BRAY INTERNATIONAL, INC. v. CHENG YUK CHOR AND OTHERS

HCA 372/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 372 OF 2007

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R U L I N G

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1.  On 23 February 2007 the plaintiff was granted ex parte three injunctions against the 1^st, 2^nd, 5^th, 6^th and 8^th defendants.  The first was an order for entry search and seizure (the Anton Pillar order) the second was to prohibit disposal of assets in Hong Kong up to a value of $31.32 million (the Mareva injunction) the third was to prevent certain unlawful conduct damaging to the plaintiff’s interests (the Interim injunction).

2.  The applications were granted against the usual undertaking in damages until a given return date or further order.  Since then there have been a number of hearings for directions with the ex parte orders remaining at large.

3.  The 8^th defendant (Key Control, or K C Chan), separately represented, applied to have the inter partes applications set down for hearing ahead of the other injuncted defendants.  This was resisted by the plaintiff who wanted all matters to be dealt with together.  But I gave leave and these matters were heard by me on 27 and 30 July 2007.

4.  As it happened, ahead of a callover in respect of the remaining defendants, the parties applied by consent for an order that the three injunctions continue pending further order; that was granted.

5.  This is my determination concerning the orders against Key Control.

Background

6.  The plaintiff (Bray) is a company founded and based in Texas USA and makes fluid and gas flow control products such as valves and actuators.  These are promoted and sold around the world under the brand name Bray.

7.  In 1995 Bray decided to expand into Hong Kong and the PRC.  It opened a sales office in Hong Kong, and employed staff to manage Bray’s sales and marketing operations to customers here and in the PRC, and subsequently throughout Asia.

8.  Louis Hui left a competitor of Bray called Keystone Valve Canada Limited (Keystone) to orchestrate the founding of Bray’s Hong Kong office and recruit staff.  He was appointed General Manager Asia Operations, a position he held until his resignation in 2003.  Two recruits included Y C Cheng and Jeff Lee, former colleagues in Keystone.  They were engaged to manage sales and marketing.  They are respectively the 1^st and 2^nd defendants.  Support staff in sales and accounting included Doki Ng and Candy Kwan.  They are the 3^rd and 4^th defendants. 

9.  Significant in the history are four incorporated companies.  Calmart Limited (Calmart) was incorporated in Hong Kong in 1994.  It has nominee corporate directors and shareholders but is owned and controlled by Y C Cheng and Jeff Lee.  American Valve & Controls Limited (AVC) was incorporated in Hong Kong in 2001, with the same directors and shareholders.  It is also beneficially owned and controlled by Y C Cheng and Jeff Lee.  AVA Controls Inc. (AVA) was incorporated in California at the same time.  Y C Cheng is registered as its president and secretary.  These companies are respectively the 5^th, 6^th and 7^th defendants.

10.  Valmart Valve Automation Limited (Valmart) was incorporated in 1996.  40% of its shares are held by Calmart.  45% are owned by K C Chan.  K C Chan is a director.  He also is held out to have a position in Calmart, though he is not a director.

11.  K C Chan is the sole proprietor of Key Control, the 8^th defendant.  It sells, maintains and repairs actuators.  K C Chan was also a former employee of Keystone.

12.  Subsequent to the execution of the Anton Pillar orders, information having emerged in the search and seizure process, Louis Hui and Valmart were joined as the 9^th and 10^th defendants.

The Whistle is Blown

13.  In February 2007 senior management of Bray were alerted to the prospect that senior employees in the Hong Kong office were covertly operating businesses in competition with Bray.  This included diverting purchase orders made by customers of Bray to companies under the guise of their being authorized distributors of Bray, when there were no such appointed distributors.

14.  Discreet enquiries supported the view that Y C Cheng and Jeff Lee, both currently in management in the Hong Kong office, had been diverting business to Calmart, AVC and AVA with the assistance of the support staff Doki Ng and Candy Kwan.  Key Control (K C Chan) was also complicit as a vehicle through which Bray’s funds were misappropriated. 

15.  A preliminary investigation indicated losses of not less than HK$31.32 million.

16.  Bray forthwith brought this action against the aforesaid senior sales and support staff, incorporated companies and Key Control.  But the first steps in the litigation were the three injunctions applied for and granted ex parte.

The Injunctions

17.  The Anton Pillar order and consequent investigations resulted in seizure of various documents including memoranda that supported the concerns that had given rise to the proceedings.  And as well the original founder of the Hong Kong office Louis Hui and the company Valmart came also to be implicated, and joined as defendants.

18.  The Interim injunction asked for sought specific protection from the alleged breaches by Y C Cheng and Jeff Lee of their fiduciary duties owed to Bray as senior employees of Bray; in particular, to restrain unauthorized dealings with Bray’s customers and products.  Key Control (K C Chan) was joined as a co-conspirator. 

19.  As far as Key Control is concerned (and for the moment that is my only concern) the injunction sought was that it would not without the express written consent of Bray, (at para.3):

“(1)     sell, submit a quotation or proposal, deal with or otherwise communicate with any third party in respect of a sale of or dealing with any products marketed or similar to those marketed, or being similar or identical in function to the products marketed by the Plaintiff, being valves and actuators;

(2)       communicate orally or in writing, state, infer or suggest any authority from or association with the Plaintiff in respect of the sale, quotation, negotiation or dealing with products of the Plaintiff to any third party.”

(at para.6):

“(1)     either directly and indirectly solicit, canvass or entice away or fulfil orders from and/or interfere with persons or companies who are customers of the Plaintiff and/or were customers during the course of the 1^st and 2^nd Defendants’ employment with the Plaintiff; and/or

(2)       either directly or indirectly employ, solicit, canvass or entice away or attempt to employ, solicit, canvass or entice away from the Plaintiff any person who is or has been within one year prior to the date hereof an employee of the Plaintiff.”

20.  The Mareva injunction sought to preserve such part of the $32 million still to hand said to have been unlawfully taken.

K C Chan’s Response

21.  In an affidavit filed in opposition, K C Chan has denied any and all improprieties he has been accused of.

22.  Material to his case is that he has never been an employee of Bray and thus owes no fiduciary duty to Bray.

23.  He says he is a contractor independent of Bray.  Key Control is in the business of providing, installing, maintaining and repairing actuators and valves in air conditioning systems.

24.  Since 1996 Bray’s Hong Kong office has subcontracted such work to him, as has Calmart since 2005.  AVC has sold him actuators between November 2005 and December 2006.  He has in turn used these in the subcontract work provided by Bray.

25.  He produced invoices sent to Bray for the work undertaken in 2006 for amounts totalling the equivalent of US$218,000 odd.  So, the money he is accused of misappropriating was earned from legitimate business transactions lawfully undertaken.

26.  He stated further that at Bray’s request he took over the paying of wages to an employee of Bray, called Barbos Chan, in order to save costs such as MPF.

27.  He denied a specific allegation that he earned or rented or had any interest in a warehouse used by Bray.  He held a key because he was undertaking work for Bray there.

28.  The Interim injunction and in particular para.3(1) has caused him to have to virtually shut down his business.  He can no longer compete with Bray or others in the industry who are benefiting from work that might otherwise have come to him.  He is injuncted from dealing in any product similar to any marketed by Bray, and that is virtually all that he does.  As a consequence he is losing about $50,000 per month and that continues.

29.  He particularly denies having misappropriated any money belonging to Bray.  He has done no more than provide goods and services to Bray for which he was entitled to be paid.

Bray’s CEO’s Response

30.  Evidence in support of a continuation of the injunctions emerged from the Chief Executive Officer of Bray in Texas, Mr Craig Brown, whose knowledge of events derived from those engaged directly in the investigation.

31.  Bray he said held firm to the belief that there had been serious misconduct by the various defendants in breach of the various duties owed Bray and that K C Chan had been complicit in all of that, justifying the granting of the injunctions and their continuation.

32.  He pointed to the connections between K C Chan and others of the defendants, and his links with the corporate vehicles to whom business belonging to Bray was wrongfully channelled under the guise of fabricated distributorships.  He referred to emails and other communications which implicated K C Chan.  He made reference to documents, records and computer generated material supporting the assertion that there had been diverting of business and the misappropriating of funds belonging to Bray channelled through Key Control.

33.  The investigations had revealed that the address of Key Control on its invoices to Bray was a false one.  The premises were occupied by a different entity altogether and the occupants and as well the security guards of the building had not heard of Key Control, or its proprietor K C Chan.

34.  Further, he said that a breakdown of charges purportedly incurred by Bray and payable to K C Chan suggest he grossly inflated labour charges and charged for staff that he did not provide.  Also it has now come out that Bray has been charged and paid by cash cheques for storage facilities provided by an entity which does not exist.  K C Chan’s mobile telephone number is on the invoices, thus implicating him. 

35.  As well there was evidence to support that he earned a secret profit by unlawfully trading in Bray’s products or by acting as a middleman between Bray and one or other of the corporate defendants.

36.  He engaged in activity to his profit not authorized by Bray which was materially damaging to Bray carried out in a complicit and unlawful enterprise with those of the defendants that were at particular given times on Bray’s payroll in senior capacities. 

The Hearing

37.  Bray’s position as argued by Ms Rattigan is that it was entirely justified in pursuing and being granted the Anton Pillar orders and Mareva and Interim injunctions and is entitled to the ongoing protection afforded by the latter injunctions.

38.  The Interim injunction should remain because there are serious issues to be tried insofar as K C Chan is a co-conspirator in a scheme involving breaches of fiduciary duties and fraud and the misappropriation of huge amounts of money.  He must not be allowed to benefit by dealing with Bray’s customers, holding himself out to have Bray’s authority or dealing in any way with Bray’s products or similar products.  That said, she accepts that what is now to be claimed as substantive relief is an injunction to prevent passing-off of Bray’s products; that it is accepted that K C Chan is entitled to compete with Bray if he does so in a legitimate way.

39.  But she claims that a period of restraint for a while was and remains justified to prevent him from benefiting from the springboard effect of being involved in the scheme that has damaged Bray.

40.  Mr Ng for Key Control and K C Chan adopts the robust position that Bray having joined his client as a perpetrator against it jointly with its former employees was misguided and inappropriate, given that he was never an employee and owed no fiduciary duty to Bray.  If there is a dispute at all, it is about the level of charges which Key Control invoiced for and Bray paid.

41.  The allegations of Key Control being complicit in systematic fraud committed by others are not backed by documentary or other hard evidence whether discovered in the search of Key Control’s premises or elsewhere.  Insufficient enquiry was undertaken before Bray took Key Control to court; there should never have been an Anton Pillar order and there were and remain no proper grounds for a Mareva injunction.

42.  There was he submits material non-disclosure at the ex parte stage that resulted in the injuncting of his client; had there been full and frank disclosure the injunctions would not have been made; at least not against Key Control.

43.  The Interim injunctions obtained are preventing Key Control from carrying on any business at all, and if allowed to continue will lead to its insolvency long before trial of the issues.  Furthermore, the orders in force are no longer being pursued on a permanent basis.  Bray thus owed a duty itself to invite a discharge or variation, in the light of this change of position.

44.  He asks thus for an immediate discharge of all orders and a dismissal of the applications to extend the same to trial or further order.

The Anton Pillar Order and Mareva Injunction

45.  In my view the strength of preliminary evidence that emerged following the blowing of the whistle that gave rise to the investigations then undertaken justified the applications made ex parte.

46.  The prospect that senior personnel in Bray (Hong Kong) had right from the inception been milking Bray over a period lasting for nearly a decade and that a huge amount of money had already been lost warranted the use of these two “nuclear weapons” as they have been described.

47.  And there was as I find sufficient evidence to indicate K C Chan’s complicit involvement to include him as a ringleader.

48.  Against the allegation that Bray and its advisers had not made full and frank disclosure at the ex parte stage, I find nothing to warrant criticism under this head.  The necessary ingredients of fraud, dishonesty and continuance were spelt out.  The enormous amount at risk justified the Mareva injunction as well.  If Bray’s case is made out at trial then all the wrongdoers including Key Control will be liable as constructive trustees of the money taken.

49.  Draconian that both forms of these orders are, they were as I find properly and appropriately asked for and granted.

The Interim Injunction

50.  Is there a serious question to be tried?

51.  Yes, there is.  As pleaded there are serious questions to be tried in respect of:

(a)     K C Chan’s complicity in breaches by Y C Cheng and Jeff Lee and Louis Hui of their fiduciary duties owed to Bray;

(b)     his involvement in a scheme to defraud Bray;

(c)     his misappropriation of Bray’s money.

52.  If Bray succeeds after trial would it be adequately compensated in damages if the injunction were to be discharged?

53.  The difficulty Bray has in justifying a continuation of the injunction under this head in its present form is that on its own concession it is asking for final injunctive relief which is narrower than the terms of the Interim injunction presently in force.  Para.3(1), which bites to the extent that, on K C Chan’s account, he can no longer do business at all, has in effect been abandoned.  That which is to be pursued at trial is an injunction to prevent passing-off of Bray’s products.  Indeed in open correspondence Bray’s solicitors proposed an alternative injunction, to that end.

54.  As I understand K C Chan’s position, he believed he could not accept that proposal because his primary position is to have done with the Interim injunction altogether.  Further, costs could not be agreed.

55.  In the circumstances and given Bray’s pleaded case the injunction in its present form is no longer tenable.  To protect its position as to costs Bray should have amended its inter partes application.  That it did not will be reflected in the costs order nisi.  I propose to order a continuation but in the amended form proposed in the open correspondence.  Bray as I find is entitled to this protection and on the balance of convenience Key Control would be adequately protected in damages were it to succeed in its defence.

56.  The effect will be that K C Chan shall be able to get back to work, if there is work to be had.

57.  Accordingly the Interim injunction shall be amended so that paras.3(1) and (2) and shall be replaced with the following:

“The 8^th Defendant (whether acting by himself, his servants, agents or any of them or otherwise howsoever) must not until trial or further order:

(1)     pass off goods or services, not being the goods or services of the Plaintiff as and for the same;

(2)     pass off goods of the Plaintiff combined with other goods not being goods of the Plaintiff as and for the same; and

(3)     enable, assist, cause, procure or authorise any person other than the Plaintiff to do so.”

58.  As for para.(6); 6(1) shall remain, applying the usual and appropriate tests, amended to include the newly joined defendant Louis Hui.  I do not see the need to continue with the injunction at 6(2).  There was at the outset cause to suspect the pinching of staff but in fact nothing has since emerged to indicate that K C Chan was doing any soliciting, canvassing or enticing away any of Bray’s employees; this was not argued for by Ms Rattigan.  Para.6 thus becomes:

“the 8^th Defendant (whether acting by himself, his servants, agents or any of them or otherwise howsoever) must not until trial or further order:

‘either directly or indirectly solicit, canvass or entice away or fulfil orders from and/or interfere with persons or companies who are customers of the Plaintiff and/or were customers during the course of the 1^st, 2^nd, 3^rd and 9^th Defendants employment with the Plaintiff.” 

Determination

59.  The Anton Pillar order has run its course and can now be discharged.

60.  The Mareva injunction remains in force pending trial or further order.

61.  The Interim injunction amended as aforesaid remains in force pending further order.

62.  Costs are nisi.

63.  In respect of the matters heard on 23 February, 2 March, 30 March and 27 April 2007 the plaintiff’s are to be in the cause; in respect of the application of 11 July those of the 8^th defendant are to be in the cause.

64.  In respect of the costs of the hearing of 27 and 30 July 2007 those of the plaintiff as to 2/3 are to be in the cause; those of the 8^th defendant as to 1/3 are to be in the cause.