LIAO CHEN TOH v. LOYAL INTERNATIONAL ENTERPRISES CO. LTD. AND OTHERS

HCA 2302/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2302 OF 2014

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REASONS FOR DECISIONS

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1. These are applications by the 1^st and 2^nd Plaintiffs by Counterclaim for an injunction to restrain the 2^nd Defendant by Counterclaim from dealing with two sums of money which had been transferred from their bank accounts to that of the 2^nd Defendant by Counterclaim in 2014.

2. In the hearing on 22 March 2016, I allowed the applications subject to a further undertaking given by a related party Liao Wen Toh.  I also allowed the 1^st and 2^nd Plaintiff’s application for a Bankers Trust order in respect of the bank accounts of the 2^nd Defendant in UBS.  I now give my reasons.

3. As these applications relate to the Counterclaim and not the Original Action, unless otherwise stated, the Plaintiffs and the Defendants referred to in this Reasons for Decisions are the Plaintiffs and the Defendants by Counterclaim.

BACKGROUND

4. This is a dispute relating to a family business known as the Loyal Group which was founded by Mr Liao Yo Chang (“Liao Senior”). It is one of the largest manufacturers for EPS in the world, which is a raw material used for a wide range of applications such as packaging and construction.  Liao Senior’s wife is Madam Liao Hwang Hsiang (“Madam Liao”). Their two sons are Mr Liao Chien Toh (“LCT”), who is the Plaintiff in the Original Action and the 1^st Defendant by Counterclaim, and Mr Liao Wen Toh (“LWT”).

5. The Loyal Group included inter alia Loyal International Enterprises Co Ltd (“LIE”) which is the 1^st Defendant by Counterclaim, and the 1^st to 3^rd Plaintiffs.  LIE is the sole shareholder of the 1^st to 3^rd Plaintiffs which are companies incorporated in Hong Kong.  They hold shares in various wholly foreign owned enterprises (“WFOEs”) in the Mainland, which in turn hold substantial manufacturing facilities in the Mainland.  In addition, the 1^st to 3^rd Plaintiffs hold shares in various joint venture companies with Japanese partners which, unlike the WOFEs, are still with the 1^st to 3^rd Plaintiffs.

6. The Liao’s family is from Taiwan.  They establish a very successful business in the Mainland.  As there was currency control in respect of the money flow between the Mainland and Taiwan, certain bank accounts belonging to the 1^st to 3^rd Plaintiffs were opened at various banks in Hong Kong.  Apparently, the Hong Kong companies (including the 1^st to 3^rd Plaintiffs) have been set up to facilitate the running of the business in the Mainland.

7. There is factual dispute as to who are the beneficial owners of the Loyal Group.  LCT claims that the business was set up by Liao Senior and himself, whereas LWT alleges Liao Senior raised funds from relatives of the Liao family and friends (“the Beneficiaries”) to establish the Loyal Group.  The Beneficiaries agreed to let Liao Senior and his designated persons to hold their interests as shares in the Loyal Group.

8. According to LWT, a six-member “board of directors” was set up with a view to enhancing the corporate governance of the Loyal Group (“the Six Member Board”), with Liao Senior assuming the leadership role.  The members included Liao Senior, LCT, LWT and 3 other members.

9. As part of a corporate restructuring scheme in anticipation of an initial public offering of the Loyal Group at the Hong Kong Stock Exchange, LIE was incorporated in the BVI on 24 July 2008.  At the direction of Liao Senior, LCT and LWT were both allotted 40% of the shares in LIE, while Liao Senior was allotted the remaining 20%. Liao Senior was appointed as the sole director of LIE.

10. On 30 December 2009 and at the direction of Liao Senior, all shares in the 1^st to 3^rd Plaintiffs were transferred to LIE.

11. Since 2007, Liao Senior’s health had been deteriorating and often required hospitalisation in Taiwan or overseas.  By the end of 2008, Liao Senior appointed LCT as the Chief Executive Officer of the Loyal Group, who, according to LWT, was to execute the duties for Liao Senior as chairman of the Six Member Board when Liao Senior was not able to attend to the affairs of the Loyal Group.

12. On 12 June 2010, Liao Senior passed away without leaving a will.  As a result, LIE no longer had any directors, while 1^st to 3^rd Plaintiffs had two remaining directors, namely LCT and Step Harvest Limited which was a nominee director representing the accountants of the 1^st to 3^rd Plaintiffs.  Thus, according to LWT, LCT has had the sole control of the 1^st to 3^rd Plaintiffs after Liao Senior’s death.

13. A meeting of the Six Member Board was convened shortly after Liao Senior’s death on 13 June 2010.  LCT was appointed by the Six Member Board to take over the role of Liao Senior and to operate the Loyal Group in a similar manner prior to the death of Liao Senior in order to maintain the stability of the Loyal Group during the transitional period.

14. It was then dispute broke out in the family, with LCT in the one camp and LWT and Madam Liao in the other.

15. LWT complains that, after LCT’s appointment, LCT viewed the Loyal Group as his own, disregarded all remaining members of the Six Member Board and held himself out as the sole person in charge of the Loyal Group.

16. There was also a huge dispute over Liao Senior’s estate in the BVI, which comprised inter alia the 20% shares in LIE.  On 11 August 2011, Madam Liao (as Liao Senior’s wife) obtained letters of administration ad colligenda bona in respect of Liao Senior’s estate.  LCT applied to the BVI court to challenge Madam Liao’s grant.  LCT failed in those proceedings and a full grant was granted to Madam Liao by a judgment dated 2 July 2013 and an order dated 24 January 2014.

17. Thereafter, Madam Liao proceeded to distribute Liao Senior’s estate in the BVI in her capacity as the administrator.  The shareholding of LIE then became as follows: LCT (46.6%), LWT (46.6%) and Madam Liao (6.6%).  According to LWT, it would have been apparent to LCT that,  by then, his loss of control over LIE and the 1^st to 3^rd Plaintiffs was imminent.

18. Madam Liao and LWT then proceeded to conduct investigations regarding the operational and financial status of the companies under LIE, including the 1^st to 3^rd Plaintiffs and the WFOEs.

19. The investigations revealed that, from February to October 2012, LCT had been dissipating the assets of the 1^st to 3^rd Plaintiffs by transferring away their shares in the WFOEs and huge sums of money in their bank accounts to his own corporate vehicles including the 2^nd to 4^th Defendants.  The subject applications relate to the sums of US$87.26 million and US$5.59 million (“the 2 Sums of Money”) transferred from the accounts the 1^st and 2^nd Plaintiffs respectively in Bank of China Hong Kong (“BOCHK”) to the bank account of the 2^nd Defendant in UBS (“the Recipient Account”) in the period from about July to October 2012.

20. As explained by LWT, due to LCT’s refusal to return the Plaintiffs’ banking documents and the obstruction encountered in the Plaintiffs’ efforts to obtain such documents from BOCHK, the Plaintiffs only received the bank documents pertaining to the 1^st Plaintiff’s transfer on 15 September 2015 and those pertaining to the 2^nd Plaintiff’s transfer on 4 November 2015.

21. The Plaintiffs therefore brought the present applications for preservation orders or proprietary injunctions against the 2^nd Defendant in order to preserve the 2 Sums of Money.  It is the Plaintiffs’ case that the transfers were procured by LCT in breach of his director’s duty.  Having regard to the background of the BVI proceedings, LCT planned the pillage of the Plaintiffs’ assets in anticipation of the inevitable judgment against him in the BVI, as it would cause him to lose control over LIE and thus the Plaintiffs and the WFOEs.  LCT aimed to extract all of the valuable assets of the Plaintiffs by way of gratuitous transfers to his own corporate vehicles just before it was too late.

22. There is some evidence to suggest that despite the lapse of time, the 2 Sums of Money are still sitting in the 2^nd Defendant’s accounts in UBS, whether in the Recipient Account or other related accounts.  According to the letter from UBS to LCT dated 16 November 2015, the fund transferred from the 1^st Plaintiff’s account had since thereafter been distributed amongst the related accounts held with UBS (“the Related Accounts”) from the Recipient Account.  The 2^nd Defendant does not seek to argue otherwise.  Further, after the Plaintiffs took out the first set of summonses on 3 November 2015, LCT and the 2^nd Defendant in fact instructed UBS to transfer funds out of and close the Recipient and Related Accounts.  However, in order to ensure compliance with applicable laws and regulatory obligations, UBS has decided to refrain from acting upon the instructions given by LCT or the 2^nd Defendant in relation to the transfer of funds out of the Recipient and Related Accounts.  The 1^st and 2^nd Plaintiffs therefore brought the present applications to preserve one of the subject matters of the Counterclaim, i.e. the 2 Sums of Money.

23. According to the wordings of the summonses, the Plaintiffs are seeking for a Mareva injunction against LCT and the 2^nd Defendant to restrain them to deal with their assets up to the total value of the 2 Sums of Money.  However by the letter dated 14 December 2015, the 1^st and 2^nd Plaintiffs, through their solicitors, confirmed that they no longer intend to pursue the Mareva injunction.  They would only maintain the claim for proprietary injunctions with related relief against the 2^nd Defendant.

24. There is also another application before the court.  It is the Plaintiffs’ case that from September 2014 onwards, they have repeatedly called board meetings and passed board resolutions to require LCT, as the Plaintiffs’ director, to inter alia return all corporate documents to the Plaintiffs and report on the Plaintiffs’ operations.  As LCT refused to do so, the Plaintiffs made an application to the court compelling him to return the documents.  The hearing of that application took place on 23 November 2015 before DHCJ Yee and judgment was reserved pending the handing down of a written decision.

LEGAL PRINCIPLES FOR THE GRANT OF PRESERVATION ORDER

25. Under RHC O 29 r 2(1), the court is empowered to inter alia make an order for the detention, custody or preservation of any property which is the subject matter of the cause or matter, or as to which any question may arise therein.

26. The applicable principles for the grant of a preservation order are well-established:[1]

(i) There is property which is bona fide the subject matter of the cause or matter.

(ii) Something ought to be done for the security of the property. Part of this inquiry will involve showing that damages may not be an adequate remedy.

(iii)  Unlike application for a Mareva injunction, no risk of dissipation needs to be demonstrated.  Further, even if there has been delay in making an application which may lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted.

(iv)  An enquiry into the relative merits of rival claims is not necessary.

27. In respect of the merits of the claim, the party seeking the preservation order only needs to show that there is a serious issue to be tried on the merits on the normal American Cyanamid principles.[2]

ISSUES RELATING TO THE PRESERVATION ORDER OR PROPRIETARY INJUNCTION APPLICATION

28. Mr Anson Wong SC, counsel for the Defendants including LCT, opposes the applications based on the following 3 grounds:

(i) there is no proprietary base to support the 1^st and 2^nd Plaintiffs’ proprietary claims or their injunction applications;

(ii) an injunction against the 2^nd Defendant would seriously jeopardise the operation of the various companies in the Mainland whose ownerships remain in dispute, which would cause irreparable damage to those Mainland companies irrespective which camp should prevail at trial; and

(iii) the assets purportedly relied on by the 1^st and 2^nd Plaintiffs to back up their undertaking as to damages are inherently inadequate, because such assets constitute the very Mainland companies whose ownerships are disputed by LCT.

29. I will deal with these arguments in turn.

(i)  Proprietary base to support the application

30. According to the Defendants’ case, the 1^st and 2^nd Plaintiffs were only nominee “paper” companies set up by LCT and Liao Senior to hold their investment interests in the Mainland companies beneficially owned by them.  The 1^st and 2^nd Plaintiffs never had any genuine operations in Hong Kong or elsewhere.  Further, the money in the BOCHK accounts of the 1^st and 2^nd Plaintiffs has never belonged to them.  Rather, LCT is the true beneficiary of the funds in these accounts.  LCT claims that this is self-evident from the fact that such funds originated from the Mainland companies to which LCT claims beneficial ownership.

31. Both camps have filed lengthy affirmations to support their respective cases.  At this stage, it is suffice for me to say that the court cannot resolve all these factual disputes in these interlocutory applications.  In fact, Mr Wong has not addressed me on the merits of the various factual allegations and so, for the purpose of these applications, I have to find that there is a genuine dispute about the beneficial interests of the Plaintiffs including the funds in their bank accounts and the various companies in the Mainland.

32. It is common ground that the 2 Sums of Money were transferred out of the 1^st and 2^nd Plaintiffs’ bank accounts.  Unless and until the beneficial ownership of the 2 Sums of Money is resolved at the trial, the 1^st and 2^nd Plaintiffs are prima facie the respective owners of the 2 Sums of Money and so they have managed to establish a serious question to be tried in this regard.  As the 2 Sums of Money are the subject matters of the claims of various parties in this case, it would be just for the court to make an order with the effect of preserving such subject matters pending the resolution of the dispute.  In particular, there is evidence to show that LCT intends to transfer the funds out of the Recipient and Related Accounts in UBS and to close these accounts after the transfer. Further in the period from February to July 2012, the 1^st Plaintiff, under the control of LCT, had been transferring the shares of various Mainland companies to the corporate vehicles of LCT.  Hence, there is a serious concern that the funds would no longer be available after the final adjudication of the claims.

33. In opposing the applications, Mr Wong refers me to the two meanings of “constructive trust” and “constructive trustee” as explained by Lord Sumption in Williams v Central Bank of Nigeria[3]:

“The problem is that in this all-embracing sense the phrase ‘constructive trust’ refers to two different things to which very different legal considerations apply. The first comprises persons who have lawfully assumed fiduciary obligations in relation to trust property, but without a formal appointment. They may be trustees de son tort, who without having been properly appointed, assume to act in the administration of the trusts as if they had been; or trustees under trusts implied from the common intention to be inferred from the conduct of the parties, but never formally created as such. These people can conveniently be called de facto trustees. They intended to act as trustees, if only as a matter of objective construction of their acts. They are true trustees, and if the assets are not applied in accordance with the trust, equity will enforce the obligations that they have assumed by virtue of their status exactly as if they had been appointed by deed. Others, such as company directors, are by virtue of their status fiduciaries with very similar obligations. In its second meaning, the phrase constructive trustee refers to something else. It comprises persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability. The intervention of equity in such cases does not reflect any pre-existing obligation but comes about because of the misapplication of the assets. It is purely remedial.”The distinction between these two categories is not just a matter of the chronology of events leading to liability. It is fundamental. In the words of Millett LJ in Paragon Finance plc v, DB Thakerar & Co [1999] 1 All ER 400, 413, it is ‘the distinction between an institutional trust and a remedial formula- between a trust and a catch-phrase’,”

34. Thefirst category of “constructive trustee” refers to someone “who although not appointed as trustee, has assumed the duties by a lawful transaction which is independent of and preceded the breach of trust and is not impeached by the plaintiff”.  The second category refers to “trust obligations” whicharise“as a direct consequence of the unlawful transaction impeached by the plaintiff”.[4] The legal significance of this distinction is that only the first but not the second category of “constructive trustees” is subject to proprietary claims.

35. I do not accept that such distinction between proprietary and personal claims can in any way assist the 2^nd Defendant’s case.

36. The 1^st and 2^nd Plaintiffs’ claim is made on the basis that they are the owners of the 2 Sums of Money.  They seek to preserve their own property and so the claim would be proprietary in nature.  The proprietary nature of the claim is also reflected in the more limited scope of the injunctions, because they would only cover the funds transferred from the 1^st and 2^nd Plaintiffs’ bank accounts in 2014.  If the 2^nd Defendant has already disposed of the funds, and yet the 1^st and 2^nd Plaintiffs are asking the 2^nd Defendant to account to them for the funds on the ground of knowing receipt, then the 1^st and 2^nd Plaintiffs’ claim would not be proprietary in nature.

37. Dr William Wong SC, counsel for the Plaintiffs, is fully aware of the limitation in the scope of the preservation order.  If the funds sitting in the Recipient and Related Accounts cannot be traced to the transfer from the accounts in BOCHK, the preservation order or the injunction would not cover those funds.  As the Plaintiffs are not seeking for a general Mareva injunction against the 2^nd Defendant based on the liability to account on the ground of knowing receipt, the aforesaid distinction between the two meanings of constructive trust cannot assist the 2^nd Defendant’s case.

(ii) Damage caused to the Mainland companies

38. LCT also claims that the injunction would have a catastrophic effect on the operation of the Mainland companies.  According to him, since around 2008 to 2009, the operation of the Mainland companies has been supported by Loyal Group Trading Co Ltd (“LGT”) and its on-shore wholly owned subsidiaries in the Mainland.  The source of funds came from borrowings granted by various banks, including UBS, and the funding provided by the 2^nd Defendant.  Since the filing of the summonses for the injunction, UBS has already frozen all the bank accounts under the names of LCT, LGT and the 2^nd Defendant.  This would dry out the financial support for the Mainland companies.

39. I accept the submission of Dr Wong that LCT’s claim about the effect of the injunction only consists of bare allegations without substantive proof.  Apart from the fact there may be many possible ways to raise funds to support the Mainland companies, there is a real possibility that these companies, through the supply of their products, are be able to generate income to finance their daily operations.  Unless LCT is able to supply the court with more concrete evidence, the court should not accept these bare allegations on face value.

40. More importantly, according to the information provided by UBS in its letter dated 16 November 2015, the 2 Sums of Money have all along remained in the Recipient and Related Accounts after they were transferred from the 1^st and 2^nd Plaintiffs’ bank accounts in 2014.  If LCT is relying on these funds to finance the daily operation of the Mainland companies, it is very difficult to explain why the 2 Sums of Money have been sitting in the bank accounts for nearly 2 years. Hence, I have serious doubt about the credibility of such allegation.

41. On the other hand, if the court does not make an order to preserve the 2 Sums of Money, it is likely that these funds would not be available after the final adjudication of the claims.  As both camps have a genuine claim to the 2 Sums of Money, it would be just for the court to make an order to preserve the funds pending the determination of the claims.

(iii)   Undertaking as to damages

42. The 1^st and 2^nd Plaintiffs agree to provide the undertaking as to damages.  However, the beneficial ownerships of the Plaintiffs and their funds and assets are matters of serious contention between the parties.  Assuming that LCT’s camp succeed in their claims, the 1^st and 2^nd Plaintiffs would actually belong to LCT’s camp or the Plaintiffs may not have any valuable assets left to honour the undertaking as to damages.  Obviously, the 1^st and 2^nd Plaintiffs would be primarily responsible for the undertaking as to damages.  However, if the LCT’s camp succeed at the trial and the judge conducting the inquiry takes the view that the members of the opposite camp should pay the damages, the judge should be able to call upon them to do so.  As Madam Liao is a lady of advanced age, I accept an undertaking given by LWT himself.  Since he is a beneficiary of Liao Senior’s estate, I consider him worth of his undertaking.

BANKERS TRUST ORDER

43. There is no serious dispute that the Plaintiffs should entitle to discovery of the bank statements relating to the movement of funds in the 2^nd Defendant’s accounts in UBS after the transfer of the 2 Sums of Money.  However, since LCT and the 2^nd Defendant have agreed to supply such information to the Plaintiffs, Mr Wong argues that there is no need to trouble UBS with a Bankers Trust order.

44. As the 2^nd Defendant concedes that the 1^st and 2^nd Plaintiffs are entitled to the bank statements, it makes no practical difference whether the bank statements are supplied by the 2^nd Defendant itself or UBS.  The reality is that there has been a complete breakdown of trust between the 2 camps.  In order to avoid any further complication, it would be more desirable to order UBS to provide the information directly to the 1^st and 2^nd Plaintiffs.  In any event, UBS has already been engaged since the commencement of these applications.

45. So far as cost is concerned, the Plaintiffs agree to pay for the reasonable costs of UBS and so it is not a concern for LCT and the 2^nd Defendant at least for now.  Hence, I also made a Bankers Trust order subject to some amendments in the terms.

46. These are the reasons for the decisions I made in the hearing.  I also make a costs order nisi that the costs of all the summonses returnable before me, save for the costs of UBS provided for in the Bankers Trust order, be costs in the cause of the counterclaim for the return of the 2 Sums of Money with certificate for 2 counsel.  The order nisi shall be made absolute 14 days after the date of the handing down of this Reasons for Decisions.