CHINA MERCHANTS BANK CO., LTD (TAIYUAN BRANCH) v. CAI SUI XIN

HCMP 2911/2016

[2018] HKCFI 2358

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2911 OF 2016

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DECISION

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1.  This is the application of Prosper Talent Ltd (“Prosper Talent”), a third party affected by the Mareva injunction granted by Deputy High Court Judge Seagroatt on 31 October 2016 (“the Injunction”), to vary it so as to allow Prosper Talent to exercise its rights to sell certain charged shares in IRC Limited pursuant to two share charges entered between Benefit Ahead Limited (“Benefit Ahead”) as chargor and Prosper Talent as chargee dated 9 July and 4 September 2013 respectively (“the Share Charges”).

Background

2.  In this action, the Plaintiff applies for a Mareva injunction in aid of foreign proceedings under s 21M of the High Court Ordinance, Cap 4.

3.  On 31 October 2016, the Plaintiff, by way of ex parte application, obtained the Injunction against the Defendant restraining the latter from disposing his assets up to RMB150 million, including the IRC Shares which are referred to in paragraph 7 below.   The Injunction was varied and continued by the orders of DHCJ Kent Yee and DHCJ A Lee dated 4 November 2016 and 22 February 2017 respectively.

4.  Benefit Ahead is a corporate vehicle owned and controlled by the Defendant.   The Defendant directly holds 5% and indirectly holds, via General Nice Group Holdings Ltd, 50% of the shares in General Nice Development (“General Nice Development”) which, in turn, holds 100% of the shares in Benefit Ahead.

5.  Prosper Talent is an indirect wholly-owned subsidiary of CCB International (Holdings) Ltd (“CCBIHL”) which, in turn, is a direct wholly-owned subsidiary of China Construction Bank Corporation which is a major bank in the Mainland.

6.  The Defendant and his various corporate vehicles entered into a series of commercial agreements with CCBIHL and Prosper Talent in relation to one of the Defendant’s then projects named Project Lumia which included the execution of the Share Charges.

7.  The Share Charges were made as security for four secured guaranteed notes issued by General Nice Development to Prosper Talent on 9 July, 4 September, 23 December 2013 and 27 February 2014 (“the Notes”) for an aggregate principal amount of HK$305,064,600.  The Share Charges are in respect of 1,163,174,000 shares owned by Benefit Ahead in a listed company known as IRC Limited (“IRC Shares”).

8.  General Nice Development defaulted under the Notes on 30 December 2015.  As a result, on 1 February 2016 (i.e. 9 monthsbefore the Injunction), Prosper Talent issued two notices to General Nice Development declaring there had been a default under the Notes and demanded immediate payment of the redemption amounts (“the EOD Notices”).  On the same day, Prosper Talent issued two declarations of event of default (“the EOD Declarations”) to Benefit Ahead pursuant to clause 8.1 of the Share Charges, whereupon the Share Charges became enforceable.

9.  Clause 8.2 of the Share Charges provides that the power of sale shall be immediately exercisable by Prosper Talent at any time on or after the occurrence of an event of default without prior notice to Benefit Ahead.

10.  Prosper Talent has exercised, and intends to continue to exercise, its rights under the Share Charges.  It has so far sold 281,274,000 IRC Shares in the open market between 6 December 2016 and 9 February 2017.

11.  The problem is that Prosper Talent sold the IRC Shares after the granting of the Injunction and the IRC Shares held in the name of General Nice Development were expressly caught by the terms of the Injunction.  The Plaintiff complains that Prosper Talent was guilty of contempt of court in disposing the IRC Shares and so the court should not entertain its present variation application.

12.  Neither the Plaintiff nor the Defendant disputes the validity of the Share Charges or challenges Prosper Talent’s entitlement to exercise its right of enforcement.  The Share Charges were made and the default occurred both before the granting of the Injunction, and it is common ground that the Injunction operates personally against the Defendant and it confers no beneficial interest to the Plaintiff over the IRC Shares.  Had Prosper Talent sought the sanction of the court before disposing the IRC Shares, there was little hope for the Plaintiff to oppose the variation application.  The issue here is therefore a narrow one: whether the court should refuse to entertain the variation application because Prosper Talent had disposed of some of the IRC Shares after the granting of the Injunction.

13.  The Defendant adopts a neutral stance in respect of the variation application.

The position and argument of Prosper Talent

14.  Prosper Talent’s primary position is that it is under no duty and it is not necessary to apply for a variation of the Injunction to obtain the court’s permission to exercise its disposal rights under the Share Charges.

15.  According to Ms Lam, counsel for Prosper Talent, a Mareva injunction operates personally against the defendant and its purpose is not to provide a claimant with security for his claim but to restrain a defendant from evading justice by disposing assets otherwise than in the ordinary course of business so as to make it judgment proof.[1]

16.  In particular, she relies on the following dicta of Mann J in Taylor v Van Dutch Marine Holdings Ltd & Ors:[2]

“Thus, in my view, a third party with security over property which is frozen by the freezing order would not need to obtain permission in order to exercise that security because the exercise of disposal rights under that security would not be an act prohibited by the order. If, for example, the third party uses a power of sale in order to dispose of the property, that would not be a disposal by the defendant notwithstanding any technicality which might arise out of the fact, which is common to many securities, that the exercise of a power of sale is technically done as agent for the mortgagor. Nor would it be any form of dissipation because the secured debt already exists and the secured property is already encumbered with it. The enforcement by the mortgagor would not be an infringement of the letter of the order; nor would it be contrary to the spirit of the order which, as I have explained, does not operate so as to give the claimant a prior right in the form of security over the assets. If the freezing order does not destroy, or affect, the rights of a charge or mortgagee (which it does not) there is no reason why it should operate so as to restrain the exercise of the rights of that person. The exercise of those rights would not infringe the order. It follows therefore, in my view, that strictly speaking a chargee or mortgagee, in a normal case, would not need to obtain a release or variation of the freezing order.”

17.  In other words, Mann J took the view that a third party with security over property frozen by a freezing order is not required to obtain permission to exercise that security because the exercise of disposal rights would not be an act prohibited by the freezing order.  According to his Lordship, the third party needs not seek the permission of the court before enforcing his security rights, and the plaintiff cannot oppose it “in the absence of something like collusion”.[3]

18.  Ms Lam also refers me to the contrary view expressed by Colman J in Gangway Ltd v Caledonian Park Investments (Jersey) Ltd & Anor[4], in which his Lordship observed that there may be a “duty” on the third party to apply for a variation before he exercises his contractual right to dispose of properties restrained by a court order.  However, this was expressly rejected by Mann J in Taylor, after considering and analyzing Colman J’s judgment in Gangway at length.[5]

19.  Despite the dicta of Mann J, Ms Lam submits that this application has been necessitated by: (i) the Plaintiff’s insistence that Prosper Talent has been aiding, abetting or otherwise assisting the Defendant in disposing the IRC Shares in breach of the Injunction; (ii) the Plaintiff’s repeated threats of contempt proceedings; and (iii) the Plaintiff’s refusal to acknowledge Prosper Talent’s rights under the Share Charges and deal with this matter by consent without an application to the court.  Hence, it is still necessary for Prosper Talent to make this variation application to clarify the issues.

The position and argument of the Plaintiff

20.  Mr Kwan, counsel for the Plaintiff, submits that Prosper Talent should have sought the approval of the court before exercising its security rights and disposing the IRC Shares.  As Prosper Talent had not done so, it was guilty of contempt and the court should not therefore entertain its present variation application unless and until Prosper Talent purges its contempt.

21.  According to Mr Kwan, most of the authorities, including those of the House of Lords and the English Court of Appeal, prior to Mann J’s first instance decision in Taylor v Van Dutch Marine Holding Ltd[6] support the proposition that a third party, even with a special or legitimate right to do so, cannot act contrary to a Mareva injunction of which he has knowledge unless he has applied to the court for and obtained a variation or permission.  Taylor was therefore decided per incuriam and should not be followed in Hong Kong.

22.  Relying on the dicta of Lord Denning MR in Z Ltd v A-Z[7], Mr Kwan submits that a Mareva injunction, though made in personam, operates in rem without creating rights in rem.  Every person who has knowledge of a Mareva injunction must do what he reasonably can to preserve the asset.  He must not assist in any way in the disposal of it.  Otherwise he is guilty of contempt of court.

23.  Mr Kwan therefore argues that a third party who wishes to exercise his security rights over properties covered by a Mareva injunction must apply for a variation because he is under a duty to do so.  The third parties in Iraqi Ministry of Defence v Arcepey Shipping Co SA (the Angel Bell)[8] and Bakarim v Victoria P Shipping Co Ltd[9] did make such applications before the courts.  Mr Kwan also relies on the dicta of Colman J in Gangway Ltd v Caledonian Park Investments (Jersey) Ltd & Anor^[10] to establish such duty.

24.  Finally, Mr Kwan refers me to the two House of Lord’s decisions in A-G v Punch Ltd[11] and Customs and Excise Commissioners v Barclays Bank plc[12] and argues that, even if the third party is taking issue with the propriety of the injunction, the proper remedy whose conduct is affected by the order is to apply to the court for the order to be varied.

25.  According to Mr Kwan, the authorities speak in one voice, namely that a third party who considers that he has a legitimate right to dispose of the defendant’s assets restrained by a Mareva injunction must apply to the court for a variation.   It serves a salutary purpose, which is to enable the court to retain control of its own process by moulding the injunction to cater for the competing rights of various parties.  It promotes the administration of justice.   As the judgment of Mann J in Taylor was made against these authorities, it was decided per incuriam and should not be followed in Hong Kong.

26.  There is no dispute that Prosper Talent was aware of the Injunction before it disposed of the IRC Shares in the period from 6 December 2016 and 9 February 2017.   What Prosper Talent had done, according to Mr Kwan, was to interfere with and obstruct the course of justice by frustrating the court’s purpose in making the Injunction, namely to preserve the assets of the Defendant until further order.  As a person in contempt is debarred from being heard until he purges his contempt[13], the court should not entertain Prosper Talent’s variation application.

The position and argument of the Defendant

27.  The Defendant adopts a neutral stance.  However, insofar as the Plaintiff is contending that Prosper Talent and the Defendant were acting in collusion in disposing the IRC Shares or that the Defendant himself disposed those shares, the Defendant denies these allegations.

28.  Mr Chiu, counsel for the Defendant, also draw my attention to s 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“the Companies Ordinance”), which generally prohibits post-petition dispositions of company assets unless a validation order is obtained.  In the context of corporate insolvency, the disposition of property subject to a security interest does not fall within the ambit of s 182 on avoidance of dispositions.  In other words, the disposition of a secured property, to the extent of the security interest, is not a disposition of the property of the company.  Mr Chiu asks the court to apply the same principle here and to hold that assets of a company subject to a mortgage or other security interest do not actually belong to the company, and so the disposition of the IRC Shares by Prosper Talent did not require the prior approval of the court.

Discussion

29.  Despite the able submission of Mr Kwan, I do not accept his contention that the court should not entertain the variation application simply because Prosper Talent was in contempt.  Further, I have great reservation as to whether Prosper Talent had a duty to apply to court for variation before disposing the IRC Shares.

30.  The starting point is that neither the Plaintiff nor the Defendant disputes the validity of the Share Charges or challenges Prosper Talent’s entitlement to exercise its right of enforcement to dispose the IRC Shares.

31.  The second point is that there is no sufficient basis for the court to find that Prosper Talent was acting in collusion with the Defendant in the disposal of the IRC Shares in the period from 6 December 2016 to 9 February 2017.  First, Proper Talent is not a “fly-by-night” company but an indirect subsidiary of a leading bank in the Mainland.  Second, the Share Charges were created more than 3 years before the Injunction.  The default took place 11 months before the Injunction and default notices were issued to the Defendant more than 6 months before the Injunction.  Finally, the evidence shows that all proceeds of sale from the disposal of the IRC Shares were applied to reduce the outstanding amount due and owing under the Notes and were not paid to the Defendant.  Hence, there is nothing to substantiate the collusion allegation.

32.  Mr Kwan relies on an email sent by Ms Bai Yue, who was the deputy manager of CCB International Asset Management Limited (“CCBIA ML”) which in turn was an affiliate of Prosper Talent, to one of the Defendant’s corporate vehicles dated 6 December 2016, in which Ms Bai stated that the Defendant had given his consent for the disposal of the IRC Shares.  As to the purpose of such email, Ms Bai explains that CCBIAML notified the Defendant about the intended disposal as a matter of business courtesy, and the Defendant did not raise any objection to the same.  Prosper Talent had not actually obtained or indeed required the consent of the Defendant for the intended disposal of the IRC Shares.

33.  In my judgment, this email is far from establishing any collusion.  As the parties had by that time engaged in the negotiation to restructure the debt, it is understandable that the email was sent to the Defendant’s corporate vehicles as a matter of business courtesy and for information only.  The email was also sent to the other staff of Prosper Talent’s affiliated company to inform them about the disposal of the IRC Shares.

34.  Having read the contents of the email, I have no reason to doubt Ms Bai’s explanation.  As the default had already occurred, there was little option open to the Defendant but to accept the intended disposal of the IRC Shares.   The indication of the Defendant’s stance in not opposing the intended disposal cannot be construed as a collusion between the Defendant and Prosper Talent to defeat the purpose of the Injunction.

35.  On the basis that: (i) Prosper Talent has all along enjoyed the unchallenged security rights over the IRC Shares which would take priority over any judgment debt owed by the Defendant to the Plaintiff; and (ii) there was no collusion between the Defendant and Prosper Talent, I take the view that, even if there was a duty on the part of Prosper Talent to make a prior variation application and it was in contempt for not doing so, the court should still entertain the present variation application.

36.  In my judgment, the court should treat the possible contempt as a separate matter and not to allow it to intermeddle with the enforcement of the security rights on the part of Prosper Talent.  It is always open to the Plaintiff to bring proper contempt proceedings against Prosper Talent.  If the contempt is found to be substantiated, the court will certainly punish Prosper Talent for such wrong.  In the case that the court disallows Prosper Talent to enforce its unchallenged security rights now, it would virtually mean that Prosper Talent would be punished twice for the same contempt.   This simply cannot be right.

37.  It is sometimes said that the court should not hear someone who is guilty of contempt unless he purges his contempt.  But in the context of the present case, there is simply no way for Prosper Talent to purge the contempt (assuming it was guilty of such wrong) because it had already disposed part of the IRC Shares.  One must also bear in mind that Prosper Talent’s act of “contempt” had caused no damage or prejudice to the Plaintiff.   Even if the IRC Shares had not been disposed of, they would not be made available to satisfy any possible judgment debt owed by the Defendant to the Plaintiff.  In such circumstances, the court should treat the possible contempt separately and allow Prosper Talent to exercise its unassailable security rights over the IRC Shares.

38.  This would have been sufficient to dispose the variation application.  However since the parties have addressed me extensively on other issues such as: (i) whether Prosper Talent was under a duty to make an application to the court for variation of the Injunction before disposing the IRC Shares; and (ii) whether it was in contempt for not doing so, I feel obliged to give my views on these issues.  Yet these views are only obiter.

39.  Regarding the first issue, I myself agree with the analysis of the Mann J in Taylor v Van Dutch Marine Holding Ltd^[14].  If one accepts that a Mareva injunction does not operate to give the claimant a prior right in the form of security over the assets, it must follow that the injunction does not destroy or affect the rights of a chargee or mortgagee.   In exercising the right to sell the securities, it cannot be said that the third party has dissipated the defendant’s assets because the secured debt already exists and the secured property is already encumbered with it.  In fact, Mann J had analyzed the relevant authorities in some details and I do not accept that the decision was made per incuriam.

40.  I do not find that the House of Lords’ decisions in A-G v Punch Ltd^[15] and Customs and Excise Commissioners v Barclays Bank plc^[16]  can assist the Plaintiff’s case.  The former relates to an injunction seeking to prohibit the publication of confidential information, which the affected third party might be bound by the injunction not to publish such information.  The second case concerns the question as to whether a bank, in releasing monies in the bank accounts caught by the terms of a freezing order obtained by the customs and excise authority, was in breach of any duty of care owed to the authority.  These two decisions are not about a third party who seeks to enforce his security rights over assets which may be caught by the terms of a Mareva injunction. 

41.  I also do not accept that Prosper Talent was in contempt in disposing the IRC Shares.

42.  So far as the Injunction is concerned, Prosper Talent is a non-party.  In Cosimo Borrelli as Trustee of the SFC Litigation Fund v Allen Tak Yuen Chan & Ors[17], I listed out the relevant legal principles relating to liability for contempt against non-parties for breach of an injunction:[18]

“(i) Non-parties are not themselves enjoined by an injunction against another person.

(ii) The legal basis for liability of parties directly enjoined and non-parties is fundamentally different,

(iii) Non-parties may only be liable for contempt if they either:

(a) knowingly aid and abet a breach of an injunction by the enjoined defendant (“the First Limb of Liability”); or

(b) interfere with the administration of justice by, with knowledge of the order, doing something which disables the court from conducting the case in the intended manner (“the Second Limb of Liability”).

(iv) The elements for non-party are different from the elements necessary to prove the liability of the defendant directly enjoined.  For example, for a defendant directly enjoined, it is not necessary to prove that the defendant appreciated that he was acting in breach of the order, as long as he had notice of the order and the conduct in breach was not accidental.”

43.  These legal principles have remained undisturbed upon appeal.[19]

44.  For the First Limb of Liability, it cannot be said that Prosper Talent, being a non-party, hadknowingly aided or abetted a breach of the Injunction by the enjoined Defendant.  Prosper Talent was only protecting its own security rights in disposing the IRC Shares.

45.  Neither can it be maintained that Prosper Talent had interfered with the administration of justice as it was only exercising its accrued right to enforce the securities.  In a way, the IRC Shares had ceased to be the properties of the Defendant, and Prosper Talent, in selling such shares, was not disposing the assets of the Defendant.  One must bear in mind that Prosper Talent is a non-party with accrued right to enforce the securities.  Unless there are strong reasons to the contrary, the court should not disturb its security rights over the assets.

46.  Further, the object of the Injunction was to preserve the assets of the Defendant to satisfy any judgment debt owed to the Plaintiff.  By reason of the pre-existing security rights, there is no chance that the IRC Shares would be made available to satisfy the judgment debt.  Hence, the object of the Injunction would not be frustrated by the disposal of the IRC Shares.  This would be very different from A-G v Punch Ltd^[20], in which the object of the injunction was to prevent the publication of some confidential information, which would be frustrated if the third party ignored the injunction and proceeded to reveal the confidential information concerned.  As observed by Mann J in Taylor v Van Dutch Marine Holding Ltd^[21], the disposal of the IRC Shares would not be “contrary to the spirit of the order”, and hence there was no interference with the administration of justice under the Second Limb of Liability identified inCosimo Borrelli as Trustee of the SFC Litigation Fund v Allen Tak Yuen Chan & Ors.[22]

47.  I agree that non-parties, apparently with a view to protect themselves, often made variation applications before the courts seeking permissions to dispose the charged or mortgaged properties caught by the terms of Mareva injunctions.  This happened in Iraqi Ministry of Defence v Arcepey Shipping Co SA (the Angel Bell)^[23] and Bakarim v Victoria P Shipping Co Ltd^[24].   I myself had also dealt with similar applications before.

48.  There is certainly some good sense for doing so. As in any other cases of taking self-help measures, there is always a danger that the plaintiff is challenging the third party’s security interests over the property.  Furthermore, in order to avoid any allegation of collusion between the defendant and the third party, it would be prudent for the latter to make a variation application to the court before disposing the assets.  Being accused of contempt of court is a serious matter with grave consequences, and so it is advisable for a third party to act cautiously under such circumstances.

49.  Despite such warning, if Prosper Talent was entitled to enforce his security rights over the “Defendant’s” assets, I take the view that it was not guilty of contempt.  The court should therefore allow the variation application notwithstanding the disposal of the IRC Shares after the granting of the Injunction.  As Prosper Talent is and was entitled to the enforce its security rights over the IRC Shares, I allow its variation application.

50.  For the above reasons, I do not need to consider the argument put forward by the Defendant relating to s 182 of the Companies Ordinance.  In any event, the said statutory provision deals with a different matter.  The purposes of winding up are very different from those of Mareva injunctions, and so no analogy can be drawn between the two cases.

51.  It is also not necessary for me to consider the other supplemental arguments advanced by the parties, such as: (i) whether the ownership of the IRC Shares had passed to Prosper Talent upon the making of the Share Charges; and (ii) whether Prosper Talent was in contempt by disposing the IRC Shares which were actually held in the name of Benefit Ahead, whereas the Injunction order only referred to IRC Shares held in the name of General Nice Development.

52.  Apart from granting an order for variation of the Injunction as sought by Prosper Talent, I also make a costs order nisi that: (i) Prosper Talent’s costs of this application be paid by the Plaintiff on an indemnity basis; and (ii) the Defendant shall bear his own costs of the variation application.  The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.

53.  I am grateful to counsel for all the assistance they have provided to this court.