CHINA NATIONAL MACHINE TOOL SALES AND TECHNICAL SERVICE CORPORATION v. NATIONSYNC ELECTRICAL AND MACHINERY EQUIP. CORP. LTD

HCMP 1939/2020

[2020] HKCFI 3066

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1939 OF 2020

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D E C I S I O N

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1.  The plaintiff obtained an urgent Mareva injunction against the defendant on 30 October 2020.[1] This is the hearing of the plaintiff’s summons for continuation of the injunction and for disclosure from HSBC as well as the defendant’s summons for discharge of the injunction. Having read and heard the parties’ arguments, in the interests of time I shall give my decision now with brief reasons.

2.  The plaintiff is a Mainland corporation engaged in the manufacture and export of machinery used in different industries.  On 7 January 2013, it entered into an agreement with Jovius Ltd for the sale to Jovius Ltd, which is a subsidiary of another Mainland company called Beijing Xinwei Technology Group Co Ltd, of a vast volume of telecommunications equipment at a price of over RMB 3 billion, for delivery to Ukraine.  Such equipment was to include base station systems, smart antenna and fibre base transceiver station platforms.

3.  The agreement with Jovius Ltd contained warranty provisions requiring the plaintiff to provide maintenance and servicing of the equipment for up to 10 years. The plaintiff “outsourced” the performance of such obligations to the defendant herein, a Hong Kong company controlled by one Mr Dai Fang (“Mr Dai”) and recommended to the plaintiff by a well‑known corporation which was the largest telecommunications equipment manufacturer in the world, and for that purpose entered into a series of 12 agreements (“Service Agreements”) with the defendant between September 2015 and May 2018 respectively, whereby the defendant was to provide technical support, testing and maintenance as regards a number of parts of the base station systems sold to Jovius Ltd.  The consideration in return would be inclusive of any cost of any equipment needed for the support and maintenance and any remuneration and travelling expenses to individuals tasked with providing any of the services.  According to the plaintiff, that well‑known largest telecommunications equipment manufacturer in the world, together with Beijing Xinwei Technology Group Co Ltd, Jovius Ltd, the plaintiff and its parent company, and the defendant, formed a team that was involved in spearheading China’s effort to help Ukraine build its telecommunications system.

4.  On 15 November 2015, the plaintiff entered into another agreement with the defendant (“Account Operation Agreement”) to regulate the use of funds to be paid to the defendant pursuant to the Service Agreements.  The Account Operation Agreement provided as follows:

「 甲乙雙方就乙方在香港滙豐銀行848-794988-838賬戶下與甲方的共管子賬戶的資金共管達成如下協議：

1) 該賬戶項下的資金，全部為甲方支付給乙方的基站項目服務費，雙方同意對此賬戶內的全部基站項目服務費本金從該賬戶內的轉出實施共管。

2) 該賬戶項下的任何基站項目服務費本金從該賬戶內的轉出需經甲乙雙方授權代表簽字後方能動用。甲方授權代表為顧彤（授權委托書詳見附件一），乙方授權代表為戴放（授權委托書詳見附件二）…。

3) 該賬戶的共管期限為此賬戶開設之日起至2020年11月12日，在此期限內甲方有權單方撤銷對該賬戶的共管，但需雙方另行簽定補充協議。

4) 如雙方在2020年11月12日之前沒有另行簽訂任何關於撤銷共管的補充協議，則本協議的效力自共管期限屆滿之日起自動終止，雙方對該賬戶的共管自動終止。

…」

English translation:

“ Party A and Party B have reached the following agreement in relation to the joint management of the fund kept in the subsidiary account held by Party B with HSBC (HK) numbered 848‑794988‑838:

1. The money in the Account is all service charges paid by Party A to Party B for the base station project. Both parties agree that the transfer-out of the principal of such service charges of the base station project from the Account shall be managed jointly.

2. Any transfer‑out of the principal of the service charges of the base station project from the Account may be made only after being signed by the authorised representatives of Party A and Party B. The authorised representative of Party A is Gu Tong (see Appendix 1 for the authorisation document) and the authorised representative of Party B is Dai Fang (see Appendix 2 for the authorisation document). …

3. The joint management of the Account shall be from the date it was opened to 12 November 2020. During this period, Party A is entitled to cancel such joint management of the Account unilaterally, but the parties will need to sign a supplementary agreement.

4. If no supplementary agreement in relation to the cessation of joint management has been signed by both parties before 12 November 2020, this Agreement as well as the joint management by both parties over the Account will be terminated automatically when the joint management period expires.

…”

5.  At around the same time, a subsidiary account (“Account”) under the defendant’s account with HSBC in Hong Kong was set up, to receive the service fees payable to the defendant under the Service Agreements.

6.  Between 16 September 2015 and 11 May 2018, the defendant issued invoices to the plaintiff for service fees pursuant to each of the Service Agreements, and between 21 December 2015 and 25 October 2019 the plaintiff paid sums payable to the defendant into the Account totalling RMB 230,245,399.32.  There is no dispute that the payments made were for the 5 invoices issued under the first 5 Service Agreements, in each case less 6.3396% which was withheld for tax payments on behalf of the defendant to be paid over to the State Taxation Administration of the PRC.  The details may be set out in the table below:

7.  In Mr Liang Feng’s 1^st affirmation made in support of the ex parte application, the plaintiff said that from 2016 onwards it occasionally asked Mr Dai for the bank statements of the Account but Mr Dai made up excuses to deflect them.  Eventually, on 4 March 2020, the plaintiff wrote formally to ask the defendant what had happened to the remitted sums and for the bank statements and receipts for expenditure.  The plaintiff also sent the defendant a confirmation to be filled in and returned for the plaintiff’s audit process.

8.  Mr Liang’s affirmation then set out various communications with Mr Dai and stated that Mr Dai failed to provide adequate and up‑to‑date information about the Account and gave false or misleading excuses for his failure to do so.  On 23 April 2020 the plaintiff managed to obtain a letter from HSBC which stated that the defendant had maintained accounts “showing present and average balances in Hong Kong dollars low nine and medium eight figures respectively”.  Also, on 24 April 2020, Mr Dai provided the plaintiff with a copy page of the bank statement dated 8 April 2020 showing there were credit balances in Hong Kong dollar of   HK$1,063,515.22 and in a foreign currency equivalent to HK$249,892,924.01.

9.  Further communications followed and in June 2020 Mr Dai sent a plan and budget to the plaintiff, to which the plaintiff did not agree, on the ground there was still no clarity on what had happened to the sums paid to the defendant. Telephone conversations in early July did not result in the defendant producing any further bank statements to the plaintiff.  On 12 October 2020, the plaintiff asked Mr Dai again for the latest bank statements.  A few days later Mr Dai responded by sending the plaintiff again the statement dated 8 April 2020, mentioning that the defendant had organised a meeting in relation to the commissioning of a base station.

10.  On 30 October 2020, without further notice to the defendant, the plaintiff obtained from the Duty Judge an ex parte Mareva injunction to the tune of RMB 230,245,399.32. Regrettably, the papers were not served on the defendant until after noon on 3 November, leaving the defendant with little time to respond on the return day of 6 November, when the injunction was ordered to be continued until today. 

11.  The plaintiff’s application was made under section 45(2) of the Arbitration Ordinance (Cap 609), for a Mareva injunction in aid of an intended arbitration.  It is not in dispute that the usual principles on Mareva injunction, including that the plaintiff has to show a good arguable case on the merits and a real risk of dissipation of assets, apply to this application.

12.  At the time of the ex parte application, the breaches alleged to have been committed by the defendant were the failure to provide information about the Account, moving funds out of that account and refusing to arrange for a requirement of joint mandate for that account.  There was no allegation of any direct breach of the Service Agreements themselves. 

13.  The problem with that case for the plaintiff, for the purpose of the application for Mareva injunction, is that the money in the Account is money payable and paid to the defendant as its fees pursuant to the first five Service Agreements and the defendant’s invoices issued thereunder.  This was made clear by clause 1 of the Account Operation Agreement.  While the Account Operation Agreement conferred a certain right on the plaintiff to control how any money was to be withdrawn, it did not purport to alter the fact that the money has been paid to and belongs to the defendant.  In fact Mr Liang said in his affirmation: “In making these payments, we were, of course, honouring our obligations under the Service Agreements.  There was too the additional benefit that since the sums have been paid out, we were no longer liable to pay tax on such income / capital”.  There was no suggestion that the money belongs to the plaintiff.  There was no attempt to obtain a proprietary injunction.  What was sought was a Mareva injunction, which is targeted at a defendant’s assets generally.

14.  The plaintiff’s ex parte application was premised on the basis that under the terms of the Account Operation Agreement, the funds in the Account could not be used without their consent.  They sought to enforce that control — which they alleged was being ignored by the defendant — through an injunction.  They alleged that it would be a breach of contract for the defendant to remove funds out of the Account without the plaintiff’s consent.

15.  But the Account Operation Agreement expressly provided in no uncertain terms that the joint control imposed was to cease after 12 November 2020.  That might well have been why the plaintiff decided to apply for an injunction on 30 October 2020.  But while the terms of the Account Operation Agreement were quoted in Mr Liang’s affirmation, it does not seem to me that the implications of its imminent expiry were specifically considered at the ex parte stage. After the expiry of the Account Operation Agreement, and in the absence of any new agreement replacing it or reinstating any kind of control involving the plaintiff over the Account or the money in it that belongs to the defendant, it would follow that how the money was to be paid out was not a matter the plaintiff had any legal right to control.  An injunction would have the remarkable effect of extending the plaintiff’s control, on a non‑consensual basis, over the Account (as well as the defendant’s other assets).

16.  The entirety of the plaintiff’s ex parte case was a complaint of breaches of the Account Operation Agreement.  There might have been sufficient evidence to proceed on the basis that there were prima facie some breaches of that agreement by the defendant, for example, by transferring funds out of the Account for the purpose of putting them on fixed deposits or investing them for return.  But the plaintiff had to show a good arguable case not only on liability but also on quantum: see eg Ming Hsieh v Xu Zhe & others (CACV 189/2015, 28 September 2016), §11; Universal Entertainment Corporation & another v Kazuo Okada [2020] HKCA 995, §24.  This was the missing link in the plaintiff’s case.  There was simply no attempt to quantify any damages the plaintiff might be entitled to claim as a result of the breaches of the Account Operation Agreement.

17.  At the ex parte stage there was an assertion in the skeleton argument (not supported by any evidence) that “more broadly, by the intended arbitration, P will be seeking a return of the sum deposited”.  No case, however, was properly formulated then, even in outline, as to the basis of such a claim, as was required: see Fourie v Le Roux [2007] UKHL 1, §35; see also Universal Entertainment Corporation & another v Kazuo Okada, §25.  The materials put forward then were in my view wholly insufficient to show a good arguable case that the plaintiff was entitled to a judgment or award, in any forum, for the return of the sums.

18.  As Mr Chang SC (who did not appear at the ex parte application) very fairly accepts, for an application for a Mareva injunction in aid of arbitration, the applicant has to show a good arguable case for an award in his favour in an amount equivalent to the limit in the proposed Mareva injunction.  There was simply no such case established or even put forward at the ex parte stage.  On that basis, while the plaintiff might have had some basis to seek an injunction to enforce the Account Operation Agreement by restraining any payment out of the Account without the plaintiff’s consent, there was no ground to seek a Mareva injunction which is a very different remedy.  Furthermore, any such limited injunction to enforce the Account Operation Agreement would have to cease after 12 November 2020, when that agreement expired.  The plaintiff, obviously, failed to draw the ex parte Judge’s attention to the lack of legal basis for its application.

19.  The plaintiff has now, in its reply affirmation filed on 27 November 2020, asserted for the first time that the defendant’s breaches of the Account Operation Agreement had led to a complete breakdown of trust between the parties and destruction of the contractual purpose, and that the plaintiff is consequently entitled to terminate all the Service Agreements pursuant to Art 94(4) of the Contract Law of the PRC. Further, it is now said that due to the turbulent situation in Ukraine, the Service Agreements could not be performed, have come to a “deadlock”, and should be terminated.

20.  I do not think these completely new allegations can be used to justify the continuation of the injunction.  The plaintiff failed to present a proper case at the ex parte stage, and should not be allowed to try to patch it up by coming up with an essentially new case only in reply: Bank Mellat v Nikpour [1985] FSR 87.  As Slade LJ said in that case (at p 93): “no amount of urgency or practical difficulties can … justify the making of a Mareva application unless the applicant first made serious attempts to ascertain the relevant cause of action and to identify for the benefit of the court the principal facts that will be relied on in support of that cause of action”.  In addition, the fact that here, the evidence in reply was only filed on 27 November means that the defendant has not had a proper opportunity of responding to it. 

21.  Moreover, even on the evidence available at present, one can see that the political uncertainties in Ukraine referred to by the plaintiff (overthrow of the pro‑Russian President in 2014; Russian annexation of the Ukrainian region of Crimea; Malaysia Airline Flight 17 being shot down in July 2014; spike in civil casualties in 2016; cyber attacks in 2016‑2017; naval blockade by Russia of the Ukrainian coastline since 2018) did not prevent the plaintiff from entering into and then performing the Service Agreements.  Thus the Service Agreements were entered into between September 2015 and May 2018 and the payments the plaintiff made to the defendant started from December 2015 and continued up to October 2019, in the midst of the so‑called turbulent situation in Ukraine. Nor is there any suggestion that the plaintiff’s agreement with Jovius Ltd had been terminated or frustrated because of the political turbulences.

22.  One must not lose sight of the fact that the Mareva injunction is not intended to provide some kind of security to a plaintiff where the contractual protection it bargained for has expired.  It is an interlocutory remedy with draconian effects, designed to prevent a defendant from dissipating his assets with the purpose or effect of frustrating the enforcement of a judgment or award the plaintiff may well obtain.  It has been said that the consequences of granting an injunction are such as to put the defendant at a very real disadvantage and in a position from which it may never adequately recover.  For this reason the court has insisted that the plaintiff must show a real risk of dissipation of assets on the part of the defendant before an injunction will be ordered.  Such risk must be established by “solid evidence” or “cogent evidence”: Hsin Chong Construction (Asia) Ltd v Henble Ltd [2005] 3 HKC 27, §20; Re Chau Cham Wong Patrick, a bankrupt [2016] 2 HKLRD 278, §§30-31.

23.  In the present case, the evidence of such risk is in my view tenuous.  Essentially the plaintiff relies on the defendant’s breaches of the Account Operation Agreement and the excuses put forward by Mr Dai when information was not provided to the plaintiff.  But what is in the Account is the defendant’s money, and by agreement the joint control on any withdrawal was to expire after 12 November 2020, with no control whatsoever thereafter.  There may have been breaches of the Account Operation Agreement in that sums had gone out before 12 November without the plaintiff’s consent, but on the defendant’s evidence they were bona fide low risk investments in bonds and fixed deposits and forex transactions for hedging purposes.  As at April 2020 the bank statement shows that some $251 million was in the Account.  The position revealed by the disclosure made by the defendant after the commencement of proceedings is that 99.3% of the amounts deposited are still there.  There is no complaint about the adequacy of the disclosure made by the defendant pursuant to the interim order.  The plaintiff has not been able to point to any substantial conduct on the part of the defendant outside its ordinary course of business the objective effect of which was to dissipate its assets with the result that any award the plaintiff might obtain against it would be frustrated.  The evidence shows that the defendant is an actively operating company with other contracts with third parties to perform.  There is no suggestion that the recommendation of the defendant by the largest telecommunications equipment manufacturer in the world has been withdrawn.

24.  As submitted on behalf of the defendant, the defendant had had endless opportunities to funnel away the funds at any moment prior to 30 October 2020, but the fact is that 99.3% of the funds paid in have remained there.  Even after the plaintiff began raising questions and threatened reporting to higher authorities earlier this year, the defendant did not dissipate the money, as can be seen from the bank statements now disclosed. 

25.  Furthermore, while the plaintiff said it was shocked by HSBC’s letter received on 23 April 2020 from which it concluded that the defendant had been breaching the Account Operation Agreement, it did not apply for an injunction until 30 October 2020.  In appropriate circumstances, delay on the part of the plaintiff may be a cogent factor militating against any conclusion of a real risk of dissipation.  The plaintiff’s explanation of its delay in this case does not assist it: it is said that they were “strongly advised [it was not specified by whom] not to cause any waves in advance of this most important political meeting of China of the year” (referring to the 5^th Plenary Session of the 19^th Central Committee of the Chinese Communist Party held from 26 to 29 October 2020).  I am unable to see how an application to the court in the Hong Kong SAR for a Mareva injunction would cause “waves” affecting the 5^th Plenary Session which was to chart the future plans for the whole nation.  What the timing does show, in my view, is that the plaintiff was content to wait for months before eventually making the application.

26.  Mr Dai had refused to provide further bank statements to the plaintiff on the ground that the Account Operation Agreement did not contain such a requirement, which was indeed the case as far as the express terms were concerned.  As to the alleged false excuses given by Mr Dai, even assuming some of them are of questionable validity, one cannot jump from that to the conclusion that an injunction should be granted.  It is necessary to scrutinise the evidence as a whole to see if it warrants a conclusion that assets are likely to be dissipated: see China Medical Technologies, Inc (in liquidation) & others v Wu Xiaodong & others [2019] HKCFI 1266, §§18‑20, per Ng J.  In my view the plaintiff has not established that the conduct of Mr Dai demonstrates such low standards of commercial morality as to warrant an inference of a real risk of dissipation or of fraud.

27.  For all these reasons, I decline to continue the injunction which should be discharged, and declined to re‑grant a fresh Mareva injunction on this occasion.  I do not consider that the approach I propose to take is intended to penalise the plaintiff.  But it is especially important in Mareva injunction cases to take a disciplined approach so that the applicant is not awarded the advantage of the previous, wrongly obtained, Mareva injunction.

28.  The application for disclosure against HSBC seems to be ancillary to the Mareva injunction and falls away accordingly.  Further, the plaintiff has not put forward a case of any proprietary interest in the funds remitted or evidence of fraud.  There is no suggestion that any necessary discovery for the purpose of the substantive dispute cannot be obtained within the arbitration or litigation between the plaintiff and defendant in the normal course.  That application is therefore also refused.