CHEN WENJUN v. LIU LUYUAN AND ANOTHER

CACV 168/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 168 OF 2014

(ON APPEAL FROM HCMP NO. 1802 OF 2014)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1. On 23 July 2014, the Plaintiff obtained an ex parte injunction from Poon J restraining the Defendants from dealing with assets up to $110,807,788 within Hong Kong. The order also contained the following provisions requiring the Defendants to disclose certain information:

“DISCLOSURE OF INFORMATION

5. The 1^st and 2^nd Defendants must inform the Plaintiff in writing at once of all their assets of an individual value of HK$10,000 or more in Hong Kong, whether in their own names or not and whether solely or jointly owned, giving the value, location and details of all such assets. The 1^st Defendant may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate him.

6. This information must be confirmed in an affidavit (or affirmation) from each Defendant which must be served on the Plaintiff’s solicitors within 7 days after this Order has been served on that Defendant.

7. Each of the 1^st and 2^nd Defendants do make, file and serve an affidavit (or affirmation) on the Plaintiff’s solicitors within 7 days after this Order has been served on them:

(a) Explaining to the best of his or its knowledge, information and belief:

i. whether the Sum, or any part thereof, remains in his or its possession, custody and/or power;

ii. the present whereabouts of the Sum, or any part thereof;

iii. if the Sum, or any part thereof, is not in his or its possession, custody and/or power, detailed circumstances as to what has become of the Sum, or any part thereof, including (but not limited to):

(i) to whom, if anyone, the Sum, or any part thereof, has been transferred, and the time and manner in which the same occurred;

(ii) upon whose instructions the Sum or any part thereof, was transferred;

(iii) the reasons for and circumstances of such transfer;

(iv) details of all assets acquired directly or indirectly by the use of the Sum, or any part thereof (“Derivative Assets”);

(v) the precise means in which the Sum, or any part thereof, has been used to acquire the Derivative Assets, or any part thereof.

(b) Exhibiting true copies of all supporting documents in his or its custody, possession and/or power in respect of the matters in paragraph 5(a) above, including (but not limited to) relevant banking and accounting documents, correspondence, and receipts.

INSPECTION OF ACCOUNTS

8.  The Plaintiff be at liberty by itself, its legal advisers and/or accountants on 3 days’ notice to inspect and take copies of the entries of the Defendants’ bank accounts within Hong Kong, whether in the Defendants’ own name or not, and whether solely or jointly owned.”

2. The order was obtained in the context of a matrimonial battle between the Plaintiff [“the wife”] and the 1^st Defendant [“the husband”].  Both of them are residing in the People’s Republic of China.  They were married in April 2007 and they gave birth to two children in May 2010 and November 2012 respectively.  They are engaged in divorce proceedings in the mainland.  According to the evidence before us, though the wife initially opposed a divorce, she now accepts that it is inevitable and she is seeking to protect her financial interest.  At a hearing at the end of July in the PRC court, parties had indicated to the court that both of them agreed to divorce.  At present, the PRC court has yet to grant a decree of divorce.

3. The husband is the CEO of Net Dragon, a publicly listed company [“the company”] in Hong Kong.  Through the 2^nd Defendant (a BVI company which the wife alleged to be his nominee) he had been a major shareholder in the company.  The wife’s case is that because the company had acquired substantial value after the marriage, she had a half interest in the shareholding of the husband and the dividends declared by the company.  She contended that this was the case as a matter of PRC law irrespective of whether there is a divorce between the parties.  In August 2013, a majority shareholding in the company was acquired by another party which resulted in a special dividend of $7.77 per share being declared in favour of all existing shareholders.  According to the wife, the 2^nd Defendant received a payment of $204 million by way of this special dividend.

4. That happened after the wife and the husband had separated (which occurred in August 2012).  The wife said she had not received her half share of this special dividend or other dividends declared after August 2012.  She quantified her half share in these dividends, after some adjustments for money she had received from the husband during this period, to be $110,807,788 which is the basis of such figure in the injunction.  She further said the husband had transferred the shareholding of the company out of the 2^nd Defendant to a third party.  Her case is that the husband tried to hide assets from her to defeat her legitimate matrimonial claims.  She said by reason of PRC law, her half interest in matrimonial assets amounts to a proprietary claim.  In the 2^nd affirmation of her solicitor, the value of the shareholding in the company (which, subject to what we said below on the uncertainty of the position, should still be owned by the 2^nd Defendant) is stated to be $369,000,000.

5. However, she also said she could not obtain relief in the PRC divorce proceedings in respect of these assets as they are assets outside the jurisdiction of the PRC court.  Because of that, the PRC court would not, as a matter of practice, grant relief for such assets.  Therefore, she started proceedings in the BVI to seek relief in respect of the assets held in the name of the 2^nd Defendant, including the shareholding and dividends and other related rights.

6. These Hong Kong proceedings were commenced as proceedings for relief in aid of the BVI proceedings pursuant to sections 21M and 21N of the High Court Ordinance. 

7. On the return day, the matter was heard by L Chan J.  Parties agreed that there was insufficient time to deal with the substantive arguments on the discharge of the injunction and sought directions for filing of evidence.  The substantive injunction is scheduled to be heard on 26 November 2014.  In the meantime, the learned judge granted an interim injunction to protect the interest of the wife.  At the request of the husband, he also granted a variation of the interim injunction, allowing him the weekly sums of $30,000 for living expenses and $300,000 for legal expenses (with a cap of $2.1 million).

8. As regards the disclosure order, the judge ordered time to be extended to give the husband another 14 days to comply with paragraphs 5 to 7 of the order of Poon J.  He rejected the request of the husband to stay these paragraphs pending the substantive hearing of the discharge of the injunction.

9. He stayed paragraph 8 of the order of Poon J pending the determination on the discharge of the injunction.

10. The husband applied for leave to appeal against the refusal of stay regarding paragraphs 5 to 7.  The judge granted leave.  However, he refused to stay those orders pending appeal.

11. As a result, the husband applied to this court on an urgent basis for the hearing of the appeal against the decision of not staying paragraphs 5 to 7 pending the determination of the discharge of the injunction.  On 13 August 2014, Lam VP gave directions to facilitate the expeditious hearing of this appeal.  An interim stay of the disclosure order was granted pending the determination of the appeal on condition that the Defendant shall lodge an affirmation giving such disclosure in a sealed envelope by 22 August 2014 and that document shall not be inspected without leave of the court.  Two affirmations had been filed and they are contained in sealed envelopes: one affirmation in respect of paragraphs 5 to 6 and another one in respect of paragraph 7.

12. There were some significant developments in the BVI proceedings after the decision of L Chan J.  On 11 August 2014, there was a hearing before Mr Justice Bannister QC in the BVI proceedings.  At that hearing, counsel for the wife said she was not claiming the shares in the company as jointly owned property.  Rather her case was that those shares and the dividends represented the intrinsic value of the jointly owned property which she identified as being the shares in the 2^nd Defendant. At that hearing, the BVI court stayed a disclosure order (in terms not dissimilar to paragraphs 5 to 7 of the order of Poon J) which had previously been granted. Mr Justice Bannister QC found it difficult to see how a disclosure order would serve to police the injunction as there are no known bank accounts in the BVI.

13. However, the position is not the same in Hong Kong.  Thus, this court should not accede to a stay of the disclosure order simply because there is a stay in the BVI proceedings.

14. The wife has re-amended her Statement of Claim in the BVI proceedings on 15 August 2014.  Mr Fung SC (appearing together with Mr Leung for the husband in this appeal) submitted that there were the following changes in the wife’s case in the re-amended Statement of Claim:

(a)   She restricted the ambit of her proprietary claim in the BVI proceedings to the shares in the 2^nd Defendant; and

(b)   She introduced a new claim based on trust in respect of the shares of the company and the dividends.

15. After due consideration of the submissions of counsel, we are of the view that the appeal should be allowed to the following extent.  In place of paragraphs 5 to 7, we would order as follows:

(a)   The affirmations filed by the husband (contained in sealed envelopes) pursuant to the order of Lam VP shall remain in the court file but shall not be inspected by the wife pending the determination of the substantive application for the discharge / continuation of the injunction;

(b)   The husband shall file and serve another affirmation within 5 days from the handing down of this judgment setting out whether the 2^nd Defendant, SMP or First Elite remains as the registered owner of the 26 million odd[1] shares in the company.  If not, the husband shall identify the registered owner of these shares.  In any event, the husband shall state whether the shares are being held by the registered owner for him as beneficial owner of the same.  If the husband is no longer the beneficial owner of these shares, he should identify the beneficial owner and give full particulars as to the date and consideration for the disposal of beneficial ownership by him or the 2^nd Defendant; and

(c)   Liberty is given to the Plaintiff to apply to the Court of First Instance for further relief in light of the disclosure pursuant subparagraph (b) above.

16. The following are our reasons for making this order.

17. In his written decision of 8 August 2014, after referring to the relevant passages in the judgment of Chadwick LJ in Raja v van Hoogstraten [2004] 4 All ER 793 the judge gave three reasons for refusing to stay these paragraphs:

(a)   There are 4 to 6 months before the discharge application will be heard and it is necessary to police the injunction in the meantime;

(b)   The claim of the wife is a proprietary one and the injunction is to preserve assets of her proprietary claim; and

(c)   The affirmation of the husband (in support of his application for variation) does not contain much information as to his means and “the brevity prima facie does not tally with his position in life”.

18. The judge also disagreed with Mr Fung’s submission that section 21M cannot be utilised for ancillary proceedings in favour of another set of ancillary proceedings.  The judge regarded the BVI proceedings as a substantive set of proceedings though he considered the wife’s claim in those proceedings could depend on the outcome of the divorce proceedings in the PRC.

19. Mr Bartlett, counsel for the wife, asked this court to bear in mind the context in which the judge referred to the need to police the injunction and the brevity in the husband’s evidence as to his means.  Counsel reminded us that the judge at the same time dealt with the variation application of the husband and granted the variation requested notwithstanding the inadequacies in the husband’s information about his means. As shown in the transcript, the judge appeared to adopt the approach that if the disclosure to be made pursuant to paragraphs 5 to 7 should reveal that the variations are not justified, the wife could come back to court to restore the position.

20. With respect, that seems to us to be a wrong approach.  If the judge was not satisfied on the materials provided by the husband that variation to the extent requested by him should be granted, he should not grant the variation or should only have granted a very limited form of variation.  He should leave it to the husband to put in the necessary information before granting to him the variation in full.  To be fair, the judge did limit the legal expenses to $2.1 million.  But it is still a reversal of burden to proceed on the basis that the wife should come back to court to restore the position if the disclosure given under paragraphs 5 to 7 shows that the variations are not warranted.

21. Be that as it may, Mr Bartlett’s point is that the husband having had the benefit of the variation, he must accept the burden in terms of compliance with the obligation to give disclosure.  Though there is some attractiveness in this submission, we are unable to accept that the matter is as simple as that. We do not consider the variations to be determinative on the outcome of this appeal and we do not understand Mr Bartlett to be suggesting so.  Whether paragraphs 5 to 7 should be stayed in the interim period must be decided on a broader balancing exercise, the kind of balance as discussed in Motorola Credit Corp v Uzan [2002] 2 All ER (Comm) 945, which was reviewed by Chadwick LJ in Raja v van Hoogstraten supra. at paragraphs 101 to 103, after which His Lordship identified the problem as follows at paragraph 104:

“The problem in cases where an order for disclosure has been made at the same time as, and in order to give teeth to, a freezing order made without notice to the defendant is that the freezing order may be set aside after hearing full argument on both sides. If so, it will then be seen that there was no proper basis for the disclosure order. But, by that time, the defendant may have been irremediably prejudiced by the disclosure of assets which he should not have been required to disclose. On the other hand, if it is held after full argument that the freezing order should stand, then the claimant may be irremediably prejudiced if the order has not been capable of being policed in the meantime. The court is faced with the position … that whichever course it takes on an application which has to be decided without full argument may lead to irremediable prejudice to one side or the other. There is a balance to be struck.”

22. The refusal to stay the relevant part of the disclosure order is an exercise of discretion.  As such, this court should not intervene unless the judge erred in principle; misapprehended material facts; took into account of irrelevant matters or failed to take into account relevant matters; or came to a conclusion which is plainly wrong.  In addition, if there were material change of circumstances since the making of the decision below, this court may intervene, see Hadmor Productions Ltd v Hamilton [1983] AC 191 at p.220C-D.  Further, as Lord Woolf observed in Motorola Credit Corp v Uzan [2002] 2 All ER (Comm) 945 at para 40, at this stage the court must take a broad-brush approach, otherwise the court will be determining the very issues which are to be determined at the later substantive hearing.

23. Though Mr Fung SC attacked the judge in respect of all three reasons, we do not think his criticisms on the first ground (as to the incorrect estimate on the length of the interim period) and the third ground (as to the lack of relevance of brevity of the husband’s affirmation filed for variation purposes) can warrant intervention by this court.  As we see it, the judge’s concern on the need to police the injunction in the interim remains  valid even though the actual interim period may be slightly shorter than he envisaged.  We are also of the view that the judge was entitled to take into account the lack of meaningful disclosure on the part of the husband in the information about his means in assessing the overall risk of prejudice to the wife if there is a stay of paragraphs 5 to 7 in the meantime.  The husband was ably advised in the preparation of his application for variation and he should be aware of the usual expectation of the court in terms of the information as to the availability of alternative resources of the party applying for variation in such a context.

24. Mr Fung SC is on stronger ground in his challenge to the judge’s characterisation of the claims of the wife as a proprietary one.  On the pleadings as they stood before the judge, the wife advanced her proprietary claims in BVI proceedings in respect of the shareholdings in the company and the dividends.  Such claims were considered to be problematic by Mr Justice Bannister QC in the BVI proceedings and the wife apparently accepted such criticism.  As Mr Fung SC submitted, in her Re-amended Statement of Claim in the BVI proceedings, the wife confined her proprietary claim to the shares in the 2^nd Defendant.  Whilst there are also new breach of trust claims regarding the shareholding in the company and the dividends, as Mr Bartlett fairly accepted before us, those were personal claims and there is no claim for tracing.  The only legal basis pleaded to support these claims is the PRC law on matrimonial property (see paragraphs 9 to 16 in the Re-amended Statement of Claim).

25. At the same time, the wife’s case is that the PRC court would not adjudicate on overseas properties.  Thus, there would not be any PRC court decision applying the PRC law on overseas properties and the wife could not advance any proprietary claims on the basis of a court order in her favour in respect of such overseas properties.  To that extent, the judge was in error in saying that the wife’s claim in the BVI proceedings depends on the outcome of the divorce proceedings in the PRC.

26. Though we had some initial doubts about whether PRC law has the effects as contended by the wife, Mr Bartlett has persuaded us that this is not the occasion to resolve that question.  Further evidence would have to be filed, including expert evidence on PRC law and BVI law, and the issues would be more fully debated at the hearing on 26 November 2014.

27. Be that as it may, insofar as the judge exercised his discretion on the basis that the wife had proprietary claims in respect of the assets in Hong Kong (as opposed to the BVI shareholdings in the 2^nd Defendant, which requires no policing), this is no longer correct.  Does this change in circumstances warrant our intervention of his exercise of discretion?

28. In our judgment, the immediate need for disclosure in respect of a proprietary claim is quite different from that in respect of a non-proprietary claim.  In the former case, very often the disclosure serves at least two purposes: (a) for policing the compliance with the injunctive relief; and (b) to facilitate further steps being taken to recover assets which belongs to the claimant.  In the latter, in most cases, only (a) is applicable.  This distinction is material to the Raja balancing exercise.  Hence, in the present context, in light of the re-formulation of the wife’s claims, we are satisfied that an important basis for the judge’s exercise of discretion is no longer correct and this court should examine the matter afresh. 

29. Whilst we accept that a Mareva injunction needs to be policed even in cases of non-proprietary claims, the need for policing in the present case must be viewed against the background that a very substantial asset of the husband identified by the wife is the shareholding in the company which her own solicitor has valued at $369,000,000.  As submitted by Mr Fung SC by citing a passage from Hong Kong Civil Procedure 2014 at para 29/1/74, the court should take account of the existence of assets readily available to satisfy a plaintiff’s claims in determining the extent of disclosure required.

30. Even without the immediate disclosure ordered under paragraphs 5 to 7, with the limited disclosure as ordered by us,  the wife should have no difficulty in policing the compliance with the injunction (which is limited to $110,807,788) by reference to these shares.  Though the shares can be sold in the market, the husband and the 2^nd Defendant are prohibited by the injunctions granted in the BVI proceedings as well as the Hong Kong proceedings from doing so.  There are means to give effect to such injunctions even assuming that the shares are registered under the name of third parties.  Solicitors acting for the wife can give notice of the injunctions to the relevant parties and the company. 

31. We should explain why we order the limited disclosure regarding the shares.  There is a suggestion before us that there had been some dubious transactions regarding those shares involving apparent transfers to two different companies: SMP and First Elite.  On the other hand, Mr Fun SC informed this court on instruction that the 2^nd Defendant still had 26 million odd shares in the company and the market value is $14 per share.

32. We believe that in all likelihood the husband would have to give a clear picture about the existing holding of these shares in replying to the evidence of the wife on dissipation of assets.  Apart from his interest in privacy, Mr Fung SC could not suggest that the husband would suffer from other prejudice in view of the undertaking given by Mr Bartlett on behalf of the wife on the restriction on the use of the information disclosed as per the usual undertaking (which is accepted and considered by this court in the balancing exercise).

33. Weighing the respective interests and potential prejudices to the parties, we take the view that the husband should give disclosure about the shares as set out in our order to address the policing need of the Mareva injunction.

34. The disclosure under paragraphs 5 to 7 may also be sought for other purposes which are not related to the policing of the injunction.  However, in principle, those other purposes do not require immediate disclosure being given when the entitlement to such disclosure is being contested by the husband and Mr Bartlett has not advanced any arguments in that regard.

35. Exercising the discretion afresh, we believe a proper balance is struck by our order.  If the court shall hold in November that the wife is entitled to the disclosure after the contested hearing, then the affirmations in the sealed envelope can be inspected by the wife.  If the court shall hold otherwise, the affirmations shall be returned to the husband. In the meantime, the other parts of our order should provide adequate means for policing the injunction.

36. On costs, though Mr Fung SC has achieved some success, we have not acceded to his request for a blanket stay.  Our order speaks for itself as to the extent of success between the parties.  In the circumstances, we shall make a costs order nisi that the costs of this appeal shall be in the cause of the Mareva injunction application.