MING HSIEH v. XU ZHE AND OTHERS

HCMP 3072/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3072 OF 2014

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D E C I S I O N

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Background

1. On 21 November 2014, Deputy High Court Judge Lok granted an ex parte injunction (“Injunction Order”) on the application of the plaintiff, whereby the defendants in these proceedings were restrained from removing or disposing of their assets in Hong Kong, up to the value of US$54 million.  The injunction was granted under s 21M of the High Court Ordinance (“Ordinance”), in aid of proceedings which had been commenced by the plaintiff against the defendants in California on 6 November 2014 (“US Proceedings”).  On 28 November 2014, the parties agreed to the continuation of the Injunction Order until the disposal of the inter partes summons issued on 24 November 2014, subject to variations relating to expenditure being incurred by the defendants in the interim.

2. At the time of the application for the Injunction Order, the plaintiff had applied for and obtained in the US Proceedings a Temporary Protective Order (“TPO”) against the assets of the defendants, and on 7 November 2014, the TPO was made by the US Court against the proceeds of sale of a house in Newport Beach, California and the defendants’ funds in an account at East West Bank, up to the value of US $54 million.  The TPO was extended to expire on 3 March 2015, and on 28 January 2015, the plaintiff issued a Writ of Attachment (“Attachment Application”) in the US Proceedings to continue the effect of the TPO against the defendants.

3. The defendants seek now to discharge the Injunction Order, on the ground of material non-disclosure on the part of the plaintiff when he applied for the ex parte order, and further oppose the continuation of the Injunction Order on the ground that the US Court has, since the making of the Injunction Order, on 26 February 2015 refused the plaintiff’s Attachment Application for the continuation of the TPO.  The defendants argued that since the Injunction Order made on 21 November 2014 and sought to be continued is in aid of the US Proceedings, the plaintiff has failed to show that it has a good arguable case for the grant or continuation of the Injunction Order, and that it would be unjust and inconvenient to grant the order under s 21M of the Ordinance.

Nature of the plaintiff’s claims

4. The claims made by the plaintiff against the defendants are that he was induced by fraudulent misrepresentations made by the 1^st and 2^nd defendants (who are husband and wife) to invest money in a business in Jinan Province on the Mainland, by the name of Antu WangMin Changfu Agricultural Company Limited (“WMCF”).  WMCF is involved in a blueberry business on the Mainland.  In reliance on representations made by the 1^st and 2^nd defendants in September 2010, that the business of WMCF had grown exponentially from 2008, was expected to grow to more than RMB 1,800 million by the end of 2010 and would exceed RMB 3,000 million by the end of 2011, that he would be given 10% of the shareholding in WMCF if he were to inject additional capital of RMB 350 million, and that WMCF would launch an IPO immediately upon receipt of the plaintiff’s capital injection, the plaintiff’s claim is that he entered into a Share Subscription Agreement with WMCF on 23 February 2011 (“Subscription Agreement”), and made and procured to be made payment of US$54 million (equivalent to RMB 350 million) to the defendants, by transfer into the bank account of the 4^thdefendant.  This included a payment of US$6,043,699.69, which was used by the 1^st and 2^nd defendants to purchase, in March 2011, a house at Newport Beach as their residence.  The house was registered in the names of the 2^nd defendant and the 3^rd defendant (the daughter of the 1^st and 2^nd defendant). 

5. There is no dispute that the Subscription Agreement was actually signed between WMCF and the plaintiff’s corporate vehicle, Antu Zelong Trading Ltd (“Zelong”), the legal representative of which is Madam Li Wenli (“Li”) (the plaintiff’s sister-in-law).

6. In gist, the plaintiff’s application before the ex parte judge on 21 November 2014 was that the various representations made by the 1^st and 2^nd defendants were false and fraudulent.  He had discovered that in fact, the revenue and profit figures contained in the audited financial documents which had been supplied to him before the signing of the Subscription Agreement were fabricated and based on bogus transactions, that WMCF never launched any IPO at all, and that by the end of 2011 WMCF’s total shareholder equity was nowhere near the RMB 3,000 million represented.  The plaintiff claims in particular that although he had been induced and had agreed to inject RMB 350 million into WMCF, WMCF’s capital had only increased by RMB 150 million, and the balance of RMB 200 million remained unaccounted for.

7. The causes of action relied upon by the plaintiff in the US Proceedings commenced against the defendants are: (1) as against the 1^st and 2^nd defendants, fraud, by reason of their false representations; (2) damages against the 1^st and 2^nd defendants under US corporate securities law and violation of the relevant Corporations Code; (3) breach of contract, in that the 1^st and 4^th defendants were in breach of an implied agreement made with the plaintiff that the US$54 million the latter paid would be injected into WMCF; and (4) the defendants’ falsification of the books and records of WMCF under the Violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and their embezzlement of the funds belonging to WMCF. 

8. Under Californian law, only the third cause of action, ie breach of implied contract, could be relied upon for the issue of an order of attachment. The TPO and the Attachment Application were made on the basis only of the breach of contract claim.

Applicable legal principles

9. The applicable legal principles are not in dispute.  Under s 21M of the Ordinance, the Court may grant interim relief in relation to proceedings which have been or are to be commenced in a place outside Hong Kong, and which are capable of giving rise to a judgment which may be enforced in Hong Kong.  This is so notwithstanding that the subject matter of the proceedings outside Hong Kong would not, apart from s 21M,  give rise to a cause of action over which the Hong Kong Court would have jurisdiction.  Under s 21M (4), the Court may refuse the application for interim relief if, in the opinion of the Court, the fact that it has no jurisdiction apart from s 21M in relation to the subject matter of the proceedings concerned makes it “unjust or inconvenient” for the Court to grant the application.

10. In exercising the power under s 21M, the Court is required to abide by the general principles governing interim relief.  In the context of a Mareva type of relief, the plaintiff must show a good arguable case (Pacific King Shipping Holdings Pte Ltd v Huang Ziqiang HCMP 2462/2012, 4 April 2014 & CACV 94/2014 15 January 2015), as well as the risk of dissipation.

11. In Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Limited, CACV 243/2014 unreported 11 March 2015, the Court of Appeal approved and applied the two-stage test for the grant of injunctions in aid of foreign proceedings, as referred to in Refco Inc v Eastern Trading Co [1999] 1 Lloyd’s Rep 159.  In Refco, Morritt LJ summarized the position, as follows (at p 170-171):

“For present purposes it is sufficient to point out that it was implicit in all the judgments that the approach of the Court in this country to an application for interim relief under s 25 is to consider first if the facts would warrant the relief sought if the substantive proceedings were brought in England. If the answer to that question is in the affirmative then the second question arises, whether, in the terms of s 25 (2), the fact that the Court has no jurisdiction apart from the section makes it inexpedient to grant the interim relief sought.”

12. The Court of Appeal in Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Limited emphasized (in paragraph 32 of its judgment) that:

“... Even before one comes to the second stage in terms of consideration under s 21M (4), the court must ask itself whether the facts of the case warrant the grant of interim relief if substantive proceedings were brought in Hong Kong. This entails the judge hearing the application to examine the strength and arguability of an applicant’s claim in the context of Hong Kong law rather than simply accepting a decision of the foreign court.” (Emphasis added)

13. In the context of discharging an ex parte order on the ground of material non-disclosure, the relevant legal principles are, again, not in dispute.  Material facts are those which are material to the judge’s determination of the ex parte application when it was made.  Materiality is to be decided by the court, and not by the assessment of the applicant or his legal advisers.  The applicant has the duty to make proper inquiries before making the application and the duty of disclosure applies not only to material facts as known to the applicant, but also to any additional facts which the applicant would have known if he had made such proper inquiries.  The extent of the necessary inquiries to be made depend on all the circumstances of the case, including the nature of the case which the applicant is making, the order for which application is made, the probable effect of the order on the defendant, and the degree of legitimate urgency and the time available for making inquiries.  (Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, Bank Mellat v Nikpour [1985] FSR 87)

14. If material non-disclosure is established, the court will be “astute to ensure that a plaintiff who obtains [an ex parte injunction] without full disclosure...  is deprived of any advantage he may have derived by that breach of duty” (per Donaldson LJ in Bank Mellat v Nikpour [1985] FSR 87, at 91).  Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application.  The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper inquiries and to give careful consideration to the case being presented in the absence of the other party.

Whether there was material non-disclosure

15. The defendants’ case is that the plaintiff had failed to disclose to the Court, at the time when the ex parte application was made, that subsequent to the Subscription Agreement, the plaintiff had in fact entered into various other agreements concerning WMCF.  These include, on the defendants’ case, a further agreement dated 22 March 2011 (“Further Agreement”) made with WMCF, an agreement dated 4 August 2012 (“Buyback Agreement”) made with the 1^st defendant’s mother (“Du”), an amendment agreement dated 14 November 2012 (“Supplemental Agreement”) made with Du, and a second amendment agreement dated 2 July 2013 (“2^nd Supplemental Agreement”) with Du.  The 1^st and 2^nd defendants claim that they had never been involved in the management and operation of WMCF or its business, despite the fact that the 1^st defendant was the legal representative and a shareholder of WMCF.  It was Du who took a major role in overseeing and developing the business of WMCF, and it was in fact Du who had made all the negotiations with the plaintiff in relation to the plaintiff’s investment in WMCF.  The 1^st and 2^nd defendants deny having made any representations to the plaintiff, to induce him to invest in WMCF.

16. As is now commonplace in litigation involving investments on the Mainland, there are allegations made in this case of forged documents and forged signatures on documents relied upon.  The plaintiff denies that he had made the Further Agreement with WMCF, that the signature appearing in the Further Agreement as that of the plaintiff’s representative (Li) was forged, and that the resolutions of the board of WMCF produced by the defendants were not genuine and/or contained forged signatures.  It is impossible and unnecessary at this stage to decide on the merits of the contested factual issues, since the plaintiff is only required to show a good arguable case.

17. What the plaintiff does not dispute is that the Buyback Agreement, the Supplemental Agreement and the 2^nd Supplemental Agreement were signed by him.  He had referred to the arrangement of the Buyback Agreement and that Supplemental Agreement and had intended to exhibit copies of the Buyback Agreement, the Supplemental Agreement and the 2^nd Supplemental Agreement to his 1^st affirmation in support of the ex parte application, but by some error, the copies were mistakenly removed from the exhibits by the solicitors. 

18. The effect of the Buyback Agreement is that the plaintiff and Du agreed, inter alia, to convert the plaintiff’s investment of RMB 350 million and his 10% shareholding in WMCF into a loan, and Du agreed to repay to the plaintiff the sum of RMB 350 million, with interest at 15% per annum, if WMCF was not listed within 3 years, ie before 6 August 2015.  The Buyback Agreement provides that if the plaintiff should not require repayment of the loan by Du, he would retain his 10% shareholding in WMCF but would not participate in the daily management of that company, but if Du should repay the loan, the shareholding of the plaintiff in his company Zelong would be held on behalf of Du, such that the 10% shareholding in WMCF registered in the name of Zelong would be held for Du instead of the plaintiff.

19. Under the Buyback Agreement, Du agreed to procure the repayment of the loan of RMB 350 million to be guaranteed by her jewellery business, Jilin City Furende Gold and Jewellery (“Furende”).

20. Under the Supplemental Agreement, the plaintiff and Du referred to the Subscription Agreement and agreed and acknowledged that the plaintiff’s investment of RMB 350 million in the 10% shareholding of WMCF would be repaid, with interest at 15%, to the plaintiff before 6 August 2015.  Clause 4 of the Supplemental Agreement states that the said loan and interest was secured by Furende’s guarantee (“Furende Guarantee”). 

21. Under the Supplemental Agreement, the plaintiff and Du further agreed to convert the plaintiff’s investment of RMB 32 million in the 40% shareholding of another of Du’s and her husband’s business (“Heitu Baiyun”) into a loan.  Such loan of RMB 32 million was again to be repaid by Du with interest.

22. Clause 5 of the Supplemental Agreement states that the plaintiff’s investment in both WMCF and Heitu Baiyun was to be converted, from the date of the Supplemental Agreement, into a loan from the plaintiff to Du, and that thereafter, the plaintiff had no further shareholding in WMCF and Heitu Baiyun, and would not be involved in the management and listing of the companies.

23. Under the 2^nd Supplemental Agreement, the plaintiff and Du referred to the Supplemental Agreement, and agreed to cancel the Furende Guarantee provided for in clause 4 of the Supplemental Agreement.  Furende instead agreed to pledge all its gold, jewellery and other stock-in-trade to the plaintiff as security for Du’s repayment of the debt.  According to the defendants, between 3 and 5 July 2013, the plaintiff took delivery from Furende of a number of boxes of jewellery items worth RMB 790,346,633.27 and signed receipts for the same.

24. The dispute on facts focuses on the Further Agreement claimed by the defendants to have been signed between the plaintiff and WMCF on 22 March 2011, and the contents of the alleged Further Agreement.

25. On the defendants’ case, advanced to support the application for discharge of the Injunction Order for material non-disclosure, the Further Agreement was signed between WMCF and the plaintiff, to alter the manner of the plaintiff’s investment in WMCF.  Instead of the plaintiff investing RMB 350 million (equivalent to US $54 million) in cash for the 10% shareholding in WMCF, Du claims that she had to design an alternative scheme of investment, to cater for the objections from other WMCF shareholders to the plaintiff’s proposed investment by cash injection.  Du explained that this was due to the fact that the other shareholders were not prepared to dilute their own shareholding.  She therefore agreed with the plaintiff that his investment in WMCF would be in the form of the injection by the plaintiff (through his corporate vehicle Zelong) of a blueberry propagation technology, which Zelong proceeded to acquire from Du.

26. Essentially, the revised scheme of investment was as follows.  A company which Du allegedly controls (Xinkeqi Health Product Co Ltd (“XKQ”) held a patent for the extraction of blueberry anthocyanidin (“Patent”).  Du first procured XKQ to transfer the Patent to Zelong.  On Du’s evidence, there was nothing in writing in respect of this transfer. 

27. Zelong then entered into an agreement in writing on 20 February 2011 (“Technology Exchange Agreement”) to transfer the Patent to Chang Chun Bai Rui Technology Development Company (“CCBR”), another company solely owned by Du, in exchange for CCBR’s transfer to Zelong of the technology for growing or propagation of blueberries (“Technology”) owned by CCBR.  Finally, the Technology transferred to Zelong was transferred by Zelong to WMCF, as Zelong’s contribution in exchange for 10% of WMCF’s shares.

28. On Du’s evidence, 10% of the shares of WMCF was valued at RMB 350 million (paragraph 26, 1^st affirmation of Du).

29. According to Du, the Further Agreement was signed between WMCF and Zelong on 22 March 2011 to reflect this revised scheme of the plaintiff’s investment.  The Further Agreement was signed by Du on behalf of WMCF, and Li on behalf of Zelong.  It refers to the agreement by the shareholders of WMCF to accept Zelong’s investment of the Technology, which was valued by the shareholders at RMB 266 million.  By agreement, RMB 150 million of the RMB 266 million was to be used to increase the capital of WMCF, and the balance of RMB 116 million was to be paid by WMCF to CCBR for the Technology (paragraph 23, 1^st affirmation of Du).

30. On Du’s evidence, 10% of the shares of WMCF was issued to and registered in the name of Zelong in March 2011.  Notwithstanding the later conversion in 2012 of the 10% shares into a loan, the shares remain in Zelong’s name since, according to Du, the plaintiff had made it clear that he would only transfer the WMCF shares to Du upon her full repayment of the loan.

31. On the defendants’ case, therefore, the plaintiff had failed to disclose the following relevant facts:

(1)  the details of the plaintiff’s investment in WMCF actually involved the transfer to him (or Zelong) of the Patent and the Technology, and that the RMB 350 million involved a payment to Du for such transfer;

(2)  the plaintiff’s investment had been converted into a loan, which loan was only due and payable by Du in August 2015;

(3)  the loan was secured by a pledge of jewellery delivered to and received by the plaintiff, of a value of RMB 790,346,633.27;

(4)  the plaintiff and his representatives had been negotiating with Du throughout, and the defendants had never been involved in the negotiations for the plaintiff’s investment in WMCF, such that no representations (and no misrepresentations) had ever been made by the defendants to the plaintiff.

The 1^st and 2^nd defendants’ role

32. I will briefly deal with the last point, concerning the role of the 1^st and 2^nd defendants.

33. Despite being a director and the legal representative of WMCF, the 1^st defendant claims that he had no role to play in the negotiations with the plaintiff in respect of his investment in WMCF, nor in the management of the blueberry business.  Whatever the 1^st defendant’s position within WMCF may be, the real issue is whether the alleged misrepresentations were made by the 1^st and/or 2^nd defendant, and these are disputed questions of fact, which cannot be resolved without cross-examination of the relevant witnesses at trial.  On the state of the disputed facts in the evidence, it cannot be determined whether the 1^st and 2^nd defendants had made the alleged representation, and accordingly, I am not satisfied that the plaintiff had failed to make full disclosure of the fact that the 1^st and 2^nd defendants had not participated in the negotiations for the plaintiff’s investment.  Paragraphs 40 to 42 below also apply to this aspect of the case.

34. At this stage, bearing in mind the fact that the 1^st defendant: (1) was the legal representative, substantial shareholder and Chairman of WMCF; (2) was described in the documents of WMCF as one of the 3 persons with active control over the management of WMCF (the other 2 being Du and the 1^st defendant’s father); (3) attended the board meetings of WMCF; (4) received cc copies of emails sent by his staff to the plaintiff during the relevant periods of time; and (5) had met with the plaintiff’s lawyer and Li in February 2011 to negotiate the terms of the Subscription Agreement, I am satisfied that the plaintiff has a good arguable case that the 1^st defendant was involved in the business of WMCF and was in a position and was likely to make representations about the business of WMCF to the plaintiff.

35. The evidence also shows that of the US$54 million paid by the plaintiff into the account of the 4^th defendant, supposedly for the capital of WMCF, US$18.3 million was paid out to the 1^st defendant’s personal bank account.  US$6 million of that amount was transferred from the 1^st defendant’s bank account to the plaintiff for the purchase of the Newport Beach property registered in the names of the 2^nd and 3^rd defendants.  Another sum of US$1.6 million was also used for the purchase of securities, the proceeds of sale of which were then transferred to the 2^nd defendant’s bank account.  After the Attachment Application was made by the plaintiff, the 2^nd defendant transferred a sum of US$150,000 from her bank account in the US to her account in Hong Kong.  On the evidence available at this stage, I am satisfied that the plaintiff has a good arguable case against the 2^nd defendant in respect of the plaintiff’s claim of fraud. 

The technology exchange and the Further Agreement

36. The plaintiff and Li deny the making and Li’s signing of the Further Agreement.  Li claims that the signatures on (inter alia) the Further Agreement and the board resolution of 22 March 2011 are not hers and were forged.  The plaintiff claims to have no knowledge of the Further Agreement until May 2012.

37. In relation to the alleged altered scheme of investment involving the transfer of the Patent to Zelong, and then Zelong’s exchange of the Patent it acquired with the Technology from CCBR, Counsel for the plaintiff has highlighted suspicious features which remain to be explained by the defendants. The Technology Exchange Agreement between Zelong and CCBR is dated 20 February 2011.  Du claims to have procured XKQ to transfer the Patent to Zelong before, and at the latest, by 20 February 2011.  Yet, according to the searches made by the plaintiff and the Certificate issued by the Mainland authorities, the Patent was only published on and takes effect from 23 March 2011.  The plaintiff points out that before 23 March 2011, XKQ had no interest in the Patent which could have been transferred to Zelong, to enable Zelong, at the time of the Technical Exchange Agreement on 20 February 2011, to have any interest to transfer the Patent to CCBR, in exchange for the Technology to be injected into WMCF.

38. It is also unexplained why there are different copies of the Technology Exchange Agreement: one of which was purported to have been signed by Du on behalf of Zelong, and by Li on behalf of WMCF.

39. These disputed questions of fact, as to whether the Further Agreement had indeed been signed for and on behalf of the plaintiff; whether the plaintiff had indeed agreed, instead of making a cash investment of RMB 350 million, to acquire the Technology from Du before injecting the Technology into WMCF; and whether the Technology Exchange Agreement had indeed been made and signed on behalf of the plaintiff, cannot be resolved on the affidavits, without cross-examination of the relevant witnesses at trial. 

40. In this regard, the remarks made in the judgment of Sir Nicholas Browne-Wilkinson VC in Dormeuil Freres SA v Nicolian International (Textiles) Ltd [1988] WLR 1362 are pertinent:

“To discover whether an ex parte order has been improperly obtained, the court first has to consider the evidence as it was at the time of the application for the ex parte order and then a mass of evidence designed to demonstrate that the evidence was misleading or failed to make full disclosure. 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. On the hearing of the inter partes motion it is impossible to make any concluded findings of fact, yet the court is being asked to reach a conclusion on the issue of non-disclosure without full knowledge of the circumstances. This attempt involves a minute examination of detailed allegations and counter allegations, the exact materiality of which may not be clear to the judge in the interlocutory hearing, in circumstances when that is not necessary for the future conduct of the case.”

41. Bearing in mind the court’s impossible task at the inter partes stage to resolve disputed facts, the Vice Chancellor concluded in Dormeuil Freres SA v Nicolian International (Textiles) Ltd that applications for discharge of ex parte orders should, save in exceptional cases, be dealt with at trial.

42. At this stage, I am neither able nor prepared to resolve the facts which are hotly in dispute between the parties as to the execution of the relevant agreements.  Suffice it to say that I am not satisfied at this stage that the plaintiff had failed to make full and frank disclosure of the details of the alleged alteration of the manner of his investment in WMCF.  If the plaintiff had never agreed to the making of the Further Agreement and the Technology Exchange Agreement, and such agreements were never signed by Li or with the plaintiff’s authority, but were produced after the event to justify the lack of payment of the full sum of RMB 350 million into WMCF, the plaintiff cannot be said to have withheld disclosure of such agreements and of the alleged injection of the Technology instead of cash for his 10% shares in WMCF.

The loan conversion and the security

43. The plaintiff explained that he intended to exhibit the Buyback Agreement, the Supplemental Agreement and the 2^nd Supplemental agreement to his 1^st affirmation filed in support of the ex parte application, and that the documents were only omitted by his solicitors inadvertently.  It was argued that any failure to withhold disclosure of these documents and the arrangements reflected therein, was not deliberate.  In any event, the plaintiff did in paragraph 21 of his 1^st affirmation point out that in November 2012 (the date of the Supplemental Agreement), he had agreed with Du that his investment of RMB 350 million would be converted into a loan, to be repaid on 6 August 2015, with an annual interest rate of 15%.  The plaintiff accordingly argued that there was disclosure of the conversion, that the agreement was made with Du, and that the loan was only repayable on 6 August 2015.

44. What the plaintiff stated in paragraph 21, in the context of his loan agreement with Du, was that Du had in fact “concocted the loan conversion scheme in an effort to stall (the plaintiff’s) investigation into (the 1^st defendant)’s wrongdoing”.  This followed the plaintiff’s statement that after an extensive investigation lasting more than 6 months, he came to realize that the 1^st and 2^nd defendants would never be in a position to repay the loan under the conversion scheme.

45. Read as a whole, the plaintiff’s 1^st affirmation, filed in support of the ex parte application for the Injunction Order, was on the basis that he had been induced by the 1^st and 2^nd defendants’ fraudulent misrepresentations to agree to make a “cash injection” of RMB 350 million (paragraphs 8 (2) and 10 of his 1^st affirmation), as consideration for 10% of the equity of WMCF.  In paragraph 16 of his 1^st affirmation, the plaintiff stated his belief that “the entirety or close to the entirety of the Investment was embezzled by the Defendants and went into the defendants’ coffers in various bank accounts across the world including the United States and Hong Kong, alternatively that it was used to acquire real properties worldwide under the names of one or more of the Defendants or their nominees”. His reference to the loan conversion in November 2012 was stated, in paragraph 21, as a “concoction”, and his application for the Injunction Order was on the basis that RMB 150 million only of his investment had been injected into WMCF’s capital, and that the balance of RMB 200 million remained unaccounted for, and had been embezzled by the defendants (paragraph 20 of the plaintiff’s 1^st affirmation).

46. The plaintiff’s reference to the loan conversion arrangement, as a concoction devised by Du to delay the plaintiff’s investigation into the 1^st defendant’s wrongdoing, gave the impression to the Court that the loan conversion was a sham.  There was never any reference made by the plaintiff to the fact that under his agreements with Du of 2012 and 2013, he had actually agreed, first to accept Du’s agreement to pay back his investment of RMB 350 million if WMCF was not listed within 3 years by August 2015, and then (by the Supplemental Agreement) to accept Du’s agreement to repay the RMB 350 million as guaranteed by Furende, and finally (by the 2^nd Supplemental Agreement) to accept the jewellery of Furende as security.  These are matters which were relevant to the ex parte judge’s determination of whether the Injunction Order should be made, and material to (1) whether the plaintiff was able to establish a good arguable case for return of his investment of RMB 350 million for fraudulent misrepresentation, or as a debt; (2) whether the defendants have a possible defence by reason of the loan conversion; and (3) whether there was a perceived risk of the defendants’ dissipation of assets, by reason of the defendants’ and Du’s conduct (which was alleged to be of low commercial morality and dishonest).

47. Under the Supplemental Agreement, the repayment of RMB 350 million to the plaintiff was not due until August 2015.  The loan was guaranteed by Furende, and under the 2^nd Supplemental Agreement, the stock-in-trade and jewellery of Furende had been pledged to the plaintiff as security for Du’s repayment of the RMB 350 million.  On the defendants’ case, the jewellery is worth RMB 790 million.  Although this value is now hotly disputed by the plaintiff, he does not deny that jewellery had been delivered and taken by him as security.  The existence and value of the security held by the plaintiff for the repayment of RMB 350 million, claimed to be payable to him, is relevant and material to the ex parte judge’s decision whether it was just to grant the Injunction Order, and the value of the assets to be made subject to the Injunction Order. 

48. I reject the plaintiff’s assertion that he was not able to disclose the fact of his holding jewellery from Du as security, because he had reported the defendants’ alleged wrongdoing and the inflation of the price of the jewellery to the police on the Mainland, and that such disclosure would prejudice the investigations on the Mainland which have to be kept confidential.  As Leading Counsel for the defendants pointed out, the plaintiff had no reservations about disclosing other criminal acts which are the subject matter of complaints made to the Mainland authorities.  Nor do I accept that disclosure of the mere fact of the plaintiff holding jewellery and gold items delivered up by Du can be prejudicial to any criminal investigations that may be ongoing on the Mainland.

49. Overall, on the evidence filed, I consider that the plaintiff has failed to make full and frank disclosure of the circumstances leading to the conversion of his investment of RMB 350 million into a loan, to be repaid by Du and which was not due until August 2015, and that the repayment was secured by jewellery which had been delivered to and were held by the plaintiff - whatever the value such jewellery should be worth.  If the plaintiff claims, as he now does, that the jewellery and security he held at any material time is worthless, he could and should have disclosed such fact to the ex parte judge, and explained and justified his claim that the jewellery is of no, or insignificant, value.

The effect of the non-disclosure  

50. The defendants argued that if the non-disclosure found by the court is such that the court, on reviewing the matter inter partes, is of the opinion that the ex parte relief was inappropriate and should not have been granted, then the court should discharge the order, although it is recognized that the court has the discretion whether to discharge the order or to grant it afresh. The fact that the non-disclosure was innocent in the sense that the fact was not known to be applicant or that its relevance was not perceived, is an important consideration but is not decisive.

51. In the case of Excel Courage Holdings Ltd v Wong Sin  Lai [2014] 3 HKLRD 642, the Court of Appeal referred to the main principles which guide the court in the exercise of its discretion, as summarized in Arena Corp Ltd v Schroeder [2003] EWHC 1089 (Ch):

(1)  If the court finds that there have been breaches of the duty of full and frank disclosure on the ex parte application, the general rule is that it should discharge the injunction obtained in breach and refuse to renew the order until trial.

(2)  Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order.

(3)  That jurisdiction should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

(4)  The court should assess the degree and extent of the comparability with regard to the non-disclosure.  It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order.  Equally, there is no general rule that a deliberate breach will attract that sanction.

(5)  The court should assess the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court.  In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.

(6)  The court can weigh the merits of the plaintiff’s claim, but should not conclude a simple balancing exercise in which the strength of the plaintiff’s case is allowed to undermine the policy objective of the principle.

(7)  The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

(8)  The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence.

(9)  There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances.

52. On the facts of this case, the loan conversion and the taking of security were known to the plaintiff.  Those acting for the plaintiff should have been astute to explaining to the plaintiff the important duty of making full and frank disclosure of all relevant facts on the making of an ex parte application to the Court.  Such duty is paramount in ensuring that the Court’s power of granting ex parte relief is not abused and is rightly employed only in appropriate and deserving cases, without doing injustice.

53. Yet, there are many unexplained features and suspicious circumstances in the defendants’ case regarding the manner of procuring the plaintiff’s funds into WMCF, how such funds were ultimately paid to Du and her companies under the alleged Technology Exchange Agreement, and how Furende, a company with a capital of RMB 100,000 and average monthly turnover of RMB 10,000 to RMB 25,000, could have stock-in-trade of a value of RMB 790 million. These suspicious features raise serious doubt whether more injustice would be caused by the refusal of the injunctions sought by the plaintiff.  The plaintiff has made out a good arguable case of fraud, and there is a risk of dissipation of the defendants’ assets in Hong Kong, without the protection of a Mareva injunction.  The non-disclosure of material facts on the plaintiff’s part cannot be described as not serious, but on balance, and bearing all the relevant circumstances in mind, it would in my judgment be a disproportionate response to deny the injunctive relief sought by the plaintiff, when the plaintiff can be adequately penalized in costs by virtue of his failure to discharge his duty to make full and frank disclosure.

Should the Injunction Order be continued or made under s21M of the Ordinance?

54. The defendants emphasise that since the making of the Injunction Order, the US Court has refused the Attachment Application to continue the effect of the TPO (which is equivalent to a freezing order in our jurisdiction).  They claim that in considering whether an injunction should be granted under s 21M at the second stage, it is unjust and inconvenient for the Hong Kong Court to continue the Injunction Order when the US Court with the primary jurisdiction has declined to grant relief to the defendant.

55. Leading Counsel for the defendants highlighted passages in the Judgment of the US Court dated 26 February 2015, when the Court noted that it “cannot plausibly predict the outcome of the plaintiff’s contract claim against the 1^st and 4^th defendants”, and continued:

“A fair reading of the Plaintiff’s declaration and supporting documents establishes that Plaintiff paid a considerable sum to Defendant through one of Defendant’s businesses in order to invest in WMCF. To the extent that Defendant failed to live up to his part of the bargain - and that Plaintiff can prove it - that claim potentially would be subject to a prejudgment writ.

But that initial transaction appears to have changed materially after, as Plaintiff describes it, he discovered that he had been defrauded.  Defendant’s mother negotiated new deals with Plaintiff.  Those new agreements addressed future repayment of Plaintiff’s original expenditure, provided guarantees regarding the operations of WMCF, and, for reasons that are unclear to the Court, involved a re-denomination of another investment in a mushroom company... The parties vigorously dispute the meaning of the new agreements and their relation to the original implied contract between plaintiff and Defendant.  The wording of the later contracts is not entirely clear.  Further, the intent of the contracting parties (if relevant, discernible, and admissible) may lead to a variety of interpretations.”

56. The US Court reached the following conclusion in the Judgment:

“At bottom, it is not clear to the Court - by a preponderance of the evidence - that the original contract survived all of those modifications.  If not, then Plaintiff is not entitled to pretrial relief...  Plaintiff cannot recover for breach of a contract (written or unwritten, express or implied) that he voluntarily agreed to rip up.  Further, if the “rip up” was based on an event that has not occurred yet - the mother’s promise to repay Plaintiff’s loan this summer and make Plaintiff whole - then his claim may be entirely unripe.  And, to the extent Plaintiff complains about any additional damage resulting from (1^st defendant)’s alleged misconduct, that tort-based injury is not the type of commercial claims that can properly the basis of an attachment request.

In strictly construing whether Plaintiff is likely to prevail, the Court has sufficient doubts about the state of the evidence that prevents a finding that Plaintiff established the validity of his claim as required under CCP sections 483.010 and 484.090 ...  The application for a writ of attachment is therefore DENIED without prejudice.”

57. The parties do not dispute that the Judgment of the US Court was decided on the basis of the plaintiff’s breach of implied contract claim.  The defendants argue, however, that the plaintiff’s claims in all the causes of action raised in the US Action are effectively based on the same alleged misrepresentations, falsification of books and embezzlement of the sum of US $54 million. They further argue that the plaintiff cannot show that he has a good arguable case on any claim, when he has failed to show that he has sustained any damage as a result of the alleged fraud by virtue of the agreement to convert his investment into a loan, which loan has not fallen due, and is in any event secured by jewellery and gold worth RMB 790 million.

58. As highlighted in paragraph 12 above, when the Hong Kong Court considers whether the facts of the case show a good arguable case to warrant the grant of interim relief if substantive proceedings were to be brought in Hong Kong, the Court has to examine the plaintiff’s claim independently, to consider the strength and arguability of the applicant’s claim in the context of Hong Kong law, rather than simply accepting a decision of the foreign court.

59. I accept the submissions made on behalf of the plaintiff that the Judgment of the US Court is confined to the plaintiff’s cause of action on the implied contract claim.  On the materials before this Court, I am satisfied that the plaintiff has a good arguable case on fraudulent misrepresentation, which would under Hong Kong law entitle him to claim damages.  Further, as the Court of Appeal held in Her Majesty’s Revenue & Customs v Shahdadpuri [2012] 1 HKLRD 2 to 3, all that an applicant is required to demonstrate, in order to establish this Court’s jurisdiction for the grant of Mareva injunction in aid of foreign proceedings, is that there is a good arguable case that the foreign proceedings are capable of giving rise to a judgment which may be enforced in Hong Kong.  I am satisfied that the plaintiff has so demonstrated in this case.

60. Since I am satisfied that the facts of this case would warrant the Mareva relief sought if the substantive proceedings were brought in Hong Kong, the second question which arises is whether, in terms of s 21M (4), the fact that the court has no jurisdiction apart from the section makes it unjust or inconvenient to grant the relief.

61. In Motorola Credit Corporation v Uzan (No 2) [2004] 1 WLR 113, the English Court of Appeal referred to guidelines as to how the discretion of the court should be exercised:

“As the authorities show, there are five particular considerations which the court should bear in mind, when considering the question whether it is inexpedient to make an order. First, whether the making of the order will interfere with the management of the case in the primary court eg where the order is inconsistent with an order in the primary court or overlaps with it. That consideration does not arise in the present case. Second, whether it is the policy in the primary jurisdiction not itself to make worldwide freezing/disclosure orders. Third, whether there is a danger that the orders made will give rise to disharmony or confusion and/or risk of conflicting inconsistent or overlapping orders in other jurisdictions, in particular the courts of the state whether person enjoined resides or where the assets affected are located. If so, then respect for the territorial jurisdiction of that state should discourage the English court from using its unusually wide powers against a foreign defendant. Fourth, whether at the time the order is sought there is likely to be a potential conflict as to jurisdiction rendering it inappropriate and inexpedient to make a worldwide order. Fifth, whether, in a case where jurisdiction is resisted and disobedience to be expected, the court will be making an order which it cannot enforce.”

62. Leading Counsel for the defendants highlighted the fact that the US Court has no jurisdiction to make a freezing order apart from the implied contract claim and that, in respect of that implied contract claim, the US Court refused to continue the TPO.

63. The evidence adduced at this stage shows that the 1^st, 2^nd and 4^th defendants have substantial assets in Hong Kong (in the form of cash, real property, securities and cars).  The 2^nd defendant admits to her family having connections with Hong Kong and that she and her children are preparing to move here shortly.  The Injunction Order sought in Hong Kong affects and inhibits the defendants’ dealings in their Hong Kong assets only.  To that extent, there is no risk of the Injunction Order giving rise to disharmony or confusion, and/or risk of conflicting, inconsistent or overlapping orders.  The Injunction Order can also be enforced in Hong Kong.

64. There is no question raised so far of conflict as to jurisdiction between the Hong Kong Court and the US Court.

65. The US Court has the jurisdiction to grant the freezing order sought, but refused to exercise its jurisdiction on the merits of the implied contract claim.  I agree this is a weighty factor against the grant or continuation of the Injunction Order (Refco Inc v Eastern Trading Co [1999] 1 Lloyd’s Rep 159, 164; Credit Suisse Fides Trust SA v Cuoghi [1998] QB 818, 831-832).  The court faced with a merely ancillary jurisdiction should be cautious and sensitive to the informed view of the foreign court concerned with the substantive merits.

66. In Credit Suisse Fides Trust SA v Cuoghi, Millett LJ pointed out, in the context of judicial comity:

“A court which is invited to exercise its ancillary jurisdiction to provide assistance to the court seised of the substantive proceedings need feel no reluctance in supplying a want of territorial jurisdiction but for which the other court would not have acted. But it should be very slow to grant relief which the primary court would not have granted even against persons present within its own jurisdiction and having assets there. Assisting a foreign court by supplying a want of territorial jurisdiction is plainly within the policy of the Act; assisting plaintiffs by offering them a lower standard of proof is not obviously within the legislative policy. I recognize, however, that the dividing line may sometimes be hard to draw, and that the distinction is not by any means necessarily decisive. I do not wish to be understood to be circumscribing a valuable jurisdiction, but rather to be indicating matters relevant to be taken into account when the court is invited to exercise it.”

67. I recognize that the US Court declined to exercise its jurisdiction to grant the equivalent of a freezing order in relation to the assets of the defendants within USA, on the basis that it was not satisfied that the plaintiff has established the probable validity of the implied contract claim. The merits of such claim should properly be reserved for the US Court.  However, it would appear that the US Court has not considered the merits or otherwise of the plaintiff’s claim based on fraud.  Although the US Court had reservations as to whether the plaintiff’s contractual claim has been superseded or replaced by the loan conversion arrangement, under which the loan payable by Du to the plaintiff has not fallen due, I agree with Leading Counsel for the plaintiff that the plaintiff’s claim for damages for fraud or deceit was not considered by the US Court when the Attachment Application was dismissed without prejudice.  The US Court does not have jurisdiction to grant the relief sought by the plaintiff in relation to his claims based on fraud, false representations and embezzlement of WMCF’s funds.  It will be for the US Court to decide, at trial, whether the subsequent agreement of loan conversion (if found to have been made) compromised the plaintiff’s claim for damages in respect of the claim in fraud or deceit.

68. In all the circumstances of this particular case, I do not consider that it would be unjust and inconvenient for this Court to continue the Injunction Order against the 1^st and 2^nd defendants in respect of their assets in Hong Kong, as an aid to the US Proceedings.  The plaintiff no longer pursues the Injunction Order against the 3^rd defendant, who has no assets in Hong Kong.

Orders made

69. I discharge the Injunction Order of 21 November 2014 on the ground of the plaintiff’s material non-disclosure, but will grant a new order in the same terms as against the 1^st, 2^nd and 4^th defendants, until the determination of the Originating Summons of 21 November 2014, or further order of the Court.

70. I will make a costs order nisi in the following terms.  The plaintiff is to pay the costs of and incidental to the application for discharge of the Injunction Order, which will include the costs of the variation of the Injunction Order, the costs of the inter partes summons of 24 November 2014 for the continuation of the Injunction Order, the costs of the ex parte hearing on 21 November 2014, and 50% of the costs of the hearing before me on 20 March 2015.  This is the sanction imposed on the plaintiff for his non-disclosure.  The 1^st, 2^nd and 4^th defendants are to pay 50% of the costs of the hearing on 20 March 2014, attributable to the arguments for the continuation of the Injunction Order under s 21M, on which the plaintiff has largely succeeded.  The Orders for costs include certificate for 2 counsel.