XY, LLC v. JESSE ZHU (a.k.a JIA BEI ZHU and JESSE JIA BEI ZHU) AND ANOTHER

HCMP 869/2014

[2018] HKCFI 1485

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 869 OF 2014

________________________

________________________

________________________

________________________

D E C I S I O N

________________________

A. Introduction

1.  By summons issued by the 2^nd defendant (“GNT”) dated 29 January 2018 (“GNT’s Summons”), GNT appliesfor variation of the Mareva injunction granted by L Chan J on 7 April 2014 (“the HK Mareva”) such that a sum of HK$1,458,996 is to be released from GNT’s bank account maintained with HSBC (“the HK Account”) directly to Messrs W K To & Co (“WKT”), GNT’s solicitors, for the payment of GNT’s legal costs.

2.  The plaintiff (“XY”)’s position on GNT’s Summons in summary is that there are reasonable grounds for believing that GNT can obtain funding for its legal costs elsewhere.

B.   Relevant Background

3.  The background to this matter is set out in part in paragraphs 4 to 21 of the Judgment of Au-Yeung J dated 13 November 2015 in which the learned judge, inter alia, dismissed GNT’s application to discharge the HK Mareva.  That description of the background is reproduced in paragraph 4 of the Judgment of the Court of Appeal dated 5 December 2016 dismissing GNT’s appeal against that decision of Au-Yeung J (the “Appeal Judgment”).

4.  Adopting herein the same terminology in those judgments, the key background facts include the following.

5.  The HK Mareva is “back to back” with the Canadian Mareva granted by Fitzpatrick J of the Supreme Court of British Columbia on 27 March 2014 in the Recovery Action.

6.  The Recovery Action was brought by XY to enforce XY’s Monetary Judgment in the sum of CAD 8,507,891 (over HK$50 million), plus interest and special costs, against Jesse Zhu (and others) on findings in the Original Action of liability for, inter alia, deceit and conspiracy relating (as Au-Yeung J described it) to “a widespread fraud of epic proportions”.

7.  The trial judge in the Original Action, Kelleher J, subsequently found Jesse Zhu in contempt for non-payment of the judgment debt and committed him to prison for 6 months.  Jesse Zhu did not answer to his committal for contempt, preferring to absent himself from the jurisdiction.  His appeals against his conviction and sentence were dismissed by the Court of Appeal of British Columbia for failure to appear.

8.  The funds in the HK Account (HK$38,214,589.45 as of 17 April 2014) are specifically identified for freezing in the Canadian Mareva and, consequently, in the back to back HK Mareva.

9.  GNT (incorporated in the BVI), and other companies that are (on XY’s case) beneficially owned and controlled by Jesse Zhu, were not defendants in the Original Action (or the subsequent related Topsires Action).  They were included as defendants in the Recovery Action in order to enforce the Monetary Judgment against their assets.

10.  On 3 September 2015, ie after the HK Mareva was obtained, XY obtained the Canadian Final Judgment against GNT in the Recovery Action, in default of GNT’s appearance, whereby it was ordered and declared, inter alia, that: GNT holds its assets, including any funds, in trust for Jesse Zhu; XY shall recover the Monetary Award (and interest) from GNT; and the Canadian Mareva shall continue in force until satisfaction of the judgments in the Recovery Action and Original Action.

11.  On 5 October 2015, a firm of lawyers in British Columbia, Canada, filed a pro forma notice to appeal the Canadian Final Judgment with no grounds engaging its merits on behalf of GNT (and others).  On 4 December 2015, GNT filed a notice of intention to act in person.  No further steps were taken by GNT in its appeal, which was first placed on the “inactive list” of the British Columbia Court of Appeal and then dismissed for non-prosecution on 4 April 2017.

12.  In dismissing GNT’s appeal against Au-Yeung J’s decision not to discharge the HK Mareva, the Court of Appeal found that a “good arguable case had been made out for an appropriate inference to be drawn that the funds in the HK Account are held beneficially for Jesse Zhu”.

13.  In dismissing GNT’s application for leave to appeal against the Appeal Judgment, the Appeal Committee of the Court of Final Appeal observed that the finding of a good arguable case on this point was made on “impeccable reasons”.

C.   The HK Enforcement Action

14.  The Writ in the HK Enforcement Action was issued on 21 November 2016.  It is specially endorsed with a full Statement of Claim.  GNT’s four-page Defence was eventually filed on 5 February 2018. 

15.  As against Jesse Zhu, the position in the HK Enforcement Action is straightforward: the Monetary Judgment obtained against him in British Columbia (in respect of which all avenues of appeal by him have been exhausted) is enforceable in Hong Kong at common law.  In any event, Mr Zhu failed to acknowledge service of the Writ in the HK Enforcement Action and an application for default judgment against him is pending.

16.  With respect to GNT, the position is more complicated because one of the requirements for enforcement of the Canadian Final Judgment obtained against GNT under the common law regime for the enforcement of foreign judgments is not met, as was noted in the Appeal Judgment.

17.  Specifically, because GNT chose not to appear in the relevant first instance proceedings in Canada and did not engage the merits of the Canadian Final Judgment in its appeal against it, the requirement under the common law regime for the foreign court to have exercised ad personam jurisdiction is not met.  As a result, XY is obliged to litigate with GNT in Hong Kong from scratch its claim that Jesse Zhu is the sole beneficial owner of the funds in the HK Account, thereby entitling XY to execute against them in respect of the Monetary Judgment obtained against him (and others).

D.   Relevant Legal Principles

18.  As laid down in Derby & Co Ltd v Weldon (Nos 3 and 4) [1990] Ch 65 (at 76-77) and quoted in Atlas Maritime SA v Avalon Ltd (No 3) [1991] 1 WLR 917 (CA) (at 920H to 921A):

(1)  The “fundamental principle underlying this [Mareva] jurisdiction is that, within the limits of its powers, no court should permit a defendant to take action designed to ensure that subsequent orders of the court are rendered less effective than would otherwise be the case”, as would occur here if the application under GNT’s Summons were to succeed because the funds available to satisfy judgment in the Hong Kong Enforcement Action would be yet further diminished.

(2)  That principle is, however, subject to the proviso that “it is not its [the Mareva jurisdiction’s] purpose to prevent a defendant carrying on business in the ordinary way … nor to impede him in defending himself against the claim.” (the “Proviso”).

19.  The first limb of the Proviso is not relevant to this case because the evidence is that GNT is simply a corporate vehicle used (by Jesse Zhu on XY’s case) to hold funds and/or shares.  It is the evidence on behalf of GNT that the funds in the HK Account are its only assets.

20.  The second limb of the Proviso is further explained by Lord Donaldson MR in Atlas Maritime SA v Avalon Ltd (No 3), ibid, thus:

(1)  (at 926C-D):

“… the fact that the variation of the injunction to enable legal costs to be paid would be likely to render any award in favour of [the plaintiff] less effective is not of itself a fatal objection because of the proviso built into what I have described as the fundamental principle. But this proviso only applies in cases in which the operation of the injunction would impede the person enjoined from defending himself against the claim.”

(2)  (at 927B):

“In exercising the equitable Mareva jurisdiction, the court should …not limit its consideration to funds to which the party concerned has a legal right, if there are reasonable grounds for believing that it can obtain money otherwise.” [emphasis supplied]

21.  In Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783, Au J at paragraph 14 stated this:

“14. In the case of an ‘ordinary’ Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the court’s discretion faced with an application to release the funds, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets to meet the payment; and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff.” [emphasis supplied]

22.  Drawing the threads together, two points thus emerge.  First, in an application of this nature, the burden is on the defendant to show “by sufficient evidence”.  Secondly, that the defendant “does not have other assets to meet the payment” should be read together with the analysis postulated by Lord Donaldson MR, so that the court should not “limit its consideration to funds to which the party concerned has a legal right, if there are reasonable grounds for believing that it can obtain money otherwise”.

E.   Reasonable grounds for believing GNT can obtain money elsewhere

23.  XY submits it is to be inferred from the circumstances of this case that GNT can obtain money elsewhere in order to pay the legal costs of defending the HK Enforcement Action.  That being the case, the “fundamental principle” underlying the Mareva jurisdiction, that it is there to prevent a defendant from making the court’s orders less effective, prevails over the Proviso and GNT’s Summons stands to be dismissed.

24.  The circumstances that XY relies upon for the foregoing inference include the following.

25.  The fact that GNT has plainly been funding its legal costs in the Recovery Action and these proceedings from sources other than the withdrawals that have been permitted to date from the funds in the HK Account (which are the only funds in its name on its evidence) with no satisfactory explanation of how it has been able to do so.

26.  GNT’s legal costs that have been met from other sources include:

(1)  the costs of instructing the firm of lawyers in British Columbia in GNT’s appeal against the Canadian Final Judgment until GNT filed notice to act in person, since that firm made no application for funds to be withdrawn from the HK Account to pay for their services;

(2)  the costs of funding GNT’s participation in the initial stages of these proceedings, including instructing Messrs Stephenson Harwood and counsel in respect of the hearing on 26 May 2014, up to the first variation of the HK Mareva on 21 August 2015 that released HK$700,000 for legal costs from the HK Account (save apparently for the allowance of CAD19,000 originally provided for this purpose in the HK Mareva itself); and

(3)  the costs of conducting these proceedings from the time of the Court of Appeal hearing on 25 November 2016, including the leave applications made to the Court of Appeal and Court of Final Appeal against the decision in the Appeal Judgment, which for the part involving the Court of Appeal alone GNT’s solicitors estimated the costs would come to HK$320,000.

27.  When challenged on how GNT was able to fund the costs of conducting these proceedings in the initial stages, including instructing solicitors and counsel for the hearing on 26 May 2014, the response from GNT’s solicitors was that the “legal costs so far incurred were paid by our client’s shareholder for and on behalf of our client as loan to the company and our client’s shareholder is unable to fund these proceedings any further.”: letter from GNT’s solicitors to XY’s former solicitors dated 28 April 2015.

28.  According to the register of members of GNT, it has two shareholders: Ms Wang Zhaoyan (“Ms Wang”), holder of 500 share transferred to her on 30 September 2014 and Ms Zhu Qian, holder of 500 shares transferred to her on 16 April 2009.

29.  The aforementioned letter from GNT’s solicitors omits to say which of these two shareholders it is claimed had been funding GNT but was unable to do so any longer.  Presumably, however, it will be claimed it was Ms Wang since nothing at all has been heard from Ms Zhu Qian, which is unsurprising given that she is Jesse Zhu’s cousin.

30.  It is worth noting in this context that in her judgment in the Topsires Action, Fitzpatrick J (the judge that granted the Canadian Mareva) found that Jesse Zhu had a modus operandi of using companies with so-called “independent” ownership or control as a “mere guise to conceal [his] true ownership and control of such entities.”

31.  The alleged position as to the source of funding after the Court of Appeal hearing on 25 November 2016 is clearer in that the shareholder that has allegedly done so is at least identified.  It is Ms Wang, as affirmed by her in paragraph 17 of her 6^th Affirmation where she says she settled outstanding legal costs and paid costs on account by remittances on 18 April 2017 and 21 April 2017 “out of my own pocket”.

32.  Copies of the claimed remittance advices and WKT’s receipts have been produced.  However, all the amounts are redacted from these copies upon a claim of “privilege and confidentiality”.  I agree with XY that there is no proper basis for claiming privilege in relation to such gross amounts.

33.  For all one can tell from the redacted remittance advices and receipts, the amounts concerned could in total greatly exceed the costs subsequently incurred by GNT in these proceedings leaving a healthy balance on account available to fund GNT’s defence in the HK Enforcement Proceedings.  In short, GNT has not put forward “sufficient evidence”, when the burden of proof was on it, to show that it does not have other assets to meet the payment of legal costs.

34.  Further and in any event, assuming that Ms Wang was the shareholder who allegedly funded GNT in these proceedings in the initial stages until funds were released to it from the HK Account, there is no explanation as to how it is that she was able to recommence the funding in April 2017, having been unable to continue to do so from April 2015 according to GNT’s solicitors.

35.  In fact, no evidence has been adduced by GNT at all that Ms Wang had or has independent means that would account for her alleged ability to step in and fund GNT either before April 2015 or again in April 2017.  This aspect was put firmly in issue by XY in highlighting Ms Wang’s vague assertion in paragraph 29 of her 6^th Affirmation that she is “running out of personal funds”.  Nothing is said in her 7^th Affirmation in reply to clear up the mystery of the source of her alleged independent means or to explain why they were allegedly “running out”.

36.  In the absence of such evidence, this court is entitled to infer that Ms Wang did not actually have the necessary independent means to provide the funding concerned.  That begs the question of the source of that funding.  The obvious answer to that question is Jesse Zhu.

37.  Once it is inferred that Jesse Zhu has all along been the source of the funds to pay GNT’s legal costs when GNT did not have or ran out of funds to do so from the HK Account, there are reasonable grounds for concluding it can fund its legal costs in the HK Enforcement Action from the same source.

38.  As already noted, the consequence of the foregoing is that GNT’s Summons stands to be dismissed because the “fundamental principle” underlying the Mareva jurisdiction (that it is there to prevent a defendant from making the court’s orders less effective) prevails over the Proviso that permits frozen funds to be drawn on by a defendant to meet legal costs.  Put simply, the operation of the injunction would not impede GNT from defending itself against the plaintiff’s claim.

F.   Conclusion

39.  For the reasons set out above, GNT’s Summons is dismissed.

40.  Further, I order that the costs of GNT’s Summons be paid by the 2^nd defendant to the plaintiff, such costs are to be taxed if not agreed.

41.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

42.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.