THE JOINT AND SEVERAL LIQUIDATORS OF GREEN ELITE LTD (IN OFFICIAL LIQUIDATION IN THE BRITISH VIRGIN ISLANDS) v. STANDARD CHARTERED BANK (HONG KONG) LTD

HCMP 2187/2022

[2024] HKCFI 259

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2187 OF 2022

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J U D G M E N T

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1.  The Applicants, the liquidators of Green Elite Limited (“Green Elite”), applied by Originating Summons dated 23 December 2022 against the Respondent Standard Chartered Bank (Hong Kong) Limited (“SCB”) for the discovery of:

(1)  Account openings documents in respect of accounts numbered 8522350750 (“852 A/c”) and 5100023 (“510 A/c”);

(2)  All bank statements for the Accounts from 1 March 2015 to date;

(3)  All communications between SCB and any person(s) involved in the opening, maintenance, use and/or operation of the Accounts;

(4)  All above information in respect of any other bank accounts in the name of Fang Ankong (“Fang”) with SCB;

(5)  Further disclosure of specific transactions identified from the bank statements of the Accounts;

(6)  Leave to use the documents obtained under (1) and (2) in support of further criminal or civil actions, in Hong Kong or elsewhere in the context of the liquidation of Green Elite.

2.  The Respondent is neutral to the application. Fang was joined as Intervener to object to the application.

Background

3.  Green Elite was a British Virgin Islands (“BVI”) company now in liquidation. The Applicants are the joint and several liquidators of Green Elite.

4.  Green Elite was incorporated on 20 January 2010. Its equal shareholders were HWH Holdings Limited (“HWH”), in which Fang was a director, and Delco Participation BV (“Delco”), a Dutch company beneficially owned by Mr De Leeuw and Mr van Ooijen.

5.  The directors of Green Elite were Fang, Fang’s brother Mr Fang Anlin (“Fang AL”), Fang’s brother-in-law Mr Ding Li (“Ding”), and Mr Gu Liyong (“Gu”) (“Three Directors”)[1].

6.  Fang and the two Dutch gentlemen had a joint venture in scrap metal in the Mainland. Out of the success of the business saw the listing in Hong Kong of Chiho Tiande Group Limited (“CT”). Part of the reasons for the listing of CT was an incentive scheme to benefit the Three Directors.

7.  Green Elite was a shareholder in CT. By an agreement dated 2 April 2014, Green Elite agreed to sell its CT shares (“CT Shares”) to Tai Security Holding Limited (“Tai Security”) for HK$150,000,000 (“Sales Proceeds”). By a supplemental agreement of the same date, Tai Security was to pay the Sales Proceeds into Green Elite’s bank account within 14 days of completion.

8.  Tai Security and its owner Mr Cai Huabo (Cai) paid the Sales Proceeds of the CT Shares in three tranches into Fang’s 852 A/c with SCB.

9.  There was never any board meeting of Green Elite authorizing the payment to Fang’s personal bank account, and the shareholders of Green Elite were never so informed.

10.  Fang then distributed the Sales Proceeds to Fang AL on 1 February 2016, to Ding on 29 December 2017, and to Gu via Fang’s son Fang Hui’s bank account on 15 February 2016.

11.  Separately, Green Elite received dividends of HK$8,892,000 from CT, and Fang borrowed HK$8,733,490.88 from Green Elite out of the dividends (“Director’s Debt”).

12.  On 15 June 2018, Green Elite was ordered to be wound up by the BVI Court of Appeal of the Eastern Caribbean Supreme Court.

13.  On 16 November 2018, the liquidation of Green Elite was recognized in the High Court of Hong Kong as per the Order of Anthony Chan, J. The Order for recognition, amongst other things, vested powers on the liquidators as if they were appointed under the Laws of Hong Kong, and in particular to request from third parties documents and information concerning the business dealings, accounts assets, liabilities or affairs of Green Elite including the circumstances that gave rise to the appointment of the liquidators, and to locate, protect, secure and take possession and control all assets and property within Hong Kong to which Green Elite appears to be entitled.

14.  On 14 December 2018, Green Elite, In Liquidation, commenced proceedings in BVI High Court of Justice against Fang, Fang AL, Ding, Gu and HWH for the payment and various declaratory relief of the Sales Proceeds and the Director’s Debt, and another debt relating to HWH (not relevant here) (BVIHC (COM) 2018/0222).

15.  In the Judgment of Adrian Jack, J [Ag] dated 17 January 2022, the BVI High Court found that:

“[47] On 27^th February 2014 Ms Chan emailed Mr van Ooijen the management accounts of Green Elite for 1^st April 2010 to 31^st December 2013. The profit and loss account shows dividend income from CT of HK$8,892,000. The balance sheet shows an ‘Amount due from Director’ of HK$8,733,492.88…

[50] On 4^th April 2014 the CT shares were transferred to Tai Security. On 18 April 2014, Mr Van Lint emailed Mr de Leeuw the accounts for Green Elite and said that the dividend from CT had been left to Mr Fang. He referred to the sale of the CT shares and included a calculation of the sum due to Delco…

[53] Contrary to the terms of the sale agreement and the supplemental agreement, Tai Security in fact paid the purchase price for Green Elite’s CT shares in three tranches on 31^st March, 2^nd April and 9^th April 2015. The payments were made to Mr. Fang’s personal bank account. Mr. Fang did not tell Mr. de Leeuw or Mr. van Ooijen that he had received the payments and that he had kept the proceeds. There was never a board meeting of Green Elite to authorize this mode of payment. Mr. Gu accepted in evidence that he knew of the payments and that he was happy for Mr. Fang to retain them…

[56] Despite the letter before action, on 15^th February 2016 Mr. Fang paid Mr. Gu HK$50,000,007.60, this being what Mr. Fang considered to be Mr. Gu’s share of the sale proceeds. By this time, Mr. Gu had retired from his employment with CT. The payment was made from the bank account of Fang Hui, Mr. Fang’s son. So far as payments to Fang Anlin and Ms. Ding are concerned, there were small instalments in April 2015. The balance was paid between 1^st February 2016 and 29^th December 2017. Again the payments were made through various members of Mr. Fang’s family. Neither Mr. de Leeuw nor Mr. van Ooijen were told about the payments…

[148] As to section 120(1) of the BCA (ie Business Company Act, BVI), it is necessary for the Court to be satisfied that the directors acted dishonestly: Nam Tai Property Inc v IsZo Capital LP & anr [2021] ECSCJ No 714 at [268]). There are, as I have set out above, some indication that Mr Fang was aware that what he was doing was not proper. Nonetheless, in my judgment Mr Fang was not dishonest. He held a genuine, albeit mistaken, belief that he was entitled to do with the proceeds of sale from Tai security as he sought fit. It was not put to Mr Gu that he was dishonest. Despite the negative view I take of Mr Gu’s evidence, I acquit him of dishonesty. The same apples to Fang Anlin and Ms Ding. There was no separate evidence that either of them was dishonest. Accordingly, the claim under section 120(1) fails.

[149] As to section 121 of the BCA, it was the duty of the four directors to satisfy themselves that the payment of the monies to three of them was for a proper purpose. The only proper purpose relied on by the defendants is the Agreed Purpose. Since that was, as I have found, not legally binding, the fulfilment of the Agreed Purpose cannot be a proper purpose. Accordingly, this claim is established. The first four defendants are jointly and severally liable to account for all the monies received from Tai Securities and the dividends received from CT…

[151] Accordingly, Green Elite is entitled to trace the monies paid to each of the Three Employees. The four directors are also on this further basis advanced by Mr. Machell QC jointly and severally liable for all the monies paid out.

[152] As to section 175 of the BCA, I have expressed my views above. Since the Agreed Purpose was not legally enforceable, this claim succeeds. Again the directors are jointly and severally liable for the monies paid out in breach of this section.

[153] The claim in restitution adds nothing to the above claims. Mr. Fang paid the monies over to the Three Employees, so there is no unjust enrichment of him. Each of the Three Employees is liable in restitution for the monies received individually by them. Mr. Gu’s defence of change of position I have rejected.

[154] The claim in respect of the loan of HK$8,733,492.88 which appeared in Green Elite’s, management accounts is also subsumed by the main causes of action. No separate amount is owed. For completeness, however, I find that Mr. Fang (and he alone) is liable for this money as a loan which appeared in Green Elite’s accounts.”

16.  On 20 January 2022, the Order was made before Adrian Jack, J [Ag] as follows:

“1. The First to Fourth Defendants (ie Fang, Fang AL, Ding and Gu) are jointly and severally liable to account for and shall pay to the Claimant the sum of HK$150,000,000.00 plus interest in the amount of HK$20,663,013.70 from 1 March 2015 to 17 January 2022 (being a sum calculated at a rate of 2% per annum).

2. The First to Fourth Defendants are liable to account for and shall to pay the Claimant the sum of HK$8,733,490.88 plus interest in the amount of HK$1,494,025.12 from 1 July 2013 to 17 January 2022 (being a sum calculated at a rate of 2% per annum).

3. …[the sum of HK$3,450,000.00 relating to HWH only]

4. The Claimant has equitable title in, and is entitled to trace, the monies paid to the First to Fourth Defendants and there shall be an inquiry to ascertain whether the First to Fourth Defendants or any of them hold any traceable funds or the proceeds or product thereof or any profit therefrom and the Claimant shall have permission to apply for directions in respect of such inquiry (all parties shall have liberty to apply).”

17.  On 23 February 2022, BVI High Court granted a worldwide freezing injunction against Fang, but a proprietary injunction was refused and only granted against the Three Directors, as the BVI Court accepted that Fang had paid out all the Sale Proceeds to the Three Directors. And the ancillary disclosure with the freezing injunction against Fang did not cover his assets in the People’s Republic of China, hence, the Hong Kong assets (including the 852 A/c and 510 A/c) of Fang were also not covered.

18.  On 16 December 2022, Green Elite commenced proceedings in Hong Kong sueing on the BVI judgment for its enforcement in Hong Kong (HCA 1779/2022).

19.  On 9 January 2023, Fang appealed against the judgment of the BVI High Court but it was upheld in its entirety by the BVI Court of Appeal.

20.  In May 2023, Fang obtained conditional leave to appeal to the Privy Council, but stay of execution was refused.

21.  Prior to the taking out of the present Originating Summons, the Applicant has on 29 September 2022 written to SCB seeking various bank statements or other documents. Apart from the 852 A/c, the 510 A/c with SCB was another account disclosed by Fang in application for disclosure in the BVI Court. There were other accounts held by Fang with SCB disclosed but the account numbers were redacted.

22.  From bank documents available, there has been movements of funds between Fang, Tai Security and its owner Cui via the 510 A/c.

Legal Principles

23.  The principles governing the grant of a discovery order against third parties for information relating to the wrongdoer or tortfeasor (Norwich Pharmacal order) are:

(1)  It is not an usual order and there should be powerful factors in favour of the grant;

(2)  There must be cogent and compelling evidence that serious tortious or wrongful activities have taken place;

(3)  It must be clearly demonstrated the order will very likely reap substantial and worthwhile benefit for the plaintiff, eg in a tracing exercise, there must be serious possibility that the discovery will realistically lead to discovery of the plaintiff;

(4)  The scope of discovery must not be unduly wide. The order must be specific, and restricted to documents or classes of documents necessary to enable the plaintiff to preserve or discover assets;

(5)  The plaintiff must have exhausted other proper and reasonable avenues for obtaining the information sought.

(Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133, applied in A Co v B Co [2002] 3 HKLRD 111 per Ma J as Ma CJ then was.)

24.  As to the principles concerning application for bankers books disclosure (Bankers Trust order) are:

“The principles concerning an application for banker’s books disclosure orders are well-established, and were set out by [IntP#2] as follows:

‘8. The primary purpose of a discovery order made under section 21 of the EO is to preserve the assets or property which might otherwise be dissipated notwithstanding an injunction not to do so. Though the court will not lightly use its powers to order disclosure of full information touching the confidential relationship of banker and customer, such an order may be justified where the plaintiff seeks to trace funds which, in equity, belong to it and of which there is strong evidence that it has been fraudulently deprived, where delay might result in the dissipation of the funds before trial.

9. There are three limits to the exercise of the power:

(1) the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim; (2) where documents are required to be disclosed, the third party should be entitled to the same specificity in the documents he is asked to produce as he would be if served with a subpoena; and (3) even if the application prima facie falls within the principle for disclosure, the court needs to balance the potential advantage of disclosure against the detriment to the person against whom the order is sought, not merely in terms of costs (for which he is ordinarily compensated on an indemnity basis by the terms of the order) but by way of invasion of privacy and requiring breach of obligations of confidence owned to others.

10. Further, the plaintiff is ordinarily required to give an undertaking that whatever information is obtained would be used only for the purposes of the action to trace the funds, and not for any other purpose.”

(Bankers Trust Co v Shapira [1980] 1 WLR 1274, considered in A Co v B Co cited above; Hwang Joon Sang and Anor v Golden Electronics Inc and Ors [2021] HKCFI 544 per Coleman J at [8]–[10]).

25.  Liquidators are privies of the company on issue estoppel. An issue estoppel arises even if the judgment is of a foreign court, so long as it is a court of competent jurisdiction and the judgment is final on the merits (Re GTI Holdings Ltd [2022] 4 HKLRD 339 per Linda Chan J at [11].

26.  Leave to use the documents obtained is not only for civil but also criminal actions to facilitate tracing of funds by the plaintiff (Aisan Corporation of America v Unknown Bank Account Holders [2023] HKCFI 567 per Au-Yeung J).

Applicant’s case

27.  Miss Mak, Counsel for the Applicant, submitted that the purpose of a Norwich Pharmacal order is to identity and locate the general assets of the judgment debtor for the possible enforcement of the money judgment (A v R1 and R2 [2022] HKCFI 3012 per DHCJ Jonathan Chang SC).

28.  Miss Mak submitted that:

(1)  The receipt and distribution by Fang of the Sales Proceeds and the Director’s Debt without approval and in breach of director’s duties were clearly found to be wrongful activities;

(2)  The finding of the BVI High Court that Fang was not dishonest is irrelevant since dishonesty is not a necessary element of the wrongful appropriation of company assets;

(3)  The discovery will reap substantial and worthwhile benefits to the Applicant as the 852 A/c was used as a conduit in the distribution of the Sale Proceeds to the Three Directors, and apart from the Fang’s say-so, there is currently no verifiable information on the locations and whereabout of the funds;

(4)  There is a clear nexus between the 852 A/c and the 510 A/c and there is a real possibility of inter-account transfer of funds;

(5)  The Applicant is entitled to trace whether the Director’s Debt has been onward transferred into other accounts.

Fang’s case

29.  Mr Phang, Counsel for the Interested Party, submitted that the essential requirements for a Norwich Pharmacal or Banker’s books order have not been met, and in addition, the orders sought are unduly wide and oppressive.

30.  Fang’s principal ground of objection is that the application is predicated on the false premise that Green Elite needs to trace the Sales Proceeds to Fang in order to find out what has become of it. The BVI Court had already conclusively determined that Fang had distributed the entire sum to the Three Directors. The Applicant is there estopped from reopening this factual issue.

31.  The BVI Court held that although the distribution by of the Sales Proceeds by Fang was wrongful, but Fang was not dishonest because he had a genuine, albeit mistaken, belief that the Three Directors were entitled to share the Sale Proceeds.

32.  The application for a proprietary injunction against Fang and HWH was dismissed by the BVI Court because Fang had already distributed the Sales Proceeds to the Three Directors.

33.  In the premises, there is no need to find out from Fang’s banker SCB to find out what has become of the Sales Proceed, as it is already known where the monies have gone. The discovery is not necessary to realizing Green Elite’s assets. Green Elite could trace the Sale Proceeds onto the Three Directors.

34.  The proper and precedent step was for the Applicant to appeal against the BVI injunction order. It is not for the Applicant to get it in Hong Kong through the back door.

35.  Further, the scope of the discovery is too wide. The Sale Proceeds were deposited into the 852 A/c in March and April 2015, and were fully distributed to the Three Directors between February 2016 and December 2017. Hence, it is too wide to seek the bank statements up to the date of the order sought.

36.  Also, Fang never denied he owned the 852 A/c. Hence, it is not necessary to seek the communications between Fang and SCB relating to the opening, maintaining, use and/or operation of the bank accounts. In any case, the Applicant had previously indicated to SCB that such communications would not be sought.

37.  The unrestricted use in support of further actions, whether civil and criminal, Hong Kong or elsewhere would also be too wide.

Analysis

38.  It has been pointed out that there may be apparent incongruity between the BVI Judgment and the Order of Adrian Jack, J [Ag].

39.  In the BVI Judgment, it was found that Fang had paid the Sale Proceeds over to the Three Directors, and there was no unjust enrichment on the part of Fang, and Green Elite was entitled to trace the monies paid to each of the Three Directors only. However in the Order, it was stated that Green Elite had an equitable claim on the Sale Proceeds and was entitled to trace the monies paid to Fang and the Three Directors.

40.  Also, while in the BVI Judgment the Director’s Debt was said to be subsumed in the Sale Proceeds, which logically must be a separate sum and the additional to the liability for the Sales Proceed, and in any case the Order did set out separate liability for the Director’s Debt by Fang. Further, while Fang alone was liable for the Director’s Debt in the Judgment, Fang and the Three Directors were all liable to account for the Director’s Debt in the Order (while the liability by the Three Directors is not a matter for the present purpose).

41.  I have not been informed of the relevant BVI law, hence, I should take it to be the same as Hong Kong law. I am going to approach the matter in the light of all the relevant findings and procedural history in order to do what is just, necessary and convenient in the circumstances.

42.  Although, Green Elite was stated to have an equitable claim for the Sale Proceeds against Fang, Green Elite did not succeed in obtaining a propriety injunction against Fang in the BVI Court on the ground that Fang had fully distributed the Sale Proceeds to the Three Directors. Green Elite had obtained a proprietary injunction with tracing against the Three Directors, it should and could have sought discovery of the Sale Proceeds directly against the Three Directors. There is no evidence before me that course had not been possible. Looking at the facts and procedures taken in BVI, I do not consider that the order sought against Fang in relation to the Sale Proceeds should be made.

43.  As to the Director’s Debt, Fang was the sole recipient of the Director’s Debt, created in the absence of the requisite formal procedure, and is liable to pay the sum back to Green Elite with interest.

44.  The BVI Order did spell out tracing of monies paid to the 1^st to 4^th Defendants therein. As Fang (ie 1^st Defendant) had paid out the Sale Proceeds and only retained the Director’s Debt, the tracing for monies received by Fang must be referring to the Director’s Debt.

45.  Ignoring the tracing against the Three Directors (ie 2^nd to 4^th Defendants), Green Elite do have a judgment sum and remedy of tracing against Fang for the Director’s Debt. Hence, the liquidators do have such powers upon stepping into the shoes of Green Elite.

46.  At the hearing, I asked Mr Phang that apart from the Sales Proceeds, Fang could not escape his liability for the Director’s Debt whether alone (as in the BVI Judgment) or together with the Three Directors (as in the BVI Order). Mr Phang was unable to give an explanation.

47.  Apparently, discovery under the BVI injunction did not extend to Fang’s assets in the Mainland. Be that as it may, Hong Kong is a separate and standalone jurisdiction from the Mainland, and I see no reason why tracing onto Fang’s accounts in Hong Kong should not be allowed. In the premises, the discovery sought in relation to the Director’s Debt must be allowed. The remaining matters are the scope and extent of the discovery.

48.  For completeness, the accounts covered should include the 852 A/c and 510 A/c, and other accounts of Fang at SCB as mentioned in [1(4)] above.

49.  There does not seem to be any time frame of the receipt of the dividends from CT and the withdrawals of the Director’s Debt, save the period of 1 April 2010 to December 2013 as stated in [47] of the BVI Judgment. Hence, the period should start from April 2010. I do not think it should stop at December 2013 lest there were movements afterwards.

50.  Unlike the Sale Proceeds, nothing much is known of the Director’s Debt. Tracing of the documents and communications sought [1(3)] as set out in above must be beneficial.

51.  As to the further discovery upon discovery, Miss Mak did not strongly object to a step by step approach in order not to make it oppressive. Hence, the further discovery [1(5)] above is not allowed at this stage.

52.  As to [1(6)] above, if relevant information were obtained, would it not to defeat the purpose if no further use in other civil proceedings for the enforcement of the judgment be not allowed?

53.  As to use in criminal proceedings, if reasonable suspicion were disclosed, report to the law enforcement agency should be a natural and reasonable consequence. If sufficient evidence were obtained, use in criminal proceedings should follow as in Aisan Corporation of America cited above, subject always to the rules of evidence in the criminal court.

Costs

54.  As it turn out that there is a some win and some lose result, I shall invite further submissions on costs on paper for the making of an appropriate costs order.

55.  Lastly, I thank Miss Mak and Mr Phang for their helpful submissions.