XCHRX FOSHAN CITY SIU TONG DEVELOPMENT CORPORATION v. CHEN YONG YI AND ANOTHER

HCA 2202/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2202 OF 1999

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D E C I S I ON

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Introduction

1. This is the Plaintiff's application for the continuation of an ex parte Mareva injunction order. After the hearing on 1 August 2000, I discharged the ex parte order, dismissed the Plaintiff's application with costs to the Defendant forthwith. The following are the reasons for so deciding.

2. The Plaintiff states in this action that it was a financial institution registered in the mainland and a subsidiary of the Foshan City Branch of the Bank of China. The Plaintiff brings this action alleging that the Defendants obtained 2 loans totalling US$5 million from it by conspiracy and fraud. The conspiracy was said to have been perpetuated in the following manner. Between about September 1992 and January 1993, D1 and a Molik Corporation (a mainland company allegedly controlled by him) misrepresented to the Plaintiff that the loans were for Molik's use when in fact they were used for real property investment and development in Hong Kong by D2. D2's liability was said to have arisen from its knowingly receiving (in about late 1992 or early 1993) the sums so obtained by D1 and Molik.

3. On 5 February 1999, the Plaintiff obtained on ex parte basis a worldwide Mareva injunction order against the Defendants until 12 February 1999. The Plaintiff took out an application for the continuation of this ex parte order. The parties agreed to the continuation of that order until the determination of the said inter partes application which was heard on 1 August 2000 as stated above.

4. Since I have dealt with in more detail the matters raised in a "related" action (H.C.A. No. 15922 of 1998), to be concise, I will only set out the salient features in this action which were taken into account in arriving at the decision in the present application. However, this does not mean I have not considered:-

(a) the totality of the relevant circumstances relating to this action;

(b) the other matters set out in the parties' respective skeleton submissions.

Related Action: H.C.A. No. 15922 of 1998

5. Another mainland financial institution (represented by the same firm of solicitors and counsel) commenced an action in Hong Kong against 4 defendants, including the 2 Defendants herein (H.C.A. No. 15922 of 1998) ("related action").

6. In the related action, similar allegations were made against the defendants there. Sometime between about December 1994 and July 1995, the 4 defendants conspired to induce the plaintiff to advance loans or grant banking facilities to them. The means by which the money was obtained were allegedly similar. 2 mainland companies (including Molik Corporation) misrepresented that the money would be used for their businesses when in fact it was sent to Hong Kong for the investment, development or improvement of the same real property development (and other real properties) in Hong Kong.

7. The plaintiff obtained a similar worldwide Mareva injunction order against the defendants in the related action on 2 February 1999 (3 days before the ex parte order herein).

8. The parties in the related action appeared before me as regards, among other applications, an application for the continuation of the ex parte order and one for its discharge. After a lengthy hearing which spanned over June and July 1999 and January 2000, I discharged the ex parte order and granted a fresh order in similar terms on 13 January 2000.

Material Non-disclosure

9. I discharged the ex parte Mareva order in the related action on the ground that misleading information was provided to the ex parte judge. When the plaintiff made its ex parte application therein, the plaintiff alleged that "sham" transactions were put up by the defendants: indigenous villagers were made to appear as owners of houses to be built by one of the defendants (by the use of "sham" assignments) when in fact it remained their owners. The plaintiff told the ex parte judge that the Hong Kong Government was thereby deceived. I was satisfied, after having been referred to the Court of Appeal decision in Liu Pui Man v. Wong Mei Yin [1998] 1 H.K.P.L.R. 84, that these so-called "sham" transactions were a usual practice used by Hong Kong developers regarding real property developments in the New Territories. In effect, the court recognised in Liu Pui Man that this method was widely adopted to deal with the Government's "small house" policy and concluded that the Government must have accepted this practice.

10. Similar to the related action, the Plaintiff in this action also relied on these so-called "sham" transactions at the ex parte hearing. Mr Hung sought to distinguish the facts in this action. He argued that (unlike the usual method outlined in Liu Pui Man) D2 herein bought the piece of land from another developer (not from indigenous villagers) and located indigenous villagers who were then registered as the owners (but without the need to pay the purchase price). The assignment documents stated that the prices had been paid but in fact D2 remained the true owner.

11. It must be noted that the transactions relied on in the related action were the very transactions relied on herein. The distinction relied on by Mr Hung was not relied on by leading counsel in the related action. In fact, I do not consider that a distinction can validly be made. Whether (as happened in this action) the land was acquired before the indigenous villagers were located or whether they were located first and then made to appear as owners is irrelevant for the purpose of the "material non-disclosure" issue. The fact remains the court was led into believing that a device was employed to deceive Government when this was not (or at least may not be) the case.

12. Alternatively, even if a distinction could somehow be made, the Plaintiff ought at least to have informed the court that there was a common practice (as outlined in Liu Pui Man) adopted by the developers of real properties in the New Territories but the one adopted by D2 was different (and set out the difference(s)).

13. For the above reasons, I found that the Plaintiff (like the plaintiff in the related action) had provided misleading information to the court. The ex parte order ought therefore to be discharged.

Whether a Fresh Order Should be Granted

14. In the related action, a fresh injunction order in similar terms to the ex parte order was granted. There were 2 reasons for that decision:-

(a) even if there had not been the non-disclosure or misleading information, the ex parte injunction order would still have been granted;

(b) there was an arguable case of fraud and dishonesty against the defendants.

15. There is an important difference between the related action and this action. Although the defence in the related action contended that the alleged "fraud" was known to the plaintiff, there was insufficient evidence to show that that must have been the case. In this action, the Defendants argued that the Plaintiff knew the true nature of the loans since:-

(a) the time when the loans were granted; or

(b) about December 1993; or

(c) about 27 February 1997.

16. Points (a) and (c) above were disputed by the Plaintiff and could not satisfactorily be resolved at this stage. In the defence skeleton submissions, a letter dated 22 December 1993 from Molik was relied upon in support of point (b) above. The Plaintiff has filed evidence in effect denying receipt of this letter. However, at the hearing, my attention was drawn to a statement (relied upon by the Plaintiff) from a Mr Lam Kin Pang (the Vice President of the Bank of China Foshan Branch until July 1995) dated 23 September 1999. Mr Lam stated at para. 8 thereof:-

"Upon expiry of the loan period [in December 1993], I demanded repayment of the loan ... [D1] was not sincere in making repayment, and even said to me: 'the sum of 5 million US dollars borrowed by Molik from [the Plaintiff] has been invested in the landed property in Hong Kong, now there is no money for prepayment, expect this sum of money could not be repaid'. It was then I come [sic] to know the Molik and [D1] have deceived me and [the Plaintiff] ... ".

17. According to Mr Lam, the Plaintiff was made aware of the "fraud" since about December 1993. There is little (probably even no) evidence as to what the Plaintiff has done thereafter. Mr Carolan referred me to a number of documents in the bundle:-

(a) a document headed "Notice of Penal Interest" dated sometime in November 1994 and signed by the Plaintiff and Molik;

(b) a document headed "Interest Demand Note" dated 22 May 1995 from the Plaintiff to Molik;

(c) several documents headed "Receipt of Demand Note [or "Notice"]" from the Plaintiff. Two of these were respectively dated 20 March 1997 and 3 January 1996.

Mr Carolan submitted that they show the Plaintiff still treated the loans as "regular" loans even after it learnt of the "truth" since about December 1993. He contended that the said documents support the lines of defence put forward herein, namely, either the true nature of the loans was known all along or there was a subsequent affirmation of the loan agreements.

18. Since this action is yet to be tried, I do not consider it appropriate to comment on whether the documents can have such an effect. However, I found that Mr Lam's statement showed that the Plaintiff was well aware of the true nature of the loans since about December 1993. This action was only commenced in February 1999, some 5 years later. There was no explanation as to why there was such a delay. The only "explanation" was that the Plaintiff only consulted Hong Kong lawyers shortly before February 1999.

19. In these circumstances, not only has there been serious non-disclosure, the matter undisclosed is such that even if there was a risk of dissipation of assets, it was one which the Plaintiff has willingly accepted for a substantial period of time. Mr Hung argued that the Plaintiff should not be prejudiced by the incompetence of its officers (or former officers), but since there is no evidence that that was the reason for the delay, the point did not need to be considered.

20. For the above reasons, I did not find that a fresh order ought to be granted. The Plaintiff's summons should be dismissed.

Other Matters

21. A number of other matters have been raised by the parties and set them out below to show that consideration has already been given to them:-

(a) the Plaintiff's argument that since there was already a similar order in place in the related action, no injustice would be caused to the defence by the making of an order herein;

(b) the defence argument that there is no need for an order herein since a similar order had been granted in the related action;

(c) the defence that the loans were made in contravention of mainland law and were thus void;

(d) the defence that there was no evidence that D2 was a knowing recipient of the loans;

(e) the sufficiency of other forms of security, for example, the registration of a lis pendens or the shareholdings in another company.

Costs

22. I ordered that the costs of the ex parte order and the Plaintiff's summons should be paid to the Defendants forthwith. It did not appear the Plaintiff disputed this costs order.

23. The Defendants argued that there had been deliberate non-disclosure and therefore indemnity costs should be ordered. At the time of the ex parte application, Mr Lam has already left his former post for quite some time. His statement was obtained only by way of reply to the Defendants' affirmations. In these circumstances, I considered that there was insufficient evidence that the Plaintiff deliberately held back the evidence relating to Mr Lam's knowledge at the time of the ex parte application. I also did not find the misleading information regarding the "small-house" policy matter to justify awarding indemnity costs and therefore ordered the costs to be taxed on a party-and party basis.