CHINA METAL RECYCLING (HOLDINGS) LTD (IN PROVISIONAL LIQUIDATION) AND ANOTHER v. CHUN CHI WAI AND OTHERS

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2013

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D E C I S I O N

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Application

1. I have before me two applications:

(1) the 1^st defendant’s summons dated 24 June 2014 (“the Variation Summons”) seeking a variation of the Re‑Amended Order of Tong J dated 30 July 2013 (as amended by the Order of Deputy High Court Judge Geiser dated 7 August 2013 and as re‑amended by the Order of Ng J dated 3 June 2014[1]) (“the Re‑Amended Injunction Order”);

(2) the plaintiffs’ summons dated 4 July 2014 (“the Unless Order Summons”) seeking an order that unless the 1^st and 13^th defendants shall, by 4 pm on the 5^th day following the date of the order to be made hereunder, each serve an affidavit or affirmation in full and proper compliance with a previous order of L Chan J dated 9 April 2014 (“the Chan Order”), the defence of the 1^st and 13^th defendants be struck out and the plaintiffs be at liberty to enter judgment with costs against them in this action.

Background leading to the two applications

2. The 1^st plaintiff is a company incorporated in the Cayman Islands with its principal place of business in Hong Kong.  It was listed on the main board of the Stock Exchange of Hong Kong in June 2009.  The 2^nd plaintiff, a company incorporated in the Macau Special Administrative Region, was one of the 1^st plaintiff’s principal operating subsidiaries.  The main business of the 1^st plaintiff and its subsidiaries is the trading of scrap metal and production of scrap metal products.

3. The 1^st defendant was the Chairman and Chief Executive Officer of the 1^st plaintiff.  He is also the sole shareholder of the 13^th defendant, which is the registered owner of 52.1% of the issued share capital of the 1^st plaintiff.

4. In December 2009, the Securities and Futures Commission (“the SFC”) commenced investigations into the affairs of the 1^st plaintiff.

5. Trading in the shares of the 1^st plaintiff has been suspended since 28 January 2013.

6. On 26 July 2013, the SFC presented a petition for the winding up of the 1^st plaintiff pursuant to section 212 of the Securities and Futures Ordinance, Cap 579.  On the same date, upon the application of the SFC, the court appointed Mr Cosimo Borrelli and Ms Chi Lai Man Jocelyn (“the Provisional Liquidators”) as provisional liquidators for the 1^st plaintiff.

7. On 30 July 2013, Tong J granted a worldwide Mareva injunction against (inter alia) the 1^st defendant restraining him from in any way disposing of, dealing with or diminishing the value of his assets up to the value of HK$1,682,198,420.

8. The order imposing the worldwide Mareva injunction on the 1^st defendant also required him to inform the plaintiffs in writing within 48 hours of service of the order on him of all his assets of an individual value of HK$50,000 or more, whether in or outside Hong Kong, whether in his own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets, and to confirm such information in an affidavit to be served on the plaintiffs’ solicitors within five days after the date of service of the order on him.

9. On 31 July 2013, the writ herein was issued.

10. On 7 August 2013, the plaintiffs amended the writ to join the 13^th defendant.  On the same date, Deputy High Court Judge Geiser granted a worldwide Mareva injunction against the 13^th defendant in terms similar to those against the 1^st defendant. The 13^th defendant was also required to make disclosure of any asset of an individual value of HK$50,000 or more within 48 hours of service of the order on it, and to confirm such information in an affidavit within five days after service of the order on it.

11. In what follows, the orders of Tong J and Deputy High Court Judge Geiser (as amended on various occasions) against the 1^st and 13^th defendants respectively will collectively be referred to as “the Mareva Injunctions”.

12. On 8 August 2013, the 2^nd plaintiff was put into provisional liquidation, and Mr Cosimo Borrelli and Ms Chi Lai Man Jocelyn were also appointed as provisional liquidators for the 2^nd plaintiff.

13. On 23 August 2013, the 1^st defendant made a statement of assets for the 13^th defendant, which was verified by his affirmation filed on 2 September 2013.

14. On 27 August 2013, the 1^st defendant made a statement of assets for himself, which was verified by his affirmation filed on 27 August 2013.

15. On 29 August 2013, the 1^st defendant made a supplemental statement of his assets.

16. On 10 September 2013, the 1^st defendant made a further supplemental statement of his assets, which was verified by his affirmation filed on 17 September 2013.

17. On 18 September 2013, the 1^st defendant made a supplemental statement of assets for the 13^th defendant, which was verified by his affirmation filed on 25 September 2013.

18. On 4 October 2013, the plaintiffs filed the statement of claim herein.  For the present purposes, it is not necessary for me to set out in detail the plaintiffs’ allegations raised in the statement of claim which are of considerable complexity.  In essence, what is being alleged is that the 1^st defendant was engaged in large scale frauds and dissipation of the plaintiffs’ funds through a series of fictitious transactions and “round robin” circulation of funds involving various other defendants in this action.  The total value of the claims in this action is estimated to exceed HK$5 billion.  Obviously, it is not the court’s function in the present applications to determine the validity of the plaintiffs’ allegations and claims against (inter alia) the 1^st and 13^th defendants, save to point out that various judges presumably took the view that the plaintiffs had established a “good arguable case” on the evidence before granting or continuing the Mareva Injunctions against them[2].

19. On 28 February 2014, Mr Recorder Houghton SC dismissed the 1^st and 13^th defendants’ application for variation of the Mareva Injunctions to increase the limit for their living and legal expenses, on the ground that they had failed to demonstrate that there were no other viable sources of funding for those expenses.

20. On 25 March 2014, the plaintiffs applied for an “unless” order to compel the 1^st and 13^th defendants to comply with the disclosure obligations under the Mareva Injunctions.  This application came before L Chan J on 9 April 2014.  As mentioned at paragraph 4 of L Chan J’s decision dated 9 April 2014 (“the Decision”), in the five statements of assets made by or on behalf of the 1^st and 13^th defendants:

(1)    The 1^st defendant disclosed that he himself had assets totalling HK$17,814,201.94 with HK$6 million in cash, HK$7,097,017 in shares and options of the 1^st plaintiff, and HK$4,717,184 in listed shares of other companies, insurance company and MPF.

(2)    The 13^th defendant disclosed that it had assets totalling HK$651,854,831 with HK$562,686,149 in shares of the 1^st plaintiff, HK$84,253,352 in other listed shares and HK$4,915,330 in cash.

(3)    Leaving aside the value of the shares and options of the 1^st plaintiff which the 1^st and 13^th defendants had been holding since the initial public offering of the 1^st plaintiff’s shares, their total assets of an individual value of HK$50,000 or more came to about HK$99,886,000.

21. This figure was to be considered in the light of the facts, as mentioned at paragraph 3 of the Decision, that:

(i) the 1^st and 13^th defendants had received total cash dividends of about HK$147.2 million from the 1^st plaintiff between 2010 and 2012;

(ii) the 13^th defendant received HK$636 million in cash from the disposal of 60 million shares of the 1^st plaintiff on 27 April 2011; and

(iii) the 1^st defendant also received HK$39,720,416 in cash by way of salaries, allowances and bonuses from the end of 2009 to 30 June 2013,

making a total of about HK$822,900,000.

22. At that stage, the 1^st defendant’s explanation for the shortfall was that the proceeds or dividends received by the 1^st and 13^th defendants that were not represented by the assets as disclosed in the five statements of assets had been “used, spent or disposed of”, without a word on how they had been used, spent or disposed of (see paragraphs 5 and 6 of the Decision).  L Chan J was obviously not impressed by this explanation, and considered that a further disclosure order was “amply justified” (see paragraph 17 of the Decision). The learned judge was, however, inclined to give the 1^st and 13^th defendants one more opportunity before considering whether an “unless” order was appropriate, there being a dispute on whether the court had jurisdiction and whether it was right in the circumstances to grant an “unless” order (see paragraph 18 of the Decision).

23. In the end, L Chan J made the following order on 9 April 2014 (ie the Chan Order):

“The 1^st and 13^th Defendants shall, by 4 p.m., on the 7^th working day following the date of this order, each serve an affidavit or affirmation on the Plaintiff’s solicitors:

(a) providing full and proper disclosure of all their respective assets of an individual value of HK$50,000 or more, whether in or outside Hong Kong, whether in their own name or not, and whether solely or jointly owned, giving the value, location and details of such assets;

(b) in the event that any assets of an individual value of HK$50,000 or more have been disposed of, encumbered or otherwise dealt with between 30 July 2013 and the date on which the said affidavit or affirmation is sworn, providing a full explanation as to what has become of the proceeds and the value thereof;

(c) providing a full explanation as to what has become of the monies received by the 13^th defendant amounting to approximately HK$636,000,000 received by the 13^th Defendant in respect of its disposal of 60,000,000 shares in [the 1^st plaintiff] on 27 April 2011 and approximately HK$147,155,803 received by the 13^th Defendant in respect of various cash dividends declared and paid by the 1^st plaintiff … and, in the event that any part of those monies have been used, spent or disposed of, providing full particulars of the circumstances;

(d)  exhibiting all documents which evidence the matters set out in paragraphs 1(a) to (c) above.”

24. In compliance, or purported compliance, with the Chan Order, the 1^st defendant made an affirmation which was filed on 22 April 2014 (“Chun 10^th”).

25. On 24 June 2014, the 1^st defendant took out the Variation Summons seeking a variation of the Re‑Amended Injunction Order so that he may be allowed, expressly, to:

“(1)  use the HK$5 million loan facility which the 1^st Defendant obtained from Wing On Finance Company Limited on 4 April 2014 (the “Loan Facility”) to pay the legal expenses of himself and the 13^th Defendant in these proceedings, HCCW 210/2013, and SFC and police investigations;

(2)  obtain further loans from banks and/or other financial institutions to pay the legal expenses of himself and the 13^th Defendant in these proceedings, HCCW 210/2013, and SFC and police investigations provided that:

 (i)  such loans are not secured against any of the assets which are the subject of the Re-Amended Injunction Order against the 1^st Defendant or the Amended Order of Deputy High Court Judge Geiser dated 7 August 2013 (as amended by the Order of Mr Justice Ng dated 4 June 2014) against the 13^th Defendant;

 (ii)  all proceeds of such loans are to be paid directly by the lender to the solicitors of the 1^st and 13^th Defendants:

 (a)  for the purpose of settling legal costs and disbursements (including counsel’s fees) incurred by the 1^st and 13^th Defendants in these proceedings, HCCW 210/2013, and SFC and police investigations; and/or

 (b)  as costs on account to settle legal costs and disbursements (including counsel’s fees) to be incurred by the 1^st and 13^th Defendants in these proceedings, HCCW 210/2013, and SFC and police investigations.”

26. The Variation Summons was supported by the 1^st defendant’s 12^th affirmation filed on 24 June 2014 (“Chun 12^th”).  In that affirmation, the 1^st defendant stated, inter alia, the following:

(1) On 4 April 2014, he managed to obtain an unsecured and non‑assignable loan facility in the sum of HK$5,000,000 from Wing On Finance Company Limited (“Wing On”).

(2) Up to that date, he had given instructions to draw down an aggregate sum of HK$3,845,343 from the Loan Facility which sum had been paid directly by Wing On to the previous solicitors of himself and the 13^th defendant (namely, Hastings) and their solicitors in HCCW 2010/2013 (namely, Li & Partners) for the purpose of settling their legal fees and disbursements.

(3) He had been advised by Hastings and verily believed that the Loan Facility was not in breach of the injunction orders which the court had granted against him and the 13^th defendant because the loan was not secured against any of the assets of himself or the 13^th defendant, and as long as all amounts drawn down were paid directly to their solicitors to settle legal fees and disbursements without going through them.

(4) Nevertheless, for the avoidance of doubt or future argument, he had been advised by his current solicitors (namely, Anthony Siu & Co) that he should notify the plaintiffs of the Loan Facility and ask them to confirm that they would not take issue with it, and to request the plaintiffs that they would not take any objection to further unsecured loans being taken out by him or the 13^th defendant for the purpose of funding their legal costs in these proceedings and HCCW 210/2003.

(5) As at the date of Chun 12^th, no confirmation had been received from Hogan Lovells (the plaintiffs’ solicitors), despite Anthony Siu & Co’s letters to Hogan Lovells dated 5 June 2014 and 13 June 2014 respectively.

27. The plaintiffs considered that the 1^st and 13^th defendants’ disclosure of assets in purported compliance with the Chan Order was untruthful and incomplete in several material respects and took out the Unless Order Summons on 4 July 2014 to compel them to fully and properly comply with the Chan Order.

28. In opposition to the Variation Summons, Mr Borrelli filed his 9^th affidavit on 28 July 2914 (“Borrelli 9^th”), and the 1^st defendant filed his 13^th affirmation on 22 August 2014 (“Chun 13^th”) in reply.  The following matters (amongst others) were raised in Borrelli 9^th:

(1) Notwithstanding the fact that the Loan Facility was taken out on 4 April 2014 and sums totalling HK$3,845,343 appeared to have been drawn down on various dates between 4 April 2014 and 13 May 2014, the plaintiffs were not informed of those matters until 5 June 2014.

(2) At a hearing of the Variation Summons and the Unless Order Summons on 11 July 2014 before Deputy High Court Judge Wilson Chan, counsel for the 1^st defendant informed the court that the 1^st defendant “does not intend to breach the injunction by using assets covered by the injunction to repay the loan”.  Mr Borrelli said that this reinforced the plaintiffs’ belief that there were undisclosed assets available to the 1^st and 13^th defendants with which they had been paying his legal expenses.  Mr Borrelli pointed out that the 1^st defendant had so far engaged at least three solicitors firm, three senior counsel and six junior counsel in these proceedings and other related proceedings to represent him and the 13^th defendant and the legal costs incurred must have well exceeded HK$3,845,343 said to have been drawn down from the Loan Facility.

(3) Mr Borrelli said that it was highly unusual for Wing On to have provided the unsecured Loan Facility to the 1^st defendant in circumstances where his assets up to HK$1,682,198,420 remained frozen (assuming that the 1^st defendant had informed Wing On of the Mareva injunction against him).  In this regard, it may be noted that in Chun 13^th, the 1^st defendant confirmed that the Loan Facility was unsecured, and stated that no security or other guarantee had been provided by himself or any other parties in respect of the facility.

(4) Mr Borrelli further pointed to various terms of the Loan Facility which he regarded as being unusual and suggested to him that either the Loan Facility was not made at arm’s length and/or that the 1^st and 13^th defendants had substantial assets held by other persons or entities which they had not disclosed.  The 1^st defendant’s answers to Mr Borrelli’s points are set out in Chun 13^th.

(5) Mr Borrelli also contended that the Loan Facility and any further loans envisaged by the Variation Summons amounted, prima facie, to dissipation and/or disposal of the 1^st defendant’s assets in breach of the Re‑Amended Injunction Order.

29. The 1^st defendant provided some further information regarding his and the 13^th defendant’s assets in an affirmation filed on 26 August 2014 (“Chun 14^th”) in response to the 7^th affidavit of Mr Cosimo Borrelli (“Borrelli 7^th”), which was made in support of the plaintiffs’ application to extend the Mareva Injunctions to cover 22 companies and a property known as Asia Steel Building in Guangzhou, PRC.

30. In response to the Unless Order Summons, the 1^st defendant filed his 15^th affirmation on 27 August 2014 (“Chun 15^th”).

31. Mr Cosimo Borrelli responded to Chun 15^th by his 10^th affidavit (“Borrelli 10^th”) filed on 24 September 2014.

32. To complete the picture, I should mention that the 1^st defendant filed a further affirmation on 20 October 2014 (“Chun 16^th”), shortly before the present hearing.  Mr Borrelli responded to Chun 16^th by his 11^th affidavit (“Borrelli 11^th”) filed on 22 October 2014.

The Unless Order Summons

33. It is accepted by Mr Russell Coleman SC (appearing together with Ms Eva Sit for the plaintiffs) that the 1^st and 13^th defendants are not required to do any “tracing” exercise in respect of the sums of HK$636,000,000 and HK$147,155,803 received by the 13^th defendant referred to in sub‑paragraph (c) of the Chan Order.  Nevertheless, they had been expressly ordered to:

(1) provide a “full explanation” as to what has become of those monies; and

(2) in the event that any part of those monies have been used, spent or disposed of, provide “full particulars of the circumstances” in which the monies have been so used, spent or disposed of.

34. In judging whether there has been a proper and sufficient compliance by the 1^st and 13^th defendants with the Chan Order, while it would not be appropriate for me to conduct a mini‑trial on affidavit evidence, I believe that I am entitled to consider whether the 1^st and 13^th defendants’ explanation is on its face credible and consistent with contemporaneous documents and/or their previous statements.

35. As earlier mentioned, the 1^st defendant filed Chun 10^th in compliance, or purported compliance, with the Chan Order.  In that affirmation, the 1^st defendant stated, inter alia, that that:

(1) the 13^th defendant received the net sum of HK$613,277,842  from the sale of 60 million shares in the 1^st plaintiff on or about 3 May 2011 (see paragraph 14 of Chun 10^th).

(2) the 13^th defendant received the total amount of HK$170,461,770.68[3] by way of cash dividends from the 1^st plaintiff between 2010 and 2011 (see paragraphs 9 to 13 of Chun 10^th); and

(3) the sum of HK$53,143,868.96 (being part of the said amount of HK$170,461,770.68) was deposited into the 13^th defendant’s account with Citibank numbered “697277” (“the Citibank Account”) on or about 30 May 2011 “to be used in stock investment” (see paragraph 11(1) of Chun 10^th).

36. In relation to the aforesaid sale proceeds of HK$613,277,842, the 1^st defendant’s explanation of how they had been used, spent or disposed of was, in summary, as follows:

(1) Between 27 June 2011 and 20 March 2012, the 13^th defendant lent the total sum of approximately US$82 million (equivalent to about HK$639.6 million at the exchange rate of US$1 to HK$7.8) (“the Loan”) to a wholly owned subsidiary called Chung Shing Finance (Holdings) Limited (“Chung Shing HK”), a company incorporated in Hong Kong.

(2) The sum of US$82 million came from the aforesaid sale proceeds in the amount of HK$613,277,842 together with the 13^th defendant’s other existing monies.

(3) The US$82 million received by Chung Shing HK was subsequently injected into two PRC subsidiaries of Chung Shing HK as their registered capitals.

(4) In or about August 2012, the 1^st defendant decided to gift the 13^th defendant’s entire interest in Chung Shing HK and the Loan to his three daughters.  The gift was effected by:

(i) a deed of gift in favour of a company called Chung Shing Investment Pte Ltd (“Chung Shing Singapore”) dated 29 August 2012; and

(ii) an instrument of transfer and bought and sold notes dated 4 September 2012 whereby the 13^th defendant’s entirely shareholding interest in Chung Shing HK was transferred to Chung Shing Singapore.

(5) Chung Shing Singapore was solely owned by Chung Shing Finance Holding Limited (“Chung Shing Belize”), a company incorporated in Belize.

(6) The ultimate beneficial and legal owners of Chung Shing Belize were the 1^st defendant’s three daughters.

37. In relation to the amount of HK$53,143,868.96 deposited into the Citibank Account on or about 30 May 2011, the 1^st defendant further disclosed in Chun 10^th and Chun 15^th the following:

(1) Out of the said amount of HK$53,143,868.96, the 13^th defendant transferred the sum of HK$51,000,000 from the Citibank Account to its securities account with BOCI Securities Limited (“the BOCI Securities Account”) in three tranches of HK$30,000,00 (5 March 2013), HK$10,000,000 (12 April 2013) and HK$11,000,00 (10 May 2013) respectively.

(2) The amount of HK$51,000,000 transferred to the BOCI Securities Account was used to off‑set losses incurred by the 13^th defendant in securities trading between February 2012 and May 2013.

38. Lastly, the 1^st defendant stated in Chun 10^th that the 13^th defendant had used HK$5,896,161.51 to increase its shareholding in the 1^st plaintiff in October 2011.

39. It is the plaintiffs’ case that there are glaring gaps and discrepancies in the disclosure given by the 1^st defendant in Chun 10^th, and those deficiencies are plainly intentional and have not been addressed or cured by Chun 15^th or 16^th.

40. In his written skeleton argument dated 20 October 2014, Mr Coleman set out the plaintiffs’ complaints under six broad grounds in paragraphs 33 to 38 thereof (which were said to be “the more salient examples” of the 1^st and 13^th defendant’s deficiencies in disclosure or “only some of the deficiencies”).  At the hearing, Mr Coleman concentrated on the following matters only.

41. First, in relation to the 1^st defendant’s explanation that the sale proceeds of 60 million shares in the 1^st plaintiff received by the 13^th defendant had been loaned to Chung Shing HK and then injected into two PRC subsidiaries of Chung Shing HK as their registered capitals, the ledgers of the 13^th defendant clearly show that upon receipt of the sum of HK$613,277,822 on 3 May 2011, about half (HK$300 million) was immediately transferred to the 2^nd plaintiff on the following day (4 May 2011).  Further, on the basis of the Provisional Liquidators’ investigation, the HK$300 million was later used to fund the payment of dividends by the 1^st plaintiff on 30 May 2011 (see paragraph 19 of Borrelli 10^th).  The 1^st defendant has not dealt with this allegation in Chun 16^th, which was filed in response to allegations raised in Borrelli 10^th.

42. It seems clear that the 1^st defendant’s explanation regarding the use of the sale proceeds of 60 million shares in the 1^st plaintiff received by the 13^th defendant is inconsistent with the accounts kept by the 1^st plaintiff (at a time when it was under the 1^st defendant’s control) and also the result of the Provisional Liquidators’ investigation (which has not been disputed on the evidence).

43. Second, Mr Coleman criticised the failure of the 1^st and 13^th defendants to produce the relevant capital verification reports of the two PRC subsidiaries of Chung Shing HK which it was said would show the dates on which the alleged capital injections took place.  What the 1^st defendant had produced in Chun 10^th were four bank withdrawal slips showing the transfer of the total amount of approximately US$82 million by the 13^th defendant to Chung Shing HK.  Under sub‑paragraph (d) of the Chan Order, the 1^st and 13^th defendants were required to “exhibit all documents” which evidenced what had become of (inter alia) the sale proceeds of 60 million shares in the 1^st plaintiff received by the 13^th defendant.  It seems to me that the relevant capital verification reports, or some other documents evidencing the alleged capital injections, ought to have been produced.

44. Third, in relation to the 1^st defendant’s explanation that out of the sum of HK$53,143,868.96 deposited into the Citibank Account on 30 May 2011, the sum of HK$51,000,000 was transferred to the BOCI Securities Account and used to off‑set losses incurred by the 13^th defendant in securities trading between February 2012 and May 2013, it is apparent from the bank statements of the Citibank Account produced by the 1^st defendant that, as a matter of fact, on the same date of the deposit:

(1) HK$20,588,228.02 was withdrawn from the Citibank Account to repay a “margin demand loan”; and

(2) HK$20,000,000 was transferred to an entity called “FCC Wellrun Ltd”.

45. It would appear therefore that the explanation given by the 1^st defendant regarding the use of the sum of HK$53,143,868.96 deposited into the Citibank account on 30 May 2011 is incorrect.

46. The 1^st defendant sought to explain this discrepancy in Chun 16^th. The 1^st defendant accepted that the said sum of HK$20,588,228.02 was used to repay the principal of a margin loan which had previously been obtained to finance the purchase of 300,000 shares of China Mobile Ltd (Stock Code: 941), and that the said sum of HK$20,000,000 was transferred to the 13^th defendant’s commodities/futures account with another member of the Citigroup (namely, Citigroup Global Markets Inc) for the purpose funding investment in various commodities, futures and securities.  The 1^st defendant said that when the securities, commodities and futures were sold, the proceeds would be credited back into the Citibank Account or other accounts held by the 13^th defendant with Citibank.  Apparently, there were many transactions carried out in various accounts for the sale or purchase of securities, commodities and futures.  In any event, according to the 1^st defendant, the sum of HK$51,000,000 transferred to the BOCI Securities Account “originated from the HK$53,143,868.96 deposited into the [Citibank Account] on or about 30 May 2011 and/or investment gains deriving from the said sum” (see paragraph 13 of Chun 16^th).

47. If this further explanation by the 1^st Defendant in Chun 16^th regarding the use of the said sum of HK$53,143,868.96 deposited into the Citibank account on 30 May 2011 is correct, it seems to me clear that the picture painted by him in Chun 10^th and Chun 15^th is incomplete and misleading, and cannot be regarded as a “full explanation” providing “full particulars of the circumstances” in which the said sum was used, spent or disposed of, as required by sub‑paragraph (c) of the Chan Order.  Also, the 1^st and 13^th defendants have failed to exhibit all documents which evidence what has become of the sum of HK$53,143,868.96, being part of the cash dividends received by the 13^th defendant between 2010 and 2011, as required by sub‑paragraph (d) of the Chan Order.

48. Fourth, according to the 1^st defendant’s own evidence in Chun 10^th, the 13^th defendant had received the total amount of approximately HK$783 million from (i) the sale proceeds of 60 million shares in the 1^st plaintiff on or about 3 May 2011, and (ii) the cash dividends from the 1^st plaintiff between 2010 and 2011.  However, he referred to only three transactions in Chun 10^th which had cost the 13^th defendant some HK$696 million, namely:

(i) US$82 million (equivalent to about HK$639.6 million) loaned to Chung Shing HK;

(ii) HK$51 million transferred to the BOCI Securities Account to off‑set losses incurred in securities trading; and

(iii) HK$5.89 million used to increase its shareholding in the 1^st plaintiff. 

There was thus still a shortfall of about HK$87 million which remained unaccounted for.

49. In all, I am satisfied that the 1^st and 13^th defendants have failed to fully and properly complied with the Chan Order.  In reaching this conclusion, it is not necessary for me to rely on other criticisms raised in Mr Coleman’s written skeleton argument which he did not develop in oral submissions.

50. Having reached the above conclusion, the next question which I turn to is whether I should make an “unless” order as sought by the plaintiffs, ie unless the 1^st and 13^th defendants do fully and properly comply with the Chan Order within a specified period, their defence be struck out and the plaintiffs be at liberty to enter judgment against them with costs in this action.

51. It is not in dispute that the court has jurisdiction to make an “unless” order to ensure compliance with disclosure orders in aid of Mareva injunctions: see JSC BTA Bank v Ablyazov [2013] 2 All ER 414 at paragraphs 146, 149, 165, 183‑188, per Rix LJ.  In relation to the exercise of such jurisdiction, the following was said by Rix LJ at paragraph 188:

“The authorities demonstrate that it is vital for the court, in the interests of justice, to have effective powers, and effective sanctions. Without these, it would be possible for a defendant (or, in a different situation, a claimant) to flout the orders of the court, which are the court’s considered means by which to keep the scales of justice for the parties even. If once it became known that the court was unable or unwilling to maintain the effectiveness of its orders, then it would lose all control over litigation of this kind, with terrible consequences for the administration of justice. Those wrongly accused of fraud would be relieved of a certain amount of inconvenience, but fraudsters would rejoice and hitch a free ride to interminable litigation on the back of ill-gotten gains.”

52. As submitted by Mr Coleman, freezing orders are critical weapons in the court’s armoury against fraud, securing the preservation of assets which might otherwise be wrongly dissipated pending judgment, and in appropriate cases, the preservation of evidence, including documentation, and the provision of information to trace the proceeds of fraud: CIBC Mellon Trust Company v Stolzenberg [2003] EWHC 13 at paragraph 103, per Etherton J.  Further, compliance with orders of the court goes to the essence of the rule of law that parties subject to the court’s jurisdiction should comply with court orders.  The gravity of the matter of non‑compliance will increase where the non‑compliance results from a conscious decision: see CIBC Mellon Trust Company v Stolzenberg [2004] EWCA Civ 827 at paragraph 167, per Arden LJ.

53. On the other hand, Mr Benjamin Yu SC (appearing together with Mr Bernard Man for the 1^st and 13^th defendants) submitted that while the court has jurisdiction to make an “unless” order in such circumstances, this is not to be contemplated lightly in view of the draconian nature of the order.  He submitted that the court should take into account whether a pre‑existing order has been clearly and obviously breached, and whether the breach is contumelious or contumacious.  He also criticised the Chan Order as being “hopelessly vague” and said that it does not specifically provide for “exactly what it is that D1 and D13 are to do”. Finally, he pointed out that the claim against the 1^st and 13^th defendants is vast and hotly contested, and thus it would be wholly unjust that the 1^st and 13^th defendants should face the possibility of judgment being entered against them without any trial.

54. In relation to the above points made by Mr Yu, my views are as follows:

(1)    As for the draconian nature of the order sought, I repeated paragraphs 51 and 52 above.

(2)    As for the question of whether the Chan Order has been clearly and obviously breached, and whether the breach is contumelious or contumacious, I consider it to be clear on the evidence that the 1^st and 13^th defendants have consciously decided not to fully and properly comply with the Chan Order.  Even after three affirmations filed by the 1^st defendant subsequent to the date of the Chan Order (ie Chun 10^th, Chun 15^th and Chun 16^th), there are still glaring gaps and discrepancies in the disclosure given by the 1^st and 13^th defendants in purported compliance with the Chan Order. The failure to comply with the Chan Order must also be seen in the light of the five statements of assets previously made by or on behalf of the 1^st and 13^th defendants in purported compliance with the disclosure obligations under the Mareva Injunctions, which L Chan J plainly considered to be insufficient.  It must also be borne in mind that the orders requiring on them to make full disclosure of their assets were made as long ago as July/August 2013.

(3)    As for the criticism that the Chan Order is “hopelessly vague” and does not specifically provide for “exactly what it is that D1 and D13 are to do”, I do not agree with this criticism.  The Chan Order seems to me to be reasonably clear and is well capable of being understood and complied with by the 1^st and 13^th defendants.

(4)    Lastly, as for the suggestion that it would be wholly unjust that the 1^st and 13^th defendants should face the possibility of judgment being entered against them without any trial, it seems to me that it is well within their ability to fully and properly comply with the Chan Order thereby avoiding the prospect of judgment being entered against them without trial.

55. In passing, I note that at page 59 of the transcript of the hearing before L Chan J on 9 April 2014, the learned judge expressed the view, in the course of an exchange with Mr Dobby of Hogan Lovells on the issue of costs, that an application for an “unless” order might be justified “if the next batch of disclosure should be lamentably incomplete”.  In my view, that indeed is the position.

56. In all the circumstances, I consider it just, appropriate and proportionate to make an order in terms of paragraphs 1 and 2 of the Unless Order Summons, save that I would allow the 1^st and 13^th defendants 14 days, instead of five days, to make the affidavit or affirmation referred to in paragraph 1 of the Unless Order Summons.  Also, the reference to the sum of “HK$147,155,803” in paragraph 1c should be changed to “HK$170,461,770.68” in view of the 1^st defendant’s own evidence in Chun 10^th.

The Variation Summons

57. Notwithstanding the extensive legal submissions which have been raised by the parties in respect of this summons, I can deal with it relatively shortly.

58. In essence, Mr Yu’s argument is that, upon the true construction of the Re‑Amended Injunction Order, there is no restriction on the 1^st defendant taking loans from third parties, provided that (i) such loans are not secured against any of the assets which are subject to the Mareva Injunctions, and (ii) all proceeds of such loans are paid directly by the lenders to the solicitors, or former solicitors, of the 1^st and 13^th defendants to settle legal costs and disbursements incurred by them in these and other related legal proceedings.  This is because such transactions would not involve any removal, dealing with, or disposition, diminution in the value or use of, the 1^st defendant’s assets within the meaning of the Re‑Amended Injunction Order.

59. On the other hand, Mr Coleman argues that such transactions would result in a reduction of the net asset (or net asset position) of the 1^st defendant, and therefore would be caught by the Re‑Amended Injunction Order.  According to Mr Coleman, the creation of a new liability by the 1^st defendant would constitute a breach of the order.

60. If Mr Yu is right in his contention, there would be no basis, or reason, for me to “vary” the Re‑Amended Injunction Order so as to permit what is in law already permissible (subject to the discussion below regarding the payment of the proceeds of loan to solicitors as “costs on account” to settle legal costs and disbursements “to be incurred”).

61. On the other hand, if Mr Coleman is right in his contention, and having regard to my conclusion that the 1^st and 13^th defendants have not fully and properly complied with the Chan Order relating to the disclosure of their assets, I would decline to exercise my discretion to vary the Re‑Amended Injunction Order as sought by the 1^st defendant, for the same reason that Mr Recorder Houghton SC refused to vary the Mareva Injunctions to increase the limit for the living and legal expenses of the 1^st and 13^th defendants, namely, that they had failed to demonstrate that there were no other viable sources of funding for those expenses.

62. I should add that, if a variation of the Re‑Amended Injunction Order is needed, I would not in any event be disposed to vary the Re‑Amended Injunction Order with “retrospective” effect so as to sanction a loan which the 1^st defendant has already obtained and partly used.  It seems to me that the requisite variation should, generally, be sought and obtained prior to the taking of the loan if a variation is indeed required.

63. It follows that, on any view of the matter, I should decline to make the order sought by the 1^st defendant and should dismiss the Variation Summons.

64. Nevertheless, in view of the extensive submissions which have been made by counsel, I shall deal the issue identified in paragraphs 58 and 59 above briefly.

65. First, as a starting point, it may be noted that both counsel’s submissions proceed on the basis of the true “construction” of the Re‑Amended Injunction Order, which follows the standard or usual form of Mareva injunction in general use in the Hong Kong courts.

66. Second, it appears not to be in dispute that, at least in theory, it is open to the court to make an order which expressly permits, or prohibits, the obtaining of loans by the defendant to be paid directly by the lender to the defendant’s solicitors to pay legal fees and disbursements already incurred.

67. Third, it is accepted by Mr Yu that if the loan proceeds are first paid to the defendant who then pay them to his solicitors, the loan proceeds in the hands of the defendant would be subject to the restraint imposed by the Mareva injunction.  See JSC BTA Bank v Ablyazov (No 10) [2014] 1 WLR 1414 at paragraph 101, per Rimer LJ, where it was said:

“Money actually advanced to Mr Ablyazov under any of the loan agreements, or to a third party to be held to his order, would of course be an ‘asset’ of his to which … the freezing order would apply”.

68. Fourth, it follows from the above that if the loans proceeds are paid by the lender directly to the 1^st and 13^th defendants’ solicitors “as costs on account” to settle legal costs and disbursements “to be incurred” by the 1^st and 13^th defendants in these and other related legal proceedings, as envisaged in paragraph 1(2)(ii)(b) of the Variation Summons, the moneys received and held by the solicitors would be an asset of the 1^st defendant which would be subject to the restraint imposed by the Re‑Amended Injunction Order.

69. Fifth, I am unable to accept Mr Coleman’s submission that the effect of a Mareva injunction, in its standard or usual form, is apt or sufficient to prohibit the defendant from increasing, or incurring new, liabilities.  Neither can I accept his submission that the position is to be looked at by asking whether the effect of the transaction will lead to a reduction of the net asset (or net asset position) of the defendant.  If Mr Coleman’s submission is correct, there could be problems with a solicitor giving legal advice or providing legal assistance to the defendant without costs on account but expecting, or hoping, that he will be paid in future after the final disposal of the proceedings against the defendant.

70. The proposition that a Mareva injunction in its standard or usual form does not prohibit the defendant from incurring new liabilities without more is well supported by authorities, including:

(1)    Gee QC, Commercial Injunctions, 5^th Edn, paragraph 19.022:

“However, a freezing injunction does not prevent the defendant from incurring new liabilities, and accordingly the defendant is free to write cheques to be debited to an account in overdraft, or to use a credit card, thereby committing the credit card company to pay the supplier.”

(2)    In the Matter of Cantor Index Ltd v Alan John Lister [2002] CP Rep 25, per Neuberger J (as he then was):

“[The Freezing Order] provide that the defendant should not ‘dispose of, deal with or diminish the value of any of his assets’. For a debtor to increase his indebtedness by borrowing from an existing creditor or even to create an indebtedness by borrowing from a new creditor, at least where the creditor is not secured on any of the debtor’s assets, does not to my mind, as a matter of ordinary language, involve disposing of or dealing with or diminishing the value of any of the debtor’s assets. I accept that it results in a diminution of the debtor’s net asset position, but that is not what paragraphs 1(1) and 1(2) of the Freezing Order refer to.”

(3)    Anglo Eastern Trust Ltd v Kermanshahghi [2002] EWHC 1702 (Ch), per Neuberger J (as he then was):

“If the legal expenses are being met by Alcole by way of direct payment to the solicitors, albeit that it is by way of a loan to the defendant, I do not think the payment of money involves: ‘diminish[ing] the value of any of [the defendant’s] asset.’ That is because, while the loan may involve diminishing the defendant’s net asset value, there is no specific asset one can identify which is diminished in value. If the loan was secured on property then the value of the defendant’s equity in the property would be diminished as the loan increased. That is not the position here.”

(4)    Lastly, Deputy Commissioner of Taxation v Hickey [1999] FCA 259, per Carr J:

“… when the respondents drew cash or paid expenses by debiting such amounts to the Visa Account they did not deal with or dispose of their assets or property within the meaning of the Mareva injunction. Throughout the relevant period that account was in debit. The respondents simply caused pre-existing indebtedness to be increased.”

71. Sixth, the most controversial issue is whether the defendant, by instructing the lender to pay the loan proceeds directly to his solicitors to settle legal costs and disbursements already incurred, should be treated as disposing of, dealing with or diminishing the value of an “asset”, namely, the contractual right to draw down under a loan agreement, for the purpose of a Mareva injection in its standard or usual form.  The English Court of Appeal in JSC BTA Bank v Ablyazov (No 10) [2014] 1 WLR 1414 held unanimously that:

(i) although there might be no fundamental objection of principle to the recognition of choses in action such as a borrower’s right to draw down under a loan agreement from qualifying as an “asset” for the purpose of a freezing order, such orders had to be construed strictly and, in determining their ordinary meaning, account should be taken of their background, context and purpose;

(ii) the wording of the freezing order (in the usual form) did not identify all choses in action as falling within the scope of the term “asset” with as much precision as was reasonably practicable;

(iii) if the order was to treat the right to draw down a loan agreement as an “asset”, despite its unamenability to enforcement and the inability to place a value on it, then additional words were needed; and

(iv) the contractual right to draw down under the loan agreement did not quality as an “asset” and thus in exercising that facility the defendant did not “dispose of” or “deal with” his assets for the purpose of the freezing order: see paragraphs 34 to 39 and 72 to 78 per Beatson LJ, paragraph 97 per Floyd LJ, and paragraphs 101 to 103 per Rimer LJ.

72. In his judgment, Beatson LJ first identified the three principles in play as to the approach of the court to freezing orders and the tension between these principles, stating as follows:

“[34] (a) The enforcement principle: The first and primary principle is that the purpose of a freezing order is to stop the injuncted Defendant dissipating or disposing of property which could be the subject of enforcement if the Claimant goes on to win the case it has brought, and not to give the Claimant security for his claim...

[36] (b) The principle of flexibility: The second principle is that the jurisdiction to make a freezing order should be exercised in a flexible and adaptable manner so as to be able to deal with new situations and new ways used by sophisticated and wily operators to make themselves immune to the courts' orders or deliberately to thwart the effective enforcement of those orders…

[37] (c) Strict construction: The third principle follows from the ‘fundamental requirement of an injunction directed to an individual that it shall be certain’…

[38] (d) The tension: There is tension between the first two principles and the third because a strict construction of the order may leave it open to an unscrupulous and determined Defendant to potentially reduce the amount that will be available to the Claimant at the conclusion of the proceedings. Another way of characterising the tension is that giving primacy to the purpose of the order or to the need for flexibility when construing it may involve not giving it a strict construction.

[39] A third way of characterising the tension is that a strict, literal and legalistic construction of terms such as ‘asset’ in a freezing order that does not take account of the purpose of such orders may have the result that conduct which will not reduce the amount available to the Claimant at the conclusion of the proceedings will nevertheless breach the order. It would do so even though it is outwith the enforcement principle which is the, or at least the primary, purpose of a freezing order. The thrust of Mr Matthews' submissions is that treating all choses in action as assets for the purpose of a freezing order has this effect. In other cases a strict and uniform construction, which gives primacy to the enforcement principle, may mean that conduct which will indirectly reduce the amount that will be available to the Claimant at the conclusion of the proceedings by increasing the claims against the Defendant's assets and thus affecting the Defendant's net asset position will not breach the order. It could thus be said to give insufficient weight to the need for flexibility inherent in the second principle…”

73. In relation to the construction of the freezing order before him, in particular on whether a contractual right to draw down under a loan agreement should be regarded as an “asset” for the purpose of the freezing order, Beatson LJ stated as follows:

“[64] I start with two general propositions about the approach to the construction of a freezing order. The first is that the words of the order must be given their ordinary meaning, and the background, context, and purpose of the order are relevant in determining that ordinary meaning…

[65] It must be remembered that an order is not a contract and (save where the order is a consent order) the principles used in the construction of a contract cannot, as Hildyard J recently stated in Group Seven Ltd v Allied Investment Corporation Ltd [2013] EWHC 1509 (Ch) at 75, be applied without modification. Because third parties have to be able to rely on the order and to take it at face value, lest they expose themselves to liability, the apparent meaning of words or phrases used should not be qualified by reference to facts which are not common knowledge…

[66] The second general proposition is the third of the principles I set out at 37 above. It is that freezing orders should be strictly construed. As with any order with a penal sanction for breach, such orders must set out clearly what the Defendant must do or not do…

[72] I agree with the judge (judgment, 75) that a man who is entitled to borrow and does so ‘is not ordinarily to be described as disposing of or dealing with an asset’. As Sir Roy Goode has stated, albeit in the context of s 127 of the Insolvency Act 1986, ‘[i]f there is one thing that is still clear in the increasingly complex financial scene . . . it is that a liability is not an asset and that an increase in a liability is not by itself a disposition of an asset’: Principles of Corporate Law, 4th ed, (2011) at 13-133. I also agree with the judge that, while in construing a legal document such as the order the court needs to have regard to the legal meaning where technical legal terminology is used to describe particular concepts, here the terms used - ‘assets’, ‘dispose of’, ‘deal with’, and ‘diminish the value of’ are not specifically legal terminology.

[73] At this stage it is important to recall the need for freezing orders to be strictly construed and the statement of Robert Goff J in Searose Ltd v Seatrain UK Ltd [1981] 1 All ER 806, [1981] 1 WLR 894 at 897, [1981] 1 Lloyd's Rep 556. He stated that ‘any asset in respect of which an order for a Mareva injunction is sought should be identified with as much precision as is reasonably practicable’. The term ‘choses in action’ was not used in the order and, as the judge stated, the terms ‘dispose of’ and ‘deal with’ suggest some form of transfer or agreement to transfer. The terms used do not naturally convey the exercise of a right to borrow, that is to either receive or cause a third party to receive money in exchange for the generation of a debt. I do not consider that it can be said that the wording has identified all choses in action as falling within the scope of the term ‘asset’ with as much precision as was reasonably practicable.

[74] I am fortified in my conclusion because of the understanding over a decade which those who obtain freezing orders and those who are restrained by them and advise such persons have gained as a result of the decisions in Cantor Index Ltd v Lister and the Anglo Eastern Trust case (and see also the commentary referred to at 88 below). That understanding is that a person who increases his or her indebtedness without providing security is not caught by a standard form freezing order…

[75] ... I have concluded that, in determining the meaning of the term ‘assets’ in a freezing order, account should be taken, as part of the background and context of such orders, of their purpose, in the way that anyone construing any document should take account of the background of it. Where the words used clearly and unequivocally lead to the conclusion that the term ‘asset’ includes that which cannot be the subject of execution, effect must be given to the words. Where they do not, the purpose of such orders will be a significant factor in determining the meaning of the term ‘asset’ in this context, and a pointer against including the particular right under consideration.

[84] Essentially, the Bank’s case is that a bright line is required, which includes all choses in action within the ambit of the term ‘asset’, primarily to remove difficulties of proof against a Defendant who the Claimant has shown poses a risk of dissipating assets. But, while it is open to a Claimant to do this by using clear and unequivocal language, the principle that these orders should be construed strictly means that the Claimant, who has control of the form of the order when he seeks it, but who has not used such language, cannot rely on the court giving the terms of the order a broad meaning. At the interlocutory stage, notwithstanding the demonstrated risk posed by the Defendant, fairness to the Defendant against which no judgment has yet been entered requires the Defendant to know where he, she or it stands, and only clear and unequivocal language strictly construed enables this. Similarly, it is important for a third party who deals with the injuncted Defendant to know whether or not a transaction is in breach of the freezing order: Z Ltd v A-Z [1982] QB 558 at 574, 575 and 582, [1982] 1 All ER 556, [1982] 2 WLR 288 per Lord Denning MR and Eveleigh LJ.

[90] … in the light of the background understanding of the purpose of such orders, the authorities on the point, and the guidance on which practitioners have relied, I have also reached the conclusion that, if the order is to treat rights of this sort as ‘assets’ despite their unamenability to enforcement and the inability to place a value on them, additional words are needed.”

74. Floyd LJ and Rimer LJ delivered short concurring judgments agreeing with the analysis of Beatson LJ.

75. The decision of the English Court of Appeal in JSC BTA Bank v Ablyazov (No 10) is directly on point here.  Nevertheless, Mr Coleman submits that the analysis of the English Court of Appeal is flawed and it should not be followed.  I am further told that leave to appeal has already been granted by the UK Supreme Court and the appeal is due to be heard in March 2015.

76. I do not share Mr Coleman’s view that the analysis of the English Court of Appeal in JSC BTA Bank v Ablyazov (No 10) is flawed, and I am not convinced that I should not follow it if it were necessary for me to reach a conclusion on this matter in order to dispose of the Variation Summons.  In particular, given the well established proposition that a Mareva injunction does not prohibit a defendant subject to the restraint from increasing or creating new liabilities, it seems to me that it would not be right to seek to get around this position by resorting to fine legal concepts.  If it is thought appropriate to prohibit the defendant from increasing or creating new liabilities, it would be far preferable to do so in express terms leaving no room for doubt.

77. It follows that, on the current state of the authorities, I do not consider that the 1^st defendant acted in breach of the Re‑Amended Injunction Order by taking the Loan Facility or giving instructions to draw down under that facility such that the loan proceeds were paid by Wing On directly to the solicitors or former solicitors of the 1^st and 13^th defendants to settle legal costs and disbursements which had already been incurred.  I do not, however, consider it appropriate for me to express any further view regarding future loan transactions which may, or may not, be entered into by the 1^st defendant the full terms of which are not before the court.

Disposition

78. I make an order in terms of paragraphs 1 and 2 of the Unless Order Summons, save that (i) the reference to the “5^th day” in paragraph 1 be changed to the “14^th day”, and (ii) the reference to the sum of “HK$147,155,803” in paragraph 1c be changed to “HK$170,461,770.68”.  I also make a costs order nisi that the 1^st and 13^th defendants shall pay the plaintiffs’ costs of that application to be taxed if not agreed, with certificate for two counsel.

79. I dismiss the Variation Summons.  On the question of costs, I have largely accepted Mr Yu’s submissions, but I do not consider that his client is entitled to any relief under that summons.  I make a costs order nisi that there be no order as to the costs of that application.

80. Lastly, I wish to thank counsel for their assistance rendered to the court.