IP PUI LAM ARTHUR AND ANOTHER v. HO YUK WAH DAVID (a bankrupt) AND OTHERS

HCA 2587/2017

[2018] HKCFI 455

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2587 OF 2017

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D E C I S I O N

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Introduction

1.  Mr Ip Pui Arthur and Mr Ip Pui Sum (collectively “the Trustees”) are the trustees-in-bankruptcy of Mr Ho and they obtained an ex-parte injunction (“the Ex-parte Order”) from Hon Lisa Wong J (“the Ex-parte Judge”) against Stephen Harwood (“SH”) in respect of a sum of HK$75,000,000 (“the Sum”) in its escrow account to be payable to Grassmere Services Limited (“Grassmere”) upon the fulfilment of certain conditions which will be explained below.  

2.  Before this court are the application of the Trustees, represented by Mr Smith SC leading Mr Joseph Wong, to continue the Ex-parte Order by their summons dated 11 December 2017 (“the Continuation Summons”) and the cross application of Grassmere, represented by Mr William Wong SC leading Mr Kok to discharge the Ex-parte Order by summons dated 13 December 2017 (“the Discharge Summons”). SH takes a neutral stance and its attendance has been excused. 

3.  The central issue is the beneficial ownership of the 5% shares in Dan Form International Limited (“the DFIL Shares”). Dan Form International Limited (“DFIL”) deposited the Sum into the escrow account pursuant to an agreement entitled “Deed of Escrow Agreement” (“the Escrow Agreement”) and the Sum represents the cash deposit to purchase the Shares from Grassmere by DFIL by way of mandatory redemption pursuant to BVI law. Whilst Grassmere is the registered shareholder in DFIL and hence prima facie the beneficial owner of the DFIL Shares, the Trustees contend that the DFIL Shares are beneficially owned by Mr Ho and Grassmere merely holds the DFIL Shares on trust for Mr Ho as its trustee or nominee.  

4.  In this Decision, before I go further into the respective arguments of the parties, I shall first outline the uncontroversial background facts. I shall continue to deal with the Discharge Summons and then the Continuation Summons.

Background facts

5.  The Trustees’ solicitors, Messrs. Li, Wong, Lam & W.I. Cheung (“LWLC”), were appointed to carry out investigation of the financial affairs of Mr Ho by a resolution of the Creditors’ Committee dated 30 December 2011 following the grant of his bankruptcy order on his own petition on 2 August 2011.

6.  Mr Ho declared negligible assets and his debts are claimed to exceed HK$160 million.

7.  Mr Ho in his affirmation filed in HCA 806/2006 (“the Earlier Action”) deposed to the fact that as of 31 December 2007, Asia-Pac Infrastructure Development Limited (“APIDL”) had held 5% interest in DFIL which then had indirectly held 34.23% controlling interest of Dan Form Holdings Company Limited (“DFHCL”). DFHCL is a listed company in Hong Kong (Stock Code: 271) and it was renamed as Asiasec Properties Limited on 9 June 2017.

8.  In regard to the Escrow Agreement, it was executed by DFIL, Harlesden Limited (“Harlesden”), Grassmere and SH in December 2016. Its recital contains the following undisputed information.

9.  Grassmere is a BVI company and holds the DFIL Shares, i.e., 5% shares of DFIL (2,500). Harlesden, another BVI company holds the remaining 95% shares (47,500).

10.  On 14 November 2016, Grassmere issued an originating application in the Eastern Caribbean Supreme Court (Virgin Islands) for appointment of liquidators to DFIL.

11.  On 17 November 2016, pursuant to s.176(1) of the BVI Business Companies Act 2004 (“BCA”), Harlesden instructed DFIL to redeem the shares held by Grassmere. DFIL did so and gave a written redemption notice to Grassmere for a proposed redemption price of HK$10 million (“the Proposed Redemption Price”).

12.  Pending an acceptance of the Proposed Redemption Price or a determination of fair value of the minority shareholding of Grassmere, either by agreement between DFIL and Grassmere or pursuant to the statutory process for determining fair value by three appraisers under section 179(9) of the BCA (“the Appraisal”), DFIL has agreed to deposit a cash security of HK$75 million, i.e. the Sum with SH to be held in accordance with the terms and conditions of the Escrow Agreement as the escrow agent.

13.  The Sum has by two instalments been deposited into the escrow account open with Standard Chartered Bank in the name of SH.

14.  After investigation, LWLC came to the conclusion that companies within the Asia-Pac Group including APIDL and its many subsidiaries remain throughout the assets of Mr Ho despite their purported sale and restructure. Mr Ho once affirmed that APIDL was held by him through a number of BVI intermediate companies and according to the latest valuation in 2007 provided by Mr Ho, APIDL was worth over HK$100 million.

15.  The lynchpin of the case of the Trustees is a joint announcement issued by Tian An China Investments Company Limited (“Tian An”), Autobest Holdings Limited (“Autobest”) and DFHCL dated 22 September 2016 (“the Joint Announcement”). The Joint Announcement is appended to the Escrow Agreement.

16.  Autobest is a BVI company wholly owned by Tian An and Tian An is a locally incorporated company listed on the Main Board of the Stock Exchange. The Joint Announcement relates to a sale and purchase agreement dated 19 September 2016 (“the Sale and Purchase Agreement”) whereby Autobest conditionally acquired approximately 36.45% of the entire issued shares of DFHCL from certain independent shareholders of DFHCL (“the Vendors”) and Tian An acted as the guarantor of Autobest for its due and punctual performance and observance of all its respective obligations under the Sale and Purchase Agreement. This transaction was referred to as Tian An Acquisition in the Escrow Agreement and I adopt this reference below.

17.  The Joint Announcement was made in compliance with the Listing Rules and the Takeover Rules. It contains the corporate information of Autobest, Tian An and the Vendors. The Vendors include Fabulous Investments Limited (“FIL”), DFIL and one Mr Dai.

18.  The following extract of the Joint Announcement relating to the corporate information of DFIL is heavily relied upon by the Trustees.

“DFIL is a company incorporated in the British Virgin Islands and a Shareholder holding 2,926,000 Dan Form shares, being approximately 0.24% of the entire issued shares of prior to completion. Mr Dai indirectly owns DFIL as to 95% through his 100% interests in Harlesden Limited. The remaining 5% of DFIL is owned by Mr David Ho Yuk Wa. Mr David Ho Yuk Wa is an independent third party to Dan Form and is not acting in concert with Mr Dai. The principal business activity of DFIL is investment holding.” (Emphasis added)

19.  At the end of the Joint Announcement, each of Autobest, Tian An and DFHCL through their respective boards of directors expressly accepted full responsibility for the accuracy of the information contained in the Joint Announcement.

Discharge Summons

20.  Mr Wong advances a number of grounds for Grassmere’s application to discharge the Ex-parte Order and he rhetorically submits that any one of such grounds alone suffices to justify the discharge. I shall deal with the major grounds in turn.

(i)  Material non-disclosure

21.  Mr Wong first complains that the Trustees failed to disclose certain matters to the Ex-parte Judge. Mr Kok by his skeleton submissions for the hearing on the first return day reminds this court of the well-settled legal principles. I find assistance in the following summary of such principles in DHCJ Kwok SC in Universal Experts Group Ltd v Zechin Technology Co Ltd, unreported, HCA 2613/2016, 24.10.2016, which was adopted by Chow J in Guangdong Yuehe Investment Holdings Co Ltd and Anor. v Hongfan International Ltd, unreported, HCA 391/2017, 3.3.2017:

“11 A party making an ex parte application has the duty to make full and frank disclosure on all material matters. The primary duty is to disclose on affidavit evidence. The duty is not discharged by making partial disclosure on oath or deposing to half truths...

12 In other words, the court is entitled to assume that the applicant acts with utmost good faith, failing which the position of the ex parte judge would be extremely difficult, if not impossible.

13 In Standard Charter Securities Limited (formerly known as Chin Tung Limited) v Arthur Lai and others, HCA 2757/1993, 28 April 1993, Woo J (as he then was) referred to Gee on Mareva Injunctions and Anton Piller Relief, 2^nd Ed, where at p 81, the learned author stated:

“… Accordingly, it is of the utmost importance that the plaintiff carefully considers the nature of the cause of action and the facts on which it is based before formulating the application.  A thorough check should be made to ensure that all defences actually raised by the defendant are identified and fairly summarised in the affidavit.’”

22.  The gravamen of the complaints of Grassmere under this head is that the Trustees have deliberately failed to disclose a discontinued action under HCA 2752/2015 (“the Discontinued Action”) to the Ex-parte Judge.

23.  The Discontinued Action was commenced by the Trustees on 24 November 2015 to seek, among other matters, a declaration that Mr Ho had the beneficial interest in the shares in Grassmere. The pleaded case was that (a) one Mr Yu Yang who was the brother-in-law of Mr Ho was the director of Grassmere and (b) according to Miss Jade Ho who is the younger sister of Mr Ho, Grassmere was a subsidiary of and/or operated under APIDL and held the shares of DFHCL. It was alleged that Mr Ho had the entire beneficial interest in APIDL despite a sham sale of its shares.

24.  The Trustees obtained leave to serve the writ of the Discontinued Action outside jurisdiction on Grassmere and Grassmere applied to set it aside with a lengthy supporting affirmation of Ms Sun Li Hua dated 24 May 2017 denying the alleged beneficial interest of Mr Ho in its shares (“the Opposing Affirmation”). There, Ms Sun alleged that she was retained by Grassmere as a director and consultant in June 2016 and she met the shareholder of Grassmere who is a PRC resident in Beijing.    

25.  Upon receiving the Opposing Affirmation, the Trustees discontinued the Discontinued Action against, among other persons, Grassmere on 21 August 2017.

26.  Mr Wong submits that in the present action the Trustees claim similar relief as they did in the Discontinued Action and now rely on similar allegations. The Trustees should have made full and frank disclosure to the Ex-parte Judge about the Discontinued Action and the Opposing Affirmation. They should also have explained to the Ex-parte Judge the reason why it was discontinued.

27.  It cannot be denied that the Trustees did not make any reference to the Discontinued Action in their supporting affirmation and the skeleton submissions.

28.  However, the Trustees do not accept that there was any material non-disclosure. They say that they did draw the attention of the Ex-parte Judge to the Discontinued Action by way of a letter issued by Messrs Kwok Yih & Chan (“KYC”) dated 7 December 2017 (“the KYC Letter”). Mr Smith points out that in the preamble of the Ex-parte Order, it was clearly stated that the Ex-parte judge had read the KYC Letter. Mr Smith further submits that the Discontinued Action has no bearing on the present action at all.

29.  I should examine the circumstances under which the KYC letter was produced to the Ex-parte Judge. SH was not a party to the present action at the very outset and the Trustees by their summons dated 5 December 2017 (“the Summons”) applied to join SH as the 5^th defendant and at the same time applied for an injunction against SH only in respect of the Sum. The Summons was returnable on 8 December 2017 before the Ex-parte Judge. Hence, only the Trustees and SH, legally represented, appeared before the Ex-parte Judge. It was meant to be an inter-partes hearing. SH indicated it adopted a neutral position with regard to the application of the Trustees.

30.  The Ex-parte Order was granted in the following manner. The Summons was not served on Grassmere. By a letter enclosing the Summons and the supporting affirmation (without exhibits) dated 7 December 2017, SH informed Messrs Campbells, which acted for Grassmere in respect of the Escrow Agreement, of the hearing. KYC on behalf of Grassmere immediately issued the KYC Letter to SH and asked a copy of the letter and all the relevant correspondence exchanged to be disclosed to the court so that the court could be fully aware of its objections.

31.  In the KYC Letter, among other matters, KYC mentioned both the Discontinued Action and the present action. The writ of the latter was yet to serve on Grassmere. The changes of the ownership of the beneficial interest in Grassmere were set out so as to refute the allegation that APIDL remained the beneficial owner of Grassmere. It only in passing made a reference to the discontinuance of the Discontinued Action without going into any detail. Lastly, by way of legal argument, it was pointed out that in any event the Trustees had no claim over the Sum even if Mr Ho had any beneficial interest in the DFIL Shares.

32.  At the hearing, the Ex-parte Judge rightly observed that Grassmere should also be heard since the injunction sought by the Trustees clearly affected its interest. Despite the attendance of the legal representatives of Grassmere at look the hearing, the Ex parte Judge treated the Summons was to be heard on an ex parte basis as against Grassmere.

33.  It was under these circumstances that the KYC Letter was produced to the Ex parte Judge for her perusal at the hearing.

34.  Mr Smith further submits that the Discontinued Action is immaterial owing to its different nature. He highlights that in the Discontinued Action, the Trustees’ claim related to the beneficial ownership of shares in Grassmere whereas in the present action, their claim is that the beneficial ownership of the DFIL Shares should belong to Mr Ho. The subject matters in the two actions are, thus, fundamentally and materially different.

35.  I first assess the materiality of the Discontinued Action. Strictly speaking, Mr Smith’s distinction of the two actions is valid. The respective claims are not identical. However, they cannot be said to be dissimilar. The abandoned allegation in the Discontinued Action that Mr Ho owns Grassmere and the allegation in the present action that Mr Ho is the actual beneficial owner of the DFIL Shares registered in the name of Grassmere cannot be said to be unrelated. The basis of the present allegation is that Grassmere has been holding the DFIL Shares as a trustee or nominee for Mr Ho suggesting the existence of a legal relationship between Mr Ho and Grassmere. Indeed, the Trustees in their reply affirmation still strongly hint that the beneficial ownership of Grassmere of Ms Su is doubtful.

36.  I agree with Mr Wong that the Ex-parte Judge should have been made fully aware of the discontinuance of the Discontinued Action whereby the allegation that Mr Ho is the beneficial owner of Grassmere was given up and provided with the reasons for its discontinuance. These should certainly be such matters that the Ex-parte Judge would take into account in the weighing progress when deciding whether to grant an injunction and, if so, on what terms.         

37.  The Trustees could not possibly rely on the production of the KYC Letter at the hearing to discharge their onerous duty to make full and frank disclosure. Though the Summons was not issued against Grassmere in the first place, they must know that Grassmere had an interest in the outcome of their application and Grassmere should normally be heard. They should have disclosed to the Ex-parte Judge all the likely and apparent defences of Grassmere and given the Ex-parte Judge a full and balanced picture. Grassmere’s denial of any relationship with Mr Ho in the Discontinued Action should have been made known to the Ex-parte Judge in their supporting affirmation. The Opposing Affirmation should have been produced to the Ex-parte Judge so that the Ex-parte Judge should consider the Trustees’ allegation of a trust/nomination regarding the DFIL Shares in light of Grassmere’s alleged absence of any relationship with Mr Ho. The Ex-parte Judge would also be interested in the reasons why the Trustees saw fit to abandon the allegation that Mr Ho is the beneficial owner of Grassmere in the Discontinued Action. This might have a bearing on the assessment of the strength of their new allegation that Grassmere is the trustee/nominee of Mr Ho for the DFIL Shares.

38.  It was only fortuitous that SH saw fit to alert Campbells to the application at the eleventh hours. KYC under serious time constraint managed to issue the KYC Letter so that the position of Grassmere could be briefly outlined and related to the Ex-parte Judge. Nevertheless, the KYC Letter could be no substitute for the Opposing Affirmation. It is also worthy of note that Mr Smith was unable to confirm with this court that the KYC Letter really contains all the key matters canvassed in the Opposition Affirmation. The fleeting reference to the Discontinued Action in the KYC Letter could not suffice.

39.  By reason of the foregoing matters, I come to the conclusion that material non-disclosure is established. The failure to give adequate prominence to the Discontinued Action including the non-production of the Opposing Affirmation is in my judgment a serious blow to the integrity of the Ex-parte Order and it should be discharged.

40.  I also find that there was another material non-disclosure, or more precisely, misleading information furnished to the Ex-parte Judge. In the last paragraph of the supporting affirmation produced by one of the Trustees, i.e., Ip Pui Lam Arthur, it is asserted that the Trustees are willing to give the usual undertaking as to damages.

41.  Despite the doubts cast on their ability to honour the undertaking by Grassmere, the Trustees have failed to provide any convincing information about their financial strength. At the hearing, Mr Smith submits that the Trustees have had difficulties in the recovery of Mr Ho’s assets.

42.  Then I have no idea on what basis Mr Ip could in his affirmation claim that the Trustees are willing to give the undertaking given their financial uncertainty if not weakness.   

43.  In Steven Gee QC, Commercial Injunction (6^th Edn.) at §11-023, there is a discussion about the duty to disclose the financial ability of an applicant in an ex parte application. The following extract is pertinent:

“If an applicant may not be good for damages on the undertaking, this is a material fact which must be disclosed to the court on the ex parte application. The point should be dealt with in the affidavit evidence adduced on the ex parte application, otherwise the court proceeds on the assumption that adequate assets are and will remain available within the jurisdiction to support the undertakings proffered to the court.”

44.  The non-disclosure of their actual financial means to the Ex-parte Judge when expressing their willingness to provide the undertaking in the supporting affirmation in my view is another valid reason to discharge the Ex-parte Order.

(ii)  Delay and abuse of the ex parte procedure

45.  I shall first refer to the following established principles relating to ex parte applications expounded by Ma J (as the Chief Justice then was) in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd and Anor., unreported, HCA5191/1998, 26.4.2002 at §24: 

“I start with the applicable legal principles. One of the facets of equality before the law (a fundamental right guaranteed under Article 25 of the Basic Law) is that no order ought to be made by a court against anyone without his first being given a reasonable opportunity of being heard.  An exception to this fundamental rule is where ex parte orders are made by the court.  At the risk of repeating the obvious, ex parte orders are only made “where the situation is of such extreme urgency that there is literally no time to warn the defendant of what is proposed or where the purpose of the injunction will or may be frustrated if the defendant is informed of what is proposed or where the defendant simply cannot be found” : see TRP Limited v. Thorley, unreported, 13 July 1993, English Court of Appeal, per Bingham LJ.”

46.  Failure to give proper notice (not just a 90-minute prior notice) is a ground to set aside an ex parte order: see Luck Continent Limited v Leonora Yung, unreported, CACV 42/2010, 22.10.2010 (§19).

47.  In the present case, the Joint Announcement was in the public domain in September 2016. Since November 2016, after the receipt of the Sum by SH, LWLC, DFIL and SH had exchanged a number of correspondences arguing about the beneficial ownership of the DFIL Shares. They should well understand their rival positions. There is no question that all along the Trustees were aware of the mandatory redemption and the Escrow Agreement. On 10 November 2017, SH informed the Trustees that the Appraisal should be completed by 5 December 2017 and that as the escrow agent, it would be obliged to pay Grassmere within seven days of the next expiry of tenure after the Appraisal.

48.  On the very same day, the Trustees commenced this action against, among other persons, Grassmere.

49.  In the supporting affirmation, the Trustees merely explained the urgency of their application with reference to the imminence of the Appraisal (5 December 2017) and claimed that there is an imminent risk that SH may pay the Sum to Grassmere from the escrow account.       

50.  I agree with Mr Wong that any purported urgency is self-induced in the circumstances. The Trustees should have applied for an injunction in respect of the Sum in the possession of SH well before the notice about the availability of the Appraisal was given.

51.  I do not accept the submission of Mr Smith that the Trustees should be entitled to rely on the indication of SH to commence interpleader proceedings before SH changed its stance in November 2017. The Trustees should have taken a more proactive approach to ensure the security of the Sum. They could and should have set a deadline for SH to commence interpleader proceedings or demanded an outright undertaking from SH not to release the Sum to Grassmere in any event pending the determination of the beneficial ownership of the DFIL Shares. If SH was not co-operative, the Trustees might make an inter partes application for an injunction. There is no reason why the Trustees should wait for more than 10 months to act. The delay is substantial and the Trustees could hardly bring their application within the limited circumstances under which an ex parte application can be made without proper notice given to the defendant as identified by Ma J in Brand Farrar Buxbaum LLP.

52.  I hold the same view even if I accept that the Trustees only found it necessary to take action in view of the change of position of SH in November 2017. At the very least, the Trustees should have promptly made clear to Grassmere that they would apply for interlocutory relief soon and ascertain from Grassmere as to how a proper notice of their action could be made so that Grassmere could be adequately informed of their application.

53.  I do not accept their explanation that it should take time to apply for service out and effect service on Grassmere in the BVI. Grassmere has along been legally represented. Had the legal advisors of Grassmere in Hong Kong such as Campbells and KYC been properly been informed that the Trustees were about to make an urgent application for interlocutory relief, I do not think that, even if they had no instruction to accept service of the writ yet, they would have withheld this information from Grassmere rendering Grassmere unable to take part in and oppose the application with proper preparation. KYC could have done much better than producing the 4-page KYC Letter in great haste.       

54.  In conclusion, the Trustees should not have made the application on an ex parte basis, especially in the absence of any proper notice given to Grassmere. This is another valid ground to set aside the Ex-parte Order.

(iii)  No serious issue to be tried

55.  Mr Wong submits that there is no serious issue concerning the beneficial ownership of the DFIL Shares.

56.  By the supporting affirmation, the Trustees rely on the Joint Announcement and certain matters taking place more than a decade ago to lend support to their allegation that Mr Ho was in control of Grassmere. In their voluminous reply affirmation filed less than a week prior to the hearing before this court, a number of new allegations are made and challenges are mounted to the genuineness of the purported acquisition of the shares in Grassmere by Ms Su.

57.  For present purposes, I shall not take into any of the new allegations in the reply affirmation which Grassmere does not have a chance to deal with by way of rebuttal evidence or otherwise.

58.  Mr Wong submits that even if this court accepts that Mr Ho is the beneficial owner of Grassmere and/or in full control of Grassmere, Mr Ho cannot, as a matter of law, claim any beneficial interest in the properties of Grassmere including the DFIL Shares. It is axiomatic that a company is a separate legal entity distinct from its shareholders.

59.  Mr Smith does not dispute the separate legal entity doctrine. Instead, he draws my attention to the decision of UK Supreme Court in Prest v Petrodel Resources Ltd & Ors [2013] 2 AC 415 for the proposition that a company may be regarded as holding the properties on trust for its beneficiary, not by virtue of his status as its sole shareholder and controller, but in the particular circumstances of the case.

60.  Further, Mr Smith cites to this court the following observations of Lord Sumption JSC at §52:

“Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts.”

61.  It does not appear to me that Mr Wong disagrees that a company can act as a nominee or trustee of a particular shareholder or the sole shareholder holding properties for him under certain circumstances. Rather, Mr Wong argues, and I agree, that the Trustees are unable to identify the exact basis upon which, and the circumstances under which, a trust has been allegedly created between Mr Ho and Grassmere in respect of the DFIL Shares. Mr Smith cannot say with any conviction that the alleged trust is one of express trust, constructive trust, common intention trust or resulting trust at this stage. Nor can the Trustees show how Grassmere has become the nominee of Mr Ho holding the DFIL Shares on trust for Mr Ho.

62.  As regards the Joint Announcement, Mr Wong’s answer is twofold. First, he points out that Grassmere was not privy to the Joint Announcement and was not involved in its creation. Grassmere was never consulted nor asked to confirm the accuracy of the contents of the Joint Announcement.

63.  Secondly, Mr Wong underscores the fact that the Joint Announcement was appended to the Escrow Agreement in the context of the Tian An Acquisition only. The material transaction under the Escrow Agreement is the mandatory redemption of the DFIL Shares and Grassmere should not be taken to have endorsed the contents of the Joint Announcement in the circumstances.

64.  I reject Mr Wong’s submission in this regard. In my view, for the following reasons, I agree with Mr Smith’s submission that the Joint Announcement provides a piece of significant and direct evidence of Mr Ho’s beneficial ownership of the DFIL Shares and, to say the least, gives rise to a serious issue about the beneficial ownership of the DFIL Shares.

65.  The information of the Vendors including DFIL in the Joint Announcement is of importance. It is expressly stated that to the best of the knowledge, information and belief of the board of Tian An after reasonable enquires having been made, each of the Vendors and their respective ultimate beneficial owner and DFHCL are third parties independent of and not connected with Autobest, Tian An and their respective connected persons and not a party acting in concert with any of them.

66.  The Joint Announcement is a serious document. The parties thereto expressly accept responsibility arising from any inaccuracies of the information contained in the Joint Announcement. Tian An should know the reasons why it came to the conclusion that Mr Ho is the owner of the DFIL Shares. On a balance of probabilities, it is unlikely that the important information about one of the Vendors, viz, DFIL and its ultimate beneficial owners turns out to be wholly incorrect despite the purported reasonable enquiries made by Tian An.

67.  Though the Joint Announcement was created for the purpose of the Tian An Acquisition and not the Escrow Agreement, it was appended to the Escrow Agreement for a discernible purpose. The Tian An Acquisition was included in the preamble of the Escrow Agreement because the second deposit in the sum of HK$57.5 million constituting the bulk of the Sum was from the sale proceeds of the Tian An Acquisition whereby DFIL sold its DFHCL shares. The integrity of the Tian An Acquisition cannot be irrelevant to the entitlement of DFIL to the sale proceeds, which is the subject matter of the transaction underlying the Escrow Agreement.

68.  I accept the submission of Mr Smith that it is reasonable to assume that Grassmere has checked and confirmed the accuracy of the contents of the Joint Announcement. It could not have overlooked the alleged misinformation about the beneficial ownership of the DFIL Shares especially when in fact it is the actual beneficial owner. It is remarkable that whilst Grassmere indicates that it strenuously disputes the accuracy of the material statement, it has adduced no evidence to the effect that the material statement has escaped its attention due to an oversight or otherwise. I do not believe that Grassmere would have accepted such an alleged mistake and raised no objection.

69.  In the premises, I agree that an adverse inference could be drawn against Grassmere by reason of its tacit acceptance of the historical facts stated in the preamble of the Escrow Agreement and the contents of the Joint Announcement appended thereto. Mr Smith does not say that the Trustees have an iron cast case on the strength of the Joint Announcement alone but it should suffice to show that there is a serious issue to be tried as to whether Mr Ho, rather than Grassmere, is the beneficial owner of the DFIL Shares at this stage. I agree with him.

70.  Mr Wong further submits that, as a matter of law, the Trustees can have no discernible proprietary claim over the Sum even if the Trustees could show that Mr Ho retains the beneficial ownership of the DFIL Shares. The simple point is that the mandatory redemption of the DFIL Shares has yet to take place. The DFIL Shares has not been turned into the Sum and the Sum cannot be said to be a new asset as the substitute for the DFIL Shares. As such, the Sum is not amenable to tracing and the Trustees at this stage cannot have any proprietary claim in respect of the Sum.

71.  Mr Wong reminds this court that it is not open for the Trustees to assert a future right to trace into the Sum for the purpose of the interlocutory injunction application. He refers to Pacas Worldwide Ltd v China Health Group Ltd, unreported, HCA 2961/2015, 3 May 2016 per Au Yeung J at §8 for the proposition that there must be a substantive cause of action actionable at the time of the application for an interlocutory relief and any potential future right or possible future course of action is not sufficient.

72.  Mr Wong impresses upon this court by reference to the Ex-parte Order that the injunction granted is expressly described to be a propriety injunction and the subject matter is the Sum. He refuses to accept the submission of Mr Smith that it is in effect a preservation order.

73.  Indeed it is a proprietary injunction. However, it should be noted that in the General Indorsement of Claim, the claim of the Trustees includes the Trustees’ proprietary claim in respect of both the DFIL Shares and the sale proceeds and dividends derived from the same. I cannot accept that there is no cause of action actionable at the time of the application though the subject matter of the injunction is the Sum and not the DFIL Shares. The Sum would be amenable to tracing if the proprietary claim of the Trustees over the DFIL Shares is allowed and upon the imminent completion of the mandatory redemption.

74.  Mr Smith submits that in the event that Mr Ho’s beneficial ownership of the DFIL Shares is upheld, the Sum or any relevant part thereof being the sale proceeds of the DFIL Shares, would be impressed with a trust in favour of Mr Ho. He must be right.

75.  I should mention that after the hearing, KYC wrote to this court by their letter dated 22 January 2018 and informed this court that the Appraisal was completed on 8 January 2018 and the fair value of the DFIL Shares was assessed at HK$55,052,041 (“the Assessed Amount”). SH has confirmed that pending the determination of the two applications, the Assessed Amount out of the Sum will be paid to Grassmere from the escrow account.  

76.  In the circumstances, I have little doubt that the Ex-parte Order sought to be continued is essential to the proprietary claim of the Trustees.

Conclusion on the Discharge Summons

77.  I am satisfied that material non-disclosure has been established. There was delay on the part of the Trustees and the urgency was self-induced. Proper notice should have been given to Grassmere. By reasons of these matters, I believe that there are sufficient grounds for me to discharge the Ex-parte Order though I have not yet dealt with other complaints of Grassmere. I just wish to make it clear that I do not accept the contention of Grassmere that there is no serious question to be tried in regard to the beneficial interest of the DFIL Shares.

Regrant?

78.  There is no dispute that this court has a discretion to grant the injunction upon the discharge of the Ex-parte Order, see Cheung Kam Wah v Cheung Hon Wah [2005] 1 HKC 136 at 156. Mr Wong reminds this court of the established principle that the discretion to grant an injunction should be exercised sparingly: Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642. Mr Smith, on the other hand, urges this court to consider all the relevant circumstances and submits that the overriding question is the interests of justice in the particular circumstances of the matter: Excel Courage Holdings Ltd at §§56-58.

79.  I do not find that the material non-disclosure regarding the Discontinued Action was deliberate. The KYC Letter was handed up to the Ex-parte Judge and it made references to the Discontinued Action. The Ex-parte Judge might not have full knowledge of the claim in the Discontinued Action and the objections of Grassmere already raised therein. However, it cannot be said that the Trustees concealed the Discontinued Action from the Ex-parte Judge. 

80.  I do not agree with Mr Wong that the Ex-parte Judge would have readily come to the conclusion that the present action is an abuse of process when she learnt more about the Discontinued Action. I do not accept that the non-disclosure can have such a serious impact.

81.  Mr Wong validly points out that the Trustees have offered no explanation for the material non-disclosure. He is correct in his submission that this is usually a factor strongly militating against any prospects of a re-grant: see Guangdong Yuehe Investment Holdings Co, supra, §15.

82.  Whilst this court is displeased with the material non-disclosure, even in the absence of an explanation, this court can hardly conclude that the non-disclosure was deliberate given the disclosure of the KYC Letter.

83.  Mr Smith submits that the Trustees have a legal obligation to preserve and collect all the assets of Mr Ho. In light of the Joint Announcement which unequivocally indicates the beneficial interest of Mr Ho in respect of the DFIL Shares, the Trustees should be entitled to an injunction so that the sale proceeds of the same could be preserved. He submits that in the interests of justice, a re-grant is appropriate.

84.  I feel the force of the submission of Mr Smith. It appears to me that the Trustees have an arguable proprietary claim over the DFIL Shares though further evidence should be amassed to support the same. They also have shown a sufficiently arguable case for a proprietary remedy. The Sum (and now the Assessed Amount) represents the sale proceeds of the DFIL Shares and hence is the property of the genuine beneficial owner of the DFIL Shares.

85.  I have not lost sight of the delay under complaint. In my view, delay has a lesser role to play in the weighing process regarding applications for a proprietary injunction.

86.  I note that there is no evidence that Grassmere is prepared and able to return to the Trustees the Assessed Amount released to it by SH or any part thereof if it is ultimately adjudicated that Mr Ho is the beneficial owner of the DFIL Shares and hence the Assessed Amount. If Grassmere is unable to do so, the estate of Mr Ho would be deprived of a very substantial sum of money. I also agree that if it turns out that Grassmere is merely a trustee or nominee of Mr Ho in respect of DFIL Shares and its sale proceeds, it is more likely than not that Grassmere would deal with the sale proceeds (the Assessed Amount) pursuant to the instruction of Mr Ho before the determination of these proceedings. It seems improbable that Mr Ho would allow the Assessed Amount to remain intact until the determination of these proceedings so as to ensure that Grassmere can return the same to the Trustees.

87.  I now turn to the alleged hardship suffered by Grassmere due to the proprietary injunction. I must say that I am not impressed with the evidence adduced by Grassmere in this connection.

88.  First, in the first affirmation of Ms Sun, she claimed that Grassmere has obtained short term loans repayable within 30 days after the Appraisal is completed so as to finance the costs of the Appraisal and the related legal proceedings. She alleged that Grassmere is obliged to repay a total amount of HK$10,799,517.36 to the lender by 6 January 2018, failing which an interest rate of 30% per annum would be applicable. She exhibited to her affirmation a copy of the loan agreement dated 6 January 2017 with the name of the lender partially redacted (“the Loan Agreement”). The Loan Agreement shall be governed by the laws of the PRC according to its express provision.

89.  The Loan Agreement shows a curious transaction. The costs that Grassmere is alleged to be required to bear for the purpose of the mandatory redemption of the DFIL Shares are huge and disproportional to the Assessed Amount. Moreover, as rightly pointed out by Mr Smith, the bulk of the payment under the Loan Agreement is in the form of a bonus payment (almost 60% of the total amount) under Clause 3.1 thereof as shown in a document entitled “Breakdown of Grassmere’s Outstanding Debt” produced by Ms Sun.

90.  I further note that there is no documentary evidence evidencing the receipt of the loan and how the loan was used to settle such alleged fees. I have serious doubt about the bona fide of the Loan Agreement.

91.  In response to the requisition of this court, Ms Sun filed her 3rd Affirmation to confirm that the loan is still outstanding and the lender has threatened to enforce the Loan Agreement by way of winding-up proceedings in a demand letter dated 9 March 2018.  She further produced the demand letter and certain documents evidencing the payments made to various professional bodies purportedly for the purpose of the mandatory redemption and the Appraisal.

92.  My doubt, however, cannot be removed by these documents. In the first place, most of such documents were in existence at the time when Ms Sun filed her first two affirmations and there is no reason why she did not produce the same earlier.

93.  In addition, I agree to the observations of LWLC in their submission dated 23 March 2018 on the adequacy of all such documentary evidence. The documents look suspect. Certain professional fees were settled by a company bearing a different name whilst some of them were settled by unknown entities. There is no documentary evidence emanating from such professional bodies such as invoices which can clearly show that the lender settled the professional fees payable by Grassmere on its behalf for the Appraisal.

94.  As regards the alleged short-term loan in the sum of HK$1,216,636, it is not covered by the Loan Agreement apparently and the actual loan agreement covering this loan is not produced.

95.  The Trustees lastly point out that the specified annual interest rate exceeds the statutory maximum rate (24%) and hence is unenforceable.  PRC legal opinion is produced. Grassmere is unable to deal with this expert evidence adduced shortly before the hearing and I am reluctant to express any view on the legality of the interest rate without the assistance of the expert evidence adduced by Grassmere.

96.  All in all, I am not convinced that the alleged indebtedness to the lender is genuine and in any event, I am not convinced that Grassmere is unable to settle such indebtedness without the Assessed Amount. Grassmere is obviously not frank with its financial position.

97.  Ms Sun next complains that Grassmere has an exclusive right to invest in an ongoing HK$2 billion asset recovery action, and this investment would yield around HK$840,000,000. Grassmere is now being deprived of this investment opportunity and huge loss has been inflicted on Grassmere by reason of the Ex-parte Order. She also alleges that Grassmere has an outstanding contractual obligation to make a RMB 3 million interest payment to one of its lenders in July 2018 and any default on its contractual repayment obligations would cause serious prejudice.

98.  Ms Sun has produced no documents to support these allegations, which sound quite unmeritorious to this court. I refuse to take them into account.

99.  On the other hand, I am mindful that the Trustees have not produced any evidence to show their financial ability to honour the undertaking as to damages.

100.  Looking at the matter in the round, I am of the view that the balance of convenience clearly favours a re-grant of the proprietary injunction. The Assessed Amount should remain in the escrow account so that it will be available to the winning party of this litigation at the end. I find it to be just and convenient to order a re-grant too.

101.  Grassmere is unable to persuade this court with cogent evidence that it has suffered or will suffer substantial damages by reason of the Ex-parte Order or its re-grant upon discharge. I do not think that an order for fortification is necessary in the circumstances.

Conclusion and order

102.  For the reasons given above, I allow the Discharge Summons and order that the Ex-parte Order be discharged forthwith. I make an order nisi that the costs of and occasioned by the Discharge Summons be paid by the Trustees to Grassmere, to be taxed if not agreed with certificate for two counsel.

103.  On the other hand, I also allow the Continuation Summons in that I order a re-grant of the Ex-parte Order with the necessary modifications in light of the completion of the Appraisal.

104.  I make a costs order nisi that the costs of and occasioned by the Continuation Summons be in the cause, to be taxed if not agreed with certificate for two counsel.

105.  It remains for me to thank leading counsel and counsel on both sides for their considerable assistance rendered to this court.