CHINACAST EDUCATION CORPORATION AND OTHERS v. CHAN TZE NGON AN D OTHERS

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1062 OF 2012

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DECISION

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1.  This court handed down a judgment on 31 July 2017 after the trial principally between the plaintiffs and Mr Ma (“the Judgment”) in which the claim of the plaintiffs against Mr Ma was dismissed and the counterclaim of Mr Ma was allowed. At the same time, this court ordered that the Mareva Injunction obtained by the plaintiffs against Mr Ma[1](“the Injunction”) be discharged forthwith for the avoidance of doubt. The Injunction was expressly continued until the conclusion of trial.

2.  By summons dated 7 September 2017 (“the Summons”), the plaintiffs apply for a renewal of the Injunction pending the determination of their appeal of the Judgement. Due to the summer vacation, the time for appeal has not yet expired and the plaintiffs have only a draft notice of appeal to support their application.

3.  Mr Cooney SC, for Mr Ma, confirms that he is ready to argue against the present application without any affirmation in opposition filed on behalf of Mr Ma. For the present purposes, I can assume that the matters stated in the draft 19^th Affidavit of Douglas Nelson Woodrum to be true and correct.

4.  In this Decision, I shall adopt the abbreviations used in the Judgement.

Jurisdiction and applicable threshold

5.  There is no dispute that this court has jurisdiction to renew the Injunction pending appeal. Mr Wong (together with Ms Ngai), for the plaintiffs, refers this court to Ketchum International Plc v Group Brick Relations Holdings Limited and Ors. [1997] 1 WLR 4[2]. While confirming that a first instance court and the Court of Appeal have concurrent jurisdiction to grant an injunction pending appeal, Stuart-Smith LJ set the threshold to be at least as high as that has to be satisfied when the court considers whether or not to grant leave to appeal, i.e. a good arguable appeal.

6.  Next, Mr Wong cites to this court the Court of Appeal’s decision in SMSE v KL [2009] HKLRD 125 in which Le Pichon JA stated the relevant test applicable to an application for leave to appeal. For leave to be granted, there should be shown a reasonable prospect of success and prospects of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable”.

7.  Three conclusions reached by this court in the Judgment are targeted at the intended appeal of the plaintiffs.  The first one relates to the allegation of unauthorised borrowings incurring unnecessary substantial amount of interest. The remaining two complaints concern the allegation of misappropriation of funds belonging to the Group in the respective amounts of US$64.5 million and US$29.3 million.

8.  Common to all these challenges of the plaintiffs is their allegation that this court has misunderstood their pleaded case and therefore failed to assess the competence of Mr Ma in his capacity as the CAO of the Group to find out whether he was in breach of his contractual and statutory duties owed to the Group.

Unauthorised borrowings

9.  First I turn to the allegation of unauthorised borrowings. It is complained in the draft Notice of Appeal that this court erroneously identified the incurrence of the unauthorised loans to the knowledge of Mr Ma and his connivance as the only pleaded complaint of the plaintiffs. In fact, it is an alternative plea only.

10.  This court, as shown in the Judgment, has all along been aware of the pleaded allegations of breach of contractual and statutory duties on the part of Mr Ma including those contained in the Answers to the Request of the 3^rd Defendant for Further and Better Particulars of the Statement of Claim (“the Answers”) under this head of complaint. I have explained in the Judgement why I perceive the case of the plaintiffs against Mr Ma to be essentially about his knowing participation in or connivance at the fraud[3].

11.  The allegations of breach of contractual and statutory duties have to be understood in the proper context. The plaintiffs’ allegations relating to the unauthorised borrowings are contained in paragraphs 54 to 58 of the Statement of Claim.

12.  In paragraph 54, indeed the plaintiffs plead that while there were alleged breaches of the contractual and statutory duties on the part of D2, D4 and Mr Ma, the person under complaint is clearly D4 only and he alone is alleged to have caused or procured the Group to incur substantial debts.

13.  In paragraphs 55 to 57, the plaintiffs explain why the unauthorised loans were unnecessary and how the interest incurred depleted the revenue of P1.

14.  In paragraph 58, the plaintiffs plead against, among other persons, Mr Ma as follows:

“Further or in the alternative, the said indebtedness was incurred with the knowledge or connivance of` each of the 1^st to 4^th Defendants having regard to the fact s that the 1^st Defendant held the positions … and the 2^nd, 3^rd (Mr Ma) and 4^th Defendants were respectively …, the Chief Accounting Officer and … of the 1^st Plaintiff … and thus of the Group. In the premises, each of the 1^st to 4^th Defendants acted in breach of his duties … and is liable for all loss and damage caused by the said breaches and/or is liable to account therefor.” (Emphasis added)

15.  In paragraph 59, the plaintiffs plead a case of an account.

16.  The plaintiffs in their prayer for relief claim damages and/or an account against the 1^st to 4^th defendants including Mr Ma under paragraph 58 only and no mention is made about paragraph 54.

17.  Mr Ma requested for further and better particulars of his breaches under paragraph 54. In the Answers, the plaintiffs further averred that Mr Ma ought to have been identified the unauthorised borrowings caused by D4 and he should have brought to the attention of the board in a proper performance of his role as the CAO of the Group but he failed or refused to do so. Mr Ma would receive truthful information during the performance of his duties including the trial balances of P3 and P4 and such information would disclose those dubious transactions and he should have investigated into them. Instead, he caused or permitted false and misleading financial information of the Group to be published.

18.  I should add that such answers given by the plaintiffs reinforce my conclusion on the true nature of the pleaded case of the plaintiffs. There, the plaintiffs expressly allege that the wrongdoings of D4 were carried out with Mr Ma’s participation, knowledge and/or connivance as the CAO of P1 and that Mr Ma had failed and/or refused to have the true financial position recorded in the CFSs and bring them to the attention to the board of P1.

19.  Pausing here, my factual finding is that those accounting documents submitted to Mr Ma actually differ from those documents purportedly evidencing the unauthorised loans recovered by the Group.[4] In other words, Mr Ma was also provided with false information. This should be sufficient to effectively dispose of the allegations of Mr Ma’s breach of contractual and statutory duties.

20.  In the opening submissions of the plaintiffs[5], the claim for damages was expressly not pursued and the plaintiffs asked for an account only out of their allegation of unauthorised borrowings. It is clear that the restitutionary relief of an account is sought on the basis of Mr Ma’s knowing participation and/or connivance at the fraud and not his alleged breach of contractual and statutory duties.

21.  In their closing submissions[6], it was submitted that the starting point was that Mr Ma principally through his inaction and omissions was in glaring breach of his contractual and statutory duties and the question for this court is whether such blatant breaches further justify an inference of connivance.

22.  In light of all these, I am unable to find any merit in the present criticism of the plaintiffs on my failure to deal with their pleaded case of Mr Ma’s alleged breach of his contractual and statutory duties in relation to the unauthorised borrowings.

Misappropriation of funds

23.  A similar complaint is being made about this court’s dealing with the pleaded case of the plaintiffs in regard to the misappropriated or unaccounted funds. The plaintiffs now complain that, apart from considering the plea of misappropriation, this court should have held that Mr Ma was in breach of his contractual duties in that he failed to detect the fraud undoubtedly perpetrated on the Group over a long period of time.

24.  In the Statement of Claim, the relevant allegations can be found in paragraphs 81 to 85. First, in paragraph 81, it is pleaded that a number of funds have disappeared or have not been accounted for in the accounts of P1 when they were under the control of Mr Ma, among other persons. Particulars of such missing or unaccounted funds are given and among them, two sums are material for present purposes. First, it is alleged that a sum of US$64.5 million has been transferred out of the Group and could not be traced. Second, it is alleged that a sum of US$29.3 million being the consideration received in respect of the allotment of 3.7 million shares of P1 to one Mr Wu has disappeared. The said sum should have been deposited into a bank account of P1.

25.  Paragraph 82 makes it clear that Mr Ma, among other persons, operated or controlled the bank accounts of P1 outside the PRC.         

26.  Paragraph 83 principally concerns Ms Fu and her alleged connection with Mr Wu and Mr Chan relating to the alleged disappearance of US$29.3 million. It is noteworthy that it is alleged that Ms Fu had a conspiracy with Mr Chan and Mr Ma in procuring the allotment of the 3.7 million shares of P1 in the absence of actual receipt of the consideration of US$29.3 million by P1.

27.  In paragraph 84, it is asserted that the misappropriations were caused or procured by the defendants including Mr Ma wrongfully and in breach of their service agreements with Ms Fu conspiring with Mr Ma, together with other persons. There is, however, no mention of any particular provision in the service agreement of Mr Ma which is alleged to have breached by Mr Ma.

28.  In paragraph 85, it is claimed that the missing or unaccounted funds have been misappropriated from P1 by Mr Ma and other persons and so all of them should account to P1. Further or alternatively, the 1^st to 5^th defendants including Mr Ma converted the funds to their own use.  

29.  Again, the plaintiffs in their prayer for relief claim damages and/or an account against the 1^st to 5^th defendants including Mr Ma under paragraph 85, which plainly alleges actual misappropriation of the funds, and no mention of paragraph 84 is made.

30.  In any event, I cannot accept that the plaintiffs’ pleaded case is on the simple basis that it was Mr Ma’s incompetence or failure to report to the board of the Group that caused or permitted the misappropriation of funds of the Group.  

31.  The Answers clearly show that the allegation of the plaintiffs about the missing or unaccounted funds is about Mr Ma’s actual participation in and/or connivance at the wrongful misappropriation.

32.  First, in their answer given in relation to paragraph 84, the plaintiffs repeat the pleaded assertion that Mr Ma caused or permitted the various misappropriation of funds from the bank accounts of P1. Then, they refer to the particulars in the Statement of Claim. These are not further and better particulars at all.

33.  Lastly the plaintiffs refer to an earlier answer given in relation to paragraph 83 concerning the alleged conspiracy among the defendants. There, it is expressly averred that Mr Ma had participated in or connived at the wrongful act of procurement of the allotment of the 3.7 million shares of P1 without consideration. The plaintiffs further aver alternatively that Mr Ma should have received truthful information contained in the financial documents such as trial balances of P1 and should have known that US$29.3 million had never been received. Instead of reporting this matter to the board of P1, Mr Ma concealed the wrongful acts of the other defendants.

34.  To recap, as pleaded in the Statement of Claim and the Answers, the case of the plaintiffs is that in respect of the sum of US$64.5 million, Mr Ma caused or permitted the misappropriation of the said sum from the bank accounts of P1 in breach of his contractual duties without any particulars as to how Mr Ma caused or permitted the misappropriation. Mr Ma is further alleged to have misappropriated or converted to his own use the same. Damages or an account is sought for the latter plea of misappropriation or conversion only. Mr Ma’s defence is that the said sum was transferred from P1’s account to CCT HK for payments of expenses of the offshore entities of the Group and Deloitte raised no concern about such payments.

35.  In regard to the sum of US$29.3 million, in light of the Answers, it was never received by the Group at all. There could be no misappropriation of the said sum from the Group by any one as such. I fail to see how the plaintiffs could still run a case of misappropriation or conversion of the said amount against Mr Ma.

36.  In the premises, I do not accept that it is reasonably arguable that I erred in disposing of the pleaded case of misappropriation of funds on the basis that there was no misappropriation or conversion of the same by Mr Ma. I merely adhered to the pleading. I do not believe that the plaintiffs’ intended appeal has a reasonable prospect of success and the threshold is not met.

Risk of dissipation and balance of convenience

37.  For completeness, I continue to consider the risk of dissipation and the balance of convenience. I also would consider the complaints raised by Mr Cooney regarding the conduct of the plaintiffs in these proceedings.

38.  I accept that by reason of the fact that Mr Ma is an ordinary resident in Beijing and the liquidity of his assets in Hong Kong comprising cash balances in local bank accounts only, there is a real risk of dissipation of Mr Ma’s assets in the absence of an injunction and the monetary claim of the plaintiffs, if accepted eventually, would thereby be rendered nugatory.

39.  Under the Injunction, as an exception, Mr Ma is entitled to withdraw certain specific amounts from his bank accounts either on a lump sum basis or weekly basis for his ordinary living expenses and business expenses. Up till now, Mr Ma has withdrawn more than HK$9 million from his bank accounts.

40.  There is no evidence about any serious financial hardship suffered by Mr Ma arising from the Injunction. He has not sought to increase the amounts that he is now entitled to withdraw as an exception to the Injunction.

41.  Under these circumstances, the balance of convenience should be tilted in favour of the renewal of the Injunction pursuant to the Injunction if the plaintiff’s intended appeal is a good arguable one.

Other matters

42.  Mr Cooney draws my attention to the following matters which in his submission amount to an abuse of process. First, he points out that the plaintiffs have in effect imposed a de facto injunction despite the Judgment by their failure to file and serve a sealed judgment (which was only served on Mr Ma in the last minute of the business day preceding the hearing of the Summons) and by their failure to inform the relevant parties of the dismissal of the Injunction by the Judgment in breach of their undertaking expressly stated in the Injunction. Therefore, Mr Ma is still unable to withdraw monies from his bank accounts without any constraint.

43.  Mr Wong accepts that the plaintiffs have failed to honour their relevant undertaking and the breach is continuing without any explanation proffered by the plaintiffs.

44.  For the late filing and serve of the sealed judgment, Mr Wong highlights to this court that a corrigendum was made on 1 September 2017 and so there had been some delay. However, this cannot explain away the 2-week delay after the corrigendum was issued.

45.  Mr Cooney submits that by reason of these matters constituting an abuse of the court process, this court should dismiss the plaintiffs’ application. Mr Wong argues that these matters do not fall within the definition of an abuse in the context of a striking out application.

46.  My view is that, regardless of whether such matters are an abuse of the court process, this court is entitled to take them into account in considering whether an injunction, as an equitable remedy, should be granted and, in this case, renewed.

47.  This court has serious concern about the plaintiffs’ apparent breach of their undertaking in the Injunction. It is, however, a matter best left to be canvassed on other occasions. I should not express any view on this until the picture is clearer with evidence filed by both parties in respect of this alleged breach.

48.  For the late service of the sealed judgment, again, absent any chance to give explanation by the plaintiffs, I should not hold the delay against them in the present exercise.

49.  Lastly, Mr Cooney complains about the plaintiffs’ delay in making the present application. He submits that the plaintiffs should not have made the full use of the summer vacation to lodge an appeal and have waited for 10 weeks to make the present application given the urgency of the renewal of the Injunction.

50.  I agree that the plaintiffs could have made the present application more promptly. I believe that they somehow feel secured with the de facto injunction by their failure to notify the banks. In any event, I am not convinced that delay is a cogent factor to refuse a renewal of the Injunction.

Conclusion and disposition  

51.  By reason of the foregoing analysis, I come to the conclusion that the plaintiffs do not have a good arguable appeal with a reasonable prospect of success. The minimum requirement before a court would consider even granting an injunction pending appeal cannot be met. I should, therefore, dismiss the plaintiffs’ application on this basis.

52.  However, the following extract from Gee, Commercial Injunctions, (6^th Edn., 2016) at §24-035 (p.868) appears to be apposite:

“even if the court of first instance is not minded to grant the injunction pending an appeal, the court will normally maintain the status quo pending the hearing of an application to the single judge or the Court of Appeal (as the case may be).”

53.  I have already explained my view on the risk of dissipation and the balance of convenience. Coupled with the fact that the plaintiffs have indicated that they would definitely lodge an appeal against the Judgement within this month, I believe I should maintain the status quo and allow an interim renewal of the Injunction pending the determination of the plaintiffs’ prompt application to the Court of Appeal for a renewal of the Injunction pending appeal.

54.  Hence, in addition to the dismissal of the Summons, I further order that the Injunction be renewed until the determination of the plaintiffs’ renewed application to the Court of Appeal to be made within 21 days from today.  I should make it clear that if the plaintiffs do not make the renewed application to the Court of Appeal within 21 days, the renewal of the Injunction by this court would cease to have effect.

55.  There is no reason why costs should not follow the event. I make a costs order nisi that the plaintiffs should bear the costs of Mr Ma of and occasioned by the Summons, to be taxed if not agreed.

56.  It remains for me to thank Mr Wong, Ms Ngai and Mr Cooney for their helpful assistance in this matter.