XCHRX LA MODE, INC. AND ANOTHER v. TONG PAT LING PATRICK AND OTHERS

HCA 10072/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10072 OF 2000

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D E C I S I O N

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1. The 1st Plaintiff ("P1") is a US company engaged in the wholesale of garments, sportswear and casual wear. The 2nd Plaintiff ("P2") is described in the Amended Statement of Claim as a Hong Kong company set up in effect as the sourcing office of P1 in Asia. Goods and materials sourced by P2 were paid for by P1.

2. The 1st to 3rd Defendants (respectively "D1" to "D3" and collectively "the Defendants") were the former employees of P2 occupying management posts therein. The Plaintiffs bring this action against the Defendants alleging that they have breached their fiduciary duties. The allegation is based essentially on:

(1) the Defendants obtaining secret commissions and profits;

(2) the Defendants operating secret businesses in conflict with P1's and/or P2's business;

(3) the Defendants inflating prices of equipment;

(4) the Defendants charging inflated rents for P2's office.

3. The 4th to 7th Defendants ("D4" to "D7") are said to be the corporate vehicles used by the Defendants to achieve the aforesaid wrongful purposes.

4. The defence put forward by the Defendants can be summarized as follows. The allegations of inflated prices and rents are as a fact undisputed. However, these were done at the instruction of a Mr Kahn who is the person in control of the Plaintiffs. Similarly, D4 to D7 were set up in the Defendants' names as instructed by Mr Kahn. The purpose of this "scheme" is in short to convert P1's profits (which would have been liable to US tax) into expenses payable (and paid) to Hong Kong companies which appear to belong to other individuals. The "hidden" profits would then be returned to Mr Kahn by the Defendants by way of cash payment. In short, all the Defendants (including D4 to D7) were Mr Kahn's "fronts". Mr Kahn commenced this action against the Defendants only because their relationship deteriorated and Mr Kahn wants to pressurize the Defendants.

5. On 27 November 2000, the Plaintiffs obtained an ex parte Mareva order against the Defendants and D4 to D7. The Plaintiffs ask for that order to be continued whereas the Defendants ask for it to be discharged.

6. The first hurdle for the Plaintiffs in an application like this is to establish a good arguable case against the Defendants.

7. The Defendants confirm at today's hearing that no issue will be taken on that point. In other words, the Defendants do not argue that the Plaintiffs have not shown a good arguable case. Their arguments as to why the ex parte order should be discharged can be summarized as:-

(1) the lack of the full and frank disclosure by the Plaintiffs;

(2) the Plaintiffs did not come to court with clean hands;

(3) the ex parte order would not serve any useful purpose;

(4) delay.

8. The Defendants rely in particular on the documents exhibited as "TPLP-2" to "TPLP-4" to establish the Plaintiffs' lack of candour. There is no need to go into the details save to say that the documents themselves are inconclusive as to whether the Plaintiffs' case or the Defendants' case is true. Further, they are not such as would enable the court to conclude which party's version is believable or unbelievable. The Plaintiffs also deny that they had prior knowledge of the documents/matters which the Defendants say the Plaintiffs should have disclosed to the court at the ex parte stage. In short, all these matters remain in dispute.

9. The Defendants also complain that the Plaintiffs failed to inform the court that the sale by D2 of his property was a sale of a negative asset. Paragraph 4.1 of the Plaintiffs' skeleton argument used at the ex parte hearing shows that the risk of dissipation was based primarily on the allegation of massive dishonesty on the Defendants' part. Put in that context, whether D2's sale of the property was a sale of a negative asset should not have affected the court's discretion at the ex parte hearing. (Without attributing the burden of proof necessarily to either party herein) I do not find that there has been a lack of proper disclosure by the Plaintiffs.

10. The allegation of the Plaintiffs not coming to court with clean hands is based on the Plaintiffs' indication to D1 that Saipan tax could be evaded. There is no evidence whether such tax evasion is illegal. For this reason the complaint that the Plaintiffs have not come to court with clean hands is not established.

11. The Plaintiffs do not accept the Defendants' claim that they do not have any substantial means. In the circumstances of this case (which are different from those involved in PBM (HK) Limited v. Tang Kam Lun, Allan & Others HCA 12138 of 1997), I consider that this claim remains a matter in dispute and no proper finding can be made as to whether the claim is true at this stage.

12. The Defendants also complain that there has been about 1 year's delay (from about November 1999 to about November 2000) before the Plaintiffs made the ex parte application. Delay is not per se a bar to a Mareva injunction order. Each case has to be decided on its own fact. The "delay" in this case has been explained in the affirmation of Mr Kahn used at the ex parte hearing: see paragraph 51 thereof. In essence, the Plaintiffs said that time was used in investigating the Defendants' activities. The Amended Statement of Claim and the Plaintiffs' affirmations set out in detail what the Plaintiffs assert to be the wrongful activities. In these circumstances, I do not consider that the Plaintiffs have delayed the matter.

13. By reason of the matters aforesaid, and having read the materials now before me, I find that my discretion should be exercised in continuing the order until the trial of this action or further order. The Defendants' application for the discharge of the ex parte order is dismissed.