WHARF LTD AND OTHERS v. LAU YUEN HOW AND OTHERS

HCA 1535 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1535 OF 2008

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BETWEEN

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REASONS  FOR  DECISION

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A. Introduction

1.  This is the application by the 2^ndDefendant (Ms Liu) to vary the terms of the Mareva injunction granted against her on 17 August 2008^[1]. The injunction restrains her from disposing of, inter alia, the net proceeds (in the sum of about $2 million) of the sale of a residential property (“the Property”) in August 2008. The said proceeds have since been by stakeheld by Ms Liu’s solicitors.

2.  Ms Liu’s application is to ask the Court to allow the solicitors to release $1.9 million out of the stakeheld proceeds to enable her to pay for the legal fees to be incurred in her defence of a parallel criminal trial against her (and the other Defendants). The trial has been fixed to commence on 23 February 2010 for 20 days at the District Court.

3.  At the end of hearing, I dismiss Ms Liu’s application with reasons to be given later. This is what I do now.

B. Background

4.  The background relevant to this application has been helpfully summarized by Hon. Poon J at paragraphs 4 to 8 of his Reasons for Decision dated 3 September 2008 in dismissing Ms Liu’s then applications to (a) stay the proceedings, (b) impose an undertaking on the Plaintiffs and their solicitors not to disclose the materials obtained under these proceedings to the police in their criminal investigations against the Defendants, and (c) vary the Mareva injunction^[2].

5.  For the present purpose, I therefore hope I can be forgiven in quoting Poon J’s summary as follows:

“3.  The plaintiffs all belong to the Wheelock group of companies, providing various services to the group.  The 1^st plaintiff provides management services; the 2^nd plaintiff, management, accounting and taxation services; and the 3^rd plaintiff, hotel management services to the hotel business of the group.

4.  Prior to 23 July 2008, the 1^st plaintiff employed the 1^st defendant as its assistant payroll manager.  He alone handled the payroll of the senior staff (assistant general manager grade or above) in the Wheelock group.

5.  The 2^nd defendant is the 1^st defendant’s wife.  The 3^rd defendant is his sister.

6.  The plaintiffs’ complaint is this. In July 2008, the plaintiffs discovered that the 1^st defendant had between 13 May 2004 and 30 January 2008 falsified documents in 14 bank transactions involving a total of HK$8.5 million and diverted the same to the defendant’s bank accounts. Further, on 30 June 2008, the 1^st defendant fraudulently drew a cheque in the sum of HK$659,540 from the 1^st plaintiff’s HSBC bank account and made it payable to himself.

7.  On 20 July 2008, the plaintiffs reported the matter to the police. The police arrested the 3^rd defendant on 24 July 1008 and 1^st and 2^nd defendants on the following day. Holding charges were then laid against them. The 1^st defendant was charged with one count of attempted theft. The 2^nd defendant and the 3^rd defendant were respectively charged with two counts and one count of dealing with property known or believed to represent proceeds of indictable offence. They were all brought before the magistrate on 26 July 2008. The 1^st defendant was refused bail and has since been remanded in custody. The 2^nd and 3^rd defendants were granted bail. The case was adjourned to 22 September 2008 for mention. In the meantime, the Commercial Crime Bureau is still continuing with the investigation.

8.  On 1 August 2008, the 2^nd defendant entered into a sale and purchase agreement in respect of a property [i.e., the Property] in Tseung Kwan O that she bought in 2005. What she did alarmed the plaintiffs. On 17 August 2008, they successfully obtained the Mareva injunction against the defendants. Among other things, the defendants were ordered to disclose the their assets of an individual value of HK$50,000 by affidavit within 14 days from the service of the order.

6.  To the above summary, I should add the following.

7.  Ms Liu is eventually formally prosecuted for three charges of offences of dealing with the following property known or believed to represent the proceeds of indictable offences contrary to ss. 25(1) & (3) of the Organized and Serious Crimes Ordinance (Cap 455), namely:

(1)  $106,500 (over the period of 31 October 2001 to 16 January 2002).

(2)  $1,758,600 (over the period of 31 January 2002 to 25 July 2008).

(3)  The Property.

8.  The criminal trial due to commence in February is in relation to the above charges.  The suggested $1.9 million legal costs to be incurred are for (a) solicitors fees which are about $488,000, (b) Counsel’s fees (of a Senior Counsel and two junior Counsel) amounting to a total $1.4 million, and (c) miscellaneous charges.

9.  At the same time, the Plaintiffs are seeking and asserting in these civil proceedings, inter alia, proprietary claims against the Defendants (including Ms Liu) for the various alleged misappropriated funds, including the tracing of them to, inter alia, the Property and thus the proceeds of sale. The principal bases of the proprietary claims are that the funds were misappropriated by the 1^stDefendant in breach of trust and/or his fiduciary duties, and/or that Ms Liu had dishonestly assisted and/or had knowingly assisted the 1^stDefendant’s said breaches.

10.  From the time of the Mareva injunction to before the present application, under these civil proceedings, Ms Liu had engaged solicitors to prepare and file a total of 5 affirmations for various purposes, and counsel for the appearance before Poon J as mentioned above in support of her then applications.

11.  For the present application, Ms Liu is also represented by Counsel, and has also engaged solicitors to prepare 2 substantial affirmations in support thereof.

C. Relevant legal principles

12.  The parties are not in dispute as to the relevant applicable principles. They can be summarized as follows.

13.  The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a 2-stage process:

(1)  First, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim.  If the defendant fails in this first hurdle, the Court needs not consider the 2^ndstage and the application should be dismissed.

(2)  Secondly, once the first hurdle is cleared, the Court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff if releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence.  This process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim.  In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has not right to use the money.  As Millet LJ (as he then was) said in Ostrich, infra, “[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings”.

See:  Ostrich Farming Corporation Ltd v Ketchell [1997] EWCA Civ 2953 (10 December 1997), per Roch LJ at page 10[3]; Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33 (CA) at paras 10 & 11 (37B-H) per Le Pichon JA; Michael Chen Kang Huang v Peter Lit Ma  (unrep., HCSD 9/2007, 27 August 2007, Sakhrani J) at paras 23-28.

14.  In the case of an “ordinary” Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the Court’s discretion faced with an application to release the funds, the Court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet the payment, and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff. The rationale behind this is explained by Lloyd J in PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at pp 162 and 164:

“What should be the correct approach for the court to take in these circumstances?  The first reported case in which a similar question was considered is Iraqi Ministry of Defence v Arcepey Shipping Co SA, The Angel Bell [1980] 1 All ER 480, [1981] QB 65.  In that case Robert Goff J held that it was consistent with the policy underlying the Mareva jurisdiction that the defendant should be allowed to pay his debts as they fall due.  The purpose of the jurisdiction is not to secure priority for the plaintiff; still less, I would add, to punish the defendant for his alleged misdeeds.  The sole purpose or justification for the Mareva order is to prevent the plaintiffs being cheated out of the proceeds of their action, should it be successful, by the defendant either transferring his assets abroad or dissipating his assets within the jurisdiction: see Z Ltd v A [1982] 1 All ER 556 at 561, 571, [1982] QB 558 at 571, 584 per Lord Denning MR and Kerr LJ.  I am not going to attempt to define in this case what is meant by dissipating assets within the jurisdiction or where the line is to be drawn; but wherever the line is to be drawn this defendant is well within it.  It could not possibly be said that he is dissipating his assets by living as he has always lived and paying bills such as he has always incurred.  I say nothing about the costs of defending himself in these proceedings.  The Mareva jurisdiction was never intended to prevent expenditure such as this or to produce consequences such as would inevitably follow if this ex parte order is upheld.”

“The distinction between the ordinary Mareva plaintiff (to use Ackner LJ’s phrase) and the case where the plaintiff is laying claim to a trust fund on the so-called wider ground, is thus clear.  In the latter case the whole object is to secure the trust fund itself so that it should be available if the plaintiff should prove his claim.  In the former case by contrast the plaintiff is not entitled to any security.  The purpose of the jurisdiction, as is now clearly established, is not to provide the plaintiffs with any form of pre-trial attachment.  It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim.”

These observations were adopted and followed in NMB Postbank Group NV v Naviede (No. 2)[1993] BCLC 715 at 717-718 per Chadwick J.

D.  The present application

15.  Bearing these principles in mind, I now proceed to deal with the application.

D1. Which principles governing the release of the enjoined funds should apply in the present application

16.  Mr Poon, counsel for Ms Liu, first submits that for the present application and notwithstanding the Plaintiffs’ asserted proprietary claims, it is the principles governing “ordinary” Mareva injunctions that should apply. This is so because, insofar as the sale proceeds of the Property are concerned (which is the only relevant subject matter of the Mareva injunction for the present purpose), the evidence clearly shows that they originated directly from Ms Liu’s own fund and did not come from or were linked to the Plaintiffs’ alleged misappropriated funds. Mr Poon’s arguments run as follows:

(1)  The sale proceeds of the Property represented the profits made by Ms Liu on the sale of the Property.

(2)  The purchase funds of the Property came from (a) the various profits made by Ms Liu in her previous 4 property transactions started in 1987, (b) the mortgage granted by the bank on the Property, and (c) the refinancing raised by last property which was not yet sold when the Property was purchased in 2005.

(3)  Given that the alleged misappropriation of funds only started to happen in the year between 2001 and 2002, it is thus clear that the funds which eventually went into the purchase of the Property could not be linked to these misappropriated funds.

(4)  In the circumstances, the sale proceeds of the Property belong entirely to Ms Liu’s own funds.  No real proprietary claim could be asserted against them.

17.  I reject Mr Poon’s submissions. In my view, the evidence is far from clear to show that the sale proceeds are not in any way linked to the misappropriated funds. My reasons are as follows:

(1)  It is also Ms Liu’s own evidence that for the purchase of the Property, $1,187,000 came from “[her] own money and borrow[ing] from relatives”.  This is a mere assertion, which only came after the Plaintiffs have made some sceptical observations in their rebuttal affirmation of her evidence.  She has for no good reasons failed to set out in the evidence how much she had borrowed from the relatives.  She has also not even identified these relatives and the proportion of funds coming from each of them.  She has similarly failed to say, insofar as part of this sum came from her own, what was the source of this unparticularized  “own” fund.

(2)  Although Ms Liu has repeatedly emphasized in the present application her right of silence and against self-incrimination to justify her position in not revealing her full case of the defence and not explaining the whereabouts of the various withdrawals from her bank account and the prima facie misappropriated funds, I do not see how this would justify the failure to provide the above mentioned evidence on the particulars of the alleged borrowing and own funds.  If she is right that the sum has nothing to do with the alleged misappropriated fund, there is nothing to prevent her from particularizing it and providing evidence in support.

(3)  Further, even in trying to set out the historic picture of the various profits and loss that she has made in the past 4 property transactions to justify that the funds used to purchase the Property came from her own source, Ms Liu has not in her evidence says that she had reinvested the profit made in each transaction into the next property transaction to support that there was a direct chain of flow of her own funds in these property transactions.  This does not therefore show that the funds used to purchase the Property came entirely or directly from her own money generated from the profit previously made, starting with the first property transaction.  Doing the best as he could, Mr Poon asked me to draw the inference.  I do not think Mr Poon is right.  First, the evidence as it now stands does not support that this is an irresistible inference that I can draw.  Secondly, as a matter of principle, for an application like this, Ms Liu (who is seeking the Court’s exercise of discretion) should not leave it to the Court’s inference when it is within her own ability to come up with the necessary clear, full and frank evidence to support her case.

(4)  For these reasons, Ms Lui has failed to demonstrate that the sale proceeds of the Property came from her own source and are not in any way linked to the misappropriated funds.

18.  I therefore conclude that the Ostrich 2-stage test applies to the present application.

D2. Has Ms Liu shown that she has no other means or assets to pay for the legal costs in the criminal proceedings

19.  After looking at the evidence globally, in my judgment, Ms Liu has failed to show by full and frank evidence that she has no other means than the enjoined funds to pay for the legal costs in the criminal proceedings. The following are my reasons:

(1)  In her evidence, Ms Liu says that, since the injunction and the freezing of all her financial assets in July 2008by the police, she has been living on financial contribution and the generosity of her relatives, and does not have any means to instruct solicitors to defend herself in the criminal case and the present civil proceedings.  Because of that, she could not even afford the fees to exercise her right at the preliminary enquiry before committal, or the fees to obtain proper advice on fact and evidence for the criminal trial PTR.

(2)  Notwithstanding the above, she has singularly failed to provide any evidence as to how she has managed to engage (and presumably pay) her lawyers (solicitors and/or counsel) to (a) draft and prepare at least 5 substantive affirmation already filed in these proceedings for various purposes, and (b) appear for her before Poon J to make the various applications at the hearing on 25 August 2008.  Similarly, there is no evidence to show how she is now able to engage solicitors to draft and prepare the 2 substantive affirmations in support of the present applications, and counsel to represent her today.

(3)  It must be noted that it is not her evidence that her relatives have been paying the legal fees for her.  It is also not her evidence that somehow these legal fees have not been paid.  It is similarly not her evidence that the unexplained funds withdrawal amounting up to some $1.7 million made between July and August 2008 were used to fund the legal costs.  Even giving full regard to her right of silence and against self-incrimination (being her reasons as to why she could not explain fully the withdrawals of these funds and their whereabouts), if any parts of these funds were used to pay for these legal fees, she should be able to do say so, as this would not infringe those rights of hers.

(4)  That shows that she has not come up with full and frank evidence to show clearly that she has no other source of means or assets to pay for the coming legal costs.

20.  Ms Liu in my judgment therefore fails to clear the first-hurdle in the 2-stage test. On this basis alone, her application should be dismissed[4].

21.  However, in case I am wrong in this conclusion, I would proceed to stage 2 of the test as follows.

D3. Stage 2 – balancing exercise

22.  Having regard to all the relevant circumstances, I would have also refused to exercise my discretion in favour of Ms Liu. This is so because:

(1)  For the same reasons set out in section D1 above, I think Ms Liu has failed to show that she has a good arguable case for the recourse to these funds.  In other words, I think there is at present a strong prima facie proprietary claim against the proceeds of the Property by the Plaintiffs.  This is of course a view based only on the interlocutory evidence now placed before me.

(2)  In the circumstances, the potential injustice to the Plaintiffs if releasing the funds far outweighs the possible injustice to Ms Liu of refusing her application.

E.  Conclusion

23.  For the above reasons, I dismiss Ms Liu’s application with costs to the Plaintiffs to be taxed if not agreed.

24.  I thank counsel for their assistance and succinctness in their submissions.

HCA1535/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1535 OF 2008

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Before : Hon Poon J in Chambers

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D E C I S I O N  N O. 2

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Introduction

1. The background circumstances leading to the present proceedings had already been set out in paragraphs 3 to 8 of the Reasons for Decision handed down on 3 September 2008, which are not repeated here.

2. The plaintiffs obtained a Mareva injunction against the defendants on 17 August 2008.  The defendants were ordered to disclose their assets of an individual value of HK$50,000 by affidavit.  In purported compliance of the order, the defendants affirmed that they do not have any asset of such value save and except that the 2^nd defendant has HK$2,064,108.59, being the net sale proceeds of her property in Tseung Kwan O sold in August 2008, savings of HK$72,479.18 and HK$52,000 in two Hang Seng Bank (“HSB”) accounts and that the 3^rd defendant has NZD17,448.83 in her account with the Bank of China (Hong Kong) Limited (“BOC”) and a property.

3. The plaintiffs were dissatisfied with the discovery made by the defendants.  By summons dated 10 September 2008 taken out under section 21 of the Evidence Ordinance, Cap. 8 and in aid of the Mareva injunction, they applied for an order to inspect and take copies of the banker’s record of the defendants’ accounts for the period between 1 May 2004 and 17 August 2008 as follows :

(1)  Accounts with The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) :

(a)         004-178-160487-001, 004-178-160487-003 and 004-178-9-009-212 held in the name of the 1^st defendant (“D1’s HSBC 001 Account; D1’s HSBC 003 Account; and D1’s HSBC 212 Account” respectively); and

(b)        such other accounts of which the defendants are sole or joint signatories.

(2) Accounts with Standard Chartered Bank (Hong Kong) Limited (“SCB”) :

(a)         003-351-0-015983-2 held jointly by the 1^st and 2^nd defendants (D1’s & D2’s SCB Account”); and

(b)        such other accounts of which the defendants are sole or joint signatories.

(3) Accounts with HSB :

(a)         200-027688-888, 200-027688-382, 200-027688-385 and 279-1-111442 held jointly by the 2^nd defendant with Madam Hau Mei Yuk (“D2’s HSB Accounts”);

(b)        200-067809-888 held in the name of the 3^rd defendant; and

(c)         such other accounts of which the defendants are sole or joint signatories.

(4) Accounts with BOC :

(a)         012-887-1-055235-3 held in the name of the 2^nd defendant (“D2’s BOC Account”);

(b)        012-710-5-010838-7 held in the name of the 3^rd defendant; and

(c)         such other accounts of which the defendants are sole or joint signatories.

4. The plaintiffs had already served the summons on the banks.  None of them opposed the application.

5. The 2^nd defendant, represented by Ms Ng, opposed the application on the following grounds :

(1)     It is too wide in scope.

(2)     It is inappropriate.

(3)     It is a fishing exercise.

(4)     It is oppressive.

(5)     It offends the 2^nd defendant’s right against self-incrimination.

6. The 1^st and 3^rd defendants, represented by Mr Mok, relied on similar grounds save and except the one on self-incrimination.

The general principles

7. Section 21(1) of the Evidence Ordinance provides :

“On an application of any party to any proceedings, the court or a judge may order that such party be at liberty to inspect and take copies of any entries in a banker’s record for any of the purposes of such proceedings.”

8. In Assets Investments PT Limited v. The United Islamic Investments Foundation and Others, HCA4392/1993, unreported, 21 January 1994, Barnett J reviewed some of the relevant authorities thus :

“6.    … The basic principle is that section 21 of the Evidence Ordinance (for the purpose of these proceedings being in substance identical to section 7 of the Bankers’ Books Evidence Act 1879) does not permit a litigant to embark upon a wholesale search of bank accounts in the hope of turning up something to his advantage. In Williams v. Summerfield (1972) 2 QB 512, Lord Widgery C.J. said :

‘The courts have set their face against section 7 being used on a kind of searching enquiry or fishing expedition beyond the usual rules of discovery.’

7.      The procedure itself is anomalous.  Whilst it is no doubt principally applicable to the trial of an action, it may be used in relation to interlocutory proceedings where there is an issue to be determined between the parties.  There has not, however, been any detailed pronouncement by the courts of the criteria against which an order for inspection will be made.  In some ways, it is analogous to the right of inspection consequent upon discovery under Order 24.  In a number of cases, decided in the late 19^th century following the introduction of the English Act, there was a suggestion that the principles relating to discovery should be followed.  Analysis of the cases, however, shows that the courts were anxious to prevent a litigant obtaining by the back door that which he could not obtain through the front, so that a litigant having sworn that certain discovered documents were not relevant, the applying party could not go behind the truth and obtain copies of those documents by going to the bank under section 7 of the Act.  See, e.g. South Staffordshire Tramways Co. v. Ebbsmith [1895] 2 Q.B. 669. In Parnell v. Wood [1892] P 137, Kay LJ said at page 141 :

‘The act does indeed provide by section 7 for allowing inspection where a judge thinks proper to order it, but a case must be made showing that such inspection is proper.’ ”

9. He then concluded :

“8.    In my judgment, the matters which must be demonstrated to a court before it can consider making an order under section 21 of the Evidence Ordinance are that the other party has a bank account and that there is a probability that that account will contain material germane to an issue which is to be tried between the parties.  Put shortly, perhaps, the test is relevance.”

10. In CTO (HK) Ltd v. Li Man Chiu & Others [2002] 2 HKLRD 875, I had this to say :

“Purpose of discovery order in aid of Mareva injunction

10.    To make a Mareva injunction effective, the court has a discretion to order the defendant to make a statement of his assets and to give discovery of documents for the purpose of ascertaining the existence, nature and location of assets and in the case of a proprietary claim, the whereabouts of the missing trust funds : see A v. C(No 1) [1981] QB 956 (note).  The primary purpose of the discovery order is to preserve the assets or property which might otherwise be dissipated notwithstanding the injunction.

11.    It is not uncommon that a plaintiff, like the plaintiff here, seeks to invoke section 21 of the Evidence Ordinance (Cap. 8) for an order that it may inspect and take copies of any entries in a banker’s record.  The bank may or may not be summonsed before the court when such an application is taken out : see sub-s (2).

12.    Though the court would not lightly use its powers to order disclosure of full information touching the confidential relationship of banker and customer, such an order is justified even at the early interlocutory stages of an action where the plaintiff sought to trace funds which, in equity, belonged to it and of which there was strong evidence that it had been fraudulently deprived and delay might result in the dissipation of the funds before trial : Bankers Trust Co. v. Shapira [1980] 1 WLR 1274.  The plaintiff would normally be required to give an undertaking that such information would be used only for the purposes of the action to trace the funds and not for any other purposes.

13.    In Arab Monetary Fund v. Hashim (No. 5) [1992] 2 All ER 911, Hoffmann J (as he then was) imposed three limits on the Bankers TrustCo. v. Shapira [1980] 1 WLR 1274 jurisdiction at pp.918E–920A.  First, the plaintiff must demonstrate a real prospect that the information may lead to the location or preservation of assets to which he is making a proprietary claim.  For the jurisdiction rests upon the proposition that unless the assets in question can be located and secured, the ultimate determination of ownership of those assets may be frustrated by their removal or dissipation and there will be no point in calling on the third party at the trial to produce the required documents or give the requested information.  Second, the jurisdiction is more restricted than a request to a party for general discovery on an issue.  When documents are required to be disclosed, the third party should be entitled to the same specificity in the documents he is asked to produce as he would be served with a subpoena.  Likewise, if he is asked for information, the questions should be directed with specificity to ascertaining the whereabouts of the assets in question.  Third, even if the application is prima facie falling with the Bankers Trust principle, the court needs to balance the potential advantage against the detriment to the person against whom the order is sought, not merely in terms of costs (for which he is ordinarily compensated on an indemnity basis by the terms of the order) but by way of invasion of privacy and requiring breach of obligations of confidence to others.”

11. With these principles in mind, I turn to consider if the present application should be allowed.  Since relevance is the test, it is useful to begin with the parties’ pleaded case.

The parties’ pleaded case

12. The plaintiffs’ claims may be summarised thus.  The defendants wrongfully conspired with each other to jointly misappropriate the funds of the plaintiffs during the period between 13 May 2004 and 30 January 2008.  Wrongfully and in breach of his fiduciary duties, the 1^st defendant falsified the autopay diskette submission forms, remittance instructions and the machine readable input diskette as required by the HSBC for autopay by adding the names of the defendants in disguise of the plaintiffs’ senior staff in the payroll to claim unauthorized payments.  Pursuant to and in furtherance of the conspiracy, the plaintiffs’ funds in the total sum of HK$8,500,000 with the HSBC were misappropriated and transferred into the defendants’ accounts thus :

	Date	Sum (HK$)		Account
1.	13/5/2004	200,000		D1’s HSBC 212 Account
2.	27/5/2004	1,000,000		D1’s HSBC 212 Account
3.	30/3/2005	1,000,000		D1’s HSBC 212 Account
4.	11/5/2005	200,000		D1’s HSBC 212 Account
5.	27/5/2005	1,000,000		D1’s HSBC 212 Account
6.	30/12/2005	400,000		D1’s & D2’s SCB Account
7.	30/3/2006	400,000		D1’s HSBC 001 Account
8.	16/5/2006	80,000		D1’s HSBC 001 Account
9.	29/6/2006	(a) 600,000		D1’s & D2’s SCB Account
		(b) 500,000		D3’s Account024-200-067809-888with HSB
10.	30/8/2006	400,000		D1’s HSBC 001 Account
11.	27/10/2006	500,000		D1’s & D2’s SCB Account
12.	28/12/2006	600,000		D2’s account024-200-027688-888with HSB
13.	30/5/2007	(a) 540,000		D1’s HSBC 001 Account
		(b) 780,000		D1’s & D2’s SCB Account
14.	30/6/2008	300,000		D1’s HSBC 003 Account
	Total :   8,500,000

13. On 4 July 2008, the 1^st defendant drew a cheque of HK$659,540 in favour of the 1^st plaintiff and deposited the same in the 1^st plaintiff’s account, which reduced the total loss suffered by the plaintiffs to HK$7,840,460.

14. The plaintiffs claimed that the defendants are liable as constructive trustees and prayed in aid the remedies of, among other things, tracing and money had and received.

15. The 1^st defendant’s only substantive defence is that the transactions were all confidential dealings authorised by the chairman’s office of the plaintiffs and carried out with their knowledge and for their benefit.  He also denied that he had falsified any document as alleged.

16. The 2^nd and 3^rd defendants basically adopted the 1^st defendant’s defence.  They further alleged that had no knowledge of the dealings between the 1^st defendant and the plaintiffs.  Of the transactions which involved their accounts, transactions 6, 9(a), 11 and 13(b) were banked into the D1’s & D2’s SCB Account without the 2^nd defendant’s knowledge.  As to transaction 12, the 2^nd defendant believed that the money derived from the Hang Seng Index stock trading and was banked in by the 1^st defendant.  As to transaction 9(b), the 3^rd defendant believed that the sum of HK$500,000 was the loan that the 1^st defendant had agreed to lend to her.

The parties’ submissions

17. The defendants’ accounts against which the plaintiffs sought discovery fall into two board categories :

(1)     those into which HSBC directly remitted the plaintiffs’ moneys between 13 May 2004 and 30 January 2008; and

(2)     those under the names of the defendants other than (1).

18. In essence, Ms Ng and Mr Mok submitted that the discovery sought is too wide in scope and inappropriate.  It is a mere fishing exercise and hence oppressive.

19. Ms Wu, appearing for the plaintiffs, submitted that the banker’s record of these accounts is relevant in constituting the movement of the misappropriated funds and revealing the identity and information of the recipients in the pipeline, to which the plaintiffs are entitled to identify by way of tracing.  Those accounts under (1) are the recipient accounts.  They are prima facie relevant, given the actual payment of the misappropriated funds into them by HSBC.  And those under (2) help complete the inquiry.

20. Ms Wu went on to submit that the exercise is particularly significant on the current state of evidence.  The defendants asserted that they do not have any asset of an individual value of more than HK$50,000 save and except those referred to in paragraph 2 above.  One naturally asked where the misappropriated funds had gone when :

(1)     the misappropriated funds amounted to a substantial sum of HK$8,500,000;

(2)     between 7 and 16 July 2008, a total of HK$1,020,101.17 (as compared to HK$72,479.18 asserted now) was standing to the credit of one of the D2’s HSB Accounts;

(3)     deposits of HK$537,000 and HK$225,000 into D2’s BOC Account on 7 August 2008;

(4)     withdrawal of HK$220,000, HK$300,000 and HK$200,000 in cash from D2’s BOC Account on 7, 8 and 11 August 2008 respectively; and

(5)     the purchase by the 2^nd defendant of the Tseung Kwan O property on 20 May 2005 at HK$7,290,000 subject to mortgage.

21. Turning to the period of discovery (1 May 2004 to 17 August 2008), Ms Wu submitted that the inquiry should begin at the time when the first misappropriation of funds took place, that is, 13 May 2004 : see CTO, para. 21 at 881H-I.  The enquiry should end on 17 August 2008 when the plaintiffs obtained the Mareva injunction whereupon the accounts would be frozen.

22. Finally, Ms Wu submitted that the plaintiffs’ application is well founded and bona fide.  It is not a fishing exercise in the hope of turning up something coincidentally to their advantage in the course.

23. I agree with Ms Wu’s submissions entirely save and except that the time for discovery should start at 13 May 2004 and not 1 May 2004 as requested in the summons.

24. What remains is Ms Ng’s submission that the discovery would offend the 2^nd defendant’s right against self-incrimination in the pending criminal case.  I am unable to accept this submission.  As noted, the 2^nd defendant’s principal defence is that :

(a)     the transactions were all authorised by the plaintiffs and carried with their knowledge for their benefit; and

(b)     she did not know the dealings between the plaintiffs and the 1^st defendant.

That being her defence, I fail to see how the discovery sought, which focuses on the movement of funds, would prejudice her defence in the criminal proceedings at all.

25. For the above reasons, the plaintiffs’ application is allowed in principle subject to the following points.

26. First, in paragraph 3 of the summons, the plaintiffs sought an order to use the information disclosed for the purpose of proceedings against the defendants in Hong Kong and elsewhere.  Ms Wu effectively abandoned this when she offered an undertaking that the plaintiffs shall use the information disclosed in these proceedings only unless otherwise compelled by a court order.  The undertaking is in my view necessary.

27. Second, as noted, the discovery should begin on 13 May 2004.

28. Third, as to the costs for making the discovery, the banks should be reimbursed with the costs in complying with the order.  I agree with Ms Wu that it is only fair for the parties to bear those costs in equal share initially and the successful party be allowed to claim its share of costs from the losing party at the end of the day.

29. The plaintiffs’ solicitors should file a draft order for the court’s approval within 14 days from today.

30. As to the costs of the application, I will make an order nisi that the plaintiffs shall have the costs against the defendants in any event, to be taxed if not agreed.

HCA1535/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1535 OF 2008

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REASONS FOR DECISION

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1. On 25 August 2008, I dismissed the defendants’ applications to (a) stay the proceedings; (b) impose an undertaking on the plaintiffs and their solicitors; and (c) vary the Mareva injunction obtained by the plaintiffs from Deputy Judge Geiser on 17 August 2008, with costs.

2. These are my reasons.

A.  Background

3. The plaintiffs all belong to the Wheelock group of companies, providing various services to the group.  The 1^st plaintiff provides management services; the 2^nd plaintiff, management, accounting and taxation services; and the 3^rd plaintiff, hotel management services to the hotel business of the group.

4. Prior to 23 July 2008, the 1^st plaintiff employed the 1^st defendant as its assistant payroll manager.  He alone handled the payroll of the senior staff (assistant general manager grade or above) in the Wheelock group.

5. The 2^nd defendant is the 1^st defendant’s wife.  The 3^rd defendant is his sister.

6. The plaintiffs’ complaint is this.  In July 2008, the plaintiffs discovered that the 1^st defendant had between 13 May 2004 and 30 January 2008 falsified documents in 14 bank transactions involving a total of HK$8.5 million and diverted the same to the defendant’s bank accounts.  Further, on 30 June 2008, the 1^st defendant fraudulently drew a cheque in the sum of HK$659,540 from the 1^st plaintiff’s HSBC bank account and made it payable to himself.

7. On 20 July 2008, the plaintiffs reported the matter to the police.  The police arrested the 3^rd defendant on 24 July 1008 and 1^st and 2^nd defendants on the following day.  Holding charges were then laid against them.  The 1^st defendant was charged with one count of attempted theft.  The 2^nd defendant and the 3^rd defendant were respectively charged with two counts and one count of dealing with property known or believed to represent proceeds of indictable offence.  They were all brought before the magistrate on 26 July 2008.  The 1^st defendant was refused bail and has since been remanded in custody.  The 2^nd and 3^rd defendants were granted bail.  The case was adjourned to 22 September 2008 for mention.  In the meantime, the Commercial Crime Bureau is still continuing with the investigation.

8. On 1 August 2008, the 2^nd defendant entered into a sale and purchase agreement in respect of a property in Tseung Kwan O that she bought in 2005.  What she did alarmed the plaintiffs.  On 17 August 2008, they successfully obtained the Mareva injunction against the defendants.  Among other things, the defendants were ordered to disclose the their assets of an individual value of HK$50,000 by affidavit within 14 days from the service of the order.

B.  Applications

9. The defendants did not seek to discharge or set aside the Mareva injunction.

10. Instead, they applied to stay the action pending until the determination of the criminal proceedings and for an order imposing an undertaking on the plaintiffs and their solicitors not to disclose any information disclosed under this action to the police or to the Department of Justice or any relevant parties.  They further applied for a variation of the injunction by :

(1) filing the affidavits on assets within 42 days after the determination of the criminal proceedings against them; and

(2) excluding the 3^rd defendant’s account with Bank of China from the injunction (“the Account”).

11. The 1^st defendant did not file any evidence in support of the applications.  Absent such evidence, Mr Mok, who appeared for all the defendants, did not pursue the applications for him.

12. I will first consider the stay application.

C.  The stay application

C.1.   The law

13. When a defendant in a civil action faces parallel criminal proceedings arising out of the same subject matter, the court has the discretion to stay the action pending the determination of the criminal proceedings.  The burden rests on the defendant to show that it is just and convenient that the plaintiff’s ordinary rights of having his claim processed and heard and decided should be interfered with : Jefferson Ltd v. Bhetcha [1979] 1 WLR 898, per Megaw LJ at p.905C-D; followed in Petroliam Nasional Berhad & Others v. Tan Soon-gin & Others [1990] 1 HKLRD 4, per Cons Acting CJ at p.8A-B.

14. Each case has to be judged on its own facts.  In deciding how to exercise the discretion, the court needs to take into account all the relevant factors.

15. Perhaps the most often cited factor in favour of a stay is the infringement made to the defendant’s right to remain silent in the criminal proceedings — in the absence of a stay, the defendant’s defence disclosed in the civil action would result in a premature disclosure of his defence in the parallel criminal proceedings.  But that is not a conclusive factor.  In Petroliam, the Court of Appeal rejected the argument that the need to reveal the defence to a criminal charge should be given no or at least no appreciable, weight unless at the same time it gave rise to a real danger of causing injustice in the criminal proceedings.  Cons Acting CJ went on to say at p.9F-G :

“   ... The right to reserve one’s defence up to the last minute, that is until the prosecution has completed its evidence, except perhaps so far as it may be necessary to put matters in cross-examination, is such a basic fundamental of the criminal process that we think it cannot be so lightly dismissed.  We accept that breach of the right does not necessarily amount to an injustice.  It may at times be no more than a disadvantage: see Charles of the Ritz v. Jory [1986] FSR 14, and at others there may be factors by which it is completely outweighed.  But in our opinion it is always a matter for some consideration, the precise weight to be determined by the individual judge in all the circumstances as he sees them. ….”

16. In Jefferson, Megaw LJ suggested some examples of relevant factors in favour of stay at pp.905D-G :

“   Of course, one factor to be taken into account, and it may well be a very important factor, is whether there is a real danger of the causing of injustice in the criminal proceedings.  There may be cases—no doubt there are—where that discretion should be exercised.  In my view it would be wrong and undesirable to attempt to define in the abstract what are the relevant factors.  By way of example, a relevant factor telling in favour of a defendant might well be the fact that the civil action, or some step in it, would be likely to obtain such publicity as might sensibly be expected to reach, and to influence, persons who would or might be jurors in criminal proceedings.  It may be that, if the criminal proceedings were likely to be heard in a very short time (such as was the fact in the Wonder Heat case in the Victoria Supreme Court) it would be fair and sensible to postpone the hearing of the civil action.  It might be that it could be shown, or inferred, that there was some real—not merely notional—danger that the disclosure of the defence in the civil action would, or might, lead to a potential miscarriage of justice in the criminal proceedings, by, for example, enabling prosecution witnesses to prepare a fabrication of evidence or by leading to interference with witnesses or in some other way.”

17. Ultimately, the court, having considered all the relevant factors, performs an exercise balancing between the justice of the parties and determines where the discretion lies.

C.2.   Discussion

18. In their affirmations, both the 2^nd and 3^rd defendants asked the court to stay the present action until the determination of the criminal proceedings.  They have not cited the right to remain silent or privilege against self-incrimination as a reason.  In fact, they have not given any single reason at all why it is just and convenient to stay the action.

19. Mr Mok tried to fill the evidential lacuna by relying on 15 special features which, he said, justified a stay.  Those special features boiled down to six contentions, which I will consider in turn below.

20. First, the defendants need to face two sets of parallel proceedings arising from the same subject matters.  The criminal charges are very serious.  The claims in the civil action well exceed their means and wealth.  An additional hardship is that the 1^st defendant is now in custody.

21. I note that neither the 2^nd or 3^rd defendant has said in their affirmation that the plaintiffs’ claims well exceed their means and wealth.  The defendants may well have to face parallel proceedings.  But it hardly justifies a stay of the civil action.  The fact that the 1^st defendant is in custody may cause inconvenience to the 2^nd and 3^rd defendants in defending the present action.  But I do not think it amounts to any hardship as such.  They should have no particular difficulty to continue with the present action.

22. Second, the defendants’ right to remain silent in the criminal proceedings, which they have exercised so far, would be infringed should they make any disclosure of their defence in the civil action.  In particular, the 1^st and 2^nd defendants are husband and wife with privilege extending to each other.

23. I fully recognize the possibility that if the 2^nd and 3^rd defendants are to meaningfully continue with the present action, they may need to disclose their defence which may have the effect of, partly or wholly, disclosing their defence in the criminal proceedings.  But I am not convinced that on the materials before me, it would amount to any injustice.  And it is outweighed by other factors, which I shall return in a moment.

24. Third, the case is likely to attract publicity.  This in itself is not a factor in favour of stay.  Publicity counts only if it might sensibly be expected to reach and to influence persons who would or might be jurors in the criminal proceedings : see Jefferson, at p.905.  Here, the defendants have not adduced any evidence to show that the publicity of the case, if any, would have such effect.

25. Fourth, there is ample opportunity for the prosecution witnesses, who are likely to be the plaintiffs’ witnesses, to tailor their evidence if they know what the defendants’ defence is.  This very serious allegation is wholly unsubstantiated by any evidence.  It must be rejected.

26. Fifth, the civil action was started at the police’s invitation.  The purpose was to preserve the defendants’ assets, which has been achieved by the Mareva injunction.  The plaintiffs will not suffer much prejudice by the limited delay in the civil action.

27. It is factually incorrect to assert that the police invited the plaintiffs to start the present action.  At all material times, the plaintiffs were legally represented.  Surely, they must have taken legal advice before commencing the present action.  Further, it is wrong to say that the plaintiffs commenced the present action simply with a view to preserving the defendants’ assets.  Like any claimant, they plainly want to recover their loss by prosecuting the action as expeditiously as possible.  They will certainly suffer prejudice if they are debarred from doing so by a stay of the present action.  It is also wrong to suggest that the stay will only result in a limited delay in the present action.  Both the criminal proceedings and the present action are at the very early stage.  Nobody knows when the criminal proceedings will come to a final resolution.

28. Sixth, the law enforcement agencies are able to aid and incite victims to take civil action to break a defendant’s silence.  It makes a mockery of the constitutional right to remain silent and privilege against self-incrimination.  I can see nothing wrong for the police, upon request, to provide relevant information to a complaint to assist him to pursue his civil remedies.  On the other hand, if the police did it with the ulterior motive to infringe the defendant’s right to remain silent by a side wind, that is, by making him to disclose his defence to the criminal charge in the civil action, it is a strong factor in favour of stay.  But the defendant who takes this point must come up with cogent evidence in support.  Here, there is simply none at all.  This complaint must be rejected.

29. To recap, of all the 15 special features that Mr Mok sought to rely on, only the possibility that the defendants’ right to remain silent may be infringed is relevant.  But as I have indicated, it is outweighed by other factors against a stay.

30. Those factors are as follows.  First, on the materials before me, the plaintiffs’ claims against the defendants are overwhelming.  They should be entitled to prosecute their claims and seek recovery of their loss as expeditiously as possible.  Second, there is a real risk of the defendants’ dissipating their assets.  It is best demonstrated by the fact that once released on police bail, the 2^nd defendant immediately entered into a sale and purchase agreement dated 1 August 2008, selling her property in Tseung Kwan O.  The Mareva injunction may offer some protection to the plaintiffs in the meantime.  But facing with such risk of dissipation, the plaintiffs should be entitled to proceed to judgment, if successful, without delay.  Third, it is also in the interest of the defendants to have the civil action determined without delay, especially with the Mareva injunction, which they did not seek to set aside or discharge, hanging over their heads.

31. To conclude the discussion, I need to deal with Mr Mok’s reliance on Article 10 of the Hong Kong Bill of Rights Ordinance, Cap. 383, which he said, encapsulated all his submissions.  As I understand him, what he meant is that the defendants will be deprived of a fair trial in the criminal proceedings if the civil action is not stayed.  For the reasons above, I do not agree that the defendants will be so deprived even if the present action is to continue in its usual manner.  So I do not Article 10 takes the matter any further.

32. For the above reasons, the stay application is dismissed.

D.  The application for imposing the undertaking

33. The application for imposing the undertaking not to disclose anything to the police of the Department of Justice or any relevant party rests on the defendants’ right to remain silent and privilege against self-incrimination.  As I have observed above, even if the defendants may need to disclose their defence which may have the effect of, partly or wholly, disclosing their defence in the criminal proceedings, it would not on the materials before me amount to any injustice.  Further, the ambit of the undertaking is simply too wide.  It may well cover matters that are outside the privilege of self-incrimination.  The application must fail.

E.  Variations

34. I now come to the variations sought.

E.1.   Extending the time for filing the affidavits on assets

35. The 2^nd and 3^rd defendants wanted to extend the time for making the disclosure of their assets “…for the reasons of preparing my defence case in [the criminal proceedings] and safeguarding my right of silence and right against self-incrimination”.  The aim was to avoid “any possible risk of anybody making use of this injunction proceedings to collect information from the affidavit of assets, whether it be existence or non-existence of any assets, to prove or disprove issues in the criminal cases.”

36. What the affidavit of assets requires the defendants to do is no more than disclosing their assets of an individual value of HK$50,000 or more.  I fail to see how such disclosure, without more, would infringe their right to remain silent or privilege against self-incrimination in the criminal proceedings.

37. Mr Mok submitted that the disclosure would lead to a train of enquiry in the criminal proceedings, which is prejudicial to the 2^nd and 3^rd defendants.  I disagree.  It is simply too early to tell if the disclosure would result in any further inquiry which impacts the criminal proceedings in the way as contended by the 2^nd and 3^rd defendants.

38. It should be borne in mind that the defendants’ assets are subject to a real risk of dissipation.  To make the Mareva injunction effective, the information sought must be disclosed.

39. This variation must fail.

E.2.   Excluding the Account

40. The 3^rd defendant’s case is that all the deposits in New Zealand currency in the Account belonged to her parents beneficially.  So it should be excluded from the Mareva injunction.  To support her case, the 3^rd defendant exhibited certain bank documents to show that the deposits were transferred from her parents’ account to the Account in August 2002 and have since remained there.

41. In my view, the documentary evidence is not conclusive.  As rightly pointed out by Ms Wu, counsel for the plaintiffs, there is a possibility that the deposits were a gift.  Plainly further investigation is necessary before the question of beneficial owner can be determined.

42. The 3^rd defendant also said that her mother, who is 84, needs to have ready access to the deposits in light of her failing health and need for constant medical treatment.  I have some doubt about this allegation because the deposits have in fact been sitting in the Account since 2002.  To preserve the status quo, I think it is right not to exclude the Account from the injunction.

F.   Conclusion

43. For the above reasons, I dismissed all the defendants’ applications.  I also took the view that costs should follow the event.  So the defendants were ordered to pay the costs, to be taxed if not agreed.