LIU XIAN FENG SAM AND ANOTHER v. LIU BO AND OTHERS

HCA5474/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5474 OF 2001

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D E C I S I O N

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1. There are two summonses before me :

(1)	The 1st defendant’s amended summons dated 16 September 2004 :
	(a)	to set aside the Mareva injunction granted ex parte by Deputy Judge Muttrie on 21 December 2001;
	(b)	alternatively, to vary the Mareva injunction to provide for legal and living expenses for the 1st defendant; and
	(c)	for security of costs against the 1st and 2nd plaintiffs.
(2)	The 1st defendant’s summons dated 21 February 2005 that unless the 1st plaintiff do file the official record from the Higher People’s Court of Anhui Province (“Anhui Court”) showing that the action “(2004) 皖民一初字第三号” (i.e. (2004) Anhui Civil First Instance No. 3) (“Anhui Proceedings”) has been finally discontinued or withdrawn by the 1st plaintiff, the Mareva injunction be set aside.

Background

2. The 1^st and 2^nd plaintiffs asserts a proprietary claim against the 1^st defendant as trustee for US$2,579,310 remitted by the 1^st plaintiff into the 1^st defendant’s bank accounts.  The major account was in the sole name of the 1^st defendant and the 1^st plaintiff was made an authorized signatory upon the opening of the account.  The 1^st plaintiff alleged that he believed the account was a joint account.  The Mareva injunction was taken out shortly after the signing authorization of the 1^st plaintiff was cancelled by the 1^st defendant.

3. The 2^nd plaintiff was incorporated in the United States and is beneficially owned by the 1^st plaintiff.  As at the application for the Mareva injunction, the action was constituted as the 1^st plaintiff trading as the 2^nd plaintiff.  The title of the action was amended on 18 May 2004.

4. The 1^st defendant asserts beneficial ownership of the funds in the accounts as profits for computer servers sold by him pursuant to contract with the 1^st plaintiff.  He also counterclaimed US$400,000 withdrawn by the 1^st plaintiff from his account, and for share of profits on the computer servers sold by the 1^st plaintiff.

5. The Mareva injunction has frozen about HK$19 million.  The inter partes return date has been successively adjourned by consent.  The injunction has been varied twice, before Chu J on 12 April 2002 and Mr Recorder Wong SC on 17 May 2004, for legal and living expenses for the 1^st defendant.

6. On 5 January 2002, the 1^st defendant was arrested by the Hong Kong Police for alleged misappropriation of the said funds.  He was remanded in custody for trial in the District Court, but on 23 August 2002, the Department of Justice withdrew the charge against the 1^st defendant, apparently on inconsistencies in the 1^st plaintiff’s statements.

7. The trial date is fixed to be on 28 November 2005 with 10 days reserved.  What led to the renewed efforts to set aside the injunction are two recent developments.

8. First, notwithstanding an undertaking in the Mareva injunction that the 1^st plaintiff “will not without the leave of the court begin proceedings against the 1^st defendant in any other jurisdiction”, on 12 September 2004 the 1^st plaintiff commenced the Anhui Proceedings over the same subject matter and on 20 December 2004, the Anhui Court issued a Notice to Answer to the Proceedings requiring the 1^st defendant to file a defence before 31 January 2004, and a summons requiring the 1^st defendant to attend court on 17 February 2005.

9. On 1 February 2005, I granted an order that the 1^st plaintiff do discontinue or withdraw the Anhui Proceedings.  At that stage, the former solicitor for the 1^st and 2^nd plaintiffs had no instruction to oppose the 1^st application’s application.

10. Secondly, the 1^st defendant discovered that the affirmation of the 1^st plaintiff in support of the application for the Mareva injunction contained untruths relating to his property ownership.  The 1^st plaintiff affirmed that he resided in Reamwood Avenue, Sunnyvale, California (“Reamwood Property”), and he owned the property free from mortgage, and the property was worth US$1 million.  In fact, the 1^st plaintiff only rented the Reamwood Property as a shop.

Grounds for setting aside

11. The grounds of Mr Kwong for the 1^st defendant for setting aside the Mareva injunction can be summarized as follows :

(1)	breach of undertaking in commencing the Anhui Proceedings;
(2)	false disclosure of ownership of the Reamwood Property;
(3)	non-disclosure of the 1st plaintiff’s previous banking dealings with the 1st defendant;
(4)	non-disclosure of the 2nd plaintiff’s financial position by producing only unaudited accounts;
(5)	failure to disclose the academic qualification of the 1st plaintiff notwithstanding the 1st defendant’s challenge that he had none;
(6)	failure to disclose two sales contracts requested by the 1st defendant; and
(7)	failure to disclose evidence of events leading to the cancellation of the signing authorization of the 1st plaintiff in the original affirmation.

Legal principles

12. I find the following legal principles relevant to the consideration to the setting aside of the Mareva injunction.

13. It is trite law that an applicant for an ex parte injunction has the duty to make full and frank disclosure of all material facts known to him.  The court in exercise of the ex parte jurisdiction will be in an invidious position if it cannot rely on the applicant and/or its lawyers to do so.

14. In Citibank N.A. v. Express Ship Management Services Ltd & anor [1987] HKLR 1184, 1190, Fuad JA (as he then was) stated :

“

The cases show what are to be regarded as material facts in this context: ‘all facts that are relevant to the weighing operation which the court has to make in deciding whether or not to grant the order’: per Browne-Wilkinson J (as he then was) in Thermax v. Schott Industrial Glass [1981] FSR 289, 298.  His test has been applied in several cases.  I find the decision of Goulding J in Wardle Fabrics Ltd. v. G. Myristis Ltd. [1984] FSR 263 to be particular helpful in that case the judge emphasized the correct test is not simply whether, if the non-disclosure had not occurred, the ex parte judge would, nevertheless, have made the order, but whether the facts not disclosed, being relevant, should have been in the scales.”

15. In Fitzgerald v. Williams [1996] QB 657, 667-8, Sir Thomas Bingham MR (as he then was) stated that :

“

In seeking ex parte relief an applicant must disclose to the judge any fact known to him which might affect the judge’s decision whether to grant relief or what relief to grant.  It is no answer for an applicant who falls down on his duty to show that his breach of duty was committed in good faith and inadvertently, or to show that the relief would have been granted even had he complied with his duty.  The courts have traditionally insisted on strict compliance with this rule, as affording essential protection to an absent defendant, and as applications for ex parte relief have multiplied so the importance of complying with this duty has grown.  The law does not however require a judge to whom an application for discharge is made to grant the relief on proof that there was material which should have been but had not been disclosed to the original judge.  The later judge has then to exercise his own judgment whether, in all the circumstances, the interests of justice are best served by discharging, or maintaining, or varying the original order.  In making this judgment he will have regard to the importance of securing compliance with the fundamental principle, but he will have regard also to the significance in the context of the particular case of the facts which had not been disclosed when they should have been.”

16. As to the financial position of the applicant, in Nam Wah Holdings Co. Ltd & ors v. Excel Nobel Development & ors [2000] 3 HKC 118, 128-9, Ribeiro J (as he then was) said :

“

… if a plaintiff’s financial position is such that, viewed fairly, it may be said to raise realistic doubts as to the plaintiff’s ability to honour the cross-undertaking, it becomes incumbent upon the plaintiff to make full and frank disclosure of his financial position to the ex parte judge so as to permit the judge to determine for himself the correct order to make in the light of such disclosures.  The judge in such cases have various options.  He may consider it proper to refuse the injunction altogether.  Or, he may decide to require some degree of fortification of the cross-undertaking as a condition for the grant of the injunction.  Alternatively, he may simple decide to grant the injunction against the cross-undertaking notwithstanding the risk that it may not be honoured or fully honoured if called upon.  It is however crucial that all relevant material be placed before the judge so that he can make the decision for himself : Lock International plc v. Beswick [1989] 1 WLR 1268 at 1279C.”

17. In Dormeuil Frères S.A. v. Nicolian Ltd [1988] 1 WLR 1362, Sir Nicolas Browne-Wilkinson VC (as he then was) stated there is no absolute right to have an ex parte order has been obtained without due disclosure set aside; there is a discretion in the court whether to do so or not.  The real question at the time of the inter partes hearing should not be what has happened in the past but what should happen in the future.  The court has to consider the substantial merits of the case or the balance of convenience.

Consideration

18. It is necessary to consider the seriousness of any non-disclosure and breach of undertaking against the substantial merits of the case and the balance of convenience.

19. It is not in dispute that the funds in the accounts were remitted by the 1^st plaintiff to the 1^st defendant.  It is also not in dispute that the 1^st plaintiff has had signing authorization over the 1^st defendant’s account.  The 1^st plaintiff said the funds were to serve as assets proof for his application to emigrate to Canada, and also for purchase of goods by the 1^st defendant in Hong Kong for him.

20. Mr Chain for the 1^st and 2^nd plaintiffs pointed out that there are serious discrepancies as to the 1^st defendant’s explanation on the funds in his bank accounts.  In his 1^st Affirmation dated 23 December 2002, the 1^st defendant said he had designed a computer server and the unit costs were about US$120,000 to US$140,000, and the profits were US$60,000 to US$80,000.  He sold 15 sets at US$200,000 each to the 1^st plaintiff and received US$3 million or about HK$23 million as purchase price.  He made the first set and used the profit from it to make the second one and so on.  The 1^st plaintiff was authorized to operate the account in order to withdraw funds to purchase the parts.  Mr Chain pointed out the inherent improbabilities that the 1^st plaintiff would be paying for the parts and yet the 1^st defendant would still receive the full purchase price without deduction. 

21. In his witness statement dated 31 December 2003, 1^st defendant changed his version that the funds were profits of selling 30 sets to the 1^st plaintiff.  He did not have to pay for the costs as the 1^st plaintiff had paid the suppliers.

22. Mr Chain pointed out that the funds were remitted in eight tranches between 30 May 2001 and 26 September 2001.  According to the 1^st defendant, the production of the 30 sets ran from January to August 2001.  If so, from January to May 2001, there was no inflow of cash to fund the production.  The 1^st defendant had to abandon ship the earlier version that he used the profits from the first set to produce the second and so on.  Mr Chain also asked rhetorically that if the funds were profits to the 1^st defendant, then why surprising they were sitting in the accounts?

23. There is no documents relating to any production except two invoices to a shanghai factory for cardboard boxes and 400 computer cases, etc.  The 1^st defendant explained that all the relevant documents were taken away by the 1^st plaintiff.

24. Mr Kwong submitted that the 1^st defendant might have made innocent mistakes about whether there were 15 sets or 30 sets delivered.  The 1^st plaintiff did assert that the funds were partly for the 1^st defendant to buy goods.  As the default judgment has been set aside, it goes without saying that the defence is not slender or tenuous.

25. At the interlocutory stage, I can at best view the respective cases ex prima facie.  I note that admittedly substantial funds were remitted by the 1^st plaintiff to the 1^st defendant and the most part had been sitting in the accounts.  The 1^st plaintiff had had signing authorization, but it was suddenly cancelled.  The truth can only be found out at the trial.  Mr Kwong conceded that practically speaking, if the Mareva injunction were lifted, one might very well not see the trial at all.

26. I now consider the breach of undertaking.  Mr Chain accepted that the commencement of the Anhui Proceedings was a breach and there was no justification.  The 1^st plaintiff explained that he was not fully advised as to the effect of the undertaking.  Mr Chain offered on behalf of the 1^st plaintiff an undertaking not to restore the Anhui Proceedings without the leave of the court.

27. The 1^st plaintiff affirmed that he never gave instructions to restore the Anhui Proceedings in December 2004.  His solicitor Mr Cheong produced a Civil Adjudication dated 4 November 2004 by the Anhui Court that the Anhui Proceedings has been stayed pending the conclusion of the proceedings herein.  Mr Cheong also stated that according to Mr Chui, the 1^st plaintiff’s lawyer in the Mainland, the summons on the 1^st defendant to appear was supposed to have been issued before the stay, but not yet served because the 1^st defendant had disappeared for months, and when the 1^st defendant unexpectedly sent an agent to the Anhui Court to collect the documents, the summons was given to the agent notwithstanding the stay.  The hearing on 17 February 2004 has been vacated.

28. Mr Kwong queried the worth of any further undertaking in that notwithstanding the stay in November 2004, the 1^st defendant was still summoned subsequently in December 2004.  Mr Kwong pointed out that on 24 September 2002, default judgement was entered against the 1^st defendant, and subsequently set aside by the master on 13 February 2003.  He surmised the 1^st plaintiff must have restored the Anhui Proceedings on the strength of the default judgment without disclosing the fact that it had been set aside.  Mr Kwong said the 1^st defendant would be placed in grave prejudice as under the Chinese Civil Procedural Code, a party who disobeys a court summons twice without justification is liable to arrest, and there is nothing this court could do to relieve the 1^st defendant if the Anhui Proceedings were restored once again.

29. I think Mr Kwong’s fear may be allayed thus.  Granted that the 1^st defendant has not attended the Anhui Court last month and there does not seem to be any prejudice to him shown.  As Mr Chain submitted, the Civil Adjudication dated 4 November 2004 ordering the stay is valid and subsisting, and that is the best defence to any charge of not entering an appearance or filing a defence.  Further, if the 1^st plaintiff is to breach the undertaking again, he could hardly expect any sympathy from the court here.

30. As to the various complaints on false and non-disclosure, Mr Chain submitted that unlike the breach of undertaking, they are not matters arisen recently or matters which the 1^st defendant could not have found out earlier.  The 1^st defendant has consented to the continuation of the Mareva injunction, and sought two variations for the release of funds.  The 1^st defendant could have raised the complaints in order to set aside the injunction on those two previous occasions.  Mr Chain referred to Chanel Ltd v. Woolworth & Co. Ltd [1981] 1 WLR 485, 492 where Buckley LJ said that “(e)ven in interlocutory matters a party cannot fight over a battle which has already been fought unless there has been some significant change in circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter.”

31. But for the breach of the undertaking, I might have agreed with Mr Chain.  Now there is an admitted breach, I can see why Mr Kwong is bringing the complaints for the court to consider the matter in its entirety.

32. Mr Chain submitted that the in light of the substantial merits and balance of convenience, and without prejudice to his stance that the Mareva injunction should be continued, even if the injunction were to be discharged, a re-grant was almost certain, and Mr Kwong’s application amounted to no more than satellite litigation with the only result of incurring unnecessary costs.  Mr Kwong replied that the false and/or non-disclosure serve to demonstrate that the 1^st plaintiff is not worthy of the undertaking given.  Even if the court were to re-grant the injunction, it should be on terms such as fortification.

33. As the court is exercising the discretion with fine balance between seriousness of the breach of undertaking and non-disclosure against the substantial merits and convenience, I shall consider Mr Kwong’s other grounds even if it could have been made earlier.

34. On the false disclosure of the Reamwood Property, the 1^st plaintiff has now affirmed that he jointly owns with his family members two properties in California : Knikerbocker Avenue, Sunnyvale purchased in August 1990 and Arques Avenue, Sunnyvale purchased in July 1999.  The values were about US$440,000 and US$742,000 and he owns 1/2 and 1/3 respectively.  They were both subject to mortgage at the time of the Mareva injunction.  Mr Chain submitted the mistake was an honest one and there was no realistic doubt as to the 1^st plaintiff's financial soundness.  With respect, as pointed out in the authorities, it is of utmost importance that the applicant make full and frank disclosure such that the court is apprised of the accurate position.  It is also the duty of the lawyer in whom the court will inevitably place reliance in an ex parte application to see to it that the information disclosed is accurate.  I fail to see how the 1^st plaintiff could have said any property he owned was free from mortgage when his two properties were subject to mortgage, let alone the shop rented was the residence he owned.  At the very least, the 1^st plaintiff and those acting for him have been very careless.  I view this breach very seriously.

35. As to the non-disclosure of previous banking dealings with the 1^st defendant, the 1^st plaintiff’s case was that in May 2001, he went for the first time with the 1^st defendant to the bank to open the account with signing authorization.  He was ignorant of the banking practice and believed that the account was a joint account.  Mr Kwong pointed out that bank record showed that in fact in March 2001, the 1^st defendant had opened at the same branch a sole name account with the 1^st plaintiff as an authorized signatory.  This undermined the 1^st plaintiff’s allegation that he went to the bank for the first time in May and was ignorant of banking procedures.

36. Mr Chain pointed out that the account opened in March 2001 was disclosed in the affirmation as one of the several accounts opened by the 1^st defendant in or about May.  There is no deliberate non-disclosure.  Further, as the 1^st plaintiff was only an authorized signatory in the March account as opposed of it being a joint account, that is consistent with his case that he mistook an authorized signatory as a joint account holder. 

37. As to the unaudited accounts, Mr Chain submitted that under United States law, private companies are not required to have the accounts audited, and at any rate, the unaudited accounts were prepared by professional accountants.  As to the point that the 1^st plaintiff had affirmed the worth of the 2^nd plaintiff in 2001 was around US$7 million, whereas taking into account the liabilities of US$2 million, the net asset value was only about US$5 million, Mr Chain submitted that the liabilities were disclosed in the 2001 accounts and there was no deliberate attempt to overstate the financial position.  As to the point that the 2004 unaudited accounts show the net worth of the 2^nd plaintiff has fallen to just under US$1 million, Mr Chain submitted that was a separate matter for the consideration of fortification of the undertaking as to damages.

38. Mr Chain submitted that the existence of the two sales contracts is disputed, and they cannot be the subject of any complaint of non-disclosure.  And the 1^st plaintiff’s academic qualification falls into the same category.

39. As to events leading to the cancellation of the signing right, the 1^st plaintiff said he discovered the cancellation through account enquiry.  In fact, he presented three cheques allegedly signed by the 1^st defendant and was informed of the cancellation when the cheques were countermanded.  The 1^st defendant alleged those cheques were forged.  Mr Kwong submitted that the omission of the details showed the 1^st plaintiff was conscious of guilt.  On the other hand, Mr Chain submitted that the 1^st plaintiff still had the signing right then and there was no need for forgery. 

40. For the present consideration, dispute as to evidence must defer to the substantial merits of the case ex prima facie.  Having considered all the matters, I am of the view that the false disclosure as to the Reamwood Property is of such seriousness that the Mareva injunction should be discharged.  However, whatever misgivings there might be about the 1^st defendant have not caused me to completely overlook the substantial merits and balance of convenience, and I am prepared to re-grant the injunction on terms.

41. The sum enjoined of HK$19 million is very substantial, and the assets of both the 1^st and 2^nd plaintiffs have decreased substantially from about US$6 million in 2001 to around US$1.5 million now.  Lurking behind the strength of the prima facie case must be the inevitable attack on the 1^st plaintiff’s credibility at trial on matters arising herein.  I find that fortification of the undertaking as to damages is necessary, and it should be in the sum of HK$2 million.

42. Mr Chain referred to Marc Rich & Co. Holding Gmbh v. Alex Krasner & ors [1999] EWCA Civ 581 where the English Court of Appeal affirmed the judge’s decision to continue the injunction notwithstanding he had found serious non-disclosure and lack of objectivity in the plaintiff’s presentation.  Mr Chain submitted that I should continue the injunction rather than to re-grant it upon discharge.  I have said that the discretion is a fine balancing exercise, and every case depends on its individual circumstances.

Variation

43. The 1^st defendant has been allowed living expenses of HK$5,000 per month and legal expenses of HK$790,000 for the trial.

44. Mr Kwong sought further variation as follows :

(1)	living expenses to be increased to HK$13,000 per month for the 1st defendant to come to live in Hong Kong from Shanghai;
(2)	alternatively, living expenses for three weeks in Hong Kong for the duration of the trial and one week beforehand, and expenses for three trips to Hong Kong for the purpose of giving instructions;
(3)	disbursement for handwriting expert at HK$80,000; and
(4)	legal fees for retaining lawyer in the Mainland to make enquiries into and to deal with the Anhui Proceedings generally.

45. Mr Kwong has abandoned the request for representation by Senior Counsel at trial and for an expert on computer.

46. Mr Chain referred to Ostrich Farming Corporation Ltd v. Brian Phillip Ketchell & anor [1997] EWCA Civ 2953 for the two staged approach in dealing with release of funds for legal and other expenses.  After referring to Fitzgerald v. Williams [1996] 2 All ER 171 per Sir Thomas Bingham MR, Millet LJ (as he then was) said at page 5 of 7 :

“	Sir Thomas Bingham was there laying down the rule that proper evidence must be submitted to establish that the defendant has no other funds beyond those to which the plaintiff lays a proprietary claim which are available to him for the payment of his legal fees and other legitimate expenses.  But he was not saying that this was sufficient.  It was only the first step.
	It cannot be sufficient for a defendant to establish that he has no other funds with which to conduct his own defence.  For even if that be so, he must in addition show that there is an arguable case for his having recourse to the funds in question.  If he cannot show an arguable claim in his part to the funds, he has no right to use the money.”

47. Mr Chain submitted that the 1^st defendant has failed to disclose his means in engaging two counsel in the application before Mr Recorder Wong SC, and also for counsel in the present application.  Mr Kwong replied that the 1^st defendant has affirmed that apart from the enjoined funds and some petty cash, the 1^st defendant has no other assets, and he was given to understand that the legal fees incurred had not been settled.  As such, I am prepared to proceed to consider whether further variation is justified.

48. As to coming to live Hong Kong, the 1^st defendant has not filed any evidence on his right to stay.  Hence, I shall not entertain such application.  The alternative application for the three weeks stay for the preparation and actual duration of the trial is reasonable and is granted.

49. As to the visits to give instructions, the 1^st defendants has previously been allowed HK$10,000 for two trips.  Those trips have been used up for the present application.  As the Mareva injunction is discharged, I shall allow two trips in lieu.

50. As to the handwriting expert, at the directions hearing on 21 July 2004, the master ordered that the parties should make application for leave to adduce expert evidence within 28 days.  No application has ever been made.  Mr Chain submitted that leave to adduce expert evidence now will jeopardize the trial date fixed.  One may add that likewise the estimated length of trial.  Also having considered the significance of the three impugned in relation to the broad issues of the case, the application for funds for the handwriting expert is refused.

51. On legal expenses in relation to the Anhui Proceedings, as those proceedings are brought by the 1^st plaintiff in breach of the undertaking, the unnecessary expenses are of the 1^st plaintiff’s making.  I shall allow HK$10,000 as a reasonable sum to deal with the matter.

Security for costs

52. Mr Chain agreed that both the 1^st and 2^nd plaintiffs are ordinarily resident out of the jurisdiction.  The question is one of quantum.

53. HK$790,000 have been allowed as legal expenses for the trial.  The 1^st defendant claimed that about HK$1.8 million had been incurred prior to the second application for variation, but such had been disallowed by Mr Recorder Wong SC.  Doing the best I can in considering all the circumstances including the relative merits, I shall set a ballpark figure of HK$350,000.

Conclusion

54. I shall discharge the Mareva injunction and re-grant it on terms of fortification of undertaking as to damages to the extent of HK$2 million.  Variation to release legal and living expenses is allowed to the limited extent indicated above.  The 1^st and 2^nd plaintiff shall give security for costs to the extent of HK$350,000.  I shall hear parties as to the form of the order if agreement cannot be reached.

Costs

55. I shall make an order nisi that the 1^st and 2^nd plaintiffs do pay the costs of the application to set aside the Mareva injunction by reason of the discharge and re-grant with fortification.  This order nisi covers both summonses relating to the same subject matter.  As Mr Kwong had not strenuously argued against the re-grant, and the time taken up was insubstantial, the costs on the re-grant could be subsumed in the costs of the discharge.

56. As to variation, as each party has been partially successful, I shall make no order as to costs.

57. As to security for costs, as Mr Chain had not strenuously argued against the application, the time taken up was insubstantial, I shall make no order as to costs.