SUNCHASE INTERNATIONAL GROUP (CHINA) LTD. v. CHIK WAI WAN, STEPHEN

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1998, No. 301
(Civil)

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J U D G M E N T

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Liu, J.A.:

1. The intended plaintiff seeks a Mareva injunction against the intended defendant. The intended plaintiff has petitioned to wind-up a company (the company) of which the intended defendant is said to have control. In the course of the winding-up proceedings, three documents came to light. All three documents are said to have been forged.

2. It is the allegation of the intended plaintiff that it invested US$2 m in the company on the force of an alleged forged document from the defendant (the first forged document). The alleged fraudulent deception is said to have given rise to a loss, firstly in the very act of purchase, then flowing from that act of purchase and lastly in the retention by the intended plaintiff of the US$2 m investment. The purchase and retention of shares were allegedly induced by the first forged document and two subsequent alleged forged documents respectively.

3. The endorsement of claim proposed to be filed by the intended plaintiff against the intended defendant is amended to include the various stages at which loss arose or flowed from the alleged fraudulent deception. The intended plaintiff's claim is for damages for fraudulent misrepresentations. Pending the institution of an intended action against the intended defendant, the intended plaintiff now applies ex parte for a Mareva injunction.

4. In order to succeed in its application not only has there to be evidence of loss, but a loss as substantial as US$2 m. Such evidence is required for supporting a good arguable case with respect to (1) a good claim and (2) the need for the protection sought against risks of dissipation of assets. It is not disputed that there must be a good cause of action to which the intended plaintiff's Mareva application may anchor. It is also to be remembered that this is an attempt by the intended plaintiff to protect a US$2 m investment. If loss is not established on "a good arguable case" basis, the plaintiff cannot even begin to make the application. Loss to be so established must be also substantial because it would not be right to injunct the intended defendant for US$2 m for an alleged small loss.

5. In my view, on the evidence of this case it is not possible to infer loss from an initial fraudulent act or acts or from the disclosed papers in the winding-up petition.

6. Paragraph 9 of the affirmation of Mr Keith Ho Man-kei affirmed on the 5th December 1998 reads:

"The Plaintiff has no reliable information about the current financial status of the Company."

7. Paragraph 6 of the affirmation of Chan Wai-ling affirmed on the 9th December 1998 reads:

"............ I am of the view and verily believe that the shares of the Company was not worth US$1.00 per share at the time when the Petitioner invested in the Company and cannot in the present circumstances carry any significant value, if at all."

That evidently is a bald allegation which is not, in my view, supported by the material placed before this court for hopefully establishing a good arguable case for a Mareva injunction in the intended plaintiff's application.

8. Counsel for the intended plaintiff has conceded that the intended plaintiff has no "hard evidence to show that the company of the intended defendant is worth zero". Counsel further concedes that the intended plaintiff is in fact "groping in the dark". Clearly, no loss or substantial loss has been shown to give rise to a good cause of action on the basis of "a good arguable case" for the Mareva sought.

9. For all these reasons, I would refuse the application.

Rogers, J.A.:

10. This is an action based on fraudulent misrepresentation. The indorsement on the writ relies upon a fraudulent misrepresentation said to have been made by the Defendant orally in uttering a forged document to Mr. Yaw, who is the managing director of the Plaintiff.

11. The document was a letter dated 16th June 1994. It was purported to be signed by a firm of certified public accountants and to contain summaries of the net tangible assets of the company in question, Pacific Asia Group Limited, as at 31st May 1994 and an interim profit and loss account for the period from 1st January 1994 to 31st May 1994. The letter itself also includes a report which indicates that a certain amount of money has been fully paid up for the shares, namely $3.3 million and it lists out the companies to which shares have been issued.

12. On the face of the evidence before this Court, that letter was a forgery. That is a very serious matter because the senior person in the accountants firm has sworn that that is a forgery.

13. I will come back to the balance sheet in a moment but the background to this case is that a winding-up Petition was presented by the Plaintiff on the 18th December last year. There were a number of allegations in that Petition but important amongst those are these :

14. First of all, it was said that in September 1995, Mr. Yaw requested the Defendant to allow the financial staff of the Plaintiff company to review and go through with the staff of the company in question the financial figures for the 6 months up to 30th June 1995. Mr. Yaw also requested the monthly financial statements of the company for the 3 months up to 30th September 1995. To cut a long story short, the Petitioner alleges that that never happened.

15. Then, it is said in paragraph 19 of the petition that by a letter dated 14th January 1997, the company forwarded to the Plaintiff's solicitors several documents including documents purporting to be the statement of profit and loss and balance sheets for the years ended 31st December 1994, 31st December 1995 and 31st December 1996. The petition goes on to say, however,

"the said financial statements were unaudited and the particulars therein stated were very sketchy. The Petitioner's solicitors Messrs. Wilkinson & Grist then wrote to Mr. Chik (the Defendant) to ask for further documents and further particulars of the Financial Statements. Instead of supplying the Petitioner the information and documents requested, the company faxed to Mr. Yaw on 13th February 1997 a purported minutes of directors' meeting held on February 13th, 1997 indicating that a resolution was passed for the removal of Mr. Yaw, Mr. Lau Hang Lun, Alan as directors of the company with immediate effect. Mr. Yaw of the Petitioner was not notified of such a directors' meeting purportedly held on 13th February 1997."

16. And then the lastly, what in effect is a "wrap-up" paragraph in the petition, reads :-

"As a shareholder holding substantial interest in the share capital of the Company, the Petitioner has been refused times and again to be supplied with the necessary financial information about the Company and subsequently, Mr. Yaw being the controlling shareholder and Managing Director of the Petitioner, was purportedly removed as a director of the Company."

17. The answer to that in the Defendant's affidavit in the winding-up proceedings was :

"The Company regularly kept Mr. Yaw informed of the management and business of the Company and the following documents relating to the financial position of the Company were supplied to the Petitioner on the respective dates."

18. First, amongst those documents was listed the profit and loss account and balance sheet for 1994 and the profit and loss forecast for 1995 which was said to be provided in January 1995 followed by the interim profit and loss accounts and balance sheets up to 30th June 1995 said to be provided in July 1995. Then, there were some later documents up to the profit and loss accounts and balance sheets for 1996 and the profit and loss forecast for 1997.

19. Just pausing there for a moment. I note that there is not even a suggestion here that there has been an audited profit and loss accounts or balance sheets or that there had been audited accounts; that is a matter which I would consider very seriously.

20. Paragraph 10 of the intended Defendant's affidavit goes on :

"In late September 1995, Mr. Yaw requested the company allow his financial staff to review the accounts of the company."

21. So far, there is agreement, but it goes on :

"After consultation with other directors, I informed Mr. Yaw over the phone and in writing that the Company would welcome inspection of its accounts by him as a director but not by his staff as the accounts contained sensitive and confidential information."

22. That is not a suggestion which, to me, rings particularly true but turning to the documents in question, I go first to the letter of 16th June 1994 which was the first "forged" document. As I have indicated, firstly, it importantly indicates how much money has been put into the Company. Whether that money had been put in is now a matter which cannot be taken for granted because certainly the accountants on whose letterhead this letter purports to be are not prepared to voucher for that. Importantly however, the assets of the company are put as fixed assets, which include the furniture and equipment, the accounts receivable to be paid by clients namely US$150,000 and cash and bank deposits of something over US$3.5 million and that is what this document indicates the company had at that stage.

23. Turning however to the later balance sheet, that as at 31st December 1994, it appears that the bulk of the cash and bank deposits has now been converted into "investments and other assets". Those "investments and other assets" are put as being US$2 million in Thai Direct Investment Fund, US$1 million in Thai Credit Card Centre and US$0.85 million in Malaysian Fund Management. Again, this balance sheet is one which the accountant has sworn is not one which emanates from his firm.

24. The balance sheet up to 31st December 1997, which was the only document which was exhibited in the Defendant's affidavit in relation to accounts again shows exactly the same investments, the cash and bank deposits are US$746,000 and the accounts receivable from clients are US$850,000.

25. In view of the fact that it is all based and stems from the 31st December 1994 balance sheet which was apparently forged and put on the accountant's notepaper then, I have absolutely no confidence that this company has any money whatsoever. I inquired of Mr. Graham whether that was his case. He indicated that he considered that that was the high-end of the case.

26. In those circumstances, I approach the case on this basis. The Plaintiff has put up US$2 million in the purchase of shares in this private company on the basis of a representation which had been made. That representation, at any rate as far as today's proceedings are concerned, must be taken to be a false representation. There had been other continuing false representations. The petition has been presented in circumstances which called for audited accounts if they had not already been prepared. Those have not been provided. This has all the markings of a company which has either never had the US$3.5 million or, for one reason or another, lost all its money or has had the money drained out of it. I would have no confidence that this company has any money. I have had no hesitation in coming to the conclusion that the interim order which is sought should be granted.

Nazareth, V.-P.:

27. Why Stone J refused the order below is not entirely clear. Although it may have had something to do with not being satisfied that damages had been established. That can be seen to be the same matter that has also troubled Liu JA in this Court.

28. The other well-known requirements that an applicant for an ex parte Mareva order has to meet have not occasioned any concern. Going then to this one item that has occasioned some concern, for my part I have had no difficulty in making the necessary inference from the material and evidence that has been placed before this Court. The latter is acknowledged by Mr Graham to be somewhat more and somewhat clearer than that which was put before Stone J. It shows the applicant has established a very high probability at least of substantial loss or damage, notwithstanding that the applicant has not been able to quantify a precise amount. That is understandable and does not mean that such amount cannot be established in the course of the substantive proceedings.

29. In that regard, the measure of tortious damages for the tort of fraudulent misrepresentation or deceit can be seen from a passage in Chapter 39 (which deals with misrepresentation) of the 16th Edition of McGregor on Damages in particular in paragraph 1964 at p.1277 where the nature of the action was explained by reference to what Cockburn CJ said in Twycross v Grant:

"'The complaint of the plaintiff is that he has been induced ... to take shares in an undertaking, which, but for this suppression, he would not have joined, and which has turned out to be worthless. ... His grievance is not that he has paid too high a price, but that he has been induced to take shares which, but for the fraud, he would not have taken at all.'

Together with such lines of reasoning as these, there are the many statements in cases where the plaintiff is induced to buy shares that the measure of damages is the price paid less the value received and that this is a well-settled rule."

From later passages in paragraph 1970, in particular, it can be seen that:

"The normal measure of damages is the purchase price of the shares less their actual value, if any, at the time of acquisition."

But from paragraph 1971, it is quite clear that there are exceptions to that rule. Indeed the House of Lords in Smith New Court Securities v Scrimgeour Vickers (HL(E)) [1996] 3 WLR 1051 made that clear. Lord Steyn said:

"It is right that the normal method of calculating the loss caused by the deceit is the price paid less the real value of the subject-matter of the sale. To the extent that this method is adopted, the selection of a date of valuation is necessary. And generally the date of the transaction would be a practical and just date to adopt." (emphasis supplied)

And later, where there has been a fraud in relation to the price, in paragraph 1972, this passage appears:

"The actual value is, therefore, the price the shares would fetch in the market if the truth concealed by the defendant's fraud was revealed and all the facts thus concealed were known. This was fully accepted in Smith New Court Securities v Scrimgeour Vickers, ..."

Applying that here, the real value of this private company was concealed. Indeed, it was misrepresented by this forged document. In those circumstances, it seems to me that it is artificial to assess the real value of what was obtained by reference to the date of acquisition. Its real value will emerge in the winding-up proceedings that are in train. That evidence may become available by the time the proposed action is resolved. It is for that reason inter alia that I have no difficulty in coming to the conclusion that the ex parte application should be granted. I would make the order sought.

30. By a majority, therefore, the order sought will be granted subject to the precise terms being settled, to which matter we will now turn.