TIONG KING SING v. SAM BOON PENG YEE AND ANOTHER

HCA 1517/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1517 OF 2011

____________

BETWEEN

____________

____________

D E C I S I O N

____________

1.  The plaintiff applies for a Mareva injunction against the defendants.

2.  The plaintiff issued a summons on 10 January 2012 for a Mareva injunction with an alternative relief requiring the 1st defendant to make certain payment into court pursuant to an agreement for the sale and purchase of shares of a company W International Group Limited (formerly called “Wijaya International Investment Limited”) (“W International”).

3.  I granted an interim order on 13 January 2012 requiring the 1st and/or 2nd defendant to pay RMB45 million on or before 20 January 2012 into a designated bank account as may be agreed by the parties.  I also granted an interim injunction against the 1st and 2nd defendants from disposing of or encumbering the shares of W International or its mainland subsidiary Chongqing Wijaya Realty Limited (“Chongqing Wijaya”) (later named Chongqing Whittier Homes Limited).  I further required the defendants to inform the plaintiff’s solicitors on a weekly basis of the sale, disposal or encumbrance of units and landed properties of a development project in the Ba Nan District in Chongqing, China (“the Ba Nan Project”) which is owned by Chongqing Wijaya.  The order was to last until 2 March 2012 when the application was to be fully argued after filing of evidence.  I extended the order on 2 March until further order.

The statement of claim

4.  The plaintiff has filed a statement of claim on 30 September 2011.  He pleaded that he is a Malaysian citizen.  He used to own all the shares of W International.  This company owns the entire issued and paid up capital of Chongqing Wijaya.  Chongqing Wijaya is the developer of the Ba Nan Project.  Chongqing Wijaya owns the land use rights on several plots of land in the Ba Nan District on which the project is developed.

5.  The 1st defendant was employed as the general manager of Chongqing Wijaya from September 2009 onwards.  The 2nd defendant is owned by the 1st defendant and is used as his nominee in purchasing the shares of W International from the plaintiff. 

6.  By an offer letter dated 14 December 2009, the plaintiff offered to sell all the shares of W International (“the sale shares”) to the 1st defendant for RMB300 million.  The offer was accepted by the 1st defendant.  The plaintiff and the 1st defendant then entered into a formal sale and purchase of shares agreement dated 30 December 2009.  Under this agreement, the purchase price was increased to RMB333.5 million and was payable in 7 instalments as follows:

(a)  RMB30,000,000 payable on the Completion Date (as defined in the Formal Agreement);

(b)  RMB20,000,000 payable on or before 8 March 2010;

(c)  RMB33,500,000 payable on or before 15 June 2010;

(d)  RMB50,000,000 payable on or before 20 December 2010;

(e)  RMB50,000,000 payable on or before 20 May 2011;

(f)  RMB50,000,000 payable on or before 1 September 2011; and

(g)  RMB100,000,000 payable on or before 1 March 2012.

7.  The plaintiff, the two defendants and the 1st defendant’s solicitors also entered into a custodian agreement dated 30 December 2009 whereby they agreed that the new share certificate for the sale shares to be issued by W International to the 2nd defendant pursuant to the formal sale and purchase agreement would be held by the solicitors as custodian pending the joint instruction of the plaintiff and 1st defendant for its release.

8.  The plaintiff also executed a deed of tax indemnity dated 30 December 2009 in favour of the defendants. 

9.  It is the plaintiff’s case that the terms of the sale and purchase agreement are contained in the offer letter, the formal agreement, the custodian agreement and the deed of tax indemnity (para 14 of the statement of claim).  The defendants dispute this.  They say that the offer letter is no part of the terms of the sale and purchase (para 13 of the defence). 

10.  The 1st defendant paid the plaintiff the 1st, 2nd and 3rd instalments.

11.  The plaintiff through his representative Wong Aik Loung (“Wong”) and the 1st defendant then entered into a variation agreement dated 22 January 2011.  This agreement rescheduled the remaining four instalments totalling RMB250 million and provided for the payment of a further RMB300 million to the plaintiff as profit of the development.

12.  These payments were rescheduled again by a 2nd variation agreement made between Wong on behalf of the plaintiff and the 1st defendant and dated 27 March 2011.  The balance of purchase price of RMB250 million is to be paid in three installments and the profit of RMB300 million in six installments as follows (A2/353-357)”

Balance of purchase price

1.  A sum of RMB100 million shall be paid before 15 February 2012

2.  A sum of RMB100 million shall be paid before 15 February 2013

3.  A sum of RMB50 million shall be paid before 15 February 2014

Profit

1.  A sum of RMB50 million shall be paid on or before 15 July 2011

2.  A sum of RMB50 million shall be paid on or before 15 January 2012

3.  A sum of RMB50 million shall be paid on or before 15 July 2012

4.  A sum of RMB50 million shall be paid on or before 15 January 2013

5.  A sum of RMB50 million shall be paid on or before 15 July 2013

6.  A sum of RMB50 million shall be paid on or before 15 January 2014

13.  Regarding the profit to be shared, the 2nd variation agreement also provided that the on the basis that the Ba Nan Project could produce a profit of RMB600 million, the parties on 25 March 2011 agreed after discussion that RMB300 million of it would be distributed to the plaintiff in six installments of twice a year (clause B); and the amount of payment should be according to the profit of the company for the current year according to the annual accounting report filed with and approved by the Taxation Bureau (clause E).

14.  Wong was also authorised by the two variation agreements to inspect the current accounts of W International on behalf of the plaintiff. 

15.  The plaintiff then pleaded various breaches of the terms of the sale and purchase agreement allegedly committed by the 1st defendant.  The plaintiff pleaded that the 1st defendant had refused inspection of the accounts of W International by Wong.  He had wrongfully transferred the sale shares to the 2nd defendant on 5 January 2010.

16.  He obtained a loan of RMB30 million at an unusually high interest rate of 42.58% per annum on 19 May 2010 by pledging 40% of the sale shares.  He further procured Chongqing Wijaya to apply in conjunction with the builder of the development Chongqing Yiping Construction Group Company Limited (“Yiping”) to a bank for a loan of RMB77 million on 24 May 2010.  The loan was secured by the mortgage of the land use rights of Chongqing Wijaya and Yiping. 

17.  He procured Chongqing Wijaya to enter into a contract with Yiping also dated 19 May 2010 and agreed to pay Yiping a high rate of construction costs contrary to the usual custom and norm of trade in the area which would result in paying RMB200 million more to Yiping. 

18.  He caused Chongqing Wijaya to be indebted in RMB127 million to others despite the company’s income being at RMB283 million.  Part of a debt at RMB90 million was secured by a pledge of 80% of the sale shares.

19.  He also caused Chongqing Wijaya to be indebted to Yiping the builder which resulted in substantial delay in the development.

20.  He also used funds of Chongqing Wijaya to purchase a piece of land in Guangdong province.

21.  He had therefore encumbered the assets of W International and diverted the funds of W International and Chongqing Wijaya to his project in Guangdong province.  He thereby denuded W International and Chongqing Wijaya of their resources and encumbered the land use rights and the sale shares which should have been held by the custodian without encumbrance.  He also thereby diluted the value of the sale shares.  He also failed to pay the plaintiff the purchase price or profit according to the schedule of payments in the 2nd variation agreement.

22.  The plaintiff’s solicitors then issued a letter dated 5 July 2011 (B. 350-351) which purported to accept the 1st defendant’s repudiation of the sale and purchase agreement.  The letter cited the following as grounds of breaches of agreement:

(i)  raising loans totalling at least RMB127 million by mortgaging some of the landed properties of the Ba Nan Project to third parties contrary to the offer letter and the use of the loan or part of it as purchase price for the sale shares.  The offer letter prohibited encumbrance to be created on the Ba Nan Project until after full payment of purchase price;

(ii)  transferring the sale shares to the 2^nd defendant contrary to the offer letter; and

(iii)  refusing access and inspection by the plaintiff’s or his representatives of the books and accounts of W International and Chongqing Wijaya.

The plaintiff’s solicitors also demanded in the letter the return of the sale shares to the plaintiff, inspection of the books and accounts of W International and the Ba Nan Project, and full settlement of all loans and discharge of all mortgages. 

23.  The plaintiff also had a misrepresentation claim against the 1st defendant.  He pleaded that the 1st defendant had represented to him that the 1st defendant had resources to pay him the RMB333.5 million revised purchase price for the sale shares and to defray at least 30% of the construction costs of Phase I of the project without encumbering the sale shares or the assets of Chongqing Wijaya.  He was induced by these representations to enter into the formal agreement and the custodian agreement.  But these representations were false as the 1st defendant intended to and did encumber the sale shares and the assets of Chongqing Wijaya.

The defence and counterclaim

24.  The defendants in their defence dated 28 October 2011 denied of having refused inspection of accounts by Wong, but admitted the refusal to allow him to make copies of the documents. 

25.  Regarding the transfer of the sale shares to the 2nd defendant, they relied on the terms in the formal agreement and documents signed by the plaintiff which effected the transfer of the sale shares to the 2nd defendant.  They also said that the shares certificates of the sale shares issued to the 2nd defendant were still held by the custodian.

26.  Regarding the RMB30 million loan, they pleaded that it had been repaid.  They also denied that pledging the land use right or the sale shares to secure the RMB77 million loan (with only RMB50 million outstanding) was a breach of the terms of sale and purchase.

27.  Regarding the building contract with Yiping dated 19 May 2010, they did not admit that the rate of costs was high and contrary to the custom and norm of trade or would result in paying Yiping an extra RMB200 million.  They further pleaded that Chongqing Wijaya became indebted to others for developing the project and raising debt finance was not a breach of the terms of sale and purchase.  They also denied of being indebted to Yiping which resulted in delay in the development.

28.  Regarding the piece of land in Guangdong, they said that it was purchased in the name of Chongqing Wijaya.

29.  They therefore denied of having breached the sale and purchase agreement.  They also denied the misrepresentation claim.

30.  They further pleaded that the 1st defendant had paid on 19 May 2011 RMB5 million as advance part payment of the RMB50 million installment due on 15 July 2011.  The balance of RMB45 million of that installment however could not have been duly paid on 15 July 2011 because of a Mareva injunction obtained by the plaintiff in HCMP 1289/2011 on 8 July 2011 which frozen the assets of the defendants and Chongqing Wijaya. 

31.  They counterclaimed specific performance of the agreement for sale and purchase of the sale shares with an alternative claim for damages for breach of the agreement by the plaintiff and return of all monies already paid plus interest.

The plaintiff’s affirmation in support

32.  The plaintiff filed an affirmation on 10 January 2012 in support of the application.  He basically repeated his allegations already made in the statement of claim with some minor variations.  He also said he had sent in a team of accountants to check the books and accounts of Chongqing Wijaya in mid-July 2011, but the 1st defendant refused them access to the books and accounts.  He said that was a delaying tactic to prevent him from finding out the actual financial position of the company. 

33.  He also said that the 1st defendant had been using the assets of Chongqing Wijaya to pay for his purchase of the sale shares as the 1st defendant had admitted on oath that he had only about RMB200,000 as at 11 August 2011.  He also said the pledge of the sale shares was a breach of the custodian agreement. 

34.  He also referred to his having been removed from the position of the statutory and legal representative of Chongqing Wijaya.  He said the 1st defendant procured his removal by forging his signature on a document filed with the mainland authorities.  He therefore said that there was an imminent risk of dissipation of assets by the defendants which justified the granting of a Mareva injunction against them.

The interim order

35.  I have already referred to the interim order I made on 13 January 2012 which I extended until further order.

HCA 1069/2011 and the application for Mareva injunction

36.  This is in fact the plaintiff’s third application for Mareva injunction against these defendants.  The plaintiff made the first application on 28 June 2011 by an ex parte summons in HCA 1069/2011.  The action was issued for a Mareva injunction against the defendants in aid of arbitration to be conducted in Singapore. 

37.  The endorsement in the writ in HCA 1069/2011 also sought an alternative of return of the sale shares to the plaintiff with inquiry of damages.  The ex parte summons sought an order to restrain the defendants from disposing of assets up to RMB333.5 million which included the sale shares and the properties and assets of Chongqing Wijaya.  The application was supported by an affirmation of the plaintiff affirmed on 27 June 2011.  That was before his purported acceptance by his solicitors’ letter dated 5 July 2011 of the alleged repudiation of agreement by the 1st defendant.

The supporting affirmation in HCA 1069/2011

38.  He said in the supporting affirmation that the 1st defendant had delayed payments of the purchase price of the sale shares to him.  He discovered sometime in mid-June 2011 that these shares had been transferred to the 2nd defendant on 5 January 2010 which was without his knowledge or consent.  He asserted that the unauthorized transfer of shares was the reason for the 1st defendant not to allow him inspection of the books and accounts of W International and Chongqing Wijaya.

39.  He also discovered that the 1st defendant had in early June 2011 obtained a mortgage loan of RMB77 million by using part of the land as security through the contractor Yiping at a high rate of interest of 36% to 40% pa.

40.  He also referred to the building contract between Chongqing Wijaya and Yiping dated 19 May 2010 which allegedly gave Yiping very high rate of construction costs comparing to the normal rate and would result in extra payment of at least RMB300 million to Yiping.

41.  He also said that Chongqing Wijaya had become indebted to others at RMB127 million despite having an income of at least RMB283 million. However, Chongqing Wijaya’s loan liability before 30 December 2010 was negligible.  Hence, he said that the 1st defendant must have used the land and the sale shares to secure loans which the 1st defendant had applied for purposes other than paying him for the sale shares. He said this was a breach of the offer letter and the agreement of sale and purchase and a disregard of his beneficial interest in these shares.

42.  He also said that the 1st defendant had used funds to join in the purchase of a piece of land in Guangdong and the funds came from loans secured by the sale shares and the Ba Nan assets.

43.  He concluded that the 1st defendant would deplete all assets in Chongqing Wijaya and not pay him for the purchase of the sale shares.

No order was made on the first application

44.  The ex parte application went before Poon J who did not make any order on it.

HCMP 1289/2011 and the second application for Mareva injunction

45.  The plaintiff then instituted HCMP 1289/2011 for Mareva injunction against the defendants from disposing of assets up to RMB245 million, the sale shares and all the properties and assets of Chongqing Wijaya.  These proceedings were also launched in aid of the arbitration to be conducted in Singapore.  These proceedings were instituted in place of HCA 1069/2011 because the originating summons should be used in such application. 

46.  The plaintiff again issued an ex parte summons for a Mareva injunction in terms similar to the previous one but with a lower ceiling of prohibition at RMB245 million.  The application was made on 8 July 2011 and was supported by the same affirmation evidence filed in HCA 1069/2011.  By this time, the plaintiff’s solicitors had already issued the letter dated 5 July 2011 which purported to accept the alleged repudiation of agreement by the 1st defendant.

Ex parte Mareva injunction order granted

47.  To J granted an ex parte order in terms as sought by the plaintiff with minor amendments. 

Discharge of the ex parte Mareva injunction order and no regrant

48.  The inter parte summons to continue the ex parte order and the defendants’ application to discharge the same went before Chung J.  The learned Judge discharged the ex parte injunction and refused to make a regrant. 

49.  The learned Judge said in his reasons dated 19 August 2011 that the plaintiff in making the ex parte application before To J, was guilty of material non-disclosure on several significant matters.  The first matter was the plaintiff’s failure to disclose to To J his unsuccessful application for ex parte injunction on the same grounds before Poon J in HCA 1069/2011. 

50.  Secondly, the learned Judge identified several clauses in the agreement for sale and purchase and custodian agreement which appeared to provide that the 1st defendant was entitled to have the sale shares transferred to the 2nd defendant, his nominee.  But these provisions were not drawn to the attention of To J.  These provisions are material in relation to the plaintiff’s complaint of unauthorised transfer of the sale shares to the 2nd defendant.

51.  The third matter was the prohibition against the defendants’ use of the assets of W International (subject to one exception) as security for lending.  The fact that the agreement did not contain any such prohibition was again not drawn to the attention of To J.  The absence of such prohibition in the agreement is material to the plaintiff’s complaint against the 1st defendant’s use of the sale shares and the land of Chongqing Wijaya as security for lending.

52.  Apart from material non-disclosure, the learned Judge also considered the merits of the plaintiff’s claim of risk of dissipation of assets by the defendants.  The learned Judge agreed with the defendants that mere breach of contract does not provide the basis for alleging such risk. 

53.  Regarding the transfer of the sale shares to the 2nd defendant, the defendants relied on the provisions in the agreement for sale and purchase and the custodian agreement and denied any breach by virtue of such transfer.  They further offered an undertaking not to further deal with these shares.

54.  Regarding the loans raised on the security of the sale shares and the assets of Chongqing Wijaya, they were kept by the 2nd defendant.  The learned Judge found that there was no proper basis for thinking that substantial assets had been siphoned off.

55.  Regarding the alleged refusal of inspection (which was denied by the defendants who also offered an inspection by the plaintiff on 8 August 2011), the learned Judge opined that such could not properly ground a real risk of dissipation of assets.

56.  Regarding the real property project in Guangdong, the learned Judge found evidence showing that it was acquired for W International.

57.  On the whole, the learned Judge also found against the plaintiff on the issue of risk of dissipation of assets.

58.  The plaintiff did not appeal against the discharge of the ex parte injunction and the refusal to regrant.  The parties later also consented to have HCMP 1289/2011 discontinued or stayed permanently as they had agreed to submit to the jurisdiction of Hong Kong.

The third application for Mareva injunction in this action

59.  The plaintiff then started the present action on 6 September 2011.  On 10 January 2012, they issued the present summons for a Mareva injunction in similar terms as the previous ones and with the ceiling of prohibition at RMB245 million.  The draft order provided an alternative relief which required the 1st defendant to pay the balance of the purchase price at RMB245 million into court in two instalments of RMB145 million forthwith and RMB100 million on or before 1 March 2012. 

60.  I have already referred to the affirmation in support which essentially repeated the complaints in the statement of claim in this action.  The complaints are similar to the previous ones made in the applications for injunctions in HCA 1069/2011 and HCMP 1289/2011. 

61.  Leading counsel for the plaintiff submitted that the application was made in the light of recent changes in the circumstances of the unlawful dealings of the Ba Nan Project.  Leading counsel summarised the plaintiff’s complaints as follows.

62.  Leading counsel referred to the 1st defendant’s failure to pay the instalments of purchase price and profit on time or at all.  He also complained that the 1st defendant had unlawfully transferred the sale shares to the 2nd defendant and had dealt with the assets of W International without authority so as to strip it of all value. Moreover, the defendants have refused inspection of the books and account of Chongqing Wijaya by the plaintiff.  Counsel also submitted that there is cogent evidence of the defendants’ dissipation of assets and an imminent risk that they were in the process of disposing or alienating the entire Ba Nan Project to 3rd parties.

63.  Regarding the complaint of non-payment of purchase price and profit, since the plaintiff has by his solicitors’ letter of 5 July 2011 purportedly accepted the alleged repudiation of the agreement of sale and purchase by the 1st defendant, there is no basis for him to demand payment of the remaining instalments under the agreement of sale and purchase as varied by the 1st and 2nd variation agreements. 

64.  Even if the 1st defendant should offer to pay him money per the agreement as varied, he would not be in a position to accept the same as the receipt of the remaining purchase price as purchase price would prejudice his claim for the return of the sale shares.  I therefore see no basis for this complaint or any argument that the failure of the 1st defendant to tender payment per the agreement can be construed as risk of dissipation when the plaintiff is not in a position to demand or accept the same pursuant to the agreement.  This is also one of the main grounds advanced by leading counsel for the defendants in opposition to the application for continuation of the ex parte injunction and I agree with it.

65.  Regarding the transfer of the sale shares to the 2nd defendant, that is prima facie blessed by a number of provisions in the agreement of sale and purchase and the custodian agreement.  I do not think the transfer can be used to suggest a risk of dissipation.

66.  Regarding the arguments about using the sale shares and underlying assets as security for loans at high interest rate and the entering into building contracts with Yiping at unusually favourable terms to Yiping, these are issues that had been canvassed before Chung J and are nothing new.

67.  In connection with the allegation of raising loans, the plaintiff also alleged that the securities for the loans were the sale shares and underlying assets.  Since the 1st defendant used such loan to pay him the purchase price, he therefore submitted that the 1st defendant had contravened section 47A of the Companies Ordinance by causing W International and its subsidiary to provide financial assistance for the 1st defendant’s acquisition of the sale shares.  However, this again is not evidence of risk of dissipation of assets and Mareva injunction is not the appropriate remedy.

68.  The plaintiff also relied on the purchase of land in Guangdong province which the plaintiff said was done in June 2011 in the name of the 1st defendant and was only transferred to Chongqing Wijaya upon enquiry by the plaintiff.  That is a matter that had been relied on in the two previous applications.

69.  The plaintiff also complained about the defendants’ refusal of inspection despite his having sent a team of auditors from Ernst & Young to Chongqing who waited there from 13 to 18 July 2011 fruitlessly.  Chung J has already decided that this did not amount to a risk of dissipation.  Furthermore, the defendants’ solicitors have already written to the plaintiff’s solicitors on 8 August 2011 offering inspection by Mr Wong upon reasonable notice but not to allow copies of documents to be made.  Hence, inspection is not refused absolutely. 

70.  The defendants have now further offered to allow Mr Wong and no more than three accountants to inspect the books and accounts of Chongqing Wijaya upon reasonable notice having been given.

71.  I therefore do not think that the dispute over the inspection of books and accounts is a ground for alleging dissipation of assets.

No significant change of circumstances and dismissal of the application

72.  Leading counsel for the defendants also presented a formidable argument to oppose this application.  Leading counsel submitted that this is the third application for Mareva injunction and there is no basis for the plaintiff to make this third bite of the cherry.  Counsel referred to Re The Prudential Enterprise, HCCW 594/1999 where Chu J referred to the general principle that when an interlocutory application is dismissed, whether on procedural ground or merits, it is not permissible to make a fresh application for the same relief on the same ground except perhaps with a significant change of circumstances (paras 12 and 13).

73.  Counsel pointed out and I agree that there is no significant change of circumstances since the first application before Poon J and there is no basis for the plaintiff to apply for the injunction for the third time. 

74.  In the premises, I see no basis for this application and I dismissed it. 

Dismissal of alternative relief

75.  The plaintiff’s summons also prays for an alternative order that the 1st defendant be required to pay RMB245 million into court.  However, I have refused the application for a Mareva injunction.  I also cannot order the 1st defendant to pay this sum into court as security for judgment for the plaintiff.  The reason being that the plaintiff has purportedly accepted the alleged repudiation of the agreement for sale and purchase and is claiming the return of the sale shares.  He is not seeking performance of the agreement or a judgment in the action for payment by the defendant according to the sale and purchase agreement.  I therefore dismiss this alternative relief as well.

Summons for payment into court for admission by the 1st defendant

76.  There is also a summons for an order requiring the defendant to pay into court the remaining instalments of the purchase price according to the sale and purchase agreement.  However, I repeat that it is the plaintiff’s case that the agreement has been repudiated and the repudiation accepted.  On his case, the agreement is no longer in existence.  I therefore cannot order the 1st defendant to pay into court monies as security for a judgment that the plaintiff is not seeking.  I have already dismissed this summons with costs at the end of the hearing.

Summons to amend the defence and counterclaim

77.  The defendants have also filed a summons to amend the defence and counterclaim.  That summons was adjourned and has been disposed off now.

The cross-undertakings

78.  The parties have offered cross-undertakings which are to have effect upon dismissal of the application for Mareva injunction.

79.  The plaintiff undertakes to refrain whether by himself his servants agents or otherwise howsoever from causing any harassment to the defendants and Chongqing Wijaya and/or any interference and disruption to the defendants’ carrying on with the development of the Ba Nan Project.

80.  In return for the plaintiff’s said undertaking, the defendants undertake:

(1)  to maintain a deposit of RMB45 million at a bank in Chongqing and to provide to the plaintiff’s solicitors a weekly report issued by the bank on the status of the deposit;

(2)  to provide the plaintiff’s solicitors weekly reports of the sale and/or disposal and/or creation of encumbrance on the units and landed properties comprising the Ba Nan Project.

(3)  not to dispose of or encumber the sale shares that are registered in the 2nd defendant’s name; and

(4)  to allow Wong and no more than three accounts to inspect the books and accounts of Chongqing Wijaya upon reasonable prior notice.

Lapse of the order of 13 January 2012

81.  The first three undertakings mirrored the terms of my order given on 13 January 2012 and order is to lapse now.

Costs order nisi

82.  Finally, I make a costs order nisi that the plaintiff do pay the defendants the costs of this application to be taxed.  I also certify the matter fit for two counsel.