NARIAN SAMTANI v. CHANDERSEN TIKAMDAS SAMTANI

HCA 496/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 496 OF 2011

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BETWEEN

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D E C I S I O N

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1.  This is an application by the plaintiff for an interim injunction restraining the defendant from disposing of assets and/or an order to preserve the assets alleged to be belonging to 2 partnerships.

UNDISPUTED FACTS

2.  The late Mr Samtani senior (“the father”) and the late Mrs Samtani (“the mother”) had 8 children of whom the plaintiff, the defendant (eldest) and Kishin are sons and Drupti (or Rose) is a daughter.

3.  Since the mid-1950s, the father had carried on import and export businesses under the names of Kay Tee Corporation (“Kay Tee”) and Kishoo Brothers.  These 2 entities are referred to collectively as “the Businesses”. 

4.  All of the children, with the exception of one daughter, have/had at some time worked in the Businesses.  The defendant started in the 1960s and the plaintiff in the 1980s.

5.  The father initially operated as a sole proprietorship, but entered into partnership with the defendant with effect from 26 May 1983 (“the 1^st partnership”).  The ratio between the father and the defendant was 60:40.

6.  With effect from 1 October 1989, the plaintiff and the defendant became partners (“the 2^nd partnership”) in the ratio of 60:40.  The father died on 29 October 1989. 

7.  The 2^nd partnership was dissolved on 6 May 2011 after commencement of this action on 24 March 2011.

THE PLAINTIFF’S CASE

8.  The plaintiff’s case is premised on a so-called “understanding”, Indian family tradition and partnership rights.  From time to time, the father had saved and invested the profits of the Businesses and the family wealth accumulated therefrom in bank accounts opened and landed properties acquired in the names of his children.  The understanding was one among the father and the children that the 3 sons would be entitled to share equally the profits of the Businesses and in the family wealth accumulated therefrom, and the daughters would be supported financially until they got married (“the understanding”).  In accordance with Indian family tradition, the father tended to trust the defendant as the eldest son more with the family wealth only on the same understanding.

9.  The defendant has/had the following properties (“the properties”) registered in his name:

Address		Year of assignment (relevant business entity)	Registered owner	Mode of payment according to plaintiff and defendant	Current occupation
1.	Flat at Evelyn Towers	1977  (sole proprietorship)	defendant	plaintiff: cash from Businesses	Residence of plaintiff & Drupti
2.	Flat at Maiden court	1981  (sole proprietorship)	defendant	plaintiff: money & mortgage from Businesses defendant: own money & mortgage	Rented out by defendant

Address		Year of assignment (relevant business entity)	Registered owner	Mode of payment according to plaintiff and defendant	Current occupation
3.	Flat at Aberdeen Centre	1992 (sole proprietorship)	defendant	plaintiff : money & mortgage from Businesses defendant: own money & mortgage	Sold by defendant
4.	House at Manderly Garden	1987  (1st partnership)	Past: defendant 30% Kishin 30% Drupti 20% plaintiff 20% Present: Kishin 30% defendant 70%	Agreement with siblings and cancellation afterwards defendant: own money & mortgage	Residence of defendant
5.	Offices nos. 1-3 on 4/F & flat roof, Conwell House	1987  (1st partnership)	defendant	plaintiff : money from Businesses defendant: own money & mortgage	Used by the Businesses
6.	Office no 3, 3rd floor, Conwell House	1987  (1st partnership)	defendant	plaintiff: money from Businesses defendant: own money & mortgage	Rented out by defendant
7.	Flat at Tower 27, South Horizons	1995 (2nd partnership)	Drupti (or Rose)		Rented out by Drupti
8.	Flat at Tower 28, South Horizons	1995 (2nd partnership)	defendant	defendant: own money & mortgage	Rented out by defendant

10.  It is the plaintiff’s case that the purchase monies for the properties had come from the father’s profits of the Businesses and/or the wealth accumulated therefrom.  The small drawings from the Businesses to cover personal expenses for each son could not have enabled the defendant to acquire the very substantial property portfolio in his own name, estimated at about $200 million, which was in stark contrast with assets that other family members have been able to accumulate. 

11.  Specifically, Evelyn Towers was purchased in cash from the Businesses whilst under the sole proprietorship of the father. It was owned beneficially by the father by way of resulting trust, subject to the understanding.  Upon death of the father, Evelyn Towers belonged beneficially to his estate and distributable by virtue of his intestacy to the mother and children, subject to the understanding.  Upon the death of the mother intestate, her 50% beneficial interest in Evelyn Towers vested in and was distributable to her children, subject to the understanding. 

12.  Maiden Court and Aberdeen Centre were also allegedly family investments made pursuant to the understanding:

(i) To the extent the deposits and mortgage repayments were financed by monies of the Businesses and rental during the currency of the sole proprietorship of the father, the 2 properties belonged beneficially to the father by way of resulting trust, subject to the understanding.  Upon death of the father, these 2 properties, to the extent of such financing, belonged beneficially to the estate of the father.  They were distributable as in the preceding paragraph.

(ii) To the extent repayment of the mortgages was financed by monies from the Businesses whilst under the 1^st partnership, they constituted partnership assets.  They were held on resulting trust by the defendant in favour of the 1^st partnership.

13.  Manderly Garden was purchased allegedly using the wealth from the Businesses, with Drupti and the 3 sons as tenants in common.  In breach of a “Manderly Rental Agreement”, beginning some time in 1996, the defendant had refused to let out Manderly Garden.  Instead he used it as his family residence without consent of Kishin and the plaintiff.

14.  Sometime towards the end of 2004, an “Evelyn Towers Agreement” was entered into whereby the plaintiff and the defendant would exchange each other’s interest in Manderly Garden and Evelyn Towers respectively.  The defendant was to pay to the plaintiff a sum of HK$10 million by instalments over 2 years as part of the consideration.  The plaintiff assigned his 20% interest in Manderly Garden to the defendant.  (Drupti did likewise.  The net result was that with effect from 16 February 2005, Kishin and the defendant held Manderly Garden as tenants-in-common as to 30% and 70% respectively.)  The defendant has since denied his obligation to pay the $10 million to the plaintiff.

15.  The Conwell House Offices were financed, as to downpayments and mortgages by monies from the Businesses.  The Businesses occupied the 4^th floor whereas the 3^rd floor was leased out.

16.  It is the plaintiff’s case that the 1^st partnership was “reconstituted following the death of the father”.  “Upon transfer by [the father] to the plaintiff of his 60% in the 1^st partnership, the plaintiff acquired all of [the father’s] proprietary rights as a partner at the time of assignment, including [the father’s] beneficial interest in such properties held on resulting trust by the defendant in favour of the [1^st partnership].”

17.  The plaintiff’s case on the understanding and family tradition was supported by his sister Lily. 

18.  The plaintiff’s case on partnership rights is also premised on the defendant trading in competition with and misappropriating monies belonging to the Businesses.  There was diversion of funds from Kay Tee to the defendant’s personal account.  The customers of Kay Tee involved were Cassidy Electrical Supply Co Ltd (“Cassidy” / “CESCO”) and Woodies.  The defendant had also used his personal account to make payments to a supplier Roden Trading Co Ltd in 2002 and to a UK supplier MGC Lamps Ltd. 

19.  The plaintiff’s claims can be broadly categorized as:

(A) partnership claims, ie

(i) account of the Businesses’ assets from 1983 to date pursuant to the understanding and/or as 60% partner in the Businesses;

(ii) damages for misappropriation of partnership funds;

(iii) account of profits for breach of duty as a partner in trading in competition with the Businesses; and

(iv) mandatory injunction for the defendant to deliver the books and records of the Businesses;

(B) tort claims, ie

(v) damages for unlawful interference in the Businesses; and

(vi) damages for conversion;

 (C) property claims, ie

(vii) account for proceeds of sale of the Aberdeen Centre flat;

(viii) declaration that Maiden Court was held on resulting trust; and

(ix) specific performance of the Evelyn Towers Agreement or damages for its breach.

THE DEFENCE

20.  The defendant denied the existence of the understanding and Indian tradition or that they had any legal force.  He was supported by Drupti.

21.  The defendant produced the father’s will dated 6 May 1963 whereby all the father’s worldly possessions were given to the mother without reference to any trust arrangement or the understanding.  The mother died intestate.  No administration has ever been taken out for either estate.

22.  The defendant asserts that Kay Tee and Kishoo were owned only by the principal or partners alone.  Those members of the Samtani family who had no partner status but had worked in the businesses were paid a salary.    

23.  The defendant denies any transfer of the father’s share in the first partnership to the plaintiff.  He avers that the 2^nd partnership was newly constituted between him and the plaintiff.  Kishin left the employ of the Businesses on his own accord in 2006.

24.  The plaintiff has all along rights and access to books and records of the businesses as any partner.  It was he who has never shown any significant interest in the management or operation of the businesses until January 2011.

25.  The Businesses were not profitable under the father’s management to be able to form any significant family wealth.  They only gradually developed after the father’s retirement.  At the time when both the plaintiff and the defendant were partners of the Businesses, they were each entitled to the same amount taken as drawings every month.  The defendant denies receiving any additional drawings over those of the plaintiff.

26.  The defendant avers that, except for Drupti’s property, the other 7 properties were acquired by him as legal and beneficial owner.  The funding came from his own savings and investments. 

27.  Re Manderly Garden, the defendant agreed that there was an arrangement whereby the 3 sons and Drupti would make contributions to the purchase price in the ratio set out in the table above.  However, after completion, the plaintiff, Kishin and Drupti disregarded their obligations to contribute towards the deposit, mortgage repayments and expenses.  The arrangement was cancelled by agreement such that the two brothers and Drupti would not have to pay back contributions towards the deposit to the defendant and the defendant would be solely responsible for the mortgage.  The three of them would transfer their legal title back to the defendant as and when called upon by the defendant to do so.  In 1996, the plaintiff and Kishin each executed a power of attorney authorizing the defendant to act for them in respect of the affairs of Manderly Garden.  In 2005, the plaintiff and Drupti have respectively executed declarations of trust and vesting assignments of their shares in favour of the defendant in respect of the Manderly Garden.  The defendant thus has full beneficial ownership of Manderly Garden.

28.  All funds due to the Businesses from CESCO or Woodies have been duly received.  The defendant claims having used personal funds for the Businesses.

29.  The defendant counterclaims against the plaintiff for damages for breach of duties for having engaged in Kishin’s business in the name of Regal Top Trading Limited (“Regal Top”), which was in competition with the Businesses; and the plaintiff had diverted business to Regal Top since 2006/7.  The defendant also counterclaims for mesne profits for the plaintiff’s occupation of Evelyn Towers.

THE APPLICATIONS

30.  The plaintiff seeks a Mareva injunction and a preservation order under Order 29 rules 1 and 2 of the Rules of the High Court and inherent jurisdiction of the court.  Towards the end of the submission, Mr Hingorani, counsel for the Plaintiff, proposes in writing that the defendant be restrained from disposing of 7 properties save for the purpose of renting them out.  If the defendant wants to sell any of them, he shall upon completion pay 60% of the net proceeds of sale into a designated account pending trial.  Mr Hingorani suggests, but eventually abandons, the idea of requiring the defendant to give not less than one month’s written notice of intention to sell with particulars of sale.

MAREVA INJUNCTION

The applicable legal principles

31.  The principles of American Cyanamid Co v Ethicon Ltd [1975] All ER 504 are well known.  It has to be shown:

(i) That there is a serious issue to be tried;

(ii) That there is a real risk of dissipation of assets; and

(iii) The balance of convenience lies in favour of granting an injunction.

Serious questions to be tried

(A)  Partnership claims

32.  Although the court does not need to resolve rival contentions at this stage, it should be borne in mind that the plaintiff should not be allowed to embark on a fishing expedition, suing the defendant without sufficient bases.  On the other hand, one should not lose sight of the fact that the plaintiff has not, even on his own case, taken interest in the partnership accounts for years.  The course taken by him to get access to those accounts and his subsequent request for bank documents from Standard Chartered Bank (“SCB”) demonstrated his difficulties in getting relevant documents from the defendant to support his claim.  One cannot therefore expect documentary evidence or parties’ evidence to be complete at this stage. 

33.  The plaintiff’s causes of action are primarily based on partnership and this is not a probate/administration action.  As confirmed by Mr Hingorani during the oral submission, the plaintiff is not suing the defendant as a partner for the father’s estate but only for that part of the properties paid for by the partnership.

34.  It is well established that upon admission of a new partner, the original partnership dissolves and a new partnership forms: Hadlee v Commissioner of Inland Revenue [1989] NZLR 447:

“In law the retirement of a partner, or the admission of a new partner, constitutes the dissolution of the old partnership and the formation of a new one. Here, upon the happening of such events there were no overt signs of dissolution; the partnership’s financial structure and arrangements were such that none was required but that does not alter the underlying legal significance of any retirement or new admission: Inland Revenue Commissioners v Gibbs [1942] AC 402, particularly per Viscount Simon LC at p 414, Lord Wright at pp 429 and 430 and Lord Porter at p 432; Brace v Calder [1895] 2 QB 253, per Lord Esher MR at p 258, Lopes LJ at p 261, and Rigby LJ at 263; Lindley on Partnership (15th ed, 1984) pp 543, 983. Nor, in my opinion, is it possible to avoid those legal propositions by the terms of the partnership agreement: no doubt it is competent for partners to agree in advance that in the event of a retirement the remaining partners will continue to practise in partnership but that does not overcome the consequence that the partnership practising the day after the retirement is a different one from that in business the previous day.” (per Eichelbaum CJ, at page 455)

35.  A claim by one partner against another in relation to the first partnership is unlikely to be regarded as having become an asset of the second and, as a matter of law, cannot be so regarded if both partners are members of the second partnership: Lindley & Banks on Partnership, 19^th ed, para 18-12. 

36.  It is particularly important to bear in mind the different partnerships constituted in the present case because the properties that form the subject matter of this summons fall into 3 categories:

(i) those purchased whilst the father was running a sole proprietorship (eg Evelyn Towers, Maiden Court and Aberdeen Centre);

(ii) those purchased before the 2^nd partnership was formed (eg Manderly Garden and the offices); and

(iii) one property purchased after the 2^nd partnership was formed (Tower 28 in South Horizons).

Strictly speaking, only item (iii) may constitute the 2^nd partnership’s property.  The other South Horizons property is in Drupti’s name and was purchased after the plaintiff became a partner.  It is not clear why the plaintiff included this property in his claim and, if any claim is made on it, why Drupti is not a party to these proceedings.

37.  That aside, the plaintiff’s case rests on concepts that may not have legal force.  For example, did the understanding purport to create some kind of unwritten trust?  If it applied to landed properties, it may be void for lack of writing: section 5 of the Conveyancing and Property Ordinance, Cap 219.  Was it purportedly based on agreement?  Absent specific provision, the default basis is that all of the father’s proprietary rights over any partnership assets would crystallize and become part of the father’s personal assets (and eventually his estate) at the time of dissolution of the 1^st partnership.  This is the inevitable consequence of the doctrine of non-survivability between partners: Lindley & Banks on Partnership, 19^th ed, para 19-13.

38.  Further, how should one reconcile the partnership rights with the understanding, the resulting trust (pleaded only after it was pointed out by the court that the plaintiff’s previously formulated claim was defective[1]) and intestacy or testacy law?  Whether testacy or intestacy law applied, the personal representative of the father is not a party to the present proceedings.  As submitted by Mr Chan, it cannot be said that the plaintiff somehow has an “indirect” claim as a beneficiary of the father’s (or even mother’s) estate.  There is no prayer for such in the re-amended statement of claim. What then is the pool of assets for each partnership?

39.  The Indian tradition adds another puzzle.  If it applied, why would the father give his majority share in the 1^st partnership to the plaintiff instead of the defendant (the eldest son)?  With the understanding and Indian tradition, did it mean that the plaintiff’s rights in the 2^nd partnership were not 60% but only 33.3%?

40.  The court expects more precision from a plaintiff who seeks an injunction of the draconian kind now sought.  That said, there is no dispute that the plaintiff was the 60% partner of the 2^nd partnership.  The plaintiff asserted from the outset, through his letter before action, that his share included a 60% proprietary interest in all the named properties, including those acquired before he became a partner.  He pleaded that the father “transferred his interest in the [1^st] partnership to him”.  This “transfer” appeared to have been acknowledged by the defendant in a letter in reply dated 21 February 2011 before action that “my late father gave me 40% share of Kay Tee Corporation and he decided to give Narian his 60% ownership in Kay Tee Corporation”.  That acknowledgement appeared in the first version of the defence (paragraph 5(4)), although it was retracted on 11 November 2011 upon amendment. 

41.  Where one partnership succeeds another, it will obviously be a question of fact whether the assets of the 1^st partnership have become assets of the 2^nd: Lindley & Banks on Partnership, 19^th ed, para 18-12.

42.  There is at least a serious question to be tried as to whether properties acquired during the 1^st partnership were “transferred” by the father to the plaintiff and formed part of the properties of the 2^nd partnership. 

43.  Further, even on the defendant’s own case, each party withdrew the same amount of money from the Businesses.  Those monthly amounts were not enormous.  The plaintiff queries how the defendant could afford to purchase the properties.  The defendant has not yet provided evidence of his savings and investments which funded the purchase.  There is a serious question to be tried as to the source of funding for purchase of the properties which might constitute partnership assets.

44.  As a partner, the plaintiff was entitled to inspection of partnership books and accounts, which the defendant did not dispute.  He was provided with limited documents before the action was commenced.   When this summons went before Suffiad J on 20 May 2011 and was adjourned for the first time the plaintiff’s request for documents was reduced from 15 to 7 years.  Even those 7 years’ records were incomplete.  The defendant undertook to produce (“the undertaking to produce”), among others, (i) credit/debit notes; (ii) remittance advices; (iii) collection orders; and (iv) remittance instructions (collectively “the missing documents”).  The undertaking to produce was repeated (with amendments that are immaterial) before Deputy Judge L Chan on 16 September 2011.

45.  The defendant claimed in his 3^rd affirmation that he had already, pursuant to his undertaking to produce, produced to the plaintiff all the documents he requested.”  In his 4^th affirmation (filed 5 months after this summons was issued), the defendant stated that the missing documents were irrelevant; that he had disclosed all available partnership documents and he had not concealed any record; and that there were no more partnership accounts or documents for the plaintiff to inspect.  In any case, the missing documents could be found in the bank statements and general legers already produced to the plaintiff.

46.  The missing documents were not disclosed even upon exchange of lists of documents. 

47.  The plaintiff had to obtain Kay Tee’s bank statements and credit/debit notes from SCB himself. Having correlated those documents to the invoices to customers, remittance instructions and the defendant’s bank account statements, there appeared to be a pattern of misappropriation of partnership funds.  Kay Tee would issue invoices to customers in US dollars.  Customers were instructed to pay into the personal account of the defendant in settlement of the invoices.  The defendant withdrew a lesser amount in HK dollars and deposited that into the SCB account of Kay Tee.  The total shortfall in the amount receivable by Kay Tee in 21 transactions was US$147,274.55.  There were 6 other transactions involving a shortfall of US$40,063.70.  (See the 5^th & 6^th affirmations of the plaintiff affirmed on 16 and 20 December 2011 respectively.)

48.  The defendant did not challenge the correlation among those documents. Instead, he alleged that there was a “CESCO payment arrangement” and “revised payment arrangement” which the defendant was made aware of.  According to the former arrangement, the invoiced amount would include the actual amount payable by the customer to the Businesses and the credit payable to CESCO for arranging a transaction (“credit”).  The credits represented the shortfalls alleged by the plaintiff.  They were not amounts due to the Businesses and hence not partnership funds.  As there had been insufficient funds to operate the Businesses, therefore, pending payment from customers (CESCO, E&M Lighting and Woodies), the defendant paid in his own funds representing the invoiced amounts less the credits.  Those customers would later pay the invoiced amounts to the defendant’s personal account and the defendant would keep it, releasing the credits to CESCO upon its instructions.  That CESCO payment arrangement had, allegedly to the plaintiff’s knowledge, been in existence since 2003.

49.  As for the revised payment arrangement, the defendant would not be holding the credits anymore but the customers would pay the invoiced amounts to the partnership and the partnership would pay the credits to CESCO when it so instructed.  However, Woodies made a mistake in making payment of the invoices directly into the defendant’s personal account. The defendant claimed that pursuant to the revised payment arrangement, he had remitted sums to the partnership account.  The only record of the existence of the 2 arrangements was CESCO’s unsworn confirmation dated 9 January 2012 produced by the defendant.

50.  Mr Hingorani challenges the assertion that Kay Tee did not have sufficient funds. There were banking facilities secured against Evelyn Towers, currently worth about $20.4 million and free from mortgage.

51.  Furthermore, as rightly pointed out by Mr Hingorani, under the defendant’s explanation, customers paid invoice amounts into the defendant’s personal account after the defendant had transferred funds into Kay Tee’s account.  Such explanation was wholly undermined by the missing documents, which showed the reverse.

52.  Further, if “credits” were paid to Cassidy for arranging transactions, they would be in the nature of agency commission.  One should not see them in relation to direct orders from Cassidy.  The fact is that the defendant paid credits even in respect of orders from Cassidy.  And the “credits” did not disclose a consistent percentage of commission.

53.  I agree with Mr Chan’s submission that I should not take the defendant’s wrong notion of giving access to the accounts to infer dishonesty.  However, the plaintiff has pleaded misappropriation even in the first version of the statement of claim on the basis of 3 remittance instructions.  At no time has the defendant ever pleaded that the shortfalls represented credits to CESCO.  He only came up with purported explanations in his 5^th affirmation when confronted with documentary evidence obtained from SCB.  

54.  The examples of misappropriation of partnership funds referred to by Mr Hingorani in his submission showed not isolated events but what might be recurrent misappropriation at least between 2004 and 2010 in relation to 27 transactions.

55.  It is not necessary to go into detailed analyses of each of the 27 transactions, nor the instances where the defendant said he had applied his own funds to pay suppliers such as Roden Trading and MGC Lamps Ltd.  Suffice to say there is a serious question to be tried on whether the defendant had misappropriated partnership funds.

56.  The defendant relied on time bar.  The plaintiff contended that section 20(1)(b) of the Limitation Ordinance, Cap 347 provides that:

“No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action to recover from the trustee trust property or the proceeds thereof in the possession of the trustee.”

57.  The question of limitation remains a triable issue.

 (B)  Tort claims

58.  The essence of the wrong of conversion is the unauthorized dealing with the claimant’s chattel so as to question or deny his title to it: Clerk & Lindsell on Torts, 12^th ed, 2010, para 17-06.  The plaintiff’s only allegation is the conversion of money belonging to the partnership.  The particulars given show that they refer to receivables, not chattels.  This cause of action is hardly unarguable.

59.  As for the cause of action on unlawful interference with the Businesses, Mr Chan points out the elements of the tort as follows:

“Unlawful means therefore consists of acts intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. It does not in my opinion include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.” OBG Ltd v. Allan [2008] 1 AC 1,para 51, per Lord Hoffmann; para with whom Baroness Hale of Richmond and Lord Brown agreed at paras 302 and 319 respectively.

60.  The pleaded case and the evidence adduced the by plaintiff are far from sustaining such a cause of action.

61.  There is no serious question to be tried on the tort claims.

(C)  Property claims

62.  There is doubt as to whether the claim in respect of Maiden Court and Aberdeen Centre based on resulting trust is sustainable, given that the relevant personal representative of the father is not a party.

63.  There is a serious question to be tried on whether there has been breach of the Evelyn Towers Agreement.  However, even on the plaintiff’s case, it will only sound in damages but not a right against the property itself.

64.  In summary, there are serious issues to be tried at least on the partnership claims and breach of the Evelyn Towers Agreement.

Risk of dissipation of assets

65.  Mr Hingorani submits that, absent any evidence of actual dissipation or threat of dissipation, the court has inferred a risk of dissipation where a defendant has acted dishonestly: CAC Brake Co Ltd Zhuhai v Bene Manufacturing Co Ltd,CACV 94/1998, 30 April 1998.  In Honsaico Trading Ltd v Hong Yiah Seng Co Ltd [1990] 1 HKLR 235, the court was satisfied of the real risk of dissipation from the fact that the defendant had acted to very low commercial standards.  Godfrey J (as he then was) held that [if the defendant’s] conduct, in relation to the transaction, leaves the court so uneasy that it is driven to conclude that there is a real risk that a judgment in favour of the plaintiff might remain unsatisfied, then it is the court’s duty to grant the injunction. (at page 240 F-G)

66.  Even accepting that the defendant may have displayed low moral standards in misappropriating partnership funds, there was no risk of dissipation of the properties.  Evelyn Towers has been held in full view of the siblings for over 30 years and the other properties for 17 to 25 years.  The state of occupation and leasing out were no secret to the plaintiff.

67.  At the hearings before Suffiad J and Deputy Judge L Chan, the defendant undertook (without prejudice to his rights in this action) to notify the plaintiff or his solicitors in writing in advance should the defendant wish to sell any or all of the properties (not including Manderly Garden and Evelyn Towers at that stage), to preserve the proceeds of sale thereof and not to make any disposition by any other means in respect of the properties (‘the undertaking re properties’).

68.  At the adjourned hearing before me on 22 December 2011, the defendant refused to continue that undertaking and I declined to order an interim injunction.

69.  The present hearing is the 3^rd adjourned hearing one year since the taking out of this summons dated 11 May 2011.  With or without the undertaking, the defendant has not done anything to deplete the properties.  There appears to be no risk of dissipation that will render judgment to the plaintiff being empty on the ground of lack of evidence of risk of dissipation.

Balance of convenience

70.  The court should consider whether, if the plaintiff succeeds at the trial, he will be adequately compensated for by damages.

71.  The 2^nd partnership has been dissolved and the plaintiff will be entitled to an account and payment of what is due to him. Save for the prayer for inspection of books and accounts, the rest of the reliefs sought will end up in a money judgment.  This was confirmed by Mr Hingorani in his first set of skeleton submission (paragraph 37) lodged on 18 May 2011.

72.  Mr Hingorani submits that the defendant stands to face an award against him of over $100 million. He queries whether the defendant will have such funds available to meet such an award.  Satisfaction of an award of damages out of funds which were themselves misappropriated will not be an adequate remedy.

73.  I have no idea how Mr Hingorani came up with the $100 million figure.  In any case, the properties are estimated to be about $200 million in value.  I find that damages will form an adequate remedy and the properties have sufficient value to meet the estimated award. 

Summary on the application for a Mareva injunction

74.  Since there is no evidence of the defendant dissipating his assets and loss of the plaintiff can be compensated for by damages, there is no reason why such a draconian order as to prohibit the defendant from selling the properties (whether as a beneficial owner or a partner with a duty to account) should be imposed.  In any case, it has not been demonstrated that freezing properties worth about $200 million is a protection proportionate to the $100 million claim of the defendant.  I decline to impose an interim injunction.

PRESERVATION ORDER

The applicable principles

75.  In respect of preservation orders under Order 29, rule 2, the source of the court’s powers is the inherent jurisdiction to secure by orders, a just and proper trial of the issues: Hong Kong Civil Procedure 2012, Vol 1, para 29/8/1.  It has to be shown that:

(i)  There is property which is the subject matter of the cause or matter, or as to which any question may arise.  The property must be bona fide the subject matter of the action: Scott v Mercantile Accident Insurance Co (1892) 8 TLR 320, Hong Kong Civil Procedure 2012, Vol 1, para 29/8/6;

(ii)  Something ought to be done for the security of that property. The court will not be deterred from making an order for preservation of property because a party against whom the order is sought has a proprietary interest in it.  An order should not be refused merely because the defendant claims that he has a discretionary power to determine whether or not the property should be preserved and how it should be preserved, when one of the issues in the case is whether or not the power is untrammeled by a duty to the plaintiff to preserve the property: Johnson v Tobacco Leaf Marketing Board [1967] VR 427, Hong Kong Civil Procedure 2012, Vol 1, para 29/8/8.

76.  The essential distinction between a preservation order and a Mareva injunction is that:

“In an action in which the plaintiff seeks to recover his property, the court has jurisdiction to grant an interlocutory injunction restraining the disposal of property over which the plaintiff has a proprietary claim. The single most significant feature of the Mareva injunction is that it goes well beyond this and enables the court to grant the plaintiff an interlocutory injunction restraining the defendant from disposing of or even dealing with his assets, being assets over which the plaintiff asserts no proprietary claim but which after judgment may be attached to satisfy a money judgment.” Hong Kong Civil Procedure 2012, Vol 1, para 29/1/51.

77.  For a preservation order, an enquiry into the relative merits of rival claims is not necessary: Johnson v. Tobacco Leaf Marketing Board [1967] VR 427, at 430. 

“What is involved is an exercise in salvage, pending, and for the purpose of, the ultimate determination. It is, therefore, relevant to consider what will be involved in that determination, and how it relates to the property sought to be preserved, and what justice demands in the way of making an order for the preservation of the property so as to prevent a determination one way or the other proving abortive.”

78.  Neither the rule itself nor the authorities require the applicant  to show risk of dissipation of assets. 

79.  However, the court will refuse to grant a preservation order if damages will be an adequate remedy for the plaintiff: Feng Loy Chuen v Lim Yiong Lin [1977] HKLR 471.

Grounds for the application

80.  In his 3^rd affirmation, the plaintiff justified this part of the application as the necessity to preserve “evidence” until the court’s determination.  He also believed that the defendant was already taking steps to transfer certain of his assets to his immediate family which might be an attempt to frustrate any order which may be made in this action.

81.  It was misconceived to regard the properties as “evidence” which needed to be preserved.  Mr Hingorani, rightly, does not insist on this point and corrects his client’s case as preservation of the subject matter of the partnership.

82.  There was also no evidence that the defendant had attempted to dispose of the properties in question, let alone to his immediate family members.

83.  However, Mr Hingorani submits that as between the plaintiff and defendant there is something which ought to be done for the security of the properties.  He relies on:

(i) Long-term misappropriation of partnership funds;

(ii) Concealment of the missing documents;

(iii) The fact that the father had, apart from Evelyn Towers, invested in stocks and had savings accounts even before 1975, demonstrating that the Businesses were in fact profitable; and

(iv) The defendant’s current challenge to specific discovery of  bank statements of his personal accounts, remittance advices/instructions, credit/debit notes and full set of export documents.

84.  I consider that those grounds are sufficient to support the application.  My analyses under paragraphs 40 to 57 on serious questions to be tried on the partnership claims are applicable.  Something ought to be done for the security of those properties. 

85.  The 2^nd partnership has indisputably been dissolved after commencement of this action.  The offices on 4^th Floor Conwell House will not be used for the Businesses and may be applied to other uses.  There is a duty to account on the part of the defendant.  The plaintiff may also have a right to trace the partnership funds that have found their way into any property held by the defendant.  Some of the properties (which I will identify below) are capable of forming bona fide the subject matter of the action, being acquired from funds of the Businesses, if the plaintiff’s case is accepted after trial.  The defendant has been leasing out or occupying the properties in the past.  Sale was not a normal activity.  If the defendant sells any of the properties, the plaintiff’s rights may be affected.

86.  There is no point preserving the properties in kind since the defendant does not object to the sale of any of them, given that his claim is in money.  Nor does he object to their leasing out.  Cash is always easier to dissipate than properties.  The misappropriation of partnership funds and less than full and frank discovery do not instill confidence in the defendant’s conduct.  It is best to avoid the trouble of rounds of tracing and discovery to see where funds have gone pending trial.

87.  I am satisfied that something ought to be done for the security of what might be partnership properties.  The question is only the form and extent.

Terms of the preservation order

88.  Mr Hingorani does not oppose sale at open market value or renting out of the properties.  All he requires is that 60% of the proceeds be put into a designated account pending trial of this action.  He does not require the defendant to seek the plaintiff’s consent before sale.

89.  The next question is what assets form the “subject matter” of this action.  Mr Hingorani identifies 7 properties.  My views are as follows:

(i) Evelyn Towers has been rightly omitted as, even on the plaintiff’s case, the resulting trust is in favour of the father’s estate and not any partnership.

(ii) Manderly Garden forms the subject matter of this action under the distinct cause of action in breach of the Evelyn Towers Agreement and Manderly Rental Agreement and does not form the asset of any partnership. It is newly added to the list of properties identified in the summons.  It forms 1/3 of the total value of the properties.  Mr Hingorani says that the plaintiff has “proprietary” interest.  I find that to be misconceived.  Any breach will only sound in damages of $10 million and lost of rental plus profits arising thereunder.  Freezing 60% of the net proceeds of sale of this property is clearly excessive and should not be allowed.

(iii) Maiden Court forms part of the father’s estate and cannot form the subject matter of a preservation order in this action.

(iv) The offices and Tower 28 of South Horizons may form the subject matter of the partnership claim. 

90.  A preservation order can be made notwithstanding that the defendant also has interest (at least 40% as a partner even on the plaintiff’s case) in those properties.  The requirement to preserve the proceeds of sale should apply whether or not the defendant sells at open market value.  (Of course if he sells at undervalue, he faces a risk in having to account the deficiency.)  Since there is distrust between the parties, the proceeds should be paid into an account held by the defendant’s solicitors instead of the defendant.

Undertaking as to damages

91.  The defendant has raised his concern that the plaintiff has not provided any undertaking as to damages.

92.  There is nothing in the rule itself or the authorities on the requirement for undertaking as to damages where the court makes a preservation order.  Since the power invoked by the court may restrain a party from disposing of assets in which he asserts beneficial ownership, the court may require an undertaking as to damages where the circumstances warrant.

93.  The plaintiff has expressed his willingness to provide the undertaking as to damages in his 3^rd affirmation.

94.  Given the difficulties alluded to in the plaintiff’s case, that the extent of the plaintiff’s entitlement remains unknown and that it may turn out to be much less than the 60% of the value of the defendant’s properties,  I am of the view that it is just to require the plaintiff to fortify his undertaking.

95.  It would, however, be oppressive to ask the plaintiff to pay into court an amount equivalent to the market value of the properties.  After all, he is not opposing the sale.  Preserving the proceeds will only affect the defendant’s opportunity to invest them.  In my view, any fortification should only be for an amount that represents loss of the ability to use the preserved funds pending trial.  The defendant has not specified what investments he has in mind and the potential gains.  I therefore adopt a rate of 5%, being the current best lending rate for borrowing funds to invest.

96.  The plaintiff says that he has been able to accumulate some $3.8 million in the form of cash and listed company shares. Since termination of the 2^nd partnership, the plaintiff is in the process of establishing an import/export business and he anticipates his income to be $800,000 per annum.  Prior to dissolution of the partnership, he had had no drawings since about July 2010.  The amount that I fix for him to fortify his undertaking should be within his means, having regard to the fact that the few properties are worth $23m in total.

97.  I order that before each payment in by the defendant of the net proceeds of sale of any of the offices or the flat at Tower 28 South Horizons into a designated account, the plaintiff shall fortify his undertaking by paying an amount equivalent to 5% of those net proceeds into court.

Costs of the application for injunction and preservation order

98.  The plaintiff is successful in obtaining a preservation order.  Cost should, prima facie, follow the event and be to him.  The question is whether other factors apply so as to make the usual order inappropriate: Order 62, rules 3(2A) and 5.

99.  The fact that one party relies on some arguments which failed does not mean he should be deprived of costs.  After all, some arguments are common to both applications in this case.

100.  The summons initially asked to restrain the defendant from dealing with all investments, stocks and shares acquired and retained by him in his own name by monies belonging to Kay Tee and Kishoo from 26 May 1983 to date.  The plaintiff has not in his supporting affirmations identified what those assets might be or condescended into particulars as to why he held such belief. The order as sought in the summons effectively requires the defendant to admit that the investment came from funds of Kay Tee and Kishoo.  The application in this regard, in my view, was doomed to failure.  It was rightly abandoned.

101.  The plaintiff pursued the Mareva injunction despite being alerted to the difficulties by Mr Chan in the skeleton submission lodged for the 2^nd adjourned hearing on 22 December 2011 before me.

102.  Further, the preservation order now given is in much narrower scope and less stringent terms than that applied for in the first place. 

103.  The defendant made no concession at all to the application.  Mr Chan describes in his skeleton submission dated 20 December 2011 that the preservation order sought by the plaintiff:

“presumably means that plaintiff only seeks a continuation of defendant’s undertaking to notify plaintiff or his solicitors of any intention to see the properties and to preserve the proceeds of sale (as well as to not make a gift or disposition of such properties). While such a concession if made would be sensible (though far belated having regard to costs), it does not go far enough. … the fundamental remains that the entirety of the plaintiff’s case for any kind of restraint in respect of the properties is without basis. There is simply no proper reason for restricting defendant’s right to deal with the properties in any way.”

This, in my view, is clear indication that the plaintiff still needs to come to court to obtain the preservation order.

104.  I do not agree with Mr Chan that “the appalling delay in pursuing the plaintiff’s application is the result of the plaintiff’s continuous failure to conduct his case properly and fairly, and in particular his regular launching of last-minute applications either to try to rectify patent deficiencies in his case or to add a yet further layer of wild allegations against defendant.” That fact is that the plaintiff had relied on the defendant’s undertaking to produce documents.  Those provided by the defendant were incomplete.  Documents from the bank came months after the summons was issued.  Spending one month’s time to collate the documents and preparing the 5^th and 6^th affirmations could not be said to be unreasonable.   The missing documents proved to be relevant material in showing a serious question to be tried on misappropriation of partnership funds.  The delay was contributed to by the defendant’s failure to provide the missing documents. 

105.  I have also taken into account the fact that numerous affirmations have been filed.  Each party has been repetitive in his case. There was detailed but unnecessary setting out of contents of correspondence (as opposed to the gist in narrative form) in the affirmations, eg the 2^nd affirmation of the defendant.  The court could have been referred to the correspondence during submissions and in fact that was what the parties did in the course of the oral submission.  Some costs should be disallowed on each side for such repetition.  To save the taxing master’s trouble in deciding which part was repetitive, I have taken into account the repetition when apportioning the percentage of costs.

106.  I have already alluded to the difficulties of the plaintiff’s case as regards the understanding, Indian tradition and resulting trust.  One cannot overlook the possibility that, after trial, even the restraint of 60% of the proceeds of sale might have been excessive.

107.  Taking all circumstances into account, I order that 30% of the costs of the summons (including all costs reserved in relation to it) should be the plaintiff’s costs in the cause.  80% of the costs of the hearing on 7 June 2012 should be apportioned as time spent on the application for of injunction and preservation order.

Costs of the application for inspection of books and accounts

108.  At the hearing on 22 December 2011, paragraph 1 of the summons on inspection of accounts (“the application for inspection”) was not proceeded with.  Each party asks for costs.

109.  I have read through the correspondence and considered each party’s submission on costs of the issue of inspection.  There was a lot of distrust and acrimony in the correspondence for which both sides were responsible.   One can only say that the issue of inspection was mixed, as rightly described by Mr Chan, with a “jumble of issues”.

110.  According to the plaintiff, before action, the defendant denied access to the accounts and asked for explanation as to why the plaintiff needed them.  The plaintiff had to go to solicitors to make the request.  The defendant provided 3 schedules of documents to the plaintiff before the summons was issued.  It took this summons to get the defendant’s response that the documents were at the partnership office, and another 2 months post-writ to allow the plaintiff to inspect the accounts.

111.  It was after 20 years of disinterest that the plaintiff suddenly sought access to partnership records.  There was then no apparent urgency.  The plaintiff obviously failed to consider the plaintiff’s need for time to prepare copies of partnership documents for the plaintiff on the one hand and the need for taking care of the Businesses and preparing the trade shows on the other. Given the years of partnership documents involved, it was not unreasonable for some of them to have been stored elsewhere and time was needed for retrieval. The plaintiff has also failed to take into account the defendant’s Parkinson’s disease which prevented the defendant from responding as quickly as the plaintiff might have expected.  I shall not infer that the defendant was denying access.

112.  The plaintiff has also unreasonably insisted on inspection of accounts at the partnership office even though the matter has gone into the hands of lawyers.

113.  Mr Chan describes the plaintiff’s requests for inspection to be “erratic, inconsistent and confusing”.  The defendant challenged the request for inspection of books and accounts relating to the Businesses and asserted that books and accounts did not normally include bank statements and receipts.  Whilst I consider that the plaintiff (or his lawyers) could have been more precise in framing the requests, there was no objective difficulty in understanding that the plaintiff was entitled to obtain only books and accounts of the 2^nd partnership.

114.  The defendant all along expressed willingness to allow access to the accounts. Apparently, he and his lawyers were keen to avoid litigation.  However, the defendant had made unhelpful assertions that the plaintiff’s inspection was no longer necessary.  He also said that he plaintiff left the office on his own accord without inspecting the documents, knowing they were available.

115.  The defendant harboured suspicions as to the plaintiff’s association with Kishin (who was not a partner or auditor but a competitor) and hence motive for obtaining the partnership records.  His concerns might have been justified as the surveillance reports commissioned by him showed that the partnership accounts obtained at the office had been passed to Kishin.  The plaintiff admitted keeping those accounts at Kishin’s place, though he explained that it was not for Kishin to scrutinize them but for passing on to the plaintiff’s solicitors.

116.  The plaintiff asked for an undertaking from the plaintiff not to disclose the partnership records to Kishin and third parties.  That was understandable though not legitimate, because it would restrict the plaintiff’s right to consult eg an auditor.  However, the defendant had soon retracted his demand for the undertaking after some tug-of-war with the plaintiff.

117.  The defendant also questioned whether Kishin had disclosed to the plaintiff the settlement terms in the proceedings involving Kishin and the defendant (“the Kishin actions”).  He queried the plaintiff’s request for waiver of confidentiality in respect of witness statements filed in the Kishin actions.  He alleged a conspiracy between the plaintiff and Kishin.  He alleged that the plaintiff was involved in Kishin’s business.  Those were entirely irrelevant to the issue of inspection.

118.  Similarly, alleging that the plaintiff had neglected his duties as a partner, asking the plaintiff (as a partner) to confirm whether he could advise on the whereabouts of the stored accounts, asserting that the plaintiff had access to partnership documents dating back to at least 1997 and hence there was no basis to seek injunction relief, asking for the plaintiff’s production of partnership documents in the latter’s possession, and expressing concern over the plaintiff’s involvement in another trading company and Regal Top, were all irrelevant to the issue of inspection.

119.  It is true that production of documents was pursuant to the defendant’s voluntary undertaking but the production was not complete.   The defendant had not produced the missing documents despite a request on 31 March 2011 before action and his undertaking to produce.  He could not have been mistaken as to what the plaintiff wanted as, on 15 August 2011, the latter has given him samples of the inward and outward remittance advices for HSBC and SCB.  The missing documents which the defendant considered as irrelevant turned out to be most relevant to the issue of misappropriation of partnership funds.  I find these matters to be weighty in terms of deciding that the defendant should bear more blame for this application.

120.  Whether the defendant has complied fully with his undertaking to produce did not rest on whether the plaintiff had made the right complaint as regards the missing documents.  It was of no use for the defendant to express surprise that despite the plaintiff’s own inspection and copying of documents the defendant still alleged that the missing documents could not be found.  It was of no use for the defendant to keep repeating that he had never denied access and the plaintiff had never asked for access over the past 21 years until recently. It was for the defendant to comply with the letter and spirit of his own undertaking.

121.  The defendant’s accusation that the plaintiff took out the writ one day before expiry of the ultimatum for production of all documents in a letter from the plaintiff dated 22 March 2011 had no significance in the context of this case.  That one day could not have led the parties to a peaceful resolution through pre-action correspondence or without issue of this summons.

122.  Having regard to all the circumstances, I am of the view that costs of the application for inspection of books and accounts should be borne by the defendant in any event.  This should take up 40% of the costs of the summons.  20% of the costs of the hearing on 7 June 2012 should be apportioned as costs of the application for inspection.

Conclusion

123.  I make an order as follows:

(1)  The application for an injunction is dismissed.

(2)  A preservation order be made such that if the defendant sells any of the offices or the flat at Tower 28 South Horizons, he shall, upon completion of any such sale preserve 60% of the proceeds of sale (after deduction of conveyancing fees and agency charges) by payment into a designated account in a bank in Hong Kong held in the name of the defendant’s solicitors until trial or further order; details of that bank account shall be notified to the plaintiff’s solicitors;

(3)  The plaintiff do fortify his undertaking as to damages so that before each payment in by the defendant of the net proceeds of sale of any of the offices or the flat at Tower 28 South Horizons into a designated account, the plaintiff shall pay an amount equivalent to 5% of those net proceeds into court.

(4)  on a nisi basis, as regards the application for the injunction and preservation order, 30% of the costs of the summons (including costs reserved), should be the plaintiff’s costs in the cause, to be taxed if not agreed.  80% of the costs of the hearing on 7 June 2012 shall be apportioned as costs under this application;

(5)  on a nisi basis, the costs of the application for inspection should be to the plaintiff, apportioned at 40% of the costs of the summons (including costs reserved), to be taxed if not agreed.  20% of the costs of the hearing on 7 June 2012 shall be apportioned as costs under this application; and

(6)  there be taxation only upon conclusion of this action.

124.  I thank counsel for their assistance.