TAIHAN GLOBAL HOLDINGS LTD v. LAU SIU MING AND OTHERS

HCA 1687/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1687 OF 2011

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BETWEEN

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REASONS FOR DECISIONS

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1.  This is an application by the 2^nd and 3^rd Defendants for the Plaintiff to provide further security to fortify the undertaking as to damages in respect of the Mareva injunction granted in an ex parte application on 6 October 2011. In the hearing on 18 November 2011, I allowed the application and ordered the Plaintiff to provide further security in the form of bank guarantee in the amount of US$3,000,000 within 14 days. I now give my reasons.

Background

2.  The Plaintiff is a wholly owned subsidiary of Taihan Electric Wire Co Ltd (“TEC”) specialised in manufacturing and supplying various types of cables, including a specialised type of cable used for electrical wire and telecommunication applications known as SCR Copper Rods (“Copper Rods”).  The Plaintiff engaged the 1^st Defendant as its agent to promote the sale of Copper Rods in the Pearl River Delta market.

3.  Recently, the Plaintiff received complaints from certain customers, alleging that they had not received the Copper Rods ordered from the Plaintiff although they had paid the full purchase price to the Plaintiff.  After investigation, the Plaintiff claims that the 1^st Defendant had misappropriated some of the Copper Rods of the Plaintiff, with some of them transferring to the 2^nd and the 3^rd Defendants.

4.  The 1^st Defendant is the 50% registered shareholder of the 2^nd Defendant and is one of its two directors.  The other 50% registered shareholder and director is one Mr. Arctic Lee (“Mr. Lee”).  Mr. Lee is also the majority shareholder and one of the three directors of the 3^rd Defendant.

5.  The Plaintiff obtained, inter alia, an ex parte Mareva injunction against the 1^st to 3^rd Defendants and disclosure order as to the whereabouts of certain Copper Rods against all the Defendants before Saunders J on 6 October 2011.  To comply with the order of the court as to fortification of undertaking as to damages, the Plaintiff paid a sum of HK$200,000 into court.  On the return day on 14 October 2011, Sakhrani J adjourned the inter parte application for the continuation of the Mareva injunction (“the Inter Parte Application”) to 11 November 2011 and gave directions for the filing of affidavit evidence.  The Plaintiff later took out an application to extend the scope of the disclosure order against the 1^st Defendant, and I allowed such application on 4 November 2011.

6.  The Plaintiff had also made a report to the police and as a result the 1^st Defendant was arrested.  He was released on bail.

7.  This case came before me again on 11 November 2011.  As the documents possessed by the 1^st Defendant relevant to the case had been seized by the police, the 1st Defendant had difficulty in preparing the affidavit to oppose the Inter Parte Application for the continuation of the Mareva injunction and to comply with the disclosure order. I therefore further adjourned the Inter Parte Application to 16 December 2011 and gave directions for the filing of affidavit evidence by the parties.

8.  Shortly before the hearing on 11 November 2011, the 3^rd Defendant filed the 2^nd Affirmation of Mr. Lee. According to Mr. Lee, the 3^rd Defendant was a broker for and on behalf of one Kuanheng Industrial Company Limited (“Kuanheng”) involved in the trading of a product known as Copper Cathodes both in the spot and in the futures markets.  By reason of the Mareva injunction, the 3^rd Defendant had suffered tremendous loss by not able to carry on the trading of Copper Cathodes in the futures markets and by the measures taken by the mortgagee bank to protect its interest under the trade financing arrangement.  The 3^rd Defendant therefore asked the court to increase the fortification on an urgent basis.  Under the impression that the continuation of the Mareva injunction would continue to increase the potential loss of the 3^rd Defendant, I agreed to deal with such application on the next summons day and gave directions for the filing of affidavit evidence.  The fortification application therefore came before me on 18 November 2011.

Factors to be considered

9.  According to the dicta of Deputy High Court Judge Coleman SC in Hui Chi Ming v Koon Wing Yee [2011] 1 HKLRD 260 at §34, there are two issues that the court has to consider in an application for fortification :

(i)   whether there is a likelihood of a significant loss arising as a result of the injunction granted; and

(ii)   whether there is a basis for the belief that the plaintiff would be unable to make good the loss.

(i)   Likelihood of significant loss

10.  Based on the evidence of the 3^rd Defendant, I am satisfied that the Mareva injunction is likely to cause significant loss to the 3^rd Defendant.  The 3^rd Defendant is a broker acting on behalf of Kuanheng involved in the trading of Copper Cathodes, which are a different kind of products from Copper Rods.  With the fund provided by Kuanheng, the 3^rd Defendant purchased Copper Cathodes in the amount of about US$21,000,000.  In or about June 2011, Kuanheng was in need of cash flow and therefore instructed the 3^rd Defendant to sell the Copper Cathodes to recoup the investment.  As the price of Copper Cathodes was not attractive by that time, Kuanheng accepted the suggestion of the 3^rd Defendant to raise fund by way of trade financing rather than to sell the products in the market.  In trade financing, the bank (Standard Bank PLC in the present case, “SBP”) financed the 3^rd Defendant on the strength of the physical Copper Cathodes mortgaged to the bank.  At the same time, the 3^rd Defendant took a “sold” position or long position of basically the same amount of Copper Cathodes in the futures contracts.  In the trading of Copper Cathodes, there is a unique way of fixing the price of the sale contract.  The buyer may fix the price by reference to the market price of the product in a specified market on a particular day within the quotation period.  After the buyer exercises the option to fix the price, the 3^rd Defendant would safeguard its position by hedging activity and place a “bought” position in the futures market.  By doing so, the 3^rd Defendant would lock up its gain to the premium and at the same time would be free from any risk which may result from the fluctuation in the price in the market before the settlement date.

11.  After the granting of the Mareva injunction, SBP took certain measures to protect its position under the trade financing agreement.  Further, as the 3^rd Defendant was not able to operate its bank accounts, the 3^rd Defendant could not carry on any hedging activity with a view to protect its interest under the futures contracts.  As a result, I am given to understand that the 3^rd Defendant has already suffered loss in the amount of US$8,562,000.  As explained by Mr. Lee in his 3^rd Affirmation, such loss has already crystallized and there is nothing that the 3^rd Defendant can do to reduce the loss.  Such loss has not taken into account the potential liability of the 3^rd Defendant to Kuanheng for the damages caused by the freezing of the capital injected by Kuanheng into the bank accounts of the 3^rd Defendant.  Mr. Hung, counsel for the 2^nd and 3^rd Defendants, informs the court that the latest position is that SBP has on 17 November 2011 by letter terminated all sale contracts.  Further, SBP closes out the Futures Positions in respect of the purchase contracts and is now selling the Copper Cathodes under those contracts to third parties.  In order to achieve the sale, the sale would be at no premium or even negative premium like a force sale, and the loss is yet to be quantified.

12.  Ms. Lam, counsel for the Plaintiff, submits that the 3^rd Defendant has exaggerated the loss, and she also raises some queries about the trading activities and the trade financing arrangement as alleged by Mr. Lee.  In my judgment, it is not appropriate for the court to conduct a mini-trial at this stage to determine whether all the allegations of the 3^rd Defendant are true.  At the very least, the 3^rd Defendant is able to produce the following documentary proof to substantiate its claim:

(i)   bank transfer documents showing the transfer of substantial amount of money from Kuanheng to the 3^rd Defendant;

(ii)   sale contracts and warehouse receipts showing that the 3^rd Defendant had purchased a significant amount of Copper Cathodes;

(iii)   cash ledger statement of the 3^rd Defendant issued by SBP showing significant transactions in the account;

(iv)   commercial invoices supporting the alleged trade financing arrangement between SBP and the 3^rd Defendant;

(v)   margin call email from SBP to the 3^rd Defendants with statement;

(vi)   sale contracts showing that the 3^rd Defendant had sold a significant amount of Copper Cathodes in the futures markets; and

(vii)   letter from SBP dated 17 November 2011 showing the recent development mentioned in the last paragraph.

13.  These documents support the 3^rd Defendant’s allegations that it was involved in the trading of significant amounts of Copper Cathodes in the futures markets and there was some kind of trade financing arrangement between SBP and the 3^rd Defendant.  As there is some degree of truth in the 3^rd Defendant’s allegations, I am satisfied that, for the purpose of the fortification application, the 3^rd Defendant has managed to establish that there is a likelihood of a significant loss arising as a result of the injunction granted.

(ii)     The Plaintiff’s ability to make good the loss

14.  I agree that the Plaintiff is a typical shell company.  The registered office is that of an accountant firm.  It does not have a representative office, and it has no staff except holding out the 1^st Defendant as its Manager.  Apart from some “prepayments, deposits and other receivables”, the Plaintiff has no substantial asset in Hong Kong.  According to the Financial Statements produced by the Plaintiff, there was “accumulated losses” booked in 2010 in the amount of US247,385.945.  In a short span of one year from 2009 to 2010, the net assets of the Plaintiff had been reduced significantly from US$426,229,593 to US$108,498,602.  The quality of the Plaintiff’s assets is also questionable.  In view of these observations, in the case that the Plaintiff is asked to honour the undertaking as to damages, I have serious doubt as to whether the 1^st Plaintiff is able to make good the loss the amount of which can be substantial.

15.  The Plaintiff’s parent company in Korea, TEC, may be in a better financial position.  I am given to understand it is a listed company in the stock market in Korea.   According to the Financial Statements of TEC for the year ending 31 December 2010, it had current assets of around US$1.8 billion and shareholders’ equity of around US$710 million.  Nevertheless, Mr. Hung is able to draw the attention of the court to the qualifications of the Auditors in the Independent Auditors’ Report of TEC, which tends to suggest that TEC may have to undergo certain restructuring exercise.  I also understand from Ms. Lam that TEC is prepared to offer assistance to the Plaintiff by providing the same undertaking as to damages.

16.  No matter what is its financial position, TEC is still a foreign company and the 3^rd Defendant may have difficulty in enforcing the undertaking as to damages in a foreign jurisdiction.  In my judgment, if the Plaintiff is asking the court to protect its interest by freezing the assets of the 3^rd Defendant before the determination of the merits of the claim, it is only fair to ask the Plaintiff to provide the same protection to the 3^rd Defendant in the case that the latter succeeds in its defence and has to enforce the undertaking as to damages. Further, if what Ms. Lam tells the court are true, TEC should have no difficulty in providing the bank guarantee to cover the possible loss to the 3^rd Defendant.  On the other hand, as the 3^rd Defendant has to cease all trading and hedging activities, one should not underestimate the impact of the Mareva injunction on the 3^rd Defendant.  If the 3^rd Defendant succeeds in its defence, it is not an exaggeration to say that the Mareva injunction has already ruined its business.  The 3^rd Defendant therefore has a legitimate concern.  In such circumstances, I accept that the fortification application is a bona fide one and not one made with a view to exert improper pressure on the Plaintiff.  It is only fair and just for the court to exercise the discretion to increase the fortification and I therefore so ordered.

The quantum of the fortification

17.  The 3^rd Defendant asks for fortification in the amount of US$11,549,500 by way of bank guarantee. 

18.  In arriving at the appropriate figure of the fortification, the court may take a broad view about the case.  In Chow Chor Leung v Rafaella Sportswear Inc. [1990] 1 HKLR 449, Bokhary J, as he then was, said the following at p. 453H:-

“ … … … The Court will order fortification where it appears just and proper to protect the defendant by making such an order; and in arriving at the amount to be put up by way of fortification, the court has to take a broad view. Indeed, there have been cases where the Courts have said that if a detailed enquiry were necessary, that may be a very good reason for not ordering fortification. That is not to say that a party seeking fortification does not have to make out a case for fortification and provide the Court will some material for the purpose of selecting a figure. What it does mean is that if there are arguments and counter-arguments on the amount, the Court has to take a broad view without resolving all those argument.”

19.  In adopting the figure of US$11,549,500, the 3^rd Defendant takes into account: (i) the crystallized loss in the sum of US$8,562,000 that the 3^rd Defendant is liable to pay the purchaser, Rongkun Trade Company Limited, under the futures contracts; (ii) the possible claim by Kuanheng for the loss resulting from the freezing of the 3^rd Defendant’s bank accounts; and (iii) the loss resulting from the sale of the Copper Cathodes as stated in the letter from SBP dated 17 November 2011.  Without a full investigation, it is very difficult to say whether the 3^rd Defendant has exaggerated its loss.  But taking into account the magnitude of the transactions involved, I agree that the potential loss can be substantial.

20.  It is clear that the original fortification in the amount of HK$200,000 is wholly inadequate.  Having considered all the circumstances and taken a broad view of the case, I arrived at a figure of US$3,000,000 in the hearing.  In my judgment, this amount would offer adequate but not complete protection to the 3^rd Defendant at this stage, and TEC, the Plaintiff’s parent company, should have no difficulty in providing the security required.

Whether the court should increase the fortification before the hearing of the Inter Parte Application?

21.  I have also considered the question as to whether I should increase the fortification at this stage or to adjourn the application to be heard together with the Inter Parte Application.  When I first agreed to deal with the fortification application on an urgent basis, I was under the impression that the continuation of the Mareva injunction would continue to increase the loss of the 3^rd Defendant.  In the substantive hearing, I was then given to understand that the most of the damages suffered by the 3^rd Defendant have already crystallized and there is nothing that the 3^rd Defendant can do to reduce the loss.  Since the damage has already been done, there is some weight in the argument that the court should just preserve the status quo and leave the fortification application to be heard together with the Inter Parte Application.

22.  Despite such consideration, I am of view that it is only fair and just to increase the fortification at this stage.  Taking into account the nature of business carried on by the 3^rd Defendant and the magnitude of the transactions involved, it is clear that the fortification provided for in the ex parte order is wholly inadequate.  In my judgment, the court should rectify the inadequacy as soon as possible.  In the case that the Mareva injunction was wrongly granted, it is likely that the 3^rd Defendant would suffer considerable loss.  If the Plaintiff is asking the court to protect its interest before the determination of the merits of the claim, it would only be fair to require the Plaintiff to offer the same protection to the 3^rd Defendant to cover the loss in the case that the Mareva injunction was wrongly granted.  Further, the evidence shows that the Plaintiff’s parent company, TEC, should have no difficulty in providing the bank guarantee in the amount of US$3,000,000.  I therefore exercised my discretion to increase the fortification before the substantive hearing of the Inter Parte Application.

23.  In the case of default of the payment of further security, the Mareva injunction would be discharged against the 3^rd Defendant.  The injunction would not be discharged against the other Defendants because the potential losses suffered by these Defendants are different and the merits of the Plaintiff’s claims against these Defendants are also different.

24.  These are the reasons for the decision I made in the hearing on 18 November 2011.