WASON HOLDINGS LTD AND OTHERS v. BHP INTERNATIONAL MARKETS LTD AND ANOTHER

HCA 1692/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1692 OF 2014

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D E C I S I O N

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INTRODUCTION

1. I have before me four applications:-

(1)  the plaintiffs’ summons dated 29 August 2014 seeking a further continuation of the ex parte injunction order granted by Mr Justice Anthony Chan against the 1^st defendant on 28 August 2014 (“the ex p injunction order”) which was continued by this court on 4 September 2014 (“the continuation summons”);

(2)  the 1^st defendant’s summons dated 3 September 2014 seeking, inter alia, (a) an order that the plaintiffs do fortify their undertaking in damages given on 28 August 2014; and (b) a discharge of the ex p injunction order (“the discharge summons”);

(3)  the plaintiffs’ summons dated 5 December 2014 seeking an order that the 1^st defendant do disclose to the plaintiffs “all information and documents in its possession, custody or power relating to the past and present location or locations of the proceeds of sale of all or any of the 288,520,000 shares in Powerlong Real Estate Holdings Limited at issue in these proceedings or of the present equivalents of such proceeds” (“the disclosure summons”); and

(4)  the 1^st defendant’s summons dated 19 December 2014 seeking to strike out the writ of summons herein dated 29 August 2014 on the grounds that (a) it discloses no reasonable cause of action, (b) it is scandalous, frivolous or vexatious, and/or (c) it is an abuse of the process of the court (“the strike out summons”).

BASIC FACTS

2. The 1^st defendant, incorporated in the Bahamas in 2008 with offices located in Nassau, London and Seoul, carries on business as an international financial institution.  One of its major lines of business is lending monies to borrowers against relatively illiquid stocks as security.  Under this business model, the 1^st defendant makes funds available to a wider range of customers who may otherwise not be able to obtain loans from mainstream banks which do not accept such stocks as security for loans.

3. Each of the plaintiffs is a company incorporated in the British Virgin Islands.  They are investment companies owned and controlled by family members of Hoi Kin Hong, the chairman of the board of directors of Powerlong Real Estate Holdings Limited (“Powerlong”), which a company incorporated in the Cayman Islands with its shares listed on the main board of the Stock Exchange of Hong Kong (with stock code 1238).  The plaintiffs used to hold a total of 1,205,400,000 ordinary shares (equivalent to about 30.1% of all the issued ordinary shares) in Powerlong.

4. The plaintiffs were introduced to the 1^st defendant through Miss Lam Ching Ching (“Miss Lam”), an intermediary based in Singapore.  Miss Lam was also banker at EFG Bank AG.  By an agency agreement dated 6 June 2013, Miss Lam was appointed an independent agent of the 1^st defendant to introduce prospective borrowers to the 1^st defendant suitable for the 1^st defendant’s collateralized stock loan and block purchase business.

5. On or about 5 February 2014, the 1^st plaintiff and the 1^st defendant entered into a Stock Secured Financing Agreement (“the Agreement”), under which the 1^st defendant agreed to grant a non-recourse loan to the 1^st plaintiff against shares in Powerlong to be pledged as security for the loan.  There are 3 versions of the Agreement before the court: the first is referred to by the plaintiffs as the “Authentic Agreement”, the second as the “Altered Agreement”, and the third as the “Manipulated Agreement”.  I should mention that the 1^st defendant does not agree with the names, or labels, given by the plaintiffs to the various versions of the Agreement.  For the sake of convenience, I shall use the names given by the plaintiffs, but I should make it clear that I make no finding at this stage as to which version of the Agreement should be regarded as “authentic”, “altered” or “manipulated”.

6. It is the plaintiffs’ case that the version which represented the true agreement between the 1^st plaintiff and the 1^st defendant was the Authentic Agreement, and that the Altered Agreement was a forgery.

7. On the other hand, it is the 1^st defendant’s case that the final form of the agreement agreed to and executed by or on behalf of the parties was the Altered Agreement.  There are some significant differences in the terms of the Authentic Agreement and Altered Agreement.  In particular, it would appear that under clause 5(d) of the Authentic Agreement the 1^st defendant had no power to sell the pledged securities save in the event of default by the 1^st plaintiff, whereas under a differently worded clause 5(d) of the Altered Agreement it is arguable that the 1^st defendant had the power to sell the pledged securities at any time irrespective of whether the 1^st plaintiff was in default of the terms and conditions of the Agreement.  I should add that Mr Russell Coleman SC (leading Ms Theresa Chow for the plaintiffs) argues that even if the Altered Agreement represented the final form of the agreement of the parties, upon its true construction the 1^st defendant likewise had no power to sell the pledged securities save in the event of default by the 1^st plaintiff.

8. For the present purposes, it is not necessary for me to set out the evidence presented by the parties in support of their respective cases on which version of the Agreement represented the true agreement of the parties.  This is because it is common ground that there is a serious issue to be tried concerning the terms of the agreement between the 1^st plaintiff and the 1^st defendant.

9. Pursuant to the Agreement (as subsequently amended on 2 April 2014 and 15 May 2014 respectively), between 11 February 2014 and 15 May 2014, the 1^st defendant advanced a total of US$22,867,382.87 (“the Loan”) in three tranches to the 1^st plaintiff, and the plaintiffs deposited a total of 288,520,000 shares in Powerlong (“the Shares”) with the 1^st defendant’s securities broker, Haitong International Securities Company Limited (“Haitong”), as security for the Loan.

10. According to the plaintiffs, they were under the belief or impression that the Shares would be retained by the 1^st defendant and would be returned to them upon full repayment of the Loan (with interest).  However, on or about 15 August 2014, the plaintiffs noticed certain irregular movements in the shares of Powerlong from the Hong Kong Stock Exchange website and they became suspicious that the 1^st defendant might have failed to retain the Shares.  Further investigation by the plaintiffs revealed that the Shares might have been sold in the open market.  Thereafter, the plaintiffs made inquiries with the 1^st defendant and Haitong regarding the current whereabouts of the Shares but no satisfactory explanation was received.

11. It is the plaintiffs’ case that the 1^st plaintiff had been in full compliance with, and had not committed any default under, the Agreement, and that no event had occurred which would permit the 1^st defendant to sell or transfer the Shares to third parties.

12. On the other hand, the 1^st defendant’s position is that it was entitled to sell the Shares under the Agreement.  At paragraph 9 of the first affirmation of Morgan J Wilbur, a director of the 1^st defendant, filed herein on 4 November 2014, it is stated, inter alia, as follows:-

“ The terms in [the 1^st defendant’s] standard stock secured loan agreements are intended to give [the 1^st defendant] certain flexibility in its transactions and running its business. There is seldom any material deviation from this form of agreement. This is for a number of reasons in this kind of business:

(a) because [the 1^st defendant] offers this product to customer who either cannot access liquidity from mainstream financial institutions, or cannot do so without onerous terms, there is a relatively higher default risk;

(b) the business model requires the continuous redeployment of capital to fund loans on the same basis as a bank; and

(c)  flexibility is required to take into account market conditions beyond the control of [the 1^st defendant], where many of [the 1^st defendant’s] borrowers have even chosen to exercise the non-recourse function of their loans due to sudden drops in the price of the stock or some other capital market event.”

13. At paragraph 10 of that affirmation, Mr Wilbur goes on to state as follows:-

“ For these reasons [the 1st defendant’s] standard loan agreements invariably permit and provide for [the 1^st defendant’s] ability to exercise and enforce all rights, powers and remedies of the holder and owner of the collateral, including the right to buy, sell or hypothecate the pledged securities. In [the 1^st defendant’s] standard loan agreements, the power to realize security and re-apply capital is standard, which is also the case with lenders in the same business. Without this provision, [the 1^st defendant] would not undertake the transaction and [the 1st defendant] has never entered into a loan agreement without this provision.”

14. On 28 August 2014, the plaintiff applied for, and obtained, the ex p injunction order from Mr Justice Anthony Chan.  In addition to restraining the 1^st defendant from disposing of or otherwise dealing with the Shares or the proceeds of sale of the Shares or their present equivalent, the 1^st defendant was also ordered to:-

(1)  inform the plaintiffs in writing of “(a) the current location of the Shares, (b) details of any transfers or sales of any of the Shares and (c) the contact details of all persons who are or were, or are or were believed to be, holding or are or were otherwise in control of any of the Shares” on or before 5 pm on 2 September 2014;

(2)  inform the plaintiffs in writing of “the current location of the proceeds of sale of any of the Shares which have been sold or their present equivalent” or before 5 pm on 2 September 2014; and

(3)  confirm the above information in an affidavit to be served on the plaintiffs’ solicitors on or before 5 pm on 4 September 2014.

15. In purported compliance with sub-paragraphs (1) and (2) above, the 1^st defendant through its solicitors (Reed Smith Richards Butler) sent a letter to the plaintiffs’ solicitors (Sidley Austin) dated 2 September 2014 (“the 2 September 2014 Letter”), disclosing that:-

(1)  520,000 of the Shares had been sold on the open market at HK$1.4845 each on 21 February 2014 and the proceeds of sale were maintained in the 1^st defendant’s account at Haitong;

(2)  the rest of the Shares (totalling 288,000,000 in number) had been transferred to Global Prime Partners (“GPP”) between 13 February 2014 and 19 May 2014 and were then still retained by GPP.

16. By a letter dated 3 September 2014 to Reed Smith Richards Butler, Sidley Austin requested the 1^st defendant to provide documentation in its possession, custody or power in relation to the alleged transfer of 288,000,000 of the Shares to GPP.

17. Sidley Austin did not receive any response to the above request.  On 5 September 2014, the plaintiffs obtained an order from this court requiring the 1^st defendant to disclose, on or before 5 pm on 15 September 2014, all documents in its possession, custody or power evidencing (inter alia) the following information:-

(1)  the transfer of the 288,000,000 Shares to GPP;

(2)  the sale of the 520,000 Shares for HK$1.4845 each on 21 February 2014.

18. The information referred to in paragraph 15 above was confirmed by the 1^st affirmation of Tiziana Mason, said to be an “associate” of the 1^st defendant, dated 11 September 2014.

19. However, upon further inquiries made by Sidley Austin on behalf of the plaintiffs, GPP informed Sidley Austin on 13 September 2014 that the 288,000,000 Shares had already been sold by the 1^st defendant and the position “was squared by 27 May 2014”.

20. By a letter dated 15 September 2014, Reed Smith Richards Butler informed Sidley Austin that the information in the 2 September 2014 Letter and the 1^st affirmation of Tiziana Mason was “incomplete” and that they were in the process of taking instructions with a view to completing a supplemental affirmation.

21. On 16 September 2014, Tiziana Mason made her 2^nd affirmation, in which she stated that on or about 12 September 2014 further documents were located by her colleagues which showed that the 288,000,000 Shares had in fact been sold to Matford, LDC (“Matford”) by stock purchase agreements dated 17 February, 14 April and 16 May 2014 respectively.  Ms Mason also sought to explain in her 2^nd affirmation how the inaccuracy, or mistake, came about.  For the purpose of disposing of the various applications before me, I do not consider it necessary to analyse the validity of her explanation, and I shall leave this issue open for further consideration if and when it becomes necessary to do so.

22. In light of this development, the plaintiffs applied for a mareva injunction against the 1^st defendant, but the application was refused by Mr Justice G Lam on 17 September 2014 primarily on the ground that the plaintiffs had failed to show a risk of dissipation of assets by the 1^st defendant.

23. On 25 September 2015, the plaintiffs succeeded in obtaining an injunction order against Matford to restrain it from disposing of or otherwise dealing with the 288,000,000 Shares in Powerlong which it purchased from the 1^st defendant or the proceeds of sale of those shares or their present equivalent, and the writ herein was also amended to join Matford as 2^nd defendant in this action.

24. By a consent order dated 11 November 2014, the substantive proceedings herein between the plaintiffs and the 1^st defendant were stayed in favour of arbitration.

THE STRIKE OUT SUMMONS

25. It is convenient to deal with the strike out summons first, because if the writ is struck out it would not be necessary to consider the other summonses before me.

26. As can be seen from the skeleton submissions of Mr Charles Sussex SC (leading Mr Jin Pao for the 1^st defendant), three grounds are relied upon by the 1^st defendant in support of the strike out summons.

27. First, it is said that on the plaintiffs’ own case and as can be seen from Sidley Austin’s letter to Reed Smith Richards Butler dated 26 September 2014, the 1^st plaintiff accepted the 1^st defendant’s repudiation of the Agreement on that date.  Hence, so it is argued, the plaintiffs’ cause of action arose after the date of the issue of the writ on 29 August 2014, and no amendment may be granted to add a cause of action which only accrued after that date (see Wong Siu Co Ltd v Goldquest International Ltd [2003] 2 HKC 64).

28. It is, however, the plaintiffs’ case that the 1^st defendant had no power to sell the Shares under the Agreement. Accordingly, each of the sale of the 520,000 Shares on the open market on 21 February 2014 and the sale of the 288,000,000 Shares to Matford pursuant to the stock purchase agreements dated 17 February, 14 April and 16 May 2014 respectively would, on the plaintiffs’ case, amount to a breach of the Agreement and a conversion of the plaintiffs’ shares.  Also, the plaintiffs would, arguably, be entitled to claim that the 1^st defendant held the proceeds of sale of the Shares on a constructive trust for them.  These various causes of action would all have accrued prior to the date of the issue of the writ.

29. Second, it is said that the plaintiffs made three ex parte applications against the 1^st defendant within 19 days and the plaintiffs’ conduct amounted to a serious abuse of process of the court.  However, the court allowed two of the applications and made orders in favour of the plaintiffs on 28 August 2014 and 5 September 2014 (ie the applications for an ex parte injunction and for disclosure of document), and rejected the remaining application on 17 September 2014 (ie the application for a mareva injunction).  I do not see why the plaintiffs should be regarded as having abused the court’s process by making those applications.

30. Third, the 1^st defendant argues that the plaintiffs acted in breach of undertaking given to the court contained in Schedule 2 to the ex p injunction order when it, without leave of the court, used information obtained under the disclosure orders to institute civil proceedings against Matford in Hong Kong and obtain an ex parte injunction against it on 25 September 2014.

31. The relevant undertaking which the 1^st defendant relies upon is paragraph (6) of Schedule 2 to the ex p injunction order (see paragraph 27 of the skeleton submissions of Mr Sussex), which states as follows:-

“ The Plaintiffs will not without the leave of the court begin proceedings against the [the 1^st defendant] in any other jurisdiction or use information obtained as a result of an order of the court in this jurisdiction for the purpose of civil or criminal proceedings in any other jurisdiction.”

32. It seems to me clear that this undertaking is intended to prevent the plaintiffs from using information obtained under the ex p injunction order for the purpose of legal proceedings in another jurisdiction, whether against the 1^st defendant or other part(ies).  It is not aimed at actions being instituted or pursued in Hong Kong.  Further, the joinder of Matford as 2^nd defendant in this action and the grant of the ex parte injunction against it on 25 September 2014 were plainly done with the leave of the court.  In any event, even if the plaintiffs had acted in breach of undertaking, proceedings could be commenced against the plaintiffs for contempt of court.  That would not, however, be a reason to strike out the writ on the ground that it is an abuse of the court’s process.

33. In all, I see no basis to strike out the writ on the grounds that (a) it discloses no reasonable cause of action, (b) it is scandalous, frivolous or vexatious, and/or (c) it is an abuse of the process of the court.

THE CONTINUATION/DISCHARGES SUMMONSES

34. These two summonses can be dealt with together.

35. In so far as continuation of the ex p injunction order is concerned, the applicable principles are well established. The court has to consider (i) whether the plaintiff has demonstrated a serious issue to be tried, (ii) whether damages would be an adequate remedy for either side, and (iii) if damages would not be an adequate remedy, where the balance of convenience lies.

36. In the present case, although the question of which version of the Agreement represented the true agreement between the parties is hotly disputed, as earlier mentioned, it is common ground that there is a serious issue to be tried on this matter.  It follows that there are also serious issues to be tried on (i) whether the 1^st defendant acted in breach of contract in selling the Shares, (ii) whether the 1^st defendant’s conduct in selling the Shares amounted to a conversion of the plaintiff’s shares, and (iii) whether the 1^st defendant held the proceeds of sale of the Shares upon a constructive trust for the plaintiffs.

37. In this connection, it is important to bear in mind that the ex parte injunction order does not impose a mareva type injunction on the 1^st defendant.  Instead, it targets specifically the Shares (paragraph 1), and the proceeds of sale of the Shares or their present equivalent (paragraph 2).  In view of the fact that the 1^st defendant has already sold the Shares to Matford, for the purpose of deciding whether the ex p injunction order ought to be continued (or discharged), the relevant issue would be (iii) above, ie whether the 1^st defendant held the proceeds of sale of the Shares upon a constructive trust for the plaintiffs.  It is for this reason that the plaintiffs do not seek a continuation of paragraph 1 of the ex p injunction order, but focus on paragraph 2 thereof such that the 1^st defendant may not “in any way dispose [of] or deal with or diminish in value any of the proceeds of sale of the Shares or their present equivalent”: see paragraph 35 of the skeleton argument of Mr Russell Coleman SC (for the plaintiffs).

38. In this regard, it may be argued that, in so far as the proceeds of sale of the Shares are concerned, damages would be an adequate remedy.  However, it is the 1^st defendant’s own evidence that its business model is such that “capital is continuously redeployed” and it “does not have power to call … loans to force immediate repayment”, and thus it was unable to put up a deposit of US$20 million as security in answer to the plaintiff’s application for a mareva injunction (see paragraph 4 of Gill Broome’s 1^st affirmation dated 16 September 2014, and also paragraph 9(b) of the 1^st affirmation of Morgan J Wilbur dated 3 November 2014).  The 1^st defendant has not adduced any evidence that it has substantial assets within the jurisdiction.  There is plainly a risk that the 1^st defendant may not be able to satisfy any monetary award that the plaintiffs may obtain in the arbitration against the 1^st defendant.  As submitted by Mr Coleman, this is a relevant consideration which the court should take into account in deciding whether to grant, or continue, the injunction: see Stone, Commercial Litigation in Hong Kong, A Practical Guide, paragraph [2.049].

39. More significantly, in my view, is the fact that the plaintiffs are arguably entitled to claim that the 1^st defendant held the proceeds of sale of the Shares upon a constructive trust for the plaintiffs (in other words a proprietary claim over the proceeds of sale), and to trace into other assets currently held by the 1^st defendant as representing the proceeds of sale.  The fact that the plaintiffs may have a proprietary claim in respect of the proceeds of sale of the Shares and other assets representing those proceeds of sale is a significant factor in the exercise of the court’s discretion whether to grant an interlocutory injunction.

40. Subject to the discussion below regarding the 1^st defendant’s application to discharge the ex p injunction order, I would be minded, in the exercise of my discretion, to continue the same.

41. The 1^st defendant has raised three specific grounds in support of the discharge summons.

(i)   No useful purpose will be served by continuing the injunction

42. First, it is said that the injunction would serve no practical purpose and there is no valid reason for its continuation. Mr Sussex argues that the evidence shows that all the Shares have been sold and there is no point in continuing paragraph 1 of the ex p injunction order.  This much is not, I understand, disputed by Mr Coleman.

43. Mr Sussex further argues that in relation to the proceeds of sale, the evidence is that the proceeds in respect of the overwhelming majority of the Shares (288,000,000 out of 288,520,000) were mixed with the general funds of the 1^st defendant and used for re-lending in the ordinary course of its business. Hence, there is no useful purpose in continuing with the injunction in so far as it relates to the proceeds of sale (see paragraphs 34 and 35 of Mr Sussex’s skeleton submissions).

44. However, if the proceeds of sale of the Shares were, as asserted by the 1^st defendant, re-lent to other borrowers thereby resulting in the creation of new assets (namely, debts owing by the borrowers to the 1^st defendant, being choses in action), the plaintiffs may, in principle, trace the proceeds into those assets, or a proportional part of those assets, acquired by the 1^st defendant.  The fact that the proceeds of sale might have been mixed with the 1^st defendant’s general funds and lent to different borrowers may create complications in identifying the relevant assets which may be traced by the plaintiffs, but there are established equitable principles which could assist in the tracing exercise.

45. At this stage, the plaintiffs are unable to identify specific assets in the hands of the 1^st defendant which represent the proceeds of sale of the Shares, this being a matter peculiarly within the knowledge of the 1^st defendant.  Further, the 1^st defendant has, it seems to me, failed to fully comply with the disclosure order under paragraph 3(2) of the ex p injunction order, which requires the 1^st defendant to inform the plaintiffs of the current location of the proceeds of sale of any of the Shares which have been sold or “their present equivalent” (see further discussion below regarding the disclosure summons).  In these circumstances, I do not consider that the court ought to decline to continue the ex p injunction order merely on the ground that the plaintiffs are currently unable to identify specific assets representing the proceeds of sale of the Shares, or hold that there is no useful purpose in continuing paragraph 2 of the ex p injunction order.

(ii)  Alleged material non disclosure

46. Second, the 1^st defendant complains of serious material non disclosure by the plaintiffs in three aspects.

47. The first aspect of alleged material non disclosure relates to the fact that Wendy Hoi executed a “Securities Transfer Instruction” on behalf of the 1^st plaintiff on a form provided by the 1^st defendant which contained an express and unqualified representation, warranty and acknowledgement that the 1^st defendant “may direct Haitong to transact such transferred shares at anytime, free of any encumbrance”.  This document was amongst the exhibits to the 1^st affirmation of Wendy Hoi put before Mr Justice Anthony Chan in support of the plaintiffs’ ex parte application but its relevance (according to Mr Sussex) was not expressly drawn to the attention of the learned judge at the hearing of the ex parte application on 28 August 2014.  It seems to me, however, that this document was intended for the benefit of Haitong so that it could carry out the 1^st defendant’s instructions regarding the disposal of the Shares without being held liable to the 1^st plaintiff.  It does not affect the position as between the 1^st plaintiff and the 1^st defendant and is, in my view, equally consistent with either the plaintiffs’ case or the 1^st defendant’s case.  I do not consider that the Securities Transfer Instruction is relevant to the weighing operation which the court has to make in deciding whether or not to grant the injunction: see Citibank NA v Express Ship Management Services Ltd [1987] HKLR 1184 at 1190.

48. The second aspect of alleged material non disclosure relates to the fact that clause 5(d) of the Agreement was the subject matter of pre-contractual negotiation between the parties.  It will be recalled that clause 5(d) of the Agreement is relevant to the question of whether the 1^st defendant had the power to sell the Shares only in the event of default by the 1^st plaintiff (according to the plaintiffs) or had an unfettered power or right to sell the Shares (according to the defendant).  It is said that the existence of such negotiation is clearly established from the evidence of Ms Lam (see paragraph 46 of Mr Sussex’s skeleton submissions).  I shall come back to the “evidence” of Ms Lam below, but it may be noted at this stage that only an unsigned attendance note of a meeting with Ms Lam on 14 November 2014 prepared by the 1^st defendant’s solicitor is before the court.

49. In any event, accepting that there was indeed detailed pre-contractual negotiation between the parties on the form or wording of clause 5(d) of the Agreement, the plaintiffs’ case before the judge at the hearing of the ex parte application was that the version of the document which represented the true agreement between the 1^st plaintiff and the 1^st defendant was the Authentic Agreement and that the Altered Agreement was a forgery.  As noted above, this is a hotly disputed issue of fact. On any view of the matter, there is a serious issue to be tried.  The fact that clause 5(d) was the subject matter of pre-contractual negotiation between the parties would not, it seems to me, be relevant to the weighing operation which the court has to make in deciding whether or not to grant the injunction.

50. The third aspect of alleged material non disclosure relates to the fact that a copy of the Altered Agreement, apparently signed or executed on behalf of both the 1^st plaintiff and the 1^st defendant, was sent by the 1^st defendant to Cheng Pui Shan (who received it on behalf of the 1^st plaintiff) by e-mail on 6 February 2014.  However, this fact was expressly mentioned in paragraphs 38 and 39 of the 1^st affirmation of Wendy Hoi. The explanation offered by Wendy Hoi was that the recipient of the e-mail (ie, Cheng Pui Shan) did not open the file attached to the e-mail or check the contents of the document when she received it, which Wendy Hoi accepted was a mistake in hindsight.  Wendy Hoi further stated that the document was eventually opened on 18 August 2014 after the plaintiffs had become concerned about the status and whereabouts of the Shares.  The significance of this email was obvious and did not require any elaboration to an experienced judge.  While questions may be raised about this explanation, it cannot be said that there was any material non disclosure in relation to this matter.

51. In all, I do not accept the 1^st defendant’s complaint of material non disclosure in the three aspects raised on its behalf.

(iii)  Alleged failure to make full disclosure in respect of material change of circumstance

52. It is the 1^st defendant’s position that Ms Lam is a highly material witness who can give detailed and first-hand evidence of what transpired during the course of the contractual negotiation between the 1^st plaintiff and the 1^st defendant regarding the terms of the Agreement, including in particular the fact that the 1^st plaintiff had signed both the Authentic Agreement and the Altered Agreement and was fully aware of the 1^st defendant’s requirement that the version of clause 5(d) appearing in the Altered Agreement should be included in the agreement of the parties.

53. Apparently, the 1^st defendant was counting on the assistance of Ms Lam in relation to these proceedings as well as in the arbitration, having entered into a “Release, Waiver and Discharge of Liability and Indemnity Agreement” with her on 31 October 2014.  However, notwithstanding the fact that Ms Lam attended an interview by the 1^st defendant’s solicitor in Singapore on 14 November 2014 in the presence of her own lawyer (giving rise to a detailed attendance note mentioned in paragraph 48 above), she has not provided further assistance to the 1^st defendant.

54. The 1^st defendant says that Ms Lam’s failure or refusal to provide any further assistance to the 1^st defendant is the result of some court order made in legal proceedings in the High Court of the Republic of Singapore (Case No: OS 1057/2014) brought by the plaintiffs against EFG Bank AG (Singapore Branch) and Ms Lam.

55. This court has no information regarding the nature of the proceedings in Singapore or the restraint which Ms Lam is, or may be, subjected to.  It is not necessary for the purpose of this judgment to examine in detail the evidence presented by the 1^st defendant on this matter because I agree with Mr Sussex that, on the basis of the existing materials before the court, there is good reason to believe that Ms Lam has indeed been restrained by some court order made in the aforesaid proceedings in Singapore from providing further assistance to the 1^st defendant. This having been said, I consider that I ought to proceed on the basis that whatever order that has been made by the Singapore court against Ms Lam is lawfully and properly made.  If the 1^st defendant wishes to find out more about the nature of the Singapore proceedings or the order made in those proceedings, it is up to the 1^st defendant to pursue whatever disclosure or discovery application as may be necessary or appropriate in Singapore and/or Hong Kong, assuming that some such application can properly be made (as to which I express no view).

56. I am now only concerned with the question of whether the ex p injunction order ought to be continued.  Mr Sussex argues that the plaintiff’s failure to disclose that they have taken steps in Singapore to prevent Ms Lam from assisting the 1^st defendant in these proceedings and/or the arbitration amounts to a failure to act in utmost good faith and of the continuing duty to make full and frank disclosure.  It is also said that the plaintiffs’ conduct demonstrates a lack of clean hands and good faith which is a pre-requisite for the grant of equitable relief (see paragraphs 59 and 62 of Mr Sussex’s skeleton submissions).

57. I have not been referred to any authority which suggests that in circumstances which are the same as or similar to the present situation, the court ought to refuse to grant, or continue, an interlocutory injunction.  As earlier mentioned, the obligation to make full and frank disclosure relates only to matters which are relevant to the weighing operation which the court has to make in deciding whether or not to grant the injunction.  It is not for me to speculate on the action which has been taken by the plaintiffs against (inter alia) Ms Lam in Singapore.  On the assumption (which I consider I am bound to make) that the plaintiffs’ action in that jurisdiction is legally and properly justified, I do not see how I can come to the view, on the basis of the presently available materials, that the details of that action would be relevant to the weighing operation that I have to take for deciding whether or not to continue the ex p injunction order.  As I see it, Ms Lam’s evidence would be relevant to the issue of whether the 1^st defendant was entitled to sell the Shares in the absence of default on the part of the plaintiffs, but that is not an issue which can be resolved on affidavit evidence alone.  Even if Ms Lam’s evidence were available, I would still be left with a serious issue to be tried on that matter.

58. I also do not consider that I can infer lack of clean hands or good faith on the part of the plaintiffs on the materials before me.

59. In all, I am not satisfied that any sufficient ground has been shown by the 1^st defendant to discharge the ex p injunction order.

THE DISCLOSURE SUMMONS

60. That the court has power to make orders for disclosure of information or discovery of documents to assist a claimant to ascertain the whereabouts of property which belongs in equity to him is undoubted.  In A v C [1981] 1 QB 956 at 958E to 959E, Robert Goff J stated as follows:-

“ I take first the proprietary claim. In such cases, there is good authority that the court may make orders with the purpose of ascertaining the whereabouts of the missing trust funds… Now these cases provide ample authority that, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court not only has jurisdiction to grant an injunction restraining the disposal of that property; it may in addition, at the interlocutory stages of the action, make orders designed to ascertain the whereabouts of that property. In particular, it may order a bank (whether or not party to the proceedings) to give discovery of documents in relation to the bank account of a defendant who is alleged to have defrauded the plaintiff of his assets; and it may make orders for interrogatories to be answered by the defendants or their employees or director.”

61. Similarly, in the recent decision of Deputy High Court Judge Le Pichon in NEC Tokin Hong Kong Ltd v Cheung Kin Keung [2013] 3 HKLRD 250 at paragraph 49, the following is stated:-

“ In order to make the injunction effective, the plaintiff seeks an ancillary order to enable it to trace its misappropriated funds, namely, that the defendants be ordered respectively to make a statement of assets and to give discovery of documents for the purpose of ascertaining:

(a) the existence, nature and location of assets; and

(b) the whereabouts of the missing funds.”

62. The learned judge then referred to the judgment of Robert Goff J in A v C and made an order for disclosure “in order to render the tracing exercise effective” (paragraph 54).

63. In the present case, the 1^st defendant says that the proceeds of sale of the Shares were mixed with the 1^st defendant’s other funds and re-lent to its borrowers.  It seems to me that, in such circumstances, there is all the more reason why the court should grant the relief sought in the plaintiffs’ disclosure summons so that, should the plaintiffs ultimately succeed in the arbitration, they would be able to trace their assets effectively.  I should add that the terms or scope of the injunction may be refined after the 1^st defendant has made disclosure, but that is a matter to be considered at a later stage.

DISPOSITION

64. For the above reasons:-

(1)  I make an order in terms of paragraph 1 of the continuation summons;

(2)  I dismiss paragraphs 1 and 2 of the discharge summons;

(3)  I make an order in terms of paragraph 1 of the disclosure summons; and

(4)  I dismiss paragraph 1 of the strike out summons.

65. I should add that the 1^st defendant’s application for fortification of the plaintiffs’ undertaking in damages was not seriously pursued at the hearing (see paragraph 73 of Mr Sussex’s skeleton submissions).  I would not, in any event, be minded to order the plaintiffs to provide fortification in view of the fact that the plaintiffs have, apparently, substantial assets in Hong Kong, namely, 916,880,000 shares in Powerlong (representing some 22.88% of all the issued share capital of Powerlong).  I appreciate that the shares in Powerlong are publicly traded and can be disposed of in the market.  However, there are disclosure obligations imposed on major shareholders of companies listed on the Stock Exchange of Hong Kong in connection with any substantial acquisition or disposition of shares.  The application for fortification may be re-visited should there be any material change of circumstances in future.

66. I also make an order nisi that the 1^st defendant shall pay the plaintiffs’ costs in respect of the above summonses, to be taxed if not agreed.

67. Lastly, it remains for me to thank counsel for the assistance that they have rendered to the court.