WAH SUN INVESTMENTS LTD & ANOTHER v. WINLAND FINANCE LTD

 HCA2517/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2517 OF 2003

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(By Counterclaim)

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DECISION

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1.  There are two applications before the Court.  They are:

(1)              An application by Lau Sze Yuen (“SY Lau”), the 2^nd plaintiff by original claim and 2^nd defendant by counterclaim, by summons filed on 18 June 2004, applying to (a) discharge the security of HK$9 million he paid into court in place of the continuation of the ex parte Mareva injunction, and (b) enforce the cross-undertaking as to damages; and

(2)              An application by Winland Finance Limited (“Winland”), the defendant by original claim and the plaintiff by counterclaim, by summons filed on 30 July 2004, applying for the grant of a fresh Mareva injunction against SY Lau in the event that his application for discharge of the security is granted.  

2.  The issues involved relate to whether there was solid evidence of a risk of dissipation of assets and whether there had been material non-disclosure in the ex parte application. 

Background

3.  SY Lau is the father of Lau Cham Yuen Albert (“Albert Lau”), the 3^rd defendant by counterclaim.  SY Lau and Albert Lau are the shareholders and directors of Wah Sun Investments Limited (“Wah Sun”), the 1^st plaintiff by original claim and the 1^st defendant by counterclaim.

4.  Winland is a licensed moneylender.

5.  Between 5 October 1999 and 12 January 2001, Wah Sun had executed 30 loan agreements with Winland.  Only the first of these was signed by SY Lau on behalf of Wah Sun.  All the loan agreements were for short term loans, the duration of which was either for one day or one month.  The amount of the loans varied between HK$ 3.5 million and HK$ 7 million.  The loans were secured by two securities.  The first is a legal charge given by Wah Sun on certain lands, some of which are registered in Wah Sun’s name.   The second is a personal guarantee given by SY Lau and Albert Lau jointly and severally.

6.  It is Winland’s case that the first 29 loans had been repaid.  As for the last loan, Wah Sun had defaulted in repayment.  This is a one month term loan for HK$ 7 million with the due date being 12 February 2001.

7.  On 18 December 2002, Winland commenced proceedings under HCA 4732 of 2002 (“2002 Action”) against SY Lau to enforce the personal guarantee. The Writ was served in January 2003.  Thereafter, no further step had been taken in the 2002 Action.

8.  On 8 July 2003, Wah Sun and SY Lau commenced the present action against Winland.  The Statement of Claim was served on 1 September 2003.  Wah Sun and SY Lau claim that the loan agreements are in breach of the Moneylenders Ordinance and seek declarations and order that the loan agreements and the securities given thereunder are illegal and void or unenforceable or should be re-opened as being extortionate.  

9.  Winland filed its Defence and Counterclaim on 9 October 2003, which was subsequently amended on 4 March 2004.  Apart from disputing the claim, Winland also counterclaims against Wah Sun, SY Lau and Albert Lau for HK$ 7 million together with interest or such other sums found outstanding and for vacant possession of the properties charged under the legal charge given by Wah Sun. 

10.  On 16 February 2004, Winland applied and obtained ex parte a Mareva injunction against SY Lau restraining him from disposing of or dealing with his assets in Hong Kong up to the value of HK$12,090,000.  At the inter partes hearing for the continuation of the injunction on 20 February 2004, an order was made by consent whereby SY Lau was to pay into court HK$ 9 million as security, and the Mareva injunction was forthwith discharged.  The provision of the security was expressly stated to be without prejudice to SY Lau’s right to apply for its discharge and upon Winland’s cross-undertaking as to damages in terms set out in the ex parte order.

11.  On 20 February 2004, SY Lau paid into court the security of HK$ 9 million.

12.  Subsequently on 18 June 2004, SY Lau issued the present summons for discharge, which was followed by Winland’s summons for a fresh Mareva injunction filed on 30 July 2004.

Application for discharge

13.  SY Lau’s application for discharge is based principally on two grounds:

(1)              There had been material non-disclosure when Winfield applied for the ex part Mareva injunction; and

(2)              There was and is no solid evidence of a real risk of dissipation of assets by SY Lau.

14.  Counsel are in agreement that since the security was put up in lieu of a Mareva injunction, the application for its discharge should be approached on the same basis as an application to discharge a Mareva injunction.  It follows that the court has to consider whether the injunction should have been granted in the first place and whether it should be discharged on the basis of material non-disclosure.  For the purpose of the present applications, SY Lau is prepared to proceed on the assumption that there is a good arguable case on which a Mareva injunction may be granted.  This being the case, it is not necessary to dwell into the claim and the counterclaim herein and the merits involved.

Material non-disclosure

15.  Given that there is no disagreement on the legal principles governing material non-disclosure, it will be sufficient to summarize the broad principles that are relevant to the present applications.  They are:

(1)              The duty to disclose is a strict duty and applies to matters known to the applicant or his agents, or matters which they ought to have known, had they made all inquiries which should reasonably have been made prior to the application: Gee, Mareva Injunctions and Anton Pillar Relief (4th edition) p.127.

(2)              In considering what matters should be disclosed to the court, the test is whether the facts are relevant to the exercise of the discretion, regardless of whether they are relevant to the merits of the claim, and irrespective of whether the matters, if disclosed, would have caused the court to refuse to grant the ex parte application: Standard Chartered Securities Ltd. v. Lai Arthur & Others [1993] 1 HKC 375, Citibank NA v. Express Ship Management Services Ltd [1987] HKLR 1184, Gee at p.133.

(3)              The materiality of matters undisclosed or misstated, if relevant, will depend on the importance of the facts to the issues which were to be decided by the judge on the ex parte application: Pacific Base Services Ltd v. Silver gain Development Ltd [1996] 1 HKC 610.

(4)              An applicant should make adequate inquiries about the financial standing of the defendant and his business and should disclose the results: Third Chandris Shipping Corp v. Unimarine SA [1979] 1 QB 645 at 671-2 adopted in Chow Chor-leung v. Rafaella Sportswear Inc [1990] 1 HKLR 449, Gee at p.131.

(5)              The fact that the parties are engaged in open negotiations is relevant to whether the applicant needs urgent ex parte relief and should be disclosed to the court: Gee at p.133.

16.  The matters relied upon by SY Lau as amounting to material non-disclosure are:

(1)              The existence of the 2002 Action,

(2)              The negotiations for the settlement of the disputes,

(3)               The inquiry, if any, made by Winland on SY Lau’s background and financial position, and

(4)              The inclusion of default or compound interest in the schedules of particulars and calculations of loans Winland provided in the course of negotiations.

17.  Winland does not dispute that these matters had not been mentioned in the evidence leading the ex parte application or otherwise mentioned to the Judge at the ex parte application.  Winland’s stance is that these matters are irrelevant and immaterial and there are good reasons for their omissions.

18.  I will deal firstly with the schedules of loans first as it is a relatively short point.  Although it is put under the ground of material non-disclosure, it is in substance a complaint that a misleading statement had been given in the affirmation leading the ex parte application.  In the first affirmation of Mr Edwin Lun filed on behalf of Winland, it is said that Winland has never charged Wah Sun interest at 4.5% or 4.8% per month, which is the default interest rate stated in the loan agreements.  Mr Li says that this is a misstatement because in the schedules of particulars of loans provided by Winland during negotiations, there were included calculations of default interest.  It is further argued that Winland should have disclosed these loan schedules at the ex parte application. 

19.  Two points need to be made about this argument.  Firstly, it is a fact that the counterclaim does not include a claim for default interest.  Paragraph 27A of the Amended Defence and Counterclaim shows that Winland’s counterclaim is for the principal sum of HK$ 7 million together with interest at 2% per month, less interest payments previously received.  Secondly, whether default interest has ever been charged or demanded is relevant to the issue of whether the loans were illegal and void under the Moneylenders Ordinance.  At the ex parte application, all that the judge needed to be satisfied was that there was a serious question to be tried.  I consider that the statement in Edwin Lun’s first affirmation, even iferroneous, and the omission of the loan schedules are not matters of materiality that should merit the discharge of the security.      

20.  I deal next with the existence of the 2002 Action.  Mr Lipoints out the 2002 Action was only brought against SY Lau.  He argues that this is indicative of Winland’s knowledge of SY Lau’s financial standing, which if made known to the judge, would have undermined the suggestion of a real risk of dissipation of assets.  Mr Li also argues that if it had been disclosed that there was no progress in the 2002 Action, or that the action did not progress further because of negotiations for settlement, the judge might have reservations about the grant of injunction.

21.  Winland’s explanation for not referring to the 2002 Action is that the action never crossed their mind, that it was understood by the parties that their dispute was to be dealt with under the present action, and it was believed that the only matter left in the 2002 Action was the issue of costs.   Reliance was placed on a letter dated 11 July 2003 from SY Lau’s solicitors, Messrs Bosco Tso & Partner (“BT”) to Winland’s solicitors, Messrs Fan & Fan (“FF”).  Mr Chang SC argues that the non-disclosure has no bearing on the ex parte application and has not caused any prejudice to SY Lau.  He relies on the fact that the 2002 Action had not been proceeded with and all the issues that may arise in that action are already covered by the present action.

22.  I agree that BT’s letter dated 11 July 2003 does not provide a basis for Winland’s belief that all the disputes between the parties were to be dealt with in the present action.  BT’s letter was in reply to FF’s earlier letter of 10 July 2003 suggesting to amend the Writ in the 2002 Action to include Wah Sun and Albert Lau.  What BT had stated in the letter is that for better case management, the 2002 Action should be consolidated with the present action at a later stage with Winland’s claims in the 2002 Action being made a counterclaim.

23.  That said however, the 2002 Action, though relevant, is only a background fact.  The 2002 Action had not been proceeded with.  By contrast, the present action is the substantial action.  All the evidence and issues relevant to the disputes between the parties are covered by the present action.  There is no risk of SY Lau being exposed to two claims.  There is also no likelihood of Winland obtaining any unfair enrichment by the injunction.  The suggestion that the disclosure would have alerted the court to Winland’s reason for only claiming against SY Lau in the 2002 Action, hence the financial standing of SY Lau is, in my view, a speculative one.  I do not consider the 2002 Action a material matter, the non-disclosure of which should of itself warrant the discharge of the security.

24.  I turn thirdly to the settlement negotiations.  It is not in dispute that there had been attempts to settle the dispute in about May 2003, as a result of which SY Lau was prepared to withhold its demand to Winland to serve the Statement of Claim in the 2002 Action, as well as after the commencement of the present action.   The attempts had not produced any fruitful results.

25.  As a matter of principle, I accept and I do not understand Mr Chang SC to be arguing otherwise, while it is not permissible to disclose the contents of the parties’ settlement negotiations, there is nothing objectionable to disclose to the court on an ex parte injunction application that there are or had been settlement negotiations.  Indeed this is a relevant factor on the weighing scale because, depending on the circumstances, it may either undermine or strengthen the fear of dissipation of assets.

26.  In the present case, the fact that the parties had after the service of the Writ in the 2002 Action and also after the commencement of the present action, engaged in settlement negotiations, albeit through a third party, is a relevant matter that ought to have been made known to the judge at the ex parte application.  It is particularly relevant to the question of the risk of dissipation of assets given that Winland’s was primarily relying on a single sale of a property as giving rise to a risk of dissipation.  I shall return to deal more with this in the context of the second main ground for the discharge application.

27.  Winland argues that what had been said were so vague that they could not be regarded as true or real settlement negotiations.  It is said in Mr Edwin Lun’s second affirmation that the discussions were no more than about how much to settle for and whether there was money to meet the payment.  I do not accept this as an adequate explanation.  It would appear from the affirmation of Mr Lun alone that the parties had through a third party engaged in discussions and negotiations for settlement and over a period of time.  Although there was no fruitful outcome, it cannot be said that there was no true or real settlement negotiations.  The fact that the discussions turned largely on issues as to the amount of payment and the ability to meet the payment is in no way indicative of the negotiations not being true or real settlement negotiations.

28.  Mr Chang SC further points to BT’s letter dated 4 November 2003 in which BT pointed out that the negotiations were only between Albert Lau and Winland.  It is argued that the negotiations did not concern SY Lau.  This submission overlooks the fact that in an earlier letter dated 3 November 2003, FF had taken the position that Winland and SY Lau were engaged in settlement negotiations.  Further, it matters little whether SY Lau was involved in the negotiations because the outcome would have a bearing on the counterclaim against him.  In any case, this is not among the reasons Winland put forward in the evidence to explain the non-disclosure of the settlement negotiations.

29.  Turning to the last and perhaps biggest complaint of SY Lau, it is that Winland had failed to disclose to the court what, if any, enquiry it had carried out to ascertain his background and financial standing.  In his affirmations, SY Lau deposed that he is a businessman of substantial standing and has his roots in Hong Kong, that he owns various real properties in Hong Kong and in the Mainland, and is the proprietor of a gambling hall in a casino in Macau.  He also exhibited a letter to show that his average monthly income from the gambling hall was HK$ 10 million in the last six months.  He further listed some of his family companies and the properties owned by them.  SY Lau’s wife and daughter also made affirmations confirming that the beneficial interest in the companies and properties belong to SY Lau.

30.  It is SY Lau’s case that it is unlikely that Winland had no knowledge of his gambling hall business and his financial position.  It is also pointed out that, being in the money lending business, Winland would either have conducted a search of Wah Sun and his financial position or have the means of finding out his credit position. 

31.  There can be no doubt that the background and financial position of the defendant is one of the most relevant matter in a Mareva injunction.  The authorities have also established that it is the duty of an applicant to make proper enquiries before making an ex parte application.  The duty extends to finding out the financial standing and the business of the defendant. 

32.  In the present case, given that Winland is in the lending business and the amount of loans involved was rather substantial, it is not unreasonable to expect Winland to have conducted some enquiries or search to establish the credit and asset position of SY Lau and Wah Sun before deciding to grant the loans and to accept the personal guarantee from SY Lau.  At the same time, it would appear from the evidence filed that Winland had been conducting updated land searches on the property at 34C of Estoril Court (“Flat 34C”) on a regular basis.  This suggests that Winland had been maintaining a keen interest in the asset position of, at least, SY Lau.  That being the case, it is not unreasonable to expect Winland to have made some enquiries on the business and credit position of SY Lau before launching the ex parte application.     

33.  The evidence adduced at the ex parte application is, however, silent as to whether Winland had conducted any enquiry or credit search on SY Lau or Wah Sun.   Winland’s case is that the affirmation in support of the ex parte application had set out all the assets of SY Lau that it knew of at the time according to information and source available to it, and that Winland could not reasonably be expected to go around making enquiries as to the credit position of SY Lau.  Winland has however not elaborated on what is the source of its information and knowledge.  

34.  If indeed Winland had made no inquiry or search with a view to establishing the credit position of SY Lau and the nature and extent of his business, then it had failed in its duty of making proper enquiries before making an ex parte application.   Mr Chang SC argues that the assets now disclosed by SY Lau in his affirmations are not much different from what Winland had disclosed in the affirmation leading the ex parte Mareva injunction application.  He points out that the bulk of the assets set out in SY Lau’s affirmation comprisesof beneficial interest in family companies, which Winland would have no means of finding out.  In my view, even if this is the case, it does not absolve Winland from its duty to make the necessary enquiries before seeking Mareva injunctive relief. 

35.  It is not in dispute that to Winland’s knowledge, SY Lau is a businessman.  This is pleaded in Winland’s Amended Defence and Counterclaim.  It is also clear from the affidavit of Selina Lau and the 3^rd affirmation of Edwin Lau, that SY Lau had a business office in Shun Tak Centre.  Miss Lau, in her capacity as Winland’s solicitor, had taken some documents there for SY Lau to sign.   In the circumstances, it is incumbent upon Winland to make enquiries as to SY Lau’s business and if it had not done so, to indicate to the court the reasons for it. 

36.  Mr Chang SC points to Winland’s Amended Defence and Counterclaim and says that the fact that SY Lau is a businessman had already been pleaded.  That in my view is insufficient to discharge the duty to disclose.  Although the pleadings were included in the bundle for the ex parte hearing, it remains the duty of Winland to draw it to the judge’s attention: see Standard Chartered Securities v. Lai Arthur & Others, op cit, and Rever (AMA) Salon Ltd. V. Kung Wai For Danny [2001] 1 HKC 241 at 246A-F.  The omission to mention to the judge that SY Lau is a businessman with a business office in Shun Tak Centre is further aggravated by the statement in the written skeleton submission that the financial position of SY Lau is unclear such that a disclosure order should also be made.

37.  At the same time, it is to be observed that in Mr Edwin Lun’s second affirmation, he said that Winland did not know if the gambling hall was SY Lau’s asset, and remains doubtful of this as of today.  That seems to suggest that Winland was aware of SY Lau’s having involvement in the gambling hall business.  If so, Winland had not indicated whether it had taken any step to ascertain the relationship between SY Lau and the gambling hall.  More importantly, if indeed Winland was aware of SY Lau’s involvement in the casino business, this should have been disclosed to the court.  Irrespective of whether SY Lau owns the gambling hall, the fact that he operates or manages a gambling hall is a relevant factor on the weighing scale both in relation to his financial position and to the risk of a dissipation of assets. 

38.  It is worth noting that although Winland entertains doubts as to SY Lau’s proprietorship of the gambling hall and whether the monthly income was inclusive of expenses, Winland does not contest SY Lau’s assertions that he is a businessman with substantial connections.  Likewise, Winland does not challenge the assertion that SY Lau owns the family companies and properties he had disclosed, though it observes that SY Lau had not made a full disclosure of his assets and that the liabilities of the companies are unknown.

39.  In my view, irrespective of whether the monthly income from the gambling hall is inclusive or exclusive of the expenses for operating the business and any payments to be made to SY Lau’s subordinates, it does not detract from the fact that SY Lau derives a very substantial income from the gambling hall.  It is a matter that the court is entitled to take into consideration on an ex parte Mareva injunction application.  As to Winland’s argument that the income is derived outside jurisdiction so that there would be difficulty in enforcing any judgment against it, it is a matter that Winland would be entitled to draw to the court’s attention and even make adverse comments on it, but it is irrelevant to Winland’s duty to disclose what it knows of SY Lau’s income and business. 

40.  I consider that, in the circumstances of the present case, the failure to set out what enquiries it had made on SY Lau’s financial position and, alternatively, the failure to make proper enquiries to establish the financial position of SY Lau are fatal to Winland’s ex parte application.  The failure becomes more acute when considered together with Winland’s case on the risk of dissipation of assets, to which I now turn.

Risk of dissipation of assets

41.  SY Lau’s second main ground for the discharge of the security is that there is no solid evidence to support a real risk of dissipation of assets.  Again, counsel have no disagreement on the relevant legal principles.  Briefly stated, the risk of dissipation must be demonstrated by solid evidence.    The applicant must demonstrate by objective facts from which inference can be drawn that the defendant is likely to move his assets abroad or dissipate them.  A mere assertion is not good enough.  Likewise, unsupported statement or expression of fear of dissipation is insufficient: see Hong Kong Civil Procedure 2004 vol. 1 para.29/1/61.

42.  At the ex parte application, Winland’s case of a risk of dissipation of assets was twofold.  Firstly, it said that the securities it holds on the loan to Wah Sun is insufficient to cover the indebtedness.  Secondly, Winland referred to the sale of Flat 34C.  According to Winland, as a result of an updated land search, it discovered that Flat 34C had been sold at HK$ 29.5 million and the sale had been completed on 30 January 2004.  Winland contended that the sale was an attempt to put assets beyond its reach or to prejudice the enforcement of the personal guarantee.   On these bases, Winland said that there was a real risk of SY Lau dissipating his assets so as to avoid liability under the personal guarantee. 

43.  The single sale of a defendant’s property per se is insufficient to justify the grant of a Mareva injunction: see Ho Sheung Ping v. Lo Shiu Yin [1963] 3 HKC 144 at 153B-153I.  On the evidence, the sale of Flat 34C appears to be an arm’s length transaction.  It is an open sale preceded by a tender.  The sale had been reported in the newspapers.  Indeed, Mr Chang SC has taken no issue on the propriety and the manner of the sale.  Winland, on the other hand, had not explained how the sale of Flat 34C gave rise to the fear of dissipation of assets.   On the materials before the court, I am of the view that the mere sale of Flat 34C does not enable any inference of dissipation of assets to be drawn.  Winland’s belief of a real risk of dissipation of assets has no proper foundation.

44.  It is argued that Winland’s fear is supported by the fact that the sale had turned the landed property into liquid asset of cash proceeds, which can be easily moved to Macau to be put beyond the reach of Winland.  I am unable to accept this submission.  At the ex parte application,this could only have been Winland’s concern if it knew SY Lau was operating a gambling business in Macau.  But on the evidence, Winland was not prepared to say this.

45.  Winland’s assertion of fear of dissipation is further undermined when one has regard to the overall financial position of SY Lau, including the fact that he is a businessman operating a gambling hall and making substantial income from the business.  As such, Winland’s failure to conduct proper enquiries on SY Lau’s business and financial position, or to disclose whatenquiry it had made on this, is a material omission that significantly affects Winland’s entitlement to the ex parte order.

46.  In short, Winland’s claim of a risk of dissipation of assets is not made out.  One of the necessary ingredients for the grant of a Mareva injunction is therefore missing.  For this reason and also by reason of its failure to discharge the duty to disclose as discussed above, the ex parte order could not stand.  It follows that the security of HK$ 9 million paid into court by SY Lau should be discharged.  In the circumstances, SY Lau is entitled to enforce the cross-undertaking as to damages given by Winland.

Winland’s application for a fresh Mareva injunction

47.  I deal finally with Winland’s application for the grant of a Mareva injunction.  It is not in dispute that, notwithstanding the discharge of the security, the court may still grant a fresh Mareva injunction if it is satisfied that this is appropriate.  Given my conclusion that Winland had not made out a case of a real risk of dissipation of assets, one of the necessary elements for the grant of a Mareva injunction is therefore lacking. 

48.  Mr Chang SC, however, argues that when considering whether there is a reasonable belief of a risk of dissipation of assets, the court should now take into account the fact that SY Lau, in making the discharge application, had not made a full disclosure of his assets.  In particular, it is said that he had not disclosed the whereabouts of the sale proceeds and he had also not given details of his other properties in the Mainland and Hong Kong.  It is further said that the assets disclosed do not reflect the substantial cash income he receives from the gambling hall business.  

49.  In my view, it is important to bear in mind two points.  Firstly, Winland is not entitled to have a pre-judgment attachment of its claim.  Only if it can establish a real risk of dissipation of assets that it is entitled to the protection of a Mareva injunction.  The burden is therefore on Winland to prove a real risk of dissipation.  Secondly, SY Lau has no duty and cannot be compelled to make a full disclose of his assets.  His position now is no different from what it was before Winland obtained the ex parte order.  SY Lau may only be compelled to disclose his assets if disclosure is necessary to aid the Mareva injunction.  But unless and until the injunction is granted, he is under no such duty.

50.  It follows from the above that no adverse inference can be drawn from the manner and extent of disclosure SY Lau had made in his application to discharge the security.  Neither can they be relied upon as justifying a belief or fear of dissipation of assets, hence the basis for the grant of a fresh Mareva injunction.  In the circumstances, Winland’s application for a fresh Mareva injunction must fail.

Conclusions

51.  For the reasons indicated above, SY Lau’s application to discharge the security and for leave to enforce the undertaking is allowed.  The application by Winland for the grant of a fresh Mareva injunction is refused.  The normal rule of costs follow event applies.  Accordingly, I make the following orders:

(A)            On SY Lau’s summons filed on 18 June 2004:

(1)              The security of HK$ 9 million paid into court by Lau Sze Yuen on 20 February 2004 in lieu of the continuation of the ex parte order granted on 16 February 2004 be discharged.

(2)              The said sum of HK$ 9 million now standing in court be paid out to Lau Sze Yuen forthwith through his solicitors.

(3)              Lau Sze Yuen be at liberty to enforce the undertaking given by Winland Finance Limited as per the order dated 16 February 2004 and continued by the order dated 20 February 2004. 

(4)              The costs of the application be to Lau Sze Yuen against Winland Finance Limited, to be taxed if not agreed.

(B)             On Winland’s summons filed on 30 July 2004:

(1)              The summons is dismissed.

(2)              The costs of the application be to Lau Sze Yuen against Winland Finance Limited, to be taxed if not agreed.