PENTA-OCEAN CONSTRUCTION CO LTD v. TREASURE PROPERTIES LTD

HCA3717/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3717 OF 2003

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REASONS FOR RULING

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1. The plaintiff applied for the continuation of the Mareva injunction granted ex parte by order of Suffiad J on 20 February 2004, and varied inter partes by order of Reyes J on 27 February 2004. The plaintiff had also taken out a summons for ancillary disclosure. The defendant applied for discharge or variation of the injunction. Having heard argument, I allowed the defendant's application for discharge and dismissed the plaintiff's application for continuation and ancillary disclosure. I now give reasons.

2. The plaintiff is a building contractor. The defendant is the developer of houses forming part of the Greenfields development at Shatin. The parties had a contract for the plaintiff to build houses for the defendant. The plaintiff took possession of the works on about 20 January 1997, but by a letter from the architect dated 17 November 1998 the employment of the plaintiff was terminated.

3. Thereafter the parties went to arbitration but then they entered into a settlement agreement dated 23 August 2000. This provided for various payments by the defendant to the plaintiff and the charging of House W of the development as security. The defendant did not pay in terms of the agreement, nor did it create a charge in respect of House W.

4. On 30 April 2002 the parties entered into a second settlement agreement. This recited the admission by the defendant of its failure to comply with the terms of the first settlement agreement and in particular to pay $15,609,600.00 on 14 July 2001 and to arrange the charge of House W. It provided inter alia for the payment of $14,009,600.00 by 14 December 2002. But the defendant again only made minor payments. So by the Statement of Claim herein the plaintiff claims the sums of $767,733.59, $13,829,662.00, interest and costs.

5. The defendant's case is that the plaintiff was in repudiatory breaches of contract because of its failure to comply with Clause 8 of the first settlement agreement concerning rectification of water leakages and Clause 1.03 of the Specification of Waterproofing/Roofing in the original contract concerning a guarantee in the joint name of the plaintiff and its roofing and waterproofing contractor. The plaintiff however says that any such breach would only sound in damages and the water leakage defence has been manufactured by the defendant with a view to delaying or avoiding payment.

6. In February 2004 the plaintiff discovered from a newspaper report that the defendant had sold the remaining six houses in the Greenfields Development. It applied ex parte for a Mareva injunction, and on 20 February 2004 Suffiad J made an order prohibiting the defendant from removing from Hong Kong and dealing with so as to diminish the value of the defendant's assets up to the value of $14,597,395.59. The injunction extended inter alia to the proceeds of sale of the last six Greenfields houses, i.e. Houses A, B, J, P, K and L which the defendant was then in the course of selling.

7. On 27 February 2004 the summons came before Reyes J inter partes and an order was made on agreed terms varying the order of Suffiad J so as to permit the defendant to complete the sales of the six houses and certain carpark spaces, and to make repayment of existing mortgages and pay agent's fees. The summons was further adjourned to 5 March 2004 when it came before me.

8. The plaintiff must show that it has a good cause of action on which it has a good arguable case; that the defendant has assets within the jurisdiction; that there is a real risk of dissipation of assets; and that it has complied strictly with the duty of full and frank disclosure.

9. It is not in dispute that there the plaintiff has a good arguable case. As to the duty of full and frank disclosure, it is not in dispute that the plaintiff failed to disclose its status as a Japanese company; but given that it has been in Hong Kong for many years and apparently has adequate assets within the jurisdiction that would make little difference; if continuation of the injunction had been appropriate a fresh injunction could have been made subject if necessary to fortification of the undertaking.

10. What was mainly in dispute was the risk of dissipation of assets. The plaintiff relied in particular on the defendant's persistent failure to comply with the terms of the settlement agreements; its feeble excuse that it could not pay because of the "ongoing economic situation... and unexpected difficulties"; the sale of the houses; the failure to create a charge over House W as agreed and its sale without notice to the plaintiff; the failure to comply with provisions in the settlement agreements as to golf debentures; the late mention of water leakage as a ground for avoiding the settlement agreements (it was only advanced in the pleadings) and the weakness of that case in any event. The plaintiff argues that the defendant's behaviour constitutes solid evidence of risk of dissipation. In support of this is advanced the opinions in Gee, Mareva Injunctions and Anton Piller Relief, 4th Ed., 1998 at pp.195-196 and the case of Standard Chartered Securities Ltd v. Lai [1993] 1 HK 375.

11. The plaintiff originally adverted to the fact that evidence advanced by the defendant that the proceeds of sale of the six houses were required to pay off mortgages thereon was unsupported. It is true that the defendant's annual return for the year to March 2003 states that the total amount outstanding on all mortgages and charges was $22.9 million. However, this was explained by the defendant's director, Irons Sze, in his second affirmation. He said that the figure of $22.9 million was secured by a first mortgage; but the total sum actually outstanding was about $193 million. Of that, about $170 million was due to the bank from the defendant's parent company, Hang Tung Resources but had been secured by a second mortgage of the houses. The figure given in the annual return had come about because of misunderstanding of the reporting requirements.

12. It does not seem to be in dispute that the proceeds of sale of the houses are not in fact available to satisfy any judgment which the plaintiff may obtain. Nor does it seem to be in dispute that the sale transactions in respect of them were in the ordinary course of the defendant's business.

13. The defendant's argument is that the Mareva application was improper and abusive in that it was only made when the plaintiff knew that the houses were to be sold; it was aimed specifically at blocking the sales.

14. So far as the defendant's conduct goes, it is argued that this is indicative only of breach of agreement and the risk of dissipation cannot be inferred. Unlike the Standard Chartered Securities case there is no evidence of dishonesty and no evidence of previous dissipation; previous sales were in the course of business and the proceeds were used in payment of outstanding mortgages. There must be solid evidence of the risk of dissipation; see Ninemia Maritime Corporation v. Trave Schiffahrts GmbH & Co. KG (The Niedersachsen) [1983] 1 WLR 1412. While a pattern of evasiveness may be, in the words of Gee, "of assistance to the plaintiff" it is not necessarily sufficiently solid evidence. The proceeds of sale are not available to satisfy any judgment which the plaintiff may obtain, there is nothing on which the Mareva injunction can bite.

15. It is true that the defendant's behaviour is that of an evasive debtor; it made but did not honour settlement agreements and it produced a defence in its pleadings which had not been advanced before. This kind of behaviour is very common but it does not go so far as to indicate either past dissipation or obvious dishonesty. In fact it seems that steps were in fact taken by the plaintiff to rectify water leakage so the defence is probably not without foundation.

16. Even if the defendant has not got much of a case at the end of the day, per Kerr LJ in The Niedersachsen at 1422C, the Mareva jurisdiction cannot be invoked for the purpose of providing plaintiffs with security for claims, even where these appear likely to succeed. The real question is whether there is indeed solid evidence of the risk of dissipation.

17. It is true that the defendant is a "vehicle" company, but it is the vehicle of a substantial group, the Hang Tung Group. It is not some kind of offshore company, obviously set up to assist its owners in evading liability.

18. It seemed to me that once it was established that payments made by the defendant were made by it in the ordinary course of business and in satisfaction of indebtedness to a bank it could not be found that there had been any past dissipation. The defendant's conduct in this case while indicating an unwillingness to pay the debt does not go so far as to infer that there is a real risk of future dissipation of assets; and there is a colourable defence. There is no evidence of any such conduct in respect of other creditors. The fact that the assets which the plaintiff sought to secure, by the injunction, would not in any event be subject to the injunction is also relevant to the question of future risk. Because of all these factors I was not satisfied that there was a real risk of dissipation of assets. Realistically, once the question of the proceeds of sale of the houses had been disposed of the injunction would be in place to provide security for the plaintiff's claims rather than against the risk of dissipation.