MICHAEL CHEN KANG HUANG AND ANOTHER v. PETER LIT MA

      HCA 218/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 218 OF 2005

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REASONS FOR JUDGMENT

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1. On 2 July 2009 I gave judgment to the plaintiffs against the defendant as follows:

(1)  to the 1^st plaintiff against the defendant for payment of the sum of US$164,500;

(2)  with interest on the said sum from date of writ 3 February 2005 to judgment at 1% above the best lending rate of HSBC and thereafter at judgment rate until payment;

(3)  to the 2^nd plaintiff against the defendant for payment of the sum of US$805,500;

(4)  with interest on the said sum from date of writ 3 February 2005 to judgment at 1% above the best lending rate of HSBC and thereafter at judgment rate until payment.

(5)  granting the following declarations in favour of the plaintiffs:

(i)     a declaration that the defendant is the constructive trustee of a trust in the sum of US$164,500, in respect of the 1^st plaintiff, and US$805,500, in respect of the 2^nd plaintiff;

(ii)   a declaration that the plaintiffs are entitled to trace any funds paid out of Hang Seng Bank Prestige Account No. 773-101324-888 (“the defendant’s bank account”) up to a maximum sum of US$970,000 and recover such funds subject to any competing rights to be asserted and resolved in DCMP 3519 of 2007.

(6)  costs of the action to the 1^st and 2^nd plaintiffs against the defendant.

2. I indicated at the time that written reasons in writing would be given.  This I now do.

3. The plaintiffs’ primary claim against the defendant is for the repayment of monies paid over to the defendant by the plaintiffs as a result of fraudulent misrepresentations made by the defendant.  The plaintiffs’ claim is for the return of the sums paid over by them as well as declaratory relief.

4. Pursuant to a bankruptcy petition presented by the plaintiffs against the defendant, a bankruptcy order was made against the defendant on 24 December 2007 and the Official Receiver (“the OR”) was appointed the trustee in bankruptcy of the defendant.

5. As a result of the bankruptcy order made against the defendant these proceedings were stayed by my order made on 8 January 2008.

6. By a letter dated 3 December 2008 from the OR the plaintiff’s solicitors were informed that the OR would not take up the defence of the defendant in this action.

7. By a consent order made on 17 December 2008 in Bankruptcy Proceedings No. 9070 of 2007 Master Hui made an order that leave be granted to the plaintiffs to proceed with and restore this action against the defendant subject to the conditions mentioned in the order.

8. By a letter dated 13 February 2009 the plaintiffs’ solicitors were informed that Chu J gave leave to the plaintiffs to fix a date for the trial of this action before me.  Chu J also gave leave to the plaintiffs to rely on the five affirmations of the 1^st plaintiff as evidence at the trial and that the attendance of the 1^st plaintiff at the trial was to be dispensed with.

9. The plaintiffs relied on the five affirmations of the 1^st plaintiff as evidence at the trial on 2 July 2009.  The defendant did not appear and did not give evidence before me.

The facts

10. I accept the evidence of the 1^st plaintiff in the five affirmations.

11. On the evidence which I accept I am satisfied that the facts set out below have been proved.

12. At all material times the 1^st plaintiff was a United States citizen resident in the USA.  He was the sole shareholder and director of the 2^nd plaintiff, a company incorporated in the British Virgin Islands.

13. On 20 July 2004 one Mr Anthony Luu (“Luu”) invited the 1^st plaintiff to invest in the issuance of a standby letter of credit to be arranged by the defendant to finance the building of a pharmaceuticals laboratory in Guangzhou. 

14. Luu told the 1^st plaintiff that he and the defendant had been able to make a lot of money investing funds for the issuing of standby letters of credit and that an opportunity had become available to invest in a standby letter of credit.  The 1^st plaintiff was told that a standby letter of credit in the sum of US$2.5 million would be issued by Deutsche Bank New York to secure a loan from HSBC Guangzhou to the pharmaceutical company.  Luu told the 1^st plaintiff that the defendant was to arrange for the issuing of the US$2.5 million standby letter of credit and that he would receive a high return of 23.5% of the value of the standby letter of credit amounting to US$587,500.

15. The 1^st plaintiff agreed to invest and on 23 July 2004 he paid the sum of US$164,500 into Luu’s bank account with HSBC in Hong Kong in order to invest in the issuing of a standby letter of credit to finance the pharmaceutical laboratory in Guangzhou.  This sum was then paid over by Luu to the defendant.

16. The 1^st plaintiff was introduced to the defendant by Luu in Hong Kong on 29 July 2004.  At a meeting at a restaurant the defendant made a number of representations to the 1^st plaintiff as pleaded:

(1)  that he had been arranging the issue of standby letters of credit for commission for many years;

(2)  that he worked for a company called North America Consultants & Management Group (“NACM”) which had lines of credit and a close relationship with many banks;

(3)  that those banks could issue standby letters of credit for NACM on payment of fees of only 23.5% of the value of the standby letters of credit.

17. On 15 August 2004 Luu informed the 1^st plaintiff that HSBC Guangzhou was not prepared to accept the wording endorsed on the standby letter of credit but that it might be possible to arrange a replacement credit from Bank of China.

18. However, on 18 August 2004 the defendant and Luu made a joint telephone call to the 1^st plaintiff during which both of them told the 1^st plaintiff that Bank of China was taking too long to obtain final approval on the wording of the standby letter of credit.  He mentioned that there was another project involving the construction of a major shopping centre in Shanghai and the issuing of a standby letter of credit to secure funding for that construction offered much better prospects than the pharmaceuticals laboratory.  The 1^st plaintiff was asked to agree to his US$164,500 being transferred to the funding for the project for the shopping centre.

19. The 1^st plaintiff was told by the defendant and Luu that the Shanghai real estate developer behind the construction of the shopping centre had obtained a US$100 million line of credit from Shanghai Pudong Development Bank (“Pudong Bank”) on condition that this credit line was fully secured by a standby letter of credit and real estate.  He was also told that Pudong Bank had agreed to accept as collateral standby letters of credit issued by one of the banks with which the defendant had connections.  He was further told that the defendant and Luu would travel to Shanghai and negotiate with the real estate developer to obtain agreement that the 2^nd plaintiff could fund the issue of standby letters of credit for the highest amount possible in return for payment of a large portion of the loan proceeds as commission.

20. On 21 August 2004 Luu informed the 1^st plaintiff that the Shanghai real estate developer was Zhenda, of which a Mr Zhu was Chairman.  Luu said that the defendant had been able to negotiate with Zhenda which required a standby letter of credit for US$30 million to secure Zhenda’s funding and that it would pay an issuing fee of US $7.05 million for that.  The 1^st plaintiff was told that Zhenda required three standby letters of credit each to the value of US$10 million which would be issued by Bank Winter in Austria after Bank Winter had received an issuance fee of 23.5% of the value of the credit and that Zhengda would instruct its Hong Kong affiliate Cecil Enterprises Corporation (“Cecil”) to wire the agreed-upon funds to the 2^nd plaintiff once Pudong Bank extended its line of credit to Zhengda after receiving the standby letter of credit from Bank Winter.

21. On 22 August 2004 Luu told the 1^st plaintiff that the defendant had told him that the applicant for the standby letters of credit to be issued by Bank Winter would be a Cyprus company CPTO Ltd (“CPTO”) which had lines of credit with many of the banks with whom the defendant dealt.  The 1^st plaintiff was told that in order to purchase the first standby letter of credit of US$10 million from Bank Winter, an issuance fee of US$2.35 million would have to be paid to this bank.  Luu told the 1^st plaintiff that US$822,000 was already available.  This consisted of the 1^st plaintiff’s US$164,500 already wired to Luu’s account on 23 July 2004 and US$657,500 of Luu’s own money.  He was told that these amounts had already been paid to the defendant and that a further US$1.528 million was needed.

22. The 1^st plaintiff then went about raising funds from friends and relatives to invest in the issuance of the standby letters of credit.  A total of US$670,000 was raised by the 2^nd plaintiff from individual investors.

23. The 1^st plaintiff was informed by Luu by email dated 23 August 2004 that the funds raised by him were needed by 1^st or 2^nd September 2004.  He was told that the funds should be wired to the defendant’s personal account which the defendant would pass onto the issuing bank from his own account.

24. On 26 August 2004 the 1^st plaintiff asked Luu to get the defendant to provide a bank letter to show that Zhengda had paid the defendant the issuance fee of US$7.05 million in respect of the standby letter of credit for US$30 million to address the concerns of the 2^nd plaintiff’s largest investor.   To address this, on 28 August 2004 the defendant faxed to the 1^st plaintiff a purported print out from a Hang Seng Bank internet site showing that he had a credit balance of US$6,002,239.13 in his account.

25. On 27 August 2004 the defendant told the 1^st plaintiff that the funds had to be paid by no later than 2 September 2004.  The defendant stated that the bank had changed from Bank Winter to North-West Private Bank Inc.

26. On 29 August 2004 the 1^st plaintiff decided to increase his own investment from US$164,500 to US$300,000.  He informed Luu that the most that he and his investors could raise was US$805,500.

27. On 30 August 2004 Luu informed the 1^st plaintiff that the defendant had agreed to invest a total of US$252,500.  He said that the defendant’s investment, together with his own investment of US$675,000 and the contributions from the 1^st plaintiff totalled US$1.88 million which Luu said was sufficient to issue a standby letter of credit of US$8 million.

28. On 1 September 2004 the defendant told the 1^st plaintiff that he needed the 2^nd plaintiff’s payment towards the issuing fee as soon as possible as a US$8 million standby letter of credit was ready to be issued.  Pursuant thereto, the 1^st plaintiff executed a wire transfer of US$805,500 from the 2^nd plaintiff’s account with HSBC to the defendant.

29. By that date the total sum of US$970,000 comprising the sum of US$805,500 and the earlier payment of US$164,500 had been paid to the defendant.

30. On 10 September 2004 the defendant told the 1^st plaintiff that a standby letter of credit for US$8 million had been issued by North-West Private Bank Inc.

31. However, on 14 October 2004 the defendant told the 1^st plaintiff that the funding of Zhengda to be secured by the standby letter of credit from North-West Private Bank Inc. had been delayed because the standby letter of credit had been sent by Pudong Bank to the Central Bank of the PRC for approval.

32. On 20 October 2004 the 1^st plaintiff was informed that the standby letter of credit had been rejected by Pudong Bank as the Pudong Bank did not have a direct business relationship with the named beneficiary Cecil.

33. Subsequently, the defendant put forward another bank to issue the standby letter of credit as a replacement namely, First National of America Banc which the defendant maintained was one of several banks from which he could obtain standby letters of credit.  On 27 October 2004 the defendant sent to the 1^st plaintiff an email attaching a draft standby letter of credit from First National of America Banc.

34. Thereafter the defendant informed the 1^st plaintiff that Zhengda had found a bank in India to fund its project but that the bank would only accept a standby letter of credit from Deutsche Bank and not from North-West Private Bank Inc.

35. On 26 November 2004 the defendant told the 1^st plaintiff that Mr. Zhu of Zhengda and a Mr. Gunawan Wijaya of Cecil were in Indonesia trying to find funding solutions and that if they could not find a solution within 8 to 10 days then either Cecil or Zhengda would return the sum of US$970,000 that had been paid by the 1^st plaintiff and his investors.

36. On 11 December 2004 the defendant told the 1^st plaintiff that no funding solutions had been found and that Zhengda and Cecil would need to discuss whether to refund the sum of US$970,000.

37. The defendant has never refunded the said sum of US$970,000 or any other sum to the plaintiffs.

38. On the evidence it is clear that the licence of North-West Private Bank Inc in the Republic of Nauru had been revoked on 27 March 2003.  Thus in 2004 the defendant could not have had a relationship with this bank and this bank could not have issued the standby letter of credit on 10 September 2004 as the defendant had told the 1^st plaintiff.

39. Also, it is clear that CPTO had been deleted from the Cyprus Companies Registry on 29 August 2003.  Hence CPTO could not have been the applicant for the standby letter of credit.

40. It is also clear on the evidence that Zhengda did not have a Mr Zhu as its Chairman.  At no material time was there an individual named Mr Zhu employed by Zhengda.  Hence the defendant’s representations about his discussions with Mr Zhu were false.

41. The First National of America Banc put forward by the defendant as the replacement bank to issue the standby letter of credit was not an entity authorized to operate as a bank.  Contrary to the defendant’s representation, he could not have arranged for this entity to issue any standby letter of credit.

42. The bank statement showing a balance of US$6,002,239.13 in his account provided by the defendant to the 1^st plaintiff was also false.  On the evidence the real balance at the material time was US$239.13.  Thus, the defendant could not have received any funds from Zhengda in respect of the issuing fee for the standby letter of credit as he had claimed.

43. In the police interview of the defendant conducted on 2 February 2005 the defendant was questioned about an Indonesian passport in the name of Mr. Gunawan Wijaya.  One of the directors of Cecil was Mr. Gunawan Wijaya.  On the evidence the passport belonged to the defendant.  During the interview, the defendant at first denied ownership of the passport but on questioning he admitted that the passport belonged to him.

44. It is abundantly clear on the evidence which I have accepted that the defendant has made false representations to the plaintiffs which I am satisfied were made fraudulently in order to induce the plaintiffs to remit the total sum of US$970,000 to the defendant.

45. The defendant in his defence has denied that he made false representations.  He also averred that only NACM dealt with the 2^nd plaintiff and that he in his personal capacity did not deal with the plaintiffs.  He also averred that he has no knowledge of the purported statement from the Hang Seng Bank internet site showing a credit balance of US$6,002,239.13 in his account.

46. As the defendant has not called any evidence in support of his defence, I reject his defence.

47. I am satisfied that the representations made by the defendant to the 1^st plaintiff were fraudulent misrepresentations made by the defendant knowingly in order to induce the 1^st and 2^nd plaintiffs to pay the sums totalling US$970,000 to the defendant in the belief that such sums would be used to fund the issuance of a standby letter of credit to generate profits for the plaintiffs.  I am also satisfied that the plaintiffs were induced to act on the defendant’s representations as a result of which they have suffered loss and damage.

48. Despite demands the defendant has failed or refused to refund the sums totalling US$970,000 to the plaintiffs.

49. The writ in this action was issued on 3 February 2005 claiming the repayment of the said sum of US$970,000.

50. By my order made on 2 February 2005 a Mareva injunction was granted to the plaintiffs against the defendant over the defendant’s assets in Hong Kong to the extent of US$970,000 until the return date of 4 February 2005.  The Mareva order was varied and extended until after trial or further order on 4 March 2005.

51. The Mareva order affected, inter alia, the following properties:

(a)  the property known as Flat C on 33^rd Floor of Block 9, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau Island (“Flat C”); and

(b) the property know as Flat F on 41^st Floor of Block 8, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau Island (“Flat F”).

52. By my order made on 21 August 2007 the Mareva order was varied to the effect that the order no longer permitted the defendant from withdrawing the sum of HK$5,000 per week from the defendant’s bank account.

53. The defendant had also applied for an order that the Mareva order be varied to the effect that it did not prohibit the defendant from raising sufficient funds to pay legal costs and to meet his living expenses by the sale of Flat F held by the defendant and his wife as joint tenants.  This application was refused by me also 21 August 2007.

54. In my Reasons for Judgment handed down on 27 August 2007 I dealt with the evidence in respect of the purchase of Flat C and Flat F and the plaintiffs’ proprietary claim to the funds in the defendant’s bank account and to properties purchased with those funds.  I reiterate and adopt what I said at paragraphs 17 to 22 as follows:

“17.  The Mareva order affected all of the defendant’s assets including Flat F and Flat C.  On the evidence Flat F was purchased in the names of the defendant and his wife for HK$1,950,000 by an instrument dated 15 November 2004.  Flat F is and was at all material times unencumbered.  Flat C was purchased in the names of the defendant and his wife for HK$2,030,000 also by an instrument dated 15 November 2004.  Flat F was subject to a mortgage with Standard Chartered Bank (Hong Kong) Ltd also by an instrument dated 15 November 2004.  According to the mortgage service application form of Standard Chartered Bank (Hong Kong) Ltd the mortgage loan was HK$1,000,000.  With the purchase price of HK$2,030,000 and a mortgage loan of HK$1,000,000, it is clear that the sum of HK$1,030,000 was paid by the defendant and his wife towards the purchase of Flat C.  This sum of HK$1,030,000 together with the purchase price of HK$1,950,000 for the unencumbered Flat F amounting to the total sum of HK$2,980,000 would have been required to be paid by the defendant and his wife for the purchase of the two properties.

18.       The bank statements in respect of the defendant’s bank account show, inter alia, the following withdrawals and cheques issued from the defendant’s bank account:

(1)    on 15 October 2004, a withdrawal in the sum of HK$240,000;

(2)    on 11 November 2004, a cheque in the sum of HK$150,000;

(3)    on 12 November 2004, a cheque in the sum of HK$831,000;

(4)    on 12 November 2004, a cheque in the sum of HK$1,759,000.

19.       These show that the total sum of HK$2,980,000 had been drawn from the defendant’s bank account as at 12 November 2004.

20.       There is no dispute that the total sum of US$970,000 from the plaintiffs was paid into the defendant’s bank account prior to 15 October 2004.

21.       Although the plaintiffs consented to the orders to vary the Mareva order on two occasions in the past to permit the defendant to withdraw sums for legal advice and representation it is clear that the concessions were made before the plaintiffs made a proprietary claim to the funds in the bank account and to any property purchased with those funds.  The proprietary claim is contained in the amendments to the statement of claim in respect of which the plaintiffs were given leave to amend by a consent summons dated 8 May 2007.  The relevant bank statements of the defendant’s bank account were only provided to the plaintiffs pursuant to the order of Master Levy made on 26 January 2006 well after the variation orders were made on the two previous occasions.

22.       The plaintiffs have included by way of the amended statement of claim a proprietary claim to the enjoined assets and opposed the defendant’s summons and in addition applied for an order in the terms of the plaintiffs’ summons so that the defendant may no longer withdraw HK$5,000 per week for living expenses from the defendant’s bank account.”

55. I find that the plaintiff is entitled to judgment for the repayment of the sums paid over to the defendant.

56. I am satisfied that the total sum of US$970,000 provided by the 1^st and 2^nd plaintiffs has been paid to the defendant’s bank account.  I am also satisfied that as the sum of US$970,000 was obtained by fraud, a constructive trust is imposed on the defendant and the property is recoverable and can be traced.  In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 667 Lord Browne-Wilkinson said at page 716:

“ I agree that the stolen moneys are traceable in equity.  But the proprietary interest which equity is enforcing in such circumstances arises under a constructive trust, not a resulting, trust.  Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity….”

57. I am satisfied that the plaintiffs are entitled to a declaration that the defendant is the constructive trustee of a trust in the sum of US$164,500, in respect of the 1^st plaintiff, and US$805,500, in respect of the 2^nd plaintiff.

58. Counsel for the plaintiffs has informed me that Flat C has been sold by the mortgagee bank Standard Chartered Bank (Hong Kong) Ltd and from the documents shown to me I am satisfied that half of the remaining surplus of proceeds has been paid to the OR as trustee in the bankruptcy of the defendant and the other half has been paid into court as the defendant’s wife claims to be entitled to the same.

59. I am satisfied that the plaintiffs are entitled to the declaration in the terms as sought at trial namely, a declaration that they are entitled to trace any funds paid out of the defendant’s bank account up to a maximum sum of US$970,000 and to recover such funds subject to any competing rights to be asserted and resolved in the District Court proceedings DCMP 3519 of 2007.

60. For the above reasons I gave judgment to the plaintiffs and made the orders as set out above at paragraph 1.  

HCSD 9/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 9 OF 2007

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HCA 218/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.218 OF 2005

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REASONS FOR JUDGMENT

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The applications

1. There were 3 applications (which were ordered to be heard at the same time) before me for hearing on 21 August 2007 as follows:

(1)	the application by the applicant in HCSD 9 of 2007 who is also the defendant in HCA 218 of 2005 to set aside the statutory demand dated 31 January 2007;
(2)	the application in HCA 218 of 2005 by the defendant by summons dated 12 April 2007 (“the defendant’s summons”) for an order that the Mareva order made by me dated 2 February 2005 as subsequently extended and varied be further varied to the effect that:
	(a)	the order does not prohibit the defendant from raising sufficient funds to pay legal costs and to meet the defendant’s living expenses by sale of the property at Flat F, 41st Floor, Block 8, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau Island, New Territories (“Flat F”) currently held by the defendant and his wife as joint tenants;
	(b)	HK$1,000,000 from the net proceeds of the sale of Flat F after deducting all charges, legal fees, government rates and stamp duty in respect of the sale be paid to the defendant’s solicitors and as to HK$260,000 of which be used to pay the plaintiffs’ legal costs pursuant to the assessment of Deputy Judge Carlson dated 27 November 2006, and as to HK$740,000 of which be applied towards paying accrued and future fees of his solicitors for the defendant’s legal advice and representation herein; and
	(c)	the balance of the net sale proceeds be retained in the defendant’s bank account no. 773-101324-888 with the Hang Seng Bank Limited (“the defendant’s bank account”) subject to and/or pending further order of the Court save that the defendant be at liberty to continue to withdraw therefrom HK$5,000 per week for his living expenses;
(3)	the application in HCA 218 of 2005 by the plaintiffs by summons dated 8 May 2007 (“the plaintiffs’ summons”) for an order that the order made by me on 2 February 2005 as subsequently extended and varied be further varied to the effect that the order no longer permits the defendant from withdrawing the sum of HK$5,000 per week from the defendant’s bank account.

2. After hearing arguments, I dismissed the application to set aside the statutory demand.  I also dismissed the defendant’s summons.  I allowed the plaintiffs’ application by the plaintiffs’ summons and made an order that the order made by me dated 2 February 2005 as subsequently extended be varied to the effect that the order no longer permits the defendant from withdrawing the sum of HK$5,000 per week from the defendant’s bank account.  I also made an order for costs against the defendant such costs to be taxed on a party and party basis in respect of all 3 applications.  I indicated that I would give my reasons in writing later.  This I now do.

Background

3. The plaintiffs’ claims in this action against the defendant are in deceit, fraudulent misrepresentation and money had and received.  The 2^nd plaintiff is a BVI company wholly owned by the 1^st plaintiff who is its only director.  The plaintiffs’ case is that the defendant fraudulently induced the plaintiffs to pay a total sum of US$970,000 to the defendant.  The sum of US$164,500 was paid by the 1^st plaintiff and the sum of US$805,500 was paid by the 2^nd plaintiff.  It is not disputed that these sums were paid by the plaintiffs and eventually were paid into the defendant’s bank account.  The plaintiffs claim the return of the said sums and damages.

4. On 2 February 2005 on the plaintiffs’ ex parte application I granted a Mareva injunction against the defendant.  By the order the defendant was restrained from removing from Hong Kong any of his assets which are within Hong Kong whether in his own name or not and whether solely or jointly owned up to the value of US$970,000.  The defendant was also restrained from in any way disposing of or dealing with or diminishing the value of any of his assets, which are within Hong Kong, whether in his own name or not, and whether solely or jointly owned up to the value of US$970,000.  The prohibition included Flat F and Flat C on 33^rd Floor of Block 9, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau Island, New Territories, Hong Kong (“Flat C”).  The defendant was also ordered to disclose to the plaintiffs in writing all of his assets of an individual value of HK$25,000 or more, whether in or outside Hong Kong and whether solely or jointly owned giving the value, location and details of all such assets.

5. By paragraph (1) of the exceptions to the order it was provided that the order does not prohibit the defendant from spending HK$5,000 per week towards his ordinary and proper living expenses and a reasonable sum on legal advice and representation.

6. The background facts giving rise to the institution of this action by the plaintiffs against the defendant are succinctly set out at paragraphs 3 to 20 in the judgment of Deputy High Court Judge Carlson of 20 July 2006 and reference can be made to this for the background facts.  There is no need for me to set these out here.  Deputy Judge Carlson was dealing with two matters before him.  One was the appeal by the plaintiffs from an order of a master ordering the plaintiff to provide security for costs, the other was an application by the defendant to discharge the Mareva order or to direct that fortification of the plaintiffs’ undertaking in damages be provided.  In a careful and reasoned judgment Deputy Judge Carlson allowed the appeal from the master’s order and dismissed the application to discharge the Mareva order or to direct that fortification be provided.  

7. It is noteworthy that Deputy Judge Carlson considered the merits of the plaintiffs’ case and the defence and came to the firm view at paragraph 28 of his judgment that “on the very impressive strength of the case against [the defendant]” the plaintiffs should not be required to provide security for costs.  I would also observe that at paragraph 27 the judge came to the view, correctly if I might add, that the defendant was in “an almost unanswerable position when it comes to resisting the action on the basis of a claim for money had and received”. 

The statutory demand

8. A statutory demand under the Bankruptcy Ordinance Cap 6 dated 31 January 2007 was served on the defendant on behalf of the plaintiffs on 16 February 2007.  This was in respect of the gross assessment of costs in the plaintiffs’ favour in the sum of HK$260,000 made by Deputy Judge Carlson on 27 November 2006 in respect of the applications he had decided on 20 July 2006.  Despite demands made on the defendant, the costs of HK$260,000 were not paid.  This resulted in the service of the statutory demand on the defendant.

9. In England, paragraph 3 of the Practice Note (Ch D) (Bankruptcy: Statutory Demand: Setting Aside) (No 1 / 87) [1987] 1 WLR 119 provides that:

“	Where the statutory demand is based on a judgment or order, the court will not at this stage go behind the judgment or order and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment or order.”

10. In Re Maydwell, ex p WFM Motors Pty Ltd, a creditor [1999] 3 HKLRD 325 Le Pichon J (as she then was) said at page 335 that although no parallel practice direction exists in Hong Kong, that practice “is obviously sound and ought to be followed”.  I respectfully agree.

11. In applying to set aside the statutory demand, Mr Wong, for the defendant, submitted that the defendant was not disputing the debt nor was he seeking to go behind the judgment for costs.  He submitted that if an order were made in the defendant’s favour on the defendant’s summons then there would be sufficient moneys to pay the costs of HK$260,000 and the Court should then set aside the statutory demand.  According to the copy of the bank statement handed up to the Court by Mr Wong, the balance standing in the defendant’s bank account as at 17 August 2007 was only HK$224,483.30.  Mr Wong accepted that if the Court were minded to dismiss the defendant’s summons there was then no basis for setting aside the statutory demand.  It follows that if the Court did not accede to the defendant’s application by the defendant’s summons then the summons to set aside the statutory demand should be dismissed.

The defendant’s summons and the plaintiffs’ summons

12. I turn to the defendant’s summons and the plaintiffs’ summons.

13. The Mareva order expressly provided that the defendant may spend HK$5,000 per week towards his ordinary and proper living expenses and a reasonable sum on legal advice and representation.

14. As for his living expenses, the defendant has been withdrawing the sum of HK$5,000 per week from the defendant’s bank account.  And as pointed out by Mr Wong in his submissions, on two previous occasions the plaintiffs have consented to withdrawals by the defendant from the defendant’s bank account for legal advice and representation.  The first occasion was on 4 March 2005 when I made an order that the Mareva order be varied to the effect that the order does not prohibit the defendant from withdrawing from the defendant’s bank account the sum of HK$150,000 for legal advice and representation.  On that occasion the Mareva order as varied was extended to until after trial or further order.  The second occasion was on 27 August 2005 when Deputy High Court Judge Gill made an order by consent that the Mareva order be further varied to the effect that the order does not prohibit the defendant from withdrawing a further sum of HK$172,100 for legal advice and representation.  Therefore, since the making of the Mareva order on 2 February 2005 the defendant has, with the consent of the plaintiffs, withdrawn the total sum of HK$322,100 for legal costs from the defendant’s bank account.  However, when the plaintiff sought to withdraw the further sum of HK$298,000 for legal advice and representation the plaintiffs refused to give their consent.

15. According to the defendant, as at about 31 July 2006 there were arrears of legal costs due to his solicitors in the sum of HK$298,000.  Apart from accrued legal costs, future legal costs will have to be incurred.  The defendant says that he has been informed by his solicitors that they could no longer charge him concessionary rates and they would be unable to extend further credits to him. 

16. There are insufficient moneys in the defendant’s bank account to settle the judgment debt for costs in the sum of HK$260,000 and the defendant’s solicitors’ accrued legal costs in the sum of HK$298,000.  For that reason the defendant applied by the defendant’s summons for a variation of the Mareva order to permit him to sell Flat F and to use the net proceeds to pay the judgment debt for costs and the defendant’s solicitors’ accrued legal costs and also to be applied towards future legal costs.

17. The Mareva order affected all of the defendant’s assets including Flat F and Flat C.  On the evidence Flat F was purchased in the names of the defendant and his wife for HK$1,950,000 by an instrument dated 15 November 2004.  Flat F is and was at all material times unencumbered.  Flat C was purchased in the names of the defendant and his wife for HK$2,030,000 also by an instrument dated 15 November 2004.  Flat F was subject to a mortgage with Standard Chartered Bank (Hong Kong) Ltd also by an instrument dated 15 November 2004.  According to the mortgage service application form of Standard Chartered Bank (Hong Kong) Ltd the mortgage loan was HK$1,000,000.  With the purchase price of HK$2,030,000 and a mortgage loan of HK$1,000,000, it is clear that the sum of HK$1,030,000 was paid by the defendant and his wife towards the purchase of Flat C.  This sum of HK$1,030,000 together with the purchase price of HK $1,950,000 for the unencumbered Flat F amounting to the total sum of HK$2,980,000 would have been required to be paid by the defendant and his wife for the purchase of the two properties.

18. The bank statements in respect of the defendant’s bank account show, inter alia, the following withdrawals and cheques issued from the defendant’s bank account:

(1)	on 15 October 2004, a withdrawal in the sum of HK$240,000;
(2)	on 11 November 2004, a cheque in the sum of HK$150,000;
(3)	on 12 November 2004, a cheque in the sum of HK$831,000;
(4)	on 12 November 2004, a cheque in the sum of HK$1,759,000.

19. These show that the total sum of HK$2,980,000 had been drawn from the defendant’s bank account as at 12 November 2004.

20. There is no dispute that the total sum of US$970,000 from the plaintiffs was paid into the defendant’s bank account prior to 15 October 2004.

21. Although the plaintiffs consented to the orders to vary the Mareva order on two occasions in the past to permit the defendant to withdraw sums for legal advice and representation it is clear that the concessions were made before the plaintiffs made a proprietary claim to the funds in the bank account and to any property purchased with those funds.  The proprietary claim is contained in the amendments to the statement of claim in respect of which the plaintiffs were given leave to amend by a consent summons dated 8 May 2007.  The relevant bank statements of the defendant’s bank account were only provided to the plaintiffs pursuant to the order of Master Levy made on 26 January 2006 well after the variation orders were made on the two previous occasions.

22. The plaintiffs have included by way of the amended statement of claim a proprietary claim to the enjoined assets and opposed the defendant’s summons and in addition applied for an order in the terms of the plaintiffs’ summons so that the defendant may no longer withdraw HK$5,000 per week for living expenses from the defendant’s bank account.

The legal principles

23. The applicable legal principles can be found in the succinct passage in the judgment of Roch LJ in Ostrich Farming CorporationLtd v Ketchell and another [1997] EWCA Civ 2953 (10 December 1997) as follows:

“	When, as in this case, a plaintiff makes a proprietary claim to funds in the possession of the defendant and has obtained from the court a Mareva injunction freezing assets in the hands of a defendant, an application by that defendant for the release of monies from the frozen funds to be used to finance his defence to the plaintiff’s claim involves a two-stage process: see Fitzgerald and others v Williams and others [1996] 2 All ER 171 at 178E, the judgment of the then Master of the Rolls, Sir Thomas Bingham.
	The first stage is in effect a hurdle that the defendant must clear before the court’s discretionary power to release monies from the frozen funds for the purpose of financing the defendant’s defence arises.  That hurdle is to establish on proper evidence that there are no funds or assets available to the defendant which can be used by him to pay his legal expenses other than the assets in respect of which the plaintiff brings his proprietary claim.
	The reason for the first hurdle is obvious.  The defendant should not be permitted to diminish the funds which the plaintiff claims are his and in respect of which the defendant is (if the plaintiff is correct) a trustee for the plaintiff.  A defendant cannot clear this hurdle unless he provides evidence on affidavit giving a full and frank account of his finances to the court.”

24. Ostrich Farming was applied in Liu Xian Feng & another v Liu Bo and others [2006] 4 HKLRD 33.

25. To overcome the first hurdle, the defendant must establish by proper evidence that there are no funds or assets available to the defendant which can be used by him to pay his legal expenses other than the assets in respect of which the plaintiffs bring their proprietary claim.

26. As Le Pichon JA said in Liu Xian Feng at paragraph 11:

“	To clear this hurdle, a defendant has to provide evidence on affidavit giving a full and frank account of his finances to the court.”

27. Once the first hurdle is overcome, as Roch LJ said in Ostrich Farming:

“

the court can make an order allowing the defendant to use part of the funds (the equitable ownership of which is claimed by the plaintiff) for the defendant’s legal expenses.  That power in the court is a discretionary power.  The court in deciding whether to exercise that power, must weigh the potential injustice to the plaintiff of permitting the funds which may turn out to be the plaintiff’s property to be diminished so that the defendant can be legally represented, against the possible injustice to the defendant of depriving him of the opportunity of having the assistance of professional lawyers in advancing what may, at the end of the day, turn out to be a successful defence.

To perform this process, which Sir Thomas Bingham in the case of Sundt Wrigley & Co Limited v Alan Charles Wrigley described as a “careful and anxious judgment”, the judge must have evidence so that he can consider all relevant circumstances and, in particular, so that he can weigh the relevant strengths of the plaintiff’s claim to property in the funds held by the defendant and the defendant’s defence to that claim.”

28. It is useful to also bear in mind what Millett LJ (as he then was) said in a passage in Ostrich Farming as follows:

“

It cannot be sufficient for a defendant to establish that he has no other funds with which to conduct his own defence.  For even if that be so, he must in addition show that there is an arguable case for his having recourse to the funds in question.  If he cannot show an arguable claim in his part to the funds, he has no right to use the money.  A trustee has no right to have recourse to trust money to defend himself against a claim for breach of trust unless he has an arguable case for saying that he has a beneficial interest in the funds in question.  No man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings.”

29. It seems to me that the same considerations should also apply in considering whether the defendant can use the funds in the bank account for his living expenses.

30. It seems to me that it is plain that on the evidence the plaintiffs have a strong proprietary claim to, inter alia, Flat F.  There is, in my view, a strong case for inferring that it was purchased with funds provided by the plaintiffs which were paid into the defendant’s bank account.  

31. The defendant’s position is that Flat F was not, at least not entirely, purchased with the funds paid in by the plaintiffs.  It was funded partly with funds from the moneys given to him by his children to the extent of US$100,000.  The evidence on this is, however, scanty and unsatisfactory.  The evidence is contained at paragraphs 8 and 9 of the 10^th affirmation of the defendant as follows:

“	8.	The children of my former marriage in the U.S. had provided pocket moneys to me in various amounts before I moved back to Hong Kong in about 2004.  I used to keep the pocket moneys in cash in the U.S.
	9.	In about early November 2004, I carried most of the pocket moneys with me to Hong Kong.  US$100,000 of the pocket moneys were used for purchase of [Flat F] currently held by me and my wife, Che Yao Yuan, as joint tenants.  I could not produce any relevant supporting document as the pocket moneys were largely in cash.  I had got rid of quite a lot of the documents/stuff at the time when I moved into the current premises in about December 2004.”

32. These are bald allegations of the defendant without condescending to particulars.  No particulars are given of how much pocket money was given to him and the children are unidentified. 

33. It is plain on the evidence that the US$100,000 was never paid into the defendant’s bank account.  The defendant does not provide any documentary evidence whatsoever that US$100,000 was used towards the purchase price of Flat F.  Even if he no longer has any documents, he could easily have obtained relevant receipts or other documents in relation to the alleged use of US$100,000 towards the purchase of Flat F from the conveyancing solicitors who acted for him and his wife in the purchase of Flat F, if his allegations are true.  No attempt appears to have been made to obtain any relevant documentation from his conveyancing solicitors.  This remains a bald allegation without sufficient particulars or documentary evidence and cannot, in my view, on the evidence before me undermine the plaintiffs’ strong proprietary claim to Flat F.

34. Mr Sheppard also submitted that, in any event, on the defendant’s own pleaded case the moneys paid by the plaintiffs which were eventually paid into the defendant’s bank account did not belong to the defendant himself.  The defendant’s pleaded case is that he represented North America Consultants and Management Corporation Inc (“NACM”) in dealing with the plaintiffs (paragraphs 6 and 7 of the defence).  And in the answers to a request for further and better particulars of the defence dated 26 July 2005 the defendant pleaded that he had a running account with NACM for money which was received by him on behalf of NACM in respect of which he was to account to CPTO Ltd of Cyprus on behalf of NACM.  Thus, it was submitted, on the defendant’s own case, the moneys paid by the plaintiffs either belonged to NACM or NACM on trust for CPTO Ltd of Cyprus but not to the defendant.  Mr Wong did not seek to dispute this.  I see the considerable force of Mr Sheppard’s submission which I accept.

35. In my judgment the defendant fails to overcome the first hurdle.  He has failed to give a full and frank account of his finances.

36. In his 2^nd affirmation affirmed on 9 March 2005 the defendant said that apart from Flat F and Flat C and the defendant’s bank account he did not have any assets of an individual value of HK$25,000 or more.  By his 1^st and 2^nd affirmations the defendant disclosed that he was living at Flat C which was mortgaged.  The outstanding mortgage loan as at 28 January 2005 was HK$805,481.20.  Monthly mortgage payments of HK$6,668 were payable by him.  He also disclosed that he was the President and majority shareholder of NACM which was used by him as a vehicle for carrying on some of his business activities.  

37. In his 1^st affirmation the defendant disclosed that his ordinary monthly living expenses were HK$36,297.  Included in this was the sum of HK$10,000 for business entertainment.  The defendant also said that he needed to constantly travel for business and the monthly expenses for this was HK$10,000.  He also said that he needed to travel to California to visit his children from his former marriage and estimated such expenses at HK$2,500 per month.  According to the figures given by him his monthly expenses came to HK$48,797.  And in his 10^th affirmation affirmed on 15 June 2007 the defendant points out that the monthly expenses of HK$48,797 were estimated in March 2005 and “the monthly expenses could not reflect my current expenses taking into account the inflation”.

38. Although he said that he had to spend HK$10,000 monthly for business entertainment and HK$10,000 monthly to constantly travel for business, nowhere in any of his affirmations does he disclose any income received by him from any of his business activities.

39. It was also pointed out by Mr Sheppard that the defendant has given contradictory accounts as regards his salary from NACM.  In the mortgage application form when applying for the mortgage loan in November 2004 for the purchase of Flat C the defendant disclosed that his monthly salary was US$8,000.  By letter dated 15 February 2006 from the defendant’s solicitors to the plaintiffs’ solicitors the defendant informed the plaintiffs that he has not received “the alleged salary of US$8,000 from [NACM] as from January 2005”.     However, when interviewed by the police on 2 February 2005 it is clear that the defendant was informing the police that he was then currently working for NACM earning a monthly salary of US$10,000. 

40. The defendant has failed to disclose any salary earned from NACM or any income from any of his unparticularised business activities in any of his affirmations.

41. I would observe that the Mareva order permitted the defendant to spend only HK$5,000 per month for living expenses.  This amounts to about HK$20,000 per month.  However, according to the defendant he has been spending HK$48,797 per month thereby leaving a shortfall of about HK$28,797 which he would have had to obtain from somewhere other than the frozen assets.  It has been about 30 months from the time of the Mareva order to the time of the hearing before me on 21 August 2007 so the shortfall would have been about HK$863,910 ($28,797 x 30).  The defendant has failed to give any particulars of where he has obtained the same.  

42. The defendant says at paragraph 14 of his 9^th affirmation that:

“	To avoid from being adjudicated bankrupt and continue the proceedings, I have to borrow loans from my relatives and friends to apply for setting aside the Statutory Demand.”

However, he fails to condescend to particulars as to how much he has borrowed and from whom.

43. It seems to me that the defendant has failed to give a full and frank account of his finances. He has failed to overcome the first hurdle of the two-stage test in Ostrich Farming.

44. Even if the defendant were able to overcome the first hurdle, I would not have exercised my discretion in the defendant’s favour.  As I have said, the plaintiffs have a strong proprietary claim to, inter alia, the funds in the bank account and to Flat F.  The defendant’s claim is to the extent of US$100,000 which he says was used towards the purchase of Flat F.  This is a partial proprietary claim to Flat F to the extent of US$100,000.  The defendant has by now already used more than US$100,000 for living expenses and legal expenses which were withdrawn from the defendant’s bank account and which funds belong to the plaintiffs if they should succeed at trial on their proprietary claim.  As set out in his written submissions, Mr Sheppard makes the point that since the Mareva order the defendant has already received legal costs of HK$322,100 ($150,000 + $172,100) from the defendant’s bank account.  He has also withdrawn HK$5,000 a week amounting to HK$663,550 from the Mareva order of 2 February 2005 to 21 August 2007.  Thus the total sum for legal costs and living expenses received by the defendant from the defendant’s bank account amounts to HK$985,650 or US$126,365.38.  It seems to me that even on the defendant’s unsatisfactory evidence about his alleged proprietary interest of US$100,000 used for the purchase of Flat F, that interest has already been extinguished.

45. I would also observe that there is no suggestion that the defendant will be unable to continue to borrow funds from friends and relatives to pay for his continuing living expenses and legal costs.  

46. In weighing the possible injustice to the plaintiffs of permitting funds which may turn out to be the plaintiffs’ property to be used for the defendant’s legal costs and living expenses and the possible injustice to the defendant in not so permitting, I see little or no injustice to the defendant in dismissing the defendant’s summons and in allowing the plaintiffs’ application by the plaintiffs’ summons but there would, in my view, be substantial injustice to the plaintiff if I were to allow the defendant’s application and dismiss the plaintiffs’ application.

47. For those reasons I dismissed the defendant’s summons and made the order set out at paragraph 2 above on the plaintiffs’ summons.  There being no legal basis for setting aside the statutory demand, I dismissed the application to set aside the statutory demand.  

48. It also seemed to me that costs should follow the event and this was not disputed.  Although the plaintiffs sought an order that costs to the plaintiffs should be taxed on an indemnity basis it did not seem to me to be appropriate to so order.  I, therefore, ordered that costs in respect of the 3 applications be costs to the plaintiffs to be taxed on a party and party basis.

HCA 218/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 218 OF 2005

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R U L I N G

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Introduction

1.  The parties are agreed that I should make a gross assessment of the successful Plaintiff’s costs in this matter which I do under O.69 r.9 of the RHC.  For that purpose, I have been supplied with a statement of costs dated 10 November 2006 provided by the Plaintiff’s solicitors under O.62 r.9(4)(b) of the Rules.  The total sought is $520,000.  I also have detailed comments from the Defendant’s solicitors in a letter dated 22 November 2006.  These costs relate to a Master’s appeal before me relating to an order for security for costs together with a summons to discharge a Mareva injunction or, alternatively for an order that the Plaintiffs fortify their undertaking in damages.  The matter occupied a whole day for argument and part of previous day when I gave directions.   

The Bill of Costs

2.  The professional work involved, which is set out under section C is for 122.5 hours and under B, there is a further 48 hours relating to conferences, telephone calls, letters and discussions with counsel.

3.  Complaint is made by the Defendant’s solicitors that the hourly rate charged by the solicitors is excessive and that the time taken over the preparation of this matter has been unnecessarily long.  There is also a suggestion that there may well be a duplication of costs in respect of work that may have been done by more than one of the fee earners. 

The Assessment

4.  It strikes me that the proposed hourly charge out rates are reasonable having regard to the weight of the case and the experience and qualifications of the person involved.  I can only look at this matter broadly.  I have regard to the fact that this is a substantial commercial action with international ramifications.  Such matters are time consuming

but even making every allowance for this, the bill it seems to me is for too high.  The only reasonable item relates to counsel’s fee which should remain as it is.  I propose to halve the bill and will make a gross assessment of $260,000.

HCA 218/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 218 OF 2005

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Before: Deputy High Court Judge Carlson in Chambers

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J U D G M E N T

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Introduction

1.  I have two matters before me.  Firstly, an appeal by the Plaintiffs from an order of Master Kwong dated 14 March 2006 by which he ordered the Plaintiffs to provide security for costs in the, relatively modest, sum of $150,000 which is intended to cover the period up to discovery.  I also have a summons by the Defendant dated 28 April this year, (this summons having been taken out a month after the Plaintiffs' appeal against the Master's order on security for costs) to discharge a Mareva  Injunction made by Sakhrani J on 2 February 2005 or, alternatively, to direct that the Plaintiffs' should fortify their undertaking in damages.

The subject matter of the action

2.  The basis of the application for security is the 1^st Plaintiff's admitted residence overseas in California and the 2^nd Plaintiff's registration as a BVI company.  The 2^nd Plaintiff is wholly-owned by the 1^st Plaintiff, who is its only director.  The Defendant is a Hong Kong resident.

3.  This case is concerned with the practice of arranging the issuing of standby letters of credit (SBLCs') on commission.  In about February 2004, the 1^st Plaintiff was employed by Manufacturers Bank at Los Angeles.  He was approached by a Mr Anthony Luu to see if he might arrange a line of credit for him to be secured by a SBLC which would be arranged for him by the Defendant.  The 1^st Plaintiff's employers rejected that application.  This introduction to the Defendant by Mr Luu resulted in the latter telephoning the 1^st Plaintiff on 20 July 2004 who told him that he and the Defendant had been able to make a lot of money out of investing funds into the issuing of SBLC's and that an opportunity had become available to invest in a SBLC to finance the building of a pharmaceutical laboratory in Guangzhou.  He mentioned that a SBLC in the sum of US$2.5 million would be issued by Deutche Bank in New York to secure the loan from HSBC Guangzhou to the pharmaceutical company.  Mr Luu said that the Defendant was to arrange for the issue of theUS$2.5 million SBLC and would receive an issuance fee, or commission, for making this arrangement, being 23.5% of the value of the SBLC amounting to US$587,000.  He mentioned that he and the Defendant had been doing this very profitably for some 20 years.

4.  It is the Plaintiffs' case that, by deceit, the Defendant was thereafter to cause the 1^st Plaintiff and the 2^nd Plaintiff to pay him a total of US$970,000 in order to invest in the issuing of a SBLC.  Whilst the details of what took place may appear somewhat opaque, given the various elements of the scheme, the essential facts are not in dispute and can be related both briefly and simply. 

5.  On or about 23 July 2004, no doubt greatly encouraged by the prospect of a 23.5% return, the 1^st Plaintiff paid the sum of US$164,500 into Mr Luu's bank account with HSBC in Hong Kong in order to invest into the issuing of a SBLC to finance the Guangzhou pharmaceutical laboratory.  It is not disputed that this amount was then paid on by Mr Luu to the Defendant.

6.  On 29 July 2004, Mr Luu introduced the Defendant to the 1^st Plaintiff at a restaurant at Tung Chung when it is said that the Defendant made a number of representations to him which I can take from paragraph 7 of the Statement of Claim:

“(1) That he had been arranging the issue of standby letters of credit for commissions for many years.

(2) That he worked at a company called North America Consultants & Management Group (“North America Consultants”).

(3) That North America Consultants had lines of credit and close relationships with many banks.

(4) That those banks could issue standby letters of credit for North America Consultants on payment of fees of only 23.5 percent of the value of the standby letter of credit.

(5) That North America Consultants received all its business from referrals from its customers.”

7.  On 15 August 2004, Mr Luu informed the 1^st Plaintiff that HSBC had not been prepared to accept the wording endorsed on the SBLC and that it was hoped that the Bank of China might step in and takeover.  Nevertheless, that project appears to have fallen away because on 18 August 2004 both Mr Luu and the Defendant had a conference call with the 1^st Plaintiff.  They told him that another project, involving the building of a major shopping centre in Shanghai, had now come up and that this required substantial funding by means of SBLC's which offered far better prospects for profit than the pharmaceutical laboratory.  The 1^st Plaintiff was asked to consent to his US$164,500 being transferred to the funding for this project.

8.  The 1^st Plaintiff was told by the Defendant and by Mr Luu that the Shanghai real estate developer who was to build the shopping centre had obtained a US$100 million line of credit from Shanghai Pudong Development Bank (“Pudong Bank”) on condition that this credit line was fully secure by SBLC and a charge over real estate.  He was also told that Pudong Bank had agreed to accept collateral SBLC's issued by a bank with which the Defendant had strong connections.  Both he and Mr Luu would be travelling to Shanghai to negotiate with the developer and obtain his agreement that the 1^st Plaintiff's company, the 2^nd Plaintiff, would issue the SBLC for the highest amount that it could provide in return for payment of a large portion of the loan as commission, presumably something approximating to the 23.5% spoken of previously.

9.  Subsequently, on 21 August 2004 Mr Luu informed the 1^st Plaintiff that the property developer, a company called Zhengda, of which a Mr Zhu was chairman, required a SBLC of US$30 million to start with and that it would pay US$7.050 million as an issuing fee for the SBLC.  Mr Luu said that Zhengda required three SBLC's each to the value of US$10 million.  Each SBLC would be issued by Bank Winter in Austria after this bank had received an issuance fee of 23.5% of the value of the credit.  Zhengda had agreed to instruct its Hong Kong affiliate Cecil Enterprises Corporation to wire the ‘agreed-upon' funds to the 2^nd Plaintiff once Pudong Bank extended its line of credit to Zhengda after receiving the SBLC from Bank Winter.

10.  The next day, the 22 August 2004, Mr Luu told the 1^st Plaintiff by telephone that the Defendant had told him that the applicant for the SBLC's to be issued by Bank Winter would be a Cyprus company, CPTO Limited, which was associated with North American Consultants and Development Company (the Defendant's company), and which had lines of credit with many of the banks with whom the Defendant dealt, thereby enabling it to issue SBLC's by paying an issuance fee of 23.5% of the face value of the credit.

11.  Mr Luu said that in order to purchase the SBLC of US$10 million from Bank Winter, an issuance fee of US$2.350 million would need to be raised and paid to this bank.  Mr Luu told the 1^st Plaintiff that US$822,000 was already available, consisting of US$164,500 from the 1^st Plaintiff (already wired to Mr Luu's personal account on 23 July 2004) and US$657,500 of Mr Luu's own money.  He told the 1^st Plaintiff that these two amounts had already been paid to the Defendant and that a further US$1.528 million was still required.

12.  The 1^st Plaintiff then set about raising money from friends and relatives in order to invest in the SBLC.  This was done by him through four investment agreements between 21 and 31 August 2004.  The individual agreements were made between the 2^nd Plaintiff and the four individuals totalling US$670,000.

13.  By an e-mail of 23 August 2004, Mr Luu informed the 1^st Plaintiff that the monies raised by him were needed by the 1^st and 2^nd September and he told him that he should wire the amounts to the Defendant's personal account and that the Defendant would pass on these amounts to the issuing bank from his own account.

14.  On 26 August, the 1^st Plaintiff asked Mr Luu to get the Defendant to provide a bank letter proving that Zhengda had paid the Defendant the issuance fee of US$7.050 million in respect of the SBLC's for US$30 million, in order to allay concerns by the 2^nd Defendant's largest investor.  This was responded to on the next day by the Defendant who faxed what purported to be a print-out from a Hang Seng Bank internet site showing that he had US$6,002,239.13 in his account numbered             388-567-315-882.

15.  On 27 August, during a conference telephone call which included Mr Luu, the Defendant told the 1^st Plaintiff that the funds would need to be paid by 2 September.  The bank had now changed from Bank Winter to North-West Private Bank Inc (a Nauru Bank).  On 29 August, the 1^st Plaintiff had agreed to increase his own investment from US$164,500 to US$300,000 and he informed Mr Luu that the most that he and his investors could now raise was US$805,500.  On the next day, Mr Luu told him that the Defendant had agreed to put in US$252,500 and that the Defendant's investment together with his of US$657,000 and that raised by the 1^st Plaintiff totalled US$1.88 million which Mr Luu said was sufficient to issue a SBLC of US$8 million.

16.  Pursuant to a request by the Defendant for the amount to be wired to him, the1st Plaintiff executed a wire transfer of US$805,500 from the 2^nd Plaintiff's account with HSBC to the Defendant's Hang Seng Account 388-567-315-882.  This comprised US$670,000 put in by the 1^st Plaintiff's investors and US$135,500 put in by the 1^st Plaintiff himself, in addition to the sum of US$164,500 that he had previously paid.

17.  On 10 September, the 1^st Plaintiff and the Defendant met at a hotel in Kowloon where the Defendant told him that the SBLC for US$8 million had been issued by North-West Private Bank.

18.  On 20 October, after a degree of toing and froing the Defendant informed Mr Luu and the 1^st Plaintiff that the SBLC provided by North-West Private bank had been rejected by Pudong Bank.  As a result a replacement bank had to be found by the Defendant.  On 17 October, the Defendant put forward another bank being First National of America Banc.  In the meantime, Zhengda had found a bank in India to back its development, but this bank would only accept a SBLC from Deutche Bank and not from North-West Private Bank.  By 26 November 2004, an impasse had been reached so that Zhengda had to consider its position and try to find alternative funding sources.  During this period further meetings would need to be held to decide whether the US$970,000 would be refunded to the 2^nd Plaintiff's bank account, this being the US$805,500 and the US$164,500.

19.  Subsequent investigations have brought to light a number of crucial facts which are beyond dispute and which are relied upon as misrepresentations made by the Defendant which now justify the return of the US$970,000 to the Plaintiffs.  They are these:

(1) North-West Private Bank did not exist in 2004, its banking licence in Nauru having been revoked by the Government there.

(ii) CPTO Limited had been deleted from the Cyprus Reigstry of Companies on 29 August 2003.

(iii) At no time had a person called Mr Zhu, who it had been represented was president of Zhengda, worked for Zhengda.

(iv) First National of America Banc did not and does not exist.

(v) The Defendant's Hang Seng Bank Account 388-567-315-882 did not have US$6,002,239.13, in fact it only had US$239.13.

(vi)          With the result that the Defendant had not received a deposit from Zhengda in respect of the issuing fee for the SBLC of US$30 million.

20.  It is the Plaintiffs case that these false representations were made to the 1^st Plaintiff to induce him to pay money into a SBLC which was either a scam in the sense of being an out and out fraud or, at best, on a false basis in the hope that all might turn out well in the end by using other people's money, being the 1^st Plaintiff and his investors, by persuading them to invest on the basis of untrue representations.  The action is one for repayment of the US$970,000 on bases that range from fraudulent misrepresentation and deceit, down to a more begnin plea of a return of money had and received for consideration that has totally failed.  There is no dispute that these amounts have all gone into the Defendant's bank account with Hang Seng Bank.

21.  The nature of the defence is that the Defendant himself was unaware of these misrepresentations and that he is really in the same position as the Plaintiffs, being one party upstream from the Plaintiffs in these arrangements.  He is liable to pay these amounts to the issuing bank for the SBLC and that the Plaintiffs, in suing him, have sued the wrong party.

The status of the claim in relation to an application for security for costs

22.  Given the circumstances, the Plaintiffs applied for and obtained a Mareva Injunction from Sakhrani J, the matter having been considered inter partes on a number of occasions.  As a result the Plaintiffs have been able to secure a considerable proportion of the total sum of US$970,000 in the Defendant's Hang Seng Bank account.  This order was finalised on 2 February 2005.

23.  The way the application for security had been put on behalf of the Defendant before the Master and now before me is that all of these very serious allegations, even if true, cannot and should not be laid at the Defendant's door.  He is an innocent investor just like the Plaintiffs and their team of investors.  At this stage, on paper, it simply cannot be demonstrated that the Defendant nor Mr Luu are parties to any of the fraudulent activities that the Plaintiffs have been able to uncover.  Once it is shown that the Plaintiffs are overseas entities, that is to say the 1^st  Plaintiff, a resident of California, and his company, a BVI company then the usual order would be and should be to require security.

24.  Quite rightly, attention is drawn to the judgment of Browne-Wilkinson VC (as he then was) in Porzelack KG v Porzelack (UK) Ltd (1987) 1 ALL ER 1074, where he made the following observations at 1077 c-f:

“The matters urged before me have spread over a fairly wide field. First there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in The Supreme Court Practice 1985 vol I, para 23/I-3/2, which says: ‘… A major matter for consideration is the likelihood of the plaintiff succeeding …'  This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action.  I do not think that is a right course to adopt on an application for security for costs.  The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence.  A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time.

         Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance.  Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed.  But for myself I deplore the attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure.”

25.  Mr Wright, for the Plaintiffs, has addressed a very detailed submission the purpose of which is to show that the merits overwhelmingly favour the Plaintiffs' case that the Defendant has been a party to what is no more or less than a ‘scam' to separate the 1^st Plaintiff and his investors from their money or, at worst, now that these facts have emerged and that the Defendant has admittedly had the money, that he can have no possible justification for keeping it and that, in such circumstances, the Plaintiffs have demonstrated even at this paper stage that there is a “high degree of probability of success …” in their action.  This being the case Mr Wright submits that I am entitled to and should have regard to the merits of the Plaintiffs' case in the exercise of my discretion as to whether to order security.

26.  Mr Martin Wong, in a succinct and attractive submission, has said that it is far too premature, on the basis of this material, to come to any such view of the merits, either for or against either party.  The merits can only be determined following a detailed examination as a result of a conventional trial.  This being so I am still left with the general position that at overseas Plaintiff, other things being equal, should be ordered to provide security.

27.  For my part I am persuaded by Mr Wright's very helpful analysis of the evidence that at the very least on the basis of an action for money had and received that it is highly likely that the Plaintiffs will succeed.  The Plaintiffs case is very well documented and it demonstrates ‘dodgy dealing' of the lowest possible order (if I may be permitted to express it is this way) in which the Defendant and Mr Luu are very closely involved.  The Defendant will have much to explain at any trial of this action in showing that he is not in the know so far as the purported use of the struck-off banks and a de-registered Cypriot company are concerned.  And even if he can provide a clean bill of health for himself, he find himself in an almost unanswerable position when it comes to resisting the action on the basis of a claim for money had and received.

28.  I have decided therefore that on the basis of the very impressive strength of the case against him that the Plaintiffs should not be required to provide security and it is on this basis that this appeal should be allowed and the Master's order be set aside.

29.  For the sake of completeness and in the event of an appeal, if it were to be held that I was in error to have formed such an optimistic view of the strength of the Plaintiffs case, I ought to say that I do not believe that the amount of the security ordered would stifle the Plaintiff's claim.  The amount is very modest, the 1^st Plaintiff should be able to raise such a sum.  I appreciate that this amount is only up to discovery and that the Defendant would be able to come again for an even more substantial amount to take the matter up to the end of the trial.  In such circumstances, the modesty of the 1^st Plaintiff's financial position would have to be looked at further and his plea that such additional security would stifle his claim would need to be given much more serious consideration than at present where the amount ordered is modest.  But all of this is entirely academic where I have found against the Defendant based on the overwhelming strength of the case against him, which subject to an appeal, would put an end to this application unless the Defendant were to discover other evidence which served to undermine the present readily apparent strength of the Plaintiffs case.

The Defendant's application to discharge the Mareva Injunction and/or to require the Plaintiffs to fortify their undertaking

30.  The timing of this summons is significant.  It was taken out a month after the Plaintiffs appeal against the Master's order for security and over a year after the injunction had been made in February 2005.  O. 29 r. 1 at 29/1/25 page 518 of the current practice says this about fortification: I will set out the passage in full:

“Fortifying undertaking— In a proper case, the court may impose a condition to the effect that the plaintiff's undertaking should be fortified by his giving security by the bond of an insurance company or by payment into court or by some other means, for example, by payment to the applicant's solicitor or to the solicitors for each party jointly to be held pending further order (Baxter v Claydon [1952] W.N. 376 and Practice Direction (Mareva Injunctions and Anton Piller Orders) [1994] 1 W.L.R. 1233).  In these circumstances, unless the plaintiff is willing and able to provide the security the injunction does not go.

A defendant should apply for the security at the time when the injunction is granted and the undertaking is given.  The court has no power subsequently to impose such an additional term on the grant of an injunction (Commodity Ocean Transport Corp. v Basford Unicorn Industries Ltd, The ‘Mito' [1987] 2 Lloyd's Rep. 197).  It would seem, however, that since the court could later discharge an injunction in appropriate circumstances, it might permit the continuance of the injunction, in an appropriate case, on the giving of security.

Before an application to fortify an undertaking can succeed a likelihood of a significant loss arising as a result of the injunction and a sound basis for belief that the undertaking will be insufficient must be shown (Bhimji v Chatwani; Chatwani v Bhimji (No. 2)[1992] 1 W.L.R. 1158; [1992] B.C.L.C. 387).”

31.  The application is very much a late one.  Fortification was not asked for at the time and this is a matter to which I must return presently.  As for the discharge of the injunction, I can discover no change in circumstances that would justify such a course.  The Defendant could have appealed the making of the injunction in February 2005 but no such appeal was brought.  I am told that on the inter partes hearings the real issue that was canvassed concerned the withdrawal of living expenses and legal calls for the Defendant.  I am satisfied that, in the absence of any change in circumstances, the application to discharge the injunction must fail.

32.  As to fortification very much the same considerations would apply where no fortification was asked for at the time although, it is right to say that the 1^st Plaintiff has now put in evidence to show that he cannot afford to raise the $150,000 security for costs that was ordered.  Nevertheless, the answer to all of this is my view of the strength of the Plaintiffs case on liability which therefore makes it most unlikely that the Plaintiff will ever be put to it to pay out damages to the Defendant on their undertakings.

33.  Accordingly, both limbs of this summons must stand dismissed.

Costs

34.  On the application for security I make an order nisi that the Plaintiffs will have their costs here and below in any event, and on the summons concerning the injunction the Plaintiffs should also have their costs in any event.  This order will also be an order nisi having regard to the fact that I have not heard argument from the parties on costs.

Colin Wright, instructed by Messrs Kennedys, for the 1^st and 2^nd Plaintiffs

Martin W H Wong, instructed by Messrs Paul W Tse, for the Defendant