ASSETS INVESTMENTS PTE LTD. v. THE UNITED ISLAMIC INVESTMENTS FOUNDATION AND OTHERS

IN THE COURT OF APPEAL

1994, No. 200
(Civil)

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J U D G M E N T

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Mortimer, J.A.:

1. In an asset swap transaction, the 1st defendant (D1) acquired shares from the plaintiff ("AIPL") at half of their quoted value. D1 lent AIPL money to be repaid by instalments followed by an option to re-purchase the shares. The price of the shares rose dramatically. According to AIPL, D1 dishonestly repudiated the agreement on a pretext to prevent AIPL from re-purchasing the shares. D1 then sold them and (it is said) pocketed the proceeds.

2. The 2nd defendant (D2) is an international swap broker and played a central role in the deal. D1 and D2 are controlled by the 3rd defendant (D3).

3. AIPL alleges fraud against D3, D1 and D2. The other defendants are associated subsidiary companies.

4. On 20th October 1993, AIPL obtained an ex parte Mareva injunction against some of the defendants. This was extended on 26th October 1993.

5. On 2nd May 1994, Barnett J granted a world-wide Mareva injunction against all the defendants and on 12th May 1994, this was continued by Rhind J.

6. The Mareva injunction froze all the assets of each defendant insofar as their value exceed HK$135m. It included orders to disclose the whereabouts of all assets, and specifically the whereabouts of the shares and proceeds of their sale, and of the instalments or their equivalents. There were various provisions permitting the payment of legal fees, outgoings in the ordinary course of business and living expenses for D3.

7. Rhind J's order required disclosure of assets within 14 days. This was probably unrealistically short but in purported compliance, D3 swore an affirmation on 26th May 1994 and disclosed documents which included a diary of share transactions and bank statements.

8. On 19th July 1994 the plaintiff, having come to the conclusion that the disclosure provisions had not been fully complied with, issued a summons for specific discovery and leave to interrogate. Before the plaintiff's summons was heard on 28th September 1994, the defendants issued a summons asking for a variation to make further provision for legal expenses, outgoings in the ordinary course of business and living expenses for D3. This application was heard before Yam J on 24th and 25th October 1994. It is against parts of his order that the defendants now appeal.

9. By way of background, it was proposed by the defendants and accepted by AIPL that a fund would be created by D4 (the holding company) selling D8 and placing the proceeds - which will amount to more than $7m - in a bank account administered by the solicitors on each side.

10. The parts of Yam J's order complained of are:

(1) The Order allowing a maximum of only $150,000 per month legal fees for all the defendants and the condition that no payment was to be made from the proceeds of the sale of D8 until the defendants had made full disclosure of their assets under Rhind J's order.

(2) Those parts of the order permitting a payment on account of $1m to the defendants' solicitors which

(a) restricted it to costs for the purposes of these proceedings, and

(b) made it conditional upon full disclosure under Rhind J's order.

Further, the defendants assert that Yam J ought to have acceded to their application to vary Rhind J's order so as to permit D4 to pay outgoings in the ordinary course of business up to $280,000, and payments in excess of $280,000 on 7 days advance notice to the plaintiffs' solicitors.

11. On the variation to $150,000 per month, the defendants' application was for $500,000 per month without conditions. The application for $1m on account was made for payment without restriction to these proceedings and without conditions.

12. Orders for payments such as applied for are not in the ordinary way contrary to the purposes underlying a Mareva injunction. That is not, and never has been, in dispute.

13. Mr Graham, for the defendants, submits in summary:

(a) That the judge was wrong to conclude that the defendants were in control of assets other than those disclosed.

(b) That compliance with Rhind J's order was not an issue before the judge.

(c) That there is no tracing claim against the defendants and no basis upon which there should be tracing discovery.

(d) That the orders were an abuse of the Mareva injunction. They prevented proper expenditure on legal fees before the plaintiff's summons for further discovery had been heard and without allowing legal fees for the purpose.

14. The purpose of a Mareva injunction is to prevent a party dissipating its assets by removing or keeping them from the court's control so as to avoid the risk of having to satisfy a judgment. It is trite to say that if a party is in control of assets not frozen by the injunction, he must usually be made to use those assets for his ordinary and legal expenses first.

15. There is no difference in approach if a party who is the subject of a world wide Mareva is shown to be in control of other assets which he is wrongfully keeping out of the court's clutches in order to avoid the risk of having to use them to satisfy a judgment. As Donaldson M.R. said at 3F in Major General Campbell Mussells v Okerentugba Gbataminigin Thompson and another (unreported C.A. 1983 M. No. 1689 and 1690), having set out the general principle-

"That is the principle; and if there is reason to believe that people are asking for money for school fees, doctors' bills, solicitors' costs, or whatever, simply as a means of avoiding bringing free money into this country, or as a means of not having to use other moneys which have not been discovered and which they wish to keep out of the clutches of the court, of course they will be refused."

However, it is important to point out that these are not principles of law but of approach. In the above case, two Commercial Court judges had found that the defendant had made inadequate disclosure of his assets outside the jurisdiction. In spite of this Bingham J (as he then was) allowed relaxation of the Mareva injunction inter alia for legal expenses. As Donaldson M.R. said at p.2:

"The whole appeal appears to turn on whether the decision in A. v C. (No. 2) (1981)1 QB 961 is to be regarded as holy writ which limits the discretion of judges administering the Mareva jurisdiction."

Having referred to the summary of that case in the Annual Practice, he continued:

"I do not regard this decision as laying down a principle of universal application and, if it did so decide, I consider that it was wrong. Every case has to be dealt with on its own merits."

There are cases where the balance between the avoidance of deliberate dissipation on one hand and abuse of the Mareva jurisdiction to put pressure on a defendant on the other is difficult to achieve. It is a matter of discretion. Clearly, as can be seen from the above case, a defendant who has not obeyed an order to disclose is not shut out from making an application of this kind (see also Jademan Holdings Ltd v Tony Wong Chun-loong [1990]2 HKLR 577 at 581 per Cons V-P).

16. Yam J concluded on AIPL's evidence that the defendants had not complied with Rhind J's order in that they were in control of assets not disclosed out of which the necessary payments could be made without reducing the assets disclosed.

17. He reached this conclusion on the defendants' failure to make proper disclosure and the fact that solicitors had been instructed in Malaysia after the date of the Mareva.

18. The first issue for our consideration is whether it was open to the judge to reach this conclusion on the evidence before him. The defendants strongly assert that the judge was in error to rely upon the instruction of Malaysian solicitors without some evidence of the nature of the retainer or the source of the funding. We are inclined to agree that alone, this would not have been sufficient to support the finding but there was ample evidence to show that the defendants had not (as enjoined) disclosed the destination of the very substantial proceeds of the sale of the shares. Once this was before him, it was plainly open to the judge to find that the intent was to hide the whereabouts of other funds available to the defendants out of which the expenditure could be met, particularly having regard to the size of the funds involved.

19. Having decided this question, the judge had to exercise his discretion on the application to vary. He did not dismiss the summons; indeed he made a number of orders not challenged. He went on to consider what amounts should be ordered.

20. For the best of motives, he then sought to ensure that Rhind J's order was obeyed before any sums were released. No doubt these conditions were designed to maintain the integrity of the injunction. Also, the judge was striving to avoid the necessity of further increasing the already large number of interlocutory applications.

21. Unfortunately the exercise of the judge's discretion by the addition of the conditions is plainly flawed. First, because the conditions complained of in the orders lacked necessary clarity at the time they were made and, secondly, because it will still be necessary for the judge to exercise his discretion whether or not to allow the expenditure and to what amount when further disclosure has been given. As can be seen from the cases cited, even if full disclosure is not made, it will still be necessary for the judge to exercise his discretion in those circumstances.

22. Normally an application to vary for this type of expenditure is a short and simple proceeding. In this summons the plaintiff raised the issue about full disclosure. This issue was already the subject of the plaintiff's earlier summons which was a more suitable proceeding for deciding and enforcing it.

23. The most appropriate course the judge could have taken was to adjourn the contested parts of this summons until after the earlier one had been heard and the compliance and discovery issues had been determined - even if, as was likely, an interim limited variation to cover immediate legal expenses had been necessary.

24. As to the amount of the order for the release of $150,000 per month for legal expenses there are no grounds for finding that the exercise of the judge's discretion in fixing this amount in the then circumstances was wrong.

25. The failure of the judge to allow $280,000 to be spent by D4 for expenses in the ordinary course of business is said by Mr Graham to have been the result of a misunderstanding by the judge. Mr Graham says that as D4 is the holding company, his application was for this company to undertake the expenses on behalf of all the other defendants and that the total asked for was a reduction of that allowed in the original order. Had the judge understood this, he asserts that there is no reason why $280,000 should not have been allowed.

26. It is not disputed that the condition restricting the payment of $1m on account to the "costs of these proceedings" was not raised at the hearing and was inserted in the order by the judge without agreement but after receiving correspondence from the parties. This raises an important procedural matter. Obviously, if there is dispute between the parties about a substantive term of an order which has not been raised in argument, the judge cannot deal with this in correspondence in the absence of agreement. The proper procedure in accordance with natural justice is to relist the case for further submissions. This was not done.

27. An order on the plaintiff's summons for further disclosure and interrogatories has now been made by Mayo J. The time for compliance with it has passed. Important new circumstances have arisen since Yam J made his order.

28. First, I would allow the appeal in part by striking out the conditions that the payments shall not be made until Rhind J's order has been complied with. But now that new circumstances have now overtaken the summons, the appropriate order is to remit the matter back to Yam J for his further consideration. Although there are no grounds for this Court to interfere with the amounts awarded, it must be open to him to reconsider all the matters raised in the appeal which will include the amount of $150,000, the question whether there was a misunderstanding about the application for D4 to spend $280,000 per month, the conditions for compliance with Rhind J's order and the insertion of words limiting the $1m to costs in these proceedings.

29. As to costs of the appeal, although the defendants have succeeded in part, the circumstances are such that I would order nisi the costs of the appeal to be costs in the action.

Godfrey, J.A. :

30. I agree.

Power, Atg C.J.:

31. I also agree.