SECRETARY FOR JUSTICE v. TAN LAM CHUAN AND OTHERS

CACV197/2005

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 197 OF 2005

(ON APPEAL FROM HCMP NO. 6503 OF 2000)

_________________________

_________________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Ma CJHC :

1. The present appeal concerns the variation of a restraint order that had been made on 19 December 2000 (“the Restraint Order”) under the Organized and Serious Crimes Ordinance, Cap.455 (“OSCO”).  On 25 February 2005 Gall J varied the Restraint Order by ordering that the sum of $472,000 be paid from the bank accounts of the 5th Respondent, Promail International (HK) Limited (“Promail”) to the 1st Respondent’s solicitors, Messrs Ng & Partners.

2. Promail, a company in liquidation (through its Liquidators) appealed this variation Order.  The issue before us was whether the Order was correctly made.  On 13 September 2005, after hearing submissions from Mr Ashley Burns (for Promail) and Mr Michael Blanchflower SC (for the 1st Respondent), this Court allowed the appeal and set aside the said Order with costs to Promail here and below, such costs to be taxed if not agreed.  We indicated that the reasons for the judgment would be handed down in due course.

3. The context of the application (made by the 1st Respondent) that led to the Order under appeal was this : the 1st Respondent, who had undergone a criminal trial, sought the release of funds from the assets of Promail (this company’s assets had been frozen under the Restraint Order) in order to pay a part of his legal expenses.  It is therefore necessary to deal with the principles governing applications of this nature.  Before I do so, it is desirable to set out the salient facts.

Background

4. On 19 December 2000, Deputy High Court Judge Toh made the Restraint Order against the five Respondents under sections 14 and 15 of OSCO.  This had the effect of prohibiting the five Respondents from dealing with monies held on their behalf in the various bank accounts specified in the Order.  In other words, these monies were frozen until such time as the Order was varied or discharged by the court.  A charging order was also made under section 16 against the 3rd Respondent but this is of no consequence in the present appeal.  All respondents were required to file affidavits or affirmations disclosing their assets, both within and outside Hong Kong.

5. The affirmation in support of the application for the Restraint Order was made by a Senior Inspector Ho Pak Ling of the Commercial Crime Bureau of the Hong Kong Police Force.  In the affirmation, Senior Inspector Ho deposed to the nature of Promail’s activities that had been investigated by the police.  In short, the allegation was that Promail was used as the vehicle in pyramid selling schemes to defraud innocent victims lured by the attraction of quick and sizeable returns.  It appeared that Promail had no legitimate business.  The 1st and 2nd Respondents were shareholders and directors of the company.  The 3rd and 4th Respondents were signatories of bank accounts of Promail.  Monies extracted from the victims were paid into Promail’s bank accounts (the same bank accounts that were frozen under the Restraint Order ).  Monies were paid out from these bank accounts to, among other people, the 1st and 4th Respondents.  Senior Inspector Ho said this in paragraph 25 of his affirmation : -

“There were transfers in and out of the personal accounts of Respondent 1 at the Hua Chiao Commercial Bank, which corresponded to some of the transactions of the company bank accounts of Promail.  It is therefore believed that the money transferred to Respondents 1 and 4 was part of the proceeds of Promail’s activities.”

6. Accordingly, restraint orders were sought in relation to the monies contained in the bank accounts of all five Respondents.  The affirmation identified monies held on each of the Respondents behalf in certain banks.  At that stage, none of the Respondents had been charged although it was contemplated that they would be charged with fraud offences under section 16A(1) of the Theft Ordinance, Cap.210 and it was also believed that each Respondent had benefited from such offences.  Section 14(2) of OSCO, to which further reference will be made below, was therefore applicable.

7. Only the first four Respondents were eventually charged.  Promail was not.  The first three Respondents were convicted.  The 1st Respondent’s trial took place from October 2004 to January 2005.  He was represented by leading counsel and junior counsel at his trial.  It was the 1st Respondent’s legal expenses for this trial that formed the subject matter of various applications to the court for a variation of the Restraint Order and in particular the application for variation that led to Gall J’s Order dated 25 February 2005.

8. Altogether, prior to the application leading to the 25 February 2005 Order, the Restraint Order was varied 16 times.  It is unnecessary to provide details of all these variations other than to highlight the following : -

(1)	On 19 April 2004, Gall J varied the Restraint Order by allowing the 1st Respondent to withdraw from his personal accounts the sum of $2 million in order to pay his solicitors’ costs on account for his criminal trial.  Later, as we shall see, both the Judge and the 1st Respondent’s solicitors were to recall incorrectly that this Order permitted the withdrawal of $2 million from Promail’s bank accounts.  A sum of $120,000 was also allowed to be withdrawn to pay the bill of costs and disbursements of Messrs Ng & Partners for the application itself before Gall J.
(2)	By a summons dated 19 May 2004, the 1st Respondent sought another variation of the Restraint Order to secure the release a further $2 million also for the purpose of meeting his legal expenses for the criminal trial.  This time, however, he sought to secure the withdrawal of this sum from the bank accounts of Promail rather than his own.  The affirmation of the 1st Respondent filed in support of the summons said this : -
	“I am a director and holding 50% shareholding of the 5th Respondent.  I am also an authorized signatory of its bank accounts.  I have beneficial interests in the monies deposited in various bank accounts in the name of the 5th Respondent.”
(3)	At the hearing before Gall J on 24 May 2004 (at which counsel for the Secretary for Justice, the 1st Respondent and the Liquidators of Promail appeared), it was urged by counsel for the 1st Respondent that the monies in the account of Promail should be made available for his use.  Counsel for the Secretary for Justice did not appear to dispute this although Mr Hill (for the Liquidators) did.  There is no formal judgment for that hearing but it is reasonably clear from the transcript that day that the Judge took the tentative and preliminary view that Promail’s assets were in principle available to meet the 1st Respondent’s legal expenses.  Nevertheless he declined to do so as a matter of discretion, apparently on the basis that such further sums to be withdrawn under the Restraint Order was unnecessary, given the availability of legal aid.  Nevertheless, although Gall J declined to allow the release of $2 million, consistent with the tentative view he had formed, he ordered that the sum of $80,000 be released to the 1st Respondent’s solicitors from one of Promail’s bank accounts for the purpose of meeting the costs bill in relation to the application before him.  $50,000 was also ordered to be released to the Liquidators in respect of their costs of the application.  Mr Blanchflower relied on this Order to support his contention before us that Promail’s assets could therefore be used for the purpose of meeting the 1st Respondent’s legal expenses.  According to him, this was what the Court had held by ordering the said payment of $80,000 and the Liquidators did not appeal the Order.  I shall presently deal with this submission in greater detail.

9. As I have mentioned, the 1st Respondent’s trial took place from October 2004 to January 2005, following which he was convicted.  Originally, the trial was fixed to last from 4 October 2004 to 6 December 2004.  The sum of $2 million ordered by Gall J on 19 April 2004 to be paid out of the 1st Respondent’s bank accounts was intended to meet his legal expenses for a trial of this duration.  The trial, however, overran by 8 days, ending only on 4 January 2005.  The additional legal expenses occasioned by this overrun came to $472,000.

10. By a summons dated 8 February 2005, the 1st Respondent applied for the release from Promail’s bank accounts of the said sum of $472,000 as well as the sum of $700,000 (this latter sum being the estimated legal expenses for an appeal against conviction), and also $120,000 being the costs for making the application.

11. By a consent summons dated 14 February 2005 (of the Liquidators and the Secretary for Justice), the Liquidators applied to have the Restraint Order, insofar as it affected Promail, discharged.

12. Both summonses came on for hearing before Gall J on 25 February 2005.  On the 8 February 2005 summons, the Judge made the Order under appeal, thus allowing the said sum of $472,000 to be paid to Messrs Ng & Partners out of Promail’s bank accounts within 14 days of the Order with no order as to costs.  An order was also made in terms of the consent summons but this was made subject to the Order under appeal.

13. I will shortly deal with the Judge’s reasons for his decision to release the said sum of $472,000.  Before I do so, I should just outline the statutory scheme relating to restraint orders under OSCO and applications for their variation.

Restraint orders under OSCO and their variation

14. OSCO is an ordinance that deals with organized and other serious crimes.  The types of offences to which the Ordinance relates, ranging from murder and kidnapping to offences under the Import and Export Ordinance, Cap.60 and the Dangerous Drugs Ordinance, Cap.134, are set out in Schedules 1 and 2 of the Ordinance.

15. One of the main objects of OSCO is to tackle the proceeds of crime.  It finds a parallel in the Drug Trafficking (Recovery of Proceeds) Ordinance, Cap.405 which deals with the proceeds of drug trafficking.  Like that ordinance, OSCO makes provision for confiscation orders : see Part III of the Ordinance.  We are in this appeal concerned with the making of restraint orders, the granting and operation of which are governed by sections 14 and 15 in particular of OSCO.  As section 19(2) makes clear, the power to grant a restraint order (a power conferred on the Court of First Instance) is one that is exercisable with a view to the making of a confiscation order.  In other words, a restraint order is a temporary measure used to freeze the assets of a person against whom a confiscation order may in due course be made.  In civil terms, it can be said to be akin to a Mareva injunction.  However, this is but a crude analogy as there are substantial differences between the two orders, both procedurally and conceptually.  For example, the Mareva injunction is a remedy which has its origins in the inherent jurisdiction of the court (although it is now a remedy conferred by statute) whereas restraint orders are made in criminal proceedings and find their origins purely from statute.  Procedurally, no undertaking in damages is given by the Secretary for Justice when restraint orders are made whereas this is an indispensable feature of a Mareva injunction.

16. Section 14 of OSCO sets out the conditions that must prevail before a restraint order is made : -

“14.	Cases in which restraint orders and charging orders may be made
	(1)	The powers conferred on the Court of First Instance by sections 15(1) and 16(1) are exercisable where -
		(a)	proceedings have been instituted in Hong Kong against the defendant for a specified offence or-
			(i)	an application for a confiscation order has been made in respect of the defendant where section 8(1)(a)(ii) or (7A) is applicable; or
			(ii)	an application has been made under section 20(1A) in respect of a confiscation order made against the defendant;
		(b)	the proceedings have not, or the application has not, as the case may be, been concluded;
		(ba)	subject to subsection (1A), if section 2(15)(aa) is applicable to an offence, the Court of First Instance is satisfied that, in all the circumstances of the case, there is reasonable cause to believe that the defendant may be charged with the offence after further investigation is carried out; and
		(c)	the Court of First Instance is satisfied that there is reasonable cause to believe -
			(i)	in the case of an application referred to in paragraph (a)(ii), that the Court of First Instance will be satisfied as specified in section 20(1A);
			(ii)	in any other case, that the defendant has benefited from that specified offence.
	(1A)	…..
	(1B)	…..
	(2)	Those powers are also exercisable where the Court of First Instance is satisfied -
		(a)	that, whether by the laying of an information or otherwise, a person is to be charged with a specified offence; and
		(b)	that there is reasonable cause to believe that he has benefited from that specified offence.
	(3)	…..
	(4)	…..”

17. In the present case, it will be recalled that none of the Respondents had been charged at the time the Restraint Order was applied for (and granted).  Section 14(2) of OSCO was therefore applicable.

18. Restraint orders differ from Mareva injunctions in another material respect, that is, in relation to the property to which such an order can attach.  While a Mareva injunction can only be granted in relation either to property belonging to a defendant or property held on trust by him (say in a trust claim or a tracing action), the type of property that can be caught under a restraint order is broader based.  A restraint order can be made in relation to “realisable property”, a term which is defined in section 12(1) of OSCO as follows : -

“12.	Definition of principal terms used
	(1)	In this Ordinance, “realisable property” (可變現財產) means, subject to subsection (2) -
		(a)	any property held by the defendant;
		(b)	any property held by a person to whom the defendant has directly or indirectly made a gift caught by this Ordinance; and
		(c)	any property that is subject to the effective control of the defendant.”

The term “effective control” is defined in section 12(11).

19. Section 15 of OSCO deals further with restraint orders in general.  For present purposes, section 15(6) is of particular note in stating that an application for the discharge or variation of a restraint order may be made by “any person affected by it”.  Section 15(6) states as follows : -

“15.	Restraint orders
	(6)	An application for the discharge or variation of a restraint order may be made by any person affected by it.”

20. Apart from applications from persons who claim to be beneficially entitled to property held under a restraint order, section 15(6) is also most often used by the persons whose “realisable property” has been subjected to a restraint order, to apply for the release of funds to enable living, legal and other expenses to be met.  Here I would refer as well to RHC Order 117, rules 5 and 6 and the commentary in Hong Kong Civil Procedure 2004 Vol.1 at paragraphs 117/5/2-5, 117/6/1-3.

21. What then are the principles that govern the exercise of the Court’s discretion when it is asked to vary a restraint order under section 15(6) of OSCO for the release of funds to allow living or (as in the present case) legal expenses to be paid?  In my view, the following approach is important and ought to be borne in mind in applications of this nature.  It is a two stage approach : -

(1)	The starting point is locus.  A restraint order can only be varied by a person who is “affected” by it.  That person (who may or may not be a person against whom the order was made in the first place) must show he has an interest in the property in question and then go on to show that the variation he seeks is justified by reference to that interest.  He may or may not need to show he has a beneficial interest in the property since this depends entirely on the nature of the variation that is sought.  Where, for example, a person who holds monies on trust applies for such monies to be placed in an interest bearing account rather than a current one, it may well not be necessary to demonstrate any beneficial interest in the property.  Similarly, where a person who holds shares again on trust, wishes to have the shares duly entered in the company’s register or to have new share certificates issued.  In other cases, however, it may be necessary to demonstrate a beneficial interest owing to the nature of the variation sought.
(2)	Where, as in the present case, a person seeks to vary a restraint order to allow monies or property to be released for his personal benefit (whether living or legal expenses), then it will be essential in my view to demonstrate a beneficial entitlement to the monies or property in question.  In the absence of some special arrangements or circumstances, I find it hard to conceive of a situation in which a person will be permitted to use monies or property belonging to someone else for his own expenses.  He is simply not “affected” by the restraint order against the relevant property.  And even if he were to have some sort of interest such as being a trustee of that property, he would still need to demonstrate how his status would entitle him to the relief sought.  In most cases, a trustee will not be able to help himself to trust property, to treat it as his own.  It is true, as Mr Blanchflower submitted, that the concept of a person having “realisable property” does not mean necessarily that a beneficial interest in that property must be shown.  The term is admittedly much wider than that.  However, where the variation of a restraint order is applied for, here one is required to be more focused on the nature of the application and of the interest of the person seeking the variation in the relevant property.
(3)	Even where locus (or, to put it another way, jurisdiction under section 15(6)) is established, that is not the end of the matter.  The second stage arises.  The Court must then go on to exercise a discretion whether or not to allow the variation.  Here, the Court takes into account many factors such as, for example, whether full disclosure has been made of assets.  As Deputy High Court Judge McMahon (now McMahon J) said in Re Susanto Kam & Another [2003] 1 HKLRD 612, at 616 (at paragraphs 10-12) : -

“	10.	There is inherent in the legislation pursuant to which restraint and charging orders can be made prohibiting accused persons dealing with all property under their control, an evident tension between the rights of the accused person, who is until conviction presumed innocent, and the interests of the community of Hong Kong, whose justifiable interest in recovering from persons eventually convicted of serious criminal offences the proceeds of their crimes, must require some method by which such accused persons can be prevented from dissipating those assets before trial.
	11.	The dangers of such a restriction causing potential injustice have long been appreciated. Accordingly, drawing from the somewhat analogous principles relating to the operation of Mareva injunctions, the courts in Hong Kong have attempted to strike a balance between the rights of the accused person to the use of property or assets owned by him and the interests of the community.
	12.	Pursuant to sections 15(5) and 16(6) of the Ordinance, restraint and charging orders can be varied upon the application of a respondent so as to release assets from the effect of those orders for the respondents’ usual living expenses or payment of their usual debts.  Such a variation can be, and very often is, made for the purposes of allowing a respondent his reasonable legal expenses.  But in allowing a variation for that purpose, a court must be alert to the variation requested undermining the purposes of the order, i.e. the request for the expenses of the respondent to be paid out of the restrained or charged assets being made so as to preserve other undisclosed assets in or outside the jurisdiction.”
	See also the remarks of the same judge in Re Cheng Wai Keung & Ors, unreported, HCMP 2801/2002, 8 April 2003 at paragraphs 14-17.

22. Finally, in relation to OSCO, I should refer to the provisions of section 22(1) dealing with the situation where, like Promail, a company which is subject to a restraint order has been wound up : -

“22.	Winding up of company holding realisable property
	(1)	Where realisable property is held by a company and an order for the winding up of the company has been made or a resolution has been passed by the company for voluntary winding up, the functions of the liquidator (or any provisional liquidator) shall not be exercisable in relation to -
		(a)	property for the time being subject to a restraint order made before the relevant time; and
		(b)	any proceeds of property realised by virtue of section 15(7) or 17(5) or (6) for the time being in the hands of a receiver appointed under section 15 or 17.”

23. This provision prevents liquidators of companies which have been wound up dealing with property that is the subject of a restraint order : see section 22(1)(a).  The term “for the time being” suggests a temporary state of affairs that is consistent with the interim nature of a restraint order.  Once, however, a confiscation order is made and an order is made to have the relevant properly realised, it also remains out of the hands of the liquidators (see section 22(1)(b)) subject of course to the right to make representations to the Court of First Instance under section 17(8).

24. Before applying the law to the facts of the present case, I shall deal briefly with the Judge’s decision in the court below.

The decision below

25. The Judge handed down the reasons for his decision to allow $472,000 to be withdrawn from Promail’s bank accounts to pay the 1st Respondent’s legal expenses.  After referring to section 22 of OSCO, he said this : -

“	8.	On 19 April 2004, I granted a variation of the Restraining Order in respect of the 5th respondent to permit payment from the realisable assets of the 5th respondent of legal fees in respect of the 1st respondent.  That order was made on the basis that it was agreed by all parties that the monies held by the 5th respondent were monies held for and on behalf of the 1st respondent, there being no other basis upon which realisable assets of the 5th respondent could be restrained.
	9.	On 25 February 2005, two summonses came before me.  The first in time was a summons seeking to vary the Restraining Order in respect of the 5th respondent so as to permit the payment out of the sum of $472,000, being the balance of the legal costs in respect of the 1st respondent.  Given the reasons upon which I had granted the variation of the Restraining Order in respect of the 5th respondent for the release of legal expenses on 19 April 2005 the same arguments for variation applied.  I considered whether or not the Restraining Order was still in effect.”

26. Some of the factual matters stated in paragraph 8 of the Reasons were incorrect : -

(1)	On 19 April 2004, the variation granted by Gall J to allow payment of the 1st Respondent legal fees was not out of Promail’s realisable assets.  As we have seen (see paragraph 8(1) above), the expenses were to be met out of the 1st Respondent’s own assets.  The Judge could, however, be excused for this error as this was precisely the way that the affirmation from the 1st Respondent’s solicitors put it.
(2)	Although counsel for the 1st Respondent and for the Secretary for Justice appeared to agree at the 19 April 2004 hearing that monies held by Promail were monies held for and on behalf of the 1st Respondent, this was certainly not the position of the Liquidators.  Quite the contrary.  Mr Blanchflower fairly accepted this.

27. The above notwithstanding, can the Judge’s decision be supported?  In my view, it could not and had to be set aside.

Reasons for setting aside the Judge’s Order of 25 February 2005

28. Quite simply, the 1st Respondent was unable to demonstrate on the evidence that he had any interest in the monies in the bank accounts of Promail.  Two matters had been relied on by him in support of his contention that he had a beneficial interest in Promail’s bank accounts : -

(1)	In the said affirmation dated 19 May 2004 in support of his application for a further $2 million to be taken out, this time from Promail’s bank accounts (see paragraph 8(2) above), the 1st Respondent made an assertion that he had the beneficial interest in the monies deposited in these accounts.
(2)	The so-called “agreement” of counsel for the Secretary for Justice at the hearing on 19 April 2004 that monies held by Promail were held for and on behalf of the 1st Respondent.

29. In my view, neither of these two matters is sufficient to make out any claim by the 1st Respondent to a beneficial interest in the monies in Promail’s bank accounts : -

(1)	The assertion made by the 1st Respondent in the affirmation dated 19 May 2004 was no more than a bare assertion, unsupported by any facts.  If anything, on a fair reading of the relevant paragraph in that affirmation, all that the 1st Respondent appeared to be saying was that because he held a 50% shareholding in Promail and was an authorized bank signatory, he was somehow therefore beneficially entitled.  This inference was of course wrong as a matter of law.
(2)	The “agreement” by counsel for the Secretary for Justice can hardly constitute any evidence towards the issue of beneficial entitlement.

30. It is convenient here to deal with Mr Blanchflower’s submission (see paragraph 8(3) above) based on the order dated 24 May 2004 whereby Gall J had ordered that the 1st Respondent’s costs of the application before him could be withdrawn from one of Promail’s bank accounts.  The thrust of Mr Blanchflower’s submissions appeared to be two-fold : that this was somehow evidence of the 1st Respondent’s beneficial interest in Promail’s bank accounts and, owing to the fact there was no appeal from this Order, the Liquidators were to be bound by this decision (through the doctrine of issue estoppel although this was never formally submitted).  In my view, neither point has substance.  As to the first point, the fact that an order was made allowing Promail’s assets to be used for the benefit of the 1st Respondent does not constitute evidence of a beneficial entitlement.  At most, it indicated that this was the Judge’s view of the evidence.  As to the second point, as the transcript of the hearing that day shows, Gall J was merely taking a view “at this point”; in other words he took a tentative and preliminary view of this question leaving a final decision on that point for another day.

31. Contrary to the 1st Respondent’s position, the available evidence strongly suggest the opposite conclusion, namely, that the monies in Promail’s bank accounts did not belong beneficially to the 1st Respondent : -

(1)	I have already made reference to the affirmation of Senior Inspector Ho in support of the applicant for the Restraint Order (see paragraph 5 above), in which it would appear that the monies from the defrauded victims of the pyramid selling schemes of Promail went into that company’s bank accounts.  These victims had put in proofs of debt with Promail’s liquidators in the amount of $187,730,187.55 (constituting over 97% of the proofs of debt lodged with the liquidators), which would support Senior Inspector Ho’s findings here.  As Mr Burns acknowledged, the victims may well be able to trace into the monies in Promail’s bank accounts in an equitable tracing claim.
(2)	Further, as Senior Inspector Ho’s investigations revealed, far from any monies flowing from the 1st Respondent into Promail’s bank accounts, the evidence seemed, if anything, to demonstrate a flow in exactly the opposite direction.
(3)	Deputy High Court Judge Toh who made the Restraint Order must have been satisfied that the monies in the bank accounts of Promail were the realisable property of Promail rather than anyone else.  She was careful in the Order to identify specifically the monies and property held on behalf of the various Respondents, this following the way that the facts had been deposed to in Senior Inspector Ho’s affirmation.  Nowhere does it appear (even to hint) that the monies in Promail’s bank accounts belonged to the 1st Respondent.
(4)	One of the orders made by Deputy High Court Judge Toh was that the Respondents filed affidavits or affirmations disclosing their assets.  The 1st Respondent filed an affirmation dated 17 January 2001 to comply with this order.  In it, he purports to set out his assets both within and outside Hong Kong.  There is no hint of Promail’s bank accounts belonging in any way or to any extent to him.

32. In light of the above, the 1st Respondent has failed to establish any locus to apply for the variation ordered by Gall J.  In any event, even if locus could somehow be established, it would by no means follow that the Court should exercise its discretion in his favour.  Questions of whether in fact he was subject to a constructive trust in favour of Promail’s victims would then arise.

33. For the above reasons, the appeal was allowed.

Hon Woo VP :

34. I agree.

Hon Barma J :

35. I agree.