NATURAL DAIRY (NZ) HOLDINGS LTD (IN PROVISIONAL LIQUIDATION) v. CHEN KEEN (alias JACK CHEN) AND OTHERS

HCA 2218/2017

[2020] HKCFI 2491

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

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DECISION

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A. Introduction

1.  This is an application by the Plaintiff (“P”), a listed company in provisional liquidation, for interlocutory injunctions (Mareva, proprietary and Chabra) against the Defendants.

2.  In broad outline, P (under the control of Joint Provisional Liquidators, “JPLs”) claims against the 1^st Defendant (“D1”), a former director, for breach of fiduciary duties with respect to a “very substantial acquisition” P entered into in May 2009 with entities under the control of the 2^nd Defendant (“D2”) to acquire various dairy assets in New Zealand (“Acquisition”).  P says that the Acquisition was a transaction in which D1 was in a position of conflict which he had not disclosed, and was highly impoverished to P, and that consequent upon it, very substantial funds belonging to P had been paid out, of which a significant amount ended up with D1 or his wife, the 3^rd Defendant (“D3”).

3.  P also claims against the 2^nd to 5^th Defendants for accessory liability in assisting D1 in his breach of fiduciary duties (knowing receipt and dishonest assistance), and in conspiracy against all Defendants.

4.  This application is by way of inter partes summons issued on 9 July 2019 (“Summons”). As will be discussed below, the timing of this application has to do with a restraint order made in HCMP No. 2111 of 2011 on 26 October 2011 (“Restraint Order”), which remains subsisting to date and has the effect of freezing all the known assets of the Defendants worldwide.

5.  This application first came before Deputy High Court Judge Dawes SC on 12 July 2019, and was adjourned for substantive argument on the basis that the Defendants would give prior written notice to the Plaintiff of any intended application by the Defendants or the Secretary for Justice to vary or discharge the Restraint Order. 

6.  This is the substantive hearing of the injunction application.

7.  The 4^th Defendant (“D4”) has not filed any defence in these proceedings and did not appear in this application. The 5^th Defendant (“D5”), a company incorporated in the British Virgin Islands (“BVI”), has since 1 November 2013 been struck off the BVI Register of Companies.  I was informed by counsel for D2 (D2 and D5 having filed a joint Defence on 19 August 2019 with D2 purporting to sign the statement of truth on behalf of D5 qua director) that steps are being taken to reinstate D5, although they are preliminary in nature and no application has yet been filed in the BVI.  In these circumstances counsel for P confirmed that she would not seek any order against D5.  Accordingly, the application is to be considered against D1 to D4 only.

B.      The Parties

8.  As to P:-

(1) It is a Cayman company which has been listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”) since 21 March 2003.  In 2008 and 2009 its name was “China Jin Hui Mining Corporation Limited”.  Following the events described below, it changed its name to the present one (Natural Dairy (NZ) Holdings Limited) in October 2009.

(2) Trading in P’s shares has been suspended since 7 September 2010.

(3) Pursuant to the application by Xiamen Hengxing Group Co Ltd, a contributory of P who has presented a petition to wind up P on just and equitable ground, the Cayman court appointed JPLs over P on 22 December 2016.

(4) At the material time in 2009, Chan Wai Kay Katherine (“Katherine Chan”) and D1 were directors and joint chairpersons of P.

9.  D1 (Jack Chen) was, between 7 May 2009 and 15 September 2009, a de jure director of P as well as its joint chairman together with Katherine Chan.  It is suggested that he has substantial business interests in the Mainland, and has lived in New Zealand for some years and active in the political scene there, being the founder of the New Citizen Party in New Zealand.  Further:-

(1) D1 does not dispute that he knew D2 and had business dealings with her, prior to his appointment as director of P and the Acquisition.

(2) D1 accepts, in his pleadings, that he beneficially owned and controlled D4.

10.  In the case of D2 (May Wang):-

(1) She is a New Zealand citizen.   

(2) It is not seriously disputed that D1 and D2 had, prior to May 2009, business dealings in the form of (i) having 60% and 40% interests (through companies they held) in the shares of UBNZ Funds Management Limited (“UBNZ Funds”) (see corporate chart below); (ii) being parties to a Commission Agreement dated 8 October 2008 (“Commission Agreement”); (iii) being directors in Global Food Holdings Limited (“Global Food”); and (iv) D1 having purchased a property in New Zealand from D2 on 10 February 2009.  (i), (ii) and (iii) are relevant to the subject matter of this claim and will be discussed further below.

(3) Further, D2 was the sole shareholder and director of UBNZ Trustee Company Limited (“UBNZ Trustee”), the holding company of a group of companies structured as follows:-

(4) D2 and the UBNZ companies were the counterparties to P in the Acquisition (see below).

11.  D3 (Ye Fang) is the wife of D1.  She is said to be the beneficial owner of Global Food, which owned various trademarks and production lines of food and beverage products in the Mainland.  D3 claims that she is a housewife as well as a successful merchant in her own right.  Her involvement in this case is primarily through her receipt of various substantial sums, which were said to be the traceable proceeds of P’s funds paid out as a result of D1’s alleged breach of fiduciary duties.

12.  As to D4, as indicated above it is a company beneficially owned and controlled by D1.  It was in receipt of various substantial sums said to be the traceable proceeds of P’s funds, and had also transferred part of those funds to D3. 

13.  D5 is said to be a company beneficially owned by D2, whose sole director is D2. 

C.      Relevant Facts

14.  The circumstances relating to the Acquisition are complex. This section sets out those facts that are most pertinent for present purposes.

C.1      The Crafar Farms

15.  The underlying assets the subject matter of the Acquisition were 20 dairy farms in New Zealand (“Crafar Farms”) (as well as the cattle stock, machinery and other chattels therein) owned by various companies associated with or controlled by the Crafar family.

16.  It is common ground that the Crafar Farms fell within the definition of “sensitive New Zealand Assets” under the New Zealand Overseas Investment Act 2005 (“2005 NZ Act”), such that consent from the relevant New Zealand authorities would be required for “overseas investment” (by an individual who is not a New Zealand citizen or resident or a company incorporated outside New Zealand or is the 25% or more subsidiary for such company) which would result in the acquisition of at least 25% interest in a New Zealand company that either (i) controls the freehold of 5 hectares or more of non-urban land or (ii) which consideration for such acquisition exceeds NZ$100 million.  The authority responsible for considering and recommending to the relevant authority on the giving or withholding of consent is the New Zealand Overseas Investment Office (“OIO”).

17.  It appears that the Crafar companies were not in a sound financial state – it is not clear from the evidence available when their financial troubles began, but by 5 October 2009 receivers had been appointed over all of the relevant Crafar companies (“Crafar Receivers”).

C.2         D1/D2’s involvement in marketing Crafar Farms

18.  In October 2008, D1 and D2 became involved in marketing the Crafar Farms for sale:-

(1) A confidentiality agreement dated 3 October 2008 was signed between UBNZ Funds (then owned by Global Financial (controlled by D1) as to 60% and UBNZ Trustee (controlled by D2) as to 40%) and Barry Fraser (“Barry Fraser”) with respect to provision of information relating to the Crafar Farms to UBNZ Funds.

(2) The Commission Agreement was entered into on or about 8 October 2008 between (i) Latitude Asia Limited (a BVI company wholly owned by Barry Fraser’s children) (ii) D1 and (iii) D2 which provided (inter alia) that “… all commission received through dairy farm purchases with CraFarm Group … will be shared equally between the said three parties”.

(3) A consultancy agreement dated 17 November 2008 (“Consultancy Agreement”) was entered into between Barry Fraser and the Crafar companies to provide for (inter alia) provision of consultancy services by Barry Fraser in relation to the sale of the Crafar Farms in return for a “success fee” of 2% upon sale.  

19.  At that time, P was engaging in the business of provision of engineering systems contracting and supporting services and sale of related spare parts and consumables, and trading of beverage and food related products, which did not appear to be profitable.  The board of directors of P (“Board”) was looking for investment opportunities to broaden P’s income stream.

20.  In April 2009:-

(1) Katherine Chan was appointed chairperson of P.  At that time Katherine Chan and D1 had been business acquaintances for several years.

(2) Although there is some dispute over who initiated the discussion, it is common ground that D1 introduced Katherine Chan to the opportunity of acquiring the Crafar Farms and D2 as the counterparty for such acquisition.

C.3     D1’s appointment as director

21.  On 7 May 2009, D1 was appointed an executive director, joint chairman and chief executive officer of P with responsibility for assisting the Board to explore the Crafar Farms opportunity, and to negotiate and execute the terms of the Acquisition.

22.  On the day following his appointment to the various offices in P (ie 8 May 2009), D1 procured Global Financial to transfer its 60% interest in UBNZ Funds to UBNZ Trustee.  There is no averment or evidence as to whether (and if so what) consideration had been given for such transfer.

C.4     The Acquisition

23.  On 18 May 2009, UBNZ Funds (a New Zealand incorporated company) entered into 6 agreements with 6 Crafar companies to acquire the businesses and assets of the Crafar Farms (“Farm Agreements”). The total consideration for the Farm Agreements was NZ$259 million.  It is P’s case that it was not aware of the consideration payable under the Farm Agreements, but D1 (who by then was a director of P) was.

24.  Four days later, on 22 May 2009, P entered into an agreement with the UBNZ companies for the purpose of the Acquisition.

25.  The Acquisition was structured as follows:-

(1) Instead of acquiring the Crafar Farms directly from the Crafar companies (which given P was a non-New Zealand incorporated company would have required approval under the 2005 NZ Act), the arrangement was for UBNZ Funds to inject the Crafar Farms and related assets it was to acquire under the Farm Agreements into a target company (UBNZ Assets, also incorporated in New Zealand), and for P to acquire the shares and debts in UBNZ Assets.

(2) P’s acquisition of UBNZ Assets would take the following form: first, P would acquire 20% shares and debts in UBNZ Assets for NZ$100 million (subsequently varied to NZ$100 million less NZ$1); at the same time P would be granted an option to acquire the remaining 80% shares and debts for NZ$400 million, which option must be exercised within 3 months after the applicable conditions precedent – the most relevant of which for present purposes was the grant of approval by the OIO – had been satisfied.   

26.  The terms of the Acquisition were set out in the Agreement dated 22 May 2009 entered into between UBNZ Trustee as vendor, P as purchaser and UBNZ Funds as warrantor (“SPA”).

27.  The SPA provided (inter alia):-

(1) UBNZ Assets did not carry on any business as at the date of the SPA, but would acquire all the assets (of which there were 5 defined items, including those set out in the Farm Agreements which were listed in Schedule 2A of the SPA) for use in the conduct of the business of cattle and dairy cattle breeding in New Zealand and production, and sale and distribution of livestock and milk fat solids (“Business”), and would carry on the Business prior to completion of the acquisition of Sale Shares (see below).

(2) P was to acquire 20% of the shares in UBNZ Assets (“Sale Shares”) from UBNZ Trustee for NZ$100 million (subsequently varied to NZ$100 million less NZ$1), which consideration was to be satisfied by (i) cash to be raised by P and (ii) zero-coupon convertible notes in the aggregate amount of not more than NZ$285 million (HKD equivalent) (“Note B”) to be issued by P.

(3) The conditions precedent to the Sale Shares completion included (inter alia) vesting of all the property, assets and rights for use in the Business (including the assets set out in the Farm Agreements) in UBNZ Assets, which must be satisfied or waived by the “Long Stop Date”, being 90 days from the date of the SPA (subsequently extended).

(4) At the time of the Sale Shares completion, an option would be granted to P, to be exercised within 3 months of satisfaction or waiver of the applicable conditions precedent, to acquire the remaining 80% shares in UBNZ Assets (“Option Shares”) for NZ$400 million, which consideration was to be satisfied by (i) zero-coupon convertible notes with value of NZ$50 million (out of the aggregate amount of not more than NZ$215 million, HKD equivalent) (“Note A”) to be issued by P; (ii) cash to be raised by P; (iii) set off against any financial assistance to be provided by P to UBNZ Assets under the SPA; (iv) further issuance of Note A in the remaining total aggregate amount; and (v) further issuance of Note B in the remaining total aggregate amount.

(5) The conditions precedent to the Option Shares completion must be satisfied or waived within 9 months from the date of the SPA.  One such condition was the obtaining of all necessary consents and approvals from the OIO, which could not be waived, and which if not satisfied within the 9-month period, P would have the right to terminate the SPA.

(6) The consideration payable by P was subject to the following additional terms:-

(a) UNBZ Trustee undertook that the audited net profits after tax of the Business for one year from 1 June 2009 would be no less than NZ$35 million, and in the event that such amount was not met, it would pay to P 20% or 80% (depending on the stage at which the transaction had reached) of the shortfall multiplied 14 times.

(b) UBNZ Trustee further undertook that the aggregate market value of the properties listed in Schedule 2A (ie the Crafar Farms) would be no less than NZ$300 million, and in the event that their value was less than that, the consideration for the Sale Shares and the Option Shares would be adjusted downwards on a dollar-for-dollar basis of such shortfall multiplied by 20% or 80% (as the case may be).

(7) Upon signing the SPA, P would have the right to conduct due diligence.

(8) Various warranties were provided by UBNZ Trustee and UBNZ Funds, including (i) an undertaking to transfer all the property, assets and rights for use in the Business to UBNZ Assets, and (ii) a warranty that the unaudited balance sheets and profit and loss accounts of UBNZ Assets for the year ended 31 December 2008 and as at 31 March 2009 gave a true and fair view of the state of affairs of the company (on the assumption that UBNZ Assets already owned the Business of the Crafar Farms).  

28.  There were a number of supplemental agreements to the SPA, but save for those referred to in this Decision, their terms do not appear to be relevant for present purposes.

29.  After signing the SPA, P made an announcement on 4 June 2009 (“2009 Announcement”). It was explained therein that the consideration under the SPA (NZ$500 million less NZ$1) was determined with reference to (i) the market value of the Crafar Farms valued at NZ$320 million; (ii) the financial position of UBNZ Assets; (iii) the current share price of certain “Fonterra Shares”[1] allotted to the Crafar Farms; and (iv) future prospects of UBNZ Assets.  One of the matters P relies upon in its claims is a statement in the 2009 Announcement to the effect that each of UBNZ Trustee, UBNZ Funds and UBNZ Assets were third parties independent to P and its connected persons.

C.5     Financial due diligence and P’s approval of the Acquisition

30.  Between June and September 2009, P engaged Shinewing (CPA) Limited (“Shinewing”) to carry out financial due diligence for the purpose of the Acquisition.  In this context:-

(1) Eric Yee (“Eric Yee”), an accountant engaged by UBNZ Assets, was responsible for liaising with Shinewing and providing Shinewing with financial information for the purpose of the due diligence.  D2 gave express instructions to Eric Yee (inter alia) that he must obtain her written confirmation before releasing any financial information to Shinewing; and he must not discuss the background of the deal or the original purchase price for the Crafar Farms to Shinewing without her written permission.

(2) By an email dated 16 June 2009 from Eric Yee addressed to D2 and copied to D1, Eric Yee stated that whilst the accounts of the Business up to 31 March 2009 revealed some weakness, the actual financial performance of the Business up to 31 May 2009 would “implode an Armageddon on the account balance sheet”, with a loss of at least NZ$30 million.

(3) By further emails dated 16, 26 and 27 June 2009 (all addressed to D2 and copied D1), Eric Yee presented his proposed adjustments to the accounts of the Business up to 31 March 2009, which would have the effect of showing a net profit (as opposed to net loss) position for 2009, and substantially larger net profits for 2008. (2) and (3) above are collectively referred to as the “Eric Yee 2009 Emails”.

31.  Following completion of the Shinewing financial due diligence, on 8 September 2009 P issued a circular (“2009 Circular”) for the purpose seeking shareholders’ approval for the Acquisition pursuant to the SPA.  The Circular stated (inter alia) that:-

(1) Upon completion of the due diligence, P decided not to acquire all 5 items of assets defined in the SPA, but only the “Properties” (the Crafar Farms) and “Fixed Assets” (the cattle, machinery and chattels used in the Business as well as the Fonterra Shares).

(2) On the latest valuation as at 19 June 2009, the Crafar Farms were worth only NZ$206 million (compared to NZ$320 million stated in the 2009 Announcement). The Board recognized that the SPA consideration represented a premium of more than 50% over such valuation, but considered that no adjustment was necessary given (i) the increasing trend in gross profits of the Business (by reference to financial information set out in Appendix II to the Circular, which set out the profit and loss statements of the Business for years ended 31 May 2007, 2008 and 2009 and showed increase of gross profits from some HK$17 million in 2007 to some HK$92 million in 2009); (ii) the tentative signs of the global economic crisis bottoming out and recovery in the global dairy market which provided an indicative sign that the current conservative valuation of the Crafar Farms would likely to revise upward favourably thereafter; (iii) the scarcity of availability of Fonterra-approved dairy farm land in New Zealand; (iv) the profit guarantee in the SPA; and (v) the property valuation adjustments in the SPA.

(3) P had requested UBNZ Trustee to disclose the prior transacted price for the assets acquired under the Farm Agreements, but due to commercial sensitivity UBNZ Trustee had declined such request.

(4) The 2009 Circular contained statements similar to that in the 2009 Announcement that the UBNZ companies were third parties independent to P and its connected persons including D1 (who was expressly referenced).

32.  It is clear from the 2009 Announcement and the 2009 Circular that the financial performance of the Business between 2007 and 2009 was relevant to (i) the fixing of the consideration under the SPA as well as (ii) the Board’s decision in September 2009 not to revise the consideration despite the reduced valuation of the Crafar Farms.

33.  On the basis of the information disclosed in the 2009 Circular, P’s members approved the Acquisition and the SPA in an extraordinary general meeting held on 2 October 2009, whereupon P also changed its name into its current name.

C.6     D1’s resignation as director

34.  Meanwhile, on 15 September 2009, D1 resigned from all offices he held with P.  He however remained a director of Nation Resources Limited (“Nation Resources”), a wholly owned subsidiary of P, until 15 September 2010, and was appointed a director of NZND Media Limited (“NDNZ Media”), another wholly owned subsidiary of P, between 29 January 2010 and 27 May 2010.  As will be seen below, there are some documents suggesting that despite his resignation from the offices, D1 continued to be involved in the Acquisition in 2011.

C.7     Events leading to Sale Shares completion

35.  One of the conditions precedent for Sale Shares completion under the SPA was the vesting of all the property, assets and rights for use in the Business in UBNZ Assets, which was supposed to take place on or before the “Long Stop Date”.  As it transpired, this deadline was extended several times by various deeds of undertaking executed by P, and was eventually postponed to 31 December 2010, because completion of the acquisition under the Farm Agreements and the SPA encountered the following obstacles.  P’s consent to extend the deadline (as opposed to terminating the SPA) in these circumstances forms one of the grounds of complaint P now raises against D1.

36.  On 5 October 2009, the Crafar Receivers were appointed over the Crafar companies.  However this did not appear to present any insuperable obstacle to progression of the Farm Agreements, and UBNZ Trustee thereafter dealt with the Crafar Receivers directly.

37.  On 20 January 2010, New Zealand lawyers engaged by P approached OIO to seek “non-binding guidance” on the proposed purchase of 4 Crafar Farms, as part of a larger transaction whereby 20 Crafar Farms would be acquired.  OIO raised concerns with the proposed transactions, which were relayed to P’s side.  The position taken by P at the time, as set out in a letter from its New Zealand lawyers to the OIO dated 5 February 2010, was that OIO consent was not required for the 4 Crafar Farms.

38.  Meanwhile, the Sale Shares completion took place on 10 February 2010, and P became a 20% shareholder in UBNZ Assets. The 4 Crafar Farms were transferred to UBNZ Assets on 12 February 2010.

C.8     Applications to the OIO

39.  Following that:-

(1) In March 2010, despite the initial view taken that no OIO approval was required (paragraph 37 above), P , UBNZ Assets and UBNZ Funds applied for retrospective consent from the OIO for the acquisition of the 4 Crafar Farms.

(2) At the same time, the UBNZ companies attempted to complete acquisition of the remaining 16 Crafar Farms. To that end, P agreed to release the Note A and Note B issued but held in escrow to UBNZ Trustee to facilitate payment under the Farm Agreements.

(3) P had, by a fifth supplemental agreement to the SPA dated 16 June 2010 and a supplemental deed of undertaking dated 26 June 2010, agreed to extend the deadlines for satisfaction of the conditions precedent with respect to obtaining OIO approval and vesting of property and assets in UBNZ Assets to 22 January 2011 and 31 December 2010 respectively.

40.  However, probably unbeknownst to the parties at the time, OIO had commenced an investigation into the transfer of the Crafar Farms since March 2010.  In the course of its investigation, the OIO received a request for assistance from the Independent Commission Against Corruption in Hong Kong with respect to alleged corruption by senior officers of P.  The matter was then referred to the New Zealand Police and the New Zealand Serious Fraud Office.

41.  Whilst these investigations were ongoing, on 10 August 2010 a further application for consent was submitted to the OIO with respect to acquisition of the remaining 16 Crafar Farms.

42.  In December 2010:-

(1) D2 was adjudged bankrupt in New Zealand (on debts which did not appear to have anything to do with the Acquisition).

(2) D1 and D2 were arrested in Hong Kong on charges of conspiracy to defraud the SEHK for false representations or non-disclosure made with respect to the Acquisition.

(3) The OIO recommended to the relevant authority under the 2005 NZ Act to decline consent on the basis that the “good character” criterion under the statute had not been met, based on the OIO’s concerns relating to both P and D2.

(4) The OIO’s recommendation was accepted and consent under the 2005 NZ Act was refused by the relevant authority on 23 December 2010.

C.9     Financing of Acquisition and application of funds

43.  At this juncture one should briefly consider how the Acquisition was financed and how such funds had been applied.

44.  As can be seen from paragraph 27(2) and (4) above, the total consideration under the SPA of NZ$500 million less NZ$1 was to be satisfied by cash, Note A and Note B.

45.  There appears to be no dispute that:-

(1) In December 2009, P had raised gross amounts of:-

(a) HK$842 million through the placing of 3% coupon convertible notes C issued by P (“Note C”) with third parties;

(b) HK$64 million through the placing of zero-coupon convertible notes D issued by P (“Note D”) with CCB International Asset Management Ltd (“CCBIAM”); and

(c) HK$49 million through CCBIAM’s subscription of optional bond issued by P which carried 3% interest (“Optional Bond”).

Note C, Note D and the Optional Bond collectively raised HK$955 million for P (“CDO Funds”).

(2) Further, on 21 December 2009, P issued:-

(a) HK$276,078,000 (equivalent to NZ$50.25 million) worth of Note A in favour of UBNZ Trustee (as “Deposit” and part of Option Shares consideration under the SPA); and

(b) HK$552,155,999 (equivalent to NZ$100.49 million) worth of Note B in favour of UBNZ Trustee (as part of Sale Shares consideration and part of Option Shares consideration under the SPA)),

which were initially placed in escrow with UBNZ Trustee’s solicitors, Fred Kan & Co (“FKC”), and subsequently released to enable UBNZ Trustee to raise funds to pay for the remaining 16 Crafar Farms (paragraph 39(2) above).

(3) Upon release, UBNZ Trustee had exercised its right to convert part of Note A and Note B into shares, and had sold the remainder to raise HK$25 million and HK$372 million respectively.  The funds UBNZ Trustee deprived from sale of Note A and Note B totalling HK$397 million are referred to as “AB Funds”.

46.  As will be seen below, whilst P advances its claims against the Defendants with respect to the CDO Funds, the AB Funds as well as a sum of NZ$1 million paid by Nation Resources on 7 October 2009 (which totalled HK$1,357,680,000 and is defined as the “Acquisition Funds” in the Statement of Claim)[2], for the purpose of this application P is only relying on the CDO Funds.

47.  As to the application of the Note C funds (HK$842 million), according to an announcement of P dated 2 February 2011[3]:-

(1) approximately HK$89 million had been paid to 3 direct and indirect subsidiaries of P (Nation Resources, Nation Yield Limited (“Nation Yield”) and Guoyuan Natural Dairy (Jiangxi) Co Ltd (“Jiangxi Natural Dairy”)) as working capital ([A] payment);

(2) approximately HK$52 million had been paid as part of the deposit payable by Jiangxi Natural Dairy pursuant to a manufacturing agreement dated 9 June 2010 it entered into with UBNZ Funds (“Manufacturing Agreement”) ([B] payment);

(3) approximately HK$8.73 million had been paid as placing fees and bank remittance charges ([C] payment);

(4) as to the bulk in the sum of HK$692.3 million, it was remitted to Knight Coldicutt (“KC”), New Zealand lawyers engaged by P for the Acquisition, and was applied as follows:-

	Amount (HK$)	Purpose
(a)	29.2 million	Paid to NZND Media (P’s subsidiary) as working capital ([D] payment)
(b)	314.17 million	Paid to UBNZ Trustee as “financial assistance” under the SPA ([E] payment)
(c)	346 million	Paid to the Crafar Receivers as escrow funds for purchase of 16 Crafar Farms ([F] payment)
(d)	1.3 million	Paid to KC and others for professional services rendered for the Acquisition
(e)	1.6 million	Retained by KC in escrow for payment of fees and costs relating to the Acquisition ((d) and (e) collectively [G] payment)

(5) With respect to the [F] payment, after termination of the acquisition of the remaining 16 Crafar Farms in circumstances described in paragraph 52 below, the sum (NZ$65.3 million)[4] was returned to KC which was then applied as follows:-

	Amount (NZ$)	Purpose
(a)	15 million	Paid to Nation Yield for the purpose of Jiangxi Natural Dairy’s registered capital ([F1] payment)
(b)	2.3 million	Paid to NZ Natural Dairy Limited (P’s subsidiary) as working capital ([F2] payment)
(c)	23 million	Paid to UBNZ Funds for (i) remaining deposit under the Manufacturing Agreement (2.77 million) and (ii) part payment of 3 months’ milk orders under the Manufacturing Agreement (20.23 million) ([F3] payment)
(d)	25 million	Paid to Nation Resources for (i) working capital (73.5%) and (ii) part payment of 3 months’ milk order in favour of UBNZ Funds (26.5%) under the Manufacturing Agreement ([F4] payment)

48.  As to the [E] payment:-

(1) I note that on the documents available, while the announcement of 2 February 2011 refers to a sum of HK$314.17 million being paid to UBNZ Trustee on 14 February 2010 as “financial assistance” under the SPA, the only payment from KC to UBNZ Trustee that one can see from KC’s ledgers during that period was a sum of NZ$51.6 million (converted into over HK$280 million at the time) made on 10 February 2010 described as “part payment of shares” (most likely a reference to the Sale Shares).

(2) Assuming[5] this NZ$51.6 million constituted part of the [E] payment, it was further transferred as follows[6]:-

Date	Movement of [E] payment
10/2/10	NZ$51.6 million paid to UBNZ Trustee for Sale Shares completion	NZ$51.6 million transferred to UBNZ Assets	NZ$21.2 million transferred to UBNZ Funds	NZ$10.5 million paid to Crafar Receivers
				NZ$10.7 million paid to UBNZ Trustee as loan
12/2/10			NZ$30.1 million transferred to UBNZ Funds	NZ$15.25 million paid to Crafar Receivers
15/2/10				NZ$14.55 million paid to UBNZ Trustee as loan
			NZ$270,000 transferred to UBNZ Funds to hold as security for Crafar company’s obligation to replace stock	NZ$270,000 paid to UBNZ Trustee as loan

(3) In other words, of the NZ$51.6 million paid by KC to UBNZ Trustee, some NZ$26 million had been paid to the Crafar Receivers (for purchase of the 4 Crafar Farms, which had been transferred to UBNZ Assets), with a balance of some NZ$25.6 million remained in UBNZ Trustee and UBNZ Funds.

(4) In addition, P claims that further sums totalling NZ$558,041.21 had been paid by KC to UBNZ Trustee on 8 March 2010 and 4 May 2010.

(5) As shall be seen below, P has stated, in its announcements dated 2 February 2011 and 3 May 2011, that the HK$314 million “financial assistance” had been repaid to P in full by the end of March 2011. It appears that the funds used to make such repayment originated primarily from the AB Funds that UBNZ Trustee and UBNZ Funds recovered from the Crafar Receivers following termination of the Farm Agreements.

49.  As to the Note D funds (HK$64 million):-

(1) HK$40 million had been applied towards payment of legal and OIO consultants’ fees ([H] payment); and

(2) HK$24 million had been remitted to Nation Resources as working capital on 23 April 2010 ([I] payment).

50.  As to the Optional Bond funds (HK$49 million), it was paid to UBNZ Funds on 16 June 2010 as part payment of the deposit under the Manufacturing Agreement ([J] payment).

51.  As to the AB Funds (HK$397 million), out of the HK$372 million portion HK$314.17 million had been applied as follows:-

Date	Movement of AB Funds
25/5/10	NZ$65.59 million paid to UBNZ Trustee by Sun Hung Kai Investment Services	NZ$60 million transferred to UBNZ Funds	NZ$31 million paid to Crafar Receivers as refundable and non-refundable deposits for remaining 16 Crafar Farms
24/6/10			NZ$24 million paid to Crafar Receivers as tax payable for acquisition of 16 Crafar Farms
Jan 11				NZ$24 million deposit refunded by Crafar Receivers
Mar 11				NZ$23.97 million tax provision refunded by Crafar Receivers

C.10      Restructuring of the Acquisition post-OIO refusal

52.  Following the refusal of approval under the NZ 2005 Act:-

(1) An undated sixth supplemental agreement to the SPA was entered into to further extend the deadline for satisfaction of the condition precedent with respect to obtaining OIO approval (and P’s right to terminate the SPA) to 30 September 2011.

(2) UBNZ Funds served notice on the Crafar Receivers cancelling the purchase of the remaining 16 Crafar Farms on 12 January 2011.

(3) Following refund made by the Crafar Receivers:-

(a) The [F] payment (being part of the CDO Funds) was applied in the manner set out in paragraph 47(5) above.

(b) Although there are some discrepancies in the figures[7], it appears that with respect to the AB Funds, (i) HK$160 million had been transferred to Nation Yield on 19 January 2011; (ii) HK$145 million had been transferred to P on 23 March 2011; and (iii) the Board agreed to set off approximately HK$9 million from P’s payment otherwise due to UBNZ Funds for milk under the Manufacturing Agreement.  

53.  In its announcement dated 2 February 2011, P stated that notwithstanding the cancellation of the Farm Agreements, P considered it did not have to terminate the SPA, and was considering its options and negotiating the revision of the same.

54.  It appears that in December 2011, P entered into a number of agreements to restructure the Acquisition (“Flying Max Agreements”).  In gist:-

(1) The consideration for the Sale Shares and the Option Shares was reduced to just under NZ$100 million.

(2) Assets in the form of cattle and dairy cattle, plant, machinery, tools and equipment valued at no less than NZ$99 million would be transferred to UBNZ Assets.

(3) P would pay, on behalf of UBNZ Assets, NZ$400 million to Flying Max Limited (“Flying Max”) and Earn Cheer Limited (“Earn Cheer”), in the form of the unissued portions of Note A and Note B as well as shares in P held by UBNZ Trustee through conversion of the issued Note A and Note B, for managing and operating the Business under a management agreement, whereunder Flying Max would provide a profit guarantee of net profits after tax of no less than NZ$35 million for each of the first 2 financial years, with shortfall to be multiplied by 14 and paid by Flying Max through cancellation of Note A and Note B and thereafter in cash. To that end Flying Max further entered into an agency agreement with Earn Cheer as exclusive agent for marketing and sale of dairy and related products in certain regions in the Mainland.

55.  It is P’s case that Flying Max and Earn Cheer were beneficially owned and/or controlled by D1 and D2, based on (inter alia) the connections between the sole director of Flying Max and Earn Cheer with D2 and D1 respectively, common directorship in Flying Max’s subsidiary and company controlled by D2, as well as UBNZ Trustee acting as guarantor of Flying Max’s liabilities for substantial loans advanced by a lender. Both D1 and D2 deny this allegation.

56.  It also appears that the Flying Max Agreements were only disclosed by P in an announcement made on 9 September 2013.  

57.  Following the Flying Max Agreements:-

(1) The remaining portions of Note A and Note B were issued and transferred to Flying Max and Earn Cheer, whereupon they converted the bulk of them into P’s shares. 

(2) The Option Shares were transferred to P, such that P became the 100% shareholder of UBNZ Assets.

58.  Meanwhile, pursuant to the direction of OIO, UBNZ Assets sold the 4 Crafar Farms to third parties, which sale proceeds were said to have been wholly applied towards discharging various mortgage loans.

D.      Criminal Proceedings against D1, D2 and D3

59.  Following D1 and D2’s arrest in Hong Kong (paragraph 42(2) above), upon the Department of Justice’s application, the Restraint Order was granted on 26 October 2011 with respect to all of the property of the Defendants in and outside Hong Kong.

60.  Two sets of criminal proceedings have since been commenced against D1, D2 and D3 in Hong Kong.

61.  In HCCC No. 82 of 2014 (“1^st Criminal Proceedings”):-

(1) D1, D2 and Eric Yee were charged with conspiracy to defraud the SEHK, P and P’s existing shareholders by dishonestly making false representations and concealing or failing to disclose matters thereby causing (i) the SEHK to allow the publication of the 2009 Announcement and the 2009 Circular; (2) P and its existing shareholders to approve the Acquisition; and (3) P to issue and release convertible notes and the Optional Bond for payment of the Acquisition.

(2) They were convicted after trial before a judge and jury, which conviction was upheld by the Court of Appeal in CACC No. 172 of 2016.  On appeal to the Court of Final Appeal in FACC Nos. 26 to 28 of 2018, the Court of Final Appeal allowed the appeal of D1, D2 and Eric Yee on the ground of duplicity, quashed their convictions and ordered a re-trial.

(3) I am informed that the re-trial (HCCC No. 309 of 2019) has been fixed to commence on 11 January 2021, with 105 days reserved.  

62.  In DCCC No. 1022 of 2012 (“2^nd Criminal Proceedings”):-

(1) D3 and a partner of FKC were charged with various counts of dealing with property known or reasonably believed to represent proceeds of an indictable offence, with respect to funds said to represent the traceable proceeds of the CDO Funds.

(2) They were convicted after trial by a district judge, which conviction was quashed by the Court of Appeal in CACC No. 299 of 2014 and a re-trial was ordered.

(3) At the re-trial before another district judge, both defendants (including D3) were acquitted.

63.  It is common ground that (i) since all convictions against D1, D2 and D3 have been quashed, I must proceed on the basis that there is no conviction against any of them; (ii) I cannot rely on the findings made in the judgments, decisions or rulings in the 1^st and 2^nd Criminal Proceedings (Secretary for Justice v FTCW [2014] 1 HKLRD 849, §§93-94 (per Lam VP)); and (iii) I am entitled to consider the underlying documentary evidence and witness testimony referred to in the aforesaid judgments, decisions or rulings as hearsay evidence, subject to the question of weight (China Everbright-IHD Pacific Ltd v Ch-ng Poh [1999] 2 HKLRD 555).

E.      The Parties’ Pleaded Case

E.1     P’s pleaded case

64.  P’s case is set out in a 61-page Statement of Claim with 8 schedules.

65.  P claims that D1 was:-

(1) a de jure director of P between 7 May 2009 and 15 September 2009; and

(2) a de facto director, alternatively a shadow director, of P from 15 September 2009 to 22 December 2016 (the date of appointment of JPLs), by reason of:-

(a) D1’s continued involvement in and responsibility for all significant aspects of the Acquisition (including inter alia the Sale Shares completion, the Flying Max Agreements and the use of the Acquisition Funds), and his causing P to incorporate a number of subsidiaries purportedly to carry on the Business;

(b) at least one or more members of the Board – including Graham Chin who was said to be a family friend of D1 and D3 who held shares in various companies which substantially owned indirectly Global Food, a company acknowledged by D3 to be mainly beneficially owned by her) – were accustomed to act in accordance with the directions or instructions of D1; and

(c) KC continued to act on D1’s instructions in relation to the application of the Acquisition Funds;

(3) alternatively, the agent of P, by reason of his having acted on behalf of P in relation to all significant aspects of the Acquisition including the use of the Acquisition Funds.

66.  As such, P claims that D1 owed various fiduciary duties to P, including (inter alia) the duty not to place himself in a position where his personal interests or duties to others conflict with P’s interests, the duty to act in the best interest of P, and the duty to exercise his powers for proper purposes.

67.  P further claims that D1 had acted in breach of the fiduciary duties.  In Statement of Claim §152, P sets out 12 counts of conduct in breach of fiduciary duties, broadly summarized as follows:-

(1) procuring P to enter into the SPA in circumstances where D1 had a conflict of interest (namely, his beneficial interest in UBNZ Funds; his intended or actual sharing in part of the Acquisition Funds with D2; and his being privy to the Commission Agreement), which conflict he had not only failed to declare but had concealed from the directors and shareholders of P and the SEHK;

(2) procuring P to enter into the SPA which terms were wholly uncommercial, in particular when the consideration under the SPA was nearly doubled that under the Farm Agreements, and P could have acquired those assets directly from the Crafar companies;

(3) procuring P to extend the various deadlines under the SPA and to postpone its right to terminate the same in circumstances where there was no approval from the OIO;

(4) procuring P to enter into the Flying Max Agreements in circumstances where (i) he had a conflict of interest; and (ii) they were plainly not in the commercial interest of P;

(5) receiving or agreeing to receive secret profits in relation to the Acquisition; and

(6) applying the Acquisition Funds for his own benefit or for the benefit of his associates.

68.  With respect to the allegation of receipt of Acquisition Funds by D1 or his associates, P’s case is as follows.

(1) As can be seen from paragraphs 48 and 51 above:-

(a) Of the approximately NZ$52.1 million (Note C funds) paid to UBNZ Trustee since early February 2010, only some NZ$26 million had been paid to the Crafar Receivers for acquiring the 4 Crafar Farms, and some NZ$26 million remained with UBNZ Trustee and UBNZ Funds.

(b) Of the NZ$65 million (AB Funds) paid to UBNZ Trustee in May 2010, NZ$60 million was transferred to UBNZ Funds, out of which NZ$55 million had been paid to the Crafar Receivers for part payment of the 16 Crafar Farms, leaving (i) some NZ$5 million with UBNZ Trustee and (ii) NZ$5 million with UBNZ Funds.

(2) P’s case is that the Acquisition Funds had been applied for the benefit of the Defendants as follows:-

Date	Use of Acquisition Funds pleaded by P
10-15/2/10	NZ$51.6 million transferred to UBNZ Trustee; after payments to Crafar Receivers approximately NZ$25.6 million remained with UBNZ Trustee
19/2/10	D1 purchased 3 New Zealand properties in the name of Anfatex Global Financial Investment Holdings Limited (“Anfatex”), a company wholly owned by D1, for NZ$8 million
	D1 (through Anfatex) purchased another New Zealand property for NZ$1.82 million
	(collectively “Anfatex Properties”)
2/3/10	HK$73.736 million (~NZ$13.7 million) remitted by UBNZ Trustee to D4’s account (1) at ICBC Hong Kong
	HK$73.7 million transferred by D4 to D4’s account (2) at ICBC Hong Kong
11/3/10	HK$69 million transferred by D4 back to D4’s account (1) at ICBC Hong Kong
		D4 drew cheque of HK$68.95 million (signed by D1) in favour of FKC client account
12/3/10			FKC drew cheque of HK$68.95 million in favour of D3 (“D3 1st Payment”)
25/5/10 – 24/6/10	NZ$65.59 million transferred to UBNZ Trustee, of which NZ$60 million transferred to UBNZ Funds, and which NZ$55 million paid to Crafar Receivers, leaving balance of NZ$5.59 million with UBNZ Trustee and NZ$5 million with UBNZ Funds
10/6/10 – 16/8/10	Anfatex received NZ$500,000 in cash from KC (“Anfatex Payments”)[8]
10/6/10 – 13/7/10	UBNZ Trustee (through KC) paid NZ$2.16 million to D4
14/7/10	D1 and D3 acquired a New Zealand property in their joint names for NZ$2.3 million (“NZ Property”)
7/7/10 – 17/8/10	NZ$103,105.45 transferred by UBNZ Trustee (through KC) to D2 (“D2 Payment”)
23/2/11	D1 and D3 discharged mortgage over 2 New Zealand properties securing NZ$1.38 million and NZ$900,000
13/4/11	D1 and D3 discharged mortgage over Hong Kong property securing HK$23.8 million (~NZ$4.63 million)
	(collectively “Mortgaged Properties”)

(3) In other words, P’s case is that part of the Acquisition Funds had been applied for the benefit of the Defendants by:-

(a) acquiring the Anfatex Properties and the NZ Property;

(b) making the Anfatex Payments;

(c) discharging the liabilities on the Mortgaged Properties;

(d) D3 1^st Payment (HK$68.95 million);

(e) D2 Payment (NZ$103,105.45); and

(f) paying some NZ$2.16 million and HK$4,736,482.56[9] (collectively “D4 Payment”).

(4) Further, P seeks to challenge the following payments derived from the CDO Funds:-

(a) HK$29.2 million paid to NZND Media (P’s subsidiary) ([D] payment in paragraph 47(4)(a) above), on the basis that at the time of payment D1 and Eric Yee were the only directors of NZND Media and the sum could not be identified in the accounts of NZND Media;

(b) NZ$25 million paid to Nation Resources ([F4] payment in paragraph 47(5)(d) above), from which a sum of HK$24,221,420 was paid out to D3 within 5 days of receipt (“D3 2^nd Payment”);

(c) payments made (through various subsidiaries of P) to UBNZ Funds for the purpose of the Manufacturing Agreement (paragraph 47(2) above), namely (i) [B] payment; (ii) [F3] payment; (iii) [F4] payment; (iv) [J] payment (paragraphs 47 and 50 above); and (v) 2 further sums of NZ$1.77 million and NZ$52.5 million, on the basis that P’s justification for the Manufacturing Agreement and payments thereunder at different times were internally inconsistent, and UBNZ Funds had substantially under-performed the Manufacturing Agreement yet very significant sums had been paid by P; and

(d) specifically with respect to the [F3] payment (NZ$23 million), NZ$9.3 million of which had within 8 days of receipt been transferred to D5 (“D5 Payment”), contrary to the stated use of those funds in the announcement dated 2 February 2011.  

(5) For completeness, P has also identified 4 groups of payment in its Statement of Claim which were said either to have derived from the CDO Funds or received by D3, with respect to which no claim has yet been advanced as the JPLs are still investigating the same.  These are (i) [F1] payment; (ii) [F2] payment; (iii) [H] and [I] payments (paragraphs 47(5) and 49 above); and (iv) sums totalling HK$114,400,749.18 received by D3 which were not sourced from P or its subsidiaries.

69.  P claims that but for D1’s breaches of fiduciary duty, it would not have entered into the SPA, or would have terminated the same at an early stage; it would not have raised finance through the use of the various convertible notes and Optional Bond or use the Acquisition Funds in the manner it did; and it would not have entered into the Flying Max Agreements.

70.  Accordingly, P claims that it has suffered loss and damage, at least in the sum of HK$3,103,227,573 (being the total of (i) the Acquisition Funds and (ii) the face value of Note A and Note B issued to and converted by Flying Max and Earn Cheer), as well as the legal and fund-raising costs incurred by P in relation to the Acquisition and not discharged from the Acquisition Funds.  P further acknowledges that it will give credit for any part of the Acquisition Funds that had been used for P’s proper business purposes.

71.  As against D2 to D5, P makes the following claims:-

(1) receipt-based claims against D2 to D5 in respect of (i) D2 Payment (D2); (ii) D3 1^st Payment, D3 2^nd Payment, NZ Property and Mortgaged Properties (D3); (iii) D4 Payment (D4) and (iv) D5 Payment (D5); and

(2) dishonest assistance against D2 to D5.

(3) P also claims unlawful act conspiracy against all Defendants.

E.2         D1 and D3’s pleaded case

72.  D1 and D3 filed a joint Defence.  Save for the matters set out in paragraph 73(8) below, their Defence essentially consists of bare assertions and denials.

73.  In gist, D1 and D3 claim that:-

(1) They are independently wealthy and successful merchants in their own right.

(2) D1 ceased to be a director of P after his resignation on 15 September 2009, and denies he was a de facto or shadow director of P or exercised any influence or control over P or the Acquisition thereafter.  In any event there were other independent directors on the Board and he denies the directors named in the Statement of Claim acted on his instructions (although the relationships with him and D3 are admitted).

(3) D1 was not in a position of conflict at the time of the SPA as:-

(a) he had no legal and beneficial interest in UBNZ Trustee or the UBNZ group at the time of the SPA, having procured Global Financial to transfer all its interests in UBNZ Funds by 8 May 2009 “in order to avoid any possible conflict of interest” and because Global Financial had already been struck off the register in the BVI on 1 May 2009 (which was also said to have triggered the transfer); and

(b) by then the Commission Agreement had already lapsed and ceased to have any legal effect, and in any event the Commission Agreement was not related to the SPA.

(4) They deny the SPA was uncommercial since the subject matter of the SPA and the Farm Agreements were different  - under the SPA, P was acquiring the Business with a profit guarantee; as such the consideration under the Farm Agreements was said to be irrelevant.

(5) The decision to enter into the SPA was made by Katherine Chan “with the support of [D1] in the negotiations”, and the Board also relied on external advisers to that end.   

(6) D1 disputes the authenticity of the Eric Yee 2009 Emails, and claims that he did not receive them nor did he have knowledge of them, and that he rarely used emails and did not understand English.

(7) D1 further denies that he caused or procured the Flying Max Agreements, or that he beneficially owned or controlled Flying Max or Earn Cheer.

(8) Specific defences have been pleaded with respect to the following payments:-

(a) For the D3 1^st Payment, it is said that:-

1. D3 had procured Global Food to enter into a Trade Marks Licensing and Production Lines Purchase Agreement with P on 16 November 2009 (“VSA-2”), whereunder P was to purchase various production lines used for packaging beverage from Global Food for HK$26 million and to obtain an exclusive licence to use certain trademarks owned by Global Food for marketing beverage products in the Mainland for 3 years for licence fees of no less than HK$30 million.  The consideration under VSA-2 was to be wholly satisfied by the allotment of 70 million shares in P.  It is said that the closing price of P’s shares on 16 November 2009 was HK$0.73, such that the value of the 70 million shares would have been HK$51.1 million.

2. By early January 2010, the share price of P had increased to HK$1.96, and D1 was interested in acquiring shares in P.  He therefore procured D4 to enter into a Transfer Agreement with D3 on 8 January 2010 to acquire all of P’s shares D3 was to obtain under VSA-2 for HK$110 million (“Transfer Agreement”).

3. It is said that the D3 1^st Payment was part payment by D1 under the Transfer Agreement.

(b) For the Anfatex Properties, NZ Property, Anfatex Payments and redemption of the Mortgaged Properties, D1 and D3 claim that those funds originated from D5 (instead of the Acquisition Funds) pursuant to an agreement dated 12 February 2010 between D4 as vendor and D5 as purchaser (“Super Worth Agreement”), whereby D5 agreed to purchase (i) all the rights under VSA-2 that D4 had or was going to acquire; (ii) production lines owned by Global Food and its subsidiaries; and (iii) the sales teams and network in the Mainland owned by Global Food and D4, for RMB195 million.

(c) For the D3 2^nd Payment, it was repayment of various interest-free loans totalling HK$24,221,420 D3 advanced to P (and paid to Nation Resources) pursuant to 6 loan agreements entered into between 13 September 2010 and 17 November 2010 (“D3 Loan Agreements”), whereunder the loans had to be repaid within 6 months.  The D3 Loan Agreements were signed by Miranda Ng, an executive director of P, on its behalf.

(9) As for the rest of the payments allegedly made from the Acquisition Funds in paragraph 68 above, D1 and D3 either non-admit or give bare denials.

(10) Further, D1 and D3 rely on the repayment by UBNZ group of HK$314 million (paragraph 48(5) above) to P and allege that P is not entitled to claim any further loss and damage.

E.3     D2 and D5’s pleaded case

74.  D2 has purported to file a joint Defence with D5.  Their Defence only consists of bare denials.

F.      The Summons

75.  The Summons was issued on 9 July 2019, shortly after conclusion of D1, D2 and Eric Yee’s appeal to the Court of Final Appeal in the 1^st Criminal Proceedings and before judgment was handed down.  The JPLs explain that this was with a view to protecting P’s position irrespective of the outcome of the appeal (whether resulting in the discharge of the Restraint Order or the application for a confiscation order).  I will consider the significance or otherwise of the Restraint Order in the context of risk of dissipation below.

76.  In the draft order attached to the Summons, P seeks (i) proprietary injunction against D1, D2 and D3 with respect to assets in Hong Kong and overseas set out in Schedule 3 and Schedule 4 thereto (which appear to contain all of their known assets); and (ii) worldwide Mareva injunction against all Defendants up to a cap of HK$3 billion.

77.  At the hearing, Ms Lam SC, counsel for P, clarified P’s position as follows:-

(1) In addition to proprietary and Mareva injunctions, P also seeks an injunction on the Chabra basis against D3.

(2) For the proprietary injunction, P would focus on (i) the NZ Property; (ii) the Mortgaged Properties; (iii) D3 1^st Payment; (iv) D3 2^nd Payment and (v) D5 Payment[10].

(3) For the Mareva and Chabra injunctions:-

(a) P would not rely on the Flying Max Agreements;

(b) for D2 to D5, P would only rely on dishonest assistance;

(c) P would revise downwards the cap to HK$955 million (the amount of the CDO Funds).

G.      Mareva Injunction

78.  For Mareva injunction, it is common ground that a plaintiff applying for the same has to satisfy the court that:-

(1) it has a good arguable case;

(2) there are no or insufficient assets within the jurisdiction to satisfy its claim;

(3) there are assets outside the jurisdiction; and

(4) there is a real risk of dissipation or secretion of those assets so as to render nugatory any judgment which a plaintiff may eventually obtain:

China Medical Technologies, Inc (in liq) v Wu Xiaodong [2019] HKCFI 1266, HCA 3391/2016 (unrep., 22 May 2019), §15 (per P Ng J).

79.  In this case, the battle lines are drawn on the first and fourth requirements.

G.1     Good arguable case – D1

80.  The threshold of “a good arguable case” is much higher than “a serious issue to be tried” under the American Cyanamid principles.  While the plaintiff need not go so far as to persuade the court that it is likely to win, it needs to show a case which is more than barely capable of serious argument, albeit not necessarily one that the judge believes to have a better than 50% chance of success.  The existence of a good arguable defence does not necessarily negate a good arguable case: China Medical Technologies §16.

81.  In assessing whether the threshold has been met:-

(1) the court must not conduct a trial on affidavit of disputed questions of fact, and should take a broad preliminary view of the plaintiff’s merits, doing the best the court can, notwithstanding the obvious difficulties that interlocutory applications present;

(2) that said, there must be proper evidential basis or concrete evidence to support the plaintiff’s claim: Gu Zhuoheng v Huang Wei Cheng [2019] HKCFI 381, HCA 2509/2017 (unrep., 13 February 2019), §§67-68 (per Lisa Wong J); and

(3) where serious allegations are made which depend upon the drawing of inferences as opposed to direct evidence, the court should consider whether the evidence demonstrates there are facts and matters capable of justifying such inference, having regard to the substance and implications of the matters relied upon by the plaintiff and testing them against the defendant’s evidence: Kwok Hiu Kwan v Convoy Global Holdings Limited [2018] HKCFI 1729, HCMP 900/2018 (unrep., 26 June 2018), §§15-17 (per Harris J).

82.  P’s arguments are based on the entering into of the SPA and the use of the Acquisition Funds, and may be summarized as follows:-

(1) D1 was a de jure director of P until 15 September 2009, and thereafter a de facto or shadow director, owing fiduciary duties to P.

(2) D1 procured P to enter into the SPA, without disclosing his conflict of interest, in the UBNZ companies or in receiving commission from the Acquisition or both.

(3) He had knowledge of but failed to disclose to P the Eric Yee 2009 Emails, which showed that the financials of the Crafar Farms had been manipulated and the value of their assets as well as profitability had been inflated.

(4) The SPA was seriously impoverished to P, given P had to pay almost double the value for the Crafar Farms (compared to the consideration under the Farm Agreements).

(5) D1 and his associates had misappropriated the Acquisition Funds in the manner set out in paragraph 68(2)-(4) above.

83.  Mr Wong SC, counsel for D1 and D3 (whose submissions were adopted by Mr Cao, counsel for D2), submitted that P has failed to demonstrate a good arguable case.  In this regard Mr Wong took issue with (i) the existence of any fiduciary duties after 15 September 2009; (ii) whether breaches of duty can be established on the evidence; and (iii) the quantum of loss claimed, having regard to:-

(1) The evidence adduced by P, consisting of a few emails in 2010 and 2011, showed no more than “sporadic consultations” of D1 and was not sufficient evidence to show D1 had control of P’s affairs subsequent to his resignation as de jure director; nor could the “loose connection” between D1 and a minority of P’s directors satisfy the test for shadow director.

(2) D1’s denial of conflict of interest, which is consistent with (i) D1 and D2 having only had historical business dealings prior to the SPA; and (ii) the Commission Agreement was no longer operative at the time of the SPA and D1’s evidence that he never received any commission thereunder.

(3) D1’s evidence that he did not speak English and had not read or replied to any of the Eric Yee 2009 Emails.

(4) The fact that the subject matter of the SPA (acquisition of the Business, the assets identified together with a profit guarantee) was different from that under the Farm Agreements, and the absence of evidence as to the detailed terms of the Farm Agreements for a proper comparison to be made.

(5) Further, the SPA was the collective decision of the Board, including Katherine Chan and other directors against whom no allegations of impropriety have been made, with assistance from legal and professional advisors.

(6) In any event, the SPA was not only publicized but specifically drawn to the attention of the relevant authorities (the OIO) by P; such publicity was inconsistent with P’s allegation that D1 and D2 were seeking to perpetuate a fraudulent scheme.

(7) The Acquisition Funds had been paid to KC for the purpose of the Acquisition and P’s subsidiaries and hence had been applied towards the proper purposes of P. Further, P had received (i) 100% shares in UBNZ Assets (together with NZ$99 million worth of assets under the Flying Max Agreements) and (ii) repayment of HK$314 million from UBNZ Trustee.

(8) Moreover, the receipt of funds by D1 and D3 was in respect of genuine and bona fide commercial transactions entered into after D1 had resigned from the Board.

84.  In my view, a good arguable case has been shown on the materials available for the following reasons.

85.  First, it is common ground that D1 was a de jure director of P between 7 May 2009 and 15 September 2009, during which (i) the SPA was entered into and (ii) the Eric Yee 2009 Emails were sent and copied to D1.

86.  Second, there is sufficiently cogent evidence to show that D1 was in a position of conflict or possible conflict with respect to P’s entering into the SPA during the period when he was a de jure director.

87.  With respect to conflict of interest:-

(1) A director must not place himself in a position of possible conflict between his interest and his duty to the company, and cannot retain an advantage acquired as a result of such a conflict: Grand Field Group Holdings Ltd v Chu King Fai [2016] 1 HKLRD 1316, §§4.2 and 4.4 (per Cheung JA).

(2) Liability does not depend on any finding of mala fide or dishonesty. The fact of a benefit acquired in breach of this rule is necessary and sufficient to found liability: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144G-145A; Kao Lee & Yip v Donald Koo [2003] 3 HKLRD 296, §135 (per Ma J, as he then was).

(3) The approach to be adopted is framed by Lord Upjohn in Phipps v Boardman [1967] 2 AC 46, 124 (adopted in Kao Lee & Yip §50):-

“It is perhaps stated most highly against trustees or directors in the celebrated speech of Lord Cranworth L.C. in Aberdeen Railway v Blaikie, where he said:

‘And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.’

The phrase “possibly may conflict” requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.” (emphasis added)

88.  In coming to the conclusion that there is a good arguable case on D1’s conflict or possible conflict, I rely on 2 matters.

(1) The first is D1’s interest in UBNZ Funds. It is not disputed that when D1 was appointed a director of P, he had a significant indirect interest in UBNZ Funds, the corporate vehicle used to acquire the assets from the Crafar companies for injection into UBNZ Assets for the purpose of the Acquisition.

(2) Although D1 claims to have procured Global Financial to divest its interests in UBNZ Funds in favour of UBNZ Trustee on 8 May 2009 (before the SPA was entered into), it has never been his case or evidence that the disposal was for consideration (paragraph 73(3)(a) above), or that Global Financial had intended to gift the shares to UBNZ Trustee.  As such, there is a serious argument that even if legal title to the shares might have passed to UBNZ Trustee, the beneficial interest remained in Global Financial (of which D1 was a 50% shareholder).  I do not consider that I need to go as far as Mr Wong submitted to find that the divestment of UBNZ Funds shares was false before I can find a good arguable case on conflict on this basis.

(3) Further, D1 has given inconsistent explanations for the transfer of UBNZ Funds shares – on one hand he claims the transfer was to avoid conflict of interest; yet he also claims that it was because Global Financial had been struck off from the register (paragraph 73(3)(a) above).  In any event neither explanation suggests that consideration had been paid.

(4) The second matter is the Commission Agreement (paragraph 18 above). Mr Wong argued that the Commission Agreement only had a tenor of one month and had already expired by the time of the SPA, by reference to the Consultancy Agreement (not in evidence before me) which was said to last for one month only.  However, that is not borne out by (i) the terms of the Commission Agreement, which contained no tenor or term of expiration, and made no reference to the Consultancy Agreement; and (ii) the fact that the Consultancy Agreement was entered into more than one month after the Commission Agreement and D1 was not a party thereto, such that there is no factual basis to suggest at the time of the Commission Agreement, D1 must have been aware of the terms of the Consultancy Agreement or must have intended that such terms would be incorporated into the Commission Agreement.

(5) Further, I note that Barry Fraser had by an email dated 16 September 2009 demanded and had also procured Latitude Asia Limited to issue a statutory demand (against UBNZ Funds, D1 and D2) in 2010 for payment of commission under the Commission Agreement.  Although I do not consider such conduct to be in any way conclusive, it was consistent with the express wording of the Commission Agreement and the absence of any term of expiration therein.

89.  In other words, there is sufficient evidence to show that D1 was in a position of conflict or possible conflict with respect to (i) the consideration payable to UBNZ Trustee under the SPA, whereunder P was to acquire shares in UBNZ Assets which assets and Business would be that of the Crafar Farms vested in UBNZ Funds; and (ii) any commission payable to D1 under the Commission Agreement for the successful sale of the Crafar Farms.

90.  I note there is at present no evidence that D1 had received any commission under the Commission Agreement and D1 has denied the same. However there is plainly a prima facie entitlement to commission and the other party to the Commission Agreement (Barry Fraser) has made a claim for the same. In the circumstances I consider there is sufficient basis to show a conflict or possible conflict with respect to the commission payable.  In any event, given the first matter identified above D1 would be called upon to account with respect to his share of the SPA consideration received by UBNZ Trustee.

91.  Third, the Eric Yee 2009 Emails (paragraph 30 above) provide a sufficiently cogent basis to show that D1 was aware that the financials of the Crafar Farms had been manipulated and their asset value and financial performance were much less favourable than as presented, and his failure to disclose the same to P would clearly be contrary to the best interest of P. 

(1) The Eric Yee 2009 Emails were clearly copied to D1.  As to D1’s claim that he did not read English, did not use emails and did not read the same, that assertion does not sit well with (i) D1’s own claim that he has been active in the political scene in New Zealand and is the founder of a political party there; (ii) D1 having sent an email dated 16 September 2009 to Barry Fraser in English (paragraph 88(5) above, which was before the courts in the 1^st Criminal Proceedings though not in evidence before me); and (iii) various emails in 2009 and 2011 recording discussions between Kerry Knight of KC with D1 over the Acquisition, which would have been conducted in English and there is no suggestion otherwise in the evidence.

(2) Further, as can be seen from paragraphs 29, 31 and 32 above, the financial performance of the Business (which included the periods of up to 31 March and 31 May 2009) that the Eric Yee 2009 Emails indicated manipulation thereof was clearly relevant to the consideration payable by P under the SPA (which was agreed upon based on inter alia the financial performance and future prospects of UBNZ Assets, which in turn depended wholly on the performance of the Crafar Farm business since UBNZ Assets had no business of its own), and it was on the basis of such information that the SPA was approved by P’s shareholders in general meeting.

(3) The fact that the extraordinary general meeting of P only approved the SPA on 2 October 2009 matters not, since there is no dispute that the general meeting relied on the 2009 Circular (which was compiled and issued at the time when D1 was a de jure director and in breach of his fiduciary duty) in arriving at its decision.

(4) I am also of the view that there is force in Ms Lam’s submission that D1’s suppression of the fact that the financials had been manipulated bolsters P’s case of conflict, namely D1 had an interest in the UBNZ companies and would stand to gain from the SPA.

92.  I should also mention that D1 and D3 have relied upon a censure issued by the SEHK on 13 January 2017 (“SEHK Censure”) as evidence to show D1 did not commit any breach of fiduciary duty, on the basis that various other directors of P were criticized by the SEHK but not D1.  The SEHK Censure was concerned with (inter alia) failure by P’s former and then current directors to ensure the contents of the 9 September 2013 announcement (paragraph 56 above) were accurate, complete and not misleading and that requisite shareholders’ approval be obtained with respect to (i) the revised use of the CDO Funds, and (ii) the restructuring of the SPA by the Flying Max Agreements. The scope of the SEHK Censure was narrower than the present inquiry and it is not known what materials were presented to the SEHK which resulted in the SEHK Censure.  Accordingly I do not consider the SEHK Censure to have the effect of or is sufficient to undermine the good arguable case otherwise shown for D1’s breaches of fiduciary duty. 

93.  Fourth, as to D1 and D3’s allegation that he did not procure P to enter into the SPA, that there were other members of the Board (including Katherine Chan) and it was a collective decision of the Board, having regard to (i) the statement in the 2009 Circular that since his appointment D1 had “been responsible for assisting the Board explore the business opportunity, negotiate and execute the terms of the Acquisition”; and (ii) D1’s acknowledgement that he was the one who handled the negotiations (paragraph 73(5) above), it is clear that D1 had a pivotal role in the structuring of the Acquisition and the terms of the SPA, in circumstances where he had not disclosed to the Board his conflict or potential conflict of interest.

94.  Fifth, given the breaches of fiduciary duty identified above, whether the SPA was of itself uncommercial or impoverished to P may not be a matter of great significance for present purposes.  The commerciality or otherwise of a transaction is normally a matter for the board or the general meeting. In this case the 2009 Announcement and the 2009 Circular did set out factors which the Board had taken into account in arriving at the consideration payable under the SPA, of which the valuation of the Crafar Farms was just one factor.  That said, the subject matter of the SPA was the Crafar Farms assets (together with the Fonterra Shares attached thereto), and the profit guarantee also depended upon the profitability of the business of the Crafar Farms, such that there would appear to be a large measure of overlap between the SPA and the Farm Agreements through which UBNZ Funds and UBNZ Assets acquired those underlying assets and the ability to generate profit. Nevertheless, given the SPA consideration arrived at by the Board and endorsed by the general meeting was based on false information which D1 had failed to disclose in breach of fiduciary duty, it would appear to me that a case of breach has been shown up to the requisite standard, without the need to go into the uncommerciality or otherwise of the SPA at this stage.

95.  Sixth, the above analysis also means that whether D1 was a de facto or shadow director of P after he resigned on 15 September 2009 may not be a matter of great significance for present purposes, since the entering into of the SPA and the endorsement of the same by the general meeting were based on or affected by D1’s breaches of fiduciary duty at a time when he plainly owed those duties, and P is not relying on the Flying Max Agreements for present purposes.  I should only point out that (i) it is not in dispute that de facto director is different from shadow director and the matters required to be established for each differ, and (ii) the undisputed evidence shows that the Board at any given time had a number of directors against whom no allegation is made, and whilst P has adduced a number of emails in September 2011 showing that KC undertook discussions concerning the restructuring of the Acquisition with D1 whom KC regarded as someone in P’s camp, the burden is on P to adduce sufficient evidence at trial to prove de facto directorship or shadow directorship (as the case may be).

96.  Seventh, on the use of the Acquisition Funds (specifically, the CDO Funds):-

(1) The applicable principles are as follows:-

(a) Where a breach of fiduciary duty leads directly to misapplication of the company’s funds, the director who is liable is required to restore to the company what he has caused it to lose as a result of his breach of fiduciary duty: Target Holdings Ltd v Redferns [1996] AC 421, 434; Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, §78.

(b) A fiduciary will be personally accountable for losses arising where there is a real sensible possibility of conflict between his beneficiary’s interest and his self-interest: Underhill and Hayton, Law Relating to Trusts and Trustees, 19^th edn, §55.1(1).

(c) In such a case, the breach of fiduciary duty was complete when the money was paid out of the company wrongfully, and the loss was incurred at that point: The Liquidator of Wing Fai Construction Company Limited (in liquidation) v Yip Kwong Robert, HCCW 735/2002 (unrep., 24 November 2017), §§280, 283 (per G Lam J).

(d) It is possible for it to be shown that the deficit was made good, and the company did not suffer a loss at all, because eg the money was later brought back by way of repayment.  It is for the director to show that credit should be given for payments in the other direction: Wing Fai §§284-285.

(e) The critical question is whether the depletion of funds had been made good by the parties responsible for the misappropriated funds with money not saddled with any liability.  If it had been, it does not matter whether or not it had been made good with the very money originally removed as a result of the breach of fiduciary duty: Wing Fai §§306-308.

(2) In this case, the CDO Funds had been applied in the manner set out in paragraphs 47 to 50 above, of which:-

(a) [A], [D] and [I] payments had been paid to P’s subsidiaries;

(b) [E] payment had been paid to UBNZ Trustee;

(c) [F] payment had been paid to the Crafar Receivers but was subsequently refunded, whereupon it was applied towards (i) payments to P’s subsidiaries ([F1], [F2] and [F4] payments) as well as (ii) the Manufacturing Agreement ([F3] and [F4] payments);

(d) [B] and [J] payments had been made for the purpose of the Manufacturing Agreement; and

(e) [C], [G] and [H] payments had been paid for professional fees relating to the Acquisition and related fund-raising.

(3) Although the legal position is that loss was suffered as soon as the money was paid out of the company in breach of fiduciary duty, and P has asserted in its pleadings that D1 is liable with respect to the whole of the Acquisition Funds, as can be seen from paragraph 68 above P has pleaded claims only with respect to the following payments out of the CDO Funds:-

(a) [E] payment;

(b) [B], [J], [F3] and [F4] payments; and

(c) [D] and [F3] payments.

These sums come up to approximately HK$776.07 million (=HK$314.17 million + HK$52 million + HK$49 million + $101 million[11] + HK$131 million¹¹ + HK$29.2 million + HK$99.7 million¹¹).

(4) As explained in paragraphs 73(8)-(9) and 74 above, save for the [E] payment which was justified on the basis of the SPA, the Defendants only pleaded bare denials to the aforesaid payments without any attempt to justify the same. That said, I do not consider the absence of specific response would necessarily mean that P has discharged its burden; instead, the court should examine the bases advanced by P to assess whether a good arguable case has been shown, in particular where the payment was said to have been made for the discharge of obligations under commercial agreements or to a subsidiary, which on their face and without more would be consistent with the normal business purpose of P and its group.

(5) In this case:-

(a) For [E] payment, it was for the purpose of the SPA. Given my conclusion on conflict of interest above, I consider that P has discharged the necessary burden with respect to this payment.

(b) For [B], [J], [F3] and [F4] payments (relating to the Manufacturing Agreement) and [D] payment, having regard to P’s pleaded case on the same (summarized in paragraph 68(4)(c) above) and in the absence of any explanation, I consider that P has just about discharged its burden with respect to the same.

(c) As to [F3] payment, P’s pleaded basis for challenging the same is that whilst it was said to be made for the purpose of the Manufacturing Agreement, in fact NZ$9.3 million had been paid to D5 (ie the D5 Payment).  In the absence of any explanation, I also consider that the burden has been discharged with respect to this payment.  

(6) In the JPL’s 1^st affidavit filed on 9 July 2019 and P’s skeleton submissions, reliance was also placed on [F1], [F2] and [C] payments. However as mentioned above, P has not advanced any pleaded claim against these payments that they were not in the interest of P, and in the JPL’s affidavit there were only assertions that it was unclear why those payments were made.  In the circumstances I do not consider that on the present materials P has discharged its burden of showing that these payments were made in breach of fiduciary duty.

(7) Finally, D1 and D3 argue that the CDO Funds were not funds of P but belonged to its investors. I do not consider that to be a valid argument. In the case of misappropriation of funds in breach of fiduciary duty, as long as the funds paid out were P’s to dispose of, it matters not even if those funds were borrowed: Wing Fai §281.

97.  Eighth, as to D1 and D3’s argument that credit should be given for (i) the repayment by UBNZ Trustee of HK$314 million in early 2011 (paragraph 47(5) above); and (ii) P having acquired (through UBNZ Assets) assets worth no less than NZ$99 million under the Flying Max Agreement (paragraph 54(2) above):-

(1) It is for D1 to show that the depletion of funds had been made good by the parties responsible for the misappropriated funds with money not saddled with any liability.

(2) For the repayment by UBNZ Trustee of HK$314 million, the evidence shows that those funds originated from the AB Funds. Although P is not relying on the AB Funds for the purpose of its good arguable case, I am entitled to take into account any allegations it may have against the AB Funds for the purpose of deciding whether they were saddled with any liability. In its Statement of Claim, P has relied on the same allegations of breach of fiduciary duty with respect to the SPA to claim the AB Funds. I have already found that those allegations give rise to a good arguable case that the SPA was entered into in breach of fiduciary duty; the issuance of Note A and Note B pursuant to the SPA could thus amount to misappropriation of P’s assets. Accordingly, D1 and D3 have failed to show that the HK$314 million derived from the AB Funds were not saddled with any liability.

(3) As for the injection of assets into UBNZ Assets, that was done not pursuant to the SPA but the Flying Max Agreements, which P contends amounted to further and separate breaches of fiduciary duty by D1. I also bear in mind the observation of G Lam J in Wing Fai §285 as to the inappropriateness of simply looking at the final difference or shortfall between all the payments in and out, for each payment out constitutes a breach of fiduciary duty and it is for the director to justify credit which has the effect of negating loss. In the circumstances, while I do not lose sight of the fact that UBNZ Assets (now a wholly owned subsidiary of P) is said to have assets of no less than NZ$99 million and this may be a matter which has to be considered at trial when the full extent of P’s claims fall to be determined, given the considerations above, at this stage I do not consider D1 has discharged his burden of showing that credit should be given for the misappropriation of the CDO Funds.

98.  Ninth, as to P’s claim that some of the Acquisition Funds had been misappropriated by D1 (namely the Anfatex Properties, the Anfatex Payment, the NZ Property and redemption of the Mortgaged Properties):-

(1) As can be seen from paragraph 68(2) above, the timing of the acquisition (or redemption) of the aforesaid assets corresponded with the receipt by UBNZ Trustee of the CDO Funds and the AB Funds, and the amounts in question also indicate they could be made out of those funds.

(2) D1’s case is that the funds used to acquire (or redeem) these assets originated from D5 (which, like UBNZ Trustee, was wholly owned by D2), pursuant to the Super Worth Agreement.

(3) This requires one to look back at VSA-2 and the Transfer Agreement, which preceded the Super Worth Agreement.  When one examines these 3 agreements, they are inconsistent with the case advanced by D1 and D3 and are also internally inconsistent.

(a) With respect to the Transfer Agreement, it is D1 and D3’s pleaded case as well as the evidence of D1 filed on their behalves that the consideration of HK$110 million was arrived at by reference to the prevailing market price of P’s shares (said to be trading at HK$1.96) and the revenue from the trademarks owned by Global Food. However that is inconsistent with the express terms of the Transfer Agreement (Schedule 5), which set out the price attributable to P’s shares which Global Food was to obtain under VSA-2 was HK$0.8 only (ie the trading price as at the time of VSA-2).

(b) Further, the preamble to the Transfer Agreement stated that D3 was to transfer to D4 (i) the rights under VSA-2; (ii) all the trademarks registered in the name of Global Food; and (iii) all the assets in the name of Global Food which, as can be seen from Schedule 4 thereto, was a reference to the production lines already sold to P under VSA-2.

(c) As to the Super Worth Agreement, it provided (inter alia) that D4 was to sell to D5 the production lines owned by Global Food. This agreement thus suffers from the same problem as the Transfer Agreement in that it purported to sell the very production lines that Global Food had already sold to P under VSA-2.

(4) Accordingly, I do not accept that D1 and D3 have advanced a credible explanation for the Transfer Agreement and the Super Worth Agreement and their receipt of funds thereunder. In light of (i) sub-paragraph (1) above and (ii) the absence of any evidence from D2 (who opposed the Summons but chose to adduce no evidence) to suggest that the funds paid to D1 and D3 were derived from funds other than that which UBNZ Trustee received from the Acquisition Funds, I consider that P has established a good arguable case that part of the Acquisition Funds had been misappropriated by D1 and could be traced into the Anfatex Properties, the Anfatex Payment, the NZ Property and the Mortgaged Properties.

G.2         Good arguable case – D2 to D4

99.  There is no dispute on the law. The plaintiff bears the burden to establish the 4 requirements for the imposition of liability for dishonest assistance:-

(1) a breach of trust or fiduciary duty by someone other than the defendant;

(2) in which the defendant assisted;

(3) dishonestly; and

(4) resulting in loss:

Hui Cheung Fai v Daiwa Development Ltd, HCA 1734/2009 (unrep., 8 April 2014), §§130-137 (per DHCJ Eugene Fung SC).

100.  The claim against D2 is straight-forward – D2 was the sole shareholder of UBNZ Trustee which was the counterparty to the SPA, as well as a party to the Commission Agreement. Given my findings against D1, a good arguable case as to assistance and dishonesty is clearly established.

101.  As to D4, as indicated above it has not filed a defence in these proceedings. Further, given D1’s acknowledgement in his pleadings that he beneficially owns and controls D4, the necessary requirements would readily be established with respect to the D4 Payment.

102.  That leaves D3, who has pleaded a positive case on assistance, and on that basis also takes issue with dishonesty.

103.  To recap, D3’s assistance is said to consist of the use of the Acquisition Funds to (i) acquire the NZ Property; (ii) redeem the Mortgaged Properties; (iii) make the D3 1^st Payment; and (iv) make the D3 2^nd Payment.

104.  D3’s defence is set out in paragraph 73(8) above. In gist, her case is that:-

(1) D3 1^st Payment was attributable to the Transfer Agreement.

(2) The NZ Property and redemption of Mortgaged Properties did utilize funds from D5, but those funds were paid pursuant to the Super Worth Agreement.

(3) D3 2^nd Payment was in discharge of the debts under the D3 Loan Agreements.

105.  For the reasons below, I am of the view that a good arguable case is established with respect to the D3 1^st Payment, the NZ Property and the Mortgaged Properties, but not the D3 2^nd Payment.

106.  As to the D3 1^st Payment and the NZ Property and the Mortgaged Properties:-

(1) For the D3 1^st Payment, as can be seen from paragraph 68(2) above, the amounts paid by UBNZ Trustee to D4 and by D4 to FKC and then D3 on 2 and 11 March 2010 were very similar.  There is no evidence as to the financial position of D4 at the time (whether from D4 or D1). In the premises, I consider that P has shown a good arguable case that the D3 1^st Payment originated from UBNZ Trustee, and the proximity in timing also indicates it originated from the CDO Funds.

(2) For the NZ Property and the Mortgaged Properties, see paragraph 98 above.

107.  Next I consider the D3 2^nd Payment.

(1) There appears to be no dispute that [F4] payment (NZ$25 million, converted into approximately HK$135.7 million) was paid to Nation Resources on or about 13 January 2011, of which some HK$99.7 million was said to be for its working capital.

(2) The D3 Loan Agreements were executed by a director of P against whom no allegation has been made.  The amounts stated in the D3 Loan Agreements corresponded exactly to the entries in the general ledgers of Nation Resources. There is no suggestion from the JPLs (who exhibited the general ledgers) that the general ledgers had been doctored or were otherwise unreliable.

(3) The D3 2^nd Payment also corresponded exactly to the total amount outstanding under the D3 Loan Agreements.

(4) The timing of the D3 2^nd Payment was consistent with the tenor of the D3 Loan Agreements, which required repayment no later than March 2011.  

(5) Even if the D3 2^nd Payment had originated from the CDO Funds ([F4] payment), I do not consider that using funds designated for working capital of Nation Resources to discharge its accrued and due debts could without more amount to breach of fiduciary duty, or that D3’s receipt thereof could without more amount to assistance in such breach.

108.  To summarize, I find that a good arguable case has been established:-

(1) against D1 for breach of fiduciary duty, to the extent of HK$776.07 million of the CDO Funds;

(2) against D2 for dishonest assistance, to the same extent as D1 given her assistance was with respect to the entering into of the SPA and the receipt of consideration payable thereunder;

(3) against D3 for dishonest assistance, with respect to the D3 1^st Payment and her share of the NZ Property and the Mortgaged Properties, being the extent of assistance given by her; and

(4) against D4 for dishonest assistance with respect to the D4 Payment.

G.3      Risk of dissipation

109.  On this requirement the parties’ arguments centre on the following issues:-

(1) whether there is “solid evidence” to show there is a real risk of dissipation; and

(2) whether the existence of the Restraint Order effectively negates any risk of dissipation.

110.  First, the law is non-contentious and is summarized in Tugushev v Orlov [2019] EWHC 2031 (Comm) §49 (per Carr J):-

(1) The court must conclude on the whole of the evidence before it that the refusal of a freezing order would involve a real risk that judgment would remain unsatisfied, in the sense that, unless restrained by injunction, either the defendant will dissipate or dispose of his assets other than in the ordinary course of business or assets are likely to be dealt with in such a way as to make enforcement of any award or judgment more difficult, unless those dealings can be justified for normal and proper business purposes. The plaintiff must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets.

(2) The risk is not to be inferred lightly. Bare or generalized assertion of risk by a plaintiff is not enough. There must be solid evidence of the risk of dissipation.

(3) Mere reliance on alleged dishonesty of the defendant is not, of itself, sufficient to found a risk of dissipation. The court must scrutinize with care whether what is alleged to have been the dishonesty justifies the inference of a real risk of dissipation. Where the dishonesty alleged is at the heart of the claim against the defendant the court may be able to draw the inference that the making out to the necessary standard of that case against the defendant also establishes sufficiently the risk of dissipation of assets.

(4) A defendant’s former use of offshore structures may be relevant but does not itself equate to a risk of dissipation. Businesses and individuals often use offshore structures as part of the normal and legitimate way in which they deal with their assets.

(5) Each case is fact specific and relevant factors must be looked at cumulatively.

111.  Second, having regard to the following matters, I am satisfied that a real of dissipation has been made out in this case.

(1) The breaches of fiduciary duty at the heart of this claim involve D1 knowingly suppressed his conflict of interest and material information which he knew to be false, in order to induce P to enter into the SPA through which he would obtain a substantial benefit.

(2) These, coupled with my finding of a good arguable case that part of the Acquisition Funds upon being paid to UBNZ Trustee had been trransferred to D1 offshore as well as to D3 and D4 (D1’s vehicle), justify an inference to be drawn of a real risk of dissipation.

(3) Further, the evidence shows that D1, D2 and D3 have repeatedly used corporate vehicles which shareholding were opaque and overlaid with nominee or trust arrangements (eg Global Food, which according to the documents annexed to the Transfer Agreement was substantially indirectly held by Graham Chin on trust for D3), and would readily and with relative ease be able to transfer assets held in one known vehicle to a newly incorporated one upon triggering events (eg UBNZ Trustee transferred the Option Shares to NZ Dairy Trustee Limited, a newly incorporated vehicle, shortly after D2 was arrested in December 2010).

112.  Third, I do not accept that the existence of the Restraint Order means that P is not entitled to a Mareva injunction.

(1) As explained by Mann J in Faya Limited (in liquidation) v Butt [2010] EWHC 3461 (Ch) at §§23-25 (citing Cancer Research UK Limited v Morris [2008] EWHC 2678 (QB)), a criminal restraint order is subject to vulnerabilities:-

“24. At para.23 of [judgment in Cancer Research], King J. says this:

‘… There is a fundamental difference between the two sets of contemplated proceedings [criminal restraint proceedings instigated by the Crown Prosecution Service (“CPS”) and civil proceedings]. Restraint proceedings instigated by the CPS will, subject to the overall control of the court, be under the control of the CPS, a public body whose primary duty is to act in the public interest and not in any private interest. In contrast, the claimant in these civil proceedings is seeking to protect its own private interests by the making of a proprietary claim in respect of funds said to have been wrongfully obtained from them. I see no reason why in these circumstances the claimant should be denied relief in private law proceedings in proper protection of those interests which would otherwise be appropriate.’

25. All that applies in this case where there is an extant criminal restraint order. The extant criminal order in this case is not even for the alleged wrongs associated with the alleged wrongs in this case; it is apparently for wrongs on a much lower scale and of a completely different nature. It is possible that that criminal restraint order will be abandoned. If it were to go and there were to be nothing else in place, then the claimant would not have any protection in this case. Similarly it may be varied in due course to limit it to something like the amount of sums which are the subject of the present investigation in the criminal proceedings. In other words, the criminal restraint order is in no way geared or intended to protect the interests of the claimant liquidator in the present proceedings. He has his own rights and his own interest in getting his own order which he controls. In the circumstances, while as a matter of fact at this very moment in time there is not a risk of dissipation because of the criminal restraint order, that position may change. The liquidator is, in my view entitled, subject to his otherwise being entitled to the order, to his own order which he controls and to bring about a situation which is not vulnerable to a change of mind by a party to other proceedings or indeed by the court, if the court were to come to the conclusion that the criminal restraint order ought to go. Accordingly for those reasons I do not think that the existence of the criminal restraint order means that there is no risk of dissipation in this case.” (emphasis added)

(2) Thus, the interest the Mareva injunction seeks to protect is different, as is the control regime. Provided the plaintiff can otherwise justify a Mareva injunction, a criminal restraint order is not a reason not to grant it even though at this point in time, there may not be a risk of dissipation.

(3) In this case, the vulnerabilities of the Restraint Order are patent in that (i) D3 has already been acquitted in the 2^nd Criminal Proceedings, such that Restraint Order against her could be discharged at any time; and (ii) the Department of Justice’s stated position, in its letter of 12 March 2020, is that the costs awarded in favour of D1 and D2 in the 1^st Criminal Proceedings (still subject to taxation) would not be brought within the ambit of the Restraint Order when paid.

(4) Further, on Mr Wong’s calculation, the Restraint Order covers assets of around HK$200 million. That is insufficient to cover the HK$776.07 million with respect to which I have found a good arguable case that D1 is liable for in breach of fiduciary duty and D2 for dishonest assistance. This also provides the answer to Mr Wong’s objection to a worldwide Mareva on the basis that the Hong Kong assets (already included in the Restraint Order) may be sufficient to meet the quantum of P’s claim.

(5) In any event, I do not consider that order of Deputy High Court Judge Dawes SC (paragraph 5 above) is sufficient protection or that this application for Mareva injunction is premature. The parties have presented their case on the Summons substantively and I have heard full argument. There is no good reason to defer determining the Summons until conclusion of the re-trial in the 1^st Criminal Proceedings, which is just a few months away.

(6) Finally, I also do not accept Mr Wong’s submission that there has been delay in making the application. When the JPLs were appointed in December 2016, the Restraint Order was not only in place but had been in place since 26 October 2011, making dissipation of assets in the meantime highly unlikely. Within 9 months of their appointment the JPLs had procured P to issue the writ of summons herein. Although D3 was acquitted in her re-trial around this time, no attempt was made by the Department of Justice to discharge the Restraint Order vis-à-vis D3 as to warrant P seeking a Mareva injunction at that point. When the judgment of the Court of Final Appeal in the 1^st Criminal Proceedings was imminent – following which there would either be a confiscation order or a discharge of the Restraint Order – P issued the Summons. In these circumstances I do not consider there was unjustified delay on P’s part.

113.  Accordingly, I find that a real risk of dissipation has been made out, and the Restraint Order is not a reason to deny P a Mareva injunction.

H.      ChabraInjunction against D3

114.  The Mareva jurisdiction may be exercised against non-parties.  The court will exercise that jurisdiction where there is “good reason to suppose” that the assets of the third party are, in truth, the assets of the injuncted defendant. “Good reason to suppose” means a good arguable case that there are assets, apparently vested in the third party, which may be beneficially the property of the defendant and therefore available to satisfy the plaintiff’s claims against him if established at trial: TSB Bank International v Chabra [1992] 1 WLR 231, 238F-G, 239F, 240B-D; Akai Holdings Ltd (in liq) v Ho Wing On Christopher, HCMP 1718/2009 (unrep., 24 September 2009), §§44-48 (per Tang VP).

115.  Thus, the invocation of the Chabra jurisdiction would depend upon facts showing that assets vested in the third party are either beneficially the property of the defendant or over which the defendant has substantive control.

116.  In this case, the Summons and the affidavit evidence filed by P made no reference to the Chabra jurisdiction.  P first intimated that it is seeking to invoke the Chabra jurisdiction in its skeleton filed one week before the hearing.  Ms Lam submitted that P is merely relying on the same evidence it has already adduced in support of this application.

117.  I do not consider that this provides a sufficient answer. The Chabra jurisdiction engages a different factual question – not that D3 has physically received the assets said to be traceable proceeds of D1’s breach of fiduciary duty, but that she holds assets either as nominee for D1 or in circumstances where D1 exercises substantive control over them.  Fairness demands that D3 be given advance warning of such application as well as the facts which P relies upon to ground the application, such that D3 would have the chance (if she so wishes) to adduce evidence or to make focused and informed rebuttal to the same.

118.  As such, I agree with Mr Wong that it is wholly inappropriate to consider the Chabra application in these circumstances.  Insofar as is necessary I will dismiss P’s application on this basis.

I.      Proprietary Injunction against D1, D2, D3

119.  As clarified by Ms Lam, P only seeks proprietary injunction against D1 and D3 with respect to (i) the NZ Property; (ii) the Mortgaged Properties; (iii) D3 1^st Payment and (iv) D3 2^nd Payment.

120.  Given my findings above, I can be relatively brief on this application.

(1) Having regard to my findings on a good arguable case for D1’s breach of fiduciary duty and D3’s dishonest assistance, the threshold of serious issue to be tried is clearly made out.

(2) I have also found that a good arguable case has been made out that the NZ Property, the Mortgaged Properties and the D3 1^st Payment are traceable proceeds of the Acquisition Funds. A “clear link” between P’s funds and the assets claimed is thus established.

(3) As to the D3 2^nd Payment, applying the lower threshold of serious issue to be tried, I also do not consider that it can be shown on the evidence presently available that D3 has given assistance to D1’s breached of fiduciary duty.

(4) I also find that having regard to the circumstances of this case as described above, the balance of convenience lies in favour of granting an injunction over the NZ Property, the Mortgaged Properties and the D3 1^st Payment.

J.      Prematurity / Necessity of Order

121.  D1 and D3 further submitted that the Mareva and proprietary injunctions sought are both premature and unnecessary, given the Restraint Order and the order of Deputy High Court Judge Dawes SC. For the reasons set out in paragraph 112 above, I do not accept this submission to be well founded.

K.      Cross-Undertaking as to Damages

122.  In her written submissions, Ms Lam invited this Court to not require P to provide a cross-undertaking as to damages, alternatively to accept a cross-undertaking limited to the net value of the realizable assets of P.

123.  The imposition of a cross-undertaking in damages is virtually a sine qua non of obtaining an interlocutory injunction.  However, the court does have power to dispense with a cross-undertaking altogether, or to accept a limited undertaking, although it would only be prepared to do so in the most extraordinary circumstances: RBG (Resources) Plc v Rastogi [2002] BPIR 1028, §§21-23 (per Laddie J).

124.  RBG (Resources) is a case where the provisional liquidators made an application under section 236 of the Insolvency Act 1986 (which must be made in the name of the office holder) to vary the unlimited cross-undertaking given to one limited to the net realizable value of the assets of the company in provisional liquidation, on the basis that the provisional liquidators were not willing to put their own assets at risk and the bank creditor who previously agreed to provide the unlimited undertaking had withdrawn its consent.

125.  Laddie J referred to the decision of Millett J (as he then was) in DPR Futures Limited [1989] 1 WLR 778 and observed that:-

(1) Office holders cannot be criticized if they are not prepared to expose themselves to financial ruin by putting up their personal assets in support of a cross-undertaking. Were the court to require that, no liquidator or office holder would dare to seek interlocutory relief, no matter how vital it might be to the execution of his duties as office holder.

(2) It is right to require the office holder to give an undertaking of an amount commensurate with the size of the company’s assets and to take the risk that he may not be authorized by the court to have recourse to them to meet his liability. If the value of such an undertaking is considered insufficient he should be required to fortify it by obtaining a bond or an indemnity from a substantial creditor.

(3) If fortification cannot be obtained this will affect the balance of convenience between the granting or refusing of the injunction.

126.  However, as can be seen from the above, the observations of Millett J and Laddie J were directed at the situation where the office holder takes proceedings in his own name.  Where the company in liquidation is the plaintiff, the cross-undertaking would be given by the company, and no question of the office holder’s personal assets being put at risk arises.  In such a case, there is no reason to depart from the general position that an unlimited cross-undertaking should be given; indeed in RBG (Resources) §12 Laddie J recorded that in similar proceedings issued by the company in that case the usual undertaking was given by the company.  If the company’s assets are considered to be inadequate, it is up to the defendant to seek fortification.  In this case, Mr Wong confirmed that D1 and D3 will not be seeking fortification at this juncture, although their right to do so is reserved.

127.  Accordingly, I do not consider that the authorities cited by P justify dispensing with the usual cross-undertaking.

128.  Ms Lam confirmed that P would offer the usual cross-undertaking. I would grant the orders in Section L below on such basis.

L.      Disposition

129.  For all the reasons stated above, I will grant the following orders:-

(1) A proprietary injunction against:-

(a) D1 with respect to his share in the NZ Property and the Mortgaged Properties; and

(b) D3 with respect to her share in the NZ Property and the Mortgaged Properties, and the D3 1^st Payment.

(2) A worldwide Mareva injunction against:-

(a) D1 up to HK$776.07 million;

(b) D2 up to HK$776.07 million;

(c) D3 up to the value of the D3 1^st Payment and her share of the NZ Property and the Mortgaged Properties[12]; and

(d) D4 up to the value of the D4 Payment.

(3) P seeks a disclosure order ancillary to the Mareva injunction, which I see no reason not to grant. The draft order attached to the Summons does not contain the monetary floor or the time within which the disclosure affidavit is to be served.  I will direct that D1 to D4 should disclose in writing all of their assets of an individual value of HK$50,000 or above, and should make such disclosure within 21 days hereof and serve the affidavit within 14 days thereafter, with liberty to D1 to D4 to apply in writing within 14 days hereof to vary the aforesaid monetary floor and/or time.

(4) The draft order to the Summons contains an exception for legal fees but no amount has been suggested by either side. Both Mr Wong and Mr Cao drew my attention to the imminent re-trial in the 1^st Criminal Proceedings for which legal costs will have to be incurred, and the prospect of receiving taxed costs from the Department of Justice pursuant to the costs order made by the Court of Final Appeal.  In these circumstances I will direct that:-

(a) D1 to D4 to file and serve written submissions of no more than 5 pages (together with any evidence they may wish to rely on) as to the amount of legal fees to be excepted under the Mareva injunction within 14 days hereof;

(b) P to file and serve written submissions of no more than 5 pages (together with any evidence they may wish to rely on) in reply within 14 days thereafter;

(c) unless otherwise directed by the Court, the issue of the legal fees exception will be disposed of on the papers.

130.  I also make a costs order nisi that 70% of P’s costs be in the cause.  The costs order nisi will be made absolute unless the parties take out an application to vary the samewithin 14 days hereof. For the avoidance of doubt, this costs order nisi does not cover the matter in paragraph 129(4) above, which costs will be separately provided for in the paper disposal.