ZIMMER SWEDEN AB v. KPN HONG KONG LTD AND ANOTHER

HCA2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2264 OF 2013

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DECISION

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Introduction

1.  Zimmer Sweden AB (“Zimmer Sweden”) was allegedly victimized in a fraud perpetuated in Sweden and was swindled out a total sum of EUR487,000 in mid October 2013. Part of the said sum allegedly ended up in the respective bank accounts of KPN Hong Kong Limited (“KPN”) and Brand Trading Limited (“BT”) in Hong Kong. Zimmer Sweden brought this action to recover such monies and obtained two separate ex-parte injunctions, first against KPN by DHCJ Leung on 21 November 2013 (“the 1^st Injunction”) and then against BT by L Chan J on 23 November 2013 (“the 2^nd Injunction”) to enjoin them from dealing with the monies in their respective bank accounts to a specified extent. Zimmer Sweden further obtained a gagging order from DHCJ Yau against both KPN and BT also on an ex-parte basis (“the Gagging Order”). This is the first encounter of the parties for substantive arguments and I am seized with several applications.

2.  First, Zimmer Sweden applies for the continuation of the 1^st and 2^nd Injunctions and the Gagging Order. Both KPN and BT seek to discharge the two Injunctions on the ground of material non-disclosure and oppose their continuation.  Alternatively, they ask for fortification of Zimmer Sweden’s undertaking as to damages. They also seek to discharge the Gagging Order. Lastly, by summons dated 11 February 2014 (“the Security for Costs Summons”), KPN and BT jointly apply for security for costs in the sum of HK$1 million up to and including the stage of exchange of witness statements by reason of the fact that Zimmer Sweden is a foreign company.

Undisputed facts by way of evidence filed at the ex-parte stage

3.  The bulk of the evidence placed before the ex-parte judges by Zimmer Sweden is not controversial and can be summarized as follows.

4.  Zimmer Sweden, based in Gothenburg, Sweden, is a part of a worldwide consolidated group trading in medical products. The headquarters of the group are located in the US. Ms Forsberg was at the material time the Finance Manager of Zimmer Sweden.

5.  On 14 October 2013, Ms Forsberg received a call from a man purported to be Mr Crines who was at the material time the Executive Vice President, Finance and the Chief Financial Controller of Zimmer Sweden’s parent company in the US. The man, whose identity remains unknown, was later found to be a fraudster (“the 1^st Fraudster”).

6.  The 1^st Fraudster alleged that he was calling from Switzerland and represented to Ms Forsberg over the phone that the Zimmer Group needed to raise funds within the group for an acquisition of a company on a confidential basis. Ms Forsberg asked Ms Quist, the Accountant of Zimmer Sweden to follow up the demand of the 1^st Fraudster.

7.  A lady calling herself Ms Laura Peter (“the 2^nd Fraudster”) telephoned Ms Quist subsequently and she purported to be an attorney acting on behalf of Mr Crines. The 2^nd Fraudster sent an invoice to Ms Quist demanding payment of EUR487,000 (“the Sum”) in favour of a company called Enara UAB aka UAB Kosona (“Kosona”) with a bank account with DNB Bank in Lithuania.

8.  On 14 October 2013, the Sum was transferred to the said account of Kosona as a result and the transfer was evidenced by a bank confirmation (“the Transfer”). The 2^nd Fraudster emailed Ms Quist to acknowledge receipt of the bank confirmation.

9.  On 21 October 2013, the 1^st and 2^nd Fraudsters separately called Ms Forsberg again to ask for further funds for the alleged acquisition. The 2^nd Fraudster sent an invoice to Ms Forsberg demanding payment of EUR490,000 (“the 2^nd Sum”) in favour of a company called Latman Invest Corp (“LIC”) with a bank account with AS Rietumu Bank (“ASR Bank”) in Latvia. They represented to Ms Forsberg that the deal would be announced on 25 October 2013 and both loans would be repaid on 26 October 2013.

10.  Pursuant to the invoice, Ms Forsberg made a transfer of the 2^nd Sum to the account of LIC with ASR Bank. The said transfer was evidenced by a transfer receipt. Ms Forsberg emailed the said transfer receipt to the 2^nd Fraudster and the 2^nd Fraudster acknowledged receipt of the document by way of a return email.

11.  On 22 October 2013, Ms Forsberg tried to call Mr Crines at the office of the Zimmer Group in Switzerland but in vain. She was told that Mr Crines had all along been in the US. She started to doubt about the two transfers and then she called the 1^st Fraudster. Knowing that the fraud was close to discovery, the 1^st Fraudster hung up and could never be reached ever again.

12.  Zimmer Sweden tried to stop the said transfer of the 2^nd Sum but in vain. The 2^nd Sum has nothing to do with KPN and BT and this action concerns the Transfer and the Sum only. KPN and BT became embroiled in this matter due to the following transactions.

13.  On 15 October 2013, Kosona converted the Sum save EUR10,000 into USD628,862.20 and transferred the same into three tranches (USD220,000, USD240,000 and USD 168,000) to the bank account of KPN with HSBC (No. 817031743848) (“the KPN Account”).  Certain bank charges were deducted from the three sums by HSBC and hence the resultant balance stood at USD628,417.29.

14.  Subsequently, on diver dates in October 2013, KPN made the following transfers totaling USD296,641 into the account of BT with HSBC (No.817-638257838) (“the BT Account”).

Date	Amount (USD)
15 October 2013	43,735
16 October 2013	(i) 69,476 (ii) 69,946 (iii) 29,621
17 October 2013	44,381
25 October 2013	39,482
	296,641

15.  Both KPN and BT have the same registered address at Unit 808, 8/F, Star House, 3 Salisbury Road, Tsim Sha Tsui, Kowloon, Hong Kong (“the Unit”). They also share the same service company, ABA Services Limited (“ABA”) as their common company secretary using the Unit as its office.

16.  A male known as Peddappaiah Nagaraja Kotagaralahalli (“Nagaraja”) is the common director of KPN and BT. He has been charged with a holding offence of dealing with property known or believed to represent proceeds of an indictable offence under section 25 of the Organised and Serious Crimes Ordinance, Cap.455.

17.  Mr Chang, counsel for KPN and BT, informs this court that Nagaraja was brought before a magistrate for mention on or about 10 March 2014 and the criminal case has been adjourned for further police investigation. The defence also handed up a copy of the charge sheet showing that the KPN Account is the subject matter of the holding charge.  

Steps taken by the parties after the commencement of these proceedings

18.  Before dealing with the controversial evidence of the parties and their respective applications, I shall give a brief account of the procedural history. The evidence adduced by Zimmer Sweden at the ex-parte stage consisted of the affirmation evidence of Ms Fewins, of Messrs. Stephenson Harwood, solicitors for Zimmer Sweden. Ms Fewins has all along been the handling solicitor in this action.

19.  In the very beginning, Zimmer Sweden sued KPN only by its Writ dated 21 November 2013. On the same day, Ms Fewins filed an affirmation and she relied on it to obtain the 1^st Injunction against KPN only. 

20.  Further, on or about 22 November 2013, one Ms Yan who was a legal assistant of Mannheimer Swartling liaised with the Hong Kong police in respect of the fraud complained of by Zimmer Sweden. A lady police officer called Madam Chan told Ms Yan that approximately HK$600,000 of the alleged fraud proceeds was transferred from KPN to BT. Ms Yan was provided with the details of the bank accounts of KPN and BT.

21.  Ms Fewins was duly notified of the foregoing information and hence in no time her 2^nd affirmation and an amended writ with BT being made a party were prepared. On 23 November 2013, Ms Fewins again applied successfully on behalf of Zimmer Sweden both an order to allow amendment of the Writ and the 2^nd Injunction on the strength of her 1^st and 2^nd affirmations.

22.  On 25 November 2013, Ms Fewins had a telephone conversation with a male identifying himself as Mr Kotagaralahalli (Nagaraja) of KPN, who called to tell her that he had received the court documents relating to these proceedings served on KPN on the registered office address of KPN, i.e., the Unit (“the Conversation”). The gentleman insisted on the innocence of KPN. On the same day, for fear that KPN may tip off other fraudsters to dissipate the Sum to frustrate tracing, Ms Fewins made her 3^rd affirmation and applied for the Gagging Order and a disclosure order against HSBC on a confidential and ex-parte basis. DHCJ Yau granted the applications and hence Zimmer Sweden obtained two orders both dated 25 November 2013.

23.  The return dates of the 1^st and 2^nd Injunctions fell on 29 November 2013 and DHCJ B. Chu made an order to the effect that both the Injunctions and the Gagging Order be extended until further order. Directions for filing evidence were also given, pursuant to which the parties have filed voluminous evidence. At the outset, Zimmer Sweden further sought indulgence to file the 2^nd affirmation of Neil Miller (“NM”) out of time. Mr Chang also on behalf of the defence applied for leave to file the 2^nd affirmation of Benjamin Muller (“BM”), who claims to be in charge of the trading operation of KPN and based in London. These applications were unopposed and hence granted.

Controversial evidence filed at inter-partes stage

24.  The defence has filed evidence to show that the monies that KPN and BT have handled were ordinary trade proceeds transferred to their respective accounts and have nothing to do with any fraud. For the purposes of these applications, it suffices to give a summary of the disputed evidence and I should start with the defence’s account.

25.  Mr Mendel Gluck (“MG”) in his affirmation explains the innocent background of KPN and BT. He claims to have become the 91% shareholder of KPN through his nominee company incorporated in the Republic of Panama in 2011. MG acquired KPN for the purpose of a joint venture with the Sri Lanka government in respect of an old sugar plant and according to the Sri Lankan requirements he needed to acquire a Hong Kong company to be the mother company. KPN comprises the initials of Nagaraja and used to be a dormant company. MG came to know Nagaraja through the introduction of his partner.

26.  Subsequently the joint venture did not materialize and MG used KPN for general trading purposes. MG decided to engage his old friend BM to run an office in London in charge of the trading activities of KPN. KPN commenced trading (mainly in household and health and beauty products) in March 2013 and BM has throughout run the business for MG and Nagaraja is a mere nominal director.

27.  BT was set up by MG and BM also for trading purpose in London. There have been fund flows from KPN to BT from time to time as loans.

28.  BM in his affirmation explains the transfers. In September 2013, his friend Mr Simon Teitelbaum (“ST”) looked for large stocks for Christmas for his client and he turned to BM. Eventually, ST targeted at products of three brands, namely, Head & Shoulders (“H&S”), Pantene and Johnson & Johnson (“J&J”).

29.  BM managed to get M & M Dearot Inc (“M&M”) to supply ST with the H & S products required. M&M sent KPN an invoice dated 1 October 2013 for USD200,322.00. As evidenced by its bank statements, on 3 October 2013, KPN allegedly paid M&M a total sum of USD 49,700.00 as part payment from the KPN Account. On 8 October 2013, KPN issued an invoice to Kosona asking for USD 219,954.15.

30.  For Pantene products, BM sourced from Strauss Group Limited (“SG”), an Israeli company. BM exhibited an invoice of SG dated 8 October 2013 for USD228,099.00 being the price of various Pantene products (“the SG Invoice”). As evidenced by its bank statements, on 9 October 2013, KPN allegedly paid SG a total sum of USD 57,000.00 as part payment from the KPN Account. On 10 October 2013, KPN issued an invoice to Kosona asking for USD 239,952.60.

31.  Lastly, BM sourced from Birida Gida Limited (“BG”), a Turkish company, the J & J stocks required by ST. BG issued an invoice dated 9 October 2013 for USD151,030.40 and purportedly in partial settlement, a sum of USD 60,000 was paid out of the Account on 10 October 2013. On the following day, KPN issued an invoice for USD168,742.00. It is noteworthy that when KPN made such partial payments on behalf of Kosona, all KPN knew about Kosona were its name and its address in Lithuania.  

32.  Since October 2013, BM has chased ST for payment of the foregoing invoices issued to Kosona even with threats, as shown by certain email exchanges exhibited. KPN also produced certain shipping documents relating to the foregoing products sourced for ST’s client.

33.  Eventually, ST’s client transferred a total sum of USD628,417.29 into the KPN Account by three separate payments on or about 15 October 2013 purportedly in payment for the foregoing products. KPN then paid the balance of the purchase price to M & M, SG and BG in early November 2013.

34.  Before making the payments, in late October 2013, KPN first transferred its monies in Swiss Francs to a foreign exchange company in the US named Freedex Express Ltd (“Freedex”) to turn them into US dollars. Freedex is claimed to offer KPN better exchange rate. In the end, Freedex not only changed monies for KPN but also made payments on its behalf to M&M, SG and BG together with another supplier pursuant to the instructions of KPN.

35.  Certain banking documents were produced to evidence these payments. Apparently, Freedex gave instructions to Barclays Bank PLC (UK) (“Barclays”) to transfer a sum of USD150,622 to M&M on 4 November 2013, a sum of USD 171,099.00 to SG on 7 November 2013 and a sum of USD 91,0030.40 to BG on 5 November 2013. Three documents of Barclays were produced to show the said three transfers from Freedex (“the Barclays’ Documents”).   

36.  In gist, the evidence of KPN suggests that the Sum was received as genuine trade proceeds and KPN had no knowledge, actual or constructive, of its alleged illegitimacy.

37.  In regard to the transfers of the total sum of USD 296,641 from KPN to BT in October 2013, BM maintains that these were ordinary trade loans between two related business entities.

38.  It should be mentioned that Nagaraja made an affirmation while he was in custody. His evidence is brief and simply makes the point that he has only been a nominal director of KPN and he had no involvement whatsoever in its business operation.

39.  Zimmer Sweden mounted a vehement challenge to the evidence of KPN and BT. It instructed a firm of investigators based in London, namely, Ten Intelligence Limted (“TIL”) to carry out intensive investigations into all the alleged business transactions made by KPN. The findings of TIL were contained in a report dated 3 March 2014 exhibited to the 1^st Affirmation of NM, who is the Chief Executive Officer of TIL.

40.  Ms Man, counsel for Zimmer Sweden, helpfully summarized by way of a table the relevant findings of TIL in juxtaposition with the corresponding allegations of the defence. I do not find it necessary to set out all the contradictions here and I would merely mention those major findings pertinent to the bona fide of the alleged transactions.

41.  First, alarmingly, M&M is found to be a property management company dealing with real estate in Buffalo, New York and could not have supplied hair and beauty products to KPN.

42.  SG was found to a food and beverage company. Its Account Executive Mr Odem Alagem confirmed by way of an email dated 2 March 2014 that SG did not deal in Pantene products as alleged at all. Further, NM contacted Mr Ronen Shamgar, the Financial Director of SG. He examined the SG Invoice and came to the firm conclusion that it was a forged document looking substantially different from their invoices. He also confirmed that SG had never dealt with KNG. He sent NM an email dated 12 March 2014 to recap his observations.

43.  TIL’s investigation also revealed that there is no company existing in the name of Birda Gida Limited. The closest is one called Birida Gida Ic ve Dis Ticaret Scnayi Ltd Sti incorporated in Turkey in 2002, which shared the same address with BG. TIL approached Mr Riza Davutoğlu (“RD”) who was one of the shareholders and Chairman of the said company. RD indicated that BG did not trade in Johnson & Johnson products as alleged. RD also produced a catalogue of the products traded by BG which did not include any of products sold by reference to the trade name of Johnson & Johnson.

44.  The documents produced by the defence including the SG Invoice also look suspect. First and foremost, in the three remittance advices showing the deposits of the monies into the KPN’s Account, the payment details inexplicably referred to real estate while there was no mention about any trade of commercial products.    

45.  The Barclays’ Documents are also under attack. KPN claims that it first transferred monies in Swiss Francs to Freedex for exchange purposes before payments were made to the three suppliers by Freedex in accordance with its instructions. In the banking documents produced by the defence, the beneficiary bank of Freedex was stated to be Mizrahi Tefahot Bank Ltd (“MTB”) and not Barclays. Mr Christopher Jefferis, Director of Zimmer Sweden, contacted the managers of MTB and was told that MTB never used the services of Barclays for any transfers of US dollars in any one of its accounts to other accounts.

46.  Freedex appears to be dubious too. BM is a director of two other English companies named Fredex Express Limited and Gold Fredeex Limited. They shared the same address with BM and three other companies of which MG is a director. The address was found to be the business address of a firm of accountants.

47.  TIL further paid a site visit to the purported London office of KPN on 5 March 2014 and it was found out that the premises were derelict awaiting demolition. About the residential address of BM, it was found out that there was no 17A on Grovelands Road and in any event the property on 17 Grovelands Road belonged to another person.    

48.  BM in his 2^nd affirmation exhibited two documents respectively issued by HSBC and the Haringey Council in England showing that his residential address was a valid one. He, moreover, pointed out that the London office of KPN was in fact closed down in mid February 2014 and all other occupants of the same building were told to vacate he said building too.

49.  Lastly, I should mention that it is the evidence of Ms Fewins that after the grant of the two Injunctions, Nagaraja contacted her by emails. After some exchange, Nagaraja called Ms Fewins indicating that he was in town and had received the legal documents from Zimmer Sweden. Ms Fewins was eager to meet Nagaraja but he told her that MG would be in a better position to explain to her their innocence.

50.  Eventually, MG called Ms Fewins in the afternoon of 25 November 2013. MG identified himself to be an employee of KPN and he was an advisor. MG told her that he had been telephoned by an individual a few months ago who expressed his interests in purchasing shampoo products from KPN for his new company Kosona. MG tried to persuade Ms Fewins that KPN was innocent but he indicated that he knew the 1^st Fraudster personally. He said the 1^st Fraudster had an address in Israel and he had all the information relating to the 1^st Fraudster so that Zimmer Sweden could track him down. He told Ms Fewins that they should work together against the 1^st Fraudster and the present proceedings should be discontinued.

51.  On the following day, Ms Fewins had a meeting with Nagaraja at her office. He told her that MG handled all the dealings with Kosona and he was not involved. He further produced certain sales documents to Ms Fewins to prove the innocence of KPN and BT. At the end, neither he nor MG disclosed any information about the 1^st Fraudster to Ms Fewins.

Material non-disclosure

52.  I first deal with the application of KPN and BT for discharge of the two Injunctions by reason of material non-disclosure. Mr Chang refers me to the summary of the legal principles relating to material non-disclosure in ex-parte applications given by DHCJ Au-Yeung (as she then was) in Velatel Global Communications Inc and Anor. v Chinacomm Limited & Ors. unreported, HCA1978/2011, 26.10.2012. Those principles are well-established and there is no debate about them. Ms Man acknowledges the duty of Zimmer Sweden to make a full and fair disclosure of all the material facts at the two ex-parte hearings. Such a duty also extends to matters of law: Memory Corp plc v Sidhu [2000] 1 WLR 1443 at 1454 C-G per Robert Walker LJ. With such principles in mind, I turn to the five complaints of the defence.

53.  First, Mr Chang submits that that Zimmer Sweden failed to bring to the ex-parte judges’ attention that service could be effected on the defence on the Unit through ABA. Instead, in the affirmation evidence, Ms Fewins asserted that KPN appeared to have ceased operating or is simply a front for carrying out fraudulent activities based on the findings of a lady staff of Zimmer Sweden law firm in Sweden who had paid a visit to the Unit on 13 November 2013. The lady staff was unable to locate KPN from checking the list of companies occupying Star House. Further, she failed to see a company operating any business inside the Unit. She looked through the frosted glass and it seemed to her that there were shelves or cabinets placed right behind the door, blocking the entrance from inside. She took some photographs to evidence her observations.

54.  Mr Chang submits that Ms Fewins should not have relied solely on the said lady staff of another firm to make the site visit and her assertion was unfounded. ABA in fact used the Unit as its office and those instructing Mr Chang was told by one Mr Leung of ABA that there were staff working in the Unit during office hours.

55.  I find no substance in this complaint. There is no direct and cogent evidence to show that the observations of the said lady staff were erroneous. There is no contrary evidence to the allegation that there was no signage outside the Unit or within Star House. Nor is there any evidence that KPN did operate its business inside the Unit on 13 November 2013. The defence said nothing about the alleged unusual scene of the entrance of the Unit being blocked from inside. The mere fact that the Unit was subsequently good for valid service does not mean that such observations were not validly made on 13 November 2013. There was no inaccurate information provided to the ex-parte judges in so far as the observations of the said lady staff were concerned. Based on those observations, Ms Fewins at the ex-parte hearing before DHCJ Leung submitted that KPN was no longer in operation. From the transcript of the said hearing, it can be seen that the deputy judge did not accept the evidence sufficient to justify such a conclusion. Notwithstanding its being rejected, the submission of Ms Fewins was not in any way misleading in my judgment.

56.  Ms Man points out that in any event the defence turned up at the inter-partes hearing on 29 November 2013 necessarily meaning that the legal documents had been successfully served on them. She submits that there can be no material non-disclosure.

57.  Mr Chang submits that the duty of full and frank disclosure is a continuing obligation and once the services were effective on the Unit, the ex-parte judges should be informed so that they could reconsider whether Zimmer Sweden had a good arguable case that KPN and BT had a hand in the fraud and whether there was a real risk of dissipation, even before the inter-parte hearing.

58.  I cannot agree with Mr Chang. It is never the evidence or submission of Zimmer Sweden that ABA did not serve its function as KPN’s company secretary in the Unit. In her 3^rd Affirmation dated 25 November 2013, Ms Fewins disclosed the fact that Nagaraja had told her that he had received the court documents served on the Unit. The fact that the Unit is good for service through ABA does not mean that KPN and/or BT continue to carry on their respective businesses inside the Unit. Further. as mentioned, the 1^st Injunction was granted not on the basis that KPN and/or BT ceased their respective businesses inside the Unit. I do not find the valid service of the Injunctions on the Unit a material fact of which the ex-parte judges should be immediately informed. I should also point out that from the transcript of the hearing before L Chan J, it can be seen that Ms Fewins did inform the judge that the Writ (issued on the date of the 1^st Injunction) was successfully served on KPN.

59.  Next, Mr Chang complains that Zimmer Sweden failed to warn the ex-parte judges that the evidence of Ms Fewins in support of the applications for injunctions contained unverified, multiple hearsay materials. He submits that Ms Fewins failed to make any independent inquiry or verification of her instructions from the legal advisor of Zimmer Sweden in Sweden and her allegations were hence based on unsatisfactory hearsay evidence. In this regard, Mr Chang relies on Anthony Chan J’s dictum in UES International (HK) Ltd v Mritima Maruba SA, unreported, HCA632/2011, 19.11.2013, §15 to the effect that solicitors should only give evidence on behalf of their client as a matter of exception which can be justified.

60.  Mr Chang also complains that Zimmer Sweden did not act fairly in obtaining the 2^nd Injunction in that the possible defence of BT was not mentioned to L Chan J. Again I see no merit in this submission.

61.  In the first place, I do not think the ex-parte judges required any warning. Being professional, the ex-parte judges must be aware of the nature of the evidence placed before them. They could not be oblivious of the fact that the supporting evidence came from a practising solicitor in Hong Kong made on instructions. The evidence was all about a fraud with an international element perpetuated outside this jurisdiction. Zimmer Sweden, in addition to reporting the matter to the Hong Kong police, asked for urgent relief soon after the fraud was discovered. In these circumstances, it was not unreasonable for its handling solicitor to make affirmations on its behalf on an urgent basis at the ex-parte stage.

62.  Further, as mentioned, the evidence placed before the ex-parte judges was not really in dispute. The defence of KPN and BT is just that they are not involved in the fraud. I fail to see why the Injunctions were not justified merely because Ms Fewins did not have personal knowledge of the alleged fraud. In any event, this has nothing to do with any material non-disclosure.

63.  Mr Chang further submits that Zimmer Sweden failed to highlight to the ex-parte judges that it had no assets in Hong Kong.

64.  The evidence before the ex-parte judges was that Zimmer Sweden has a substantial business overseas supported by its audited accounts. It did not allege that it had any assets in Hong Kong. In the skeleton submissions placed before the ex-parte judges, Ms Fewins merely mentioned about the substantial nature of Zimmer Sweden. I do not think the ex-parte judges were under any misapprehension that Zimmer Sweden being a Swedish company had any assets in Hong Kong. I do not accept that as a matter of inflexible rule that a foreign company with no assets in Hong Kong must invariably be ordered to fortify its cross-undertaking in damages. I do not find such a lack of assets in Hong Kong a material fact which Zimmer Sweden should have underlined to the ex-parte judges.     

65.  Mr Chang then goes on to complain about the failure on the part of Zimmer Sweden to disclose the Conversation and the subsequent disclosure of the sales documents by Nagaraja to Ms Fewins when they met on 26 November 2013. Mr Chang submits that though these took place after the grant of the Injunctions, nevertheless, Zimmer Sweden owes the ex-parte judges a continuing obligation to make full and frank disclosure.

66.  I cannot accept this submission. Zimmer Sweden is never obliged to take the words of Nagaraja (which were subsequently contradicted by the affirmation evidence filed by the defence) and the authenticity of the sales documents he disclosed at face value. The Injunctions were already served on the defence and they expressly provided that the defence could apply to vary or discharge the Injunctions. I do not see in those circumstances why it was incumbent on Zimmer Sweden to immediately file an affirmation even before the return date to mention the purported defence whilst the defence could simply sit on the Injunctions.

67.  Lastly, Mr Chang complains about the brevity of the skeleton submissions of Ms Fewins placed before the ex-parte judges. Each of them consisted of two pages only.

68.  To start with, I cannot see how the brevity of the written submissions can amount to any material non-disclosure. There is no specific matter in the evidence said to have been omitted from the written submissions. At best, it can be argued that the ex-parte judges were not given helpful assistance before the hearings. However, as the transcripts show, the ex-parte judges needed little further assistance on the evidence placed before them during the hearings and they were able to conclude that Zimmer Sweden was in need of urgent relief on such evidence.

69.  In conclusion, I find that there is no material non-disclosure that justifies the discharge of the Injunctions. Hence, I reject the application of KPN and BT to discharge the Injunctions.

Continuation of the injunctions

70.  Then I proceed to consider whether the Injunctions should be continued in light of the evidence filed at the inter partes stage. I wish to say something about the applicable principles first.

71.  Though the parties are prepared to argue on the basis that the Injunctions sought are Mareva injunctions, they also accept that on the evidence, Zimmer Sweden actually asserts a proprietary claim in the monies in the KPN Account and the BT Account. As such, it is primarily seeking proprietary injunctions. 

72.  In A v C [1981] 1 QB 956, the plaintiffs claimed to have been victimized by a conspiracy to defraud committed by the 1^st to 5^th defendants and in the result they paid a sum of GBP 383,872.44 to the bank account of a person identified as W.L. with the 6^th defendant bank. The plaintiffs applied for an injunction to restrain the defendants from disposing of the said amount or any lesser amount standing in the credit of the 1^st to 5^th defendants’ accounts or the said account with the 6^th defendant bank and two other incidental disclosure orders.      

73.  Robert Goff J (as he then was) took the opportunity to highlight the difference between proprietary injunctions and Mareva injunctions and had this to say (at §958D to E):

“In this connection, it is to be borne in mind that the injunction and associated relief were being sought in respect of two separated matters: (a) the second plaintiff’s proprietary claim to the sum of L383,872.44 paid by them to the sixth defendant for the account of W.L., and (b) both plaintiffs’ claim to a Mareva injunction against the first five defendants, all of whom are resident outside the jurisdiction. Of course, the basis of these two forms of injunctive relief is different, the first being granted to restrain the disposal of assets of which the second plaintiff claims to be the beneficial owners, and the second being granted to prevent a possible abuse, viz. The abuse of foreign parties causing assets to be removed from the jurisdiction in order to avoid the risk of having to satisfy any judgment which may be entered against them in pending proceedings in this country.

I take first the proprietary claim. In such cases, there is good authority that the court may make orders with the purpose of ascertaining the whereabouts of the missing trust fund.”

74.  Robert Goff J continued to refer to London and County Securities Ltd. v Caplan (unreported), May 26, 1978 and Mediterrania Raffineria Siciliana Petroli S.p.A. v Mabanalt G.m.b.H. (unreported) December 1, 1978 wherein injunctions were granted in aid of tracing claims. For the former case, Robert Goff J quoted the following words of Templeman J (as he then was):

“… a case of interlocutory relief granted to preserve the assets which were the subject of the litigation and are the subject of criminal proceedings. It is a case where, unless effective relief is granted, justice may well become impossible because the evidence and the fruits of crime and fraud may disappear.”

75.   His Lordship further had this to say:

“Now these cases provide ample authority that, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court not only has jurisdiction to grant an injunction restraining the disposal of that property; it may in addition, at the interlocutory stages of the action, make orders designed to ascertain the whereabouts of that property.”

76.  In Madoff Securities International Ltd and Anor. v Raven and Ors. [2012] 2 All ER (Comm) 634, Flaux J dealt with an application for a proprietary injunction and had this to say about the different applicable test (at §§127-128):

“MSIL seeks a proprietary injunction against the Kohn defendants. It is essentially common ground that there are three elements which the claimant has to demonstrate for the grant of a proprietary injunction, following the approach prescribed by American Cyanamid Co v Ethicon Ltd (No.1) [1975] A.C. 396; [1975] 2 W.L.R. 316 : (1) that the claimant has shown that there is a serious issue to be tried on the merits; (2) that the balance of convenience is in favour of granting an injunction; and (3) that it is just and convenient to grant the injunction.

In other words, both the basis for a proprietary injunction and the circumstances in which it will be granted are different from the case of a freezing injunction: see Polly Peck International Plc v Nadir (Asil) (No.2) [1992] 2 Lloyd's Rep 238 at 787 per Lord Donaldson M.R. In particular, unlike in the case of a freezing injunction, it is not necessary to show any risk of dissipation of assets and, even if there has been delay in making an application which might lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted: see Cherney v Neuman [2009] EWHC 1743 (Ch) per H.H.J. Waksman QC sitting as a Judge of the High Court at [101]–[102].”

77.  To J in Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited and Anor., unreported, HCA 1934/2011, 9.7.2012 also noted the difference between a proprietary injunction and a Mareva injunction and accepted that they could be applied for at the same time despite the difference in their applicable tests. His Lordship explained as follows:

“…is also wrong to argue that a Mareva injunction was not appropriate where the primary case against the 1^st defendant is solely proprietary in nature.  There are no constraints on the nature of a claimant’s cause of action or on the types of monetary relief which he may seek.  A Mareva injunction is designed to protect the claimant against the dissipation of assets against which he might otherwise execute judgment whether immediately or in the future: see Gee’s Commercial Injunctions, 5^th edition at paragraphs 3.029 and 5.009.  So long as the claimant has a claim against the defendant and that the defendant has assets which may be used to satisfy judgment, a claimant may apply for a Mareva injunction to restrain the defendant from dissipating his assets. A claimant’s right to a proprietary injunction is different.  It is issued to preserve assets which a claimant has a proprietary claim so that they can be turned over to the claimant if he is successful in the action   A proprietary injunction is easier to obtain and not subject to the usual liberties inserted into Mareva relief and there is no need to prove risk of dissipation.  It is a better relief than Mareva injunction, provided that the property has not been dissipated.  Where there is risk that the property has been dissipated, then it is prudent to apply for a Mareva injunction in aid or as a “top-up” protection in support of the proprietary injunction.”

78.  Mr Chang agrees to the foregoing principles and accepts that for the Injunctions to be continued, Zimmer Sweden does not need to show risk of dissipation. He further agrees that the balance of convenience is in favour of the continuation of the Injunctions. The live issue appears to be whether there is a serious issue to be tried on the merits.

79.  Before turning to the substantive arguments, it is pertinent to take note of the wise words of Parker L.J. in Derby & Co. ltd. v Weldon [1990] Ch.48 at pp.57-58 (with which May L.J. and Nicholls J agreed) to the effect that the court must not try to resolve conflicts of evidence on affidavit, or to decide difficult questions of law which call for detailed argument and mature consideration in interlocutory injunction applications after citing the speech of Lord Diplock in American Cyanamid [1975] AC 396.

80.  In his able submission, Mr Chang takes a legalistic approach and seeks to persuade this court that Zimmer Sweden has no discernible cause of action against KPN and BT.

81.  First, Mr Chang vigorously criticises the Statement of Claim. These, it is only pleaded that the Transfer was procured by fraudulent representation and that the Transfer being proceeds of fraud is traceable to the monies in the KPN Account and the BT Account. It goes on to say that it is unconscionable for KPN and BT to retain any part of the Sum and hence they become constructive trustees of the Sums holding the same on trust for Zimmer Sweden. It is further pleaded that KPN and BT are each liable to repayment and/or restitution of all monies received by any of them, being monies had and received by each of them.

82.  Mr Chang complains that no cause of action is pleaded against KPN and BT. He helpfully draws my attention to the elaboration of tracing by Millet L.J. in Boscawen and Ors. v Bajwa and Anor. [1996] 1 WLR 328 at 334D-F. He rightly points out that tracing in itself is neither a claim nor a remedy but a process whereby the plaintiff can trace what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. Unless he can show the retention by him of a beneficial interest in the property which the defendant handled or received, he could not raise an equity against the defendant’s unjust enrichment was at his expenses. It should also be borne in mind that it is still a prerequisite of the right to trace in equity that there must be a fiduciary relationship calling equitable jurisdiction into being.

83.  Mr Chang is also right in pointing out that neither knowing receipt nor dishonest assistance is pleaded against KPN and BT. No plea of fraud is pleaded, either. All in all, there is no unjust factor shown on the pleading save the plea of mistake to disentitle the retention of the Sum by KPN and BT.

84.  Ms Man, not being the author of the pleading, accepts that the statement of claim properly requires improvement. Nevertheless, she contends that the essential facts are present and they sufficiently entitle Zimmer Sweden to restitutionary remedy against KPN and BT. She further relies on the following dictum of Deputy Judge Woo in JS Microelectronics Ltd v Achhada [2013] 1 HKLRD 334 at §38:

“This case involves fraud and deceit; the evidence of it and that necessary for assisting in the tracing of the loot will unlikely be readily available. Indeed, I venture to say that after discovery, it may be necessary to amend the statement of claim further.”

85.  In that case, the deputy judge allowed the continuation of a Mareva injunction and dismissed the application to strike out the claim. Ms Man submits that this court is in a similar situation.

86.  I think it is a red herring to examine on the inadequacies of the pleading. This court is required to consider whether the plaintiff is entitled to interlocutory relief on the evidence. This court has to consider the totality of evidence and not just the pleading to decide or not whether the plaintiff can meet the threshold. Of course if the matters pleaded materially differ from those disclosed in the evidence, normally the reliability of the plaintiff’s evidence would be called into question. But this is not the case here.

87.  On the evidence of Zimmer Sweden, Mr Chang raises the point that even if equitable tracing is available in the case of mixed funds, Zimmer Sweden has failed to identity its monies in the account of Kosona in that it failed to ascertain the credit balance in the said account before the Transfer and hence the payments made to KPN could come from its own funds.

88.  As rightly pointed out by Ms Man, indeed Zimmer Sweden did produce a bank statement of the account of Kosona. It shows that it had a zero balance before the Transfer on 14 October 2013. This challenge is invalid.

89.  Further, Mr Chang raises a legal argument and submits that the plea of constructive trustees is doomed to failure even KPN and BT took a knowing part in the fraud. He relies on the recent judicial reluctance to follow the well known observation of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 69 at 716:

“I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v Wilson [1913] 2 KB 235, 244; R Leslie Ltd v Sheill [1914] 3 KB 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co v Shapira [1980] 1 WLR 1274, 1282C-E: see also McCormick v Grogan (1869) LR 4 HL 82, 97.”

90.   In Shalson and Ors v Russo and Ors. [2005] Ch281, Rimer J decided not to follow the foregoing observation. At §11, Rimer J pointed out that the authorities cited by Lord Browne-Wilkinson actually provided less than full support for the general proposition in the foregoing passage. Rimer J held that in any rate, he did not accept the proposition that property transferred under a voidable contract induced by fraud will immediately (and prior to any rescission) be held on trust for the transferor.

91.  Mr Chang further relies on the dictum of Millett LJ in Paragon Finance v DB Thakerar & Co [1999] 1 All ER 400 at 409e. There, Millett LJ explained the nature of a constructive trust in the following term:

“The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always give relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be ‘liable to account as constructive trustee’. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are ‘nothing more than a formula for equitable relief’: Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 at 1097, [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J.”

92.  On the other hand, Ms Man draws my attention to the recent observation of Stephen Morris QC sitting as a deputy High Court judge in Armstrong GmbH v Willington Networks Ltd [2012] 3 WLR 835 at §§127-129. The duty judge was aware that the observation of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council was doubted but in his judgment, in so far as it relates specifically to the case of theft or a bare transfer (and perhaps also where there is a contract between A and B which is void), it is accepted as representing the law: see Goff & Jones, para. 4-040 and Chitty, para 29-160. Ms Man thus submits that it is still good in law that the fraud perpetuated on Zimmer Sweden imposes a constructive trust on the fraudulent recipients including KPN and BT.

93.  Notwithstanding this interesting controversy about the nature and applicability of a constructive trust, Mr Chang accepts that it is not necessary for this court to express any firm view on this complicated legal issue. He eventually accepts that it is at the very least arguable that the observation of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale remains good law.

94.  In my view, stripped of legal niceties, on the evidence it is clearly shown that there are serious issues to be tried between the parties and Zimmer Sweden has shown a good arguable case against KPN and BT. I am convinced that it has a sound claim for restitution and that it will be entitled to proprietary remedy relating to the Sum. KPN and BT do not begin to argue that Kosona was entitled to any payments by Zimmer Sweden. The bone of contention is clearly about the genuineness of the alleged transactions among Kosona and KPN and BT. In the event that the alleged transactions were found to be bogus, their defence of change of position and bona fide purchaser for value can hardly succeed and it is difficult to see how it is just for KPN and BT to hold on to any part of the Sum.

95.  I am very much convinced on the evidence that Zimmer Sweden has a good arguable case to prove that there was no genuine trading between Kosona and KPN and the transfers of the Sum to the KPN Account was not for bona fide commercial purpose. For the purpose of this application, I should refrain from making a forensic analysis of the conflicting evidence. Suffice it to say, I have come to this conclusion despite the affirmation and documentary evidence adduced by the defence. I have also taken into account the defence plea of change of position and bona fide purchaser for value. It appears to me that the defence is required to give further explanations in light of the untested rebuttal evidence of Zimmer Sweden emanating from TIL.

96.  In the premises, I also conclude that it is just and convenient to continue the Injunctions. Mr Chang applies for a variation of the Injunctions so that each of KPN and BT can have a maximum of HK$10,000 per week on legal advice and representation. It appears to be a reasonable request and I have heard no objection. I agree to the proposed variation.   

Fortification of the cross-undertaking as to damages

97.  The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification and there is no obligation on a plaintiff to give full and frank disclosure of financial circumstances to oppose an order for fortification (or to argue for a lesser amount): per Deputy Judge Coleman SC in Hui Chi Ming v Koon Wing Yee & Ors [2011] 2 HKC 185 at §§44-45.

98.  BM provides the evidential basis for the application for fortification. He claims that both KPN and BTL have been forced to stop their business operations completely since they could not trade without an active bank account. On the basis of a loss of a profit of HK$1.3 million per month for KPN alone and assuming the trial would take place within 12 months from the grant of the Injunctions, KPN asks for a sum no less than HK$15.6 million as fortification.

99.  I am not persuaded that there is a need for fortification and that HK$15.6 million is the appropriate quantum. The only ground advanced by the defence is that Zimmer Sweden is a foreign plaintiff having no assets in Hong Kong. That alone, however, can hardly justify an order for fortification in my view and all the circumstances should be considered to determine whether there is a genuine need for fortification. As submitted by Ms Man, there is no challenge to the financial standing of Zimmer Sweden. Their financial ability to honour the cross-undertaking in damages should therefore not to be doubted. Nor is there any evidence that Zimmer Sweden may not be willing to honour the cross-undertaking given to the court in November 2013, bearing in mind a breach of the cross-undertaking may attract serious legal, in addition to financial, consequences.

100.  With respect to quantum, I am not persuaded by the evidence of KPN that it would suffer any loss at all. With one bank account frozen, KPN could still carry on business provided that it has viable financial resources. There is nothing to stop KPN and BT to open a new bank account to continue trading. There is indeed inadequate evidence of KPN’s fund situation. I am not convinced that there is a causal link between its purported loss of business and the imposition of the Injunctions. 

101.  Ms Man submits that the KPN Account should be frozen by the police by reason of the criminal prosecution of Nagajara anyway and any hardship suffered by KNP is not attributable to the Injunctions. Mr Chang informs this court that the police did not freeze the KPN Account. This is surprising to me since the charge concerns the KPN Account and I would have thought that it must be frozen until the close of the criminal prosecution. I find force in Ms Man’s submission and this provides an additional reason why I find KPN unable to prove loss due to the Injunctions.

102.  I should add that in any event I am not persuaded by its monthly profit loss of HK1.3 million since the grant of the Injunctions. I do not think it is right for me to come up with a figure myself to be a real estimate of the loss of KPN for the purpose of fortification, as suggested by Mr Chang in the circumstances of this case.

103.  In the premises, I refuse to order fortification. 

Gagging Order

104.  Mr Chang submits that a gagging order is an exceptional remedy and should not be lightly granted as it prima facie infringes freedom of speech. The burden is on Zimmer Sweden to justify the need of such an order. He helpfully refers me to A Co v B Co [2002] 3 HKLRD 111. There, Ma J (as the Chief Justice then was) explained the purpose of a gagging order as follows:

“A gagging order is granted where there are grounds to believe that once a wrongdoer is aware he is being pursed, steps may be taken by him to frustrate any claim that may be made against him or any investigations being carried out.”

105.  Mr Chang submits that now that KPN and BT are parties to these proceedings and their respective accounts have been frozen, the Gagging Order serves no useful purposes. I cannot agree with him.

106.  As pointed out by Ms Man, Ms Fewins has been told by MG that he knew the 1^st Fraudster personally and he could provide to her all his contact information. Obviously Zimmer Sweden can have a valid claim against a fraudster who has defrauded it. Given the position of Zimmer Sweden that KNP and BT worked in concert with the 1^st Fraudster, I accept that there is a reasonable risk that the personnel of KNP and BT may tip off the 1^st Fraudster and all his accomplices so that other viable recovery actions would be hindered or rendered nugatory.

107.  On the other hand, there is no hardship alleged if the Gagging Order is to be continued and I fail to see any. The Gagging Order cannot be onerous to KPN or BT in terms of compliance. In the circumstances, I opine that I should exercise my discretion to continue the Gagging Order.

Security for Costs Summons

108.  It is accepted by the parties that under Order 23 rule 1(1), Rules of the High Court. This court has a wide discretion to order security for costs if the plaintiff is a foreign plaintiff. To exercise the discretion properly, this court would order security if this court thinks it just to do so having had regard to all the circumstances of the case. It is not an inflexible or rigid rule that a foreign plaintiff should provide security for costs.

109.  Ms Man urges me to take into account the unchallenged financial strength of Zimmer Swiss as evidenced by its audited accounts and the good merits of its claim. She submits that the overall justice of the case requires a refusal of the security application.

110.  I cannot say I am not impressed by the merits of the claim of Zimmer Swiss but I am not satisfied that Zimmer Swiss has clearly demonstrated that it has a high degree of probability of success at trial. Ms Man confirms that there is no allegation that an order for security would stifle the genuine claim of Zimmer Swiss. Looking at the matter in the round, I believe it is only fair to order security so that the defence would not be exposed to the risk of an empty costs order.

111.  I have perused the estimated schedule of costs of the defence. A sum of HK$1 million is asked for up to the stage of exchange of witness statements. Taking a broad brush approach, I opine HK$600,000 is a reasonable figure as security for KPN and BT’s costs up to and including the stage of exchange of witness statements and I so order such a security to be made within 28 days of today either by way of payment into court the said amount or by provision of an irrevocable bank guarantee in the said amount.  

Conclusion and Orders

112.  To conclude, I refuse to discharge the Injunctions and I order them to be continued in their full terms and effects without any fortification in cross-undertaking as to damages save that I allow an increase on their weekly allowance for legal expense from HK$5,000 to HK$10,000 for each of KNP and BT.

113.  Moreover, I order that the Gagging Order be continued and I accede to the security for costs application. I order that Zimmer Sweden do provide security in the sum of HK$600,000 within 28 days of today either by way of payment into court the said amount or by provision of an irrevocable bank guarantee in the said amount. 

114.  Zimmer Swiss is the overall winner and it should be entitled to be paid its costs forthwith, to be taxed if not agreed except the costs of and occasioned by the Security for Costs Summons, which should be paid forthwith by Zimmer Swiss to KNP and BT, to be taxed if not agreed. For the purpose of taxation, I should point out that the actual hearing of the Security for Costs Summons was minimal and lasted not more than 10 minutes.

115.  Lastly, I thank Ms Man and Mr Chang for their invaluable assistance.