XCHRX WANG JIAN AND ANOTHER v. ZHANG TIEN FENG AND OTHERS

HCA 607/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 607 OF 2001

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Reasons for Decision

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The Plaintiffs' Case

1. The 1st Plaintiff is a businessman engaged in stock investments, real properties and other businesses in mainland China. The 2nd Plaintiff is a company under his control. In about mid-2000, the 1st Plaintiff wished to acquire a Hong Kong listed company and to inject his mainland assets into that company for the purpose of raising further capital. As he was not familiar with the local conditions, he enlisted the assistance of the 3rd Defendant.

2. The 3rd Defendant is a friend of the 1st Plaintiff. He moved to Hong Kong from mainland China in about 1989 and started his own business here. The 4th Defendant was a company under his control. In about June to August, 2000, the 3rd Defendant introduced the 1st Defendant to the 1st Plaintiff as someone versed in investment affairs in Hong Kong. In about October, 2000, the 1st and 3rd Defendants further introduced the 2nd Defendant to the 1st Plaintiff as one who could assist him in advancing his investment plan. It was agreed between the 1st Plaintiff and the 3rd Defendant that the 4th Defendant would be used as the vehicle to conduct negotiations for the take over.

3. In order to finance the acquisition, the 1st Plaintiff transferred ￥12,000,000 and ￥20,000,000 to Hong Kong on 1st and 27th September, 2000. The bulk of these sums were deposited into an account of the 2nd Plaintiff with Citic Ka Wah Bank Limited.

4. Shortly before 12th October, 2001, the 1st Plaintiff was informed by the 1st and 3rd Defendant that the Board of the targeted listed company wished to be assured that the 4th Defendant was in fund to the extent of HK$80 million before they would agree to negotiate exclusively with the 4th Defendant for a period of 6 months thereafter. The 1st Plaintiff remitted a further sum of ￥14,000,000 to Hong Kong which was deposited into the bank account of Luckier Shell Investment Limited, another company controlled by the 3rd Defendant.

5. On 12th October, 2000, at the suggestion of the 1st Defendant, the bulk of the funds so remitted by the 1st Plaintiff amounting to HK$40,000,000 was deposited into a fixed deposit account in the name of the 4th Defendant with the Development Bank of Singapore Limited ("DBS") to mature on 12th January, 2001. This deposit was used to secure a loan of like amount granted by DBS to the 4th Defendant. The 1st Plaintiff was then the sole signatory authorised to operate the deposit and the loan accounts. In order to further secure his own position, the 1st Plaintiff asked the 3rd Defendant to sign a Chinese Agreement acknowledging that the sum was lent by the 2nd Plaintiff to the 4th Defendant for the purpose of acquiring a Hong Kong listed company.

6. The proposed take over was unsuccessful. The 1st Plaintiff came to Hong Kong on 18th January, 2001 with the view of uplifting the fixed deposit of HK$40,000,000 scheduled to mature on 12th January, 2001. It was then discovered by the 1st Plaintiff that the 1st to 3rd Defendants had altered the 4th Defendant's mandate to DBS and had uplifted the fixed deposit without his consent. The 1st Plaintiff confronted the 1st and 2nd Defendant on 19th January, 2001 and pressed for satisfaction the following day. The 1st Plaintiff reported the matter to the Police on the 20th but the 1st and 2nd Defendants could not be found. Police investigation revealed that the 1st to 3rd Defendants channeled the HK$40 million from DBS into various personal and company bank accounts of these Defendants. In a statement to the Police dated 23rd January, 2001, the 3rd Defendant admitted that he had received about US$2 million in the scheme to defraud the 1st Plaintiff. On 24th January, 2001, the 3rd Defendant was charged with one count of conspiracy to defraud. This was subsequently amended to a charge of theft of HK$16 million, the same being the property of the 1st Plaintiff. The 3rd Defendant pleaded guilty to this charge on 3rd August, 2001 and was sentenced to a term of 2 years and 4 months imprisonment. International Arrest Warrants had been issued for the arrest of the 1st and 2nd Defendants.

7. The case of the Plaintiffs against the 1st to 3rd Defendants is that they fraudulently misappropriated funds belonging to the Plaintiffs. The Plaintiffs further assert that the 7th Defendant, a BVI company, is the vehicle used to hold the proceeds of such misappropriation.

Institution of proceedings and the World-wide Mareva injunction

8. The Plaintiffs commenced the current proceedings on 7th February, 2001. On the same day, they obtained an ex parte worldwide Mareva injunction from Cheung J. By that order, the 1st to 3rd Defendants were restrained from removing from Hong Kong any of their assets which are within Hong Kong up to the value of HK$40,000,000. The 2nd Defendant was restrained from disposing of any money in account no. 002-7-346014 in his name ["the 2nd Defendant's Hong Kong Bank Account"] with the Hongkong and Shanghai Banking Corporation Limited ["Hong Kong Bank"]. The 7th Defendant was restrained from removing from Hong Kong any of its assets which are within Hong Kong up to the value of HK$12,000,000. The 7th Defendant was further prohibited from disposing of any money in account no. 500-762182-000 with Hong Kong Bank ["the 7th Defendant's Hong Kong Bank Account"] to a similar extent. The 1st to 3rd Defendants were ordered to inform the Plaintiffs in writing "all of their assets of an individual value of HK$50,000.00 or more in or outside Hong Kong". The Order "does not prohibit the Defendant from spending HK$5,000.00 per week towards his ordinary living expenses and HK$10,000.00 per week towards his ordinary and proper business expenses and also HK$50,000.00 on legal advice and representation".

9. The order of Cheung J. was continued by the order of Yeung J. dated 2nd March, 2001. The 1st and 2nd Defendants were required to comply with the disclosure order of Cheung J. within 10 days from the date of service of the order of Yeung J. ["the Disclosure Order"].

The disclosure affidavits of the 1st and 2nd Defendants

10. The 1st Defendant sought to comply with the Disclosure Order by an affirmation filed on 1st August, 2001. The affidavit was sworn before a notary public in Shandong, China although the 1st Defendant gave as his address an address in Singapore. The 1st Defendant identified 2 pieces of assets as coming within the ambit of the Disclosure Order. The first is a sum of HK$86,000 in account 062807904833 with the Hong Kong Bank ["the 1st Defendant's Hong Kong Bank Account"]. He indicated he had given instructions to that bank to withdraw HK$50,000 to cover part of his living expenses. The second is a sum of HK$100,000 in account 0013198602 with the Bank of America ["the 1st Defendant's BA Account"]. The 1st Defendant asserted that apart from these 2 pieces of assets, "...I do not own any asset...of an individual value exceeding HK$50,000 whether in or outside Hong Kong...".

11. The 2nd Defendant sought to comply with the Disclosure Order by an affirmation filed on 31st July, 2001. He gave an address in Seattle, Washington. He identified a sum of HK$200,000 in his Hong Kong Bank Account as the only piece of asset within the ambit of the Disclosure Order.

The applications before me

12. At the commencement of the hearing on 20th August, 2001, there were 3 applications before me. The first is the Summons dated 27th July, 2001 taken out by the 1st, 2nd and 7th Defendants for variation of the 7th February, 2001 order of Cheung J. so as not to "prohibit the 1st, 2nd and 7th Defendants from spending ...and also HK$250,000.00 on legal advice and representation" ["the Variation Application"]. The second is the Summons dated 10th August, 2001 taken out by the Plaintiffs for amendment of the 2nd March, 2001 Order of Yeung J. so as to restrain the 7th Defendant from disposing of funds in the 7th Defendant's Hong Kong Bank Account to the extent of HK$12,045,215.03 ["the Amendment Application"]. The third is the Summons dated 10th August, 2001 taken out by Messrs. Robertsons, Solicitors of the 1st, 2nd and 7th Defendants, to cease to act. Mr. Hoy of Messrs. Robertsons requested that the last Summons be adjourned sine die with liberty to restore. I acceded to his request.

13. The Amendment Application arose as a result of discoveries made by the various banks in compliance with the orders of Cheung J. and Yeung J. The Plaintiffs' proposed amendment would reflect the actual amount standing in the 7th Defendant's Hong Kong Bank Account.

14. The Variation Application could be traced to Messrs. Robertsons' letter to Messrs. Sit, Fung, Kwong & Shum, solicitors for the Plaintiffs, dated 17th July, 2001. Messrs. Robertsons indicated that "our clients need to uplift the current permitted figure of HK$50,000 to a figure of $250,000.00 immediately for legal advice and representation". By their letter dated 23rd July, 2001, Messrs. Robertsons further indicated that "our clients intend to withdraw the said sum of HK$250,000 from [the 7th Defendant's Hong Kong Bank Account]". The Summons dated 27th July, 2001 reflects this position which was strongly attacked in the skeleton submission of the Plaintiffs exchanged between the parties before the hearing.

15. When opening the Variation Application before me, Mr. Hoy tendered 2 alternative orders for my consideration. The first alternative contemplates variation so as to permit the 1st and 2nd Defendants or the 1st, 2nd and 7th Defendants to spend jointly and severally a further sum of HK$360,000 on legal advice and representation. Without expressly so stating, the proposed order envisages that the sum of HK$360,000 be paid out from the 1st Defendant's Hong Kong Bank and BA Accounts and the 2nd Defendant's Hong Kong Bank Account. The second alternative engrafts upon the first alternative additional permission to the 7th Defendant to spend HK$120,000 on legal representation and advice and to utilise the sum standing in the 7th Defendant's Hong Kong Bank Account for this purpose. I directed that the 1st, 2nd and 7th Defendants should issue a summons to amend their Summons of 27th July to reflect these 2 alternatives. Subject to any issue on costs, I shall consider the Variation Application on the wholly new bases put forward at the date of hearing.

The applicable principles

16. I have adopted the following approach in assessing the Variation Application :

1. The purpose of the jurisdiction is not to secure priority for the plaintiff; still less to punish the defendant for his alleged misdeeds. The sole purpose or justification for the Mareva order is to prevent the plaintiff being cheated out of the proceeds of their action, should it be successful, by the defendant either transferring his assets abroad or dissipating his assets within the jurisdiction. [Per Lloyd J. in PCW(Underwriting Agencies) Limited v. Dixon [1983] 2 All E.R. 158 at 162e].

2. 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. 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. [Per Mortimer JA in Assets Investments Pte. Limited v. The United Islamic Investments Foundation [1995] 1 HKC 560 at 563C].

3. 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. [Per Mortimer JA in Assets Investments Pte. Limited v. The United Islamic Investments Foundation [1995] 1 HKC 560 at 563I].

4. Even if the whole of the defendant's assets could be regarded as a trust fund, the grant of the injunction is still discretionary. The circumstances of the case might indicate that it would be unjust to compel the defendant to reduce his standard of living or to prevent the defendant from defending himself properly in order to secure what is as yet only a claim by the plaintiff. [Per Lloyd J. in PCW(Underwriting Agencies) Limited v. Dixon [1983] 2 All E.R. 158 at 164g].

5. In the exceptional case where a proprietary claim is made to enjoined funds and the plaintiff is able within the reasonable confines of an interlocutory hearing to demonstrate a strong probability that the proprietary claim is well-founded then that may properly affect the Court's decision whether the defendant should be free to draw on those funds to finance his defence. [Per Sir Thomas Bingham MR in Sundt Wrigley & Co. Limited v. Wrigley Unreported. Transcript 23rd June 1993]..

6. Payment of moneys in legal costs is not, prima facie, dissipation. A defendant ought to be at liberty to defend himself, notwithstanding the grant of the injunction. Prima facie a defendant ought to be allowed to choose the legal representatives he thought best qualified to present his case and to pay them such charges as may be properly payable as a matter of contract. It does not lie in the mouth of a plaintiff to say that the defendants ought to have gone to a cheaper firm of solicitors. [Per Ferris J. in Cala Cristal SA v. Emran Al-Borno (1994) The Times Law Reports 251].

7. If there is reason to believe that people are asking for money for solicitors' costs 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. [Per Sir John Donaldson MR in Campbell Mussels v. Thompson Unreported. Transcript 24th May, 1984].

8. Judges should have a very healthy scepticism when they are dealing with parties to whom Mareva injunctions apply. [Per Sir John Donaldson MR in Campbell Mussels above cited].

9. A Defendant seeking to obtain a variation of a Mareva should satisfy the court, by full and frank disclosure of their assets, that there is no ulterior motive which involved the removal of other undisclosed assets out of the jurisdiction. [Per Griffiths L.J. in Campbell Mussels above cited].

10. In the exercise of its discretion the court may allow the defendant to use his own assets within the jurisdiction for a purpose for which they would ordinarily have been used if the proceedings had not been brought. If the evidence indicates that the defendant had already hidden away substantial assets abroad, it would be unjust to permit him to use what is left of the depleted Hong Kong assets to make such a payment. [See Gee on Mareva Injunctions and Anton Piller Relief 4th edition at p. 320]

11. A defendant who has not obeyed an order to disclose is not shut out from making an application of this kind. Even if full disclosure is not made, it will still be necessary for the judge to exercise his discretion in those circumstances. [See Assets Investments Pte. Limited above cited].

My Decision

17. The only hint of the nature of the 1st, 2nd and 7th Defendants' defence is to be found in the affirmation of Ms. Chong Pui Shan (solicitor for those Defendants) dated 22nd June, 2001. According to the 1st and 2nd Defendants, the 2nd Plaintiff extended a term loan to the 4th Defendant. It was within the contemplation of the parties that the loan would be utilized for acquisition of a designated listed company pursuant to the 12th October, 2000 loan agreement and that the loan would be repaid to 2nd Plaintiff in full by unwinding the transactions if the acquisition plan ultimately fails. There is no explanation as to why the mandate to DBS was altered without the knowledge and consent of the 1st Plaintiff and in what ways their positions differ from that of the 3rd Defendant who admitted to the charge of theft resulting in a lengthy period of imprisonment. On the materials before me, I am of the view that the Plaintiffs have a strong prima facie case against the 1st, 2nd and 7th Defendants. In paragraphs 7 to 18 of the 1st Plaintiff's 3rd affirmation dated 14th August, 2001, the sums standing in the 7th Defendant's Hong Kong Bank account could clearly be traced as proceeds of the alleged misappropriation. There is however no clear evidence at this stage linking the outstandings in the 1st Defendant's Hong Kong Bank and BA accounts and the 2nd Defendant's Hong Kong Bank account with the proceeds of the alleged fraud.

18. Despite the strength of the Plaintiffs' case, the 1st, 2nd and 7th Defendants are clearly entitled to defend themselves if there is no infringement of the underlying policy behind the Mareva jurisdiction. It is incumbent on the 1st, 2nd and 7th Defendants to satisfy this Court that there is no ulterior motive behind the Variation Application and that the Variation Application is not a means of avoiding bringing free money into Hong Kong, 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.

19. I am not so satisfied. First, the Variation Application was for the purpose of topping up the costs already in the account of Messrs. Robertsons. I asked Mr. Hoy to identify for me the source of the past payments. Mr. Hoy failed to give me an answer. There is therefore no evidence to suggest that the 1st, 2nd and 7th Defendants would ordinarily have resorted to their local accounts for payment of their legal fees. Secondly, HK$40 million had allegedly been misappropriated. Whilst the Plaintiffs managed to trace HK$36 million, about HK$3.6 million is still unaccounted for. Although the Disclosure Order does not impose any obligation on the 1st and 2nd Defendants to outline the movement of the HK$40 million, it is incumbent upon them to satisfy this Court that there is no violation of the Mareva jurisdiction. Thirdly, the 1st Defendant gave an address in Singapore in his affidavit of 1st August, 2001 which he affirmed before a notary public in Shandong. He left Hong Kong with members of his family on 20th January, 2001. He said his current occupation is that of a "company director". The 2nd Defendant also left Hong Kong with his girl friend on 20th January, 2001. His current occupation is said to be that of an "investment-banker". The Variation Application is supported by the 2nd and 3rd affidavits of Ms. Chong Pui Shan dated 24th and 27th July, 2001. In sharp contrast to the efforts made by the Defendant in PCW Limited v. Dixon (above cited), these affidavits gave no information as to how the Defendants sustain themselves in Singapore and Seattle. I see little risk of the 1st or 2nd Defendants incriminating themselves by revealing their current earnings and the manner whereby they maintain themselves and their families.

20. For these reasons, I am not prepared to exercise my discretion in favour of the 1st, 2nd or 7th Defendant and I dismiss the Variation Application. I make an order nisi for costs in favour of the Plaintiffs in relation to this application.

21. The Amendment Application is merely administrative in nature. Given my decision on the Variation Application, I allow the Plaintiffs' Amendment Application. I also make an order nisi that costs in relation to this application be costs in the cause.