CENTURY FIRST INVESTMENTS LTD. and Others v. LUNG PING and Others

IN THE COURT OF APPEAL

1995, No. 217
(Civil)

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J U D G M E N T

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Liu, J.A.:

1. Injunctions were discharged by Mr Justice Yam against all three defendants. The 1st and the 2nd defendants were represented before the judge. The third defendant company was not represented. We have the same situation before us in this court to which the plaintiffs take the determination of the Mr Justice Yam on appeal. The presentation of the plaintiff's case before the judge, we are told, took eight days. It is unsurprising that the real issue seemed to have been lost in the colossal mass of evidence.

2. The facts of the case are not really complicated. The background of this case is, in outline, this. There was a scheme on foot to enter into a joint venture development with a Shanghai enterprise, a Shanghai pharmaceutical establishment that has been shortly described as SPI or SPA. The third defendant was to be used as the joint venture vehicle into which funds were to be poured by the three plaintiff companies. The personalities negotiating the joint venture from the Hong Kong side were Mr Cheng Ping Fui and the 1st defendant, Madam Lung. The first plaintiff was owned by the 3rd plaintiff and some Taiwanese investors, one of whom held shares through his British Virgin Island company. The 2nd plaintiff was a company wholly owned by Mr Cheng Ping Fui and his cohabitant in Taiwan, Madam Ho. The 3rd plaintiff was owned and controlled by the 2nd plaintiff and two other Taiwanese gentlemen. Mr Cheng Ping Fui could wield power in the 2nd and 3rd plaintiffs but he had a relatively small voice in the 1st plaintiff. In the 2nd plaintiff, Mr Cheng's Taiwanese cohabitant held the other minority shares. In the 1st and 3rd plaintiffs, there were Taiwan interests. In short, apart from Mr Cheng's personal interests, all three plaintiff companies had other shareholders. It was agreed verbally, and the agreement was evidenced partly in writing, that the issued capital of the 3rd defendant was to be increased from 10,000 shares to 100,000 shares. Madam Lo, the first defendant and one Mr Lu were the original shareholders and directors of the 3rd defendant company. Mr Lu had resigned by the time of the joint venture negotiation between Mr Cheng and the 1st defendant. The 3rd defendant was to comprise the three plaintiffs and Madam Lung, the 1st defendant. It was decided that the 1st plaintiff was to be issued 49,000 shares, the 2nd plaintiff 7,000 shares, the 3rd plaintiff 14,000 shares and 1st defendant 20,000 shares. There had been a switch in the shareholdings of the 2nd plaintiff and the 3rd plaintiff. The distribution of issued shares was allegedly modified. The 1st defendant came out eventually subscribing to 69,000 shares in the 3rd defendant company taking over, in the process, the 49,000 shares intended for the 1st plaintiff. It was a maneuver to minimise the Taiwanese influence on the alleged instructions of Mr Cheng. That is a matter in dispute.

3. In the main, allegations of conspiracy and acts in furtherance thereof were made against the 1st and 2nd defendants. After the joint venture agreement, $2m was deposited into the 3rd defendant's Hong Kong accounts and US$1.9m was transmitted to its Shanghai accounts as proof of financial strength. These accounts were earmarked for the joint venture. It is alleged that the 1st defendant by herself, with the 2nd defendant and through the 3rd defendant had misconducted herself. These allegations are strongly refuted by the 1st defendant. It can be seen from documents that the significant Taiwanese investors were ousted, different share allotments were returned and the 2nd defendant joined as a director of the 3rd defendant. Save for the 2nd defendant's directorship, the 1st defendant claims that all steps taken and business transacted had been with the consent and knowledge of Mr Cheng Ping Fui with whom she had an amorous relationship. Out of the US$1.9m, four flats were purchased in an area in Guangzhou City called the Lai Wan City. These flats were acquired in the name of the 3rd defendant. The 1st defendant purchased a flat in Tung Shan Terrace and had it decorated. A sum of US$800,000 was paid to Zhi Hong which was associated with a prior joint venture agreement involving at one time the 3rd defendant. Some HK$330,000 had been paid as "entertainment expenses". The rest of the US$1.9m went into transactions involving payment of credit card bills etc. These items of expenditure almost exhausted the US$1.9m sent from Hong Kong to Shanghai, being the bulk of the contributions to the joint venture by the three companies. Some US$20,000 is said to remain in Shanghai.

4. Madam Lung, the 1st defendant explained to the judge in affirmation evidence that it was Mr Cheng Ping Fui who proposed not to leave the US$1.9m lying idle. The scheme was to place it on a time deposit which in turn would be pledged with the bank to secure overdraft facilities in favour of the 3rd defendant company. According to the 1st defendant, Mr Cheng "did not wish the Taiwanese Investor to know". The contrivance was such as would enable the 3rd defendant company, as directed by the 1st defendant and acquiesced in by Mr Cheng, to use the overdraft facilities for short-term investments in the Lai Wan City property purchases and also for the daily running of the 3rd defendant company. It transpired that the banking facilities drawn down were not for the daily running of the 3rd defendant company but for, inter alia, acquiring four flats in the Lai Wan City. There were other items of expenditure unconnected with the joint venture. A deception was thus practised on the others, including the plaintiff companies. To recapitulate: (1) There was the HK$5m or so sunk into the purchase of the four flats in Lai Wan City. (2) HK$2m was paid to the 1st defendant as salary in advance. It is claimed that this amount was used to purchase her Tung Shan Terrace residence. An amount was spent on decoration. (3) Some US$800,000 was paid for the Sino Foreign Joint Venture through Zhi Hong. (4) There was a sum of HK$330,000 for entertaining expenses. Lastly, (5) the rest was used to pay credit card bills and some other items, amounting to approximately HK$1m. There was US$20,000 left. A Mareva injunction with a ceiling of US$1.9m and extra-territorial effect was obtained from the ex parte judge against the 1st and 3rd defendants. Injunction orders were also granted against all the defendants for tracing assets representing this amount. Directors of the 3rd defendant were restrained from effecting share transfers. There were orders for discovery and preservation of documents. The defendants came before Mr Justice Yam who found the plaintiffs, in the prevaricating versions given by Mr Cheng, guilty of material non-disclosures. The judge discharged the injunctions and declined to regrant them on the ground that the evidence adduced by the plaintiffs was not cogent enough to support a "strong prima facie case of fraud". The moneys in the Hong Kong accounts of the 3rd defendant were retrieved by Mr Cheng. It is the US$1.9m in Shanghai that was not returned when the plaintiffs decided to withdraw from the joint venture in January 1995. This is the plaintiffs' appeal from the order of Yam, J.

5. To begin with, I would set out the two basic principles pertinent to this appeal. In Barclays Bank v. Quistclose, [1990] AC 567 at p. 581E to 582B, it was held that an advance earmarked for a specific purpose would constitute, after it is put to use as intended, a debt recoverable by the lender. If the specific purpose is not carried out, then the amount would be held on a resulting trust for the lender. The second principle is Brink's Mat Ltd. v. Elcombe, [1988] 1 WLR 1350. At p. 1357 C/D, Lord Justice Ralph Gibson had this to say:

"Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application."

6. In view of the concession made by Mr Pow on behalf of the 1st defendant with which the 2nd defendant through his counsel associates, it is quite unnecessary for me to deal specifically with the Grounds of Appeal. Suffice it to say that the issue before us is whether there was any non-disclosure material to the issue on which the ex parte application for injunctions was sought to be grounded. In this appeal, no point is taken by counsel for the 1st and 2nd defendants on "good arguable case", "risk of dissipation" and the consequential balance of convenience. It is, however, contended that Mr Justice Yam was less than impressed by Mr Cheng Ping Fui's affirmation evidence. That would go to credibility which is a matter to be decided at the trial.

7. The central events as given in the affirmation evidence by and on behalf of 1st and the other defendants are telling. It is a case of deliberate deception practised on the limited companies, involving misuse of their funds. It is also reasonably clear that the plaintiff companies could not be bound by the activities in which Mr Cheng is alleged to have indulged. Against this background, this court has to consider whether any of the non-disclosures complained of can be said to be material to the issue before Mr Justice Yam and the ex parte judge.

8. At pp. 6 & 7 of his judgment, Mr Justice Yam set out six non-disclosures which he regarded as material. The judge relied on their cumulative effect. These so-called non-disclosures are:

"(1) Cheng did not disclose to the ex parte judge that in the O. 14 proceedings in the first action (HCA No.A2372/95), he had sworn an affirmation confirming the truth of the content(s) of the Statement of Claim. This Statement of Claim is now said by him to contain a number of important factual errors.

(2) Cheng failed to disclose to the ex parte judge the amount and the extent of inconsistencies existing between the Statement of Claim in the first action and in the second action.

(3) Cheng did not disclose to the judge the fact that the O.14 proceedings in the first action were withdrawn by the Plaintiff and the 1st Defendant was preparing to strike out the Statement of Claim in the first action.

(4) Cheng said that the 1st Defendant on 2 September 1994, faxed the copy of the joint venture agreement to him and he did not have any knowledge of the signing of the joint venture agreement on 2 or 3 September 1994. He said he was not present at the signing of the agreement in Shanghai. But at that material time, it turned out to be a fact (which he did not deny) that he and the 1st Defendant were in Shanghai staying in the same hotel room together. Although Cheng still denied that he was present while the actual signing of the agreements occurred or any knowledge of the same before hand, this must have cast a lot of doubt on his original version. At least at this stage the fact that he was with the 1st Defendant at that material period, sharing the same room and they flew back to Hong Kong in the same plane must be material non-disclosure in the circumstances of this case.

(5) Cheng said according to his information as at 8 March 1995, the balance of US$20,000 odd remaining in the 3rd Defendant in Shanghai on 20 February 1995 had been completely withdrawn. This was meant to impute that the 1st Defendant is a fraudster. The evidence produced by the 1st Defendant was that this amount was still intact in the Shanghai account.

(6) Cheng initially put forward the case that he did not know the 1st Defendant's residence. This was meant to impute that the 1st Defendant might abscond or disappear at any time. After the 1st Defendant said that Cheng, in fact, knew and had been at her residence three or four times and stayed overnight about two times, Cheng eventually agreed that he had been there but said that he had forgotten about the exact address and he was told by the 1st Defendant that it was her father's property."

(4) and (5) have been conceded by Mr Pow, counsel for the 1st defendant, as matters not amounting to non-disclosure for the purposes of a Mareva application. Counsel is prepared to accept that these would merely set a false or misleading scenario. The matters as specified by the judge would require no further elaboration. None of these so-called non-disclosures 1, 2, 3 and 6 is material to the issue which the ex parte judge or Yam, J had to consider as to whether the injunctions applied for should be granted or continued. . After the plaintiffs withdrew from the joint venture, the US$1.9m remitted to Shanghai was clearly caught by the principle stated in Barclays Bank v. Quistclose. These funds admittedly used other than for the joint venture must be, on the central events as given by the 1st defendant, held on a resulting trust in favour of the plaintiff companies. To the 1st defendant, the orchestrated release of US$1.9m earmarked for the joint venture was unauthorised as Mr Cheng Ping Fui, so the 1st defendant asserts, was seeking to conceal these activities from the Taiwanese investors. The interests of these investors were substantially represented in the plaintiff companies. Such use as was made of this US$1.9m could not therefore have been sanctioned by the plaintiff companies to which the sum must be returned. On the version given by the 1st defendant, the manner in which the US$1.9m was said to have been diverted from the joint venture would render the defendants accountable to the plaintiffs under the principle in Barclays Bank v. Quistclose. Therefore the so-called non-disclosures relied upon by the judge are not matters which bear upon the central issue which the court had to decide in considering as to whether or not to grant or continue the injunctions. The other considerations for granting the injunctions are not argued.

9. In the circumstances, balance of convenience clearly lies in favour of the plaintiffs. The bulk of evidence in the number of files placed before the judge must have contributed to his difficulty in identifying the real issue. In my judgment, the injunctions should not have been discharged. For these reasons, the ex parte order granted by the ex parte judge ought to be restored but perhaps on terms to be considered by this court after we have heard further submissions from counsel. I would therefore allow the appeal and would, subject to what counsel have to say, order costs of this appeal in favour of the plaintiffs against the 1st and 2nd defendants.

Ching, J.A. :

10. I agree that this appeal is to be allowed. Whatever disputes there may be as to detail it is accepted that the Plaintiffs lent the 3rd Defendant over US$2m. The plaintiffs claim that it was for use in a joint venture and that a vast majority of it has been used for other purposes by the 1st and 2nd Defendants. The Defendants say that some of it has been used for the joint venture but however that may be, the loan would be repayable upon demand especially if, as the Plaintiffs allege, their participation in the joint venture has fallen through.

11. It is accepted by the 1st and 2nd Defendants that but for the alleged failure to make full and frank disclosure at the ex parte stage as found by the judge below the injunction must issue. The non-disclosures as found were those of a Mr. Cheng, a director of the 2nd Plaintiff and indirectly a shareholder of the 1st and 3rd Plaintiffs. The main subject of the alleged non-disclosures was his relationship with the 1st Defendant and the allegation, which he denied, of having authorised her to use the money for purposes other than that of the joint venture without telling the other shareholders and directors. It suffices to say that if, as the 1st Defendant alleges, Mr. Cheng acted as alleged his acts were contrary to the interests of the 3rd Defendant. His knowledge cannot be imputed to the Plaintiffs and so non-disclosure of them cannot be laid at their door. In my view the other alleged non-disclosures were not such as would require that the injunction should not be continued or should be discharged. I would therefore allow this appeal.

Godfrey, J.A. :

12. I agree.

13. The plaintiffs advanced to the 3rd defendant something over US$2m for the purposes of a joint venture in China to be carried out by the 3rd defendant and a Chinese partner. The 3rd defendant is now controlled by the 1st defendant and the 2nd defendant, who both accept that much of the money has been applied for other purposes. This was, prima facie, a misapplication of the plaintiffs' money; but the 1st defendant and the 2nd defendant say that this was authorised by one Cheng Ping-fui (a shareholder in the 2nd plaintiff and a director of the 2nd plaintiff and the 3rd plaintiff) acting for the plaintiffs. Mr. Cheng denies that he authorised these misapplications of the 3rd defendant's money; and the plaintiffs deny, in any event, his authority to authorise the misapplications. These matters will have to be investigated at the trial of the action, but in the meantime the plaintiffs sought interlocutory relief in the form of Mareva injunctions against the 1st and the 2nd defendants. On 22 May 1995 Jerome Chan, J. granted such injunctions.

14. On 4 October 1995, Yam, J. discharged the injunctions, on the ground of "material non-disclosure" by the plaintiffs. The plaintiffs now appeal, asking that the injunctions be continued. The defendants accept that, but for the alleged "material non-disclosure", it would have been right for the judge to continue the injunctions, for, on the facts alleged, the 1st defendant and the 2nd defendant, being responsible for the misapplication of the plaintiffs' money, would have been liable to account to the plaintiffs as constructive trustees.

15. Before this present action was commenced, the plaintiffs had brought another action raising similar issues to those in this action and had launched an application for summary judgment in that action; but the application was not pursued and the action was discontinued. These matters were not mentioned in the evidence in support of the plaintiffs' application for Mareva injunctions.

16. Allegations of "material non-disclosure" are frequently made by defendants seeking the discharge, or non-continuance, of injunctions in the Mareva form. Certainly, it is the duty of an applicant for interlocutory relief, most especially an applicant for ex parte interlocutory relief, not to mislead the court, for example (it is only an example), by failing to disclose something which would be material to the disposition of the application. If an applicant for interlocutory relief has misled the court, an injunction granted to him in those circumstances will be discharged (though in some cases a further injunction may be re-imposed).

17. In the present case, the judge, after referring to the fact (which had not been disclosed in the plaintiffs' evidence) that Mr. Cheng and the 1st defendant had been on intimate terms, referred to the "material non-disclosures" upon which he relied for discharging the injunctions; these have been set out in the judgment of my Lord, Liu, J.A.

18. But it seems to me that all these alleged "non-disclosures" go to the credibility of Mr. Cheng, rather than to any issue which the judge had to decide in considering whether or not to grant the injunctions. For my part, I do not think that these are "material non-disclosures" which ought to have affected his judgment. Matters which go to Mr. Cheng's credibility will fall to be dealt with by the trial judge. Mr. Cheng's credibility cannot be assessed by a judge hearing an interlocutory application on affidavit evidence alone.

19. For these reasons, I disagree with the judge. I do not think this case exhibits any "material non-disclosure" on the part of the plaintiffs. I see no good reason why the injunctions granted by Jerome Chan, J. ought not to be continued and therefore I too would allow the appeal.