SUM MUN KID FREDERICK v. AUTO ITALIA LTD AND OTHERS

HCA 60/2017

[2018] HKCFI 1049

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 60 OF 2017

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DECISION

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1.  On 7 May 2018, having heard the parties, I made an order, with reasons to follow, that costs on the plaintiff’s (“Mr Sum”) application for the extension of an injunction order and a preservation order in respect of a sum of HK$5,515,000 be costs in the cause.

2.  In the course of preparing my reasons for that order it became quickly apparent to me that I had proceeded under a significant misapprehension of a fundamental principle in respect to preservation orders. I immediately ordered that the order was not to be sealed and sent a memorandum to counsel informing them of my concern and inviting further submissions.

3.  I heard those submissions on 8 May 2018, and reserved my decision which I now give.

Background

4.  Mr Sum is a very experienced purchaser and owner of Ferrari cars.  He holds the prestigious status with Ferrari of a Very Very Important Person, (VVIP).  At the relevant times the 1^st defendant (“AIL”) was the sole dealer for new Ferrari cars in Hong Kong.  Over the years Mr Sum has bought a large number of Ferrari cars from AIL.

5.  On 23 July 2013, Mr Sum entered into a written contract with AIL to purchase a LaFerrari (“the LaFerrari”) car from AIL for the sum of US$1,350,000.  In addition, US$98,550 worth of personalised optional extras for the vehicle were purchased.  Pursuant to the contract a deposit of US$270,000 was to be paid upon making the contract, with a second deposit of US$405,000 payable six months before production and the estimated balance of US$773,550 to be paid within seven calendar days of notification by AIL to Mr Sum that the LaFerrari had arrived in Hong Kong.  The final total price for the LaFerrari was US$1,448,550.

6.  On 23 December 2014, Mr Sum entered into a written contract with AIL to purchase a Ferrari 458 Speciale Aperta (“the 458”) from AIL for the sum of HK$2,446,744.20.  Personalised optional extras offered by Ferrari for the vehicle totalling HK$829,765 were also purchased.  Pursuant to the contract a deposit of HK$250,000 was to be paid, with the estimated balance of HK$3,026,529.20 to be paid in accordance with the conditions of sale in the contract.

7.  Mr Sum duly paid the initial deposits, but by December 2016, had not paid any of the balance on either vehicle, although it appears that both vehicles were in Hong Kong and available for Mr Sum to collect upon payment.  There is significant issue between the parties as to the timing, adequacy and appropriateness of certain notices purportedly given by AIL to Mr Sum pursuant to the two contracts. Interpretation of the relevant provisions of the two contracts will be central to the trial.

8.  On 28 December 2016, Mr Sum paid to AIL a sum of HK$3,718,219 being the balance of the final purchase price of the LaFerrari, and the sum of HK$3,026,529 being the balance of the final purchase price of the 458.

9.  Mr Sum was concerned that, notwithstanding his payment of the balances due, AIL would dispose of the vehicles.  On 12 January 2017, Mr Sum successfully obtained an ex parte injunction restraining AIL from disposing of the vehicles.  As well as the order restricting AIL from disposing of the two cars, an order was made that AIL must preserve the two cars in the condition in which they were on that date.

10.  On 14 January 2017, Mr Sum was told that on 18 December 2016, AIL had (purportedly) sold the LaFerrari to an (allegedly) independent third party, with delivery having taken place on 3 January 2017. Mr Sum was further told that the 458 had also (purportedly) been sold, again to an (allegedly) independent third party, on 11 January 2017, with delivery of the car scheduled to take place on 12 January 2017.  Because of the injunction, delivery of the 458 had not taken place.  The genuine nature of these transactions, and the independence of the buyers, will be issues in the trial.

11.  The return date for the injunction was 23 January 2017, by which time the “purchasers” of the vehicles had instructed AIL not to disclose to Mr Sum their identities.  On that day the usual directions were given for the filing of affidavits in order that there may be a contested hearing inter partes in respect of the injunction.

12.  That hearing took place before Deputy High Court Judge Nigel Francis on 10 and 11 July 2017.  In the hearing AIL sought to discharge the application on the basis of material nondisclosure. 

13.  The Judge found no good basis for the allegations of material nondisclosure and declined to discharge the ex parte injunction order.  He found that there were serious questions to be tried between the parties.  These questions included whether the contracts between Mr Sum and AIL were validly terminated by AIL, and whether damages would be an adequate remedy for Mr Sum.  The Judge further found that the balance of convenience lay in preserving the status quo pending trial or further order.

14.  The injunction was accordingly continued.

15.  As to costs, the Judge ordered that the costs of AIL’s failed application to discharge the injunction should be plaintiff’s costs in the cause, and that the costs of the application to continue the injunction should be costs in the cause.

The preservation order application

16.  Over 8 months after the ex parte injunction had been granted, on 22 August 2017, Mr Sum made an application pursuant to Order 29 Rules 1 & 2, Rules of the High Court, (“RHC”), to preserve the deposits paid to AIL, which AIL had purported to forfeit in December 2016, and to join the purported purchasers.  On 25 August 2017, Lok J joined the purchasers and extended the injunction to them.  At that time he declined to grant the interim preservation order sought and gave directions for filing evidence.  An order was made that costs on the application should be reserved. 

17.  As a result of disclosure at that hearing Mr Sum ultimately learned that the LaFerrari had been further sold, ultimately leading to the joinder of the 5^th defendant in the proceedings.

18.  Subsequently, the 4^th defendant disclosed that it has no claim or interest in the 458, and proceedings have been discontinued in that respect.  Despite an order having been made on 13 October 2017, the whereabouts of the LaFerrari is still unknown.

19.  On advice, Mr Sum now accepts that a preservation order could not be made. 

Preservation order principles

20.  The principles relating to the granting of a preservation order are set out in Samtani v Samtani [2012] 4 HKLRD 872 at §§75 – 79.  First, there must be property which is bona fide the subject matter of the cause or proceedings, and, second something ought to be done for the security of the property.  The enquiry on the second issue will usually involve showing that damages may not be an adequate remedy.  A detailed enquiry into the relative merits of rival claims is not necessary as in respect of merits, the party seeking the preservation order need only show that there is a serious issue to be tried on normal American Cyanamid issues.

21.  In the case of a specific asset, as with the cars in this case, there is little difficulty in identifying the property, the subject matter of the proceedings.  In appropriate cases, where the property is easily identified, there will usually be little difficulty in determining whether or not there should be a preservation order. 

22.  But in this case, Mr Sum seeks to have preserved a sum of money equivalent to the deposits paid by him to AIL.  The amount is a little over HK$5 million.

23.  Mr D’Souza was not able to argue that the actual money paid by Mr Sum was still held by AIL.  But he said that that did not matter as the principles relating to a preservation order did not require that the actual money should still exist.  The funds were paid to AIL by December 2016.  There is no evidence as to whether the payments were made by cheque, or by bank transfer.  However, there is no suggestion other than that the funds were banked into AIL’s bank account where they were intermingled with whatever other funds AIL had and its accounts at that time.

24.  It is not suggested that cash was paid, which was placed by AIL in a safe, in which situation it would be open to argument that, like the cars, the actual money paid was still held by AIL.

25.  Mr D’Souza sought to draw an analogy with a deposit paid by a tenant to a landlord where, under the tenancy agreement the landlord was contractually obliged to keep the rental deposits until the contract was concluded, in which circumstances, unless there has been a breach, the rental deposit is recoverable by the tenant.

26.  The analogy is not appropriate. In the case of a landlord, the retention is pursuant to a contractual agreement between the parties.  In any event, it is not the actual deposit that is refunded to the tenant by the landlord, but a money sum equivalent to the actual deposit.  There is no contractual provision between these parties requiring that AIL should keep any deposits paid in an account, in order that they may be refunded to the purchaser in the event that the transaction does not proceed. 

27.  I am satisfied that for there to be a preservation order the property sought to be preserved must be the actual property which is part of the subject matter of the proceedings.  That that is so is reflected in Mr D’Souza’s submission that had Mr Sum believed in August 2017, when the application of the preservation order was taken out, that the deposits were no longer available for return in the event that he succeeded at trial he would have framed the present application under Mareva principles.

28.  That the actual property sought to be preserved must still be in existence is clearly demonstrated in the following passage from Hong Kong Civil Procedure 2018, Vol 1, p 727, §29/1/58:

“ In an action in which the plaintiff seeks to recover his property, the court has jurisdiction to grant an interlocutory injunction restraining the disposal of the property over which the plaintiff has a proprietary claim. The single most significant feature of the Mareva jurisdiction is that it goes well beyond this and enables the court to grant the plaintiff an interlocutory injunction restraining the defendant from disposing of, or even merely dealing with, his assets, being assets over which the plaintiff asserts no proprietary claim but which after judgment may be attached to satisfy a money judgment.”

29.  It is unfortunate that when I pressed Ms Kong during the hearing as to authority for the proposition that the actual property to be preserved must still be in existence (the direct opposite of Mr D’Souza’s submission), she did not refer me to this passage, which was cited in Samtani.

30.  I accept Mr D’Souza’s submission that it is not necessary that there be a proprietary claim to the property by the party seeking preservation of the property.  One can easily envisage a situation where there may be property which is the subject matter of a cause or matter or as to which a question may arise, in which a plaintiff does not claim a proprietary interest, but which was essential to the cause or matter.  In those circumstances the absence of a proprietary claim does not prevent a preservation order being made.

31.  The cases relied upon by Mr D’Souza such as Johnson v Tobacco Leave Marketing Board[1967] VR 427 do not go to establish that no proprietary interest need be established in the property for there to be a preservation order, but rather establish that a claim by the holder of the property that he has a proprietary interest in the property is not a bar to a preservation order.

32.  In circumstances where money has been paid over and has become intermingled with other money, for example in a recipient’s general bank account, a preservation order over the money simply cannot be made, as the money (the property) cannot be separately identified.  In such circumstances the appropriate application is for a Mareva injunction.

33.  For these reasons I am satisfied that the application for the preservation order was wholly misconceived, particularly when it was brought to the court 8 months after the money had been paid to AIL.  It was inevitable by that time that it had been intermingled with other money.  The application that should have been brought is an application for a Mareva injunction.

What costs order should be made

34.  Mr Sum, having decided not to pursue the application for the preservation order, the issues raised by the summons come to an end.  The question of costs on the summons, reserved by Lok J, now arises.  The usual rule would be that costs follow the event which in this case would mean costs to AIL.

35.  Mr D’Souza says that Mr Sum did not act unreasonably in seeking the preservation order and although the summons has been effectively abandoned, says that Mr Sum should have his costs or alternatively there should be an order for costs in the cause.  Mr D’Souza has referred me to the decision of Deputy High Court Judge Joseph Kwan in Chow & Anor v Chiu & Ors [1] [2018] HKCFI 118, where on an application for preservation order of specific documents it turned out that the documents were no longer in the defendant’s possession as they had been given to the police.  The preservation order was refused, but the judge did not consider the application unreasonable and made no order as to costs.

36.  I accept Ms Kong’s submission that a party seeking to displace the general rule that costs should follow the event naturally bore the burden of showing that the circumstances justified such an exceptional course: see Mariner International Hotels Ltd v Atlas Ltd (No 2) (2007) 10 HKCFAR 246, [2007] 4 HKLRD 194.

37.  I have found that the application for the preservation order was, in the circumstances, wholly misconceived.  It is one thing for the judge to consider it not unreasonable to make an application, it is quite another matter when a wholly misconceived application is made.

Conclusion

38.  The order made on 4 May 2018, is set aside.

39.  In the circumstances I am satisfied that the appropriate order for costs is that the costs on the application for the preservation order should be to AIL, to be summarily assessed and paid forthwith.  Ms Kong has supplied me with a schedule of costs.  Mr D’Souza, or his solicitors, shall have until 5 pm on Monday 21 May comment on that schedule.  I shall thereafter assess the costs.

40.  I am aware of the fact summons, as well as seeking a preservation order, also sought to extend the interim injunction to the 2^nd, 3^rd and 4th defendants.  In respect of that part of the application costs will be plaintiff’s costs in the cause.