TAIHAN GLOBAL HOLDINGS LTD v. LAU SIU MING AND OTHERS

HCA 1687/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1687 OF 2011

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D E C I S I O N

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1.  For alleged non-compliance with an unless order for disclosure, the plaintiff[1] (“Taihan”) applies to strike out the pleadings of the 2^nd defendant (“Yuanzhi”) and the 3^rd defendant (“Winful); and to enter judgment against these defendants respectively. Before me are also Taihan’s summonses for leave to file and serve 2 further affirmations respectively in support of its present application.

BACKGROUND

2.  The unless order in question was made by the master on 17 October 2012 (“the Unless Order”) pursuant to and in terms of Taihan’s summons for such purpose filed on 12 October 2012:

“1. Unless by 4:00 pm on the 31^st October 2012, the 2^nd Defendant discloses the credit balance of its bank account with Bank of China (Hong Kong) Limited numbered 012-883-92-11697-3, the 2^nd Defendant be debarred from defending the Plaintiff’s claim and judgment be entered for the Plaintiff with costs;

2. Unless by 4:00 pm on the 31^st October 2012, the 3^rd Defendant discloses the credit balance of;

a. the 3^rd Defendant’s multi-currency bank account with The Hongkong & Shanghai Corporation Limited numbered 808-804520-274, 808-804520-285 and 808-804520-292;

b. the 3^rd Defendant’s bank account with Bank of China (Hong Kong) Limited numbered 012-677-9-205338-6; and

c. the 3^rd Defendant’s ‘WINFU 1’ bank account with Standard Chartered Bank Plc

the 3^rd Defendant be debarred from defending the Plaintiff’s claim and prosecuting its Counterclaim and judgment be entered for the Plaintiff with costs; and

……”

3.  I would refer to the 4 specific bank accounts mentioned above in the same order as follows:

(1)   Yuanzhi’s BOC account;

(2)   Winful’s HSBC account;

(3)   Winful’s BOC account; and

(4)   Winful’s SCB WINFU 1 account.

4.  Yuanzhi and Winful filed their respective affirmations in answer to the Unless Order. Lee Chi Yuen Arctic (“Lee”), director of both companies deposed on their behalf, and thus his 11^th (“11^th  Lee”) and 12^th affirmations (“12^th Lee”) filed on 22 October 2012 and 24 October 2012 respectively.

5.  Taihan took the view that 11^th Lee and 12^th Lee fall short of compliance with the Unless Order.  Correspondence between the parties ensued.

6.  On 2 November 2012, Taihan took out the present application by summons, which is supported by the 5^th affidavit of its then solicitors, Mr Luxton of Messrs Homan Fenwick Willan (“5^th Luxton”).

7.  Directions were then given by the master.  Pursuant to the directions, the 13^th affirmation of Lee (“13^th Lee”) was filed in opposition of the application.  Taihan did not file its affirmation in reply within the time directed.  Now represented by its current solicitors, Taihan took out a summons on 6 September 2013 for leave to file the 1^st affirmation of Mr Georgiou of its current solicitors (“1^st Georgiou”).

8.  Before Taihan’s summons for leave to file 1^st Georgiou mentioned above, Lee actually filed a further affirmation (“16^th Lee”) in opposition of the present application on behalf of Winful.  By then, Yuanzhi and Winful have been represented by their current solicitors.

9.  On the day before the hearing, Taihan took out another summons for leave to file and serve a further affirmation (“2^nd Georgiou”).

POINTS TO NOTE

10.  Several points to note.

11.  First, Yuanzhi and Winful oppose the late application for leave to file and rely on 1^st Georgiou and 2^nd Georgiou.  However Mr Zimmern for these 2 defendants had no objection to reference to these affirmations de bene esse.  His stance was that the materials in these late affirmations were in any event irrelevant to the determination of the present application.

12.  Second, Taihan saw fit to set out an alternative in its summons for judgment.  It takes the form of application for another unless order whereby Yuanzhi and Winful were given a further deadline for disclosing the “outstanding information” about the abovementioned bank accounts.

13.  Such alternative at the initiative of Taihan is difficult to understand.  If the non-compliance of the Unless Order is proved, Taihan would succeed in its application for judgment.  In that event, the question of whether further indulgence should be given to its opponents would not set in at Taihan’s initiative or in the form of another unless order.

14.  The simple fact is that there is no request by Yuanzhi or Winful for such indulgence by way of a cross application for relief from sanction, in the event that the court finds against any of them for non-compliance with the Unless Order.  Mr Zimmern confirmed this position.

THE ALLEGED NON-COMPLIANCE

15.  Mr Hughes for Taihan referred to Hong Kong Civil Procedure 2013 (at 3/5/6) and Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 at 1674.  I find it helpful to recite his summary of principles as follows:

(1)   An unless order is an order of last resort, not made unless there is a history of failure to comply with other orders.  It is the party’s last chance to put its case in order.

(2)   Because it is the last chance, a failure to comply with ordinarily result in the sanction being imposed.

(3) The sanction is a necessary forensic weapon which the broader interests of the administration of justice require to be deployed unless the most compelling arguments are advanced to exonerate the failure.

(4) It seems axiomatic that if a party intentionally flouts the order he can expect no mercy.

(5) A sufficient exoneration will almost invariably require that he satisfies the court that something beyond his control has caused the failure.

(6) The judge will exercise his judicial discretion whether to excuse the failure in the circumstances of each case on its own merits, at the core of which is service to justice.

(7) The interests of justice require that justice be shown to the injured party for procedural inefficiencies causing the twin scourges of delay and wasted costs. The need for the public administration of justice to contain those blights also weighs heavily.  Any injustice to the defaulting party, though never to be ignored, comes a long way behind the other two.

16.  Much of the above summary relates to the exoneration of failure to comply with an unless order.  As mentioned, in the absence of application for relief against sanction, there will be no question of excuse or exoneration of default in compliance with the order, if this is what I am going to find.

17.  Likewise, as far as Daimler AG v Leiduck [2012] 3 HKLRD 119 and Top One International (China) Property Group Co Ltd v Top One Property Group Ltd [2011] 1 HKLRD 606 (referring to the case of Hytec) relate to the court’s exercise of discretion to grant indulgence or relief from sanction upon default in complying with an unless order, what Mr Hughes cited from these cases would not be relevant, in the absence of such question before the court.

18.  The single question before the court is whether Yuanzhi or Winful has failed to comply with the Unless Order.  In Realkredit Danmark v York Montague Ltd, unrep, UK Court of Appeal (26 November 1988), the appellate court identified the issue of principle that arose on the appeal before it, namely, what the test for establishing whether or not there has been compliance with an unless order of the kind (ie disclosure) is.  The court had this to say:

“This court has recently considered the effect of failure to comply with unless orders in Hytec v Coventry City Council [1997] 1 WLR 1666. Usually a failure to comply with such an order will result in the proceedings being struck out. It follows, I think, that before this drastic consequence is visited upon the offending party, the court must be sure that there has been a failure to comply with the order in question. The onus is ordinarily on the party who alleges that there has been a failure to comply. Usually the discharge of this onus presents no problem because in almost all cases the court is concerned with a total failure to comply. But this is not such a case. I think the right approach in a case such as this is to be found in two cases cited by Mr Elliot. First Abalian v Innous [1936] 2 All ER 834 where, at page 838 Greene LJ said:

“The dismissal of an action at an interlocutory stage is a very serious matter and may well work serious injustice.  If an order is to be made in the form that, unless one party or another does something, the action will be dismissed, it is imperative that the thing to be done in order to avoid dismissal of the action should be specified in the clearest and most precise language, so that it may be possible for the party on whom the necessity of doing the act lies …… to be in no doubt whatsoever as to the steps which he is to take if he is to avoid his action being dismissed.  Looking at it in another way: where the defendant, in reliance on such order, goes to the court and asks it to say that, as a result of the order, the action stands dismissed and is no longer existent, he must be able to show first of all, that the language of the order is sufficiently precise, and, secondly, that which the order contemplates have occurred.”

There was nothing unclear about the order made in this case, in that it required service of a list of documents. But a list was served so, prima facie, the order was complied with. Interestingly there is no reported case of an action being struck out as a result of a list being incomplete. But there is in the much litigated field of Further and Better Particulars where, in Reiss v Woolf [1952] 2 QB 557, at pages 559-560, the Court of Appeal approved a passage from the judgment of Devliln J who said:

“So construed, ‘default’ refers to default in the delivery of a document within the specified time.  I do not, of course, mean that any document with writing on it will do.  It must be a document made in good faith and which can fairly be entitled ‘particulars’.  It must not be illusory; …… That is the test, in my judgment, and not as the plaintiff contends, whether each demand for particulars has been substantially met.”

……

These general principles have to be applied to orders for discovery with the provisions of Order 24 in mind…..”[emphasis added]

19.  The Unless Order provided for the drastic consequence of shutting out Yuanzhi and Winful with judgment against them.  In the premises, the need for the court to be certain about non-compliance and the burden of Taihan as the applying party to establish non-compliance should be obvious.  Mr Zimmern submitted that the test of whether there was non-compliance as explained in Reiss (above) likewise applies in the context of the present case.  I agree.

Terms of the Unless Order

20.  Much was argued about whether the Unless Order refers to the current balances of the bank accounts.  Mr Hughes referred to the correspondence, both before and after the Unless Order, for the purpose of showing that the parties understood his client’s request to be one for the current balances of the accounts.  For the same purpose, he also referred to what was allegedly said during the hearing before the master.

21.  In the absence of reference to any specific date or period, the balances expected under the order could well be the balances as far as Yuanzhi and Winful managed to tell at the time of the disclosure.  I say this simply to make practical sense out of the order but not because of what was allegedly said between the parties before or during the hearing before the master or afterwards.

22.  The specific reference to credit balance in the Unless Order also prompted much argument.  Again Mr Hughes referred to what was said before and after the Unless Order has been made.

23.  Literally construed, the so-called ambiguity, if at all, about whether the order meant to cover credit balance only, in my view, does not exist.  The Unless Order was made in terms as sought by Taihan’s summons, which did refer to credit balance only.  Even assuming that one approaches the term of the Unless Order other than as a matter of literal construction, I still do not lose sight of the fact, which Mr Hughes actually reiterated, that the order stemmed from that first made in aid of the mareva injunction made in October 2011 for the disclosure of asset with individual value of HK$50,000 or more.  The concern about credit, as opposed to debit, bank account balance should be obvious.

24.  However Mr Hughes also pointed out that in the affirmation in support of the summons for the Unless Order, the terms ‘credit balance’ and ‘current balance’ were used interchangeably by the former solicitors for Taihan and therefore could only be reference to the same thing.

25.  To say that references to “credit balance” and “current balance” mean the same thing, in my view, is hard to accept both literally and objectively.  I only need to point out that in setting out the terms of the alternative order being sought in the summons for judgment, the former solicitors for Taihan did not seem to use the terminology interchangeably as argued.  They actually referred to the ‘current credit balance’ and ‘latest credit balance’.

26.  The point here is that in line with Reiss and Realkredit Danmark (above), precision is expected of the terms of an order being applied for, particularly when it is an unless order providing for drastic consequence on the rights of the party subject to it in the event of non-compliance.  The court expects no less from a party who was legally represented at all material times.

Yuanzhi’s BOC account

27.  By 11^th Lee, Yuanzhi produced copies of the account passbook containing entries up to 30 August 2011, i.e. just before the mareva injunction was made.  The balance was US$5.93.  Lee deposed that it remained the balance as there has been no activity in the account since the injunction.

28.  Tailan complains that the current balance of the account was not specified; and hence non-compliance with the Unless Order.

29.  I disagree.  In 13^th Lee (filed in opposition of the present application), Yuanzhi explained that the passbook of this account as at 30 September 2011 was what he had then to disclose.  It could not have the passbook of this bank account updated since the imposition of the mareva injunction; but there has been no activity in the account.  This was in line with its earlier explanation in the correspondence between the former solicitors of both sides in October 2012.

30.  In view of the present application, Yuanzhi formally wrote to BOC in early November 2012 seeking assistance.  By letter dated 15 November 2012, Yuanzhi’s solicitors wrote to BOC putting on record the exchange between them and the bank in this regard.  It was only on 20 November 2012 when the bank passbook could be updated.  Copies of them were produced.  They show exactly what Lee deposed to in 11^th Lee.  There has been no activity in the bank account since the last entry on 30 September 2011.

Winful’s HSBC Account

31.  Taihan accepts that the Unless Order in respect of this bank account has been complied with.

Winful’s BOC Account

32.  By 12^th Lee, Winful produced the passbook of this account which contained the last entry dated 30 September 2011 and balance HK$290.16.

33.  Taihan complains about the lack of disclosure of the balance of this account since then.  During the hearing, Mr Hughes further complained that unlike what was said in respect of Yuanzhi’s BOC account, Lee was silent in 12^th Lee as to what happened to the account afterwards.

34.  As far as this was what Winful managed to disclose, I do not agree that a clear case of non-compliance has been made out, particularly bearing in mind that the mareva injunction against disposal of value of asset up to US$7,400,000 was imposed less than a week later.

35.  As mentioned, by 13^th Lee in opposition of the present case, Winful managed to have the passbook for this account updated on 20 November 2012. Again it shows no activity in the account since the last entry dated 30 September 2011 and thus confirming the truth of and good faith behind the disclosure in respect of this account by 12^th Lee.  This was also in line with the previous explanation by correspondence mentioned above.

Winful’s SCB WINFU 1 account

36.  By 16^th Lee, it was clarified that this account should properly be called WINFU account, which is one of the 2 WINFU accounts (the other being WINFU 2) held by Winful with SCB.  In 12^th Lee, it was deposed that this account with SCB was at the time of the affirmation having a negative, or debit, balance.

37.  Taihan complains that that does not tell the amount.

38.  In view of the terms of the Unless Order, as discussed above, I do not agree that Taihan may argue that the lack of disclosure of the amount of debit balance amounted to non-compliance with the order specifically to disclose credit balance.

39.  Even if one looks beyond the literal terms of the order, one still doubts how the disclosure of the amount of debit balance would have fitted into the purpose of a disclosure order first stemming from the order to disclose asset of the stated value made in aid of the mareva injunction.

40.  By 16^th Lee, Winful also produced, on a without prejudice basis, copy of the cash ledger statement for WINFU 1 account which shows continuing debit balance in millions (US$) since the end of 2011.  This confirmed the truth of what was deposed to in 12^th Lee in respect of this account.

Conclusion

41.  In my view, any possible confusion as to the terms of the Unless Order (particularly whether the order extended to credit balances only) could only be attributed to how the former solicitors for Taihan chose to word the order sought.

42.  In any event, economical in details as they were, 11^th Lee and 12^th Lee contained the bona fide disclosure of what Yuanzhi and Winful managed to make at the time.  There is nothing untruthful about the disclosure made by 11^th Lee and 12^th Lee on behalf of Yuanzhi and Winful.  When asked in court, Mr Hughes accepted that.  In my view, what were disclosed were neither illusory nor meaningless.

43.  However Mr Hughes submitted that what were said and produced by 13^th Lee and 16^th Lee should have formed part of the disclosure by the deadline set by the Unless Order.  Now both affirmations have become too late for such purpose.

44.  I disagree.  11^th Lee and 12^th Lee served the purpose of complying with the Unless Order.  13^th Lee and 16^th Lee were filed (pursuant to the directions of the court) serving a different purpose, namely, opposing Taihan’s present application for judgment.  That was done pursuant to the directions of the court (as usual).  Evidence was collected and produced in support of their position that they have (by the 11^th Lee and 12^th Lee) complied with the Unless Order and thus Taihan has no valid ground for its present application.

45.  The terms of the Unless Order did not go so far as requiring Yuanzhi or Winful to give explanation as now contained in 13^th Lee or 16^th Lee.  I notice that the explanation for the lack of such further and better details as well as that of the attempt to obtain them form part of the alternative unless order set out in Taihan’s summons only now.  In the circumstances, what Taihan regards as incomplete, rather than lack of relevant and true disclosure, does not enable it to condemn Yuanzhi or Winful for non-compliance with the order.

1^ST GEORGIOU AND 2^ND GEORGIOU

46.  As directed, Taihan was supposed to file its affirmation in reply within 7 days after the defendants’ affirmations in opposition have been filed; and there shall be no further evidence thereafter without leave of the court.  13^th Lee was filed on 21 November 2012.  Taihan did not do so.  It was on 6 September 2013, some 5 days before this hearing, did Taihan seek to file 1^st Georgiou.  As to 2^nd Georgiou, leave to have it filed is sought by summons on the day just before this hearing.

47.  By the 1^st Georgiou, Taihan refers to the history leading to the Unless Order.  References are also made to various instances of breach of orders on the part of Yuanzhi and Winful.  Taihan also seek to refer to another action that it commenced this year against, among others, Lee, Yuanzhi and Winful – HCA 454/2013 – as well as these defendants’ conduct of proceedings in the course of that recent action.  Essentially it was argued that Yuanzhi and Winful have demonstrated a pattern of default in disclosure and had to be pressed hard from time to time.

48.  In line with the summary of principles in the case of Hytec (§15(1) above), the history must have already been taken into account when the master was considering whether to make the Unless Order.  But the same would hardly be relevant to the question of whether Yuanzhi or Winful have failed to comply with the order made.  This is a matter of the terms of the order and whether and, if yes, what the defendants did.

49.  As to the reference to the history to aid the construction of the terms of the order, I shall not repeat my discussion above.

50.  The past conduct of proceedings on the part of Yuanzhi and Winful would also have been relevant to the consideration of whether any failure to comply with the Unless Order may be excused or, in practical terms, whether relief from sanction may be granted.  However, as mentioned, there is no such issue here.

51.  For the same reason, the factual premise for reliance on the discussion in the case of Hyetc (particularly the principles summarised in §15(3) to (7) above) is also lacking.

52.  As to the action newly commenced, the rights of Taihan remain theirs to take action against the defendants in respect of the latter’s conduct of proceedings in that action.

53.  By 2^nd Georgiou, Taihan repeats the account of the history leading to the Unless Order and the present application as set out in Mr Hughes’ submissions. It also exhibits full sets of bank statements of Winful’s WINFU account all the way up to June 2013.  Taihan aims to point out that there were dealings with the account after the mareva injunction.

54.  The relevant time for the present purpose should be that when the Unless Order was made or when Winful made the disclosure by way of 11^th Lee and 12^th Lee.  Further, the balances referred to remained debit balances.  What the Unless Order obliged Winful to disclose was the credit balance, not debit balance, or to set out the transactions in the account by then.

55.  By the 2^nd Georgiou, Taihan also exhibits the full set of bank statements in respect of Winful’s HSBC account.  As mentioned, this account is not in issue in the present application.

56.  Mr Zimmerns submitted that the materials in the 1^st Georgiou and the 2^nd Georgiou were largely irrelevant to the question of whether the defendants have failed to comply with the Unless Order.  I agree.

ORDER

57.  Taihan’s application for judgment is dismissed.  So are its applications to file 1^st Georgiou and 2^nd Georgiou.

58.  Yuanzhi and Winful should have their costs occasioned by Taihan’s 3 summonses.  Mr Zimmern indicated that his clients would seek costs to be taxed on an indemnity basis.  By their solicitors’ letter dated 29 May 2013, exhibited to the 16^th Lee, Yuanzhi and Winful set out their arguments and invited Taihan to withdraw the present application with no order as to costs.  Notice of intention to seek costs on indemnity basis, if Taihan failed in the present application, was thus given.

59.  There is point in the argument that Taihan should not have proceeded with the application at the latest after the filing of the 16^th Lee.

60.  On that basis, I make a nisi order that (1) the costs of and occasioned to Yuanzhi and Winful by Taihan’s summonses shall be paid by Taihan; (2) unless otherwise agreed, costs shall be taxed on a party and party basis save that the costs from 5 September 2013 (after the filing of the 16^th Lee), including the costs of the hearing, shall be taxed on an indemnity basis.  In the absence of application within 14 days to vary, the nisi costs order shall become absolute.

HCA 1687/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1687 OF 2011

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BETWEEN

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D E C I S I O N

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1.  The plaintiff obtained from Saunders J on 4 October 2011 an ex parte Mareva injunction and disclosure order against the 1st, 2nd and 3rd defendants and a disclosure order against the 4th defendant.

2.  The plaintiff has applied to continue the Mareva injunction.  The 1st, 2nd and 3rd defendants have applied to set aside the same.  The 2nd defendant has also applied for an extension of time beyond that prescribed by an unless order for it to file its defence.  But the plaintiff has applied to enter judgment against the 2nd defendant pursuant to the unless order. 

THE PARTIES

3.  The plaintiff (“TGH”) is a company incorporated in Hong Kong.  It is a wholly owned subsidiary of Taihan Electric Wire Company Limited (“TEC”).  TEC is a leading international cable manufacturer.  It manufactures, among other things, copper rod wires including Southwire Continuous Rod (“the SCR Copper Rod”).  TEC is listed in the Korean Exchange. TGH was set up in 2006 to sell TEC’s products including SCR Copper Rod to customers in Southern China.

4.  The 1st defendant was TGH’s sales agent until his appointment was terminated at around 20 September 2011.

5.  The 2nd defendant is a company incorporated in Hong Kong.  It has been owned by the 1st defendant and his friend and business associate Mr Lee as equal shareholders since 31 March 2010.

6.  The 3rd defendant is also a company incorporated in Hong Kong and Mr Lee is its 60% shareholder.

THE PLAINTIFF’S CASE FOR MAREVA INJUNCTION

7.  A director of TGH, Mr Park made an affirmation in support of the application for Mareva injunction.  The basis of the application is misappropriation by the 1st defendant of the containers of SCR Copper Rod sent by TEC to Hong Kong for fulfilment of contracts of sale by TGH to its customers in the Pearl River Delta.  Some of these containers were wrongly delivered to the 2nd and 3rd defendants.

The mode of sale of goods by TGH

8.  Mr Park in his affirmation referred to the usual arrangement for sale of SCR Copper Rod to customers in the Pearl River Delta.  TEC would first supply the SCR Copper Rod in containers to TGH.  TGH would ship them from Korea to Hong Kong.  The delivery would be by TGH’s forwarder Seda Lines Company Limited (“Seda”). One shipment of containers could comprise of several consignments of goods for sale to several customer. 

9.  When the containers were shipped to Hong Kong by Seda’s contracted shipping company, Seda would issue to TGH a house bill of lading (“HB/L”) for each consignment of goods that has been allocated to a particular purchaser with address for delivery as advised by TGH.  For contracts of sale with payment by a letter of credit (“L/C”), the 1st defendant would on behalf of TGH present the HB/L together with the L/C and other necessary commercial documents through TGH’s banker to the L/C issuing bank for payment.  The containers would be stored in the warehouse of the shipping company pending delivery. 

10.  These containers were released from the warehouse and delivered by the 4th defendant to the customer upon the instruction of Seda.  It was not necessary for the HB/L to be surrendered by the purchaser to Seda or the shipping company before the containers would be released by the shipping company.  The 4th defendant was the sub-contractor of shipping company.  It provided the road carriage service to deliver the containers to the customer.  This was so whether the payment by the customer to TGH for the goods was by L/C or telegraphic transfer (“T/T”).  I note that in either case, the customer was not required to present the HB/L to Seda or the shipping company for release of the goods.

TGH’s discovery of loss of goods

11.  Regarding the discovery of the alleged misappropriation by the 1st defendant, Mr Park said on 20 September 2011 he was contacted by Mr Ahn of TEC who said that millions of dollars of consigned SCR Copper Rod appeared to have gone missing and TGH had not received payment for the goods from customers.  The 1st defendant appeared to be involved in this.

12.  In fact, two colleagues of Mr Park had already come to Hong Kong on 19 September to investigate the matter.  But they could not contact the 1st defendant.  They could only contact the 1st defendant’s business partner Mr Lee.  Mr Park also came here on 21 September to assist with the investigation.

13.  He met on the same date the representatives of 2 customers, Sun Fai Industrial Company (“Sun Fai”) and Eco Metal (Hong Kong) Limited (“Eco Metal”) who complained of not having received their consignments of SCR Copper Rod for which they had already paid TGH.  These transactions would have been brokered by the 1st defendant. 

14.  Sun Fai paid TGH US$764,586.56 on 30 August by depositing a cashier order into TGH’s bank account (page D1-39) for four containers of SCR Copper Rod.  Eco Metal had remitted US$2,760,000 and US$950,000 to the TGH on 29 June and 1 September respectively (pages D1-40 and 41) for 400 MT of SCR Copper Rod, but received only 120 MT of rod.  There was no information from the 1st defendant on the non-delivery.  Mr Park, the representatives of Sun Fai and Eco Metal and Lee then reported the alleged theft of SCR Copper Rod to the police. 

15.  In addition, there were 7 L/Cs provided by customers under which applications for payment were rejected.  The total sum not collected from these L/Cs totalled US$4,036,605.  Mr Park said that the customers who procured these L/Cs complained that they had not received the goods they ordered which should have been shipped from Korea. 

16.  Mr Park produced 3 notifications from TGH’s bankers saying that payments under 2 L/Cs were not to be made because of discrepancies (pages D1-102-107).  But none of them said that the non-payment was because of non-delivery of goods. 

17.  In fact, when banks process applications for payment under L/Cs, they only consider the documents presented by the seller and pay no regard to the receipt of goods.  The documents presented by the seller to the bank would include the B/L which is a document of title to the goods.  After effecting payment under the L/C, the purchaser can obtain the B/L and use it to obtain the goods.  Hence, the purchaser cannot withhold payment under the L/C until after the goods have been received.  Mr Park’s allegation therefore appeared strange. 

18.  However, a letter from Wonderful Photoelectricity (Dongguan) Company Ltd. (“Wonderful”), a customer of TGH, dated 27 September 2011 (pages D1-107, 108) exhibited by Mr Park in his first affirmation does suggest that Wonderful was expecting the goods to be delivered by the 2nd defendant (the company owned equally by the 1st defendant and his friend Lee) before it would allow payment to be made under the L/C already procured to TGH.

19.  In any case, Mr Park said the 1st defendant had not given any reason why the applications for payments under the 7 L/Cs were rejected.  He also said the goods covered by the payments that were rejected under the L/Cs were also missing. 

20.  From the above, it appears that the usual procedure of international sale with payment by L/C has not been adhered to by TGH, the 1st defendant, Seda, the 4th defendant and some customers of TGH.  Mr Park said the investigations by TGH showed that some US$30,000,000 (later increased to US$35,000,000) worth of goods had gone missing.

Investigations by TGH

21.  Mr Park’s colleagues also went to the 4th defendant’s office to investigate the matter.  They discovered that there were containers of SCR Copper Rod delivered by the 4th defendant to warehouses in Hong Kong at the instructions of the 1st defendant.  This came as a surprise as TGH had only sold and delivered such goods to customers in the Pearl River Delta and not in Hong Kong.  There were also no manufacturing facilities in Hong Kong that required such material.

22.  Mr Park’s colleagues also had discussions with Mr Lee who told them that the 1st defendant was responsible for the SCR Copper Rod business conducted by the 2nd defendant.

23.  Mr Park’s colleagues also went to the office of Eco Metal where the 1st defendant was provided with a desk to carry out his work.  They found some commercial documents there which included some instructions given by the 1st defendant to the 4th defendant to deliver goods to customers.  But Mr Park thought that the delivery instructions should have been given by Seda to the 4th defendant and not by the 1st defendant.  The commercial documents also included some invoices naming the 2nd and 3rd defendants as purchasers of SCR Copper Rod in 2011.  But Mr Park was unaware of such purchases.  He only knew that the 3rd defendant had a limited number of purchases in January to March 2011.  The dates of the invoices and packing list were also problematic as their dates were in 2011 whilst the goods were said to have been delivered from Korea to Hong Kong in 2009 and 2010.

24.  Mr Park also referred to certain documents and said that some containers which were intended to be delivered to some customers in the Pearl River Delta were diverted to the 2nd or 3rd defendant.

25.  At the ex parte stage, the plaintiff alleged that there were 10 transactions of sale where the containers of goods were unaccountable.

Containers delivered by D4 to customers

26.  Pursuant to the disclosure order of Saunders J made on 4 October 2011, the sole shareholder and director of the 4th defendant, Mr Mok made an affirmation on 7 October 2011 detailing the dates and recipients of 10 lots of containers of SCR Copper Rod which were supposed to have been delivered to customers of TGH pursuant to the 10 transactions.  Mr Mok also said that the 1st defendant was the sales representative of TGH who gave instructions on behalf of TGH to the 4th defendant to make the deliveries.

Containers at Steinweg warehouse claimed by Standard Bank

27.  Mr Park made a 2nd affirmation on 27 October 2011 in support of an extension of the disclosure order for further disclosure by the defendants of the whereabouts of more containers of goods.  In addition to updating the information of the goods in the 10 transactions, he also referred to some 500 MT of SCR Copper Rod which were then stored at a warehouse of one C Steinweg (Hong Kong) Limited (“Steinweg”) in Fanling, Hong Kong. 

28.  These copper rods were delivered to Steinweg in July and August 2011.  They included the three containers of goods in the second of the 10 transactions referred to in the ex parte application. Both TGH and Standard Bank Plc (“Standard Bank”) are claiming ownership of these goods.  TGH learnt of these goods at the Steinweg warehouse from the affirmation of Mr Mok of the 4th defendant.  

29.  These goods were supposed to have been delivered to certain customers of TGH.  With the exception of Wonderful as referred to in the 2nd transaction, these customers, who were supposed to have purchased and received these goods, had indeed paid for them by L/Cs.  However, these goods had not been delivered to them but were stored in the Steinweg warehouse.  Hence, Mr Park thought that the 1st defendant must have delivered some other goods to them to satisfy their payments.  That would explain why the goods that were supposed to have been delivered to them were still kept in the Steinweg warehouse.

30.  Standard Bank also claimed that the goods in the Steinweg warehouse were purchased by it from the 3rd defendant pursuant to 2 contracts of sale dated 7 February and 26 July 2011 and it had paid the 3rd defendant the price for the goods.  However, Mr Park said that the 3rd defendant had not purchased these goods from TGH. 

31.  TGH had indeed received 5 sums totalling US$4,371,528.61 from the 3rd defendant which were remitted by Standard Bank to the 3rd defendant.  But the 1st defendant had previously advised TGH that these sums should be allocated as payments of outstanding price of other customers.  Payments received were also allocated by the 1st defendant for goods sold in his monthly statements to TGH.

Switching/misappropriation of containers

32.  Since many containers appeared to have been switched or misappropriated since early 2011, Mr Park said TGH had difficulty in identifying precisely which consignment of goods had been paid and which had gone missing.

D1’S CASE IN OPPOSITION

33.  The 1st defendant made a number of affirmations to set aside the ex parte injunction and to oppose its continuation.  He explained how he carried out his duties in arranging the sale and delivery of the SCR Copper Rods for TGH and in collecting the sale proceeds.

Credit sale to and payment by L/C by Dayang group

34.  One of TGH’s customers is a Dayang group which comprised of Shenzhen Dayang Electrical Company Limited (“Dayang Electrical”), Shenzhen Dayang Industry Company Limited (“Dayang Industry”) and Easebond Electrical Material (Dongguan) Company Limited (“Easebond”).  The 1st defendant claimed that TGH through him had been selling SCR Copper Rods to the Dayang group on credit.  Payments were made by L/Cs to be opened subsequently by members of the Dayang group. 

35.  When the 1st defendant received an L/C procured by a Dayang company, he would ask TGH to instruct Seda to issue an HB/L in respect of certain containers of goods purportedly for sale to the Dayang company.  He would then present the L/C, HB/L and other required commercial documents to the bank for payment to be made to TGH under the L/C.  But the payment received would be applied to settle the outstanding price for goods already delivered and not for the containers specified in the HB/L. 

36.  The goods in these containers would then be sold and delivered pursuant to other sale transactions.  Very often, they would be sold and delivered to customers other than the L/C applicant.  These goods would then be paid separately by the purchasers. 

37.  I note that such arrangement was possible because the HB/Ls need not be surrendered to Seda or its sub-sub-contractor the 4th defendant before the containers would be released by it. The containers were supposed to be released at the direction of Seda to the 4th defendant.  Seda would have presumably been instructed by TGH to release the containers before it would in turn instruct the 4th defendant to do so.

38.  The 1st defendant also produced a credit/debit note dated 30 August 2011 which purportedly showed a running account between TEC and Dayang Electrical for August 2011 (page D4-2).  This document shows that Dayang Electrical owed TEC US$670,800.13 on 1 August and US$140,165.78 on 30 August. 

Knowledge of TGH on dealings with Dayang group?

39.  It is the 1st defendant’s case that the practice of selling goods to the Dayang group on credit and the specification of containers in HB/Ls merely for obtaining payment under L/Cs for outstanding price were matters known to and endorsed by TGH/TEC in particular Mr Oh Dong Jin, the sales manager of TEC. 

40.  Regarding the actual sale and delivery of the goods in the containers specified in the HB/Ls, the 1st defendant further said in paras 32 and 33 of his 2nd affirmation:

“32. Most importantly, TEC knew and must have known whether its copper rods were actually delivered and to whom. My understanding in this regard is that after delivery to a consignee designated by me, Kar Yue would obtain from the recipient a receipt and submit it as proof of delivery to the shipper for payment. The shipper would send the receipt of Seda, which would in turn forward the same to TEC for payment. Therefore, I believe that TEC must know the whereabouts of the Cargoes including those in Transaction No. 1. I was all along aware of these details of the delivery process by Kar Yue because the Sales Department of TEC from time to time contacted me to confirm whether the consignees shown on the said receipts were genuine and in fact designated by me.

33.      In this respect, I have found in the documents produced by the Plaintiff a copy of the receipt for containers ‘GESU3900145’ and ‘TCKU1819811’ at [30] of exhibit ‘PHY-2’ to the 2^nd Affirmation of Mr Park.  It shows that Kar Yue delivered the two containers on 26 August 2011 (a few days earlier than the delivery date of 29 August 2011 requested by me: see the 2^nd Delivery Order).  This substantiates the disclosure made by Mr Mok in the Table at ‘MHT-1’ to his Affirmation.”

41.  He also referred to a copy delivery order issued by the 4th defendant dated 26 August 2011.  It was provided by the 4th defendant to the plaintiff during the plaintiff’s investigation (page D1-321).  This order was for delivery of two containers to a company Pacific Cable in the first of the 10 transactions.  It bears the receipt chop mark of Pacific Cable in Chinese characters.

42.  The representatives of TGH/TEC have however denied knowledge of the alleged practice of selling goods to the Dayang group on credit and getting pay subsequently from L/Cs procured by this group.  They also denied of having seen the credit/debit note referred to above or that there was any running account as alleged.

43.  However, the plaintiff does admit that in about August 2011.  The 1st defendant had told Mr Oh that the price of some 1,200 MTs of SCR Copper Rod was outstanding from the Dayang group because the 1st defendant had extended credit to Dayang group.  Mr Oh said on affirmation that he then told the 1st defendant that the credit was unauthorized and required him to collect the outstanding proceeds.  The 1st defendant then explained to Mr Oh that the overdue payments would be settled by L/Cs to be issued by the Dayang group for later transactions.  Mr Oh then demanded the 1st defendant to abandon this practice, rectify the account record of receivables from the Dayang group and advise him the total sum outstanding from this group.  The 1st defendant promised to do so. 

44.  Despite what was said by the 1st defendant, TGH did not know if the Dayang group had really paid the outstanding price by subsequent L/Cs or whether this had any impact on the delivery of goods and collection of payments for transactions between TGH and the Dayang group. 

45.  The representatives of TGH/TEC also maintained that the containers specified in the HB/Ls were intended to and supposed to have been delivered to the notify parties stated therein though the HB/Ls themselves were not required to be surrendered in exchange for delivery of goods.  The documents exhibited by the parties also provide no proof that TGH/TEC was aware of the practice alleged by the 1st defendant.

46.  I also note that the practice alleged by the 1st defendant involves fraud on the L/C issuing banks.  The L/Cs were issued to the Dayang group on the assumption of the existence of genuine underlying transactions.  I do not believe that these banks would have allowed the Dayang group to make use of the credit facilities to issue L/Cs to pay for outstanding price.  The HB/Ls presented to L/C issuing banks would also have no value as security to the banks because the containers specified in them would have been released, sold and delivered under other sale transactions.

47.  One unsatisfactory aspect, as stressed time and again by Mr Lui, counsel for the 1st defendant, is that none of the plaintiff’s affirmants has in their many affirmations dealt with the matters mentioned by the 1st defendant in paras 32 and 33 of his 2nd affirmation as quoted above.

Goods at Steinweg warehouse

48.  Regarding the three containers of goods in the 2nd transaction, they had been specified in an HB/L that had been used by TGH to obtain payment under the L/C issued by Wonderful as referred to in para 18 above.  I have already referred to the letter from Wonderful dated 27 September 2011.  In the end, no payment was made to TGH under this L/C because of non-delivery.

49.  The 4th defendant confirmed on affirmation that these three containers had in fact been delivered to the Steinweg warehouse on 17 August 2011.  Standard Bank is claiming ownership of the goods in them.  The 1st defendant referred to these containers in para 67 of his 2nd affirmation. He said they were allocated by Mr Oh to be sold to the 3rd defendant.

D3’S CASE

                   Repo transactions

50.  Mr Lee of the 2nd and 3rd defendants however gave a very different story for these 3 containers and other containers that have been delivered to the Steinweg warehouse and are claimed by Standard Bank. He said in his 7th affirmation that the 1st defendant told him in early 2009 that there would be several occasions every year when TEC would required cash urgently.  TEC would ship the SCR Copper Rods to Hong Kong even when there was no buyer for them.

51.  On another occasion, the 1st defendant, in the presence of Mr Oh and Oh’s supervisor, repeated this problem of TEC.  The 1st defendant asked Mr Lee if the 3rd defendant could do some trade finance to assist TEC.  The trade finance arrangement was known in the trade as “repo”.  The 3rd defendant then opened an account with Standard Bank to do repo for TEC with TEC’s SCR Copper Rods that had been delivered to Hong Kong.

52.  “Repo” is essentially a sale and repurchase arrangement.  It is in effect a lending of money by Standard Bank on the security of the copper rods.  The 3rd defendant firstly bought the goods from TGH/TEC.  It then sold the goods as legal owner to Standard Bank.  The bank would pay 95% of the price to the 3rd defendant.  The 3rd defendant in turn paid this sum to TGH/TEC as payment or partial payment of the price for the goods.  The 3rd defendant at the time of entering into the sale contract with Standard Bank had to enter into a forward purchase contract with the bank agreeing to buy back the goods 90 days later at the same price.  This period could be extended.  The date of settlement of the forward purchase contract was in effect the maturity date of the loan.  In the meantime, the copper rods would be stored at the Steinweg warehouse for Standard Bank.

53.  If the plaintiff should later find a buyer for the goods, the 1st defendant would instruct the 3rd defendant to buy back the goods and settle the forward contract with the bank.  The price paid by the buyer would be used to repay the bank the 95% price previously paid to the 3rd defendant, the interest on this sum and the bank’s handling fees.  The 3rd defendant at the opening of a repo transaction would also be required by the bank to do a hedging transaction at the London Metal Exchange to secure against the fall of copper price.  In this way, TGH/TEC would be able to use of 95% of the price of the goods even when there is no buyer.

54.  Mr Lee further said that between January and August 2011, the 3rd defendant had done 13 repo transactions for TGH/TEC.  The goods in the first 8 transactions had been bought back from the bank and sold to TGH/TEC’s buyers in the mainland per the 1st defendant’s instructions.  There were still 50 MT copper rods that were with the bank and kept at the Steinweg warehouse under the 9th to 13th transactions.  Mr Lee further said that the 3rd defendant did these transactions for TGH/TEC (and thus exposed to the risk of TGH defaulting) intending to build up a good relationship with Standard Bank in the long run.  He further said that because of these transactions, when the 3rd defendant later opened another account with Standard Bank for trading of Copper Cathodes, the bank waived the requirement of an initial margin of US$1,000,000.

55.  Mr Lee further produced a number of sale and forward purchase contracts and documents it made with Standard Bank in relation to SCR Copper Rods.  These contracts and documents indeed show that the 3rd defendant was doing repo transactions with the bank.  He also said that he had on 20 August given Mr Oh some statements of the future purchase contracts, the sum required to be paid to the bank to buy back the goods and the 5% price of the goods kept by the bank. 

56.  However, despite all these, Mr Lee did not produce any document including banking document to show the settlement of the forward purchase contracts, the sale of the goods by TGH/TEC to their customers and the application of the sale proceeds to settle account with Standard Bank.  There is also no document proving that the repo transactions were done by the 3rd defendant for TGH/TEC rather than for its own purposes.

TGH denied knowledge of repo

57.  Mr JH Park, a director of TEC, denied in his affirmation that TGH/TEC was aware of the repo arrangement.  He also asserted that if TEC would have wanted to carry out repo financing, it would have done so in its own name as it was a substantial listed company in Korea.

58.  Mr Oh in his affirmation also denied any knowledge of the repo transactions alleged by Mr Lee.  He said he was only aware of containers having been delivered to the Steinweg warehouse in Hong Kong for the first time on 23 September.

59.  He said on 20 September when Mr Lee asked him if he was aware of anything about the Standard Bank, he replied in the negative. He also declined Mr Lee’s request to confirm “200 MT futures position” as he knew nothing about the transaction.  He did admit that Mr Lee had given him a pile of documents which included a number of tables, remittance advices, a tax return of the 1st defendant and a number of tables about transactions between the 3rd defendant and local suppliers of SCR Copper Rod.  Since the documents did not seem to contain information that would assist his investigation, he did not study them in detail.  He then forgot about them until Mr Lee referred to them in his 7th affirmation.

60.  Mr JH Park however said that there was a straightforward sale by TEC of 1,200 MT of SCR Copper Rod to Standard Bank in about March 2009.  But he could only exhibit the bill of lading for the goods showing Standard Bank as the consignee and notify party.  He did not produce any contract, invoice, packing list, receipt of goods by the bank or copy receipt that it issued to the bank acknowledging receipt of the price.

61.  On the other hand, Mr Lee in his 9th affirmation produced the sale and forward purchase contracts that the 3rd defendant made with Standard Bank in respect of the 1,200 MT of copper rods.  He said these were repo transactions rather than a sale of the goods by TEC to the bank.

62.  I think the 1,200 MT of goods might have been shipped to the bank for repo transactions done in the name of the 3rd defendant rather than for a sale of the goods by TEC to the bank.  I do not think the bank would first purchase the goods directly from TEC and then purchase them for the second time from the 3rd defendant for repo transactions.  Nevertheless, even if the goods were used for repo transactions as contented by Mr. Lee, it is still not clear whether the repo transactions were done by the 3rd defendant for TEC or for its own purposes. 

63.  I would add that the same analysis and observation may or may not be applicable to 1,000 MT of copper rods delivered by TEC to the 3rd defendant in February 2011.  TEC said that that was a sale, but the 3rd defendant said that that was a repo.  The HB/L was issued by Seda to the 3rd defendant direct.  It could also be a sale of the goods by TGH to the 3rd defendant which then used the same for repo transactions.  I think the matter has to be canvassed at the trial.

Payment to TGH for goods supplied by other suppliers

64.  Mr Lee in his 7th affirmation also alleged that 2 local suppliers of SCR Copper Rods namely: Tai-I Jiang (Guangzhou) Company Limited (“Tai-I”) and Zheng Wei Technology (Shenzhen) Limited (“Zheng Wei”) had supplied copper rods to TGH/TEC’s customers to satisfy orders placed by them with TGH/TEC.  The payments for these goods were however not received by Tai-I or Zheng Wei, but obtained by TGH/TEC under L/Cs procured by these customers to TGH/TEC.  Hence, TGH/TEC did not supply the goods but took the price.

65.  Mr Oh however said in his affirmation that he had only heard of this allegation when he and his colleagues met with their end customers in November 2011 and not before the ex parte application. TGH/TEC was still verifying these claims.

CHRONOLOGIES OF DEALINGS IN FIRST FIVE TRANSACTIONS

66.  On the basis of the documents exhibited by the parties in this action, 5 summaries have been prepared in relation to the 1st to 5th transactions referred to in Mr Park’s 1st affirmation.  They show the dates of receipt of the L/Cs, HB/Ls and various other documents and of when and to whom the containers specified in the HB/Ls were delivered.  The summaries are produced at Appendix A hereto.

SERIOUS QUESTION TO BE TRIED AGAINST D1?

TGH’s present case not misappropriation?

67.  Mr Lui submitted for the 1st defendant that the case of TGH as it now stands is very much different from its case at the ex parte stage.  He said TGH’s case at the ex parte application was missing or stolen cargoes in the 10 transactions in Schedule 1 to the ex parte order.  Now it is a case of the 1st defendant diverting cargoes to different customers without TGH’s consent.  The basis of this submission is that all containers under the 10 transactions have been delivered to various customers as confirmed by Mr Mok of the 4th defendant which TGH does not dispute.  Mr Lui further submitted that since all goods had been delivered to the customers of TGH, TGH has no good arguable case against the 1st defendant.

68.  I do not think Mr Lui has represented the case of TGH correctly.  Though the containers in the 10 transactions had indeed been delivered to various customers including some to the Steinweg warehouse for the 3rd defendant or Standard Bank, it does not mean that TGH has not established a good arguable case on misappropriation of goods.  Though the containers had been delivered, many of them were not to the customers mentioned in the HB/Ls.

69.  Sun Fai paid US$764,586.56 to TGH on 30 August. Four containers of goods were allocated in a packing list for delivery to it (page D1-32).  A commercial invoice was also prepared (page D1-31).  However, the goods were not delivered to it but to the Steinweg warehouse and held by Standard Bank pursuant to a repo transaction.  The price or loan from Standard Bank under the repo was paid to the 3rd defendant.  But the repo could be for the 3rd defendant’s purpose or the purpose of TGH.  TGH’s case is that these monies it received from the 3rd defendant were allocated by the 1st defendant to be payments by other customers.  It denied that any loan under a repo done by the 3rd defendant was done on its behalf.

70.  If TGH is right, then these goods would have been misappropriated by the 1st defendant or the 1st and 3rd defendants.  They were then used by the 3rd defendant in repo transactions to generate loans for the 1st defendant’s use in paying up the deficient accounts of other customers. 

71.  Furthermore, if the deficiencies in the accounts of these other customers were caused by their failures to pay TGH for goods delivered to them, then there did not appear to be any cause to oblige the 1st defendant to find money to pay on their behalf to TGH.  Hence, it could well be that these customers had already paid the price, but the 1st defendant had applied or allocated the same for other purposes.  One purpose could be for crediting it to the Dayang group to cover up the credit sale to this group.  The 1st defendant then used the subsequent repo loans from Standard Bank to pay back the outstanding price in the deficient accounts of these customers.  I must not overlook TGH’s denial of knowledge of the credit extended by the 1st defendant to the Dayang group and its admission that Mr Oh was only advised by the 1st defendant in about August 2011 that the price of some 1,200 MTs of goods was outstanding from the Dayang group because of the credit extended by him.

72.  I would also point out that the alleged unauthorised credit sale by the 1st defendant of goods to the Dayang group is likewise an alleged misappropriation of goods.

Goods at Steinweg warehouse

73.  In addition to the alleged unauthorised sale of goods to the Dayang group on credit, there were also the case of Wonderful not receiving three containers of rods (where payment by L/C was rejected), the Sun Fai case of non-delivery of four containers of goods (which it had paid) and the Eco Metal case where it had paid for 400 MTs of goods but was only delivered 120 MTs.

74.  There are also the many containers of goods including those intended for Wonderful, Sun Fai and Eco Metal that had been delivered to the 3rd defendant and are held by Standard Bank.  I have already alluded to the unsatisfactory production of documents on the repo transactions by the 3rd defendant.  There is not a piece of paper showing that TGH was a party to these transactions.  If the many containers of goods were delivered at the 1st defendant’s instructions to the Steinweg warehouse for repo transactions undertaken by the 3rd defendant for its own purposes, then the 3rd defendant might have misappropriated these goods.

TGH not challenged paras 32 and 33 of D1’s 2nd affirmation

75.  However, Mr Lui gave a further reason to show that it was impossible for TGH not to be aware of the true destinations of the containers though they were not as stated in the HB/Ls.  If TGH was fully aware of the true destinations, then there could not have been misappropriation by the 1st defendant.  For this reason, Mr Lui submitted that the injunction must be discharged and not regranted.  The reason is the failure of TGH to challenge paras 32 and 33 of the 1st defendant’s 2nd affirmation which I have quoted above.

76.  The 1st defendant in effect said in these two paragraphs that TGH/TEC was aware of the destinations of the containers as the same had been reported by the 4th defendant to Seda after delivery and Seda in turn reported the same to TEC.  It is indeed unsatisfactory for TGH/TEC not to have expressly dealt with this allegation.  I do not think it enough for the staff of TGH/TEC to simply say in their affirmations that they should not be taken to admit to anything that they did not expressly traverse.

77.  However, I must look at the totality of the case to judge the effect of TGH/TEC’s failure to challenge these two paragraphs. The representatives of TGH/TEC have steadfastly denied knowledge of sale of goods to the Dayang group on credit or that containers specified in HB/Ls were sent not to the notify parties therein.  They have also denied knowledge of the Dayang group’s practice of payment for goods by future L/Cs.  They also denied knowledge of the repo transactions or that containers having been sent to the Steinweg warehouse for the 3rd defendant or Standard Bank.  Taking all these into account, I do not think the failure of TGH/TEC to expressly challenge paras 32 and 33 of the 1st defendant’s 2nd affirmation is enough for me to conclude that TGH/TEC must have been aware of the destinations of the goods which were in many cases not the same as the notify parties in the HB/Ls.

78.  I further point out that if TGH/TEC indeed had prior knowledge of the true destinations of the containers as instructed directly by the 1st to the 4th defendant, then there did not appear to be any reason for TEC to instruct its forwarder Seda to send e-mails to the 1st and 4th defendants to release the containers as mentioned in the HB/Ls.  These e-mails appear to accompany the HB/Ls, but not the actual deliveries as directed by the 1st defendant.  The actual deliveries very often were not on or about the dates of the HB/Ls.  The containers in a particular HB/L have sometimes been delivered to more than one customer and on earlier dates too. If TGH/TEC was aware of the actual destinations of the containers, I cannot see any reason for the issuance of the e-mails for release of containers.  A perusal of the summaries at Appendix A will make this plain.  Some e-mails to the 1st and 4th defendants for release of containers were sent out weeks after the containers had been delivered to other purchasers. 

Serious question to be tried against D1

79.  For the above reasons, I find that TGH has indeed established a good arguable case on misappropriation of goods by the 1st defendant.  I reject Mr Lui’s submissions for discharging the ex parte injunction against the 1st defendant.

RISK OF DISSIPATION OF ASSETS BY D1 AND CONTINUATION OF MAREVA INJUNCTION AGAINST D1?

80.  Mr Lui also submitted that there is no evidence showing a risk of dissipation.  I also differ.  The 1st defendant says that all that he did were known to and endorsed by TGH/TEC.  The representatives of TGH/TEC denied of the same absolutely.  If the 1st defendant should be in the wrong, then he must have been behaving in a very dishonest manner in his dealings with TGH.  There is indeed a serious question to be tried on whether the 1st defendant has misappropriated the goods of TGH and hence has behaved dishonestly vis-à-vis TGH.  There is therefore a real risk of dissipation of assets.  The Mareva injunction should be continued as against the 1st defendant.

DISCHARGE OF DISCLOSURE ORDER?

81.  Finally, for the 1st defendant, Mr Lui submitted that there is no need to require disclosure by the 1st defendant of the whereabouts of the goods sold by TGH in 2011 or the proceeds thereof.  The goods are enumerated in Schedule 4 to the order as varied by DHCJ Lok on 4 November 2011.  I disagree.  It is TGH’s case that it all along regarded the HB/Ls as the documents showing what container to be delivered to whom.  But that was not what happened.  I think the disclosure will enable the plaintiff to reconcile all its sale, delivery and payment received and come to an accurate picture of what goods have been sold and delivered to whom and who owes how much to it, if any.  I will therefore continue the order of disclosure as well.

SERIOUS QUESTION TO BE TRIED ANDCONTINUATION OF MAREVA INJUNCTION AGAINST D2?

82.  Since some containers had also been directed to the 2nd defendant allegedly without the knowledge of TGH, I find that there is a serious question to be tried on whether the 2nd defendant has misappropriated TGH’s goods.  I would therefore continue the Mareva injunction against the 2nd defendant.

SERIOUS QUESTION TO BE TRIED AGAINST D3?

Repo transactions

83.  The 3rd defendant’s case is that it has purchased containers from TGH/TEC and/or TEC Leadings Company Limited (“TEC Leadings”) (a subsidiary of TEC) solely to raising money for them.   

84.  I have already pointed out the discrepancy between the story of the 1st defendant and that of the 3rd defendant as told by Mr Lee in relation to the 3 containers in the 2nd transaction.  The 1st defendant said that they were sold to the 3rd defendant and delivered by the 4th defendant to the Steinweg warehouse (page C-103, para 67).  The 3rd defendant said that these containers were not sold to it in its own right, but were sold to it for it to pledge to Standard Bank for repo finance for the benefit of TGH/TEC/TEC Leadings.  It used the goods for repo financing for TGH/TEC/TEC Leadings at the request of the 1st defendant made in the presence of the representatives of TEC. 

85.  The same discrepancy applies to the containers in the 10th transaction and one container in the 8th or 9th transaction which were delivered to the Steinweg warehouse on 28 February 2011.  The containers in the 10th transaction were later specified in a packing list as destined for Sun Fai and one container in the 8th or 9th transaction was destined for Eco Metal (see table attached to skeleton submissions of counsel for the 1st defendant).  In fact, the 1st defendant has not said that any container of goods had been used in repo finance for TGH/TEC.

86.  The representatives of TGH/TEC on the other hand said that they are not aware of the repo transactions or the involvement of Standard Bank at all. 

Submissions of D3 on serious question to be tried?

87.  Mr Hung, counsel for the 2nd and 3rd defendants, argued that there is no serious question to be tried as against the 3rd defendant. He submitted that TGH had failed to explain how the 3rd defendant had converted the goods or its proceeds.  Regarding TGH’s claim that the 2nd and 3rd defendants had collected sale proceeds on behalf of TGH and remitted the same to TGH, Mr Hung said there was not a shred of evidence to support why TGH had to collect proceeds through them.  He also said that such was improbable and did not make sense.  He challenged the finance of TEC by reference to its gloomy financial picture and its poor performance in recent years.  He also referred to the US$11,553,000 paid by the 3rd defendant via Standard Bank to TGH in 2011 and asserted that TGH could not explain how this sum could have come about if they were not payments to TGH in respect of repo transactions done for its benefit.

88.  Mr Lee also said in his 7th affirmation that despite the provision by the 3rd defendant of the repo contracts and payments by the 3rd defendant to TGH of repo loans advanced by Standard Bank, TGH could only say in general that the payments were made in settlement of outstanding sums due from goods sold to other customers.  It could not set out the details of the goods for which the sums were paid.

89.  Mr Hung also made extensive attacks on TGH’s explanation for the moneys that came from the 3rd defendant.  These attacks are forceful and well made.  I think the accounts department of TEC should have done a better job.  However, all these cannot mask the fact that there is not a sheet of document to connect TGH/TEC with any of the repo transactions.  The 3rd defendant has also failed to produce a sheet of document to show how any of the repo transactions had been settled and how the goods were redeemed from Standard Bank and sold by TGH to its customers.  I therefore cannot decide the matter either way on the affirmations. 

Serious question to be tried against D3

90.  I find that TGH has shown a serious question to be tried on whether the repos were done by the 3rd defendant for its own purposes or for and on behalf or for the benefit of TGH/TEC.  If the 3rd defendant did the repos for its own purposes but without purchasing the goods from TGH, then it has with the help of the 1st defendant misappropriated the goods from TGH.  This is the serious question to be tried as between TGH and the 3rd defendant.

MATERIAL NON-DISCLOSURE

91.  The 3rd defendant also seeks to discharge the ex parte injunction for material non-disclosure.  Mr Hung submitted on a number of matters relating to repo transactions that TGH had failed to disclose.  I think this submission is premised on the basis that it was inherently impossible for TGH not to know that the 3rd defendant had done repo transactions on its behalf or for its benefit.  But I think the premise has been set too high.  I have already pointed out the deficiencies of the 3rd defendant’s case about TGH’s knowledge of repo transactions.  The representatives of TGH/TEC have also denied the factual allegations made by Mr Lee in relation to the repo transactions. 

92.  There are other allegations of material non-disclosure.  They are the payments by customers to TGH for goods supplied by Tai-I and Zheng Wei, the 1st defendants’ disclosure to Mr Oh in August 2011 about goods being sold to the Dayang group on credit and the Dayang group paid for the goods by subsequent L/Cs.  These allegations have either been explained or denied by the representatives of TGH/TEC.

93.  The 3rd defendant also alleged that TGH when applying for the ex parte injunction order should have told the court the potential devastating effect of the injunction on a copper trader like the 3rd defendant.  However, the only evidence relied on is Mr Oh’s awareness that the 3rd defendant traded in copper cathodes and copper price is volatile.  I do not think such evidence is enough to affix the need on TGH to make the disclosure referred to. 

94.  The 3rd defendant further alleged that TGH had failed to disclose the fact that it was relying on Mr Lee and the 3rd defendant to track down the wrongs of the 1st defendant.  I think as a matter of fact, Mr Park has indeed disclosed that Mr Lee had assisted him to look for the 1st defendant, reporting the matter to the police and attended meetings.  I do not think there is any material non-disclosure. 

95.  The 3rd defendant also asked the rhetorical question of whether TGH, being the victim of misappropriation, would have asked one of the thieves (the 3rd defendant) to look for the other thieves for it.  It in effect submitted that the assistance by Mr Lee and the 3rd defendant to TGH would mean that there is no risk of dissipation by the 3rd defendant and TGH should have informed the court about this.  I reject this submission.  I do not think that there is no risk of the 3rd defendant dissipating its assets simply because it and Mr Lee had assisted TGH in the investigations.  If TGH is right, Mr Lee and the 3rd defendant might have been pretending to be innocent.

96.  The 3rd defendant also accused TGH for not telling the court that the use of the Dayang L/Cs to pay for goods delivered previously is a criminal offence as it involves deception on the banks.  I think the facts are there and the conclusion arises automatically.

97.  On the whole, I find that these allegations of non-disclosure are not well founded.  I will not discharge the injunction as against the 2nd or 3rd defendants on the ground of material non-disclosure.

RISK OF DISSIPATION OF ASSETS BY D3

98.  The 3rd defendant also submitted that there is no risk of dissipation.  The basis is that Mr Lee and the 3rd defendant had assisted in the investigation for lost goods and had provided the Steinweg documents to the representatives of TGH.  Mr Oh has already explained his case on these documents.  I repeat that Mr Lee and the 3rd defendant might have been pretending to be innocent when assisting TGH in the investigations. I also reiterate TGH’s case of ignorance about the repo transactions.

99.  I have already found a serious question to be tried on whether the 3rd defendant had misappropriated TGH’s goods and used the same for repo transactions for its own purposes.  This is a question of whether the 3rd defendant has been doing business in a dishonest fashion.  There must be a risk of dissipation of assets by the 3rd defendant to follow this question.

CONTINUATION OF MAREVA INJUNCTION

100.  In the premises, I will continue the ex parte injunction and dismiss the application by the 2nd and 3rd defendants to set it aside.

EXTENSION OF TIME FOR D2 TO FILE DEFENCE

101.  The 2nd defendant applies for extension of time beyond the unless order for it to file the defence.  The plaintiff seeks judgment in default of defence.

102.  As a matter of chronology, the plaintiff applied for the ex parte injunction on 4 October 2011.  It issued the writ of summons on 6 October, but it did not file the Statement of claim in time.  It issued a summons on 29 November 2011 for, among other matters, extension of time until 12 December for it to file the Statement of claim.  It then filed the Statement of claim on 13 December.

103.  The 1st, 2nd and 3rd defendants did not file their defence in time.  There was a consent order dated 10 January 2012 extending the time to 24 January for 1st defendant to file his defence.  There was then an order extending time to 20 January for the 2nd and 3rd defendants to file their defence.  The three defendants did not file their defence within the extended times.

104.  There was then an unless order by consent extending the time to 17 February for the 1st defendant to file his defence.  There was another order dated 1 February also extending the time to 17 February for the 2nd and 3rd defendants.  The 3rd defendant duly filed its defence on 17 February.  The defence was amended on 24 February and re-amended on 2 March. 

105.  The 1st defendant’s defence was only ready on 20 February.  He also produced an amended version on 22 February.  Suffiad J on 2 March extended the time to 20 February for the 1st defendant to file his defence and 22 February for him to file his amended defence. 

106.  The plaintiff on 23 February filed a summons seeking leave to enter judgment in default of defence against the 1st and 2nd defendants.  The application against the 1st defendant was made because the 1st defendant did not file his defence by 17 February when the unless order expired.  He was only given leave on 2 March by Suffiad J to file his defence dated 20 February. 

107.  After TGH has taken out this application, the 2nd defendant also prepared on 24 February and issued on 27 February a summons for extension of time to 2 March for it to file its defence.  Its defence was available on 29 February and a copy was served on TGH on 1 March. 

108.  Mr Lee made his 8th affirmation to support this application.  He referred to the long time the plaintiff had taken to file its statement of claim.  The plaintiff was investigating this matter since sometime around 20 September 2011.  It obtained an ex parte injunction on 4 October.  But it only filed the Statement of claim on 13 December.

109.  Mr Lee then referred to the difficulties of the 2nd defendant in preparing its defence.  He said the 1st defendant had not returned to work for the 2nd defendant since about mid-September 2011.  Furthermore, the documents about sales of SCR Copper Rod had been seized by the police from the 1st defendant’s place of work at Eco Metal as well as from the 2nd defendant’s office.  The police also took away the computer from the 2nd defendant’s office.  The documents produced by the plaintiff were only those it obtained from the defendants and the plaintiff produced them in a chaotic manner.  There were numerous transactions involved in this action that spanned from the beginning of 2011 to September 2011.  Since commencement of the action, the communication between the 1st defendant and Mr Lee for the 2nd defendant was through their solicitors.  For these reasons, the 2nd defendant was seriously handicapped in preparing the defence. 

110.  Since it was the 1st defendant who dealt with the purchase and sale of the SCR Copper Rods, the 2nd defendant’s lawyers would like to see what was the 1st defendant’s response to the allegations in the statement of claim.  In the end, the 3rd defendant was able to comply with the deadline and filed its defence on 17 March but the 1st defendant only filed his defence on 20 February.

111.  Mr Lee denied that there was any intent to deliberately flout the unless order.  He emphasised that the action is still at an early stage where the parties are fighting over the interlocutory injunction.  The plaintiff has also not filed any reply to the defences filed by the other defendants.

112.  Mr Hung also submitted that the 2nd defendant’s application for relief was made on 27 February 2012 and was within 14 days of the failure to comply as required by O.2 r.4 of the Rules of High Court.

113.  TGH however submitted that the 2nd defendant’s failure to comply with the unless order was deliberate and inexcusable.  It referred to the fact that the 2nd defendant only prepared the summons for extension of time one week after the expiry of the unless order and the defence was only served on the plaintiff on 1 March.  TGH also did not accept the difficulties alleged by the 2nd defendant.  It also referred to the 2nd defendant’s failure in complying with some orders made in this action.

DECISION ON EXTENSION OF TIME

114.  Judging from the complexity of the case, the new materials revealed in the affirmations filed by the parties from time to time, the seizure of papers and computer by the police, I accept that the 2nd defendant has faced considerable difficulty in preparing its defence.  The different approaches in the affirmations of the 1st and 3rd defendants in opposing the injunction also shows that the 1st defendant and Mr Lee were not working together.

115.  It is also clear from the affirmations filed by the defendants that they are all working very hard to resist the injunction and defend the action.  I therefore find that the 2nd defendant has not deliberately flouted the unless order.

116.  In the premises, I am of the view that this is a special case where the 2nd defendant should be relieved of the sanction of the unless order.  I therefore grant an extension of time for the 2nd defendant to file its defence within two working days from today.  I dispense with service of this defence.

COSTS ORDERS NISI

117.  I also make the following costs orders nisi. I order that the costs of the plaintiff’s application to continue the ex parte injunction order be in the cause.  I order that the costs of the applications by the 1st, 2nd and 3rd defendants to set aside the ex parte injunction be paid by these defendants to the plaintiff in any event.

118.  I also order the 2nd defendant to pay to the plaintiff the costs for its application to extend time for filing of defence save that the costs of the argument of this application be paid by the plaintiff to the 2nd defendant in any event.

Appendix A

Transactions 1 to 5 as shown in the documents exhibited by the parties

Transaction No. 1

1. The 1st defendant gave delivery instruction dated 13 August 2011 to the 4th defendant to deliver two containers GESU3900145 and TCKU1819811 to Pacific Cable on 29 August, one container TGHU0848489 was delivered to Dayang Electrical on 26 August, and two containers TGHU0918879 and XINU1367434 were delivered to Dayang Industry on 26 August 2011 (page D1-258).

2. The 4th defendant delivered two containers to Pacific Cable, one container to Dayang Electrical and two containers to Dayang Industry all on 26 August, 2011 (page D1-273).

3. L/C No. DC SMC652432SZ procured by Dayang Industry was received by the 1st defendant on 24 August 2011 (page D4-107).  Payment was for 60 MT of goods already delivered and 40 MTs of goods to be delivered.  Payment was later effected under this L/C.

4. The 1st defendant sent an e-mail on 24 August 2011 to the plaintiff asking for allocation of the above-mentioned five containers for payment under the above L/C (page D4-106).

5. House B/L No. SEDAINHK1108008 was received by the 1st defendant on or after 24 August 2011 (page D4-145).

6. RenJessee of Seda sent an instruction by e-mail dated 25 August 2011 to the 1st and 4th defendants telling them to release and deliver the above-mentioned five containers (LSM-39-1 and 2).

Transaction No. 2

1. The 1st defendant gave delivery instruction dated 4 August 2011 to the 4th defendant to deliver three containers CRSU1486085, GLDU3226230 and GLDU5269523 to Steinweg on 16 August 2011 (page D1-158 and page D2-186).

2. The 4th defendant delivered the three containers to Steinweg for the 3rd defendant on 17 August 2011 (page D1-273).

3. L/C No. FIAACT20165/1 procured by Wonderful was received by the 1st defendant on 6 September 2011 (page D4-111).  Payment was later rejected under this L/C for non-delivery of goods.

4. The 1st defendant sent an e-mail on 6 September 2011 to the plaintiff asking for allocation of the above-mentioned three containers for payment under the above L/C (page D4-110).

5. Jenny Hu of Seda sent an e-mail attaching House B/L No. SEDAINHK1108018 dated 9 September 2011 to the 1st defendant (page D4-114).

6. RenJessee of Seda sent an instruction by e-mail dated 16 September 2011 to the 1st and 4th defendants to release and deliver the above-mentioned three containers (LSM-39-3 and 4).

Transaction No. 3

1. The 1st defendant gave delivery instruction dated 4 August 2011 to the 4th defendant to deliver two containers GLDU5470965, STXU2013051 to Dayang Electric on 16 August 2011 and one container STXU2015060 to Ming Tak Electrical on 22 August 2011 (page D1-158 and page D2-186).

2. The 4th defendant delivered two containers to Dayang Electrical on 16 August and the remaining one to Ming Tak Electrical on 23 August 2011 (page D1-273).

3. L/C No. 345010031925 procured by Easebond was received by the 1st defendant on 7 September 2011 (page D4-123).  Payment was later effected under this L/C for 60 MT of goods already delivered.

4. The 1st defendant sent an e-mail on 8 September 2011 to the plaintiff asking for allocation of the above-mentioned three containers for payment under the above L/C (page D4-122).

5. Jenny Hu of Seda sent an e-mail attaching House B/L No. SEDAINHK1108019 dated 9 September 2011 to the 1st defendant (page D4-127).

6.                RenJessee of Seda sent an instruction by e-mail dated 9 September 2011 to the 1st and 4th defendants to release and deliver the above-mentioned three containers (LSM-39-5 and 6).

Transaction No. 4

1. The 1st defendant gave delivery instruction dated 4 August 2011 to the 4th defendant to deliver two containers STXU2052572 and STXU2056860 to Caleb Cable Co. Industrial Ltd. on 17 August, one container STXU2067720 to Feng Chun Copper Wire on 20 August and one container TCKU1380190 also on 20 August to Hong Li Kai Electrical (page D1-158 and page D2-174).

2. The 4th defendant delivered two containers to Caleb Cable on 18 August, one container to Feng Chun Copper Wire on 20 August 2011 and one container to Hong Li Kai Electrical on 20 August 2011 (page D1-273).

3. L/C No. LC190111000108 procured by Dayang Electrical was received by the 1st defendant on 9 September 2011 (page D4-132).  Payment was later effected under this L/C for 80 MT of goods already delivered.

4. The 1st defendant sent an e-mail on 10 September 2011 to the plaintiff asking for allocation of the above-mentioned four containers for payment under the above L/C (page D4-131).

5. Jenny Hu of Seda sent an e-mail attaching House B/L No. SEDAINHK1108004 dated 16 September 2011 to the 1st defendant (page D4-137).

6. RenJessee of Seda sent an instruction by e-mail dated 16 September 2011 to the 1st and 4th defendants to release and deliver the above-mentioned four containers (LSM-39-7 and 8).

Transaction No. 5

1. The 1st defendant gave delivery instruction dated 4 August 2011 to the 4th defendant to deliver three containers TCKU3216165, TGHU0873769 and TGHU1467825 to Dayang Industry on (page D1-158 and page D2-186).

2. The 4th defendant delivered one container to Dayang Industry on 20 August and the remaining two also to Dayang Industry on 21 August 2011 (page D1-273).

3. L/C No. LC190111000109 issued procured by Dayang Industry was received by the 1st defendant on 13 September 2011 (page D4-141).  Payment was later effected under this L/C for 100 MT of goods already delivered.

4. The 1st defendant sent an e-mail on 13 September 2011 to the plaintiff asking for allocation of the above-mentioned three containers for payment under the above L/C (page D4-141).

5. Jenny Hu of Seda sent an e-mail attaching House B/L No. SEDAINHK1108020 dated 16 September 2011 to the 1st defendant (page D4-145).

6. RenJessee of Seda sent an instruction by e-mail dated 16 September 2011 to the 1st and 4th defendants to release and deliver the above-mentioned three containers (LSM-39-7 and 8).

HCA 1687/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1687 OF 2011

_____________

BETWEEN

_____________

_________________________

REASONS FOR DECISIONS

_________________________

1.  This is an application by the 2^nd and 3^rd Defendants for the Plaintiff to provide further security to fortify the undertaking as to damages in respect of the Mareva injunction granted in an ex parte application on 6 October 2011. In the hearing on 18 November 2011, I allowed the application and ordered the Plaintiff to provide further security in the form of bank guarantee in the amount of US$3,000,000 within 14 days. I now give my reasons.

Background

2.  The Plaintiff is a wholly owned subsidiary of Taihan Electric Wire Co Ltd (“TEC”) specialised in manufacturing and supplying various types of cables, including a specialised type of cable used for electrical wire and telecommunication applications known as SCR Copper Rods (“Copper Rods”).  The Plaintiff engaged the 1^st Defendant as its agent to promote the sale of Copper Rods in the Pearl River Delta market.

3.  Recently, the Plaintiff received complaints from certain customers, alleging that they had not received the Copper Rods ordered from the Plaintiff although they had paid the full purchase price to the Plaintiff.  After investigation, the Plaintiff claims that the 1^st Defendant had misappropriated some of the Copper Rods of the Plaintiff, with some of them transferring to the 2^nd and the 3^rd Defendants.

4.  The 1^st Defendant is the 50% registered shareholder of the 2^nd Defendant and is one of its two directors.  The other 50% registered shareholder and director is one Mr. Arctic Lee (“Mr. Lee”).  Mr. Lee is also the majority shareholder and one of the three directors of the 3^rd Defendant.

5.  The Plaintiff obtained, inter alia, an ex parteMareva injunction against the 1^st to 3^rd Defendants and disclosure order as to the whereabouts of certain Copper Rods against all the Defendants before Saunders J on 6 October 2011.  To comply with the order of the court as to fortification of undertaking as to damages, the Plaintiff paid a sum of HK$200,000 into court.  On the return day on 14 October 2011, Sakhrani J adjourned the inter parte application for the continuation of the Mareva injunction (“the Inter Parte Application”) to 11 November 2011 and gave directions for the filing of affidavit evidence.  The Plaintiff later took out an application to extend the scope of the disclosure order against the 1^st Defendant, and I allowed such application on 4 November 2011.

6.  The Plaintiff had also made a report to the police and as a result the 1^st Defendant was arrested.  He was released on bail.

7.  This case came before me again on 11 November 2011.  As the documents possessed by the 1^st Defendant relevant to the case had been seized by the police, the 1st Defendant had difficulty in preparing the affidavit to oppose the Inter Parte Application for the continuation of the Mareva injunction and to comply with the disclosure order. I therefore further adjourned the Inter Parte Application to 16 December 2011 and gave directions for the filing of affidavit evidence by the parties.

8.  Shortly before the hearing on 11 November 2011, the 3^rd Defendant filed the 2^nd Affirmation of Mr. Lee. According to Mr. Lee, the 3^rd Defendant was a broker for and on behalf of one Kuanheng Industrial Company Limited (“Kuanheng”) involved in the trading of a product known as Copper Cathodes both in the spot and in the futures markets.  By reason of the Mareva injunction, the 3^rd Defendant had suffered tremendous loss by not able to carry on the trading of Copper Cathodes in the futures markets and by the measures taken by the mortgagee bank to protect its interest under the trade financing arrangement.  The 3^rd Defendant therefore asked the court to increase the fortification on an urgent basis.  Under the impression that the continuation of the Mareva injunction would continue to increase the potential loss of the 3^rd Defendant, I agreed to deal with such application on the next summons day and gave directions for the filing of affidavit evidence.  The fortification application therefore came before me on 18 November 2011.

Factors to be considered

9.  According to the dicta of Deputy High Court Judge Coleman SC in Hui Chi Ming v Koon Wing Yee [2011] 1 HKLRD 260 at §34, there are two issues that the court has to consider in an application for fortification :

(i)   whether there is a likelihood of a significant loss arising as a result of the injunction granted; and

(ii)   whether there is a basis for the belief that the plaintiff would be unable to make good the loss.

(i)   Likelihood of significant loss

10.  Based on the evidence of the 3^rd Defendant, I am satisfied that the Mareva injunction is likely to cause significant loss to the 3^rd Defendant.  The 3^rd Defendant is a broker acting on behalf of Kuanheng involved in the trading of Copper Cathodes, which are a different kind of products from Copper Rods.  With the fund provided by Kuanheng, the 3^rd Defendant purchased Copper Cathodes in the amount of about US$21,000,000.  In or about June 2011, Kuanheng was in need of cash flow and therefore instructed the 3^rd Defendant to sell the Copper Cathodes to recoup the investment.  As the price of Copper Cathodes was not attractive by that time, Kuanheng accepted the suggestion of the 3^rd Defendant to raise fund by way of trade financing rather than to sell the products in the market.  In trade financing, the bank (Standard Bank PLC in the present case, “SBP”) financed the 3^rd Defendant on the strength of the physical Copper Cathodes mortgaged to the bank.  At the same time, the 3^rd Defendant took a “sold” position or long position of basically the same amount of Copper Cathodes in the futures contracts.  In the trading of Copper Cathodes, there is a unique way of fixing the price of the sale contract.  The buyer may fix the price by reference to the market price of the product in a specified market on a particular day within the quotation period.  After the buyer exercises the option to fix the price, the 3^rd Defendant would safeguard its position by hedging activity and place a “bought” position in the futures market.  By doing so, the 3^rd Defendant would lock up its gain to the premium and at the same time would be free from any risk which may result from the fluctuation in the price in the market before the settlement date.

11.  After the granting of the Mareva injunction, SBP took certain measures to protect its position under the trade financing agreement.  Further, as the 3^rd Defendant was not able to operate its bank accounts, the 3^rd Defendant could not carry on any hedging activity with a view to protect its interest under the futures contracts.  As a result, I am given to understand that the 3^rd Defendant has already suffered loss in the amount of US$8,562,000.  As explained by Mr. Lee in his 3^rd Affirmation, such loss has already crystallized and there is nothing that the 3^rd Defendant can do to reduce the loss.  Such loss has not taken into account the potential liability of the 3^rd Defendant to Kuanheng for the damages caused by the freezing of the capital injected by Kuanheng into the bank accounts of the 3^rd Defendant.  Mr. Hung, counsel for the 2^nd and 3^rd Defendants, informs the court that the latest position is that SBP has on 17 November 2011 by letter terminated all sale contracts.  Further, SBP closes out the Futures Positions in respect of the purchase contracts and is now selling the Copper Cathodes under those contracts to third parties.  In order to achieve the sale, the sale would be at no premium or even negative premium like a force sale, and the loss is yet to be quantified.

12.  Ms. Lam, counsel for the Plaintiff, submits that the 3^rd Defendant has exaggerated the loss, and she also raises some queries about the trading activities and the trade financing arrangement as alleged by Mr. Lee.  In my judgment, it is not appropriate for the court to conduct a mini-trial at this stage to determine whether all the allegations of the 3^rd Defendant are true.  At the very least, the 3^rd Defendant is able to produce the following documentary proof to substantiate its claim:

(i)   bank transfer documents showing the transfer of substantial amount of money from Kuanheng to the 3^rd Defendant;

(ii)   sale contracts and warehouse receipts showing that the 3^rd Defendant had purchased a significant amount of Copper Cathodes;

(iii)   cash ledger statement of the 3^rd Defendant issued by SBP showing significant transactions in the account;

(iv)   commercial invoices supporting the alleged trade financing arrangement between SBP and the 3^rd Defendant;

(v)   margin call email from SBP to the 3^rd Defendants with statement;

(vi)   sale contracts showing that the 3^rd Defendant had sold a significant amount of Copper Cathodes in the futures markets; and

(vii)   letter from SBP dated 17 November 2011 showing the recent development mentioned in the last paragraph.

13.  These documents support the 3^rd Defendant’s allegations that it was involved in the trading of significant amounts of Copper Cathodes in the futures markets and there was some kind of trade financing arrangement between SBP and the 3^rd Defendant.  As there is some degree of truth in the 3^rd Defendant’s allegations, I am satisfied that, for the purpose of the fortification application, the 3^rd Defendant has managed to establish that there is a likelihood of a significant loss arising as a result of the injunction granted.

(ii)     The Plaintiff’s ability to make good the loss

14.  I agree that the Plaintiff is a typical shell company.  The registered office is that of an accountant firm.  It does not have a representative office, and it has no staff except holding out the 1^st Defendant as its Manager.  Apart from some “prepayments, deposits and other receivables”, the Plaintiff has no substantial asset in Hong Kong.  According to the Financial Statements produced by the Plaintiff, there was “accumulated losses” booked in 2010 in the amount of US247,385.945.  In a short span of one year from 2009 to 2010, the net assets of the Plaintiff had been reduced significantly from US$426,229,593 to US$108,498,602.  The quality of the Plaintiff’s assets is also questionable.  In view of these observations, in the case that the Plaintiff is asked to honour the undertaking as to damages, I have serious doubt as to whether the 1^st Plaintiff is able to make good the loss the amount of which can be substantial.

15.  The Plaintiff’s parent company in Korea, TEC, may be in a better financial position.  I am given to understand it is a listed company in the stock market in Korea.   According to the Financial Statements of TEC for the year ending 31 December 2010, it had current assets of around US$1.8 billion and shareholders’ equity of around US$710 million.  Nevertheless, Mr. Hung is able to draw the attention of the court to the qualifications of the Auditors in the Independent Auditors’ Report of TEC, which tends to suggest that TEC may have to undergo certain restructuring exercise.  I also understand from Ms. Lam that TEC is prepared to offer assistance to the Plaintiff by providing the same undertaking as to damages.

16.  No matter what is its financial position, TEC is still a foreign company and the 3^rd Defendant may have difficulty in enforcing the undertaking as to damages in a foreign jurisdiction.  In my judgment, if the Plaintiff is asking the court to protect its interest by freezing the assets of the 3^rd Defendant before the determination of the merits of the claim, it is only fair to ask the Plaintiff to provide the same protection to the 3^rd Defendant in the case that the latter succeeds in its defence and has to enforce the undertaking as to damages. Further, if what Ms. Lam tells the court are true, TEC should have no difficulty in providing the bank guarantee to cover the possible loss to the 3^rd Defendant.  On the other hand, as the 3^rd Defendant has to cease all trading and hedging activities, one should not underestimate the impact of the Mareva injunction on the 3^rd Defendant.  If the 3^rd Defendant succeeds in its defence, it is not an exaggeration to say that the Mareva injunction has already ruined its business.  The 3^rd Defendant therefore has a legitimate concern.  In such circumstances, I accept that the fortification application is a bona fide one and not one made with a view to exert improper pressure on the Plaintiff.  It is only fair and just for the court to exercise the discretion to increase the fortification and I therefore so ordered.

The quantum of the fortification

17.  The 3^rd Defendant asks for fortification in the amount of US$11,549,500 by way of bank guarantee. 

18.  In arriving at the appropriate figure of the fortification, the court may take a broad view about the case.  In Chow Chor Leung v Rafaella Sportswear Inc. [1990] 1 HKLR 449, Bokhary J, as he then was, said the following at p. 453H:-

“ … … … The Court will order fortification where it appears just and proper to protect the defendant by making such an order; and in arriving at the amount to be put up by way of fortification, the court has to take a broad view. Indeed, there have been cases where the Courts have said that if a detailed enquiry were necessary, that may be a very good reason for not ordering fortification. That is not to say that a party seeking fortification does not have to make out a case for fortification and provide the Court will some material for the purpose of selecting a figure. What it does mean is that if there are arguments and counter-arguments on the amount, the Court has to take a broad view without resolving all those argument.”

19.  In adopting the figure of US$11,549,500, the 3^rd Defendant takes into account: (i) the crystallized loss in the sum of US$8,562,000 that the 3^rd Defendant is liable to pay the purchaser, Rongkun Trade Company Limited, under the futures contracts; (ii) the possible claim by Kuanheng for the loss resulting from the freezing of the 3^rd Defendant’s bank accounts; and (iii) the loss resulting from the sale of the Copper Cathodes as stated in the letter from SBP dated 17 November 2011.  Without a full investigation, it is very difficult to say whether the 3^rd Defendant has exaggerated its loss.  But taking into account the magnitude of the transactions involved, I agree that the potential loss can be substantial.

20.  It is clear that the original fortification in the amount of HK$200,000 is wholly inadequate.  Having considered all the circumstances and taken a broad view of the case, I arrived at a figure of US$3,000,000 in the hearing.  In my judgment, this amount would offer adequate but not complete protection to the 3^rd Defendant at this stage, and TEC, the Plaintiff’s parent company, should have no difficulty in providing the security required.

Whether the court should increase the fortification before the hearing of the Inter Parte Application?

21.  I have also considered the question as to whether I should increase the fortification at this stage or to adjourn the application to be heard together with the Inter Parte Application.  When I first agreed to deal with the fortification application on an urgent basis, I was under the impression that the continuation of the Mareva injunction would continue to increase the loss of the 3^rd Defendant.  In the substantive hearing, I was then given to understand that the most of the damages suffered by the 3^rd Defendant have already crystallized and there is nothing that the 3^rd Defendant can do to reduce the loss.  Since the damage has already been done, there is some weight in the argument that the court should just preserve the status quo and leave the fortification application to be heard together with the Inter Parte Application.

22.  Despite such consideration, I am of view that it is only fair and just to increase the fortification at this stage.  Taking into account the nature of business carried on by the 3^rd Defendant and the magnitude of the transactions involved, it is clear that the fortification provided for in the ex parte order is wholly inadequate.  In my judgment, the court should rectify the inadequacy as soon as possible.  In the case that the Mareva injunction was wrongly granted, it is likely that the 3^rd Defendant would suffer considerable loss.  If the Plaintiff is asking the court to protect its interest before the determination of the merits of the claim, it would only be fair to require the Plaintiff to offer the same protection to the 3^rd Defendant to cover the loss in the case that the Mareva injunction was wrongly granted.  Further, the evidence shows that the Plaintiff’s parent company, TEC, should have no difficulty in providing the bank guarantee in the amount of US$3,000,000.  I therefore exercised my discretion to increase the fortification before the substantive hearing of the Inter Parte Application.

23.  In the case of default of the payment of further security, the Mareva injunction would be discharged against the 3^rd Defendant.  The injunction would not be discharged against the other Defendants because the potential losses suffered by these Defendants are different and the merits of the Plaintiff’s claims against these Defendants are also different.

24.  These are the reasons for the decision I made in the hearing on 18 November 2011.

Ms. Catrina Lam & Ms. Sabrina Ho, instructed by Messrs. Holman Fenwick Willan, for the Plaintiff

Mr. Mike Lui, instructed by Messrs. Chan & Young, for the 1^st Defendant

Mr. Andy Hung, instructed by Messrs. Y. T. Szeto & Co., for the 2^nd & 3^rd Defendants

Messrs. Ng, Au Yeung & Partners, absent (attendance excused)