CANTON PLUS ENTERPRISE LTD AND ANOTHER v. TONG ZHENJUN AND OTHERS

HCA 227/2017
HCA 1026/2020 &
HCA 2132/2020

[2021] HKCFI 273

HCA 227/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 227 OF 2017

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HCA 1026/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1026 OF 2020

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HCA 2132/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2132 OF 2020

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_________________

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DECISION

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1.  These 3 actions arose out of a much larger dispute between parties split into 2 camps:

(1)  the camp led by Mr Chu Kong (“Mr Chu”); and

(2)  the camp led by Mr Lau Wing Yan (“Mr Lau”).

Mr Chu and Mr Lau were former partners in a shipping business carried on through, inter alia, the Pacific Bulk group of companies until early 2014 when they parted ways, each setting up new companies to operate independently in the same business.

2.  These are all derivative actions taken at Mr Chu’s behest on behalf of Pacific Bulk Shipping Limited (“PBHK”) (HCA 227/2017), Pacific Bulk Shipping Cayman Limited (“PB Cayman”) (HCA 1026/020) and Pacific Bulk Lines Company Limited (“PB Lines”) (HCA 2132/2020) on the alleged ground that Mr Lau and companies under his ownership and/or control had misappropriated the assets, and diverted the businesses, of PBHK, PB Cayman and PB Lines.

3.  On 5 January 2021, upon the ex parte applications by the plaintiffs in these 3 actions (“plaintiffs” collectively), Deputy High Court Judge A To granted Mareva and proprietary injunctions and ancillary disclosure orders (“5.1.2021 Orders” collectively) against the 1^st, 3^rd, 4^th and 5^th defendants in HCA 227/2017, the 1^st, 9^th and 10^th defendants in HCA 1026/2020 and the 1^st and 5^th defendants in HCA 2132/2020 (collectively “defendants”) as summarised in Appendix I to the skeleton submissions on behalf of the defendants which I, in turn, attach as an appendix to this decision.

4.  By summonses issued on 12 January 2021 (“MND Discharge Summonses”), the defendants applied for the discharge of the 5.1.2021 Orders primarily on the grounds of material non-disclosure and misrepresentation.  By orders made on 15 January 2021, the return date of the plaintiffs’ summonses to continue the 5.1.2021 Orders (“Continuation Summonses”), Deputy High Court Judge Winnie Tsui adjourned the substantive argument of the Continuation Summonses and the MND Discharge Summonses.  DHCJ Tsui so directed after having formed the view that the defendants have made out an arguable case for discharge while the plaintiffs may have an arguable defence to the charges of material non-disclosure etc.  The substantive argument has now been fixed before Mr Justice Anthony Chan on 26 April 2021 at 10 am with 1 day reserved.  For the sake of completeness, DHCJ Tsui heard and dismissed the defendants’ applications to suspend the ancillary disclosure orders, made on the ground that the defendants’ then evidence disclosed the existence of sufficient assets within the jurisdiction to satisfy the plaintiffs’ claims herein.

5.  Before the court now are the defendants’ summonses dated 25 and 26 January 2021 (“Security Discharge Summonses”) for the immediate discharge of the injunctions as well as disclosure orders on the following undertakings by Mr Lau (“Lau Undertakings”), the fulfilment of which would furnish the plaintiffs with a sufficient “Security Package” for their claims herein:

(1)  to cause and procure the discharge of the existing tripartite legal charge/mortgage dated 4 October 2017 (“Existing Bel-Air Charge”) over Flat B, 33/F, Tower 3 and Private Cars Car parks Nos 133 and 134, Car Park Level 1, Bel-Air on the Peak, Island South, 68 Bel-Air Peak Avenue (“Bel-Air Property”) in favour of China CITIC Bank International Limited (“CITIC Bank”) as soon as practicable;

(2)  pending such discharge, to procure Pacific Bulk Panamax Company Limited[1] not to create any liabilities under the Existing Bel-Air Charge;

(3)  to cause and procure Smooth Day Management Limited[2] (“Smooth Day”) to execute and register a legal charge/mortgage[3] over the Bel-Air Property, the agreed value of which is USD14.5 million;

(4)  pending trial or further order, not to dispose of, deal with, or otherwise diminish the value of his direct or indirect interest in Sun Harvest Limited[4] (“Sun Harvest”), Up Profit Limited[5] (“Up Profit”) and/or Rooms 1901, 1902 and 1912, 19/F, West Tower, Shun Tak Centre, 168-200 Connaught Road, Hong Kong (“Shun Tak Property”) whether by himself, his agent, servants, associates or otherwise howsoever;

(5)  to execute all such necessary documents within his powers and to cause and procure Wat Fung Ying (also known as Bonnie Wat) (“Ms Wat”) to execute all such necessary documents within her powers[6] to enable Up Profit to execute and register a legal charge/mortgage[7] over the Shun Tak Property up to Mr Lau’s 50% indirect interest therein, which is agreed to be worth USD9.25 -10.65 million;

(6)  to cause and procure Pacific Bulk Cape Company Limited (“PB Cape”) to pay into court USD3,451,030.18 plus the USD equivalents of HKD9,736.97, AUD1,454.44 and EUR377.31 (i.e. approximately a total of USD3,453,868.10) standing to the credit in its bank account numbered 848-545588-838 with The Hongkong and Shanghai Banking Corporation Limited (“HSBC”);

(7)  to execute all such necessary documents within his powers to enable Sea Premier Limited (“Sea Premier”) to pay into court USD2,415,459.25 standing to the credit in its bank account numbered 8018-896050 with HSBC, which represents Mr Lau’s no less than 50% indirect interest in Sea Premier’s funds; and

(8)  to cause and procure another USD3,210,000 to be paid into court[8].

6.  The applications by the Security Discharge Summonses are made expressly without prejudice to the MND Discharge Summonses.

7.  There is no dispute as to the said respective value of the Bel-Air Property or the Shun Tak Property.  The Lau Undertakings are intended to provide the plaintiffs with security amounting to USD32,829,327.35 for the satisfaction plaintiffs’ claims herein.  A breakdown of the said amount of USD32,829,327.35 is as follows:

Charge over the Shun Tak Property up to Mr Lau’s indirect share in 50% of its value	USD9.25–10.65 million
Charge over the Bel Air Property	USD14.5 million
Payment of the PB Cape’s bank balance into Court	USD3,453,868.10
Payment of 50% of Sea Premier’s bank balance into court	USD2,415,459.25
Sub-total:	USD29,619,327.35
Additional payment into court	USD  3,210,000.00

8.  What prompted the defendants to issue the Security Discharge Summonses ahead of the hearing and determination of the MND Discharge Summonses is that the defendants, particular, PB Cape[9] and Pacific Bulk Supramax Company Limited[10] (“PB Supramax”) which are actively trading in the dry bulk shipping business are gravely prejudiced by the continuing effect of the 5.1.2021 Orders.  Although the 5.1.2021 Orders against the corporate defendants are proprietary in nature, apparently banks have discriminately frozen all their bank accounts, without making any attempt to verify whether the funds in such accounts represent the traceable proceeds of the alleged misappropriated funds.   All the bank accounts of PB Cape and PB Supramax have as a result been frozen, making it difficult, if not impossible, to carry on as going concerns.  As for Mr Lau and Mr Tong Zhenjun (“Mr Tong”), the 1^st defendant in HCA 227/2017, all their bank accounts in Hong Kong have been frozen and credit cards suspended.

9.  One of the objections raised by the plaintiffs to the Security Discharge Summonses is that the Security Package should have been offered before DHCJ Tsui when the defendants first argued to discharge the 5.1.2021 Orders or suspend the ancillary disclosure orders and that the defendants should not be allowed to have a second bite of the cherry.  In support reference was made to [16]-[17] of Compania Sud Americana De Vapores SA v Hin Pro International Logistics Ltd [2015] 2 HKLRD 458, citing Chanel Ltd v FW Woolworth & Co Ltd [1981] 1 WLR 485, to the effect that if a point was open to a party on an earlier interlocutory application and was not pursued, then it is not open to him to take the point at a later application when there has been no material change of circumstances and no new facts.

10.  In answer, Mr Victor Joffe (and, with him, Mr Alexander Tang), counsel for the defendants (except Mr Tong who is separately represented by Mr Martin Lau), drew my attention to Chu Hung Ching v Chan Kam Ming [2001] 1 HKC 396, in which a similar point was raised.  It was held by Mayo VP (with whom Le Pichon JA agreed) that there was nothing in the point; that was an on going interlocutory matter and it was always open to the court to entertain an application to discharge an interlocutory injunction.

11.  Chu Hung Ching was referred to by Kwan J (as she then was) in Bank of America NA, Canada Branch v Pang Wing Wah Johnnny, HCCL 6/2002, unreported, 8 February 2002, in which objection was taken to an application to vary the paragraph of an ex parte injunction relating to disclosure of information on the basis that an application to vary the same paragraph had already been made to the judge on the return date.  Kwan J entertained the application to vary.  At [6], Kwan J said:

“It would appear that the doctrine of res judicata would apply less stringently in interlocutory matters. I have some reservations if res judicata should apply here. I am not prepared to rule against the defendant on this point.”

12.  In any event, a party against whom a Mareva injunction was made can at any time obtain a release from such injunction if he provides security by paying the amount injuncted into court or makes provision for security in that sum by some other method agreed with the applicant or approved by the court.  Such exception is included in the standard form order under Practice Direction 11.2 and has been incorporated as an exception to each of the 5.1.2021 Orders.  For instance, paragraph (3) under “Exceptions to this order” of the order made in HCA 227/2017 reads as follows:

Paragraphs 2 and 3 of this Order shall cease to have effect against [Mr Tong] and/or [Mr Lau] if they (or any of them) provides security by paying the following sums into Court, or makes provision for security in that sum by some other method agreed with the Plaintiff’s solicitors or approved by the Court:

	Amount
3rd Defendant	USD11,099,723.23 (or Hong Kong dollars equivalent at the time of payment)
1st Defendant	USD8,899,364.63 (or Hong Kong dollars equivalent at the time of payment)

13.  There can be no argument that a Mareva injunction subject to such an exception would lapse upon the payment into court of the amount injuncted even if the payment into court is made after an unsuccessful application for discharge on other grounds on the return date.  By parity of reasoning, the same consequence should follow upon the provision of sufficient agreed or approved security since payment into court and provision of security are intended to be alternative ways of securing a discharge of a Mareva injunction.

14.  Mr William Wong SC (and, with him, Mr John Hui, Mr Michael Lok and Miss Jasmine Cheung), counsel for the plaintiff, however, reminded me that the 5.1.2021 Orders include proprietary injunctions, the purpose of which is to preserve the plaintiffs’ own assets.  It is against principle to allow a defendant who had converted the plaintiff’s property to continue the conversion by just putting aside a fund or otherwise giving security equivalent to its value simply because the defendants have deep pockets.

15.  As I understand from reading the evidence in support of the ex parte applications, the assets sought to be protected by the 5.1.2021 Orders are (1) monies allegedly misappropriated from the plaintiffs’ bank accounts and (2) profits estimated to have been lost to the plaintiffs by having their businesses allegedly diverted to the corporate defendants.  The alleged misappropriation and wrongful diversion of businesses mostly date back to 2014 and 2015.

16.  In short, the property for which the plaintiffs sought protection by applying for and obtaining the proprietary injunctions under the 5.1.2021 Orders is money.  As observed by A Chan J in DBS Bank (Hong Kong) Ltd v Tian Wen Qian, HCA 3228/2016, unreported, 12 October 2017, at [14], money is probably the most fungible asset, and a proprietary claim over cash is to be distinguished with, for example, a proprietary claim over a wedding ring or any property of a unique character.

17.  Further, insofar as the claims arising from the allegedly wrongful diversion of businesses are concerned, while the plaintiffs attempted to estimate the amounts of profits of which they had allegedly been deprived, there are no separate or specific funds earmarked as “estimated profits”.

18.  I can see nothing wrong in principle for a defendant to be released from a proprietary injunction protecting money upon provision of sufficient security for the proprietary claim aided by the injunction.  The matter is essentially a balancing exercise.   In the present instance, the balance is tipped in favour of acceding to the Security Discharge Summonses by also discharging the proprietary injunctions under the 5.1.2021 Orders, having regard to the facts/evidence that:

(1)  The 5.1.2021 Orders, if continued, may in reality cause the destruction of or occasion serious damage to Mr Lau’s businesses even before the hearing and determination of the MND Discharge Summonses.

(2)  Mr Chu and Mr Lau’s respective companies are business competitors.  In such circumstance, the court should be mindful of the possibility of the 5.1.2021 Orders taking effect to destroy or damage Mr Lau’s businesses to the advantage of Mr Chu, even if such consequence may be unintended when the ex parte applications were made.

(3)  Subject to proof of Smooth Day’s title to the Bel-Air Property and Mr Lau’s beneficial ownership of the shares in Smooth Day (for which provision will be made), the Security Package is, in my assessment, sufficient to secure the plaintiffs’ claims herein.  In so saying, I have not overlooked that the proprietary injunctions under the 5.1.2021 Orders also cover the traceable proceeds, substitutes or fruits etc of the allegedly misappropriated funds and estimated profits of allegedly diverted businesses. The extra USD3,210,000 agreed to be added to form part of the Security Package is to cater for such traceable proceeds, substitutes or fruits etc.

(4)  The Security Package is advantageous to the plaintiffs as it turns them into secured creditors for their claims in these actions.

19.  However, I do take on board Mr Wong SC’s point that the discharge of the injunctions should take place, not upon the Lau Undertakings, but upon the completion of the acts promised by such undertakings.  It goes without saying that notwithstanding the 5.1.2021 Orders, HSBC may permit the necessary withdrawals to be made from PB Cape and Sea Premier’s accounts.  For the avoidance of confusion to third parties served with the 5.1.2021 Orders, where deemed necessary, the defendants can come back to this court for orders discharging the 5.1.2021 with evidence of the realisation of the Lau Undertakings.  The applications can be made on paper upon affidavit(s), copied to the plaintiffs’ solicitors.

20.  In this regard, there is no controversy over the title to the Shun Tak Property given that Mr Chu himself is an indirect half owner of the property.  A legal charge of Mr Lau’s indirect half share in the Shun Tak Property and the 3 payments into court add up to total value of USD18,329,327.35 – USD19,729,327.35.  Such value, once provided by the execution of the legal charge over the Shun Tak Property and the making of the 3 payments into court, is sufficient to discharge the 5.1.2021 Orders in either (1) HCA 227/2021 and HCA 2132/2020 or (2) HCA 1026/2021 and HCA 2132/2020.  It appears to me fair to give the defendants the choice as to which two 5.1.2021 Orders (the injunction aspect) they wish to have discharged first before the execution of the legal charge of the Bel-Air Property.

21.  As for the Bel-Air Property:

(1)  CITIC Bank is hereby directed that the 5.1.2021 Orders do not prevent the discharge or release of the Existing Bel-Air Charge and it is hereby also directed to effect such discharge/release as soon as practicable. 

(2)  Regarding the charge to be executed by Smooth Day, I direct that the investigation of Smooth Day’s title to such property and Mr Lau’s beneficial ownership of the shares in Smooth Day should be undertaken and completed within 10 business days upon the provision of title deeds and documents by an independent firm of solicitors (who may, if necessary, instruct independent counsel of its choice to advise).  Such firm should be nominated by agreement of the parties, failing which, to be appointed by the court.  Should there be no agreement as to which firm to instruct by 4:30 pm on 2 February 2021, this court should be provided by each camp with a list of 3 firms and their respective quotations for undertaking the investigation needed by 10 am on 3 February 2021.

22.  That leaves the ancillary disclosure requirements under the 5.1.2021 Orders.  As observed by DHCJ Tsui at [10] of her decision dated 15 January 2021, a disclosure order ancillary to a Mareva injunction would enable the plaintiff to find out the whereabouts of the defendant’s assets and take steps accordingly to make sure that those assets are effectively frozen (e.g. by informing relevant banks which would proceed to freeze the defendant’s bank accounts).  Where the Mareva injunction is discharged upon provision of security approved by the court, the disclosure order can have no independent continuing force.

23.  As DHCJ Tsui further stated at [11], in the case of a proprietary injunction, an ancillary disclosure order would enable the plaintiff to locate, trace and thus preserve and pursue assets which the plaintiff says is beneficially his.[11]   Likewise, where a proprietary injunction is discharged upon provision of security approved by the court, including security for the traceable proceeds, substitutes and fruits etc of the plaintiff’s asset, I am not sure the ancillary disclosure order can conceptually continue to have independent force.  It appears to me that in the absence of a proprietary injunction, the location and tracing of the plaintiff’s assets should be left to discovery and the administration of interrogatories.

24.  Should I be wrong, I would in any event have stayed the compliance with the disclosure orders ancillary to the proprietary injunctions under the 5.1.2021 Orders until the hearing on 26 April 2021. 

25.  As stated above, most of the alleged misappropriations and wrongful diversions of businesses date back to 2014 and 2015.  I can readily imagine that tracing going back 6-7 years of a number of active businesses would be a daunting exercise. On the ancillary disclosure orders, Mr Wong SC relied on what DHCJ Tsui said at [28] of her said decision in refusing to stay the disclosure orders:

“Mr Wong[12] also pointed out the record to be disclosed by the defendants under the disclosure orders goes back to six years. It would be onerous task. I agree that time will need to be spent on this. While this is onerous, it is doable. …”

26.  DHCJ Tsui did not have the evidence now before me.  By way of highlights, 5 fee-earners of DLA Piper Hong Kong have taken around 10 days without producing anything tangible.  The defendants have since approached Deloitte which estimates that it would take them over 1,000 man-hours (utilising a team of 8 professionals) and around 2 to 4 months to complete the tracing exercise.  Yes, it is doable.  But at what costs?

27.  The underlying objectives of the Rules of the High Court (Cap 4A) include the increase of the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the court and the promotion of a sense of reasonable proportion and procedural economy in the conduct of proceedings.  See Order 1A, rule 1(a) and (c).  To compel the defendants to incur the time and costs needed to comply with the disclosure orders now when the injunctions to which they are ancillary are about to be discharged upon the provision of court- approved security would be to ignore or pay lip service to these underlying objectives.

28.  In summary, I order/direct as follows:

(1)  The 5.1.2021 Orders in HCA 227/2017 and HCA 2132/2020[13]  shall be discharged upon the following:

(a)    Mr Lau’s undertaking, pending trial or further order, not to dispose of, deal with, or otherwise diminish the value of his direct or indirect interest in Sun Harvest, Up Profit and/or the Shun Tak Property whether by himself, his agent, servants, associates or otherwise howsoever;

(b)    the production to the plaintiffs’ solicitors of a legal charge/mortgage over the Shun Tak Property up to Mr Lau’s 50% indirect interest therein executed by Up Profit as per pages 1-14 of “LWY-9” to Mr Lau’s 9^th Affirmation;

(c)    the payment into court by PB Cape of the sum of USD3,451,030.18 plus the USD equivalents of HKD9,736.97, AUD1,454.44 and EUR377.31 standing to the credit in PB Cape’s account numbered 848-545588-838 with HSBC to secure the plaintiffs’ claims in these 3 actions;

(d)    the payment into court by Sea Premier of USD2,415,459.25 standing to the credit in Sea Premier’s account numbered 8018-896050 with HSBC to secure the plaintiffs’ claims in these 3 actions; and

(e)    the payment into court by or on behalf of the defendants of USD3,210,000 to secure the plaintiffs’ claims in these 3 actions;

(1A)  HSBC shall allow the withdrawals from PB Cape and Sea Premier’s said respective accounts for the purposes of the above first and second-mentioned payments into court notwithstanding the 2.1.2021 Orders;

(2)  The 5.1.2021 Orders in HCA 1026/2020 be discharged upon the production to the plaintiffs’ solicitors of a discharge or release of the Existing Bel-Air Charge by CITIC Bank and a legal charge/mortgage over the Bel-Air Property executed by Smooth Day as per pages 35-47 of “LWY-9” to Mr Lau’s 9^th Affirmation;

(2A)  CITIC Bank shall effect the discharge/release of the Existing Bel-Air Charge as soon as practicable;

(3)  The parties shall by 4:30 pm on 2 February 2021 agree on and jointly nominate an independent firm of solicitors (who shall be at liberty to instruct independent counsel of its choice to advise where necessary) to investigate and verify Smooth Day’s title to the Bel-Air Property and Mr Lau’s beneficial ownership of the shares in Smooth Day within 10 business days at the defendants’ costs and expenses in the first instance;

(4)  Should there be no joint nomination by 4:30 pm on 2 February 2021, each side should provide the court with a list of 3 firms of solicitors and their respective quotations by 10 am on 3 February 2021;

(5)  Pending the discharge of the 5.1.2021 Orders as provided for in sub-paragraph (1) and (2) hereof, the ancillary disclosure orders under the 5.1.2021 Orders be stayed;

(6)  Liberty to apply to Hon Lisa Wong J.

29.  Needless to say, where Mr Chu’s co-operation is required, in particular, in signing the legal charges over the Shun Tak Property and the Bel-Air Property as agent for the Secured Parties, the written resolutions by the shareholders of Up Profit[14] and the written resolutions of the directors and shareholders of Sea Premier[15], this court expects Mr Chu’s co-operation to be forthcoming upon request by the defendants.

30.  I reserve the question of costs to myself pending the provision of the Security Package.