CHINA MERCHANTS BANK v. I-CHINA HOLDINGS LTD. AND ANOTHER

HCA 7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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(By Counterclaim)

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J U D G M E N T

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Background:

1. These proceedings began nearly two years ago when the plaintiff issued the writ and statement of claim against the 1st and 2nd defendants by original action. Although the counterclaim has introduced four additional parties, they are not concerned with this summons. I will accordingly refer to the parties throughout as the plaintiff and defendants. I adopt the description of the background of the circumstances set out in the judgment, dated 7 February 2001, of His Honour Judge Gill, sitting as a Deputy High Court Judge, as correctly setting out the nature of the dispute between the parties.

2. In simple terms, the plaintiff claim US$45,000 from the defendants by way of principle sums due under two agreements, a Loan Assumption Deed and a Loan Agreement. Also claimed is interest on those sums. The defendants, by counterclaim, say that by reason of fraudulent misrepresentation on the part of the plaintiff the Loan Assumption Deed has been rescinded and consequently there is no liability under the deed or the Loan Agreement.

3. The writ and statement of claim were issued on 26 July 2000. The statement of defence and counterclaim were filed on 5 October 2000. The reply and defence to the counterclaim were filed on 22 November 2000.

4. On 28 December 2000 the plaintiff was granted an ex parte Mareva injunction by Suffiad J. The injunction related to the proceeds of sale of a property owned by the 2nd defendant. On 13 January 2001 the plaintiff sought an inter partes injunction in the same terms and at the same time the defendants sought to have injunction discharged. Judge Gill extended the injunction and dismissed the defendants' application in a reserved decision dated 7 February 2001. By the time the matter came before Judge Gill the sale had been completed and the net sale proceeds of HK$6,482,500 had been paid into court. There the sum remains pending the outcome of the trial.

5. On 2 January 2001 the plaintiff issued a summons for summary judgment pursuant to Order 14. That matter was heard by His Honour Judge Longley, sitting as a Deputy High Court Judge, on 14 May 2001. In a reserved judgment delivered on 15 June 2001 the defendants were granted unconditional leave to defend the proceedings and the summons for summary judgment was dismissed, with costs to the defendant.

6. On 28 May 2002 the defendants issued a summons to discharge the injunction. That matter came before me for hearing on 25 June 2002.

7. It was clear to all parties following the judgment of Judge Longley that it would be necessary for the defendants to amend the defence and counterclaim. The claim that the two agreements were either rescinded or bad for fraudulent misrepresentation on the part of the plaintiff had not been pleaded in terms. Then counsel for the defendants, in the course of the argument, undertook to the court that the appropriate amendments would be made. However no amended counterclaim has been filed.

8. It was however equally obvious that it would be necessary for the plaintiff to amend the statement of claim. As a result of the transaction the 1st defendant received US$22,500,000. There appears no reason why it should be able to retain that sum, even if the agreements are bad, and a claim for money had and received must be pleaded by the plaintiff as an alternative claim. That in turn will require further amendments to the defence. Mr. Wong said that the amended statement of claim would be filed within 24 hours. Leave will be required but that should be by consent from the defendant.

The relevant principles:

9. A Mareva injunction has been described as one of the nuclear bombs in a litigants arsenal. The other is an Anton Piller order. In such circumstances it is not surprising that the court will view with strong disfavour a litigant who, having obtained such an order, then lets the action lie. The matters is well put by Glidewell J in Lloyds Bowmaker Ltd v Britannia Arrow Plc [1988] 1 WLR 1337 at 1347:

"A Mareva injunction, as Donaldson LJ in Bank Mellat v Nikpour [1985] FSR 87, 92 said, is a draconian remedy. It is intended as an adjunct to the action itself, not as a substitute for relief to be obtained on trial. In other words, a plaintiff who succeeds in obtaining a Mareva injunction is in my view under an obligation to press on with his action as rapidly as he can so that if he should fail to establish liability in the defendant the disadvantage which the injunction imposes upon the defendant will be lessened so far as possible."

10. There is thus plainly jurisdiction in the court to set aside a Mareva injunction where a plaintiff is guilty of delay in bringing the action on for trial.

11. I accept that delay on its own is not the only matter that the court must consider in deciding whether to discharge a Mareva injunction for delay. Mr Wong submits, relying on Steven Gee in Mareva Injunctions and Anton Piller Relief 4 ed. 378, and I accept, that the following matters ought also to be taken into account: (i) whether the lapse of time was a result of a deliberate decision on the part of the plaintiff; (ii) the length of the time lapse and the explanations put forward by plaintiff; (iii) the degree of prejudice liable to be caused to the plaintiff if the injunction is discharged; (iv) whether the plaintiff has sought to rectify position and proceed with the action or whether the lapse of time was still continuing time of the hearing; (v) the degree of prejudice cause to the defendant is a result of the lapse of time; (vi) whether the defendants have through their conduct either caused the lapse of time or contributed to it.

The lapse of time:

12. There appear to be four reported decisions on the question of discharge of an injunction for delay by a plaintiff. In Lloyds Bowmaker the delay was over two years and the Mareva injunction was discharged. In Town & Country Building Society Ltd v Daisystar Ltd (Unreported, The Times, 16 October 1989) the delay was also two years and again the injunction was discharged. In Newsgroup Newspapers v The Mirror Group [1991] FSR 487 the delay was 2 years and the injunction (not a Mareva injunction) was discharged. In Comdel Commodities v Siporex Trade S.A. [1997] 1 Lloyds LR 424 the delay was 19 months and the injunction was discharged. In Sanwa Development Ltd v Chan Kar Keung & Anor [1999] 1 HKC 847 the delay was over three and a half years and again the injunction was discharged.

13. At the date on which the summons was filed, 28 May 2002, the delay had been 11 months and 13 days from the date of Judge Longley's judgment of 15 June 2001. The delay here is significant and borders on the point where it will be sufficient to found an application for discharge. But it is substantially less than in the reported cases and unless the other factors favour discharge the delay of itself does not demand discharge.

A deliberate decision by the plaintiff:

14. There may well be commercial reasons why a plaintiff who has obtained a Mareva injunction, or as here, secured the payment into court of a sum, may decide to let the claim lapse. The most obvious situation will be that where the prospect of recovery is minimal even if the claim succeeds. The plaintiff may find, from evidence put in by the defendant in opposition to an interlocutory order, that his case is not as strong as he thought, or may result in public exposure of matter he might wish to keep out of public view.

15. In the present case there is no direct evidence to show that a deliberate decision has been made by the plaintiff not to proceed further with the claim. In January 2002 an open offer was made to the plaintiff by the 1st defendant to settle the matter. The plaintiff simply did not respond to that offer. As far as the court papers show, the plaintiff has taken no action at all in the proceedings for nearly a year. While both of these factors point to a deliberate decision by the plaintiff to let the claim sit and to take no further steps as recovery is unlikely that evidence alone is not sufficient to make that finding.

16. Against this is the explanation, by Mr. Xia Jin Qing in the affidavit in reply, of the steps that the plaintiff has been taking to put its house in order to enable it to continue with the litigation. In the absence of that explanation I may have found that the decision had been made to abandon the claim. But the explanations satisfies me that no such decision was made.

The plaintiff's explanation for the delay:

17. The explanation for the delay on the part of the plaintiff in pursuing the proceedings are set forth in the affidavit of Mr. Xia. These were summarized by counsel as follows: (i) report and discussion of the consequences of the Order 14 application; (ii) the need to deal with new issues raised by the defendants in the order 14 hearing; (iii) the need to get in touch with the parties to obtain the necessary documents; (iv) the need to retrieve documents for study to provide advice; (v) the preparation and study of the proposed amended statement of claim; (vi) to obtain legal advice; (vii) the consequence of the bankruptcy of the majority shareholder in the 2nd defendant; (viii) to consider negotiations offered by the 1st defendant.

18. I have to say that I am not at all impressed with the cumbersome way in which the plaintiff has chosen to organize itself to deal with this litigation. It appears from Mr. Xia's affidavit that every decision needs to go through several departments for consideration and then be referred to more senior people for final decision. It is no answer to the delays that have been occasioned in this litigation to say that the matter is substantial and that accordingly there must be detailed consideration of the steps by many departments and people. Equally it is no answer to a complaint of delay to say that holidays have intervened. This is substantial litigation and ought to be dealt with efficiently and promptly. If the plaintiff should chose to organize itself to deal with serious litigation in a way which causes long delays in making decisions it must accept the consequences of those delays. While in part explaining the delay, the organisational problems that the plaintiff describes in the affidavit in reply do not excuse the delay.

19. The report on the consequences of the Order 14 application is a matter that need take no time, and is necessarily limited by the time required to lodge an appeal against the decision. The new issues raised by the defendants in the s14 hearing made it plain that the statement of claim required amendment by the addition of a claim for money had and received. That is a simple amendment and Mr. Wong accepted that it was logical that that amendment should be made before the amended defence and counterclaim were filed. Extra documents were required. Some of these, particularly those relating to HCA 9815/2000 were already in the plaintiff's hands, it being the plaintiff in that action. It was not a party to HCA 3959/2000, but once it became plain that there may be a delay in getting those documents an action for discovery should have been commenced. A shareholder in the 2nd defendant had gone bankrupt, but while that is a matter which may impact on the litigation it is not a matter that should cause any delay in progressing the litigation. I have already dealt with the plaintiff's response to the offer in settlement. That too took up no real time. The explanations for the delay explain, but do not excuse it.

20. That said it is clear that the matter is not straightforward. The counterclaim has introduced new parties who have been parties to other litigation with the defendants, partly at least, in relation to the same or similar subject matter. The counterclaim has extended the proceedings well beyond that of a straightforward claim for money due under agreements, the way in which it began. There have been two other sets of proceedings relating to the issues raised by the counter-claim, one not involving this plaintiff, which I can understand it might wish to inspect before proceeding further. The plaintiff did not help itself by simply ignoring the defendants' open letter to resolve all matters of dispute between them, but it demonstrates that as at January this year the defendants did not consider that the conduct of the plaintiff was such that the claim had been abandoned.

21. Although the plaintiff is certainly open to criticism for the delay, in that it ought to have moved matters on more quickly, I am satisfied that it has not sat completely idly by, doing nothing at all, and lulling the defendants into a false sense of security that the claim against them has gone away.

The degree of prejudice to the plaintiff:

22. The financial position of the defendants is not clear. The annual reports for the 1st defendant for the years 2000 and 2001 were produced by the plaintiff. These show that in the year to 31 March 2000 the 1st defendant had an operating loss of nearly $100 million and for the year to 31 March 2001 an operating loss of over $250 million. The year 2000 accounts assert net assets of only $64 million, and those for 2001 a capital deficit of $285 million. In these circumstances the removal of the protection of a sum paid into court clearly puts the plaintiff at risk that they may have nothing on which to execute a judgement.

Has the plaintiff sought to rectify the position:

23. The summons to discharge the injunction was taken out and served on 28 May 2002. it is now 25 June 2002 and virtually a year has passed since judge Longley dismissed the Order 14 summons. The affidavit of Mr. Xia shows that the plaintiff has been active, although not prompt, in putting together the information required to bring the matter onto trial and that the amended statement of claim is now ready. It ought to have been filed well before now and that it has not means that time is still running against the plaintiff.

The degree of prejudice to the defendant:

24. The defendant is out of pocket on a substantial sum and has been out of pocket on that sum for nearly a year. The prejudice from that is plain and obvious. But that is as high as the defendants can put their case. They rely on an assertion that the funds are needed to fund the activities of the 1st defendant, and say that the funds are needed immediately. The most up to date figures available to the Court are to 30 September 2001. An examination of the accounts filed shows that the liabilities of the 1st defendant have been reduced by some $200 million in that period. In the light of the ability to reduce liabilities by such a substantial sum the immediate need for some $2 million from the secured sum to meet debts, mostly incurred during the period in which the liabilities were reduced, is not adequately explained. The plain inference is that if the 1st defendant can reduce its liabilities by such a sum, there ought to be funds available to meet the much smaller sum. The uncertain position of the defendants' financial affairs is exacerbated by the fact that the 1st defendant's auditors found it necessary to note in the accounts for the year ended 31 March 2001 that:

"because of the significance of the fundamental uncertainties relating to litigation and to the going concern basis, we are unable to from an opinion as to whether the financial statements give a true and fair view of the state of affairs of the company"

and

"In respect alone of the limitations on our work set out in the basis of opinion section of this report we have not obtained all the information and explanations that we consider necessary for the purpose of our audit."

Has the defendant contributed to the delay?

24. Mr. Wong has referred me to the decision of the Court of Appeal in Zimmer Orthopaedic Ltd v Zimmer Manufacturing Co Ltd [1968] 1 WLR 1349, a trade mark case in which the defendant sough to have the claim dismissed for want of prosecution. The defendant itself was a plaintiff in the proceedings by counterclaim. The court held that although it was the duty of a plaintiff to bring an action to trial and a defendant was normally under no such duty, under O. 15 r.2 a defendant making a counterclaim was put in the same position as the plaintiff in the action. Thus, Mr. Wong said, the defendants, were under an equal duty to prosecute the counterclaim, and, not having done so, could not rely on the delay themselves.

25. The counter-claim contains a claim for damages as well as declarations in relation to the two agreements. The defendants claim for damages would provide an answer to the plaintiff's claim for money had and received but that does not place the defendant in a position where the counter-claim is merely a shield and need not be pursued unless the plaintiff pursues its claim. The reality is that the counterclaim is being used by way of a shield and may well not have been brought as a separate action, had the plaintiff not brought its action. But that in no way lessens the importance of the counterclaim, especially in a case such as this where the obvious answer to the counterclaim is an action for money had and received. To that action there is, at least so far, no obvious answer on the part of the defendants.

26. Consequently, where a defendant comes to the court seeking the discharge of a Mareva injunction on the grounds of the plaintiff delay, in circumstances where he is himself a plaintiff by way of counterclaim I am satisfied that he must himself be able to show that he has diligently prosecuted his counterclaim.

Conclusion on discharge:

27. The delay in this case, although sufficient to base a claim for discharge must be seen in the light of all other factors. The defendant was not itself a plaintiff by counterclaim in any of the reported cases in which the injunction was discharged. Had the defendants in this case been taking steps to advance the counterclaim it might be in a better position to rely on the plaintiff's delay. But where it does not advance its own case it is much less able to rely on the others delay. Weighing that factor particularly and all of the other matters I have set out, I am not satisfied that the defendants have made out a case to discharge the Mareva injunction. The order sought is declined.

Variation of the injunction:

28. Mr. Xia's affidavit was served only the day before the hearing. It contains a number of allegations relating to the issue of variation to which the defendants have not had sufficient time to reply. If the application to vary is to proceed they ought to be able to have the opportunity to reply. It was agreed by counsel that the matter would be argued only as to discharge and that in the event that discharge was refused the question of variation would be addressed.

29. I will allow the defendants 21 days to file an affidavit in reply to that of Mr. Xia. There are to be no further affidavits without leave. The summons to vary the injunction is to be set down for hearing, in consultation with counsel's diaries, on 3 days notice following the expiry of the period to file the affidavit.

25. Costs are reserved for consideration on the variation application in due course. In the event that the defendants elect not to pursue the application for variation costs on the summons will be in the cause.