THE JOINT AND SEVERAL TRUSTEES OF THE PROPERTY OF CHAU CHAM WONG PATRICK, A BANKRUPT v. CHAU KAR HON QUINTON AND OTHERS

HCB 549/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 549 OF 2012

___________

RE:  CHAU CHAM WONG PATRICK, a Bankrupt

____________

____________

_________________________

J U D G M E N T

_________________________

Introduction

1.  The application before this court was an oddity in that it was an inter partes application for mareva injunction, the parties have been engaged in extensive correspondence on the subject of the Applicants’ substantive claims for a year or so and, months before the application, one of the Respondents had even been invited to give an undertaking in lieu of injunction in order to save time and costs.

2.  By summons dated 25 November 2013 (“Summons”), the Joint and Several Trustees (“Trustees”) of the Property of Chau Cham Wong Patrick (“Chau”) applied for a worldwide mareva injunction against the 1^st Respondent (“Quinton”), the 2^nd Respondent (“Vanessa”) and the 3^rd Respondent (“Mary”) (collectively “Respondents”) up to the sums of HK$12,264,129, HK$4,608,700 and HK$5,501,842 respectively and ancillary disclosure order against them.

3.  The underlying substantive claims of the Trustees were also set out in the Summons in which the Trustees sought:

(1) A declaration that the Respondents are holding various funds and assets as trustees of Chau; alternatively, a declaration that the following transfers made by Chau to the Respondents are void under section 49 of the Bankruptcy Ordinance, Cap 6 (“BO”) as transactions at an undervalue:

(a) 10 cash and cheque transfers in the sum of HK$9,337,953 from Chau to Quinton (“Quinton Transfers”) before 29 September 2008 when a worldwide mareva injunction against Chau and Leung Yung (“Leung”), both directors of A-One Investments Limited (“A‑One”), in HCA 1868 of 2008[1] was granted by Madam Justice Kwan (as she then was) (“Injunction”); these transfers were said to have taken place between 27 March and 25 September 2008;

(b) A 5.05 carat diamond purchased by Chau at HK$1,005,030 in August 2008 and given to Quinton as a gift (“Quinton Diamond”);

(c) 26 cash and cheque transfers in the sum of HK$1,494,202 from Chau to Quinton (“Quinton Withdrawals”); these transfers were said to have taken place between 17 October 2008 and 10 December 2011;

(d) a refund of HK$426,944 from New House Construction Co. Ltd. to Chau and received by Quinton in September 2010 (“Quinton Refund”);

(e) 8 cash and cheque transfers in the sum of HK$3,360,000 from Chau to Vanessa (“Vanessa Transfers”); these  transfers were said to have taken place between 6 and 25 September 2008;

(f) 25 cash and cheque transfers in the sum of HK$1,248,700 from Chau to Vanessa (“Vanessa Withdrawals”); these transfers were said to have taken place between 13 December 2008 and 10 December 2011;

(g) 1 transfer from Chau and Mary’s joint account to Mary’s sole account on 9 October 2008 in the sum of HK$2,279,073 (“Mary Transfer”); and

(h) 65 cash and cheque withdrawals from Chau to Mary in the sum of HK$3,322,769 (“Mary Withdrawals”); these transfers were said to have taken place between 3 December 2008 and 6 September 2010;

(collectively “Impugned Transactions”).

4.  The matter first came before this court on 19 December 2013 at 9:30 am.

5.  Ms Chan SC for the Trustees explained to this court why the application was made inter partes: first, there had been extensive correspondence between the Trustees and the Respondents prior to the issuance of the Summons and it could therefore not be said that there was a need for secrecy; in fact, in one of the demand letters from the Trustees in May 2013, Quinton was asked to provide an undertaking not to dissipate his assets; second, the Trustees considered a last opportunity should be given to the Respondents to adduce evidence to show they had an arguable claim to the funds referred to in the Summons.

6.  Mr Scott SC submitted the Respondents did not have an opportunity to reply to the very substantial affidavit in support of the Summons. He, as expected, sought directions for the filing of evidence and an adjournment of the mareva application for argument. He also resisted the Trustees’ application for an interim injunction.

7.  In the end, this court acceded to Mr Scott SC’s request and adjourned the mareva application without granting any interim relief.

8.  The mareva application came back to this court on 25 March 2014. This is the court’s decision on the application.

Background

9.  Chau was a man of substantial wealth and son of a wealthy family in Hong Kong owning a number of companies and valuable properties at 1 Robinson Road, Hong Kong. He left Hong Kong for the UK in late 2008.

10.  Quinton and Vanessa are the children of Chau and Mary. Quinton is now in his early thirties and the President of Asia Pacific Consalve AG, a Swiss financial advisory firm, in Hong Kong. He is married and lives with his wife in Hong Kong. Until October 2013, he lived at Suite X, 27^th Floor, 1 Robinson Road, Hong Kong (“Suite X”).

11.  Vanessa is now also in her early thirties and is Vice President for Business Development Asia at Gerson Lehrman Group. She lives in Hong Kong at Suite Y, 28^th Floor, 1 Robinson Road, Hong Kong (“Suite Y”).

12.  Mary is the former wife of Chau. They were married in 1977 and divorced on 13 February 2009. Since her marriage, Mary has been living in Hong Kong. Her family is also in Hong Kong. She now also lives in Suite Y.

13.  According to the Trustees, since early 2008, Chau has been in financial difficulty and begun to use the assets of A-One and its subsidiary A‑1 Business Limited (“A-1 Business”) to repay his personal loan to DBS Bank (“DBS”) and to provide security in favour of DBS. 

14.  Chau was the Chairman and Executive Director of Peace Mark Holdings Ltd (“PMH”), a company listed on the Stock Exchange of Hong Kong Limited and in which A-One held controlling shareholding. On 18 August 2008, PMH shares were suspended from trading. On 10 September 2008, Kwan J (as she then was) appointed provisional liquidators over PMH. It was delisted from the Stock Exchange on 29 July 2011.

15.  On 23 September 2008, Kwan J (as she then was) appointed the Trustees as provisional liquidators of A-One.

16.  On 29 September 2008, the Trustees, as provisional liquidators of A-One, obtained the Injunction against inter alia Chau and Leung. 

17.  The Injunction was in the following terms:

“The Defendants must not –

(a) remove from Hong Kong any of his assets which are within Hong Kong, whether in his own name or not, and whether solely or jointly owned, up to the value of CHF 20,000,000 (equivalent to HK$140,000,000); or

(b)    in any way dispose of or deal with or diminish the value of any of his assets which are within Hong Kong, whether in his own name or not, and whether solely or jointly owned, to  the same value of CHF 20,000,000 (equivalent to HK$140,000,000).” 

18.  The Injunction also contained an exception which “does not prohibit [Leung] and [Chau] from spending HK$50,000 per week towards their ordinary living expenses and also a reasonable sum on legal advice and representation”.

19.  On 13 November 2008, after a contested hearing, DHCJ Mayo continued the Injunction against Chau. The Injunction remains in force.

20.  On 3 January 2012, A-One and A-1 Business (under the control of the Trustees as liquidators) obtained judgment by consent against Chau for HK$132 million in HCCL 28 & 32 of 2009.

21.  Upon investigation of the affairs of Chau, the Trustees discovered that, on 28 August 2008, Chau assigned 3 valuable properties at 1 Robinson Road, Hong Kong (collectively “Robinson Road Properties”) to 3 BVI companies whose directors were Quinton and Vanessa viz. Highmax Overseas Limited (“Highmax”), Marista Group Limited (“Marista”) and Goldwick International Limited (“Goldwick”):

Transferee	Property	Consideration
Highmax	Suite O on 17th and 18th Floors with Car Parking Space No.9 at No.1 Robinson Road (“Suite O”)	HK$27,900,000
Marista	Suite X with Car Parking Space No.8 at No.1 Robinson Road	HK$16,000,000
Goldwick	Suite Y with Car Parking Spaces No.8 and No.8A at No.1 Robinson Road	HK$16,290,000

22.  On 27 January 2012, in order to safeguard the Robinson Road Properties, A-1 Business (under the control of the Trustees as liquidators) obtained an order from Reyes J in HCCL 32 of 2009 to vary the Injunction against Chau by including the Robinson Road Properties as Chau’s assets and restraining Highmax, Marista and Goldwick from disposing of them, on the basis that Chau remained their beneficial owner. On 9 February 2012, the Injunction against Chau was continued by consent until payment of the judgment in the action and remains in force. 

23.  On 16 May 2012, a bankruptcy order was made against Chau pursuant to a petition presented by DBS on 2 February 2012. On 21 June 2012, the Trustees were appointed in these proceedings.

24.  Sometime in August 2012, the Trustees also discovered that on 19 September 2008, Chau assigned a property at 17^th Floor, Aberdeen Industrial Building, No.236 Aberdeen Main Road (“Aberdeen Property”) to another BVI company whose directors were Quinton and Vanessa viz Richburg Group Limited (“Richburg”) for HK$4 million. On 8 May 2012, Richburg sold the Aberdeen Property for $9.8 million.

25.  By summons dated 22 October 2012 and issued in these proceedings, the Trustees applied for declarations that the Robinson Road Properties and the Aberdeen Property have been held by the respective BVI companies as trustees for Chau, alternatively, orders to avoid the assignments of those properties by Chau to the BVI companies as transactions at an undervalue pursuant to section 49 of the BO: [A/4/57§ 44] (“1st Avoidance Application”).

26.  On 6 February 2013, the Trustees issued a summons in these proceedings seeking a worldwide mareva injunction against Richburg up to the value of HK$9.8 million. The matter was listed before M Chan J on 22 February 2013 when the learned Judge adjourned the application for argument without granting any interim relief as sought by the Trustees. On 10 May 2013, the matter went before Recorder P  Shieh  SC who granted the injunction against Richburg.

27.  On 25 November 2013, the Trustees issued the Summons against the Respondents.

Legal Principles

28.  I shall first remind myself of some of the applicable principles.

29.  Where a plaintiff applies for a worldwide Mareva injunction, it 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 of those assets so as to render nugatory any judgment which a plaintiff may eventually obtain.

Hong Kong Civil Procedure 2014 Vol. 1 para. 29/1/83.

30.  A Mareva injunction should not be granted lightly. The  consequences of granting the injunction are such as to put the defendant at a very real disadvantageous and in a position from which it may never adequately recover: Hsin Chong Construction (Asia) Limited v. Henble Limited [2005] 3 HKC 27 para. 20; Dieulemar Shipping SpA v. Transfield ER Futures Ltd [2011] 1 HKLRD 75 para. 55 - 56.

31.  Given the serious consequences, the standard of proving inter alia a real risk of dissipation is “relatively high”. The plaintiff must establish that risk by reference to “solid evidence” or “cogent evidence”: Laemthong v. Artis [2005] 1 Lloyd’s Rep 100 [60]-[61]; Hsin Chong Construction (Asia) Limited v. Henble Limited supra para. 20.

32.  In order to establish a real risk of dissipation of assets, the plaintiff must prove at least objectively the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment – the conduct in question must be unjustifiable and there must be a real risk that the defendant’s assets will be used otherwise than for normal and proper commercial purpose: Mobil Cerro Negro Ltd v Petroleos de Venezuela SA [2008] 1 Lloyd’s Rep 684; Eastman Chemical Ltd. v Heyro Chemical Co Ltd. (No.2) [2012] 3 HKLRD 307 para. 26.

33.  While the mere fact of delay in bringing an application for mareva injunction or that the application is first made inter partes does not, without more, negate a risk of dissipation, delay, and the lack of proper explanation for it, is always a relevant consideration when assessing whether there is a real risk of dissipation: Enercon v Enercon (India) [2012] EWHC 689 (Comm). As Eder J put it at [78] :

“[I]t is not simply the fact of delay that is so important but what it tells the court about the risk of dissipation. Absent some proper explanation, the fact that the claimants here waited for almost two and a half years before seeking a freezing injunction raises, at the very least, a large question mark as to whether there is indeed a real risk of dissipation”.

34.  Equity does not act in vain - a court does not usually grant injunctions where significant time has elapsed and an injunction would in effect be locking the stable door after the horse has bolted: Hsin Chong Construction (Asia) Limited v. Henble Limited supra para. 29.

Risk of dissipation

35.  I shall deal with the risk of dissipation first as it seems to me the Trustees’ application will stand or fall with it.

36.  On this subject, a recurrent theme of the Trustees’ case was that the Respondents were aware of the terms of the Injunction and all monies and assets received by them after 29 September 2008 ie the Quinton Withdrawals, Quinton Refund, Vanessa Withdrawals, Mary Withdrawals and possibly Mary Transfer[2] were received in breach of the Injunction.

37.  The Respondents themselves denied having knowledge of the grant of the Injunction or its terms. Quinton said he merely acted on Chau’s instructions to withdraw HK$50,000 weekly to cater for the family’s living expenses during Chau’s absence from Hong Kong, while Vanessa and Mary said they merely acted upon what Quinton had been asked of by Chau.

38.  In my view, if the Trustees considered that the Respondents had acted in breach of the Injunction, they could have applied to commit the Respondents for contempt. It is well-established that a non-party to a mareva injunction can be guilty of contempt if he knowingly aids and abets a breach of the order or if he intentionally frustrates the purpose of the order. Their decision not to do so demonstrates a lack of faith in establishing this theme. Further, since the Trustees were not making an application for contempt, this was not the occasion to resolve the question whether the Respondents were or were not aware of the Injunction and had acted in breach of it.

39.  More importantly, there were over 100 post-Injunction withdrawals from October 2008 to December 2011 and, by and large, the amount of each withdrawal was relatively small ie HK$50,000 or slightly below. If the Respondents really intended to assist Chau in breaching the terms of the Injunction or to frustrate its purpose, or if the Respondents seriously intended to assist Chau to hide his assets from his creditors, it is extraordinary that the Respondents would have withdrawn a small amount of Chau’s monies over and over again for a long period of time – that does not appear to this court to be the modus operandi of someone who was minded to hide his assets or that of someone who was aiding and abetting him.

40.  For these reasons, in assessing the risk of dissipation of assets, this court is not prepared to infer dishonesty on the part of the Respondents from the mere fact that many of the Impugned Transactions took place after the Injunction had been granted and were said to be made in breach of it.

41.  Mr Lui, for the Trustees, made four main points in his skeleton submissions on the risk of dissipation.

42.  First, given the Respondents have not voluntarily disclosed their assets, there is no way for the Trustees or this Court to tell whether they have or have not already dissipated their assets.

43.  This, with respect, is a non point. As stated above, the burden is on the Trustees to prove a real risk of dissipation of assets. There is no burden on the Respondents, whether by voluntarily disclosing their assets or otherwise, to disprove it. If and in so far as this is said in Madoff Securities International Ltd v Raven [2012] All ER 634 (Comm) at [170]-[173] to be a relevant factor in deciding whether a real risk of dissipation exists, this court is unable to follow it.  It is contrary to principle and authorities: LG International Corp. v J & J Chemtrading Co Ltd. unrep. HCA 2557 of 2008; 30 December 2008; Sakhrani J.; Eastman Chemical Ltd. v Heyro Chemical Co Ltd. (No.2) [2012] 3 HKLRD 307 at para. 26.

44.  Secondly, the Respondents’ conduct demonstrates a dishonesty that is both relevant and crucial in inferring a real risk of dissipation. This court’s attention was drawn to what was described as the Respondents’ history of assisting Chau to put his identifiable assets beyond the reach of his creditors and facilitating the transfer of Chau’s assets to themselves or for their own benefit including:

(1) transfers of the Robinson Road Properties and Aberdeen Property to the four BVI companies;

(2) backdating deeds of licences permitting Quinton and Vanessa to occupy Suite X and Suite Y (both part of the Robinson Road Properties) and a consent letter permitting Mary to occupy Suite Y rent free during their life times; these documents were all dated 5 September 2008 but according to “evidence made available to the Trustees”, as of 6 October 2008, they had not been finalised and signed;

(3) taking steps, as directors of Shing Cheong, to dissipate its assets.

45.  The Respondents’ conduct was said to be indicative of what they would be prepared to do so as to defeat genuine creditors claims.

46.  In my view, this may be a valid point if the Trustees could demonstrate with cogent evidence that Quinton and Vanessa knew or had reasons to believe that Chau was in financial difficulty at the times of the transfers ie August and September 2008 and backdating (which the Trustees have not pinpointed a date) if that was indeed the case.

47.  In less than ten paragraphs in the 8^th affidavit of Borrelli ie paras 207 to 215, the Trustees set out what they regarded as Chau’s major assets and liabilities in 2007 and 2008 and concluded that Chau was “insolvent at least as at the date of the Purported Assignments or became insolvent as a result of the Purported Assignments”.

48.  As far as major liabilities were concerned, the Trustees mentioned a HK$200 million loan from ABN Amro Bank NV, a HK$300 million loan from DBS and Chau’s liabilities to PMH and its subsidiary Peace Mark Limited as a result of his fraudulent breaches of fiduciary duties to the two.

49.  There was however no evidence that any of the Respondents were in fact aware of Chau’s alleged liabilities or insolvency. There was not even evidence that any of the Respondents should have been aware of Chau’s alleged liabilities or insolvency. The fact that the Respondents are closest family members of Chau can cut both ways – it may permit an inference that more likely than not Chau would have revealed his financial difficulties to the Respondents, but it may also permit the opposite inference if Chau was minded to protect his closest family members.

50.  The objective evidence before this court was that Chau was only made bankrupt in May 2012, pursuant to a petition presented in February 2012. If Chau was hopelessly insolvent in 2008, as the Trustees were at pains to emphasise, it would be most surprising that he was not made bankrupt much earlier, given the adverse publicity which the suspension of trading of PMH shares, the liquidation of PMH and A-One and the legal proceedings instituted by A-One and A-1 Business against Chau must have attracted.

51.  The explanation from Quinton and Vanessa for the transfers was that they were nominated by their father to act as directors of the four BVI companies as part of their family trust arrangement, pursuant to advice by TMF Trust (HK) Limited (“TMF”), a company providing various trust and fiduciary services.  Under the said arrangement and advice by TMF, the Robinson Road Properties and Aberdeen Property were transferred from Chau to the four BVI companies in the Trust. Quinton and Vanessa executed documentation for the said transfers for the purpose of injecting the properties into the Trust and resigned as directors of the four BVI companies immediately afterwards.

52.  Regarding the allegation of backdating documents, it was no more than a bare allegation by the Trustees: the so-called “evidence made available to the Trustees” was not before this court – it was wholly unclear in what ways the Respondents were said to have been involved in backdating the documents.

53.  Regarding Shing Cheong, it was incorporated in 1970. Chau was its director and majority (97%) shareholder as at 5 January 2010. It became dormant on 1 January 2009 and was dissolved on 7 September 2012 upon an application by Quinton for its deregistration as a defunct private company.

54.  Prior to its dissolution, the Respondents were its directors and Shing Cheong had assets which were shown in its audited financial statements from 1 April 2009 to 31 December 2011 to have been sold to a director “at pre-determined basis” viz (a) Aberdeen Marina Club Membership for HK$1.8 million – this was admitted in open correspondence dated 25 April 2013 to have been purchased by Quinton and paid for by two instalments in September/ October 2011 and (b) a 18‑year‑old vehicle sold in 2009 and a 6-7 year-old vehicle sold in 2011 for HK$180,000 in total.

55.  The Trustees also prayed in aid the fact that on 17 October 2011, (1) a cheque of Shing Cheong for HK$1.6 million was paid into Chau’s bank account - other than HK$500,000 paid to Chau’s solicitors, Leung & Lien, the remaining HK$1.1 million were withdrawn by Quinton and Vanessa within 17 days from 23 November to 10 December 2011 which formed part of the Quinton and Vanessa Withdrawals; (2) a cheque of Shing Cheong for HK$200,000 was paid into Chau’s bank account and the funds were withdrawn by Quinton on 8 December 2011 which formed part of the Quinton Withdrawals. These were admitted in open correspondence dated 25 April 2013 to be repayment by Shing Cheong of shareholder’s loan due to Chau. The subsequent withdrawals from Chau’s bank accounts were also admitted.

56.  In the view of this court, the sale of Shing Cheong’s assets for valuable consideration by its directors at a time when the company had been dormant for a number of years cannot be regarded as a dissipation of its assets, let alone dissipation of Chau’s assets in fraud of his creditors. Further, the fact that (1) the disposition was documented in Shing Cheong’s audited financial statements and admitted in open correspondence with the Trustees and (2) money received by Shing Cheong out of the sale of its assets was paid into Chau’s bank account militates against the probability that what the Respondents had done was to perpetrate a dishonest scheme to put Chau’s assets beyond the reach of his creditors. If there were such a scheme, the last thing that one would do was to put money back into Chau’s (empty) bank account.

57.  Thirdly, even if this Court is disinclined to find that the Respondents are outright dishonest people who have willingly participated in a scheme to transfer Chau’s assets beyond the reach of creditors, the timing of the Impugned Transactions and the way in which they occurred should leave one with the distinct impression that they were instigated by Chau himself.

58.  This may or may not be so. But unless the Trustees could demonstrate by cogent evidence the Respondents knew or should have known of Chau’s dishonest intention when he instigated the Respondents, there was no justification to infer the existence of a real risk that the Respondents themselves would dissipate assets to frustrate any judgment which the Trustees might eventually obtain against them. 

59.  In the present case, the objective facts speak for themselves – the Trustees were obviously not concerned that the Respondents would dissipate assets to frustrate any judgment which they might eventually obtain. The Trustees found out about the cash transfers from Chau to Quinton in early 2013 at the latest: see, for instance, Trustees’ letters dated 14 February and 7 March 2013 to Michael Li & Co. Instead of immediately invoking the mareva jurisdiction of the court, the Trustees continued to engage into correspondence with his solicitors, cumulating in a demand on 6 May 2013 that Quinton paid back over HK$12.9 million to the Trustees and an invitation that Quinton gave an undertaking not to remove from Hong Kong or dispose of his assets up to HK$12.9 million. Similarly, the Trustees had engaged in extensive correspondence with solicitors for Vanessa and Mary after they had found out about the Impugned Transactions but did not apply for mareva relief until the issue of the Summons.

60.  Fourthly, weight must be given to the fact that cash arising from the Impugned Transactions is readily transferable out of the Respondents’ bank accounts or can readily be dissipated.

61.  The short answer to this point is that if the Respondents were inclined to dissipate the cash arising from the Impugned Transactions, they would have done so long ago, say, when the Trustees first made inquiries in correspondence with Quinton and Vanessa about Chau’s affairs in September 2012. There was also ample opportunity for the Respondents to do so in November 2013 after the Summons was issued.

62.  The fact that the Trustees spent 1 year corresponding with (two out of the three) Respondents and did not apply ex parte for mareva relief shows  the suggestion that there is a real risk of dissipation of the cash arising from the Impugned Transactions cannot be taken seriously.

Conclusion and Disposition

63.  For the above reasons, this court is not satisfied that the Trustees have shown a real risk of dissipation of assets. The application for mareva injunction must be dismissed.

64.  As for the ancillary order for disclosure, its purpose is to identify and preserve assets of a defendant which might otherwise be dissipated notwithstanding the grant of an injunction: Gee Commercial Injunctions 5^th Ed. para. 22.003. It seems to this court contrary to principle to make a disclosure order in circumstances where an applicant has failed to show real risk of dissipation of assets and the mareva application is dismissed. For this reason, this part of the application also fails. 

65.  There shall be an order nisi that costs of the application be to the Respondents.