XCHRX LA MODE, INC. v. WANG TAI ENTERPRISE (INTERNATIONAL)DEVELOPMENT LTD. AND OTHERS

HCA 1290/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1290 OF 2001

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DECISION ON INJUNCTION

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1. This is the Plaintiff's application for the continuation of a Mareva injunction granted ex parte on 10 August 2001 and the 3rd Defendant's application for its discharge. The writ in this action was issued in March 2001. At the time the action was against the 1st and 2nd Defendants only. That action was based on a judgment entered apparently in default against the 1st and 2nd Defendants by the US District Court of the Northern Marianna Islands in January 2001.

2. The case on the Statement of Claim originally was simply that the 1st Defendant (which is a Hong Kong company controlled by the 2nd Defendant) had failed to construct a factory in Saipan in accordance with approved plans and within time. After the issue of the Writ against the 1st and 2nd Defendants in Hong Kong on 21 March 2001, a Mareva injunction was obtained against them on 23 March 2001. Pursuant to an order granted on that day, the 2nd Defendant filed an affirmation disclosing the assets of the 1st and 2nd Defendants in April 2001.

3. Four months later, however, the Plaintiff applied to amend the Writ to join the 3rd Defendant as a defendant and for an ex parte Mareva injunction against the 3rd Defendant, a company in Hong Kong. The case against the 3rd Defendant as shown in the amended Statement of Claim was that it was in a conspiracy with the 1st and 2nd Defendants to injure the Plaintiff. It has been alleged that the Plaintiff paid the 1st Defendant some US$1.08m for the design and the construction of a factory in Saipan and that between February 1998 and April 1999, 14 payments totalling HK$3.6m approximately were apparently made by the 1st Defendant to the 3rd Defendant purportedly as payment for construction materials supplied by the 3rd Defendant for the Saipan project.

4. By way of evidence in support in the Plaintiff's affidavits, there has been exhibited invoices chopped with a chop purporting to be that of the 3rd Defendant although Mr Chan, counsel for the 3rd Defendant, says that on a close examination the chop does not appear to be the same as that used by the 3rd Defendant in some other invoices that it had issued to unrelated parties.

5. The Plaintiff has also exhibited statements of account showing "payment by cheque" (although unspecified) on 14 occasions. Such statements of account have been purportedly issued by the 3rd Defendant to the 1st Defendant.

6. The Plaintiff's case is that these invoices and statements of account were disclosed by the 1st Defendant in the proceedings in Saipan, and it is the Plaintiff's case that the items in the invoices were not shipped or were not required for the Saipan project. Further or alternatively, the 1st and/or 2nd Defendants, it is said, have disposed of or transferred their profits, income or assets to the 3rd Defendant and others for their holding, use or benefit. However, no particulars of such dispositions or transfers have been given.

7. The 3rd Defendant, on the face of the company returns, is a company controlled by two brothers of the 2nd Defendant's wife. Of these two brothers, one Mr Danny Lee Shu Yan is the controlling shareholder holding 99% of the shares. The 3rd Defendant has by Mr Danny Lee filed an affirmation alleging that the 3rd Defendant had nothing to do with the Saipan project, that the invoices had not been issued by it, that the statements of account had not been issued by it and the 3rd Defendant had never received any payment from the 1st Defendant. The 3rd Defendant has exhibited statements of what it says is its only bank account, being a bank account in the Dao Heng Bank, showing that all receipts can be accounted for as receipts for invoices that it had issued for hats manufactured by a company called Interhats which is owned by the brothers. It has also said that none of the 14 payments can be traced into the Dao Heng Bank account.

8. The 3rd Defendant therefore says that it can be shown clearly that it has never received the $3.6m or any part thereof, and it has also exhibited audited accounts showing that its auditors have also taken the Dao Heng Bank to be the sole bank account of the 3rd Defendant.

9. The issues joined between the parties at the hearing are as follows:

1) whether the Plaintiff has shown a good arguable case for the grant of a Mareva injunction;

2) whether the Plaintiff has shown that there is a real risk of dissipation;

3) whether the ex parte injunction should be discharged because the Plaintiff (which is a foreign corporation) had failed to disclose that its only asset in Hong Kong, being its subsidiary company by the name of Le Mode Far East Limited, had a petition for winding up presented against it on the basis of a Labour Tribunal award; and

4) whether there has been such delay that the Plaintiff should not be granted the remedy of a Mareva injunction.

10. First, I shall deal with whether the Plaintiff has shown a good arguable case.

11. The required standard of a good arguable case has been described in the leading case of The Niedersachsen [1983] 2 C.A. 600 as something between "barely capable of serious argument" and "more than 50%". On the face of the invoices and the statements of account, they show that the 1st Defendant had paid approximately HK$3.6m to the 3rd Defendant. Although there is nothing to show to whom the cheques had been written or into whose bank account the money had been paid, one reasonably assumes that when invoices are issued by a particular company, that would be the company in whose favour cheques would be written and money would be paid, in the absence of anything else shown. If the 3rd Defendant had nothing to do with the issue of those invoices and statements of account, one wonders why its name was chosen for these false documents. No explanation has been offered by the 3rd Defendant as to why the 1st Defendant, a company run by a brother-in-law the 2nd Defendant, would implicate it in this way. As far as the 1st and 2nd Defendants are concerned, their position as stated by their solicitors in correspondence is that they had not forged any documents.

12. It is not for this court at this stage to determine conflicts of evidence as to who had issued those invoices and statements of account and to whom payments were made (see Derby v Weldon [1990] Ch 48). As for the 3rd Defendant's point that none of the money could be traced into its Dao Heng Bank account, that assumes that that is indeed its only bank account anywhere in the world. Further, Mr Chan, counsel for the 3rd Defendant, has accepted in the course of submissions that cheques written in favour of the 3rd Defendant if endorsed by it would not find their way into the Dao Heng Bank account.

13. In my view, given the invoices and the statements of account which show on their face that invoices had been issued by the 3rd Defendant and that payments had been made, the Plaintiff has shown a sufficiently good arguable case for the purposes of a Mareva injunction. Once that standard is reached, the court would not consider fine points of merits, see the Court of Appeal's decision in Wah Nam [2000] 3 HKC 118.

14. I then turn to the issue of real risk of dissipation. There has been no or no adequate evidence that there is a real risk of dissipation by the 3rd Defendant. By that I mean that there is no or no adequate evidence that the 3rd Defendant is likely to remove any assets away from Hong Kong or use them in such a way as to avoid execution should judgment be granted against it in the future.

15. The 3rd Defendant has been operating for some 10 years and it holds a residential property which is the residence of its controlling shareholder, Mr Danny Lee. That property has been charged to provide banking facilities to Interhats and it is also the subject matter of an instalment loan. Interhats has been carrying on business since 1989.

16. In support of its suggestion that there is a real risk of dissipation, the Plaintiff could only say that Mr Lee is the brother-in-law of the 2nd Defendant, that both companies have offices (although in different rooms) on the same floor of a building and that Interhats has been listed as an "affiliated" company in the name card of the 2nd Defendant's son.

17. In my view, however, it is not adequate evidence that the 3rd Defendant is controlled by or is the alter ego of the 1st and/or 2nd Defendants or was its or his trustee. By way of example, there is no evidence that the 1st or 2nd Defendants had even had a hand in the 3rd Defendant's business or was an authorised signatory of the 3rd Defendant's bank account, and certainly there is no evidence that the 3rd Defendant had been dealing with its property in any way other than in the usual course of its business. In my view, in the absence of any adequate evidence that there is a real risk of dissipation by the 3rd Defendant, I would discharge the injunction and I would refuse to continue the Mareva injunction.

18. Third, is the issue of material non-disclosure. I find that the fact that the Plaintiff did not disclose that its subsidiary in Hong Kong was at the receiving end of a winding up petition is not material non-disclosure. The fact that the Plaintiff is a foreign company is clear from its name and from the evidence in support of the Mareva injunction. Of course, that might give rise to an application for security for costs but that is not equivalent to saying that the Plaintiff had to disclose what assets it had in Hong Kong and the state of those assets when otherwise it own financial position appear to be healthy. This is different from the Wah Nam case where the plaintiff's disclosure to the ex parte judge of its financial position was necessary because of the parlous state of its finances and it was necessary so that the ex parte judge could consider for himself whether to grant the injunction with a cross undertaking disclosed as being risky.

19. Fourth, there is the issue of delay. This is quite apart from the lack of evidence that there is a real risk of dissipation. I am concerned with the delay in the application for the Mareva injunction in this case. On the Plaintiff's own evidence, it had known for 11/2 years that the invoices were false in that it says the goods had not been shipped or that the goods were not for the Saipan project. However, no steps were taken against the 3rd Defendant. It was not sued in the US District Court.

20. The Plaintiff sought to explain the delay by saying that it was only in April 2001 that it realised that the 1st and 2nd Defendants had no assets. Even then, however, it waited for another 4 months before applying for an ex parte Mareva injunction against the 3rd Defendant. No explanation has been offered for this delay of 4 months.

21. The Mareva injunction and the Anton Pillor order have been described quite often as two of the most lethal weapons in the law's arsenal. The court should be very cautious when deploying these weapons and they should be deployed only when the facts of the case warrant it. They should not be used casually in aid of a plaintiff who had chosen to sit on his hands for a substantial period of time when the facts which it now says show a conspiracy were known to it. I am not saying that the Plaintiff cannot proceed with an action against the 3rd Defendant but, in my view, as I have said, this delay causes me very great concern.

22. In view of the matters set out above, I would discharge the ex parte order granted on the 10 August 2001 and I would dismiss the Plaintiff's summons for the injunction.