YAU CHIU WAH v. GOLD CHIEF INVESTMENT LTD. AND ANOTHER

HCA 807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 807 OF 2001

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J U D G M E N T

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1. By a judgment handed down on 21 May 2003, I dismissed the Plaintiff's application for a wasted costs order against D.S. Cheung & Co. The main ground for doing so was that in circumstances where D.S. Cheung & Co. were prevented and thus handicapped by reason of legal professional privilege from disclosing the full extent of its instructions, retainer and communications while acting for its former client (the 1st Defendant), it was not fair to make such an order.

2. I also made a cost order nisi saying the following:-

"65. As to costs, I would make an order nisi that each side bears its own costs. It seems to me that where a large and critical part of the evidence is missing owing to privilege not having been waived and that this evidence, if revealed, may or may not have enured to the benefit of the solicitor involved, this is the right order. Of course, where it can be shown that the application was misguided in the first place or somehow unreasonably taken out or continued, this may be different. However, while fully accepting I have not heard the parties as to costs, it does not seem to me in the circumstances that the Plaintiff has taken out either a misguided or misconceived application nor that she has acted unreasonably in doing so or continuing it. This order for costs will also apply to all reserved costs."

3. D.S. Cheung & Co. now applies for this order nisi as to costs to be varied to an order that it should be paid the costs of and occasioned by the wasted costs application. Mr Gareth Thomas, for the firm, submits quite simply that costs should follow the event and there is nothing in the circumstances of the case to suggest a contrary order.

4. On reflection and in reviewing the legal propositions made by Mr Thomas, I agree that once the Plaintiff was apprised of the fact that D.S. Cheung & Co. was labouring under the handicap or disadvantage referred to earlier, she was at risk as to costs in the event her application was unsuccessful. The state of the law as I have described in my judgment in relation to this handicap (which the Plaintiff is presumed to know), reinforces this.

5. However, the focus then becomes just when it was that the Plaintiff first knew of D.S. Cheung & Co.'s handicap. At the time of the first hearing of the application on 20 November 2002, it was not clear whether or not at that stage the 1st Defendant was prepared to waive privilege. If that hearing had gone ahead, it is difficult to say whether or not D.S. Cheung & Co would have been successful in resisting the application. Mr Thomas submits that the Plaintiff ought to have known right from the start that the firm may have been handicapped in obtaining a waiver of privilege, but I do not share this view. D.S. Cheung & Co. at no stage hinted at this difficulty in the inter-solicitor correspondence that was exchanged. There was a hint of this in the first affirmation of Mr Cheung Doi Shu, but the matter was left inconclusive as to whether the 1st Defendant would in fact waive privilege.

6. However, by the time Mr Cheung served his second affirmation dated 22 January 2003, the Plaintiff would then have been apprised of the problems that the firm was experiencing in relation to privileged material. From then on, in my view, the Plaintiff was at risk as to costs.

7. I appreciate that there were many other aspects to the wasted costs application apart from the waiver of privilege issue and I have dealt with some of these in my judgment. I have also not forgotten that at the 20 November 2002 hearing, both sides were to an extent unprepared. However, the approach I take on the question of costs is to take an overall view of the application. While the principle that costs should follow the event applies in the present case, there were some unusual features that have to be taken into account. On the whole, these relate to the revelation that the 1st Defendant was not prepared to waive privilege.

8. In my earlier judgment, I referred to the fact that the privileged material which could not be disclosed, may or may not have enured to the benefit of D.S. Cheung & Co. and thought that this was therefore relevant as to the question of costs. I have reflected on this and am now persuaded that it is entirely neutral. Once the Plaintiff knew that D.S. Cheung & Co. was under the disadvantage I have described, she ought to have realised that to carry on with the wasted costs application put her on risk as to costs.

9. In these circumstances, I am of the view that the correct order for costs is:-

(1) That there be no order as to costs up to the time the second affirmation of Mr Cheung Doi Shu was served.

(2) Thereafter, the costs of and occasioned by the application be to D.S. Cheung & Co., all such costs to be taxed if not agreed.

(after submissions on costs)

(3) The costs of and occasioned by the present application be to D.S. Cheung & Co., such costs to be taxed if not agreed.

Representation:

Mr Victor Chan, of Messrs Tang, Wong & Cheung, for the Plaintiff

Mr Gareth Thomas, of Messrs Herbert Smith, for Messrs D.S. Cheung & Co.

HCA 807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 807 OF 2001

__________________

________________

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J U D G M E N T

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Background

1. The application before the court involves the Plaintiff and a firm of solicitors, Messrs D.S. Cheung & Co. ("DSC & Co."). The Plaintiff seeks an order that DSC & Co. do indemnify her in relation to all costs expended by her since 6 March 2001. The application is made under RHC Order 62 rule 8. I will deal with the exact ambit of this summons further below.

2. On 20 February 2001, the Writ in the present action was issued in which the Plaintiff made a claim against the 1st Defendant for the sum of $4.95 million (this being the outstanding balance of a loan made by the Plaintiff under a loan agreement dated 6 November 2000), together with interest and costs. The loan had been for $5 million for a period of three months, at the end of which the 1st Defendant was to repay the principal sum together with $750,000.00 as interest. The 1st Defendant had repaid only $800,000.00. The Plaintiff's claim against the 1st Defendant was also on the basis of a dishonoured cheque for $5.75 million (less the $800,000.00 that had been paid by the 1st Defendant). As against the 2nd Defendant, the Plaintiff's claim was on the basis of a guarantee also dated 6 November 2000 that had been provided by the 2nd Defendant to guarantee the 1st Defendant's obligations.

3. On 19 February 2001 (the day before the Writ was issued), the Plaintiff sought against the 1st Defendant and obtained from Waung J, a Mareva injunction on assets in Hong Kong up to the limit of $4.95 million. The particular assets that were identified in the Mareva injunctions were shares held by the 1st Defendant in a Hong Kong company called Prosper eVision Limited ("PeV"). PeV was a company set up by the 1st Defendant, together with the 2nd Defendant, to introduce into the Mainland interactive broadband TV. A part of Waung J's order read as follows:

"1. Restriction on Disposal of assets

...........

(2) If the total unencumbered value of the 1st Defendant's assets in Hong Kong exceeds HK$4,950,000, the 1st Defendant may remove any of those assets from Hong Kong or may dispose of or deal with them so long as the total unencumbered value of its assets still in Hong Kong remains above HK$4,950,000.

...........

2. Disclosure of information

(1) The Defendant must inform the Plaintiff in writing within 14 days from today of all its assets of an individual value of HK$4,950,000 or more in Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets. The 1st Defendant may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate it.

(2) This information must be confirmed in an affidavit which must be served on the Plaintiff's solicitors within 14 days after this Order has been served on the Defendant." (Emphasis added)

4. It was also ordered by Waung J that as regards the amount that the 1st Defendant could spend on legal advice representation, this was to be limited to $100,000.00.

5. On 20 February 2001, the Plaintiff applied by summons to continue the Mareva injunction and for its part, on 22 February 2001, the 1st Defendant applied by summons to set aside Waung J's said order.

6. On 23 February 2001, on a normal summons day, Yeung J adjourned both summonses and discharged the 19 February 2001 order upon the 1st Defendant providing a number of undertakings including the discovery obligations earlier ordered by Waung J. No undertaking was, however, given in respect of paragraph 1(2) of the Order set out above.

7. By an affirmation dated 6 March 2001 made by one Yu Won Kong, Denis, a director of the 1st Defendant ("Mr Yu"), served in compliance with the discovery order made by Waung J, he gave the following details of the 1st Defendant's assets in Hong Kong (of an individual value of HK$4,950,000.00 or more):-

"Particulars
Details of Assets	Value (HK$)		Location
244,169,585 shares of Prosper eVision Limited (closing price was $0.159 per share as at 28 February 2001		38,822,964.01	3 million shares held with Sun Hung Kai Securities Investment Services Limited and share certificates of the remaining shares are kept in Beijing, PRC"

8. This affirmation was filed on the same day. It is the costs as from this date that the Plaintiff now seeks an indemnity from DSC & Co.

9. No hint was given that these 244,169,585 shares in PeV or any part thereof ("the Shares") were encumbered or had any value as at 28 February 2001 (using their closing price) other than the stated one of $38,822,964.01. This affirmation was filed by DSC & Co. on behalf of the 1st Defendant. The reference of DSC & Co. on the backsheet was given as "TT/DSC/P0055/B00164 LIT". "TT" refers to Ms Teresa Tsang ("Ms Tsang"), "DSC" refers to Mr Cheung Doi Shu ("Mr Cheung"), now the senior partner of DSC & Co. (then its sole proprietor).

10. On 20 April 2001, the two applications I have referred to in paragraph 5 above came before me (sitting as a Recorder) for determination. In the course of that hearing, I specifically asked Mr Austen Wither ("Mr Wither") who represented the 1st Defendant at that hearing, whether the Shares were encumbered. The relevance of this inquiry seemed at that time fairly obvious. For example, if the Shares had indeed been encumbered, it would then have been necessary to find out the true value of them and the likelihood of the encumbrance being discharged. If the Shares had little or no value (or a value less than the Plaintiff's claim), it would then have been necessary to look closely at the amount of expenses that the 1st Defendant should be allowed, not to mention the discovery order. As stated above, the 1st Defendant through Mr Yu had deposed to the fact that it held the Shares which were said to be worth some $38,822,964.01. However, by a letter dated 11 April 2001, the Plaintiff's solicitors specifically asked DSC & Co. whether the Shares were encumbered. This was in response to a letter from DSC & Co. dated 10 April 2001 in which the Plaintiff had been asked whether she would be willing to agree to the lifting of all restrictions on the amount that the 1st Defendant could spend on legal advice and representation (Waung J had placed a cap of $100,000.00 on this aspect, as mentioned above). There appears to have been no substantive reply to the question raised by the Plaintiff's solicitors in the 11 April 2001 letter.

11. By a judgment handed down on 15 May 2001 ("the 15 May 2001 Judgment"), I discharged the Mareva injunction granted by Waung J by reason of material non-disclosure on the Plaintiff's part, but granted a new injunction. Part of my reasons in dealing with the aspect of risk of dissipation, related to the Shares:-

"(5) Given the factors referred to above, the fact that the 1st defendant's assets are liquid become significant. In Mr Dennis Yu's second affirmation (served in compliance with the order for discovery made under the injunction granted by Waung J), he refers to the fact that the 1st defendant has 244,169,585 shares in PeV, of which 3 million are held at Sun Hung Kai Securities Investment Services Limited, with the share certificates for the balance being kept in Beijing. By a letter dated 11 April 2001 from the plaintiff's solicitors to the 1st defendant's solicitors, enquiries were made as to whether these shares were encumbered. I also asked this question of Mr Wither to which there was no answer. In my view, this is not satisfactory"

12. Following the 15 May 2001 Judgment, the Plaintiff applied by a summons dated 28 May 2001 for an order that the 1st Defendant state on oath whether the Shares were encumbered. In the affirmation in support of this summons, the Plaintiff's solicitor, Mr Victor Chan ("Mr Chan") pointed out the Plaintiff's concern over the diminishing value of the Shares since the time Mr Yu made his said affirmation dated 6 March 2001. It was stated by Mr Chan:-

"No doubt whether any of the Shares have been encumbered and if so, the extent to which they have been encumbered would affect the effectiveness of any Mareva injunction obtained herein as well as the further conduct of the proceedings herein by the Plaintiff. It must therefore be implicit in the Undertaking given to the Court by the 1st Defendant that the 1st Defendant must not only disclose the gross value of the Shares based on the open market price thereof but also disclose if any of the Shares have or have not been encumbered and if so, full particulars of those encumbrances including the extent to which they have been encumbered and the net value of the Shares after taking into account of the liability under those encumbrances, so as not to mislead the Court or the Plaintiff."

13. In his affirmation, Mr Chan also referred to a number of letters that had been sent by his firm to DSC & Co. enquiring about whether the Shares were encumbered:- see the said letter dated 11 April 2001 and the letters dated 24 April 2001, 27 April 2001, 4 May 2001, 16 May 2001 and 21 May 2001. In particular, in the letter dated 24 April 2001 from the Plaintiff's solicitors to DSC & Co., it was stated:-

"iii. This is most unsatisfactory as no doubt as whether the Shares were encumbered and if so, the extent to which they have been encumbered would be highly relevant not only to whether your client has fully and properly discharged its undertaking given to the Court on 23rd February 2001 but also the continuous prosecution of our client's claims herein including the continuation of the Order;"

14. On 12 June 2001, the matter came before me again in which the final form of the injunction which I had granted was in issue as well as the question of the costs of the 20 April 2001 hearing. In addition, the 1st Defendant (again represented by Mr Wither) sought an increase on the limit imposed in respect of legal advice and representation from $100,000.00 to $1,000,000.00. I granted this application despite resistance from the Plaintiff. In my judgment given that day ("the 12 June 2001 Judgment"), I said this:-

"(b) In relation to the amount that the 1st defendant should be permitted to spend on legal costs for the action, the figure which I allow for legal costs is $1 million. The 1st defendant must be allowed to defend the action properly. A Mareva injunction is not made to cause disruption. Its function is to freeze a party's assets in the face of a risk of dissipation. Expenditure on matters such as daily living expenses and legal costs will always be allowed where the amounts sought are reasonable. Mr Chan, for the plaintiff, submits that it is necessary to ascertain the totality of the 1st defendant's assets before such an allowance can be made. I disagree. Only where the amount sought is unreasonable or excessive, then perhaps it may be relevant to look at the totality of the plaintiff's assets. However, I am of the view that a figure of $1 million is neither excessive nor unreasonable."

15. On 13 June 2001, the day after I made the said order, a consent summons was filed in relation to the Plaintiff's 28 May 2001 summons (referred to in paragraph 12 above). A consent order was accordingly made by Mr Recorder Kenneth Kwok SC on 13 June 2001.

16. In compliance with the consent order, Mr Yu made an affirmation dated 15 June 2001 (filed only on 20 June 2001) in which it was revealed for the first time that 241,169,585 of the Shares had been encumbered under a loan agreement dated 8 January 2001 made between a Chinese company, Beijing Dong Hua Investment Company Limited, the 1st Defendant and China Convergent Corporation Limited (formerly the 2nd Defendant). Only 3 million shares in PeV were unencumbered and said to be worth only $549,000.00 as at 8 June 2001. This affirmation was filed by DSC & Co., again with the reference "TT/DSC/P0055/B00164 LIT".

17. This revelation (for the first time as far as the Plaintiff was concerned) provoked an accusation by the Plaintiff's solicitors that Mr Yu's earlier affirmation (dated 6 March 2001) had been misleading in deposing to the fact that the 1st Defendant had assets worth $38,822,964.01:- see the letter dated 29 June 2001 from the Plaintiff's solicitors to DSC & Co.

18. On 23 October 2001, the Plaintiff took out a summons seeking an order that Mr Yu be cross-examined on the two affirmations I have earlier identified. This application was heard by me on 8 January 2002 and I made an order that day acceding to the Plaintiff's summons. In my Reasons for Decision handed down on 22 January 2002 ("the 22 January 2002 Reasons for Decision"), I took the view that the picture presented by the 1st Defendant of its financial position was far from satisfactory. I was referring precisely to the fact that most of the Shares were encumbered and how this did not emerge until a late stage, despite constant inquiries from both Plaintiff and the court. See in particular:- paragraphs 22 to 26 of the 22 January 2002 Reasons for Decision. Further, I said this in relation to the increase of the amount for legal advice and representation from $100,000.00 to $1 million ordered by me on 12 June 2001:-

"(5) I would not have allowed the increase if I had known that the available assets of the plaintiff [clearly this should be a reference to the 1st Defendant] were non-existent. Indeed, it would have been pointless to increase the amount from $100,000 to indeed any figure if there were no assets freely available to the 1st defendant. No explanation has been given to me (and none was given when the 1st defendant served its affidavit evidence in response to the present summons) as to why an application was made for an increase in the allowance for legal fees when, apparently, the 1st defendant had no available assets. This gives rise, as the plaintiff submits, to an inference that there may be other assets which the 1st defendant has not disclosed. I see the force in these submissions."

19. By a consent order dated 14 May 2002 ("the Tomlin Order"), the Plaintiff settled the action with the 1st and 2nd Defendants but expressly without prejudice to the Plaintiff's right to seek an order for costs against DSC & Co.

20. At all material times, DSC & Co. was of course the 1st Defendant's solicitors and it continued in this capacity until 22 April 2002 when I gave an order giving leave to that firm to cease to act. The solicitors who handled the case on behalf of the 1st Defendant were Ms Tsang and Mr Wither. I shall deal presently with their involvement as well as that of Mr Cheung and a Mr Colin Hiles, the manager of the firm ("Mr Hiles").

The present summons

21. By a summons dated 13 September 2002, the Plaintiff originally sought an order that DSC & Co. should indemnify her in relation to all costs expanded by her since 6 March 2001 in relation to "(a) the continuation of the Order made by the Honourable Mr Justice Waung on 19 February 2001; (b) the investigation in the financial position of the 1st Defendant, to be taxed, if not agreed". The hearing of this summons was fixed for hearing before me on 20 November 2002. On that day, it was clear that both sides needed to clarify their position. I therefore gave directions allowing the Plaintiff leave to amend the summons and also gave leave to DSC & Co. to supplement its affidavit evidence.

22. The Plaintiff duly amended her summons on 26 November 2002 to make clear that the costs in respect of which the Plaintiff wanted DSC &Co. to indemnify her, were those in relation to the 20 April 2001, 12 June 2001, 8 January 2002 and 27 February 2002 hearings (as well as those of the consent summons made on13 June 2001). The only hearing I have so far not dealt with is the one that took place on 27 February 2002. This was a short hearing before me for an extension of time of 7 days to the 1st Defendant to file a further affirmation following the 8 January 2002 hearing.

23. Although costs orders were made in relation to these four hearings, the Tomlin Order expressly stated that as between the Plaintiff and the Defendants, it was agreed that the parties would bear their own costs in the action (therefore including the four hearings) but without prejudice to the Plaintiff seeking costs against DSC & Co. as the solicitors formerly acting for the 1st Defendant.

24. The substantive hearing of the amended summons took place before me on 25 March 2002. Mr C.Y. Li acted for the Plaintiff, Mr Paul Shieh for DSC & Co. Although oral submissions concluded that day, both parties have since lodged further written submissions (dated 1 April 2003 for the Plaintiff, dated 8 April 2003 for DSC & Co.) and are content that I resolve the matter without a further oral hearing.

25. Before identifying the various issues I have to decide in this application, I first deal with the relevant law.

Law

26. RHC Order 62 rule 8(1) states as follows:-

"Personal liability of solicitor for costs

8. - (1) Subject to the following provisions of this rule, where in any proceedings costs are incurred improperly or without reasonable cause or are wasted by undue delay or by any other misconduct or default, the Court may make against any solicitor whom it considers to be responsible whether personally or through a servant or agent an order-

(a) disallowing the costs as between the solicitor and his client; and

(b) directing the solicitor to repay to his client costs which the client has been ordered to pay to other parties to the proceedings; or

(c) directing the solicitor personally to indemnify such other parties against costs payable by them."

27. Although the Plaintiff's amended summons does not state the precise basis for the application, I am in the present case concerned with the question whether costs (incurred by the Plaintiff) have been wasted by the misconduct or default of DSC & Co. This is by far the most usual form that an application under Order 62 rule 8 takes.

28. The authorities on the court's general approach in such applications are numerous. The usual starting point is to refer to K.B. Chau & Co. (a Firm) v China Finance Trust and Investment Corporation [1995] 2 HKLR 567 applying the well-known case of Myers v Elman [1940] AC 282; see also Hong Kong Civil Procedure 2002 Vol. 1 at paragraphs 62/8/1 to 62/8/8.

29. It is unnecessary for me to repeat the general principles that guide the court in such applications. They are to be found in the above authorities. Nevertheless, I wish to emphasise some aspects of this jurisdiction which are relevant in the present application.

30. First, in examining a solicitor's conduct, one must have regard not only to his role as the legal representative of his client but also to his position as an officer of the court. A solicitor's obligation here is that while he is expected to act in the best interests of his client, he must not overstep the mark by undermining or in any way obstructing the administration of justice by the courts. The discharge of a solicitor's duties towards his client must not cause him to be in breach of his duties to the court:- cf. Arthur J.S Hall & Co. v Simons [2002] 1 AC 615.

31. The duty owed to the court is expressly referred to in the Legal Practitioners Ordinance Cap 159. Section 3(2) states that every solicitor shall be an officer of the court and is subject to its jurisdiction. Rule 2(f) of the Solicitors Practice Rules under that Ordinance states that a solicitor should not do or permit to be done on his behalf anything which compromises or impairs or is likely to compromise or impair his duty to the court.

32. The duty owed to the court means that a solicitor, like a barrister, has a critical role to play in the administration of justice. As Sir Thomas Bingham MR said in Ridehalgh v Horsefield [1994] Ch. 205 at 227 C-D, "The court's jurisdiction to make a wasted costs order against a solicitor is founded on breach of the duty owed by the solicitor to the court to perform his duty as an officer of the court in promoting within his own sphere the cause of justice". This passage was cited with approval by the Court of Appeal in K.B. Chau & Co. at 573. In litigation, the courts rely on solicitors to facilitate their arriving at a just result in any given dispute. As I have said above, a solicitor must not do anything to undermine or in any way obstruct the administration of justice. Obviously, he must not do anything to mislead or deceive the court. Courts have to rely on the integrity and honesty of solicitors. In addition, a solicitor must not use his position to obtain an unfair advantage for his client. One often hears a reference to litigation "tactics" but this must not be misunderstood. While everyone would accept that a solicitor should act at all times in the best interests of his client, he must also be scrupulously fair to the other side. He must not mislead, deceive or otherwise act unfairly, for litigation in the courts is a serious legal contest, not a game.

33. The present case concerns one of the most important aspects of the administration of justice: discovery. Much has been said and written about how discovery has got out of hand in modern litigation. Whatever its excesses, the basic principle is the notion that justice is served by the parties revealing all relevant factual matters and documents within their possession, custody and power. In the Mareva injunction context, as in the present case, discovery orders are frequently made ordering a party to disclose the extent of his assets.

34. A solicitor's duty in relation to discovery is to ensure that his client properly complies with his obligations in this context. The duty is not limited merely to preventing the client filing an affidavit which, to his knowledge, is false. The solicitor must actually explain to his client the extent of his obligations in relation to discovery and take reasonable steps to ensure that this obligation is fulfilled:- see Myers v Elman at 304 and 322. As Megarry J said in Rockwell Machine Tool Company Limited v EP Barrus (Concessionaires) Limited [1968] 1 WLR 693, at 694, "Many litigants (and not least corporate litigants) have little appreciation of the scope of discovery, and the duty of making full disclosure".

35. In relation to an order for disclosure of assets under a Mareva injunction order, a solicitor has the responsibility to ensure that the party for whom he acts makes proper discovery:- see Gee: Mareva Injunctions and Anton Piller Relief (4th Edition) at 134.

36. Secondly, the exercise of the court's jurisdiction to order a solicitor to pay costs personally under Order 62 rule 8 does not depend on dishonesty, personal obliquity or behaviour such as would warrant disciplinary action being taken. While mere mistake or error of judgment may not necessarily be enough, misconduct, default or even negligence will be if this is serious or worse still, gross. See here:- Myers v Elman at 319, Ridehalgh at 227 and K.B. Chau & Co. at 573 and 577.

37. Thirdly, I wish to highlight an unusual feature that sometimes occurs in proceedings under Order 62 rule 8. Normally, in any hearing before the court, one expects that all available evidence within the powers of the parties to adduce, is in fact produced. The consequence of this is that where a party does not produce evidence he is expected to adduce, this omission can give rise to adverse inferences being drawn against him. However, in Order 62 rule 8 cases, it sometimes occurs that the solicitor who is the subject matter of the application is handicapped in presenting his case by his client (or former client) refusing to waive privilege, thereby effectively preventing the solicitor from presenting the full picture to the court.

38. In Ridehalgh, Sir Thomas Bingham MR recognised the problem and said this at 237:-

"The respondent lawyers are in a different position. The privilege is not theirs to waive. In the usual case where a waiver would not benefit their client they will be slow to advise the client to waive his privilege, and they may well feel bound to advise that the client should take independent advice before doing so. The client may be unwilling to do that, and may be unwilling to waive if he does. So the respondent lawyers may find themselves at a grave disadvantage in defending their conduct of proceedings, unable to reveal what advice and warnings they gave, what instructions they received. In some cases this potential source of injustice may be mitigated by reference to the taxing master, where different rules apply, but only in a small minority of cases can this procedure be appropriate. Judges who are invited to make or contemplate making a wasted costs order must make full allowance for the inability of respondent lawyers to tell the whole story. Where there is room for doubt, the respondent lawyers are entitled to the benefit of it. It is again only when, with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order."

39. I emphasise the last part of this quoted passage. A court must make full allowance for any inability on the solicitor's part to tell the whole story. Where there is room for doubt, the solicitor is entitled to the benefit of it. Only when it can be seen that, even with the allowances made for the client or former client refusing to waive privilege, a solicitor's conduct is plainly unjustified would it then be appropriate to make a wasted costs order.

40. This poses a real problem in practice. Where it is the client who makes an application against his own solicitor under Order 62 rule 8, it would appear that there will be implied a waiver of all relevant privileged matters:- see Medcalf v Mardell [2002] 3 WLR 172, at 187 (paragraph 31) referring to Lillicrap v Nalder & Son [1993] 1 WLR at 94. Where, however, as in the present case, it is the other side in the proceedings who makes the Order 62 rule 8 application against the solicitor, that solicitor's client may have no wish or incentive to become involved in this aspect of the proceedings. Quite apart from anything else, the client may not wish to spend time or money seeking advice in relation to such an application and where the litigation has in fact come to an end, the incentive to become involved again becomes even further lessened. The solicitor is then left with a refusal on the part of the client to waive privilege. In Medcalf v Mardell, again at 187 (paragraph 31), Lord Steyn referred to this situation as a "systemic problem".

41. In the same case, Lord Bingham of Cornhill referred to and approved that part of his judgment in Ridehalgh (set out in paragraph 38 above), but (in paragraph 23 at 184-5 of his speech) made various points which I can summarise as follows:-

(1) Where a solicitor facing an application for a wasted costs order is unable to give a full account of events by reason of privileged material (and the client does not waive privilege) the court must proceed very carefully. As he says at 184, "Speculation is one thing, the drawing of inferences sufficiently strong to support orders potentially very damaging to the practitioner concerned is another".

(2) It is perhaps only on rare occasions that a court will, even after making full allowance for the handicap the solicitor finds himself in, conclude there is no room for doubt in holding that the solicitor has been at fault. The reason for this is that a court must necessarily proceed with the utmost caution where it does not have the full facts before it.

(3) Where a solicitor's professional reputation is at risk of being tarnished (an inevitable consequence of an order under Order 62 rule 8), the court must be fair to him in the light of the handicap on privileged material l have referred to.

(4) Lord Bingham of Cornhill summarises the position in this way at 185, "Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is (a) satisfied that there is nothing that the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order".

42. The existence of privileged material (for which no waiver is given by the client) does not by itself operate as an absolute bar to a wasted costs order under Order 62 rule 8. It is but one, albeit important, part of the court's approach to such applications. Once the benefit of the doubt is given to the solicitor concerned, any element of unfairness is removed and should a wasted cost order still be made in the circumstances, the solicitor has no cause to complain:- see Medcalf at 194-195 at paragraphs 61-2 per Lord Hobhouse of Woodborough.

43. But what is meant by privileged material in the context of solicitor-client communications? Generally, almost anything exchanged in confidence between the solicitor and his client is privileged, providing the solicitor is acting in his professional capacity. In other words, any confidential communications to or from a solicitor in connection with the professional capacity in which a solicitor is engaged (i.e. giving legal advice) will generally be privileged. Here, I would refer to the useful commentary on the subject in Hong Kong Civil Procedure 2002 Vol. 1 at paragraph 24/5/8 and to the decision of the English Court of Appeal in Balabel v Air India [1988] Ch. 317.

44. Not only are the contents of the communications themselves privileged, I believe also any fact which may directly or indirectly reveal the contents of privileged matters or which may by a process of inference lead to such revelation, is also privileged:- see Passmore: Privilege at 247-8 referring to Gardner v Irwin [1878] 4 Ex D 49, at 53 and Derby v Weldon(No. 7) [1990] 1 WLR 1156. For convenience, I shall call these facts "peripheral facts". Thus, relevant dates of communications between solicitor and client may be held to be privileged if by their being disclosed to the other side, this may lead to the revelation of privileged matters. An example of this is where a party is asked when he consulted lawyers in the context of the happening of an event (such as the termination of a contract). By finding out the date of communications with the lawyer, the other side might then be able to piece together the contents of legal advice given in relation to that event.

45. Whether or not such peripheral facts are privileged will vary from case to case depending on the relevant circumstances. In Pang Yiu Chung v Commissioner of Police [2002] 4 HKC 579, Hartmann J held that the fact of monies being paid to a solicitor was not privileged. The crucial aspect was that such payments were not covered by legal professional privilege as they were "unconnected to advice given or sought":- see paragraph 34 of his judgment at 593. Where the relevant fact or document (of which disclosure is sought) is not connected with legal advice given or sought, it is not privileged:- see Conlon v Conlons Limited [1952] 2 All ER 462, at 466; R v Manchester Crown Court ex parte Rogers [1999] 1 WLR 832, at 839. It follows that where any fact or document (peripheral or otherwise) is connected with legal advice given or sought, it will be privileged. None of the authorities cited by Mr Li says otherwise and indeed it would be surprising if they did. There was a vague attempt to submit that where an "objective fact" was involved (by which was presumably meant facts rather than opinions or advices and this term therefore includes dates, etc), privilege could not attach. This is simply not so. The test is, as I have stated, whether the fact or document is connected to legal advice sought or given.

46. Fourthly, I wish finally to emphasise that in Order 62 rule 8 applications, it is not enough for the applicant merely to show misconduct or default. The applicant must also demonstrate a causal connection between the misconduct or default and the costs which are said to have been wasted:- see Ridehalgh at 237.

47. With these principles in mind, I now turn to the complaints made by the Plaintiff in this application.

Was DSC & Co. guilty of misconduct or default?

48. Mr Li submitted before me that DSC & Co. has been in dereliction of duty and there was misconduct on its part. The relevant factual background to the Plaintiff's application has already been set out above. Of the background, the most crucial fact is that it was not until the 15 June 2001 affirmation of Mr Yu that it was revealed for the first time (and some 4 months after the discovery order under the Mareva injunction was first made) that the Shares were encumbered.

49. The Plaintiff puts her case against DSC & Co. in a number of ways. These have changed in emphasis over the course of the hearings and in the latest written submissions provided on her behalf. Essentially, the Plaintiff submits as follows:-

(1) DSC & Co., whether through Mr Cheung himself, Mr Hiles, Mr Wither or Ms Tsang, actually knew or ought to have known that the Shares were encumbered and therefore somehow deliberately assisted the 1st Defendant in keeping this information from the Plaintiff and the court. The material period of time under consideration here is from February 2001 (when the Writ was issued and the Mareva injunction first obtained and discovery ordered) to 15 June 2001 when it finally came to light that a vast proportion of the Shares was encumbered.

(2) Alternatively, DSC & Co. (through the same people referred to above), if it did not possess the knowledge as stated above, nevertheless failed to discharge the duty on it as solicitors to advise properly or impress upon the 1st Defendant in the strongest possible terms as to the impact and effect of the discovery obligations contained in the Mareva injunction that was granted and continued. The result of this failure was that the 1st Defendant was allowed to make an affirmation (the affirmation of Mr Yu dated 6 March 2001) that was misleading in not stating that the Shares were encumbered. Both the Plaintiff and the court were accordingly misled as to the true picture and it was not until 15 June 2001 when the true facts were revealed.

50. Before dealing with each of these submissions, I would just like to add the following points in relation to the way I have approached the present application:-

(1) DSC & Co. will be responsible if it is shown that any of its solicitors has been guilty of misconduct or default at the relevant time. Mr Cheung, who was the sole proprietor of DSC & Co. for a large part of the relevant period, accepts responsibility for any misconduct or default on the part of those in his employment at the relevant time.

(2) A Mareva injunction is a remedy that is granted only in exceptional cases. It has been commonly referred to as one of the law's "nuclear weapons":- see Bank Mellat v Nikpour [1982] FSR 87, at 92. However, given that its function is to prevent the injustice of a defendant dissipating his assets before judgment, once granted, it will contain all necessary features to ensure that it operates effectively. As I remarked in the 22 January 2002 Reasons for Decision, Mareva injunctions are exceptional orders "but once granted, they must be made effective and practical":- see [2002] 2 HKLRD 832, at 840 (paragraph 16). A discovery order requiring a party to disclose assets is one of the more common features of a Mareva injunction. Its importance is easily seen. The identification of assets enables sufficient protection to be given to a plaintiff whether by the "freezing" effect of a Mareva injunction itself or by notification to relevant third parties. Furthermore, the value of disclosed assets is also an important aspect, again for the same reasons. In my view, there can be no doubt that in the case of any asset that is ordered to be disclosed as part of a Mareva injunction order, it is important also to divulge whether or not the asset is encumbered. The extent of an encumbrance is of course relevant to the value of the asset.

51. I now deal with the Plaintiff's submissions.

52. As far as Mr Cheung and Mr Hiles are concerned, I have little hesitation in rejecting the Plaintiff's submissions in relation to them.

53. Mr Cheung

(1) The case made against Mr Cheung was that not only was he the sole proprietor (later senior partner) of DSC & Co. during the time the Mareva injunction was in force, he had also at one stage been a director of the 1st Defendant (between 7 December 2001 and 20 March 2002) and also the chief executive officer and a director of the 2nd Defendant (between 21 November 2000 and 1 February 2002). The 1st Defendant was a subsidiary of the 2nd Defendant. Mr Cheung also remains to this day the managing director of PeV. PeV is a subsidiary of the 1st Defendant. Thus, it is said that he knew or must have known about the Shares being encumbered. It will be recalled that the vast proportion of the Shares were encumbered as a result of the loan agreement dated 8 January 2001 made between Beijing Dong Hua Investment Company Limited, the 1st Defendant and the 2nd Defendant.

(2) The Plaintiff makes a further point against Mr Cheung. It is said that as Mr Cheung's initials appeared in the reference given in the backsheet of Mr Yu's 6 March 2001 affirmation and also in various letters emanating from DSC & Co. dealing with the Mareva injunction, so it must follow that Mr Cheung must have knowingly permitted Mr Yu to make a misleading affirmation.

(3) Mr Cheung has made two affirmations. He deposes to the fact that he was not involved in the said loan agreement dated 8 January 2001 and only came to know about it (though not specific details) until later. He also states that given his position within the 1st Defendant, the 2nd Defendant and PeV, he left the running of DSC & Co. to others. As far as litigation was concerned, he left this to Mr Wither. The conduct of the present proceedings was left to others, although (as one might expect) Mr Cheung was informed at least on one occasion by Mr Wither in relation to what happened at the 23 February 2001 hearing. Administrative matters of the firm were left to Mr Hiles. These steps were taken pursuant to Rule 2.05 of the Hong Kong Solicitors Rules of Professional Conduct. Moreover, so as to avoid any conflict of interest on the company side, he left it to others within the companies to make the relevant decisions on legal representation and other matters in the present action. The instructions to DSC & Co. in the present proceedings were given by Mr Yu and one Mr Eddy Lo ("Mr Lo"), then the Chief Financial Officer of the 2nd Defendant and PeV.

(4) Mr Cheung's explanation for the presence of his initials in the references given in the backsheet to Mr Yu's affirmation and in the correspondence, is that he was the sole proprietor of the firm at the time even though he had no personal involvement in the Mareva injunction proceedings. When DSC & Co. became a partnership in December 2001, it became no longer necessary to refer to Mr Cheung and the correspondence thereafter shows this to be so.

(5) Based on the material before me, I am not satisfied that a case on actual, presumed or any other form of constructive knowledge has been made out by the Plaintiff against Mr Cheung. He appears not have known at the material time there was an encumbrance on the Shares. Nor has it been shown that he was aware either of the progress of the Mareva injunction proceedings or the inter-solicitor correspondence dealing with the particular aspect of encumbrances on the Shares. He left the running of the litigation to others. His version of events has not been challenged in cross-examination, the Plaintiff not having sought an order to this effect. It is said it was "inconceivable", "incredible" or "unbelievable" that Mr Cheung did not know of the encumbrance on the Shares. This is pure speculation. If anything, the facts show otherwise.

(6) Given Mr Cheung's lack of involvement in relation to the Mareva injunction proceedings, he personally would not have had the obligation to advise in relation to the proceedings and specifically on the aspect of discovery. I accept that Mr Cheung was the sole proprietor of the firm but I equally accept he was entitled to delegate the handling of the litigation to others. Indeed, given his relationship with the two Defendants and PeV, it is right that he did not have any professional involvement in the Mareva injunction proceedings.

54. Mr Hiles

(1) In relation to Mr Hiles, the Plaintiff contends that as he was the deputy chairman and a director of the 2nd Defendant (between 15 December 2000 and 10 January 2002), as well as the administrative manager of DSC & Co., he therefore must have been aware of the said loan agreement and must also have been involved in the Mareva injunction proceedings. Much play is made of the fact that Mr Hiles has not come forward to give his version of events.

(2) However, I am of the view that again, the Plaintiff has failed to demonstrate that degree of knowledge on Mr Hiles' part of relevant matters (or indeed any knowledge). There is no evidence (nor even an assertion) to suggest that Mr Hiles had any involvement in either the loan agreement or the Mareva injunction proceedings. In fact, Mr Cheung in his second affirmation states that Mr Hiles had no management role in the 2nd Defendant nor had any role in the Mareva injunction proceedings. Again, there was no challenge to this by way of an application to cross-examine Mr Cheung.

(3) Similarly, as in the case of Mr Cheung, since Mr Hiles was not involved in the handling of the litigation and the Mareva proceedings, he did not have any duties to advise. The Plaintiff's alternative submission therefore also fails in relation to Mr Hiles.

55. I now turn to the case-handlers within DSC & Co. who were actively involved in the Mareva injunction proceedings. They were of course Mr Wither and Ms Tsang. The case against them seems prima facie to be at least sustainable and I confess initially upon reading the papers to have been of the view that their conduct of the Mareva injunction proceedings on behalf of the 1st Defendant left much to be desired. In this context, the following facts and matters are of note:-

(1) As solicitors in charge of the Mareva injunction proceedings, Mr Wither (who seems to have largely taken on an advocate's role) and Ms Tsang (who was the actual solicitor having the day-to-day care of the proceedings), must have appreciated the duty that was incumbent on them in relation to discovery (see paragraphs 33 to 35 above). In my view, a solicitor when advising a client who has been ordered to make discovery of assets under a Mareva injunction order, must make it clear to the client that not only must there be full and proper disclosure, there must also be frank disclosure. This will mean that where the value of any asset may be qualified or affected by any matter that is not obviously apparent, this must also be disclosed. The existence of an encumbrance is precisely such a matter which ought to be revealed. Otherwise, a discovery order made pursuant to a Mareva injunction becomes less effective and may even be seriously undermined. It will be recalled that paragraph 1(2) of the Mareva injunction granted by Waung J on 19 February 2001 actually uses the word "unencumbered" (see paragraph 3 above).

(2) In the present case, there is the added feature that in the correspondence with the Plaintiff's solicitors, it must have been apparent to the case-handlers at DSC & Co. that the issue of whether any part of the Shares was encumbered, was a matter about which the Plaintiff was very concerned. I have already referred in paragraph 10 above to the said letter dated 11 April 2001 from the Plaintiff's solicitors to DSC & Co. when it appears this question was first raised.

(3) Further, the question of whether the Shares were encumbered was specifically raised by me at the 24 April 2001 hearing, to which the answer given by Mr Wither was that he did not know. Ms Tsang was with him at the time and she told Mr Wither she did not know the answer either.

(4) In fact, as the person in day-to-day charge of the litigation, Ms Tsang clearly knew the importance of the question of whether the Shares were encumbered. She was responsible for the preparation of all court documents in relation to the Mareva injunction proceedings. There is a draft affirmation of Mr Yu in connection with the discovery order in which underneath the reference to the Shares, someone (no doubt Ms Tsang) has written "disclose how many are pledged if any". This draft affirmation led to the 6 March 2001 affirmation of Mr Yu in which the reference to the Shares and the stated value of $38,822,964.01 was unqualified.

(5) The question whether the Shares were encumbered was also relevant to the 12 June 2001 hearing when Mr Wither on behalf of the 1st Defendant sought an increase in the limit of spending for legal advice and representation from $100,000.00 to $1,000,000.00. I have already referred to the judgment I gave that day and what I had to say about this aspect in the 22 January 2002 Reasons for Decision (see paragraph 18 above).

56. With the above matters in mind, the following questions (among others) in relation to DSC & Co.'s handling of the case then arise:-

(1) Given that the importance of the question whether the Shares were encumbered was known at least to Ms Tsang, why did it take until Mr Yu's affirmation dated 15 June 2001 (as I have said, some 4 months after the discovery order in the Mareva injunction was first made) for the encumbrance to be revealed?

(2) Why was no reference made to any encumbrance in the affirmation of Mr Yu dated 6 March 2001 (especially as the relevant loan agreement was dated 8 January 2001)?

(3) Why was a non-committal answer given to the court at the 20 April 2001 hearing and why was the matter not brought up or clarified by DSC & Co. at the 12 June 2001 hearing (when the question of whether the Shares were encumbered was of relevance to the application for variation made by the 1st Defendant)?

57. In my judgment, however, these and other questions that arise in relation to the conduct of the Mareva injunction proceedings by DSC & Co. (and in particular by Mr Wither and Ms Tsang) can only really be answered or at least put in a proper and fair perspective if DSC & Co. were free to disclose the full extent communications to and from its client, the 1st Defendant. It is clear that DSC & Co. is not free to disclose its communications with the 1st Defendant, except to a very limited extent. By a letter dated 4 November 2002, Messrs Herbert Smith (DSC & Co.'s solicitors in the present application) sought the 1st Defendant's consent to disclose documents and information relevant to the defence of the present application but which were privileged. In a fax dated 6 November 2002 from Herbert Smith to the 1st Defendant, copies of privileged documents for which consent was sought to disclose, were enclosed. Full consent, however, was not forthcoming. By a letter dated 7 November 2002, the 1st Defendant only gave limited consent to some of the documents. These documents have been exhibited in the affirmations before the court. By a letter dated 20 November 2002, Herbert Smith repeated the request to the 1st Defendant that a waiver be given in relation to all documents and information concerning the litigation from 19 February 2001 to 22 April 2002 (when DSC & Co. ceased to act for the 1st Defendant). By a letter dated 5 December 2002 in reply, the 1st Defendant declined beyond the limited consent given in its 7 November 2002 letter. As a result of the lack of general consent, DSC & Co. has been unable to produce all the material it would otherwise have wanted to present to the court. Mr Cheung in his second affirmation refers to a statement that had been provided by Ms Tsang for the purposes of the present application but this statement has not been produced owing to the refusal on the 1st Defendant's part to waive privilege.

58. I now give some instances of where the refusal to waive privilege assumes considerable importance in the present application (there are no doubt others):-

(1) A basic question arises as to when DSC & Co. first knew that the Shares were encumbered. Obviously, at some stage, the firm must have known for sure about this since it no doubt prepared and filed the said affirmation of Mr Yu dated 15 June 2001. Mr Li submits that the answer to this question cannot be privileged and that therefore this is the complete answer that effectively destroys DSC & Co.'s position in this application. I am not persuaded that this is correct at all. First, for DSC & Co. to reveal when it knew for sure that the Share were encumbered, must mean the disclosure of communications (whether written or oral) to and from its client to members of the firm. All this would evidently have been in the course of the giving and obtaining of legal advice. Secondly, it is likely that the question of whether the Shares were encumbered was an ongoing one and would involve many solicitor-client communications. I say this is likely because the question of whether any property is encumbered includes not only an analysis of the nature of the encumbrance itself but also enquiries as to how far the encumbrance bites into the asset. For example, if the encumbrance is a charge or a pledge, there would have to be enquiries made as to the extent to which any underlying indebtedness has been discharged or even to the existence of other securities. All these enquiries would be directed to the ultimate question which is to ascertain the value of the asset concerned. There is some hint that there must have been ongoing discussions between DSC & Co. and the 1st Defendant over the status of the Shares. I have already referred to the draft affirmation of Mr Yu in which an enquiry was made (probably by Ms Tsang) as to whether the Shares were pledged (see paragraph 55(4) above). Since Mr Yu's affirmation dated 6 March 2001 made no reference to any pledge, it can be inferred that there must have been some communications with the solicitors in the meantime. Added to this is the fact that when I asked Mr Wither at the 20 April 2001 hearing whether the Shares were encumbered, the response from him and Ms Tsang was that they did not know. This is suggestive of ongoing communications. Mr Li hinted at the responses being deliberately misleading. I am not prepared on the existing material and in the absence of any cross-examination to make a finding to that effect at all. Thirdly, if communications between DSC & Co. and the 1st Defendant as to the question of encumbrances on the Shares or the dates of such communications were to be divulged, this may also likely lead to a reasonable guess at the sort of legal advice that the 1st Defendant was receiving from DSC & Co. at the time and that (for the reasons stated in paragraphs 43 to 45 above) cannot be disclosed without a waiver of privilege.

(2) Mr Li rightly focuses on the importance of the following events: Mr Yu's affirmation dated 6 March 2001 (which did not hint that the Shares being encumbered), the 20 April hearing (when no answer was given to my question about the Shares) and the 12 June 2001 hearing (when an increase in the allowance for legal representation and advice was sought by the 1st Defendant). He submits that an explanation is required for DSC & Co.'s conduct. I would agree with this. However, in my view, Mr Shieh is right when he says that DSC & Co. cannot give a proper explanation without divulging privileged matters for which no consent to disclose has been given. The documents in respect of which consent has been given by the 1st Defendant to be revealed, provide at best an incomplete picture. In relation to the 6 March 2001 affirmation of Mr Yu, Mr Cheung says this in his second affirmation:-

"I verily believe that I am precluded by the terms of Gold Chief's partial waiver of privilege contained in its letter, being page 1 of exhibit 'DSC-6',from giving Teresa Tsang's explanation from her statement as to why the reference to any pledge of the shares contained in the (first) draft affirmation was deleted and on whose instructions this was done."

59. Out of completeness, I should also mention in this context that in an affirmation made for the purpose of DSC & Co.'s application to cease to act for the 1st Defendant (the affirmation of Wong Chi Yuen dated 11 April 2002), it is stated that when Mr Wong made enquiries of Mr Yu and Mr Lo of the 1st Defendant in relation to the issue of the Shares being encumbered, he was told that both Mr Wither and Ms Tsang had already been informed at an earlier stage that the Shares were in fact encumbered. It was further asserted by the 1st Defendant to Mr Wong that Ms Tsang then allegedly advised that it was unnecessary to disclose this fact in Mr Yu's affirmation dated 6 March 2001. This version has obviously been denied and in the absence of any further evidence or cross-examination, I am not prepared to attach any weight to these allegations made by the 1st Defendant.

60. In the circumstances, I am of the view there is simply insufficient material to enable me confidently, properly or fairly to accede to the Plaintiff's submissions in this application. I wondered at one stage whether, given the lapse of time between the granting of the Mareva injunction and the time when it was finally revealed by the 1st Defendant that the Shares were encumbered, at least some criticism could be made of DSC & Co. that they adopted a rather leisurely attitude to what was a serious matter. On reviewing the evidence (or lack of it) and the circumstances, I am unable even to make that criticism.

61. For the above reasons, I am of the view it has not been shown that DSC &Co. was guilty of misconduct or default.

Causation

62. It is unnecessary to deal with this aspect given my conclusions on the previous issue. The Plaintiff's main contention here was that had she known about the Shares being encumbered, serious thought would have been given to abandoning the whole action or at least the Mareva injunction proceedings. Mr Shieh submits convincingly that the conduct of the Plaintiff even after it was disclosed that the Shares were encumbered, demonstrates that the Plaintiff would have carried on nevertheless with the litigation and the Mareva injunction proceedings. He also submits that the 20 April 2001 and 12 June 2001 hearings were not directly involved as such with the issue whether the Shares were encumbered. The contention was that the hearings would have had to take place anyway.

63. I hope I will be forgiven if I do not deal with these submissions on causation. It seems to me that without a concrete finding as to how exactly DSC & Co. may have been guilty of misconduct or default, there is simply no starting point in relation to causation. One can, I suppose, try to deal with each possible situation of misconduct or default (not that one can necessarily be exhaustive anyway) but this seems rather pointless.

Outcome

64. I therefore dismiss the Plaintiff's application.

65. As to costs, I would make an order nisi that each side bears its own costs. It seems to me that where a large and critical part of the evidence is missing owing to privilege not having been waived and that this evidence, if revealed, may or may not have enured to the benefit of the solicitor involved, this is the right order. Of course, where it can be shown that the application was misguided in the first place or somehow unreasonably taken out or continued, this may be different. However, while fully accepting I have not heard the parties as to costs, it does not seem to me in the circumstances that the Plaintiff has taken out either a misguided or misconceived application nor that she has acted unreasonably in doing so or continuing it. This order for costs will also apply to all reserved costs.

Representation:

Ms Julie Chan Catton and Mr Jeremy S.K. Chan, instructed by Messrs Tang, Wong & Cheung, for the Plaintiff (on 20 November 2002)

Mr C.Y. Li, instructed by Messrs Tang, Wong & Cheung, for the Plaintiff (on 25 March 2003)

Mr Gareth Thomas, of Messrs Herbert Smith, for Messrs D.S. Cheung & Co. (on 20 November 2002)

Mr Paul Shieh, instructed by Messrs Herbert Smith, for Messrs D.S. Cheung & Co. (on 25 March 2003)

HCA807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.807 OF 2001

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REASONS FOR DECISION

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The application before the court

1. There is before the court an application by the plaintiff for an order for cross-examination of one Yu Won Kong Dennis ("Mr Yu") on his 2nd and 4th affirmations dated 6 March 2001 and 15 June 2001, filed on behalf of the 1st defendant.

2. On 8 January 2002, after hearing argument from the plaintiff and the 1st defendant, I made the following orders :-

(1) The 1st defendant be given leave to file and serve further affidavit evidence within 21 days of 8 January 2002.

(2) Mr Yu do attend before a judge of the Court of First Instance on a date to be fixed not less than 21 days from 8 January 2002 for the purpose of being cross-examined on his 2nd and 4th affirmations and on any other affirmations filed pursuant to Order (1) above.

(3) Any other deponent of affirmations or affidavits served pursuant to order (1) above do also attend for cross-examination as aforesaid.

(4) The costs of and occasioned by the application be to the plaintiff in any event.

Background

3. The application arises from a Mareva injunction granted by Waung J on 19 February 2001 in which it was ordered, inter alia, as follows :-

"Disclosure of information

(1) The Defendant must inform the Plaintiff in writing within 14 days from today of all its assets of an individual value of HK$4,950,000 or more in Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets. The 1st Defendant may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate it.

(2) This information must be confirmed in an affidavit which must be served on the Plaintiff's solicitors within 14 days after this Order has been served on the Defendant."

4. The 1st defendant sought to comply with this order (without prejudice to its position that the Mareva injunction should be discharged) by the 2nd affidavit of Mr Yu dated 6 March 2001 ("Mr Yu's 2nd affirmation"). In that affirmation, it was stated :-

"2. I make this affirmation in compliance with the 1st Defendant's undertaking to the Court stipulated in the Order of Mr Justice Yeung on 23 February 2001, to inform the Plaintiff of all its assets of an individual value of HK$4,950,000 or more in Hong Kong, whether in its own name or not, and whether solely or jointly owned, giving the value, location and details of all such assets, which are as follows:

Particulars
Details of Assets	Value (HK$)	Location
244,169,585 shares of Prosper eVision Limited(closing price was $0.159 per share as at 28 February 2001)	38,822,964.01	3 million shares held with Sun Hung Kai Securities Investment Services Limitedand share certificates of the remaining shares are kept in Beijing, PRC"

I shall hereinafter refer to Prosper eVision Limited simply as "PeV".

5. Subsequent to Mr Yu's 2nd affirmation came the hearing in which the plaintiff applied to continue the Mareva injunction granted by Waung J and the 1st defendant applied to have it set aside. That hearing was before me on 20 April 2001. In a reserved judgment handed down on 15 May 2001, I discharged the injunction granted by Waung J but indicated that I was prepared to grant a fresh one. After another hearing on 12 June 2001, an order was made finalising the terms of the new injunction.

6. Subsequent to the judgment handed down on 15 May 2001, the plaintiff applied by summons dated 28 May 2001 seeking the following orders consequent upon Mr Yu's 2nd affirmation, namely that :-

(1) The 1st defendant do disclose whether any of the shares in PeV (referred to in that affirmation) was encumbered and, if so, to provide details of such encumbrances.

(2) The 1st defendant do provide on oath the information referred to above, identifying all relevant documents.

(3) The 1st defendant do disclose on oath all of its assets, other than the said shares, of an individual value of $50,000 or more whether in its own name or not and whether solely or jointly owned, giving the value, location and full details of such assets and identifying all relevant documents.

7. This summons was necessitated by the 1st defendant's refusal to clarify whether or not the PeV shares referred to in Mr Yu's 2nd affirmation were encumbered. This question had been asked in correspondence but without any positive response. It was also a question I had asked during the hearing on 20 April 2001, to which there was also no substantive response. It is, as the plaintiff puts it, a simple question. In my judgment handed down on 15 May 2001, I had commented on this.

8. The 28 May 2001 summons was dealt with by a consent order made by Mr Recorder Kenneth Kwok, SC on 13 June 2001, whereby the 1st defendant agreed to disclose voluntarily on oath all the matters requested in the summons. I would add that this order was made a day after the hearing before me in which the terms of the re-granted Mareva injunction were finalised. One of these terms was that, after argument, I increased the amount allowed to the 1st defendant to expend on legal costs from $100,000 to $1 million. I was satisfied at that time that this amount was not excessive or unreasonable in the circumstances. I shall be returning to this part of the order presently.

9. By his 4th affirmation dated 15 June 2001 ("Mr Yu's 4th affirmation"), Mr Yu sought to comply with the consent order. What was now stated regarding the defendant's assets was this :-

"2. I make this affirmation to inform the Plaintiff of the following information in relation to the 1st Defendant's assets :

	Particulars
Details of Assets	Value (HK$) (as of 8 June 2001)	Location
241,169,585 shares ofProsper eVision Limited(closing price was $0.183per share as at 8 June 2001)	44,134,034.05	The shares are pledged to a third party in Beijing as security and in consideration for a loan of HK$46,100,000.00. On 8 June 2001, the interest due on the said loan was HK$1,456,760.00
		The relevant document in respect of the above encumbrance is a Loan Agreement signed on 8 January 2001 in Beijing. The said share certificates were deposited with the said third party in Beijing and the loan was drawn down in full on the same day.
3,000,000 shares of Prosper eVision Limited	549,000.00	The shares are held in the 1st Defendant's account with Sun Hung Kai Securities Investment Services Limited and are not subject to any encumbrance. The said shares are held in the said account for convenience only.
Credit balance	97,790.97	This sum is held in the 1st Defendant's cash account with Sun Hung Kai Securities Investment Services Limited
Credit balance	122.01	Current account no. 004-002-332328-001-02 of the 1st Defendant held with Hongkong and Shanghai Banking Corporation Limited

3. The net market value of the aforementioned shares as at 8 June 2001 was HK$44,683,034.05 after taking into account the loan and interest thereon was a deficit of HK$2,873,725.95.

4. The 1st Defendant does not have any other assets of an individual value of HK$50,000.00 or more other than those of such value set out above."

10. Furthermore, although Mr Yu dealt with the 1st defendant's assets (comprising according to him the PeV shares and some minor credit balances in certain financial institutions), no documents were provided. I shall also be returning to this aspect later.

11. Not satisfied with this affirmation, the plaintiff issued the present summons for an order that Mr Yu be cross-examined on his two affirmations. The grounds were essentially that the 1st defendant had not made proper disclosure of its true financial position and that it was therefore necessary for Mr Yu to be cross-examined for this purpose.

12. Given this background, I now turn to the applicable legal principles.

The applicable principles

13. There is undoubtedly jurisdiction in the court to order cross-examination of a deponent on any affidavit or affirmation made by him in compliance with an order for discovery under a Mareva injunction : see paragraph 29/1/68 Hong Kong Civil Procedure 2002; Bekhor v. Bilton [1981] QB 923, at 944; House of Spring Gardens Limited v. Waite [1985] FSR 173 at 176. Whether or not the jurisdiction will be exercised in any case is a matter of discretion.

14. Insofar as relevant to the present application, the following principles emerge from the authorities as to how this discretion is to be exercised :-

(1) The object of an order for cross-examination is to enable a Mareva injunction to be made more effective : cf. Bekhor v. Bilton. This afterall is the justification for an order for discovery as an ancillary order to a Mareva injunction in the first place. It has to be remembered that the purpose of such cross-examination is to obtain more information as to a defendant's assets and as to the whereabouts of such assets in circumstances where the court has already formed the view that there exists a risk of dissipation. The purpose is not to enable information to be gathered so as to impugn the defendant's credit or to investigate whether there has been a breach of the Mareva injunction and thereby obtaining material for possible contempt proceedings : see Bayer v. Winter (No. 2) [1986] 1 WLR 540.

(2) An order for cross-examination is far from being automatic. On the contrary, such orders, if made pre-judgment, are rare. The court is more likely to make such an order post-judgment than pre-judgment. This is because, pre-judgment, there is no certainty that at the end of the day the plaintiff will win and if the claim fails, then the time (and expense) involved in a cross-examination exercise would have been wasted, not to mention the injustice to a defendant of being subject to what is often likely to be hostile cross-examination. I would also observe here that the cross-examination of a deponent is not simply an examination on an appointed date. It is possible if not probable that further discovery in preparation for the hearing may be required. The production of accounts in the case of a company is perhaps an example of this. Pre-judgment, therefore, the making of such an order runs the risk of producing a trial within a trial resulting in the court and the parties being distracted at least to a certain degree from what is the real purpose of an action, namely, the proper adjudication of the dispute between the parties. It has been commented that the granting of an order for cross-examination pre-judgment is exceptional and a strong step often difficult to justify : see MarevaInjunctions and Anton Piller Relief by Steven Gee, QC (4th edition) at page 354. See also in this context : Wendy Wenta Seng Yuen v. Philip Pak-Yiu Yuen [1984] HKLR 431, at 436 E-H per Fuad JA.

(3) I would also add here that it is not permissible for a cross-examination to be conducted for the purpose of eliciting material to be used at trial : see CBS United Kingdom Limited v. Perry [1985] FSR 421 at 425-6. Where the cross-examination will deal with the same issues as those at trial, exceptional circumstances will have to be shown. In Grand Empire Holdings Limited v. Marco International (HK) Limited, unreported, 7 December 1999, Burrell J, it was said at page 4 :

"In my judgment, if the cross-examination is to be on the same issues as those which form the basis of the dispute between the parties, an order under Order 38, rule 2, should rarely, if ever, be made. In this case, there are no exceptional circumstances which would merit such an order."

(4) True that the court therefore has to undertake a balancing exercise, but ultimately the key to whether an order should be made lies in my view on the justice of the situation facing the court. I gratefully adopt the simple and practical formulation of the discretion by Burrell J in Grand Empire Holdings Limited v. Marco International (HK) Limited, where at page 2, the learned judge said :

"The court has an unfettered discretion to order cross-examination and that discretion should be exercised in favour of the parties seeking it when the court is satisfied that it is necessary in the interests of justice. In other words, if there is a real risk that justice will not be done if cross-examination is not allowed, then leave should be granted."

(5) Put simply, the question for the court is this : Would the making of an order result in justice being achieved; conversely, if an order were not made, would there be injustice?

15. It may be argued (as indeed Mr Wong for the 1st defendant has done) that the terms of a Mareva injunction itself, applying as it does to the whole of a defendant's assets up to a stipulated limit, gives sufficient protection to a plaintiff without the need for any further orders such as an order for cross-examination. The argument runs essentially thus : since the Mareva injunction affects all assets (subject to exceptions and limits), why is it therefore necessary to try to identify specific assets? If the defendant breaches the injunction by dealing with his assets, whether disclosed or not, he is liable to be held in contempt.

16. In my judgment, these are not convincing arguments at all. Mareva injunctions are exceptional orders but once granted, they must be made effective and practical. The possibility of contempt proceedings (which are usually long drawn out applications) cannot by itself provide the only practical means of making effective a Mareva injunction. The reason why ancillary orders to a Mareva injunction are made is so that as far as possible, precise assets of the defendant are located and identified. I have already in my judgment handed down on 12 June 2001 referred to the practice that parties seeking Mareva relief should identify specific assets. The identification of specific assets enables a Mareva injunction to be made more effective. For example, third parties may hold the assets of a defendant and it is important that they are informed of the injunction so as to avoid any dealing with the relevant assets, whether knowingly or unwittingly. The reference to the position of third parties as a standard feature of the terms of a Mareva injunction underlines just how common it is that third parties are involved with the assets of a defendant. The present case provides an example of this. According to Mr Yu's 4th affirmation, the share certificates for the PeV shares are deposited with or held by third parties.

The present case

17. It will be apparent that the present application by the plaintiff is for an order for cross-examination of the deponent of two affirmations pre-judgment. The issues that divide the parties in this action (which I have earlier set out in my judgment dated 15 May 2001) will have to be resolved at a trial yet to take place.

18. Mindful as I am of the desirability not to have unnecessary distractions deflecting the parties and the court from dealing with the real controversy in this action, I am of the view that in the present case, it would be in the interests of justice that an order for cross-examination be made.

19. I start from the basic rationale underlying the granting of Mareva relief. It is to ensure that the plaintiff is given adequate protection from the possibility of being left with a barren judgment in circumstances where a real risk exists of the defendant dissipating its assets before judgment.

20. Where it has been shown that the plaintiff is entitled to a Mareva injunction, the court will also ensure, as I have said, by the making of ancillary orders, that the injunction is made effective. One such ancillary order, as I have already noted, is the making of orders for discovery and as an adjunct to that, an order for cross-examination of deponents of affidavits served for the purpose of revealing the whereabouts and existence of the defendant's assets. I have already mentioned one of the justifications for this : to inform third parties who may be involved.

21. In the present case, the 1st defendant was ordered to file affidavit evidence giving discovery of its assets. It purported to do so by Mr Yu's 2nd and 4th affirmations.

22. I regret to say that I have found the picture presented by the 1st defendant of its financial position far from satisfactory. I come to this view for the following reasons :-

(1) In Mr Yu's 2nd affirmation, the overwhelming impression given by him is that the 1st defendant had assets (being the PeV shares) to the value of $38,822,964.01. In other words, there were more than enough assets, as disclosed, to meet any judgment which may be given against it in this action. It will be recalled that the limit of the Mareva injunction is $4,945,553.

(2) Some three months later, by Mr Yu's 4th affirmation, the position had dramatically changed. Instead of having sufficient assets to meet any judgment, the 1st defendant was now contending that it was in the position of being effectively unable to meet any judgment made against it. This at least was the impression it was giving. The main difference between the 2nd and 4th affirmations was that the PeV shares were now said to be encumbered and all along encumbered, even at the time Mr Yu's 2nd affirmation was served.

(3) Although documents were referred to, none was exhibited. Mr Wong submitted that under the terms of the consent order all that the 1st defendant had to do was to "identify" documents, not exhibit them. Be that as it may (and I should not be taken to accept this), the fact remains that there are no documents to support this quite dramatic (to say the least) turn of events.

(4) At the hearing on 12 June 2001, following an application by the 1st defendant which was resisted by the plaintiff, I ordered as one of the Exceptions to the injunction, that the 1st defendant was to be allowed to spend up to $1 million on legal advice and representation up to and including trial. This was an increase from the previous figure of $100,000. In my judgment, I said :

"In relation to the amount that the 1st defendant should be permitted to spend on legal costs for the action, the figure which I allow for legal costs is $1 million. The 1st defendant must be allowed to defend the action properly. A Mareva injunction is not made to cause disruption. Its function is to freeze a party's assets in the face of a risk of dissipation. Expenditure on matters such as daily living expenses and legal costs will always be allowed where the amounts sought are reasonable. Mr Chan, for the plaintiff, submits that it is necessary to ascertain the totality of the 1st defendant's assets before such an allowance can be made. I disagree. Only where the amount sought is unreasonable or excessive, then perhaps it may be relevant to look at the totality of the plaintiff's assets. However, I am of the view that a figure of $1 million is neither excessive nor unreasonable."

(5) I would not have allowed the increase if I had known that the available assets of the plaintiff were non-existent. Indeed, it would have been pointless to increase the amount from $100,000 to indeed any figure if there were no assets freely available to the 1st defendant. No explanation has been given to me (and none was given when the 1st defendant served its affidavit evidence in response to the present summons) as to why an application was made for an increase in the allowance for legal fees when, apparently, the 1st defendant had no available assets. This gives rise, as the plaintiff submits, to an inference that there may be other assets which the 1st defendant has not disclosed. I see the force in these submissions.

23. Furthermore, the unsatisfactory feeling that the court has been left with, is exacerbated by the conduct of the 1st defendant :

(1) It is clear from the correspondence before me that the plaintiff has been enquiring of the 1st defendant since at least 11 April 2001 as to whether the PeV shares were encumbered. No positive reply to this simple question was received until Mr Yu's 4th affirmation.

(2) I have already referred to the inquiry I raised at the hearing on 20 April 2001 as to whether the shares were encumbered. Thus, from that time at least, the 1st defendant must have been aware of the importance of this question.

(3) The defendant may well have an explanation for its conduct and an answer to the queries raised. In my judgment, an order for cross-examination is appropriate in the circumstances I have mentioned. This would be to enable the plaintiff and the court to ascertain from the defendant its true financial position. The attempts on the 1st defendant's part so far to disclose its true financial position have been, to put mildly, somewhat unenthusiastic.

24. Mr Wong said that if I was in any way minded to make an order, instead of an order for cross-examination, I should order the 1st defendant to file further affidavit evidence to explain its financial position as, I suppose, some sort of last chance to be given to it. I have decided not to make such an order in lieu of an order for cross-examination, for the following reasons :-

(1) The defendant has now had two opportunities to state its financial position on oath. This has not provided the desired result.

(2) The defendant's conduct so far also leads me to the view that rather than have a situation in which more time is taken up by continued requests for information, it would be better simply to have the 1st defendant's witnesses cross-examined. I echo here the sentiments of Cumming-Bruce LJ in House of Spring Gardens Limited v. Waite where at 183, the learned judge said :

"It may be that there are situations in which the circumstances demonstrate that it is more sensible, if only for reasons of speed and urgency, not to order further affidavits in order to fill that vacuum alleged to exist in the affidavits filed pursuant to the original order, but to proceed at once to order that the defendants attend for cross-examination upon their affidavits. The purpose of the cross-examination would be to elicit with greater particularity the extent and the whereabouts of the defendants' assets."

25. It will be recalled that one of the orders made by me at the conclusion of the hearing was that leave was to be given to the 1st defendant to file and serve further affidavit evidence. This does in fact enable another opportunity to be given to the 1st defendant to fill in the gaps in the existing evidence and to reveal its true financial position as required by the previous orders. If satisfactory evidence is served, there would then probably be no need for a cross-examination to take place and the plaintiff would be at risk at least as to costs to proceed in such circumstances. However, if the evidence provided is not satisfactory, it would be desirable to have cross-examination of the relevant deponents without yet another application to court.

26. The 1st defendant submits that it should not be harassed by an order for cross-examination. Whether the 1st defendant will be harassed or not, the object of the exercise is to enable, as I have said, the plaintiff and the court to ascertain the 1st defendant's true financial position. Insofar as any harassment is involved (and I see none), the 1st defendant has to a large extent brought this upon itself.

Representation:

Ms Julie Catton instructed by Messrs J. Chan, Yip, So & Partners, for the Plaintiff

Mr Arthur Wong Chi Yuen of Messrs D.S. Cheung & Co., for the Defendants

HCA807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 807 OF 2001

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J U D G M E N T

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1. On 15 May 2001 following a hearing that had taken place on 20 April on two summonses, one taken out by the plaintiff for the continuation of a Mareva injunction granted by Mr Justice Waung on 19 February 2001, the other taken out by the 1st defendant for the discharge of that injunction, I set aside the original ex parteMareva injunction (which had been modified by order of Mr Justice Yeung on 23 February 2001), but held that a fresh injunction should be granted. The reason I set aside the original injunction was that there had been material non-disclosure.

2. The matter comes back before me because there has been no agreement as to the appropriate form of the order I should make and as to costs. I deal first with the form of the order. There is a large measure of agreement between the parties. On the contentious issues, I decide the following :

(a) The reference to the 1st defendant's current account at The Hongkong and Shanghai Banking Corporation should remain. It has not been suggested that such an account does not exist. Parties seeking Mareva relief should identify specific assets as much as possible and it is therefore right for this account to be named. As to the 1st defendant's argument that a specific reference to this account will or may adversely affect the 1st defendant's financial standing (if indeed this is a real fear as to which I have some doubts), it is nevertheless a natural consequence of a Mareva injunction being granted.

(b) In relation to the amount that the 1st defendant should be permitted to spend on legal costs for the action, the figure which I allow for legal costs is $1 million. The 1st defendant must be allowed to defend the action properly. A Mareva injunction is not made to cause disruption. Its function is to freeze a party's assets in the face of a risk of dissipation. Expenditure on matters such as daily living expenses and legal costs will always be allowed where the amounts sought are reasonable. Mr Chan, for the plaintiff, submits that it is necessary to ascertain the totality of the 1st defendant's assets before such an allowance can be made. I disagree. Only where the amount sought is unreasonable or excessive, then perhaps it may be relevant to look at the totality of the plaintiff's assets. However, I am of the view that a figure of $1 million is neither excessive nor unreasonable.

3. I now deal with the costs of the two summonses. Both sides basically seek an order for costs in their favour. In circumstances where a court sets aside an ex parte order on the basis of material non-disclosure but makes a fresh order, the applicant for the order has obtained an indulgence from the court and has been given what the authorities call a locuspoenitentiae. I have already, in my earlier judgment, referred to the vigilance needed to ensure that material facts and matters are placed before the court.

4. The case of Pacific Base Services Limited v. Silver Gain Development Limited [1996] 2 HKLR 26 referred to by Mr Chan reinforces this. In my judgment, the proper order for costs is that the plaintiff, having obtained an indulgence from the court despite the material non-disclosure (albeit innocent), must pay the costs of and occasioned by the two summonses, such costs to include the hearings on 23 February and 20 April 2001. There will be no costs order for the hearing on 19 February 2001 before Mr Justice Waung.

5. It is sometimes the case that the court will order costs payable on a more generous scale where there has been material non-disclosure. In the present case, I do not do so for the following reasons :

(a) the material non-disclosure was, as I have said, innocent;

(b) justice demanded that a Mareva injunction be granted; and

(c) the 1st defendant has not asked for such an order.

6. Although Mr Chan has argued that either the plaintiff should have her costs or that the costs should be the plaintiff's costs in the cause, I am of the view that where there has been a material non-disclosure, the plaintiff should not be permitted to derive any advantage from an order obtained in such circumstances. Although the plaintiff has succeeded in obtaining Mareva relief, this was as a result of an indulgence and is therefore right that she should bear the costs. It should be noted that while the material non-disclosure was as I have held innocent, it was nevertheless a serious omission. The omission was one that gave a misleading impression of the strength of the plaintiff's case at the ex parte stage.

7. I will therefore hear the parties now as to the costs of today before finalizing the form of the order.

Representation:

Mr Louie Chan, instructed by Messrs J. Chan, Yip, So & Partners, for the Plaintiff

Mr A. Wither of Messrs D.S. Cheung & Co., for the 1st Defendant

HCA807/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 807 OF 2001

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J U D G M E N T

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THE APPLICATIONS BEFORE THE COURT

1. By a Writ dated 20 February 2001, the plaintiff claims against the 1st defendant the sum of $4.95 million, this being the outstanding balance of a loan made by the plaintiff to the 1st defendant under a loan agreement dated 6 November 2000 ("the Loan Agreement"). The plaintiff also claims that sum by reason of the dishonour of a cheque in the amount of $5.75 million drawn in favour of the plaintiff by the 1st defendant (in respect of which the plaintiff gives credit for $800,000). The endorsement of claim was subsequently amended on 26 March 2001 to include a claim for rectification. The relevance of this will become apparent later in this judgment.

2. On 19 February 2001 (the day before the Writ was issued), the plaintiff obtained against the 1st defendant an ex parte Mareva injunction, which was granted by Waung J. The terms of this injunction were more or less in standard form and was limited to a ceiling of $4.95 million.

3. By a summons dated 20 February 2001, the plaintiff applied for a continuation of the injunction. By a summons dated 22 February 2001, the 1st defendant applied to set aside Waung J's order and discharge the Mareva injunction. The matter then went before Yeung J on 23 February 2001 on a normal summons' day, when the learned judge made an order discharging the injunction but only upon undertakings given by the 1st defendant effectively allowing the prohibitory aspects of the Mareva injunction to remain in place. Directions were also given for the service of affidavit evidence. Both summonses were adjourned to a date to be fixed.

4. At the start of proceedings, Mr C.Y. Li, for the plaintiff, submitted that the original injunction having been discharged by Yeung J, the 1st defendant's summons might somehow be redundant. The relevance of this was that as the 1st defendant was now running arguments based on material non-disclosure, a technical objection could be taken as to whether the court should entertain such arguments at all. However, Mr Li fairly said that he would not be taking this line and that he was prepared to argue the material non-disclosure point on its merits. Equally, it could be said of the plaintiff's summons that it was technically inaccurate to apply for a continuation of the original injunction when there was now nothing to continue. Mr Wither, for the 1st defendant, however takes no technical points either. Both parties' approach is with respect sensible.

5. In case, however, there is any doubt, I would only say this. The original injunction is in practical terms still in place in that, instead of an actual prohibition by order of the court, there is an order made by Yeung J expressly on the basis of undertakings proffered by the 1st defendant to which I have already referred. Furthermore, both summonses were expressly adjourned by Yeung J. In my view, they are alive and properly before me.

THE PLAINTIFF'S CLAIM

6. As pleaded in the Statement of Claim, the plaintiff alleges that in or about early November 2000, an oral agreement ("the Oral Agreement") was made between one Daisy Yeung ("Daisy Yeung") and Jenny Tam ("Jenny Tam") acting on behalf of the plaintiff, and one Tang Yau Sing, Gareth ("Gareth Tang") and Chiu Chiu Wing ("Chiu") acting for the 1st defendant, whereby the plaintiff was to lend $5 million to the 1st defendant for a term of three months, with interest payable at the end of that period at the agreed sum of $750,000. One of the securities for the loan was that the 1st defendant would charge 5 million shares ("the 5 million shares") which it held in a Hong Kong listed company called Prosper eVisions Limited ("PeV"). Another security was that the 2nd defendant would provide a guarantee.

7. The Oral Agreement was intended to have been formalised and put into writing by the following documents which were executed :-

(a) the Loan Agreement;

(b) a Guarantee dated 6 November 2000 executed by the 2nd defendant in favour of the plaintiff ("the Guarantee"); and

(c) an undated Charge of Listed Shares executed by the 1st defendant ("the Charge") in relation to the 5 million shares.

8. The Loan Agreement contained the following clauses dealing with the aspect of the security for the loan :-

"4.2 Security

In consideration of the Lender [the plaintiff], at the request of the Borrower [the 1st defendant], agreeing to advance to the Borrower the Loan, the Borrower shall deliver to the Lender the following as continuing security ('Security') for the due and punctual repayment of the Loan by the Borrower: -

(a) Listed Shares [the 5 million shares]; and

(b) An executed and undated Deed of Charge of Listed Shares;

(c) An executed and undated blank Instrument of Transfer in respect of the Listed Shares delivered by the Borrower to the Lender; and

(d) Corporate Guarantee of China Broadband Corporation Limited.

4.3 Release and discharge

The Lender shall return to the Borrower the Listed Shares; undated Deed of Charge of Listed Shares; undated blank Instrument of Transfer and Corporate Guarantee of China Broadband Corporation Limited delivered by the Borrower to the Lender as security as referred to in Clause 4.2 above immediately following full and valid repayment of the Loan.

....

6. DEFAULT INTEREST AND INDEMNITY

6.1 In the event of any failure by the Borrower to pay any amount at the time and in the manner specified herein or in the event of any breach or default of this Agreement then without prejudice to the other provisions and remedies of this Agreement, the Lender shall be entitled to cause the undated Instrument of Transfer delivered by the Borrower to the Lender as Security to be completed and cause the Listed Shares delivered by the Borrower to the Lender as Security to be redeemed. The Lender shall be entitled to use the sum of money received out of such redemption ('Redemption Money')) of the Listed Shares to set off the outstanding amount of the Loan otherwise repayable by the Borrower. The Lender shall refund to the Borrower all remaining balance of the Redemption Money immediately following such set-off. Such set-off shall be deemed to be full and valid repayment by the Borrower."

As stated above, the Guarantee was duly provided by the 2nd defendant.

9. As far as the Charge is concerned, the Statement of Claim pleads the following provisions :-

"1.1 In the Charge including the Recitals and Schedule:

'Shares' means the listed shares particulars of which are set out in the Schedule hereto and the certificate of which is to be deposited with the Lender, together with the dividend, rights and securities, etc. referred to in Clause 2.3 hereof.

.....

2.1 In consideration of the Lender making available the Loan to the Borrower, the Chargor, as beneficial owner, charges all the Shares and the proceeds of any sales of the Shares as a continuing security to the Lender for the repayment and satisfaction on demand of all Indebtedness. The Chargor undertakes to procure that immediately after the execution of this Charge instruments of transfer and sold notes excited in blank in respect of the Shares is delivered to the Lender or to its order.

.....

2.5 The Charge hereby created shall:

a. be a continuing security;

b. not be discharged or affected by any failure of, or defect in, any agreement given by or on behalf of the Chargor or any other oppressor who has entered into guarantee, or has given security in respect of any Indebtedness, or by any legal limitation, or lack of any borrowing powers of the Chargor, lack of authority of any person appearing to be acting for the Chargor in any matter in respect of any Indebtedness or by any other facts or circumstances (whether known or not known to the Lender) as a result of which any Indebtedness may be rendered illegal, void or unenforceable by the Lender;

c. remain binding on the Chargor notwithstanding any amalgamation, reconstruction, re-organisation, merger, sale or transfer by or involving the Chargor or the Lender or the assets of the Lender and for this purpose this Charges and all rights conferred on the Lender hereunder may be assigned or transferred by the Lender accordingly; and

d. be additional and without prejudice to any other security which the Lender may hold from time to time.

.....

5. Remedies on default

5.1 If the Chargor fails to pay or satisfy any of the Indebtedness on the due date or the Chargor is in breach of any terms of this Charge, the Lender shall have the option to elect to purchase the Shares at any amount and in exercise of the option, may, without further notice, procure the transfer of all the Shares to the Lender or its nominee, and the Lender or its nominee (as the case may be) may complete the blank transfer form referred to in Clause 2.1 above in its favour, whereupon the Indebtedness shall be deemed to be fully repaid."

10. Of the provisions in the Charge, I highlight the following :-

(a) Clause 2.5(d) in which the Charge on the 5 million PeV shares was to be "additional and without prejudice to any other security which the Lender may hold from time to time";

(b) Clause 5.1 which states that if the plaintiff lender exercised the option to purchase the 5 million shares at any amount and, in the exercise of this option, completed the blank transfer form referred to in Clause 2.1, the indebtedness of the 1st defendant to the plaintiff would be "deemed to be fully repaid"; and

(c) although not pleaded, Clauses 5.2 and 5.3 are also relevant :-

"5.2 The Lender shall also have the right to sell or dispose of all or any part of the Shares in such manner and for such consideration (whether payable or deliverable immediately or by instalments) as the Lender may, in its absolute discretion, think fit.

5.3 Upon the disposal of the whole or any part of the Shares which the Lender shall make or purport to make under Clause 5.2 hereof, the Lender may apply the proceeds of sale in or towards discharge of the costs so incurred and of the Indebtedness and no residue shall be paid to the Chargor. The Lender may give a good discharge for any moneys received in exercise of such power of sale or disposal and for any dividend, rights, moneys or property receivable in respect of the Shares."

These clauses bear on the issues I must decide.

11. I should add, in relation to the security which the plaintiff obtained for the loan, that a blank Form of Transfer was provided to the plaintiff for the 5 million shares. A postdated cheque in the sum of $5.75 million drawn in favour of the plaintiff by the 1st defendant was also provided as security for the loan. This cheque was signed by Gareth Tang and was eventually dishonoured.

12. The 1st defendant's defence relies heavily on Clause 5.1. In the present case, it is common ground that the Form of Transfer was filled in by or on behalf of the plaintiff. Thus, it is asserted by the 1st defendant that the plaintiff having exercised the option to purchase the 5 million shares, the indebtedness is accordingly extinguished.

13. In anticipation of this defence, although not contained in the original endorsement of claim on the Writ but only in the amended endorsement of the claim, the plaintiff claims an order for the rectification of the Charge. From the Statement of Claim, the plaintiff makes two points :-

(1) First, clause 5.1 of the Charge, in seeking to extinguish the whole of the 1st defendant's indebtedness upon the plaintiff purchasing the 5 million shares and transferring them to herself or her nominees, did not reflect the true agreement between the parties. The true agreement, it is said, was that the Charge on the shares was to represent but only one part of the security for the loan. The plaintiffs seeks therefore an order rectifying Clause 5.1 to read as follows :-

"If the Chargor fails to pay or satisfy any of the Indebtedness on the due date or the Chargor is in breach of any terms of this Charge, the Lender shall have the right to sell the Shares at any amount and may without further notice to the Chargor procure the transfer of all the Shares to the Lender or its nominee, and the Lender or its nominee (as the case may be) may complete the blank transfer form referred to in clause 2.1 above in its favour."

In support of the rectification plea, the plaintiff also relies on an affidavit of Gareth Tang, in which he states that Clause 5.1 did not reflect the Oral Agreement. It was his belief that the Charge on the 5 million shares represented only one of the securities for the 1st defendant's indebtedness. He says, in paragraph 11 of his Affirmation :-

" I have been told by [Daisy] Yeung that GC [the 1st defendant] is now relying on the said clause to contest Yau's claim for repayment of the balance of the loan and interest. Without delving into the dispute between GC ad Yau now, I would say the followings on the said clause. I confirm that insofar as the said clause means that Yau could not chase after GC and/or CB [the 2nd defendant] for the balance of the loan of HK$5,000,000 and interest thereon after having realized the PeV shares pledged as collateral for the loan, the said clause has never been part of the agreement made between me acting on behalf of GC and Yeung and/or Tam acting on behalf of Yau. The agreement, as already said above, was that Yau could realize the security of the 5 million shares of PeV as deposited with Kingston by GC once GC failed to repay the loan and interest and there was no agreement that Yau could not then claim against GC and CB for the balance in case the sale proceeds of the 5 million PeV shares was insufficient to cover the loan and the interest. In fact, the aforesaid meaning of the said clause did not make any commercial sense. It would be senseless for Yau to be contented with just realizing the securities over the 5 million PeV shares as at the time she did so, she would know the sale proceeds of the said 5 million PeV shares would not be sufficient to cover the loan and interest."

(2) Secondly, in any event, the plaintiff argues that even on its own terms, Clause 5.1 does not apply. This is because the definition of "Shares" in Clause 1.1 of the Charge (referred to above) refers to shares "to be deposited with [the plaintiff]". In the present case, share certificates for the 5 million shares were not deposited with the plaintiff. Instead, the shares were placed with the 1st defendant's account at Kingston Securities Limited ("Kingston"). Furthermore, it is argued that the plaintiff did not "purchase" the 5 million shares. All that the plaintiff did was to have the shares transferred to her name so that she could on-sell them to third parties and thereby enforce one of the securities for the indebtedness.

14. I now turn to the issues I have to decide in the summonses before me.

ISSUES

15. The 1st defendant contends that :-

(1) the plaintiff has not shown that she has a good arguable case on the merits;

(2) there is no risk of dissipation of assets;

(3) the balance of convenience is against the granting of a Mareva injunction; and

(4) in any event, there has been material non-disclosure in relation to the injunction granted by Waung J.

I deal with these points in turn.

GOOD ARGUABLE CASE

16. In my judgment, I am satisfied the plaintiff has demonstrated that a good arguable case exists on her claim. I bear in mind that it is undesirable for a court at this stage to go into any great detail about the merits of the case, but, nevertheless, it is necessary to say a few words about why I am so satisfied on good arguable case. In doing so, I stress that I do not make any comment on the strengths or weaknesses of the parties' respective cases. This is a matter for the trial judge.

17. There is little or no dispute (at this stage anyway) that $5 million was lent to the 1st defendant and that it has not been repaid. It is also accepted that the cheque was dishonoured. The key issue identified by the 1st defendant is Clause 5.1 of the Charge.

18. Here, I am satisfied that the plaintiff does establish a good arguable case on both its arguments referred to above :-

(1) There is evidence by affirmation from Daisy Yeung, Jenny Tam and Gareth Tang as to the Oral Agreement that was made regarding the loan.

19. On rectification, I have already referred to Gareth Tang's affirmation in which he states that Clause 5.1 was never part of the Oral Agreement made between the parties. He also deposes to the fact that the Charge and the other loan documents (such as the Loan Agreement) were prepared by him. He says in his affirmation :-

".... I did not apply my mind as to whether any term in the aforesaid documents differed from the actual agreement I had on behalf of [the 1st defendant] already made with Yeung acting on behalf of Yau [the plaintiff]. ...."

Specifically, in relation to Clause 5.1, he says this in paragraph 13 of the affirmation :-

"I could not recall why the said Clause [5.1] appears in the Charge as it is now. Perhaps I had done thing in a hurry and the said clause was a result of some wrong editing on my part."

20. I am very much influenced by this affirmation in my views on good arguable case. I am also influenced by the argument that if Clause 5.1 meant what the 1st defendant says it means, it would be inconsistent with the other documents and even with clauses within the Charge itself, which all seem to indicate that the Charge was only intended to be but one of the securities for the 1st defendant's indebtedness. One such clause is Clause 5.3 of the Charge.

21. In stark contrast to the affirmation evidence in support of the plaintiff's case, the defendant has not adduced any evidence going to this issue. The affirmations of Dennis Yu do not touch upon the actual Oral Agreement made between the parties nor upon the rectification issue. In the circumstances, Gareth Tang's affirmation is, at this stage, not contradicted.

(2) I also hold that the plaintiff has established a good arguable case on its alternative argument that in any event, Clause 5.1 does not, on its own terms, apply.

22. Certificates for the 5 million shares were not "deposited" with the plaintiff. Furthermore, there is some doubt as to whether it could be said that the plaintiff was exercising an option to "purchase" the shares within the meaning of Clause 5.1. She argues that all she was doing was merely realizing one of the securities for the indebtedness under Clauses 5.2 and 5.3 of the Charge. This is not to say that the 1st defendant does not have sound arguments in support of its case. For example, the 1st defendant relies on a letter dated 13 February from Messrs J. Chan, Yip, So & Partners to the 1st defendant ("the 13 February 2001 letter") in which it is stated :-

" We are further instructed to inform you that in pursuance of Clause 5.1 of the Charge, our client has exercised her right to transfer Shares to her or her nominee."

23. The 1st defendant says that this represents a clear reliance on Clause 5.1 and constitutes a binding election on the plaintiff's part to rely on that clause. This point may eventually be held to have some substance but I am not satisfied, at this stage, that it is enough to undermine the plaintiff's case to such an extent that it can be said that no good arguable case exists. It seems to me it is at least arguable that the plaintiff's position was really that as reflected in the last paragraph of the 13 February 2001 letter :-

" In the meantime all rights of our client, including her rights to sell or dispose the Shares or any part thereof in pursuance of Clause 5.2 and Clause 5.3 of the Charge and apply the proceeds of the same 'in or towards discharge of the costs so incurred and of the Indebtedness' are hereby expressly reserved."

24. I note in relation to election the basic principles as stated in Halsbury's Laws of England (4th edition), Vol.16 at para.957 :-

"Thus a plaintiff, having two inconsistent claims, who elects to abandon one and pursue the other may not, in general, afterwards choose to return to the former claim and sue on it; but this rule of election does not apply where the two claims are not inconsistent and the circumstances do not show an intention to abandon one of them."

I cannot say, at this stage, that the plaintiff's conduct has been unequivocally to adopt what the 1st defendant says is the effect of Clause 5.1, that is, the extinguishment of the indebtedness. It seems to me there is a good arguable case that the plaintiff's conduct was consistent with her wishing merely to enforce one of the securities at her disposal. Some of the terms of the Loan Agreement and the Charge, to which I have referred to above, lend support to this.

RISK OF DISSIPATION

25. Here, again, I am satisfied that the plaintiff has discharged the burden of showing a real risk of dissipation. I bear in mind the principles summarized in Steven Gee QC : Mareva Injunctions And Anton Piller Relief (4th Ed.), at pages 189-199 and in para.29/1/73 of Hong Kong Civil Procedure 2001. I set out the various factors that I regard as relevant :-

(1) The 1st defendant is a BVI company whose parent is the 2nd defendant, a Bermuda company listed in Australia.

(2) In paragraph 14 of Daisy Yeung's 1st Affirmation, she makes the point that the 1st defendant has not registered itself as an oversea company under section 333 of the Companies Ordinance. That section applies only to oversea companies which have established a place of business in Hong Kong. In the present case, the 1st defendant, despite what is said in Daisy Yeung's 1st Affirmation, has not vouchsafed any details of its business nor as to why it has not registered itself under section 333 of the Companies Ordinance. There is, on the other hand, prima facie evidence that the 1st defendant does have a place of business in Hong Kong. Its officers appear to be based exclusively in Hong Kong : the persons who made the Loan Agreement with the plaintiff were Gareth Tang and Chiu; and Dennis Yu, who is the only person who has made affirmations on behalf of the 1st defendant in the proceedings before me, is based in Hong Kong. Moreover, the 1st defendant made a loan arrangement with the plaintiff, a Hong Kong person. It also has offices in Hong Kong, the address being 20th floor, Wheelock House, Pedder Street.

26. In my view, the evidence at this stage points to the British Virgin Islands being merely a domicile of convenience rather than substance.

(3) As the 1st defendant is a BVI company, there may be enforcement problems on any judgment obtained against it. I refer here to an oft-quoted passage contained in the judgment of Lord Denning in Third Chandris Shipping Corporation v. Unimarine S.A. [1979] QB 645 at 669A-D :-

"The mere fact that a defendant is abroad is not by itself sufficient. No one would wish any reputable foreign company to be plagued with a Mareva injunction simply because it has agreed to London arbitration. But there are some foreign companies whose structure invites comment. We often see in this court a corporation which is registered in a country where the company law is so loose that nothing is known about it - where it does no work and has no officers and no assets. Nothing can be found out about the membership, or its control, or its assets, or the charges on them. Judgment cannot be enforced against it. There is no reciprocal enforcement of judgments. It is nothing more than a name grasped from the air, as elusive as the Cheshire Cat. In such cases the very fact of incorporation there gives some ground for believing there is a risk that, if judgment is obtained, it may go unsatisfied. Such registration of such companies may carry many advantages to the individuals who control them, but they may suffer the disadvantage of having a Mareva injunction granted against them. The giving of security for a debt is a small price to pay for the inconvenience of such a registration."

(4) The 1st defendant's conduct in relation to the dishonour of the cheque is, in my view, significant. This conduct leaves much to be desired from a commercial morality point of view especially when no real justification for it is attempted. It is not disputed by the 1st defendant that there was a dishonour of the cheque upon presentation on 7 February 2001. Mr Dennis Yu, in his affirmation, seeks to provide an explanation in the following way :-

"As Gareth Tang was removed as an authorised signatory to the 1st Defendant's account with The Hongkong and Shanghai Banking Corporation Limited on 13 December 2000, the 1st Defendant countermanded the cheque which appears as Exhibit DY-3 of Ms. Yeung's Affirmation."

27. Mr Wither, for the 1st defendant, did not seek to justify that excuse and rightly so in my judgment : it is a poor excuse. At the time the cheque was given to the plaintiff, Gareth Tang was properly authorised. I say no more about that at this stage for it may be a matter that will feature at the trial. I recognise that the 1st defendant's position now is to rely on Clause 5.1 of the Charge and that this would also constitute a defence to the dishonour. However, this was not the explanation given by Mr Yu for the dishonour. Another explanation was given, which as I have said, constituted a poor excuse.

(5) Given the factors referred to above, the fact that the 1st defendant's assets are liquid become significant. In Mr Dennis Yu's second affirmation (served in compliance with the order for discovery made under the injunction granted by Waung J), he refers to the fact that the 1st defendant has 244,169,585 shares in PeV, of which 3 million are held at Sun Hung Kai Securities Investment Services Limited, with the share certificates for the balance being kept in Beijing. By a letter dated 11 April 2001 from the plaintiff's solicitors to the 1st defendant's solicitors, enquiries were made as to whether these shares were encumbered. I also asked this question of Mr Wither to which there was no answer. In my view, this is not satisfactory.

(6) Furthermore, there is evidence before me that the 1st defendant has been disposing of its shares. Following a dramatic fall in the price of PeV shares on 28 December 2000 from $2.60 per share to $0.43 per share, the 1st defendant disposed of some 63,764,000 shares on a forced sale, thereby reducing its holding from 42.6% to 33.78%. This took place on 29 December 2000. On 31 January 2001, the 1st defendant disposed of another 610,000 shares in the company, thereby reducing its holding further down to 28.84%.

(7) I have been referred to many passages contained in Daisy Yeung's 1st Affirmation alleging evasive behaviour on the part of the 1st defendant and its officers. Mr Dennis Yu, in his affirmations, has denied these allegations although there is no attempt to deal in specific terms with the allegations. However, I have given the 1st defendant the benefit of the doubt here and have not regarded this evidence as significant in view of the disputed nature of them.

28. Nevertheless, overall, I am satisfied that there is a real risk of dissipation.

BALANCE OF CONVENIENCE

29. Given my views on good arguable case and risk of dissipation, the balance of convenience is clearly in favour of the granting of a Mareva injunction, subject to a consideration of the aspect of material non-disclosure.

MATERIAL NON-DISCLOSURE

30. The 1st defendant submits that even if I am satisfied that there exists a good arguable case and a real risk of dissipation, nevertheless, in my discretion, I ought not to continue Mareva injunction granted nor grant a fresh injunction, on the basis that the plaintiff has been guilty of material non-disclosure. Essentially, the plaintiff complains that four material facts were not placed before Waung J at the ex parte stage, namely :-

a) the oral agreement with regard to the loan arrangements made between the 1st defendant and the plaintiff;

b) Clause 5.1 of the Charge and its effects;

c) the 13 February 2001 letter in which the plaintiff's solicitors made specific reference to Clause 5.1; and

d) the need for rectification of Clause 5.1 of the Charge.

31. The 1st defendant submits that had these matters been disclosed to the learned judge, they would at least have weighed in the scales in the exercise of his discretion whether or not to grant a Mareva injunction. As a matter of law, this is all that is necessary to be demonstrated : see Citibank NA v. Express Ship Management Services Limited [1987] HKLR 1184 at 1190C-E. It is not necessary to demonstrate that had the alleged material facts been disclosed to the court, the court would necessarily or likely have arrived at a different decision (although if this can be shown, it would be an important consideration going to the discretion whether or not to set aside the order or grant a fresh order : see Behbehani v. Salem [1989] 1 WLR 723 at 729).

32. I approach the question of material non-disclosure by dealing with the following questions :-

1. Were the facts alleged not to be disclosed, material?

2. Was there non-disclosure?

3. If there was non-disclosure, was it innocent?

4. If there was material non-disclosure, should the court nevertheless exercise its discretion not to discharge the injunction or grant a new one?

1. Were the facts alleged not to be disclosed, material?

33. The aspect of the oral agreement can be disposed of shortly. This was indeed a material fact but one that was in my view disclosed : see paragraphs 4-6 of the first affirmation of Daisy Yeung dated 19 February 2001. In these paragraphs, reference is made to what is in effect the oral agreement pleaded in the Statement of Claim. Although this could have been more explicitly stated, I do not think that it can be said to have been in any way misleading.

34. Equally, the Clause 5.1 point is material. As mentioned above, this clause goes to the heart of the 1st defendant's defence and if correct, would provide a complete answer to the plaintiff's claim. Mr Li submits that neither Clause 5.1 nor the 13 February 2001 letter was a material fact for the following reasons :-

a) By reason of the definition of "shares" in the Charge and the fact that the plaintiff did not exercise any option to purchase, Clause 5.1 has no application and is therefore irrelevant.

b) Furthermore, as far as the 13 February 2001 letter was concerned, it had been overtaken by events and was somehow therefore irrelevant.

As for (a), I have already referred to the plaintiff's arguments in this regard. As for (b), Mr Li referred to the fact that, on 13 February 2001, the plaintiff had tried to have 3,000,000 of the 5 million shares transferred to her. However, she was prevented from achieving this (in Mr Li's submission, most probably by the 1st defendant). Thus, it is submitted, even if the reference to Clause 5.1 in the letter was correct (he said it must have been a mistake on his solicitors' part), there could not have been any purported or actual exercise of rights under Clause 5.1, or of any election to do so, by reason of the fact that the plaintiff did not actually successfully transfer the shares either to herself or to her nominees. The effect of the 1st defendant's alleged action in blocking the transfer was that the reference in Clause 5.1 in that letter was therefore irrelevant, or that the 1st defendant, by its conduct, is somehow estopped from running the point.

35. In my judgment, the Clause 5.1 point is clearly arguable and cannot simply be dismissed out of hand at this stage as being irrelevant. Afterall, Messrs J. Chan, Yip, So & Partners in the 13 February 2001 letter themselves specifically referred to it in relation to a transfer of 2,000,000 of the shares to the plaintiff (albeit as events turn out, this did not take place). Nevertheless, eventually, all the 5 million shares were transferred to the plaintiff's name and on sold to third parties in circumstances which the 1st defendant would argue not to be dissimilar from what was intended to be the position as stated in the 13 February 2001 letter. It was clearly material for the judge to know that, at one stage, the plaintiff was of the view that Clause 5.1 was applicable in relation to such a transfer to the plaintiff. In my view, by not referring to Clause 5.1, the plaintiff gave a somewhat misleading impression of the strength of her case.

2. Was there non-disclosure?

36. Mr Wither submits that nowhere in the affirmations or in the skeleton arguments of the plaintiff before Waung J, is there a reference either to Clause 5.1 or to the 13 February 2001 letter. This is accepted by Mr Li. However, Mr Li submits that though not specifically referred to, the Charge (containing Clause 5.1) and the 13 February 2001 letter were exhibited in the affirmations before Waung J. This is not sufficient disclosure. It is not for the court on an ex parte application (particularly when such applications are by nature made in urgent and pressing circumstances) to search through the papers to discover for itself the material facts. This has been stated time and time again in the authorities and is sometimes referred to for convenience as the "needle in a haystack" point. It is up to the plaintiff to state all material facts either in his affirmation or in his skeleton submissions.

37. Next, Mr Li submits that, in fact, the Clause 5.1 point was expressly referred to in the affirmation of Daisy Yeung dated 19 February 2001. This was the main affidavit in support of the Mareva injunction. In that affirmation, Daisy Yeung, after dealing with the oral agreement referred to earlier in this judgment, then refers to the loan documentation which was generated as a result thereof. She refers specifically to the Charge and says this at paragraph 10 of her affirmation :-

"10. On the Charge and the 5M shares, I want to explain the followings :-

(a) I had not read the Charge in details in the past. I have now been told by Yau's legal advisers the provisions of the Charge and there were areas where the provisions of the Charge and its actual performance differed.

(b) The provision of the Charge seemed to suggest that GC had delivered the shares certificates of the 5M shares together with instrument of transfer and sold notes to Yau upon the exception of the Charge. In actual fact, upon the execution of the Charge, GC had only delivered to me and I had in turned given it to Tam a Form of transfer. ('The Form (sic) of Transfer'). There is now produced and shown to me marked 'DY-5' a copy of the Form of Transfer. The form of Transfer had already been executed by Tang on behalf of GC when it was delivered to me and Tam. I did not find any problem with the arrangement as it sufficed to have the Form of Transfer for effecting the transfer of the 5M shares without any sold notes. I also want to point out that the Form of transfer as produced here was subsequently filled up when Yau tried to enforce the security as deposed below.

(c) As to the shares certificates, the position was simply that it was understood amongst Tang acting on behalf of GC, I and Tam acting on behalf of Yau that the 5M shares were those as kept by GC in its account with Kingston. The reason was that GC had indeed kept 20 million shares of PeV in its account with Kingston. After making the loan agreement on $15M loan with Chu, 15 million of those shares were kept by Kingston as securities for the loan ('the 15M shares'). Instead of taking the 5M shares out of its account, the same was simply kept with Kingston and earmarked as security for the $5M loan.

(d) At the time of making the Loan Agreement, the market value of PeV was about HK$2.5 per shares. As such, Tam and I indeed thought there was sufficient collateral to secure the $5M loan."

38. Mr Li submits by reference to this paragraph 10, in particular to sub-paragraphs (a) and (b), that sufficient hint was given of the problems which might exist in relation to Clause 5.1. Indeed, he says paragraphs 10(a) and (b) would make little sense unless Clause 5.1 was borne in mind.

39. In my judgment, this is yet another example of the "needle in a haystack" point. In the same way that a court cannot be expected to search through exhibits in order to discover material facts, so the court is equally not to be expected to have to sift through intricate legal arguments or facts in order to achieve this end. Quite simply, it is for a party seeking ex parte relief to state all material facts and points fairly (fair that is to the absentee party against whom he is seeking ex parte relief), clearly and fully, either in his affidavit evidence or skeleton submissions. If not contained in either of these documents, such material facts or points must be submitted orally to the judge hearing the ex parte application. I would add that even after an ex parte order has been obtained, there is a continuing duty of disclosure so long as the matter remains on an ex parte basis : see Commercial Bank of the Near East Plc. v. A and Others [1989] 2 Lloyd's Rep 319.

40. In the present case, I am of the view that there has been non-disclosure of material facts.

3. If there was non-disclosure, was it innocent?

41. Mr Li submits that any material non-disclosure in the present case was innocent. Mr Wither does not submit otherwise although he makes the point that there is no affidavit explaining the non-disclosure. Mr Li says that the reason why Clause 5.1 was not specifically drawn to Waung J's attention was that, basically, the plaintiff's legal advisers took the view it was a bad point. I have earlier set out the arguments in this regard. Furthermore, the reference to Clause 5.1 in the 13 February 2001 letter was, Mr Li submits, simply a mistake.

42. In the circumstances, particularly given the fair way in which Mr Wither has approached the matter, I accept that the material non-disclosure was innocent. I can see why the plaintiff's legal advisers took the view that Clause 5.1 was not applicable since no certificates for the shares had been deposited with the plaintiff and the plaintiff did not, in any event, exercise an option to purchase the shares as such. Although it is for the court to decide what matters are material rather than the party applying for ex parte relief, I find in the present case that although the non-disclosure was inexcusable, it was nevertheless innocent.

4. If there was material non-disclosure, should the court nevertheless exercise its discretion not to discharge the injunction or grant a new one?

43. Material non-disclosure is rightly regarded as a serious matter and in certain cases would not only justify the setting aside of an existing order but may also constitute the determining factor in the refusal of a fresh grant. However, it is important for a court, when considering whether or not to set aside an existing order or to grant a new injunction, to consider all the circumstances of the case to arrive at what is the justice of the situation. There is of course no doubt that the court does have the residual discretion not to set aside or to grant a fresh order even in circumstances where material non-disclosure has been shown.

44. Of the relevant factors that a court would consider in the exercise of its discretion, they would include the following :-

1. Whether the non-disclosure was innocent or deliberate.

2. The excuse or reason for such material non-disclosure.

3. Whether the non-disclosure would in fact have resulted in the original order not having been made in the first place or whether, conversely, even if the material fact or facts have been disclosed, this would have made no difference. Here, the court is required to look at the merits and justice of the grant of a Mareva injunction.

4. Whether the party guilty of the non-disclosure is deserving of a locus poenitentiae.

45. Of the cases I have considered in this regard are Bank Mellat v. Nikpour [1985] FSR 87, Lloyd's Bowmakers Ltd v. Britannia Arrow Holdings Plc. [1988] 1 WLR 1337, Brink's Mat Ltd v. Elcombe [1989] 1 WLR 1350, Ali and Fahd Shobokshi v. Moneim [1989] 1 WLR 710, Shenzhen Universal Enterprises Industry and Trade Company Supplies and Another v. Wei Bun Trading Co. Ltd and Others [1989] 1 HKLR 470, AMD Pack Rack Ltd and Others v. The Barrons Group Ltd and Others [1992] 2 HKLR 50, Arab Business Consortium International v. Banque Franco-Tunisienne [1996] 1 Lloyd's Rep 485.

46. Normally, a court would expect affidavit evidence in relation to these factors. It is in my view important, given the stringency by which the court regards ex parte applications, that at all stages, the court is given the full picture. The cautionary warnings given by the courts over the years are not simply mantras to be recited. They are to be taken seriously. No one needs reminding that ex parte applications are very much against the normal way in which courts operate. The vigilance that needs to be displayed both by the court and the applicant seeking ex parte relief is multiplied many times over precisely because the party against whom an order is to be made is not present.

47. In the present case, given my finding that there has been material non-disclosure, I would discharge the ex parte Mareva injunction granted by Waung J. However, in the exercise of my discretion, I would nevertheless be prepared to grant a fresh injunction in favour of the plaintiff. The following factors have influenced me in this regard :-

a. The material non-disclosure was innocent.

b. As I have said, I accept the belief of the plaintiff's legal advisers that they thought the Clause 5.1 point was a bad one. Indeed, this is in some way reinforced by the evidence and arguments in support of the good arguable case which I have referred to above. However, I would reiterate that I make no comments on the merits or the strengths or weaknesses of the parties' cases in this regard, save to say again that I am satisfied a good arguable case exists.

c. I have considered that the risk of dissipation to be a very real one. The 1st defendant's evidence here has left much to be desired.

In my judgment, justice requires that a Mareva injunction be granted.

CONCLUSION

48. Given my findings on material non-disclosure, I set aside the original ex parte injunction but hold that the balance of convenience is clearly in favour of the grant of a fresh order. At the conclusion of the hearing, I asked the parties to agree a draft order in the event that I was in favour either of retaining the present injunction or granting a fresh one. So far there has been no agreement between the parties in this regard.

49. I will therefore hear the parties on the form of order that I should grant and on the question of costs, unless this can be agreed between the parties.