extrapolated from the Plaintiff's management accounts : see (ii) above.

For all these reasons, I have grave reservations as to the reliability of the figures put forward by the Plaintiff as its estimated loss or its estimate of the 1st Defendant's profit. Using the methodology of Schedule B and simply adjusting the net profit margin but disregarding the other factors referred to earlier, the revised figure would be of the order of $3.6 million.

Jurisdiction to grant a Mareva injunction

20. It is well-settled that the jurisdiction to grant a Mareva injunction is exercisable where the Plaintiff establishes on the evidence as a whole that (1) there is a good arguable case that it would succeed at trial; (2) there is a real risk that any judgment or award would remain unsatisfied by reason of disposal by the Defendant of his assets, unless he is restrained by court order from so doing; and (3) it would be just and convenient in all the circumstances of the case to grant the relief sought. See The Ninemia [1983] 1 WLR 1412 and generally Gee on Mareva Injunctions and Anton Piller Relief (supra) at p.12.

Good arguable case

21. For the purposes of this application for the continuation of the Mareva injunction, the 1st Defendant is prepared to accept that on the evidence the Plaintiff has a good arguable case on past breaches. The concession, however, does not extend to quantum. Nor does it extend to future breaches since in view of the injunction granted on 22 November 1996, such breaches would warrant contempt proceedings. Nevertheless the concession renders it unnecessary to consider the evidence as to the existence of a good arguable case.

Risk of dissipation of assets

22. As to the risk of dissipation, the Plaintiff submitted that on the evidence adduced to establish a good arguable case, the Plaintiff has shown that the 1st Defendant is a person of low commercial morality. The Court was invited to adopt the approach of Godfrey J. (as he then was) in Honsaico Trading Ltd. v. Hong Yiah Seng Co. Ltd. [1990] 1 HKLR 235 and conclude that the 1st Defendant would not shrink from attempting to defeat the interests of the Plaintiff under any judgment that might be obtained. Further, the 1st Defendant has expressed an intention to emigrate to Canada.

23. Although according to the 1st Defendant, no application to emigrate has yet been made, he accepts that he did mention that tentative intention to Mr Ho. The 1st Defendant's assets other than his shareholding are now liquid. Whilst his expressed intention is to run his two companies in Hong Kong, the businesses are not well-established. On balance, I accept that a risk of dissipation has been made out.

Should the Mareva injunction be continued?

24. For practical purposes, the only asset that would be affected by the Mareva injunction would be the net proceeds amounting to some $2.5 million presently held by the Defendants' solicitors as the 1st Defendant's shareholding in the Plaintiff is not an asset that the 1st Defendant could readily realise without the Plaintiff's consent.

25. On the evidence, the 1st Defendant owns two companies, namely, the 3rd Defendant and another company called International Duty Free Catalogue Shoppers Limited ("IDFCS"). The 1st Defendant purchased the 3rd Defendant as a shelf company in January 1996. The two companies had been financed by the 1st Defendant through overdraft facilities secured against the Property which has now been sold. The overdraft of some $3 million has been paid off. The monthly recurring overheads required to run these two companies is $80,000. For the 1st Defendant, Mr Chain submitted that as the two companies (which are in their starting-up stage,) constitute the 1st Defendant's means of livelihood, he must be allowed to deploy his assets in those businesses. For that purpose, the 1st Defendant requires the $2.5 million to be deposited with the bank in order to secure banking facilities for those businesses. Mr Chain submitted that the Mareva injunction should not be continued because the value of the 1st Defendant's shares in the Plaintiff constitutes sufficient security. Without prejudice to that primary submission, Mr Chain offered the undertakings on behalf of the 1st Defendant as to the net proceeds. The undertakings are :

(1) to cause the net proceeds to be deposited with a licensed bank in Hong Kong to secure general banking facilities for legitimate business expenses of the 3rd Defendant and IDFCS provided that payments by the 3rd Defendant and IDFCS to the 1st Defendant by way of remuneration or otherwise shall not exceed the sum of $80,000 per month in the aggregate;

(2) to cause all business proceeds of the 3rd Defendant and IDFCS to be paid into that bank account; and

(3) not without the leave of the court or the consent of the Plaintiff in writing to cause any sum thereof to be transferred out of the jurisdiction.

26. The Plaintiff does not consider that these undertakings give it sufficient protection. It proposed that :

(1) the net proceeds be deposited into an interest bearing account to secure overdraft facilities on that sum;

(2) the 1st and 3rd Defendants and IDFCS bring into that account all future business proceeds; and

(3) total monthly drawings be $200,000 : $80,000 for ordinary and proper expenses, $40,000 for legal expenses and $80,000 for working capital. There is to be subsequent notification relating to working capital and that there should be an order for either prior or subsequent notification for amounts over $80,000.

The Plaintiff produced a letter that it had written to a licensed bank inquiring if the bank would regard an order containing a Mareva injunction limiting the 1st Defendant's drawings from the proposed current account to $80,000 per month as enforceable in that form to limit the withdrawals. (The fact that in the request the amount of withdrawal per month was stated to be $80,000 rather than $200,000 is not a factor that would affect the feasibility of such an order.) The response was to the effect that if withdrawals up to a stated limit per month are to be permitted from an account subject to the order, the bank would not look into the propriety of each withdrawal "but would require the Plaintiff's solicitors to confirm in writing their consent to each proposed withdrawal from the account in question."

27. The first matter to note is that each withdrawal even within the permitted limit has to have the Plaintiff's prior written consent. I do not see how the 1st Defendant can be expected to continue to run his companies by operating an account that is subject to such constraints. The proposal is simply unworkable.

28. The management accounts for the 3rd Defendant and IDFCS (recently submitted to the court by the 1st Defendant pursuant to the direction given at the last adjourned hearing on 17 February 1997), show that for the period 1 January 1996 to 4 February 1997, these companies traded at a loss. They also demonstrate the need for credit facilities if the companies are to remain in business. It is also evident from McDonald v. Graham (supra) that an important (if not overriding) consideration is whether injustice or even difficulty will be caused to the defendant if he is not free to run his business and to earn what he can and to pay his costs and business expenses and outgoings. In that case, elaborate arrangements were made to enable the defendant to retain this freedom. Those arrangements involve casting on the defendant's solicitors the burden of monitoring the propriety of each payment out. The report does not reveal how this arrangement came about except that it came to be embodied into the judge's order. For my part, although the point does not arise for consideration in the present case as neither party has advocated such a course, I have reservations as to the desirability of this type of arrangement since it throws a severe burden on someone who is not even a party to the proceedings. Moreover, it plainly cannot be imposed without the co-operation and consent of the Defendant's solicitors.

29. In my judgment, the continuation of the Mareva injunction in this case is neither just nor convenient : First, and most importantly, it would work serious injustice to the 1st Defendant since the effect of the Mareva injunction would be to deprive him of the opportunity of making a living. Second, the Plaintiff already has substantial security in the form of the 1st Defendant's 12.5% shareholding in the Plaintiff. Third, on the evidence as it stands, I do not accept that the maximum sum is not capable of being imposed : in any event, on the revised Schedule B basis (i.e. adjusting only the net profit margin and disregarding the other matters that may affect the reliability of certain premises underlying Schedule B) and taking into account the copyright claim, the amount is only marginally, rather than significantly, in excess of $3 million. Fourth, the undertakings offered by the 1st Defendant constitute a measure of additional comfort which in the circumstances adequately address such part (if any) of the Plaintiff's claim that exceeds $3 million.

30. Accordingly, as it appears to be common ground that the 1st Defendant's shareholding in the Plaintiff Company cannot be effectively dealt with by the 1st Defendant, the Mareva injunction is discharged upon the undertakings of the 1st Defendant as set out above.

31. I make an order nisi for costs in favour of the 1st Defendant.