SILVER UNIVERSE INVESTMENTS LTD v. CHINA TIMES SECURITES LTD AND OTHERS

HCA 1824/2018

[2019] HKCFI 153

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1824 OF 2018

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REASONS FOR DECISION

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1.  There are two related matters before me:

(a)  The substantive hearing of the summons filed by the plaintiff (“P”) on 6August 2018 as subsequently amended with leave granted by me on 10 August 2018 (the “Amended Summons”) for a proprietary injunction together with certain disclosures in aid against the 1^st defendant (“D1”); and

(b)  The first hearing of another summons (the “Non-compliance Summons”) taken out on 21 December 2018 by P for certain relief against the 2^nddefendant (“D2”) for its alleged failure to comply with certain previous Court Orders for disclosures.

The Non-compliance Summons

2.  I record first what happened in respect of the Non-compliance Summons. I heard Mr Deng for P and Mr Chiu for D2. Mr Deng invited me to deal with the application immediately.  Mr Chiu on the other hand invited me to either dismiss the application forthwith, and if I was not minded to do so, grant D2 time to file evidence in reply.  I took into account the submissions (both written and oral) and the materials before me.  The facts and the legal principles involved were not entirely straightforward.  The application was only set down for half an hour.  I was not prepared totruncate the application in the way Mr Chiu invited me to do.  On the other hand, given the circumstances of the case (which will become clearer when I deal with them later), I could understand why P was anxious to proceed with the matter.  In the end, I imposed a tight timetable for parties to file further evidence and directed that the application should come back before me on 4 February 2019 with two hours reserved. 

The Amended Summons

3.  The Amended Summons first came before me on 10 August 2018 on an inter partes basis. At that stage, D1 was the only defendant before the court.  It was then represented by Mr Pierrepont.  The application concerned the 70,000,000 shares (the “Pledged Shares”) in China Silver Group Limited (“China Silver”) which P on 13 February 2018deposited in an account (number M600683, the “Account”) it held with D1 as collateral for a loan (the “Loan”) from D2.  On that day, having heard parties:

(a)  I granted P leave to amend the same;

(b)  I granted an interim-interim injunction (the “Interim-Interim Injunction”) restraining D1 from disposing of the Pledged Shares or their traceable proceeds in the following terms:

“ Until disposal of the Amended Summons, or further order of theCourt, [D1] be restrained, whether as principal, agent or nominee,and whether by its officers, servants or agents, or otherwise howsoever, disposing of or otherwise dealing in [P’s] 70,000,000 shares…in [China Silver] deposited by [P] on 13 February 2018 in [the Account] held with [D1] and/or their traceable fruits or proceeds;”

(c)  I ordered D1 to make disclosures of the particulars of certain parties. D1 has complied with the Order.  In reliance of those disclosures, P has successfully applied to have D2, the 3^rd defendant (“D3”) and the 4^thdefendant (“D4”) joined as additional defendants;

(d)  I adjourned paragraph 3 of the Amended Summons, whereby P sought from D1 certain disclosures in order to trace the whereabouts of the Pledged Shares or their proceeds. 

4.  The matter now comes back before me for (1) continuation of the Interim-Interim Injunction, and (2) an Order in terms of paragraph 3 of the Amended Summons.  Having heard parties, and subject to certain minor amendments to the disclosure order, I granted the application in terms of the draft order attached to Mr Deng’s written submissions. I said that I will hand down my reasons for my decision, which I now do.

Factual background

5.  The material background can be put as follows.

6.  China Silver is a company listed on the Main Board of the Hong Kong Stock Exchange.

7.  P is a company listed in the British Virgin Islands.  It is an investment vehicle which owns 71,696,000 shares in China Silver.  Its sole director and majority shareholder is Mr Chen Jianle (“Mr Chen”).

8.  Mr Chen is a businessman in the Mainland.  He does not read or write English.

9.  D1 is a company incorporated in Hong Kong.  It holds a Type 1 licence with the Securities and Futures Commission.

10.  D2 is a company incorporated in Belize.  Its principal place of business/last known or usual address is at 47 Ridgevale Drive, Toronto, Ontario, Canada M6A1K9.  Its registered address is at Corner Hutson & Eyre Street, Blake Building, Suite 302, Belize City, Belize.

11.  In early 2018, Mr Chen wished to raise funds for certain investments.  He did not want to sell the China Silver shares held by P.  He wanted instead to explore ways to use them as collaterals for a loan.  He was assisted in the process by a couple of his associates (Zheng Yongxiang (“Sean”) and William Wai (“William”)).  They were introduced to Mr Andy Lai (“Mr Lai”), who eventually became a liaison with agents acting for the “360 Group”.  

12.  As represented by Mr Lai, the 360 Group was a private family- held Geneva based investment.  It was international in nature and had an affiliate in Hong Kong by the name of 360 HK Limited.

13.  In the course of the negotiation with the 360 Group, P was referred to the website https://360-hkltd.com.  Therein, it was represented, inter alia, that:

(a)  “360 HK Ltd., established in 2009 in Hong Kong, is a business development consultancy and belongs to Das Capital Group.  With offices in Hong Kong, USA, Canada, and Vietnam, we are known for providing complete business solutions that turn innovative, exciting ideas into groundbreaking, profitable investments and stable developments”;

(b)  Its Headquarter in Hong Kong was at 12 Harcourt Road, Bank of America Tower, Suite 3705 – 37/F, Central, Hong Kong (“the Represented 360 HK Address”);

(c)  Its international Executive Vice President was Mr Nebojsa Micic Micko (subsequently named as D4 in this action).

14.  Another person from the 360 Group who Mr Chen’s associates negotiated with was Mark Klein.  He held himself out as the managing director of 360 Group.  He would subsequently be joined as D3 in the present action.

15.  On 12 February 2018, P as borrower and pledger entered into a Loan Agreement (the “Loan Agreement”) and a Pledge Agreement (the “Pledge Agreement”) with a company named therein as “360 HK LIMITED”.  There were originally some difficulties identifying who this 360 HK LIMITED was (which difficulties I will later explain).  But upon the disclosures made by D1 upon my Order (see paragraph 3(c) above), it became identified as D2. 

16.  Pursuant to those agreements, D2 was to grant to P certain loan facilities (which became the “Loan”). Mr Chen said that the amount of the loan was HK$70 million[1].  In exchange, P agreed to pledge 70,000,000 shares on China Silver in favour of D2 as collateral (namely the Pledged Shares).

17.  According to the Loan Agreement:

(a)  The Loan would be funded in three tranches the amount of each to be reasonably determined by D2, subject to prevailing marketing conditions (clause 2(a));

(b)  P would remain the beneficial owner of the Account, provided that D2 might sell or otherwise dispose of the Pledged Shares following an event of default (clause 3(b));

(c)  D2 should not sell or short sell the Pledged Shares (or any of them) to a third party unless an event of default had occurred and was not cured in full.

18.  On 12 February 2018, P as borrower, D2 as lender, and D1 as collateral agent entered into a Collateral Agreement (the “Collateral Agreement”).  It was signed by Mr Chen on behalf of P, D4 on behalf of D2, and Mr Frank Yu as director on behalf of D1. 

19.  According to the Collateral Agreement and pursuant thereto:

(a)  D1 was appointed by D2 as the agent to “hold the [Pledged Shares] in an Account on behalf of the Lender, provided that such Account will be in the name of, and owned by, the Customer;” (clause 1);

(b)  “The Collateral Agent will send copies of all statements and confirmations for the Account simultaneously to the Customer and Lender through email, or by mail/fax upon request.  The Collateral Agent shall use reasonable efforts to promptly notify the Lender and Customer if any person claims that it has an interest in property in the Account and/or that it is a violation of that person’s rights for anyone else to hold, transfer or deal with the property therein or any portion thereof.”  (clause 5)

20.  On about 13 February 2018, P opened the Account with D1.  I will come back to certain terms in the account opening documents said byD1 to be relevant to this application.  It is not in dispute that P then deposited into the Account with D1 the Pledged Shares.  At the then prevailing price, the value of the Pledged Shares was about HK$146 million.

21.  On or about 20 February 2018, P received the 1^st tranche of the Loan, in the net sum of HK$22,696,339 (US$2,902,345).  According to the Funding Notice of 19 February 2018, it was called “Tranche #1”, the total amount of the Loan was to be “Approximately USD$10,600,000”, and the quantity of the Pledged Shares used to secure Tranche #1 (called “Tranche Shares” in that Notice) was 23,333,333.

22.  As things turned out, Tranche #1 was the only tranche which P has ever received.  No further tranches have been advanced. 

23.  Whilst the balance of the Loan was not forthcoming, the Pledged Shares, according to the Central Clearing and Settlement System (“CCASS”) records produced by P, appeared to have got transferred out of the Account on 23 February 2018 by D1 to Standard Chartered Bank (“SCB”), and were then subsequently transferred further on by SCB to other market participants.  On the other hand, the statement of the Account issued by D1 showed that as at 19 July 2018, the Pledged Shares remained part of the Portfolio Holdings of the Account.

24.  Mr Chen in his affirmation has given extensive evidence on his (and his associates’) subsequently correspondence with D1 and D2 on the Loans and the whereabouts of the Pledged Shares.  There is no need for me to set all of them out here.  Suffice for me to say that the information P received was conflicting.  For example:

(a)  shortly after the dates when the Pledged Shares according to the CCASS records had been transferred to SCB, Ms Penny Ng, who was a director of D1, told William that the 360[2] had instructed D1 to transfer the Pledged Shares to SCB;

(b)  on 27 February 2018, D3 represented to William that D2 did not instruct D1 to make the transfer to SCB, and when William requested him to instruct D1 to get back the Pledged Shares, he responded by saying that “we’ll try certainly”;

(c)  on 6 April 2018, in a telephone conference, Sean again urged D2 to return the Pledged Shares to P.  D3 for the first time said that the Pledged Shares had been packaged with other securities and entered into a Credit Default Swap arrangement with insurance companies which could not be easily undone;

(d)  Mr Chen on 21 June 2018 and 3 July 2018 met respectively Ms Penny Ng and Mr Frank Yu.  Both of them told him that it was D2 which instructed D1 to make the transfer of the Pledged Shares to SCB.  Both of them maintained that the Pledged Shares were still there and that they were with SCB under some custodian arrangements.  But when questioned as to why the Pledged Shares appeared to have been transferred from SCB to other entities, Mr Frank Yu did not deny that there had been such transfers but merely said that that was SCB’s problem and none of D1’s business.

25.  The bottom line was that P only got part of the Loan, but that the whereabouts of the Pledged Shares have become unknown.

26.  Things have got worse from P’s perspective.  Subsequent site visits by P’s previous and current legal advisers all revealed that there were no company whose name resembled that of D2 at the Represented 360 HK Address.  Company searches further show that while there were two companies in Hong Kong which had the names of “360 HK Limited” or “360HK Limited”:

(a)  one of them changed its name in May 2018, and has unequivocally denied having any involvement in or knowledge of the Loan; and

(b)  the other one was dissolved by striking off in 2015.

Court proceedings that ensued

27.  On 6 August 2018, P took out a generally indorsed Writ against D1.  D1 was the sole defendant at that stage as P had difficulty identifying the other implicated parties.  P sought inter alia against D1 declaratory relief to the effect that the Collateral Agency Agreement was null and void, and that the Pledged Shares were held on trust by D1 for P.  It also sought an injunction restraining D1 from disposing of the Pledged Shares.

28.  On that same day, P took out the Amended Summons (in its original un-amended form) against D1.  That summons came before me on 10 August 2018.  I granted leave for it to be amended.  I have set out above my Order upon conclusion of that hearing.

29.  Subsequently, upon the disclosures made by D1 as ordered by me, P had the other defendants joined.

30.  On 20 September 2018, P took out another summons for inter alia an injunction against D2.  The application came before G Lam J on 5 October 2018.  D2 did not appear.  Having heard counsel for P, G Lam J granted an injunction (“Lam J Injunction”) against D2 in the following terms:

“ Until further order of the Court, [D2] be restrained, whether as principal, agent or nominee, and whether by its officers, servants or agents, or otherwise howsoever, disposing of or otherwise dealing in [the Pledged Shares] and/or all their traceable fruits or proceeds.”

On the same occasion, G Lam J further ordered D2 to make certain disclosures in aid.  Whether D2 has complied with that Order is an issue to be considered in the context of the Non-compliance Summons.

31.  On 20 November 2018, P filed its Statement of Claim against all the defendants.  Amongst other matters, fraudulent misrepresentation, breach of trust, dishonest assistance, knowing receipt, conspiracy to defraud (by unlawful means or with intent to injure) and unjust enrichment have been pleaded.  No defence had yet been filed by any of the defendants as at the date of the hearing.

The evidence that has been filed on D1’s behalf, and its stance

32.  For the purpose of this hearing, Mr Frank Yu has filed one affirmation on behalf of D1.  It is a brief affirmation.  In summary, and so far as material, he makes reference to the account opening documents concerning the Account.  He makes specific reference to paragraph 18 of the “Supplemental Agreement for Margin Account”, and asserts that:

“ 5. … [D1] is expressly authorized in its discretion to deposit the shares with a custodian. The fact is that [D1] dealt with the shares legitimately in accordance with the terms of the account opening documents, and is not involved in any wrong-doing as alleged by [P]. I understand that these very important documents were not produced by [P] in support of its application for an injunction.

6. [D1] is an innocent party caught up in this dispute which is effectively between [P] and [D2], and [D1] would in normal circumstances take a neutral position, since both [P] (as the borrower) and [D2] (as the lender) are both clients of [D1]. However, since [P] is making serious allegations against [D1] (including allegations of fraud), [D1] must, while giving due consideration to its position regarding client confidentiality, defend the wrongful claims being made by [P]. In the Skeleton Submissions relied upon by [P] at the hearing before Deputy High Judge Keith Yeung SC on 10 August 2018, it is stated:

‘P’s case is that it was defrauded out of 70 million shares in [China Silver] by [D1] and its co-conspirators …’

I consider this to be unsubstantiated and outrageous allegation made by [P] and is categorically denied by [D1].

7. On 16 August 2018, [D1] was informed by [D2] that it had delivered a Notice of an event of default to [P]. As stated above, it is evident that there is a dispute between [P] (as the borrower) and [D2] (as the lender), and [D1] (as the collateral agent) is caught up in the middle.

8. In any event, [D1] will oppose paragraph 1 of [P’s] Amended Summons on the basis that an injunction should not be granted against [D1] in the circumstances of this case, and particularly for the reasons as mentioned above.  Further, [D1] will oppose paragraph 3 of [P’s] Amended Summons on the ground that the information sought is effectively a fishing expedition on the part of [P], which has still failed to fully plead its case and make out its claim against [D1] ….”

33.  As can be seen from the above, Mr Yu’s evidence is nothing more than mere assertions and mere denials.  He makes reference to Clause 18 of the Supplemental Agreement for Margin Account. Whether his interpretation of that clause is correct will be an issue for the trial.  But even assuming that he were correct, without D1 informing the Court what its arrangements with SCB in relation to the Pledged Shares have been, there is simply no material to support his assertion that D1 has dealt with the Pledged Shares “legitimately in accordance with the terms of the account opening documents.”  Similarly, he refers to the information D1 has received about D2 having issued a notice of an event of default without adducing any evidence in support of the underlying events.

Submissions on behalf of D1

34.  Upon specifically asked by me in the course of the hearing, Mr Pierrepont, solicitors appearing for D1, says that he only wishes to make the following points:

(a)  In respect of P’s application to continue the Interim-interim Injunction:

(i)  due to the existence of the Lam J Injunction, which binds also D2’s agent, and D1 being D2’s agent, it is no longer necessary to have the Interim-interim Injunction continued; and

(ii)  P failed to disclose the account opening documents when the Injunction Summons was originally filed, and they were important documents;

(b)  In respect of paragraph 3 of the Amended Summons, D1 is concerned about the duty of confidentiality it owes to D2, but it will comply with any order which this Court may make on disclosure.

Discussion

35.  Mr Pierrepont has not sought to argue that P has failed to show any serious issue to be tried.  In my view, he is correct in not seeking to do so.  P is the registered holder of the Pledged Shares and has proprietary interest in the same.  P has deposited the Pledged Shares in the Account.  Only one tranche of the Loan has been advanced.  The whereabouts of the Pledged Shares however have not been accounted for. Inconsistent explanations and information have been provided.  D2 could not be found at the Represented 360 HK Address.  It is a Belize company and was not established in Hong Kong despite what was claimed in the website.

36.  Mr Yu asserts that what D1 has done is in accordance with the account opening documents in respect of the Accounts.  I repeat paragraph 33 above. 

37.  Having considered the evidence and the submissions made on behalf of the parties, I am of the view that P has demonstrated a serious issue to be tried in respect of its claim against D1.

38.  One of the points taken by Mr Pierrepont is that given the Lam J Injunction, it is no longer necessary to have the Interim-interim Injunction continued.  I do not agree.  The Lam J Injunction restrains D1 to do the restrained acts in D1’s capacity as D2’s agent only.  At this stage, what D1 has done with the Pledged Shares is not clear.  The arrangements that might have been agreed upon between it and SCB have not been revealed.  D1 could well have become liable to alienate or otherwise deal with the Pleaded Shares in capacity other than as D2’s agent.  The continuation of the Interim-interim Injunction is in my view necessary.

39.  The other point taken by Mr Pierrepont concerns P’s failure todisclose the account opening documents in respect of the Accounts when thematter was first before me on 10 August 2018.  But as submitted by Mr Deng, that was an inter partes hearing.  Mr Pierrepont was there representing D1. He did refer me to those account opening documents.  I repeat further paragraph 33 above.  In my view, this point does not prevent the continuation of the Interim-interim Injunction.

40.  Given the proprietary nature of the claim, having considered the balance of convenience, and Mr Pierrepont not having raised any further point in opposition, I am of the view that the Interim-interim Injunction ought to be continued.      

41.  In relation to paragraph 3 of the Amended Summons, it is not a fishing expedition as asserted by Mr Yu in his affirmation.  P needs the information to trace the Pledged Shares.  On the issue of confidentiality, D2 itself has not raised any objection.  It itself is subject to similar disclosure obligations under the Lam J Injunction.  Mr Pierrepont in the course of his submissions at one stage suggests that because of that, it is not necessary to impose any additional disclosure obligations upon D1.  I do not agree.  D1 is privy to its arrangements with SCB.  D2 is apparently not.  D1 under the Collateral Agreement also has some specific obligations relevant to the rendering of information on the Pledged Shares.  Paragraph 3 of the Amended Summons is in my view clearly necessary.

Conclusion

42.  For the above reasons, I granted upon the conclusion of the hearing the application in terms of the draft order attached to Mr Deng’s written submissions.

Costs

43.  I make a costs order nisi that (1) the costs of the summons filed on 7 August 2018 (namely the summons to amend) be to D1; (2) the costs of the summons filed on 6 August 2018 and as amended (namely the Amended Summons) be P’s costs in the cause. Any party who wishes to vary the above (or to seek summary assessment) is directed to file its submissions within 14 days from the handing down of this Reasons for Decision, submissions in response then within 14 days of receipt, and submissions in reply within 14 days of receipt of the response.

Postscript

44.  On 16 January 2019, Arun Nigam Associates wrote to my clerk and invited me to consider certain additional documents said to be relevant to the authorization (or the expiry thereof) given by P to D1 concerning the Pledged Shares and the Account.  On 17 January 2019, solicitors for P wrote in and objected to the re-opening of the matter.  In my view, no case has been made out by D1 for the matter to be re-opened and for additional evidence to be adduced.  In any event, I repeat paragraph 33 above.  The matters sought to be raised would not in any event have affected my decision.