XCHRX VOGUE TOWN LTD. v. RIGHT HEAD LTD.

HCA4935/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4935 OF 1998

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J U D G M E N T

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1. This is an application to continue a Mareva injunction against the plaintiff who is the defendant to a counterclaim; and to join Wealth Score Limited as a second defendant to that counterclaim, and then to extend the Mareva injunction to assets of the second defendant and to preclude the second defendant, as then constituted, from enforcing a charging order in respect of property in the name of the plaintiff.

2. The dispute arises out of a sale and purchase agreement in respect of which the defendant, Right Head Limited, was the vendor, and the plaintiff, Vogue Town Limited, was the purchaser. That agreement was made on 26th May 1997 and was for the assignment of the ground floor of a building in Tung Choi Street, Kowloon, for a sum of $18.5 million. Completion was due to take place on 12th November 1997, but the plaintiff purchaser refused to complete saying that title had not been proved. According to the evidence filed in the proceedings, requisitions were raised in early June 1997, but in October 1997, the plaintiff raised for the first time the question of outstanding rent due from the defendant vendor to the Government, an amount in the region of $16,900.

3. The purchaser's case, as pleaded, was that the vendor sent a fax of a receipt for the payment of outstanding rent but that nonetheless the purchaser's solicitors "made an inquiry with the Government Treasury which could not confirm that the outstanding rent had been discharged;" and that no valid proof was provided that the rent had in fact been discharged. So the purchaser, alleging that this constituted failure to show good title, instituted proceedings by which it sought a declaration that the defendant had failed to show good title, and damages, which damages in effect constituted the deposit paid as well as commission paid to an estate agent, and fees for a valuation report.

4. The Statement of Claim is dated 2nd May 1998. A Defence and Counterclaim was filed which is dated 29th May 1998, in which the vendor asserted that all requisitions raised in June 1997, which did not include any requisition about Government rent, had been answered; that the Government rent was in fact paid on 12th November 1998 and that, in any event, the question of Government rent did not affect title, and that the requisition about it had not been raised in time. The defendant asserted that it had, in a falling market, sold the land at a much lower sum and it claimed the difference less the rent, a sum of $4.5 million, plus legal expenses lost, and commissions paid.

5. The Reply and Defence to Counterclaim agreed that it was legitimate for the plaintiff to raise the question of rent; denied that the requisition was raised out of time; and said that the defendant had waived any right to challenge "the propriety of the said matter relating to outstanding rent raised by the plaintiff".

6. In the midst of these various steps in the action instituted by the plaintiff, charges were registered by a third party, namely, the company called Wealth Score Limited, against property owned by the plaintiff.

7. On 29th April 1998, that is three days before the plaintiff started these proceedings, Wealth Score - to whom I shall refer as the third party - started proceedings against Vogue Town (the plaintiff) claiming the sum of $5,969,617.31 "being the amount of indebtedness due by the plaintiff as evidenced by a confirmation of balance dated 20th April 1998. Despite repeated demands and requests by the plaintiff, the defendant had still failed to pay."

8. On 20th May 1998, judgment was entered in favour of the third party in the sum thus claimed; and on 28th May 1998, a day before the Defence and Counterclaim in this action was filed, the third party obtained a charging order in respect of two properties owned by the plaintiff, namely, a shop in Sim City, and another shop in Mody Road. In addition, it transpires that the directors of the third party are the very same as the directors of the plaintiff, and the shareholders of the third party company are the very same bodies as hold shares in the plaintiff company. The two companies have the same registered office. Each is a company in respect of which the total paid up value of shares issued is $2, the director of which is a BVI company and the shareholders of which are another BVI company, and a Mr Joe Chan Man Fai, a resident of Hong Kong.

9. In late July 1998, so the evidence suggests, the defendant received a telephone call from a Mr Andrew Chan, a staff member of a property agent, suggesting that the defendant and the plaintiff should settle the matter, but also suggesting that the plaintiff had already disposed of its assets and that any judgment would be an empty judgment. So the defendant company caused inquiries to be made through its solicitors and it was then that the defendant discovered the facts which I have related about the charge or charges registered and about the identity of the directorships and shareholding in the two companies. So that is why the defendant went to court and sought a Mareva injunction, and an order, now, that the company Wealth Score be joined as second defendant.

10. The matter came before Sears J. on 7th August 1998. On the third party's undertaking not to enforce the charges in the meantime, the application to join Wealth Score was adjourned and Wealth Score was ordered to file evidence, and a Mareva injunction was granted against the plaintiff (Vogue Town), which injunction restricted dealings in its assets to the tune of $5 million.

11. On 5th October 1998, the defendant obtained summary judgment for damages to be assessed, on the defendant's counterclaim.

12. The defendant applicant before me says that the facts have only to be stated barely to show or suggest that something is amiss, and that there is good cause to believe that Vogue Town wishes to, and has been setting about, depriving the defendant of its due under the judgment, which it now has, and which it must always have been obvious would be granted.

13. There are three affirmations in this application from Mr Joe Chan, one in his capacity as director of Vogue Town (the plaintiff), the other two in his capacity as director of Wealth Score.

14. In his first, dated 6th August 1998, he says that he had never told Mr Andrew Chan that the plaintiff had disposed of its assets, although he was aware that Mr Chan was or might be proposing a settlement to the defendant company. Then in that affirmation, Mr Joe Chan confirmed that the properties of the plaintiff had been charged, but it is noteworthy that in that affirmation he said nothing whatsoever about the reason for the charge, or its background, nor did he explain how it came to be that two closely connected companies had been engaged in court proceedings, or why it was that judgment had already been entered in default.

15. An explanation, however, came from Mr Joe Chan (as director of Wealth Score) in an affirmation dated 28th August 1998. The explanation proffered is that Wealth Score was a company utilized to raise funds from investors in the property market, and that the plaintiff company borrowed funds to engage in the sale and purchase of real property, and that between July 1997 and March 1998 the plaintiff borrowed about $6 million from Wealth Score. "I am", he said in that affirmation, "in the course of retrieving all the relevant documents from Wealth Score's accountant. Due to insufficient time I am unable to produce all such documents in the meantime. I shall produce all such documents showing the flow of the said loan in due course." Now that was said three weeks after the order of Sears J. And there were then simply produced bank statements; and Mr Chan said that certain highlighted items were the funds injected by investors.

16. The most recent affirmation from Mr Joe Chan is dated 26th October 1998. Documents are still not produced by the third party, but there is what purports to be a breakdown prepared by in-house accountants showing an indebtedness of almost $6 million by the plaintiff. There is no lump sum loan shown in the amount of the judgment obtained by the third party against the plaintiff, but rather, it is said, periodic advances. There are, I note, no documents produced by the plaintiff to show that the funds so injected were utilized for the purchase of property. Indeed there is nothing at all from the plaintiff to show receipt of the funds and to what end they were put. Mr Chan concludes his affirmation by saying "Since the documents that I have collated for the accountant are voluminous, I do not intend to produce them as exhibits."

17. I am not bound to accept the ispe dixit of the third party as to the loan or its suggested genuine nature. There is, it seems to be, much which is unexplained and, on its face, suspect. The case launched by the plaintiff against the defendant was in the first place self-evidently very weak. The charging of properties by a company with an identity of directors and shareholders at the very time of this dispute in a sum just in excess of that counterclaimed by the defendant necessarily raises some suspicion. In addition, in the first affirmation filed by the plaintiff, all that is said is that the properties have been charged without any explanation being given, nor any assertion, about the purported loans. Even today, there is scant documentation produced in support of the suggested loan to the plaintiff; there is no list of investors; there is no loan agreement; there is no evidence of demands for repayment as suggested in the pleadings; no cheques are produced; no bank or other accounts in the name of the plaintiff to show what has happened with the moneys.

18. Now I cannot decide this issue as to the bona fides or otherwise of the suggested loans to the plaintiff on the papers, nor am I invited to, and it may be that in due course it will be shown that there was a loan and that it was bona fide and that the charging order was properly obtained.

19. That said, there is, in my judgment, made out on the papers a prima facie case that the plaintiff with the help of the third party has dissipated funds in the third party's favour in order to defeat the claims of creditors including the defendant. I believe that there is an issue which needs to be tried, namely, the validity of the third party's claim that the sums represented by the charge were the subject of a genuine loan to the plaintiff. The defendant says that once damages are determined, it will enter a charge in respect of the judgment it now has and will seek to have the charge in favour of the third party set aside. In those circumstances, it seems to me that this is a suitable case in which I should order that Wealth Score should be added as a second defendant, and I do so pursuant to the provisions of O.15, r.6(2)(b)(ii), even though there is as between the defendant and the third party no cause of action.

20. That there is power in the circumstances for me to make the orders I intend to make is established. (See S.C.F. Finance Co. Ltd. v. Masri and Another [1985] 1 WLR 876, T.S.B. Private Bank International S.A. v. Chabra [1992] 1 WLR 230, and Mercantile Group (Europe) A.G. v. Aiyela and Others [1994] QB 367.)

21. It is suggested on behalf of the plaintiff and the third party, or at least it was in skeleton submissions presented to me, that since the rights which the defendant has by reason of the injunction is a right in personam and the rights which the secured chargee has are rights against property, the rights in personam must be subordinate to those of the secured chargee. But that principle takes no account of the case where the charge is itself said to be a device to assist in the dissipation of assets, and it cannot be that the court is, in the face of evidence which suggests that might be so, precluded from extending the Mareva injunction so as to prevent enforcement of the charge or other dealing with the property until the determination of the issue whether the loan which gave rise to the charge was or not a sham. It is true that there has been judgment in favour of the third party in respect of the suggested loan, but that does not determine the issue raised by the defendant as against the defendant. There has been no judicial determination of that issue on the merits and the very act of obtaining judgment and of obtaining a charge in respect of the judgment debt is said by the defendant - and there is some evidence to support what it says - to be part and parcel of a collusive act between plaintiff and third party intended to defeat the counterclaim of the defendant and effective execution of the defendant's judgment on that counterclaim.

22. There seems to me clearly to be an issue which should be determined between all three parties; for which reason, as I have said, the third party should be joined as a second defendant, and I accordingly make that order.

23. As for the injunction and its continuation and extension to the second defendant as now constituted, it is said I should not continue the injunction against the plaintiff. I do not see why I should not. The case which I have described is by its very nature one which suggests some ground for fearing dissipation of assets to defeat execution of the judgment, so the order as against the plaintiff will continue. It also appears to me to be a case in which it is just to include the second defendant in the injunction and to prevent him also from enforcing the charging order.

24. I shall hear counsel as to the precise terms of the order.