CHINA MERCHANTS BANK v. I-CHINA HOLDINGS LTD. AND ANOTHER

HCA7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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(By Counterclaim)

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J U D G M E N T

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1. This is an application by the first two defendants to vary a Mareva injunction made by Judge Gill, sitting as a Deputy High Court Judge, on 7 February last year. His order appears in the Core Bundle ("CB") 34-36. The net effect of the order is that the 2nd defendants have paid into court HK$6,482,500 which they did on 5 January last year pursuant to the terms of an ex parte order of Suffiad J of 28 December 2000. This accounts for the present position although more has occurred since Judge Gill's order which I will need to refer to presently. Now, before me, these two defendants invite me to return to them HK$2,910,000 so that they may meet, what they say are, pressing legal and business expenses.

2. Before I turn to the nature of the action it is helpful to recite the steps which have been taken since the writ has issued in December 2000. I am the 5th judge who has been required to make an order, and notwithstanding the 21 months that have elapsed since the action started there is no sign that a trial is imminent.

3. This all started when the plaintiffs learnt of the pending sale by the 2nd defendant of premises that it then owned on the 15th Floor, Euro Trade Centre, 13-14, Connaught Road, Hong Kong. The plaintiffs made an ex parte application to Suffiad J on 28 December 2000 to prevent the 2nd defendant from disposing of the proceeds of sale of the property which amounted to HK$24.12 million save for payment of the outstanding mortgage on the property and the costs of sale. There was also an application directing the 2nd defendant not to dispose of or reduce its assets to below US$10 million save that it was permitted to spend up to HK$10,000 a week on business expenses, together with a reasonable sum for legal expenses. The judge made that order. The sale was completed on the following day. The net proceeds of sale amounted to HK$6,452,500 which, as I have already mentioned, was paid into court by the 2nd defendant on 5 January 2001.

4. The matter then came before Judge Gill inter partes on 30 January. The plaintiff sought to have the order continued and the defendants applied for its discharge. On 7 February the judge continued the injunction. See his judgment, CB24-32.

5. On 2 January 2001, the plaintiffs also took out an Order 14 summons for summary judgment. That came on before Judge Longley, also sitting as a Deputy High Court Judge, on 14 May 2001. He gave judgment on 15 June dismissing that summons (See CB42-50).

6. For the following year not much has happened. The plaintiff took no steps to prosecute the action to trial. The 2nd defendant then took out a summons on 28 May this year to have the injunction discharged or, in the alternative, to vary it by releasing part of the amount presently in court. The 2nd defendant's case on the application to discharge the injunction was essentially based on the fact that the plaintiff had "sat" on the matter, done nothing to bring the action on for trial, and that in the circumstances it was wrong for the 2nd defendants to be deprived of their money where nothing was being done by the plaintiff to have the matters tried. Judge Saunders who heard the application gave judgment on 27 June (CB292-303) and, whilst he had some sympathy for the 2nd defendant's position, he felt unable to discharge the order. He put over the question of whether the injunction ought to be varied and it is this which is now before me.

7. So much for the route by which the matter comes before me. I now need, albeit briefly, to describe the nature of the claim and the counterclaim. Judge Gill has found that the plaintiffs have made out "a good arguable case" justifying the retention of the injunction, whilst Judge Longley has not found it so overwhelming to justify summary judgment in their favour. The claim by the plaintiffs is for US$45,000,000. The amount in court is therefore modest by comparison. The nature and basis of this claim has been described by Judge Gill in his judgment, see CB25-26. The plaintiff sues under a Loan Assumption Deed and a Loan Agreement together with interest on the outstanding amounts. There is a counterclaim by the defendants to the effect that by virtue of fraudulent misrepresentation by the plaintiff, the defendants were entitled to rescind and have rescinded the Loan Assumption Deed and that, consequently, there can now be no liability under the Deed or the Loan Agreement. All of this remains to be decided at the trial and on the merits for the purposes of the present application I am really unable to go beyond what has been decided by Judge Gill and Judge Longley against whose orders there has been no appeal.

8. The basis of this application for the release of a little over HK$2.9 million appears in the 5th affidavit of Shirley Choi ("Ms Choi") (CB63). The first discrete amount required is HK$497,000 to pay for the defendants' legal costs in contesting this action. This amount is supported by an estimate prepared by their solicitors in this matter and is "Ex SCSL43" to Ms Choi's 5th affidavit (see CB104). There is said to be a further requirement for the release of HK$880,000 to another firm of solicitors, Messrs Tang, Tso, Lau & Co., who have been advising the defendants, who are publicly listed companies, on a number of other matters not directly related to this litigation. This has been described at paragraph 17 of Ms Choi's 5th affidavit (see CB63) as follows :

(i) simplifying the corporate structure by dissolving redundant, dormant and inactive subsidiaries;

(ii) restructuring debts owed to banks and other financial institutions by surrendering charged properties to them;

(iii) compiling and presenting business development information to potential investors;

(iv) handling a High Court Action No.1318/2001 between Peregrine Brokerage Limited and Fordit Limited, a subsidiary of the 2nd defendant; and lastly

(v) dealing with other lesser litigation in two District Court actions.

These solicitors are on a retainer of HK$80,000 a month and their fee note for HK$880,000 is exhibited as "SCSL44". Additionally, the 2nd defendant is indebted to its auditors, Deloittes, to the tune of HK$422,880 for the preparation of an audit of its financial statements. This account is exhibited as "SCSL45" and is now becoming pressing. The 1st defendant, as a public company, is liable to pay an annual listing fee. The amount is HK$145,000 each year. These fees have not been paid in 2001 and 2002 (see SCSL46). The total comes to HK$290,000. A claim is also made for subscription fees to the Dynasty Club which is for just under HK$20,000. I can indicate now in what is a balancing exercise that even if I were to allow a variation, this item which must occupy a lowly position in the hierarchy of priorities would not be allowed. Lastly the 2nd defendant also needs to satisfy the two District Court judgments which relate to the actions which I have referred to. These judgments come to HK$800,259.57.

9. The breakdown of the required amount is at paragraph 26 of Ms Choi's affidavit, CB66.

10. Before I relate Mr Wong's objections to the variation, it is helpful to briefly consider the law as it bears on applications of this sort. Mr Wright for the defendants has helpfully drawn my attention to the relevant cases and to Mr Stephen Gee's text on Mareva injunctions. Not surprisingly, both counsel are agreed on the principles that shall apply.

11. The leading authority to which Mr Wright draws attention is Iraqi Ministry of Defence v. Arcepey Shipping Co. S.A. (The "Angel Bell") [1981] QB 65. The effect of the decision by Robert Goff J (as he then was) is sufficiently reproduced in the headnote to the report :

"...., the purpose of the Mareva jurisdiction was not to improve the position of any claimants to the property of the insolvent debtor but rather to prevent the injustice of a foreign defendant .... causing assets to be removed from the jurisdiction in order to avoid the risk of having to satisfy a judgment in pending proceedings .... as the plaintiffs had not yet proceeded to judgment but were merely claimants for an unliquidated sum, the defendants should not be prevented from using their assets to pay their debts as they fell due ...."

This approach was followed by Lloyd J (as he then was) in PCW v. Dixon [1983] 2 All ER 158 and then approved by the Court of Appeal in Avant Petroleum Inc. v. Gatoil Overseas Inc. [1986] 2 Lloyds Rep. 236 where Neill LJ, in delivering the main judgment, whilst holding that this type of injunction should not be used to prevent the payment of trade creditors in the ordinary course of business, approving the decision in The Angel Bell (supra), also made clear (P242) that the party that is the subject of the injunction; "In summary, if not in most cases .... will therefore have to show that he has no other free assets which can be used to make the relevant payment." (See, for example, A & B v. C (No. 2) [1981] 1 Lloyds Rep. 559.) The effect of these principles has also been discussed in Gee on Mareva Injunctions and Anton Pillar Relief (4th Edition), from pages 318 to 321.

12. The effect of this therefore is to strike a balance between upholding the purpose of the injunction, which has been validly obtained, which is to prevent dissipation of the defendants' assets, and the defendants' legitimate right to be able to continue trading and to meet his proper liabilities.

13. Whilst accepting these principles as being those which must apply in the exercise of my discretion, Mr Brian Wong, in a series of careful submissions, has sought to demonstrate that on the evidence no variation should be allowed. Firstly, he submits that the defendants have simply failed to demonstrate that they have no other funds with which to meet their liabilities and, secondly, that there is more than a suspicion that they have failed to make full disclosure of their position and therefore as a matter of discretion they are undeserving of the court's assistance.

14. On the question of the requirement to make full disclosure he relies on the judgment of Ackner LJ (as he then was) in A.J. Bekhor & Co. Ltd. v. Bilton [1981] 1 QB 923C to 945A. This all relates to what Mr Wong says is a failure by the defendants to show their true financial circumstances. Mr Wong draws attention to what he says are discrepancies in Ms Choi's affidavits as to the source of income of the group of companies and the 2nd defendant's role in that group. In support of this he has helpfully prepared a schedule at page 5 of his written submission, showing the alleged discrepancies between Ms Choi's 5th and 6th affidavits and her previous affidavits. He then supports this by the auditors' comments in respect of the 1st defendant's audited financial statements for the years 1999, 2000 and 2001 which is to the effect that they had not obtained all the information and explanations that they considered necessary for the purpose of the audit and that they were therefore not able to determine whether proper books of accounts had been kept. Such comments must be viewed with great concern when made of a public company and one that is required in this application to come clean, if I can so express it, in showing its true financial position and thereby discharging the further burden of demonstrating that there are no other funds with which to meet its liabilities.

15. Mr Wong then presses on by referring to the accounts themselves which, he says, demonstrate that funds are indeed available. Alternatively, he submits that if the court is not of that view that it should find that the accounts leave sufficient unanswered questions to amount to a failure by the defendants to make out its case on lack of funds.

16. Most of this has been picked out from Mr Xia's affirmation of 22 June this year, the relevant part of which starts at CB168. The matters particularly relied on relate to the financial relationship between the 1st and 2nd defendants, the former being the latter's holding company. In her 5th affidavit, Ms Choi has deposed that the 1st defendant did not hold any significant amount of cash so that it relied on the 2nd defendant, the main operating company, to meet its liabilities. These payments would be treated as inter-company loans. This line is persisted in her 6th affidavit. Mr Wong then contrasts these statements with some of her earlier affidavits, for example, her 1st affidavit which says that the 1st defendant has from time to time advanced funds to the 2nd defendant to cover the group's operating expenses. Such advances are repayable on demand and are interest fee. Ex SCSL141 of the Bundle of Documents shows such a loan for HK$278,719,137.60. These unexplained contradictions and the auditors' remarks form the basis of Mr Wong's submission on this part of the application.

17. True enough Ms Choi has sought in her 6th affidavit dated 5 August 2002 to provide a detailed rebuttal of what Mr Xia has said on the accounts.

18. There is no doubt that there are many unanswered questions and issues that can only be resolved by live evidence and not on conflicting affidavits. I have had to work through this unresolved conflict and arrive at a view more by instinct and intuition rather than a firm view based on findings of fact that a judge arrives at following a trial with live evidence. My sense is that the defendants have just about persuaded me that at present they lack the funds to pay for these liabilities.

19. I am persuaded that these are all genuine debts which they are liable to pay. Nevertheless, this does not mean that they should use the funds in court to pay for all of these debts. This is a balancing exercise in the way contemplated by Neill LJ in Avant Petroleum (supra). To go all the way in favour of the defendants would unjustifiably undermine the purpose of the injunction. I have already indicated that the fees due to the Dynasty Club are not sufficiently important to be paid from the money in court. I propose to release the following amounts. It seems to me that the judgment debt in the District Court should be met in full - HK$800,259.57, so should the listing fees of HK$290,000 as well as Deloitte's audit fee of HK$422,880. These are pressing and unavoidable. They should be met. I will also allow HK$400,000 for King & Co.'s account because this relates to the fee for the conduct of this action. Other arrangements will need to be made as to the balance. As to Messrs Tang, Tso & Lau's retainer, I only feel able to release HK$400,000 for their expenses. I have had to come to a view about this matter and whilst a large group such as this clearly needs to spend for legal advice of the sort provided by their solicitors, in all the circumstances and in an effort to maintain a proper balance in this matter, that is, as far as I am prepared to go. The total released amounts to HK$2,213,139.57. I will release it on the terms that the individual items of expenditure which make up this total are paid out in the sums that I have allowed for. To this extent, the injunction granted by Judge Gill will be varied. I hope the parties will be able to agree the form of the order, otherwise the matter can be referred to me. As to costs, I propose to say costs in the cause. Neither party has been entirely successful, I suspect the matter had to come to me for resolution and whoever is ultimately successfully will get these costs. This order for costs will be an order nisi in the usual way.

20. I am grateful to both counsel for their assistance.

Representation:

Mr Brian C.W. Wong, instructed by Messrs Hastings & Co., for the Plaintiff (By Original Action)

Mr Colin Wright, instructed by Messrs King & Co., for the 1st and 2nd Defendants (By Original Action)

HCA 7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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(By Counterclaim)

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J U D G M E N T

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Background:

1. These proceedings began nearly two years ago when the plaintiff issued the writ and statement of claim against the 1st and 2nd defendants by original action. Although the counterclaim has introduced four additional parties, they are not concerned with this summons. I will accordingly refer to the parties throughout as the plaintiff and defendants. I adopt the description of the background of the circumstances set out in the judgment, dated 7 February 2001, of His Honour Judge Gill, sitting as a Deputy High Court Judge, as correctly setting out the nature of the dispute between the parties.

2. In simple terms, the plaintiff claim US$45,000 from the defendants by way of principle sums due under two agreements, a Loan Assumption Deed and a Loan Agreement. Also claimed is interest on those sums. The defendants, by counterclaim, say that by reason of fraudulent misrepresentation on the part of the plaintiff the Loan Assumption Deed has been rescinded and consequently there is no liability under the deed or the Loan Agreement.

3. The writ and statement of claim were issued on 26 July 2000. The statement of defence and counterclaim were filed on 5 October 2000. The reply and defence to the counterclaim were filed on 22 November 2000.

4. On 28 December 2000 the plaintiff was granted an ex parte Mareva injunction by Suffiad J. The injunction related to the proceeds of sale of a property owned by the 2nd defendant. On 13 January 2001 the plaintiff sought an inter partes injunction in the same terms and at the same time the defendants sought to have injunction discharged. Judge Gill extended the injunction and dismissed the defendants' application in a reserved decision dated 7 February 2001. By the time the matter came before Judge Gill the sale had been completed and the net sale proceeds of HK$6,482,500 had been paid into court. There the sum remains pending the outcome of the trial.

5. On 2 January 2001 the plaintiff issued a summons for summary judgment pursuant to Order 14. That matter was heard by His Honour Judge Longley, sitting as a Deputy High Court Judge, on 14 May 2001. In a reserved judgment delivered on 15 June 2001 the defendants were granted unconditional leave to defend the proceedings and the summons for summary judgment was dismissed, with costs to the defendant.

6. On 28 May 2002 the defendants issued a summons to discharge the injunction. That matter came before me for hearing on 25 June 2002.

7. It was clear to all parties following the judgment of Judge Longley that it would be necessary for the defendants to amend the defence and counterclaim. The claim that the two agreements were either rescinded or bad for fraudulent misrepresentation on the part of the plaintiff had not been pleaded in terms. Then counsel for the defendants, in the course of the argument, undertook to the court that the appropriate amendments would be made. However no amended counterclaim has been filed.

8. It was however equally obvious that it would be necessary for the plaintiff to amend the statement of claim. As a result of the transaction the 1st defendant received US$22,500,000. There appears no reason why it should be able to retain that sum, even if the agreements are bad, and a claim for money had and received must be pleaded by the plaintiff as an alternative claim. That in turn will require further amendments to the defence. Mr. Wong said that the amended statement of claim would be filed within 24 hours. Leave will be required but that should be by consent from the defendant.

The relevant principles:

9. A Mareva injunction has been described as one of the nuclear bombs in a litigants arsenal. The other is an Anton Piller order. In such circumstances it is not surprising that the court will view with strong disfavour a litigant who, having obtained such an order, then lets the action lie. The matters is well put by Glidewell J in Lloyds Bowmaker Ltd v Britannia Arrow Plc [1988] 1 WLR 1337 at 1347:

"A Mareva injunction, as Donaldson LJ in Bank Mellat v Nikpour [1985] FSR 87, 92 said, is a draconian remedy. It is intended as an adjunct to the action itself, not as a substitute for relief to be obtained on trial. In other words, a plaintiff who succeeds in obtaining a Mareva injunction is in my view under an obligation to press on with his action as rapidly as he can so that if he should fail to establish liability in the defendant the disadvantage which the injunction imposes upon the defendant will be lessened so far as possible."

10. There is thus plainly jurisdiction in the court to set aside a Mareva injunction where a plaintiff is guilty of delay in bringing the action on for trial.

11. I accept that delay on its own is not the only matter that the court must consider in deciding whether to discharge a Mareva injunction for delay. Mr Wong submits, relying on Steven Gee in Mareva Injunctions and Anton Piller Relief 4 ed. 378, and I accept, that the following matters ought also to be taken into account: (i) whether the lapse of time was a result of a deliberate decision on the part of the plaintiff; (ii) the length of the time lapse and the explanations put forward by plaintiff; (iii) the degree of prejudice liable to be caused to the plaintiff if the injunction is discharged; (iv) whether the plaintiff has sought to rectify position and proceed with the action or whether the lapse of time was still continuing time of the hearing; (v) the degree of prejudice cause to the defendant is a result of the lapse of time; (vi) whether the defendants have through their conduct either caused the lapse of time or contributed to it.

The lapse of time:

12. There appear to be four reported decisions on the question of discharge of an injunction for delay by a plaintiff. In Lloyds Bowmaker the delay was over two years and the Mareva injunction was discharged. In Town & Country Building Society Ltd v Daisystar Ltd (Unreported, The Times, 16 October 1989) the delay was also two years and again the injunction was discharged. In Newsgroup Newspapers v The Mirror Group [1991] FSR 487 the delay was 2 years and the injunction (not a Mareva injunction) was discharged. In Comdel Commodities v Siporex Trade S.A. [1997] 1 Lloyds LR 424 the delay was 19 months and the injunction was discharged. In Sanwa Development Ltd v Chan Kar Keung & Anor [1999] 1 HKC 847 the delay was over three and a half years and again the injunction was discharged.

13. At the date on which the summons was filed, 28 May 2002, the delay had been 11 months and 13 days from the date of Judge Longley's judgment of 15 June 2001. The delay here is significant and borders on the point where it will be sufficient to found an application for discharge. But it is substantially less than in the reported cases and unless the other factors favour discharge the delay of itself does not demand discharge.

A deliberate decision by the plaintiff:

14. There may well be commercial reasons why a plaintiff who has obtained a Mareva injunction, or as here, secured the payment into court of a sum, may decide to let the claim lapse. The most obvious situation will be that where the prospect of recovery is minimal even if the claim succeeds. The plaintiff may find, from evidence put in by the defendant in opposition to an interlocutory order, that his case is not as strong as he thought, or may result in public exposure of matter he might wish to keep out of public view.

15. In the present case there is no direct evidence to show that a deliberate decision has been made by the plaintiff not to proceed further with the claim. In January 2002 an open offer was made to the plaintiff by the 1st defendant to settle the matter. The plaintiff simply did not respond to that offer. As far as the court papers show, the plaintiff has taken no action at all in the proceedings for nearly a year. While both of these factors point to a deliberate decision by the plaintiff to let the claim sit and to take no further steps as recovery is unlikely that evidence alone is not sufficient to make that finding.

16. Against this is the explanation, by Mr. Xia Jin Qing in the affidavit in reply, of the steps that the plaintiff has been taking to put its house in order to enable it to continue with the litigation. In the absence of that explanation I may have found that the decision had been made to abandon the claim. But the explanations satisfies me that no such decision was made.

The plaintiff's explanation for the delay:

17. The explanation for the delay on the part of the plaintiff in pursuing the proceedings are set forth in the affidavit of Mr. Xia. These were summarized by counsel as follows: (i) report and discussion of the consequences of the Order 14 application; (ii) the need to deal with new issues raised by the defendants in the order 14 hearing; (iii) the need to get in touch with the parties to obtain the necessary documents; (iv) the need to retrieve documents for study to provide advice; (v) the preparation and study of the proposed amended statement of claim; (vi) to obtain legal advice; (vii) the consequence of the bankruptcy of the majority shareholder in the 2nd defendant; (viii) to consider negotiations offered by the 1st defendant.

18. I have to say that I am not at all impressed with the cumbersome way in which the plaintiff has chosen to organize itself to deal with this litigation. It appears from Mr. Xia's affidavit that every decision needs to go through several departments for consideration and then be referred to more senior people for final decision. It is no answer to the delays that have been occasioned in this litigation to say that the matter is substantial and that accordingly there must be detailed consideration of the steps by many departments and people. Equally it is no answer to a complaint of delay to say that holidays have intervened. This is substantial litigation and ought to be dealt with efficiently and promptly. If the plaintiff should chose to organize itself to deal with serious litigation in a way which causes long delays in making decisions it must accept the consequences of those delays. While in part explaining the delay, the organisational problems that the plaintiff describes in the affidavit in reply do not excuse the delay.

19. The report on the consequences of the Order 14 application is a matter that need take no time, and is necessarily limited by the time required to lodge an appeal against the decision. The new issues raised by the defendants in the s14 hearing made it plain that the statement of claim required amendment by the addition of a claim for money had and received. That is a simple amendment and Mr. Wong accepted that it was logical that that amendment should be made before the amended defence and counterclaim were filed. Extra documents were required. Some of these, particularly those relating to HCA 9815/2000 were already in the plaintiff's hands, it being the plaintiff in that action. It was not a party to HCA 3959/2000, but once it became plain that there may be a delay in getting those documents an action for discovery should have been commenced. A shareholder in the 2nd defendant had gone bankrupt, but while that is a matter which may impact on the litigation it is not a matter that should cause any delay in progressing the litigation. I have already dealt with the plaintiff's response to the offer in settlement. That too took up no real time. The explanations for the delay explain, but do not excuse it.

20. That said it is clear that the matter is not straightforward. The counterclaim has introduced new parties who have been parties to other litigation with the defendants, partly at least, in relation to the same or similar subject matter. The counterclaim has extended the proceedings well beyond that of a straightforward claim for money due under agreements, the way in which it began. There have been two other sets of proceedings relating to the issues raised by the counter-claim, one not involving this plaintiff, which I can understand it might wish to inspect before proceeding further. The plaintiff did not help itself by simply ignoring the defendants' open letter to resolve all matters of dispute between them, but it demonstrates that as at January this year the defendants did not consider that the conduct of the plaintiff was such that the claim had been abandoned.

21. Although the plaintiff is certainly open to criticism for the delay, in that it ought to have moved matters on more quickly, I am satisfied that it has not sat completely idly by, doing nothing at all, and lulling the defendants into a false sense of security that the claim against them has gone away.

The degree of prejudice to the plaintiff:

22. The financial position of the defendants is not clear. The annual reports for the 1st defendant for the years 2000 and 2001 were produced by the plaintiff. These show that in the year to 31 March 2000 the 1st defendant had an operating loss of nearly $100 million and for the year to 31 March 2001 an operating loss of over $250 million. The year 2000 accounts assert net assets of only $64 million, and those for 2001 a capital deficit of $285 million. In these circumstances the removal of the protection of a sum paid into court clearly puts the plaintiff at risk that they may have nothing on which to execute a judgement.

Has the plaintiff sought to rectify the position:

23. The summons to discharge the injunction was taken out and served on 28 May 2002. it is now 25 June 2002 and virtually a year has passed since judge Longley dismissed the Order 14 summons. The affidavit of Mr. Xia shows that the plaintiff has been active, although not prompt, in putting together the information required to bring the matter onto trial and that the amended statement of claim is now ready. It ought to have been filed well before now and that it has not means that time is still running against the plaintiff.

The degree of prejudice to the defendant:

24. The defendant is out of pocket on a substantial sum and has been out of pocket on that sum for nearly a year. The prejudice from that is plain and obvious. But that is as high as the defendants can put their case. They rely on an assertion that the funds are needed to fund the activities of the 1st defendant, and say that the funds are needed immediately. The most up to date figures available to the Court are to 30 September 2001. An examination of the accounts filed shows that the liabilities of the 1st defendant have been reduced by some $200 million in that period. In the light of the ability to reduce liabilities by such a substantial sum the immediate need for some $2 million from the secured sum to meet debts, mostly incurred during the period in which the liabilities were reduced, is not adequately explained. The plain inference is that if the 1st defendant can reduce its liabilities by such a sum, there ought to be funds available to meet the much smaller sum. The uncertain position of the defendants' financial affairs is exacerbated by the fact that the 1st defendant's auditors found it necessary to note in the accounts for the year ended 31 March 2001 that:

"because of the significance of the fundamental uncertainties relating to litigation and to the going concern basis, we are unable to from an opinion as to whether the financial statements give a true and fair view of the state of affairs of the company"

and

"In respect alone of the limitations on our work set out in the basis of opinion section of this report we have not obtained all the information and explanations that we consider necessary for the purpose of our audit."

Has the defendant contributed to the delay?

24. Mr. Wong has referred me to the decision of the Court of Appeal in Zimmer Orthopaedic Ltd v Zimmer Manufacturing Co Ltd [1968] 1 WLR 1349, a trade mark case in which the defendant sough to have the claim dismissed for want of prosecution. The defendant itself was a plaintiff in the proceedings by counterclaim. The court held that although it was the duty of a plaintiff to bring an action to trial and a defendant was normally under no such duty, under O. 15 r.2 a defendant making a counterclaim was put in the same position as the plaintiff in the action. Thus, Mr. Wong said, the defendants, were under an equal duty to prosecute the counterclaim, and, not having done so, could not rely on the delay themselves.

25. The counter-claim contains a claim for damages as well as declarations in relation to the two agreements. The defendants claim for damages would provide an answer to the plaintiff's claim for money had and received but that does not place the defendant in a position where the counter-claim is merely a shield and need not be pursued unless the plaintiff pursues its claim. The reality is that the counterclaim is being used by way of a shield and may well not have been brought as a separate action, had the plaintiff not brought its action. But that in no way lessens the importance of the counterclaim, especially in a case such as this where the obvious answer to the counterclaim is an action for money had and received. To that action there is, at least so far, no obvious answer on the part of the defendants.

26. Consequently, where a defendant comes to the court seeking the discharge of a Mareva injunction on the grounds of the plaintiff delay, in circumstances where he is himself a plaintiff by way of counterclaim I am satisfied that he must himself be able to show that he has diligently prosecuted his counterclaim.

Conclusion on discharge:

27. The delay in this case, although sufficient to base a claim for discharge must be seen in the light of all other factors. The defendant was not itself a plaintiff by counterclaim in any of the reported cases in which the injunction was discharged. Had the defendants in this case been taking steps to advance the counterclaim it might be in a better position to rely on the plaintiff's delay. But where it does not advance its own case it is much less able to rely on the others delay. Weighing that factor particularly and all of the other matters I have set out, I am not satisfied that the defendants have made out a case to discharge the Mareva injunction. The order sought is declined.

Variation of the injunction:

28. Mr. Xia's affidavit was served only the day before the hearing. It contains a number of allegations relating to the issue of variation to which the defendants have not had sufficient time to reply. If the application to vary is to proceed they ought to be able to have the opportunity to reply. It was agreed by counsel that the matter would be argued only as to discharge and that in the event that discharge was refused the question of variation would be addressed.

29. I will allow the defendants 21 days to file an affidavit in reply to that of Mr. Xia. There are to be no further affidavits without leave. The summons to vary the injunction is to be set down for hearing, in consultation with counsel's diaries, on 3 days notice following the expiry of the period to file the affidavit.

25. Costs are reserved for consideration on the variation application in due course. In the event that the defendants elect not to pursue the application for variation costs on the summons will be in the cause.

Representation:

Mr Brian Wong, instructed by Messrs Hastings & Co., for the plaintiff (by original action) and the 1st defendant (by counterclaim)

Mr Colin Wright, instructed by Messrs King & Company, for the defendants (by original action) and the plaintiff (by counterclaim)

HCA 7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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________________

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R U L I N G

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1. The Plaintiff brings this summons for judgment under Order 14 of the Rules of the High Court.

2. The Plaintiff's claim in this action arises from two agreements:

(i) a "Loan Assumption Deed" dated 30 December 1998 under which the 1st Defendant agreed to take over the indebtedness of two other companies, Rich China International Limited (RCL) and Minivest International Limited (MIL) to the Plaintiff in the sum of US$22.5 million (the "Loan Assumption Deed"),

(ii) a "Loan Agreement" of 31 December 1998 with the 1st Defendant under which the Plaintiff agreed to make available to the 1st Defendant a term loan facility of US$35 million, which the 1st Defendant drew down in full (the "Loan Agreement").

3. In so far as the Loan Assumption Deed is concerned the Plaintiff's case is that the 1st Defendant discharged US$12.5 million of the $22.5 million indebtedness it had assumed by authorising the Plaintiff to debit the 1st Defendant's account under the Loan Agreement in that sum. That left the balance of US$10 million payable under the Loan Assumption Deed in respect of which the 1st Defendant had delivered two post-dated cheques to the Plaintiff, one for the Hong Kong dollar equivalent of US$2.5 million dated 31 December 1999 (the 1st cheque), the other for the Hong Kong dollar equivalent of US$7.5 million dated 3 December 2000 (the 2nd cheque).

4. When the 1st cheque became due it was presented but dishonoured.

5. The Plaintiff claims against the 1st Defendant under the Loan Assumption Deed for the sum of US$2.5 million on the 1st cheque, alternatively the whole sum of US$10 million remaining outstanding under the Loan Assumption Deed plus interest.

6. Under the terms of the Loan Assumption Deed, the Plaintiff procured the 2nd Defendant to execute a debenture by way of floating charge over its assets to secure the outstanding balance of US$10 million. The Plaintiff's case is that under the terms of this debenture, the 1st Defendant's default has crystallized the floating charge into a fixed charge. The Plaintiff claims against the 2nd Defendant a declaration that the floating charge has been crystallized into a fixed charge and is now enforceable and judgment for the sum of US$10 million plus interest.

7. In so far as the Loan Agreement of 31 December 1998 is concerned, interest is payable on the amount drawn down quarterly. The Plaintiff claims that the 1st Defendant has failed to pay interest since 21 June 1999 and that accordingly the whole principal of US$35 million and interest thereon totalling US$37,482,699.00 is payable. The Plaintiff claims that sum plus interest thereon against the 1st Defendant under the Loan Agreement.

8. The Defendants' defence alleges that the Loan Assumption Deed is voidable for misrepresentation, essentially on two grounds:

(i) that the Plaintiff is in breach of a term fully to disclose to the 1st Defendant certain material facts which it was obliged to disclose; in addition or alternatively,

(ii) the Plaintiff had misrepresented that it did not hold any encumbrance over certain material property under the terms of the agreement.

9. The 1st Defendant claims rescission of the Loan Assumption Deed and alleges that the Plaintiff is liable to repay the US$12.5 million paid under the Loan Assumption Deed and that it is not liable on the cheque for US$2.5 million.

10. The 2nd Defendant claims that his liability to the Plaintiff under the debenture is conditional upon the 1st Defendant being liable to the Plaintiff under the Loan Assumption Deed. In the light of the 1st Defendant's claim for rescission of the Loan Assumption Deed, it claims that it is not liable under the terms of the debenture.

11. The 1st Defendant counterclaims for the sum of US$12.5 million being the amount it advanced under the Loan Assumption Deed and a declaration that the deed is rescinded and that it is not liable to the Plaintiff under its terms. The 2nd Defendant counterclaims for declaration that it is not liable to the Plaintiff under the terms of the debenture.

12. Although the Plaintiff's summons under Order 14 seeks judgment under both the Loan Assumption Deed and the Loan Agreement, Mr Wong for the Plaintiff conceded at the commencement of the hearing that the Defendants did have an arguable case in respect of the claim on the Loan Assumption Deed. He is therefore only seeking judgment against the 1st Defendant under the Loan Agreement. This part of the claim does not concern the 2nd Defendant.

13. The amount to which Mr Wong claims the Plaintiff is entitled under the Order 14 summons is the amount drawn down under the Loan Agreement (US$35 million) less $12.5 million out of the sum drawn down, representing the sum which the 1st Defendant had paid to the Plaintiff under the Loan Assumption Deed and upon which he concedes the 1st Defendant has an arguable case, plus interest.

14. The 1st Defendant's pleaded defence to the claim under the Loan Agreement is stated in paragraph 44(4) of the Defence in the following terms:

"if the 1st Defendant is liable to the Plaintiff under the Loan Agreement as alleged or at all (which is denied), the 1st Defendant is entitled to set off the aforesaid claim in extinction and/or diminution of the Plaintiff's claim"."

15. The "aforesaid claim" is the claim in respect of the US$12.5 million which the 1st Defendant is alleging was paid on a consideration that had wholly failed or money paid pursuant to a voidable contract which had been rescinded. In other words, while generally denying liability under the Loan Agreement, it is not specified on what grounds, save in so far as the set-off is concerned. The 1st Defendant has not pleaded repudiation of the Loan Agreement or claimed rescission.

16. In the absence of notice of the rescission of the loan by the 1st Defendant (in contrast to its plea of rescission of the Loan Assumption Deed), Mr Wong argues that the Plaintiff is entitled to judgment. He argues that by serving the defence and counterclaim and electing to rescind the Loan Assumption Deed but making no reference to rescission of the Loan Agreement and in particular not seeking a declaration that the Loan Agreement is rescinded, the 1st Defendant was electing not to avoid the Loan Agreement.

17. The 1st Defendants' defence to this argument is based upon paragraph 11 of the affirmation of the Plaintiff's own witness Xia Jin Qing, the manager of its Offshore Banking Department. Mr Xia said: "I wish to repeat that the Loan Agreement was made between the Plaintiff and the 1st Defendant in consideration of the Loan Assumption Deed". Mr Shieh for the 1st Defendant argues that on this basis both the Loan Agreement and the Loan Assumption Deed were part of the same "package". If the Loan Assumption Deed is rescinded for misrepresentation this would also vitiate the Loan Agreement. The Plaintiff's claim under the Statement of Claim is simply in contract under the Loan Agreement. If the Loan Agreement is vitiated by fraudulent misrepresentation and rescinded, the Plaintiff has no claim in contract, but only for instance under a claim for money had and received. There is no such claim in the Statement of Claim. The court cannot assume that there would be no answer to a claim by the Plaintiff for money had and received. There might for instance be a defence of change of position (see Lipkin Gorman v. Karpnale [1991] 2 AC 548, 578 at F). Mr Shieh admits that this point was not raised on the pleadings but argues that for the purpose of Order 14 proceedings the defence is not precluded from raising defences which had not been pleaded (see Incorporated owners of Haifong Mansion v. Convey Advertising HCA 9773 of 2000 at page 5). Although that 1st Defendant may not have hitherto elected to rescind the contract, Mr Shieh stated that by his submissions he made that election on behalf of his client.

18. Despite an initial unattractiveness, I am persuaded that Mr Shieh's submissions are correct. I am unable to find that simply by denying liability in its defence without specifying upon what grounds and in particular without asking for a declaration that the Loan Agreement had been rescinded, the 1st Defendant was electing to affirm the contract. Election or affirmation requires an occasion calling for election. The act relied on must be clear and unequivocal and must be consistent only with a desire to affirm and inconsistent with a desire to terminate the contract. Silence does not per se amount to affirmation though depending on the act it may be evidence of affirmation. (see Chitty paragraph 6-120, The Kanchenjunga [1990] 1 Ll LR 391 at 398, Spencer Bower "Actionable Misrepresentation" 4th ed. Paragraphs 245-246)

19. I do not find that the 1st Defendant did anything which indicated that they were affirming the validity of the Loan Agreement. The fact that it did not specify the basis upon which it was denying liability under the Loan Agreement or plead repudiation cannot be said to be consistent only with an affirmation of the continued validity of that Agreement. I do not find that Shirley Choi Sui Lui, the 1st Defendant's witness has ever denied that the Loan Agreement was made in consideration of the Loan Assumption Deed. In paragraph 23 of her 3rd affidavit she expressly relies upon the argument now advanced by Mr Shieh.

20. I find therefore that the 1st Defendant has an arguable defence in respect of the Loan Agreement on the Plaintiff's claim as it is now framed.

21. I dismiss the Plaintiff's summons and give unconditional leave to the Defendants to defend.

22. In view of the circumstances, I make the following orders as to costs; that the costs in so far as the summons relates to the Loan Agreement be costs in the cause and the costs in so far as the summons relates to the Loan Assumption Deed be costs to the 1st and 2nd Defendants.

Representation:

Mr Brian Wong, instructed by Messrs Hastings & Co., for the Plaintiff (By Original Action)

Mr Paul Shieh, instructed by Messrs King & Co., for the Defendants (By Original Action)

HCA 7266/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7266 OF 2000

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J U D G M E N T

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Introduction

On 28 December 2000 Suffiad J granted a Mareva injunction on application made ex parte by the plaintiff against the first and second defendants.

1. The order concerned a pending sale by the second defendant of its property being on the 15th floor Euro Trade Centre, 13-14 Connaught Road and 21-23 Des Voeux Road Central. The defendants were ordered not to dispose of the sale proceeds (less deposits already paid) of $24.12 million save for the payment of the mortgage and costs of sale, and to pay the balance proceeds into court. The second defendant was further ordered not to dispose of or otherwise reduce its assets below the value of US$10 million, but without restraining it from spending up to $10,000.00 per week towards business expenses and a reasonable sum for legal expenses.

2. On 29 December 2000 the sale in question was completed. The net sale proceeds came to $6,482,500.00. On 5 January 2001 the second defendant paid this sum into court.

3. By summons dated 28 December 2000 the plaintiff has applied inter partes for an injunction on like terms. By summons dated 3 January 2001 the first and second defendants seek a dismissal of the plaintiff's summons, a discharge of the injunction and an inquiry into damages for loss sustained by the first and second defendants because of the injunction.

Background

4. The plaintiff is the China Merchants Bank, a joint stock commercial bank constituted under the laws of Peoples Republic of China and licensed to carry on the business of a bank. The first defendant is called I China Holdings Limited. It is listed on the Hong Kong Stock Exchange and is the holding company of a large group of companies collectively known as the Seapower Group. Through a wholly-owned intermediary the first defendant is the parent of the second defendant, called Seapower Consortium Company Limited. The second defendant's primary purpose is to hold investment properties in the Group. It is itself the sole or principal shareholder of numerous other companies in the Seapower Group.

5. As at December 1998 two Hong Kong registered companies, called Rich China International Limited (RCI) and Minvest International Limited (MI) were indebted to the plaintiff in the sums of US$16.5 million and US$6 million respectively. By a deed dated 30 December 1998 called a loan assumption deed (the LAD) the first defendant assumed liability for the total indebtedness of US$22.5 million in return for debts and certain other property of RCI and MI.

6. By agreement of the same date called a loan agreement (the LA) the plaintiff agreed to advance to the first defendant the sum of US$35 million on terms therein recorded under which the first US$12.5 million was designated for the purpose of reducing its indebtedness to the plaintiff under the LAD by this amount to US$10 million.

7. By debenture of the same date (the debenture) made by the second defendant in favour of the plaintiff the second defendant guaranteed the due performance by the first defendant of its obligation under the LAD to meet the balance of that debt of US$10 million. Under the debenture the second defendant charged all its assets and undertaking save for what was described as the mortgaged property and any interest therein and related thereto. The mortgaged property was defined as (i) offices A, B and C on 2nd floor of Gold Union Commercial Building, nos. 70, 71 and 72 Connaught Road West, Hong Kong and (ii) the entire 15th floor Euro Trade Centre, 13, Connaught Road Central Hong Kong (the Euro Trade Centre property).

8. Under the LAD the first defendant was committed to repay the balance of US$10 million by two instalments; the first falling due on 31 December 1999 of US$2.5 million, the second falling due on 31 December 2000 of US$7.5 million, by post dated cheques.

9. The first defendant defaulted in meeting the instalment of US$2.5 million. The following is a chronology of that event and what happened afterwards:-

31 December 1999 -	the first defendant's cheque for US$2.5 million in favour of the plaintiff matured.
4 January 2000 -	the cheque having been presented was dishonoured.
6 January 2000 ) 8 March 2000 )	the plaintiff demanded from the first defendant the amount of the cheque.
17 April 2000 -	the cheque was presented again and dishonoured again.
31 May 2000 -	the plaintiff demanded from the first defendant repayment of the full amount due under the LAD of US$10 million.
10 July 2000 -	the plaintiff demanded from the second defendant the sum of US$10 million under the debenture.

10. During the course of this time frame the first defendant defaulted in meeting interest due under the LA and the plaintiff called up that advance of US$35 million and interest. By 20 July 2000 there having been no payment or other satisfaction the plaintiff issued a writ against the first and second defendants, seeking recovery of the sums of US$35 million and US$10 million with interest and costs. On 5 October 2000 the first and second defendants filed a defence and counterclaim. In their pleadings they have joined RCI and MI and two affiliates alleging against the plaintiff and these parties fraudulent misrepresentation, rendering the LAD voidable. On 22 November 2000 the plaintiff filed a reply denying such allegation.

11. What suddenly brought matters to a head was a chance land search conducted by the plaintiff's solicitors in December 2000. That revealed that the second defendant had sold the Euro Trade Centre property. Deposits of $2.68 million had been paid and received and the balance of $24.12 million was due to be paid on 29 December 2000, the agreed date of completion of the sale. A further search revealed that the Hong Kong Stock Exchange had released a notice made by the first defendant, giving details of the sale, in October 2000, in which it stated under heads Reasons for the Disposal, and Use of Proceeds, as follows:-

"Reasons for the Disposal

The Board of Directors of the Company (the "Board") believes that the terms of the Disposal are fair and reasonable in the current market conditions, and it is in the best interests of the Company and its shareholders as a whole. The Board also considers that the Disposal represents a good opportunity for the Company to realise its investment in the Property and increase the funds available for general working capital.

Use of proceeds

The net proceeds of the Disposal will be used for repayment of bank borrowings and for general working capital purpose."

12. In the context the company refers to the first defendant.

13. The plaintiff formed the view that this action demonstrated an intention to transfer funds out of the second defendant reducing thus its worth to the prejudice of the plaintiff, should it succeed in its action against the second defendant.

14. Against this background the application for the Mareva injunction was made and granted.

15. To complete the picture, on 2 January 2001 the plaintiff filed an application for summary judgment against both first and second defendants. There has been a directions hearing and that matter is pending.

The Ex Parte Order

16. Two points arise from the form of the order made.

17. The first is that it was made to last until the return date, and by extension to the date of this judgment. The defendants' application for it to be discharged is thus redundant. However I accept that it is their case that the order should never have been made and would not have been made had there been full and frank disclosure, and having been made the second defendant has suffered loss. It was thus appropriate to apply to discharge whilst it was in operation to preserve the right to damages in the event that I find the ex parte application was deficient.

18. The second point is that the order purports to bind both the first and second defendants. No doubt the application was so framed because of the relationship between the parties and because of the way the Stock Exchange release was framed. In fact the net sale proceeds of the Euro Trade Centre property are funds wholly owned by the second defendant, and otherwise the order restrains only the second defendant's right to trade in its own assets. The first defendant is not, in fact, affected at all.

The essential ingredients of a Mareva injunction

19. It is trite law that before a Mareva injunction will be granted three matters must be established as follows:-

(a) the plaintiff must have a good arguable case against the defendant;

(b) there must be a real risk that judgment will go unsatisfied by reason of the disposal by the defendant of its assets unless it is restrained by court order from disposing of them;

(c) it would be just and convenient in all the circumstances of the case to grant the relief sought.

20. In addition, where the initial application is made ex parte, there is a duty on the plaintiff to make full and frank disclosure.

The case for the second defendant

21. Mr Ng, counsel for the second defendant, puts his arguments under four heads, as follows:-

1. No good arguable case.

The second defendant's liability under the debenture as the first defendant's guarantor to perform its obligations under the LAD depends on the validity of the LAD. It is the second defendant's case as pleaded that because of fraudulent misrepresentation there is no such liability.

2. Exclusion of the Euro Trade Centre property from the debenture.

That exclusion gave the second defendant the freedom to sell the Euro Trade Centre property without reference to the plaintiff and to utilize the sale proceeds as it chose.

3. Material non-disclosure.

In its ex parte application there was almost no mention at all of the defendants' pleaded case and certainly no reference to the fraud both parties claim to be victims of. Further, the judge's attention was not specifically drawn to the exclusion clause in the debenture concerning the Euro Trade Centre property.

4. No dissipation of assets.

There is not and never has been the intention to reduce the worth of the second defendant's assets to defeat the plaintiff's claim. As disclosed in the Stock Exchange release the proceeds were intended for expenses of the Seapower Group, including the legal costs of these proceedings. The sale of the Euro Trade Centre property was no more or less than the operation of the second defendant's normal business activity of buying and selling investment properties.

Determination

22. I shall deal with the second defendant's arguments in term.

1. I am satisfied the plaintiff has made out a good arguable case. The chronology reveals that the first defendant defaulted under the LAD in January 2000 and that default has persisted. Demand was made of the second defendant under the debenture in July 2000 without result. The first defendant defaulted under the LA in June 1999 and that default has persisted. On the face of it US$45 million plus interest is due; more than $351 million. The defence of fraud was not raised until the pleadings. On the papers there is clear evidence of liability, it being for the defendants to establish the fraud pleaded. Certainly there is sufficient before me to achieve the necessary burden of a good arguable case.

2. The exclusion of property from the charged assets in a debenture will permit the sale of the same without reference to the debenture holder in a situation where there has been no default. But in this case there has been apparent default and there is potential liability for nearly $78 million. The issue of whether or not the sale proceeds of the Euro Trade Centre property are caught under the debenture is something of a red herring. The plaintiff is not estopped from exercising its right as a creditor to protect its claim simply because it has no charge over the property the subject of a sale.

3. I am not satisfied there has been material non-disclosure; certainly not of the kind that would have influenced the judge when he granted the injunction ex parte. The pleadings referring to fraud were on file and before him. These allegations post-dated by several months the default. And I have already indicated that the exclusion of the Euro Trade Centre property from the charged assets in the debenture is not in the circumstances a material factor.

4. Notwithstanding the second defendant's assertion to the contrary, I am satisfied release of the sale proceeds and otherwise freedom of the second defendant to trade outside the terms of the injunction would result in a dissipation of assets. It is declared policy of the Seapower Group to move funds freely through the various companies; that is how it proposed to deal with the sale proceeds. The size of the plaintiff's claim relative to the worth of the second defendant would render such activity prejudicial to the realization of the debt if its claim succeeds.

Conclusion

23. In the circumstances I am satisfied that the plaintiff has made out a case entitling it to a Mareva injunction ex parte at first instance and now inter partes.

24. There will be an order in terms of its application of 28 December 2000, save for clause 8, as this has already been dealt with.

25. The application of the first and second defendants is dismissed, with costs of the plaintiff in the cause. This order as to costs is nisi at first instance.