TIONG KING SING v. SAM BOON PENG YEE AND ANOTHER

HCMP 1289/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1289 OF 2011

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REASONS FOR DECISION

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Introduction

1.  These are respectively the defendants’ application for the discharge, and the plaintiff’s application for the continuation, of the ex parte Mareva injunction order granted on 8 July 2011.  The action itself was commenced also on that day.

2.  At the end of the hearing of these applications, I discharged the ex parte injunction order and refused to re-grant a fresh order, with costs to the defendants.  The reasons are set out below.

Background

3.  The dispute herein arises from a real property development in Chongqing.

4.  The plaintiff (“Tiong”) is a Malaysian investor who purchased various lots of land in Chongqing for development purposes (“the Project”).  The corporate vehicle used for the Project is now called “W International Investment Group Ltd.” (“W Int’l”) (formerly called “Wijaya International Investment Ltd.”), a company incorporated in Hong Kong (it has a Mainland subsidiary which, for present purpose, is treated as W Int’l).

5.  Whatever was the real reason for doing so (this is disputed), Tiong decided to sell the Project to the 1^st defendant (“Sam”) who wanted to carry on with his own resources; the shares of W Int’l would be sold to Sam (some other properties were also included).  For such purpose, the parties executed the following documents:-

(a)  an offer letter dated 14 December 2009 (“the offer letter”);

(b) an agreement dated 30 December 2009 (“the agreement”); and

(c)  a custodian agreement also dated 30 December 2009 (“the custodian agreement”).

It is undisputed the 2^nd defendant (“New Sunshine”) is Sam’s nominee company.

6.  The total price payable was RMB333.5 million, which was to be effected by instalments.  It is undisputed that the first 3 payments have been made.  The parties also entered into 2 agreements for rescheduling the remaining payment.

Ex Parte Application

7.  Tiong commenced an action HCA 1069/2011 on 28 June 2011 (this was discontinued on 26 July).  On the same day, he applied ex parte for a Mareva injunction order but the application was unsuccessful; the court made no order thereon.

8.  On 8 July 2011 (slightly less than 2 weeks later), Tiong applied in this action again ex parte for the same order.

9.  In his skeleton submissions used for the ex parte application, Tiong complained of the following breaches of contract on Sam’s part:-

(1) the shares of W Int’l have been used as a security for loans;

(2) the lots of land have been used as a security for loans;

(3) the shares of W Int’l became registered in the name of New Sunshine;

(4) Sam refused to permit Tiong to inspect the books and accounts of W Int’l; and

(5) Sam delayed/defaulted in paying the instalments

(see especially para. 24, skeleton submission dated 8 July 2011).

10.  According to the court record, the ex parte hearing lasted for about an hour.  At the end of the hearing, the court granted the order sought (with slight amendments).  The return day of the inter partes summons, a practice required by Practice Direction 5.3, para. 2, was fixed to be 12 August 2011 (more than one month after 8 July).

Duty of Full and Frank Disclosure

11.  The grant of an ex parte injunction order implies the grant of legal relief without the party against whom the relief is sought having the opportunity to be heard: Hong Kong Civil Procedure 2011, Vol. 1, para. 29/1/39.

12.  The first short-coming of such a course is that, to certain extent, it is an inroad into a litigant’s entitlement to a right to be heard, such entitlement being set out, for example, in Art. 10, Hong Kong Bill of Rights Ordinance (Cap. 383).  The other short-coming is the temptation for an applicant to try to get a “head-start” in the litigation by obtaining an ex parte order.

13.  One of the tools employed by the courts to eliminate (or mitigate against) any abuse of this “unconventional” remedy is the requirement that the applicant must proceed “with the highest good faith” (Schmitten v. Faulkes [1893] WN 64).

14.  The requirement has many facets:-

(a)  the applicant must make proper inquiries before making the ex parte application;

(b)  “material” means all matters which are material for the ex parte judge to know and which are necessary to enable him to exercise his discretion properly;

(c)   an applicant has a continuing duty to inform the court as soon as he becomes aware that the court has been misinformed or given incomplete information earlier;

(d)  there is also a duty to disclose any material change of circumstances while the proceeding remains ex parte; and

(e)   the disclosure should be made in the affidavit (and/or the skeleton submissions) and not in the exhibits (this is to ensure the ex parte judge will not overlook the matters which require disclosure, ex parte applications being usually urgent (so the judge usually has little reading time) and ex parte hearings are often short).

15.  Where there is material non-disclosure by the applicant, the court will ensure that he is deprived of any advantage derived from his breach of duty: Hong Kong Civil Procedure 2011, Vol. 1, para. 29/1/39; Commercial Litigation: Pre-emptive Remedies (2005) para. A1-458, p. 175, citing Bank Mellat v. Nikpour (Mohammad Ebrahim) [1985] FSR 87, 91.

16.  There are two purposes for the court to do so:-

(1)    to deprive the wrongdoer of an advantage improperly obtained; and

(2)    to serve as a deterrent to ensure that applicants realize that they have a duty of disclosure and the consequences if they fail in that duty.

17.  Chu Hung Ching v. Chan Kam Ming and Others, CACV 46/2001 (9 February 2001) was an instance where a Mareva injunction order was discharged where the plaintiff had failed to make full disclosure of changed circumstances, despite strong evidence of likely dissipation of assets.

18.  Nonetheless, the court retains a discretion not to discharge the ex parte order, or to make a new order on terms.  A typical example where the discretion will be so exercised is:-

(i)   the non-disclosure is innocent; and

(ii)  an injunction would still have been granted even had the facts been properly disclosed.

19.  The plaintiff has failed to discharge the above duty in this application.

20.  First, it has failed to inform the ex parte judge of the earlier unsuccessful application to another judge in HCA 1069/2011.

21.  Secondly, although the skeleton submissions for use at the ex parte application mentioned cl. 19, the offer letter (which provided in short that its terms were subject to the other terms and condition to be stipulated in the agreement), the plaintiff did not inform the ex parte judge (whether in the supporting affirmation or the skeleton submissions) some of the provisions in the agreement and the custodian agreement.

22.  There were provisions in the agreement relevant to the plaintiff’s complaint that the shares were transferred by Sam to New Sunshine.  The preamble thereof stated:-

“… [Tiong] agrees to sell his 100% legal and beneficial shareholdings in the Investment Company to [Sam] or [his] nominee(s) such that upon Completion (as defined below), [Sam] shall through the Investment Company indirectly hold 100% shares of or equity interest in the PRC Subsidiary” (emphasis supplied).

Further, clause 5(2) thereof stated:-

“Prior to the full settlement of the Purchase Price by [Sam], the new share certificate in the name of [Sam] (‘New Share Certificate’) in respect of the Sale Shares shall be deposited with the Li & Partners, solicitors for [Sam] … and to be released in accordance with the terms of [the custodian agreement] to be signed by the parties upon signing of [the agreement]” (emphasis supplied).

Clause 8 thereof stipulated:-

“Upon signing [the agreement], [Tiong] shall duly execute all the transfer forms and such documents in giving full effect on the transfer of the Sale Shares in favor of [Sam] and/or his nominee(s) as [Sam] may nominate together with the New Share Certificate” (emphasis supplied).

“Completion” has not been clearly defined in the agreement, but the whole tenure of its provisions tends to suggest this is an event which corresponded with the payment of RMB30 million (about 10% of the purchase price): cl. 4(1)(i) thereof.

23.  The custodian agreement was executed by:-

(a) Tiong;

(b) Sam;

(c) New Sunshine; and

(d) Li & Partners.

It provided:-

“[Sam] agreed to nominate [New Sunshine] to take up the Sale Shares” (recital (emphasis supplied) (B) thereof);

“ ‘Custodian Document’ shall mean the original new share certificate in respect of the Sale Shares in the name of [New Sunshine] deposited with [Li & Partners] by [Sam] and [New Sunshine] or on their behalf pursuant to Clause 2.1 hereof” (emphasis supplied) (cl. 1.1 thereof);

“Within 2 Business Days after Completion, [Sam] shall deliver and deposit the Custodian Document with [Li & Partners], subject to the provisions of [the custodian agreement]” (cl. 2.1 thereof).

24.  Further to the above, although cl. 4(1), the offer letter contained an express prohibition against the defendants’ using the assets of W Int’l as securities (subject to an exception), the agreement contained no such (or similar) provisions.  The attention of the ex parte judge has not been drawn to the last-mentioned matter.

25.  As summarized in para. 9 above, the defendants’ alleged breach included Sam’s unlawful dealings with (i) the shares of W Int’l (para. 9 (1) and (3) above), and (ii) the assets held by W Int’l (para. 9 (2) and (4) above).  The contractual provisions quoted above are material for the purpose of the ex parte application:-

(1) whether the transfer of shares to New Sunshine was in fact within the contracting parties’ contemplation (see, in particular, the contractual provisions quoted in paras. 22 to 23 above); and

(2) whether the mortgage loans were a breach of contract.

Risk of Dissipation of Assets

26.  Hong Kong Civil Procedure 2011, Vol. 1, para. 29/1/51 says:-

“The single most significant feature of the Mareva jurisdiction is that it … enables the court to grant the plaintiff an interlocutory injunction restraining the defendant from disposing of, or even merely dealing with, his assets … ”.

To justify the grant of a Mareva injunction, the applicant must show:-

(a)  a good arguable case on a substantive claim;

(b)  there are assets within the jurisdiction;

(c)  the balance of convenience is in favour of grant; and

(d)  there is a real risk of dissipation of assets, or removal of assets from the jurisdiction, which would render the applicant’s judgment of no effect

(Hong Kong Civil Procedure 2011. Vol. 1, para. 29/1/56).

27.  The thrust of the defendants’ case is that there is no or insufficient evidence of a real risk of dissipation of assets by them.  They contend that mere breach of contract does not provide the basis for such a risk.  I agree.

28.  In relation to the shares of W Int’l (already registered in the name of New Sunshine before the inter partes hearing), they offer an undertaking not to further deal with them: see the letter dated 29 July 2011 and para. 18, defence skeleton submissions.  As stated above, it is also argued that, by reason of the provisions of the agreement and the custodian agreement quoted above, there was no breach of contract.

29.  In relation to the mortgage loans concerning the shares and the underlying assets, broadly speaking the funds obtained are still kept by New Sunshine.  Despite various criticisms levied by the plaintiff’s Mainland accountants against the financial report of W Int’l (provided by the defence), there is no proper basis for thinking substantial assets have been siphoned off.

30.  The complaint of the defendants’ refusal to permit the inspection of book and accounts (which is denied, and an offer to inspect was made by the defence solicitors on 8 August 2011) cannot properly ground a real risk of dissipation of assets.

31.  The plaintiff also complained at the inter partes hearing about a development project in Guangdong.  But there is evidence the project was acquired for W Int’l.

Other Matters

32.  As stated above, the return day of the inter partes summons has been fixed over one month after the grant of the ex parte injunction order.  I understand the departure from the usual practice (set out in the practice direction) was related to the likely time period required to effect proper service on the defendants (especially Sam who resides in the Mainland).

33.  The rationale behind the above usual practice (of requiring the applicants of ex parte applications to take out an inter partes summons returnable in a short time) seems to be this.  Experience in the past showed that some applicants have not prosecuted the litigation with as much diligence as should be, giving rise to the suspicion that they may be “sitting on” the litigation while enjoying the benefit of the ex parte orders.

34.  An early return day would also help to ensure the application can be re-considered again with little delay (whether or not the respondent thereto in fact enters an appearance).

35.  Respondents against whom ex parte injunction orders have been made, and who are not within the jurisdiction, can fall into 3 categories:-

(a)  those unknown to the applicants; that is, they are total strangers with no known addresses for service (or communication);

(b)  those known to the applicants but there is proper basis for concluding they can no longer be found at their usual or last known addresses (for example, they have absconded); and

(c)  those known to the applicants and can be found at their usual or last know addresses (or the parties have been able to communicate with each other through other means)

(Sam belongs to the third category (sub-para. (c) above).

36.  For the reason given below, in relation to the third category respondents, it would seem that to fix the return day of the summons in accordance with the practice direction is often the better course to adopt.

37.  Nowadays there is often no lack of easy and speedy modes of correspondence: e-mail, short message service (or SMS), facsimile transmission, telephone call and the like.  Most people would find these means of communication more efficient than personal or postal delivery, for example. Due service of process must naturally be effected in accordance with the procedural rules.  But this does (and should) not stop the beneficiary of an ex parte order from notifying the party affected by using these modes of communication (which the parties probably have already been using in their previous dealings (be the dealings commercial or otherwise)).