ALLTOGETHER LAND CO LTD v. CHINA CREATE CAPITAL LTD AND ANOTHER

HCA 883/2020

[2022] HKCFI 2726

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 883 OF 2020

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BETWEEN

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R E A S O N S    F O R    D E C I S I O N

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1.  At the hearing of the summons dated 11 May 2022 issued by the 1^st defendant (“D1”) for variation of the Mareva injunction granted by DHCJ To on 4 June 2020 (as continued[1] by the orders dated 12 June 2020, 28 August 2020 and 30 September 2020 and varied by the order dated 22 January 2021) (“Injunction”), I dismissed the summons with costs. These are the reasons for my judgment.

2.  The Injunction restrains D1 from dealing with its assets up to HK$312,417,010.95. At the time it was granted, the specific assets identified in the Injunction included (1) the US$100 million 10% senior notes due 2020 issued by Guorui Properties Ltd, (2) any assets in the account maintained at Haitong International Securities Company Ltd (“Haitong Securities”) and (3) any money in the bank account at China Minsheng Banking Corp. Ltd, Hong Kong branch.

3.  By the summons, D1 seeks to vary the Injunction so that it does not prohibit

“(1) the sale of any securities held by [D1] in any of its accounts that are subject to the [Injunction] (“Sale”); and

(2) the payment or deduction of any relevant fees and expenses charged by the securities firms and/or financial institutions corresponding to and/or for the purpose of effecting and/or completing any Sale.”

Background

4.  In this action, the plaintiff (“P”) claims against D1 (and the 2^nd defendant (“D2”)) HK$312,417,010.95, being the debts due and owing under various loan agreements made in August 2018 under which D1 was the borrower and D2 was the guarantor.

5.  P and D1 are companies incorporated in the BVI.

6.  D2 is a Hong Kong resident. She is the wife of Mr Zhang Wei (“Zhang”). On 1 June 2021, Zhang was sentenced to life imprisonment in the Mainland for a litany of triad-related and dishonesty-related crimes. D2 is said to be a fugitive who fled to the USA in 2019 in order to avoid criminal investigations by the Mainland authorities.

7.  It is P’s case that D1 is beneficially owned and controlled by Zhang and/or D2.

8.  The writ of summons was issued on 4 June 2020. On the same day, P obtained the Injunction and a disclosure order against D1-D2 on an ex parte basis.

9.  The Injunction as against D1 was continued at 3 subsequent hearings and varied upon P’s application:

(1) At the return date on 12 June 2020, Godfrey Lam J (as he then was) extended the Injunction (except the disclosure order) to 28 August 2020 or until further order of the court.

(2) On 28 August 2020, Marlene Ng J further extended the Injunction against D1 until judgment of this action or further order of the court.

(3) On 30 September 2020, this Court ordered that the Injunction against D1 to continue until further order of the court.

(4) On 22 January 2021, this Court varied the Injunction against D1 to enable Haitong Securities, a creditor who holds a charge over the listed securities and the funds deposited in D1’s account(s) as security for the amounts owed by D1 to Haitong Securities and other companies in its group, to sell the assets in such account(s) to pay the debts owed by D1 to Haitong Securities or its group companies, provided that D1’s total assets shall not be less than 85% of HK$312,417,010.95 at the time before and after the sale.

10.  D1 and D2 were absent at the aforesaid hearings.

11.  D1 did not give notice of intention to defend. On 26 July 2021, a final judgment in the amount claimed together with interest thereon was entered against D1 (“Judgment”). There is no application to set aside the Judgment.

12.  P served a statutory demand on D1 on 11 January 2021 (“SD”) requiring it to pay HK$444,610,752.82, being the unpaid principal of HK$312,417,010.95 and interest accrued up to 1 November 2021 and fixed costs of HK$11,045 (“Debt”). The Debt remains outstanding.

13.  According to P, it intended to enforce the Judgment against D1’s assets, but discovered that all of D1’s known assets in Hong Kong had already been subject to charging orders and garnishee orders obtained by another creditor. This is not disputed by D1.

14.  In the meantime, a number of proceedings have been instituted against D1 which may be summarised as follows:

	Date	Action No.	Plaintiff(s)	Nature of Claim
1.	25.6.2019	HCA 1151/2019	Sky Motion Holdings Ltd	Breach of agreement and constructive trust
2.	2.7.2019	HCA 1180/2019	China Insurance Group Finance Co Ltd & anor	Outstanding loan and interest of over HK$430 million
3.	10.8.2020	HCA 1333/2020	Haitong Securities	Outstanding margin facility
4.	21.12.2020	HCA 2123/2020	Haitong International Products & Solutions Ltd (“Haitong International”)	Outstanding sum owed under certain financial instruments
5.	2.2.2021	HCA 196/2021	Jin Jiang Investment Ltd & anor	Damages or equitable compensation of over HK$1 billion
6.	19.2.2021	HCA 282/2021	Hua Han Health Industry Holdings Ltd & ors	Relief arising out of receipt of the plaintiff’s funds
7.	22.2.2021	HCA 291/2021	Haitong International	Outstanding sum owed under certain financial instruments

15.  On 10 May 2021 and 16 June 2021, Haitong International (in HCA 2123/2020 and HCA 291/2021) obtained final judgments against D1 in the amounts of US$35,651,869.11 and US$81,122,410 respectively together with compound interest at 20% p.a. from the date of the writ to the date of judgment. It is not in dispute that the liability under these 3 judgments exceeds HK$1.6 billion.

16.  In his judgment in HCA 196/2021 handed down on 17 February 2022 (“196 Judgment”), Coleman J considered that there was a risk of dissipation of assets in view of D1’s low commercial morality. The learned Judge allowed the plaintiffs’ application to continue the Mareva injunction against D1 up to HK$1 billion and dismissed D1’s application to vary the injunction for the purpose of enabling it to fulfil the condition imposed by the Court of Appeal in HCA 1151/2019 (where D1 was given leave to defend on condition of paying HK$295 million into court).

17.  By letter dated 1 March 2022, Messrs Fangda Partners (“Fangda”) on behalf of D1 wrote to Messrs Hui & Lam LLP, solicitors for P, sought P’s consent to vary the Injunction so as to allow D1 to sell the listed securities held in D1’s accounts and to pay the fees and expenses required for conducting such sale when market conditions are favourable, on the basis that the proceeds from the sale will remain frozen in the accounts.

18.  The solicitors continued to debate the proposed variation by exchanging 5 letters. In short, P did not agree to the proposed variation for the following reasons:

(1) D1 had not explained why it requested to sell the listed securities;

(2) the variation, if allowed, would potentially diminish the value of the listed securities in that (a) even if the sale is conducted in open market, it is entirely possible that the securities may be sold at undervalue to a third party or affiliated persons/entities; (b) it is unclear what is the nature and amount of the fees charged by financial institutions in conducting the sale; and (c) as the listed securities are thinly traded, their value would be seriously diminished if a significant number of them are sold in open market; and

(3) given the number of lawsuits and judgment debts against D1, and the fact that D1 had failed to comply with the SD, D1 is “deemed insolvent”. Accordingly, all of the listed securities covered by the Injunction shall be subject to enforcement actions by P and other creditors of D1. Any disposal of the listed securities would only concern the interest of D1’s creditors. It is “inexplicable and suspicious” as to D1’s “true motive” in seeking the variation.

19.  On the other hand, Fangda argued that the Injunction should be varied for the following reasons:

(1) D1 intends to sell the listed securities in open market, and repeated the reasons for seeking the variation as stated in their letter of 1 March 2022;

(2) As owner of the listed securities D1 has the right to sell the listed securities. The suggestion that D1 intends to diminish the value of its own assets is without basis. If the Injunction is not varied, D1 would be denied of the opportunity to sell the listed securities when the market condition is favourable, which would prejudice the rights of both D1 (as owner) and its judgment creditors (including P);

(3) The sale proceeds would remain frozen in D1’s accounts, and would not be dissipated;

(4) The fees are ordinary administrative fees charged by securities firms and/or financial institutions for processing the sale, and the amount depends on the particular sale; and

(5) It lies ill in P’s mouth to allege that D1 is deemed insolvent, as the reason why D1 was unable to satisfy the Debt is that D1’s assets are currently subject to (amongst others) the Injunction.

20.  Against the above background, D1 issued the summons.

21.  According to P, as at 29 June 2022, D1 owned listed securities issued by 6 companies which, according to their closing price on that day, worth HK$485 million.

Discussion

22.  The principles are not in dispute.

23.  Once the plaintiff obtained a Mareva injunction, the burden is on the party seeking variation to show what he proposes would be just (Gee on Commercial Injunctions, 7^th ed., §§21-039, 21-048). In considering the application, the court would apply the same principles when considering whether or not to grant Mareva relief and ask whether it is “just and convenient” to allow the variation. As the purpose of Mareva relief is to prevent unjustifiable disposal, the court would bear in mind that the assets belong to the defendant and that the injunction is not intended to provide the plaintiff with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment (Gee §21-052; Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Ltd [2015] EWHC 2748 (Comm), §§45-46).

24.  As Mr Thomas Wong (appearing with Mr Cristian Tsang), counsel for P, submits, where as here a defendant seeks to vary a post-judgment Mareva injunction:

(1) The plaintiff will be in a “much stronger position” to resist the application. The court will take into account the plaintiff’s status as a judgment creditor, and the remedies which are or may be available to him through execution or enforcement of the judgment (Gee §21-072).

(2) If the plaintiff could petition to wind up the defendant and intends to present a winding-up petition, it would “usually be appropriate” to restrain the defendant from disposing of its property except as sanctioned by the Companies Court under s.182 of the Companies (Winding Up and Miscellaneous and Provisions) Ordinance (Cap 32) (Gee §21-072).

(3) It would “sometimes and perhaps usually be inappropriate” to allow the defendant to use the injuncted assets to make payments in the ordinary course of business. Given the policy of the law strongly in favour of the enforcement of judgments, the judgment debtor should not be left free to carry on business and ignore the outstanding judgment (Michael Wilson & Partners Ltd v Emmott [2019] 1 CLC 303 §56 (Gross LJ)).

25.  Ms Candice Lau, counsel for D1, submits that the application should be allowed for the following reasons:

(1) The application is and can only be for a proper purpose. D1 remains the owner of the frozen assets (Halifax Plc v Chandler [2001] EWCA Civ 1750, §16, applied in CK v TCH [2019] HKFC 179, FCMC 5240/2011, 9 July 2019, §§20-23 and Acbel Polytech Inc. v Sec (Hong Kong) Co. Limited, HCA 492/2013, 26 April 2013, §11). A Mareva injunction operates in personam and remains so post-judgment, unless the plaintiff takes steps to enforce his judgment against the assets subject to the injunction (Mercedes Benz AG v Leiduck [1996] AC 284, 306C-D, per Lord Nicholls). As P is not a secured creditor and has no proprietary claim to the listed securities, it has no interest in such securities (Halifax, §19). Even though the listed securities are subject to future enforcement actions, any assets in excess of the Debt remain D1’s assets.

(2) It is in the interest of D1 to preserve/maximise the value of its listed securities against fluctuating market conditions. P’s suggestion that the application is not bona fide or that it is made for an improper purpose are pure speculation. A freezing order is not intended to prevent a defendant from carrying out its ordinary business dealings (Iraqi Ministry of Defence and others v Arcepey Shipping Co SA and another (Angel Bell) [1981] 1 QB 65, 73C). Nor should the order be used to compel a defendant to change his method of trading. If the party enjoined can show that the purpose for which he wishes to use the frozen assets is a purpose for which those or similar assets had been used by him in the course of his ordinary trading, such purpose could be regarded as a bona fide purpose for the use of those assets (Gee, §21-040; Avant Petroleum Inc v Gatoil Overseas Inc [1986] 2 Lloyd’s Rep 236, p243).

(3) There is no evidence to suggest that D1 is insolvent. The failure to comply with the SD only gives rise to a presumption of insolvency, which is rebuttable. The court would not make a winding up order unless it is satisfied that the company is in fact insolvent (Re First Dragon Fashion (Hong Kong) Limited, HCCW 41/2010, 14 February 2011, §15). Mareva relief is not an aid to obtaining preference for payment from an insolvent party (Camdex International Ltd v Bank of Zambia (No. 2) [1997] 1 WLR 632, 638A). Nor is the court concerned with the question of execution itself (Camdex, 637B-C; Mobile Telesystems Finance SA v Nomihold Securities Inc [2011] EWCA Civ 1040, §32). If a judgment creditor deliberately refrained from petitioning for the winding up of a company which continues to trade, then it may be inequitable for the court not to permit the judgment debtor to continue its business and pay its trade creditors notwithstanding the existence of the judgment (Gee, §3-028).

(4) There is no conceivable risk of dissipation or prejudice to P, as the sale will be conducted in open market and the proceeds will remain frozen in D1’s accounts.

26.  On the other hand, Mr Wong submits that the summons should be dismissed for the following reasons:

(1) It is an abuse of process for D1 to make the application when such application could have been made at the previous hearings and there was no change of circumstances or new facts which justify the application being made 2 years after the Injunction was granted (Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Ltd [2015] 2 HKLRD 458 (CA) at §§16-17).

(2) P is a judgment creditor who is ready to present a winding up petition against D1. P has more than a “good arguable case” against D1. It would be inappropriate and unjust to allow D1 to dispose of its assets, even if (which is denied) the disposition is made in the ordinary course of business.

(3) D1 lacks commercial morality. Apart from its failure to pay the Debt, P relies on the following matters recorded in 196 Judgment (and documented in several news reports exhibited to P’s affirmation):

(a) D1 is wholly owned and controlled by D2 and/or Zhang from February 2011 to March 2018. Although the shares in D1 have since been transferred away, D1 remains under the control of D2 (196 Judgment §14).

(b) On 1 June 2021, Zhang was sentenced to life imprisonment for various offences including illegally defrauding public investors and leading triad-related criminal syndicates. According to media reports, Zhang had, through a group of companies including D1, made up fake investment projects and accepted deposits from the public unlawfully (196 Judgment §16).

(c) D2 has been on the wanted list of the Mainland authorities, apparently fleeing to the USA in 2019 in order to avoid criminal investigations (196 Judgment §§17, 117).

(d) Even D2’s personal assistant, Huang Xuli, was sentenced to 5 years’ imprisonment for conducting unlawful cross-border currency exchange transactions in breach of the Mainland’s capital control regulations (196 Judgment §42).

(e) There was evidence to suggest that D2 committed foreign exchange crimes through her network of corporate vehicles and natural persons, including D1. There was clearly circumstantial evidence showing a propensity to commit commercial crimes by these people (196 Judgment §114).

(f) D2’s defence in HCA 196/2021 was that the subject contracts were executed to provide a false picture or pretence to third parties, being banks or regulatory authorities of listed companies and the investing public. In other words, D1-D2 were perfectly content to, and intended to, dupe third parties into believing that the subject contracts were genuine, when they were knowingly not genuine (196 Judgment §115).

(g) There was evidence of actual dissipation. 2 days before the Mareva injunction was granted in HCA 196/2021, D2 transferred all her shares in D1 to Wang Hao, her cousin and assistant. There was no proper explanation for the transfer and its timing (196 Judgment §116).

(4) D1 is plainly insolvent given its failure to pay the 3 judgment debts. It has no incentive to sell the listed securities at the highest price, but has every reason to put them beyond the reach of its creditors by selling them at an undervalue to its associates or nominees.

(5) The listed securities identified by P are extremely thinly traded. D1 can easily arrange its nominees or associates to buy the securities at an undervalue through the open market as the proposed variation imposes no restriction on the identity of the buyer or the base price. In any event, given that the securities are so illiquid, any attempt by D1 to sell them in large quantity would likely lead to a drastic drop in prices which, in turn would prejudice the interest of P.

27.  I am prepared to deal with the application on the basis that D1 is entitled to make the application, despite the fact that it chose not to attend all the previous hearings when the court continued the Injunction.

28.  The burden is on D1 to demonstrate that it is just for the court to grant the variation sought. However, in the affirmations filed in support of the application, there is no evidence on (1) what listed securities are covered by the Injunction, (2) the value of the securities, (3) their trading volume and prices trend, (4) why D1 considers it necessary to sell the securities 2 years after the Injunction was first granted, (5) whether the intended sale can be effected having regard to the security held by Haitong Securities and the judgments obtained by Haitong International against D1, and (6) whether the securities are covered by the Mareva injunction continued by Coleman J.

29.  Without the aforesaid evidence which is highly relevant to the application, there is simply no basis for D1 to contend that it is just or convenient to vary the Injunction in the manner suggested by D1. On the day before the hearing, this Court directed the parties to address inter alia the questions as to what listed securities are covered by the Injunction and their current market value. At the hearing, Ms Lau produces a 2-page document listing out a number of listed companies and says that the total current market value is HK$518,566,647.93. There is no description on how many shares D1 holds in respect of each listed securities, their trading prices or where such securities are kept. Nor has D1 produced any statements to substantiate the so-called current market value.

30.  It is no answer to say that D1 is the owner of the listed securities or that the Injunction does not create any security or propriety interest in the listed securities in favour of P given that:

(1) P is a judgment creditor and the Debt owed is over HK$440 million, which is close to the market value of the securities known to P. As judgment creditor, P is entitled to take enforcement action over the listed securities frozen by the Injunction to pay the Debt if and to the extent that such securities are not subject to any prior encumbrances including the charge executed by D1 in favour of Haitong Securities and its affiliates (presumably includes Haitong International).

(2) According to P, Haitong International obtained a charging order absolute over the listed securities held in D1’s account although it does not know the full extent of D1’s liability and whether the value of the securities in the account exceeds such liability.

(3) It is incumbent upon D1 to demonstrate by evidence that taking into account (a) the security held by Haitong Securities and the charging order obtained by Haitong International and (b) the 2 judgments obtained by Haitong International, there is still surplus available to D1. It is only if there is any surplus after discharging the liability to Haitong Securities and Haitong International that D1 can say that it is the owner of that portion of the listed securities.

31.  Further, there is no evidence from D1 to refute P’s assertion (made in correspondence and repeated in affirmations) that D1 is insolvent by reason of its failure to comply with the SD and the 3 judgments entered against it. Even after this Court raised this question before the hearing, D1 still does not adduce any evidence to show that it is solvent or that it has the financial means to pay the 3 judgment debts. In particular, the senior notes mentioned in the Injunction have already been redeemed upon their maturity in June 2020. The proceeds in the amount of US$36.7 million had been paid into D1’s account at Haitong Securities and applied to repay the debts owed by D1. As at July 2021, around US$19.9 million remained in the account which has since been made subject to the garnishee order absolute obtained by Haitong International.

32.  As evidence now stands, D1 is plainly insolvent. While no winding up petition has yet been presented by P against D1, in the absence of any evidence to show that D1 has the means to pay the 3 judgment debts and the other liabilities which may result from the pending action, it is inevitable that D1 will be wound up in the future.

33.  It is well established that where a company is insolvent or of doubtful solvency, the interests of the company are in reality the interests of the creditors as it is the creditors’ money which is at risk. The directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion (Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] BCC 885, §74, per DHCJ Leslie Kosmin QC; Bilta (UK) Ltd v Nazir (No. 2) [2016] AC 1, §§123, 130, per Lord Toulson & Lord Hodge JJSC). Although D1 remains the legal owner of the listed securities, it does not have any real interests in such securities which are in truth the assets of the creditors including P.

34.  The evidence before the court shows that D1 has been under the control of Zhang and/or D2, both of whom are implicated in serious wrongdoings and are beyond the jurisdiction of the court. The proposed variation, if allowed, would allow D1 to sell the listed securities to anyone and at any prices, without any reference to the condition of the market or in consultation with P. There is nothing to ensure that the securities would be sold at the best prices reasonably obtainable in the market. Nor is there anything to protect the interests of P. Even after this Court asked the parties to consider whether they can agree on a mechanism which enables the sale of the listed securities at the prices agreeable to both P and D1, D1’s position is that it only would agree to give 24 hours’ prior notice to P on any proposed sale of the listed securities. The proposal does not allay the concerns of P about the possible sale at undervalue. Nor does it serve any useful purpose given that it is unrealistic to expect P to be able to apply to the court to stop the proposed sale within 24 hours.

35.  For the above reasons, I do not see any ground for the court to vary the Injunction as sought in the summons.