CHINACAST EDUCATION CORPORATION AND OTHERS v. CHAN TZE NGON AND OTHERS

HCA 1062/2012

[2020] HKCFI 3121

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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J U D G M E N T

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A. INTRODUCTION

1.  On 2 January 2014, a sum of HK$3,000,000 was paid into court ("the Fund") as fortification of an undertaking as to damages given by the Plaintiffs ("the Ps") in respect of a Mareva Injunction ("the Injunction") obtained against, inter alia, the 3^rd Defendant ("D3").

2.  The Ps' claims in the action were ultimately dismissed and the Injunction was discharged.

3.  D3's claim for damages consequent on the imposition of the Injunction has also been dismissed.

4.  The Ps are indebted to D3 for a sum of approximately HK$2.2 million, exclusive of interest ("the Indebtedness"), comprising the amount of a judgment obtained by D3 against the Ps, interest and taxed costs, less an amount paid into court by the Ps as security for D3's costs which has already been paid out to D3 in partial satisfaction of the taxed costs.

5.  Before the court are:

5.1  D3's appeal against the order of Master H Au Yeung dated 24 October 2019 dismissing D3's application for payment out of court of so much of the Fund as will satisfy the Indebtedness, and5.2 The Ps' application by summons for payment out of the Fund to Ps.

6.  At the time of the dismissal by the Master of D3's application, D3's appeal against the dismissal of his claim for damages consequent on the imposition of the Injunction was still pending. However it has now been abandoned.  

7.  At the heart of the dispute as to whether or not D3 is entitled to have recourse to the Fund for the satisfaction of the Indebtedness is the question as to whether or not the Fund is the subject of a Quistclose trust such that it can only be used for the purpose of complying with and satisfying the court order, pursuant to which it was paid into court as fortification of the P's undertaking as to damages, or whether it can and should be used for the purposes of satisfying the Indebtedness. 

8.  The monies constituting the Fund were provided by third party funders tothe 1st Plaintiff, namely Chinacast Education Corporation ("CEC").  In order to determine whether or not the Fund is the subject of a Quistclose trust it is necessary to examine the terms on which the monies were advanced and paid into court. 

B.  THE FUNDING OF THE MONIES PAID INTO COURT

9.  In the 13^th Affidavit of Douglas Nelson Woodrum ("Mr Woodrum"), sworn on behalf of the Ps on 16 March 2015, in opposition to D3's application for security for costs, Mr Woodrum explained the funding arrangements as follows:

“30. The Plaintiffs were therefore only left with the option of raising funds through their shareholders and other third party funders. The Plaintiffs have had three rounds of shareholders’ financing in April, May and August 2012 respectively which have raised about US$4.4 million in total. Fir Tree Partners, a substantial shareholder of CEC, provided about one-third of the funding whilst five other shareholders (namely, Columbia Pacific, Lake Union, Ashford Capital, Special Situations, MRMP Management) contributed the remainder in about equal proportions.

31. Of the US$4.4 million raised, around US$2 million was spent as the Group’s operating expenses in China and to fund the Group’s investigation efforts given the wholesale removal and destruction of documents and records belonging to the Group by the Defendants.  Around US$0.5 million was spent on legal fees and other expenses in relation to the preparation of regulatory filings in the US and in dealing with varous regulatory inquiries.  Around US$1.5 million was spent on pursuing the present proceedings in Hong Kong which include the payment into court of HK$3 million to fortify the Plaintiffs’ undertaking as to damages in respect of the Mareva injunction against Mr. Ma and a payment into of court of HK$1 million as security for the 2^nd Defendant’s costs.”

10.  In Mr Woodrum's 21^st Affidavit, sworn on 11 January 2019, in support of an earlier application by the Ps for payment out of the Fund to the Ps, Mr Woodrum stated as follows:

“7. On 19 June 2012, the Plaintiffs obtained an ex parte Mareva injunction against the 1^st to 5^th Defendants (the “Injunction Order”) with the usual undertaking as to damages being provided by the Plaintiffs (the “Plaintiffs’ Undertaking”).

8. By the Order of the Honourable Mr Justice Anthony Chan dated 11 November 2013 (“11 November 2013 Order”), the Injunction Order was continued against the 3^rd Defendant and the Plaintiffs were ordered to fortify the Plaintiffs’ Undertaking with a payment into court or a bank guarantee of HK$3 million.

9. The Plaintiffs were impecunious and had to raise funds through the shareholders of CEC and their related parties to fund the proceedings and fortify the Plaintiffs’ Undertaking.

10. Mr Ned Sherwood (“Mr Sherwood”), Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., and I are and were shareholders of CEC at the materials times.

11. As recorded in an acknowledgement of receipt issued on behalf of CEC on 24 December 2013 (the “Acknowledgement”) (at page 1 of DNW-34):-

(i) Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., Mr Sherwood and I (collectively the “Funders”) agreed to and did advance US$390,000 (the “Funds”) in total to CEC exclusively to fund the fortification which CEC was ordered to provide under the 11 November 2013 Order; and

(ii) CEC agreed and is bound to return the Funds to the Funders upon the Funds being released from the court.

12. On 26 December 2013, I arranged for CEC to wire the Funds to the Plaintiffs’ then solicitors, Messrs Fried Frank Harris Shriver & Jacobson (“Fried Frank”).

13. Fried Frank then made a payment of HK$3 million into court on 2 January 2014 pursuant to the 11 November 2013 Order.

14. The HK$3 million was therefore provided by the Funders for the sole purpose of providing fortification to meet the court’s condition for continuing the Injunction Order and the Funders never transferred property in the HK$3 million to CEC.

15. On 9 November 2016, CEC made the Chapter 11 Filing by way of a voluntary petition in the United States.  Under the earmarking doctrine, a principle in the bankruptcy laws of the United States, the HK$3 million never became party of CEC’s assets.  In this regard, I crave leave to refer to the Affidavit of Mr Michael L. Cook for his opinion on the relevant bankruptcy law of the United States.”

11.  The "acknowledgment of receipt", dated 24 December 2013, to which reference is made in paragraph 11 of Mr Woodrum's 21^st Affidavit ("the Acknowledgment of Receipt") is in the following terms:

“December 24, 2013

Chinacast Education Corporation (the “Company”) hereby acknowledges receipt of US$390,000 from the entities and individuals listed below. The Company agrees to use these funds exclusively to fund a litigation deposit of HK$3,000,000 as ordered by the Hong Kong Court related to the Company’s Hong Kong Action No. 1062 of 2012 against Jim Ma.

In return for providing these funds, the Company hereby agrees with the entities and individuals as follows:

a) to return US$390,000 to the entities and individuals upon the Court Deposit being released to the Company by the Hong Kong Court and

b) to issue US$1 dollar of the Company’s Promissory Notes and 1 warrant for each US$1 provided to the Company for the Hong Kong Court Deposit

Funds provided by:

Fir Tree Value Master Fund, L.P.	US$109,200
Fir Tree Capital Opportunity Master Fund, L.P.	US$20,800
Ned Sherwood	US$130,000
Doug Woodrum	US$130,000

CHINA EDUCATION CORPORATION By (signed) Name: Doug Woodrum Title: Chief Financial Officer”

12.  CEC is now in Chapter 11 bankruptcy in the United States.  In filings made therein, Mr Woodrum, Fir Tree Value Maser Fund, LP and Mr Sherwood are shown as creditors ofCEC, each for USD 130,000, described as "Loan to company for payment of surety for Hong Kong Litigation".

13.  In Mr Woodrum's 22^nd Affidavit, sworn on 1 April 2019, to "clarify" an issue raised in the skeleton submissions of D3 for the earlier application by Ps for payment out of the Fund to Ps, Mr Woodrum stated as follows:

“4.  The HK$3 million which was paid into court on 2 January 2014 to fortify the Plaintiff’s Undertaking did not actually come from the US$4.4 million which was raised in April, May and August 2012 as referred to in paragraph 30 of my 13^th affidavit dated 16 March 2015.

5.  For the sole purpose of fortifying the Plaintiffs’ Undertaking, CEC raised US$390,000, which was in addition to the US$4.4 million, in December 2013 through its shareholders including myself as explained in my 21^st affidavit.

6.  As shown by the relevant bank statements of CEC, I made a deposit of US$130,000 to CEC on 15 January 2014 whilst the other Funders made two deposits of US$130,000 each to CEC on 24 December 2013. There is now produced and shown to me marked “DNW-35” copy of the relevant bank statements of CEC, I could only make the deposit on 15 January 2014 as I was away on vacation during the Christmas period.

7.  My statement as paragraph 31 of my 13^th affidavit that the US$4.4 million included the payment into court of HK$3 million to fortify the Plaintiffs’ Undertaking as to damages in respect of the Injunction Order against the 3^rd Defendant is therefore incorrect and I apologise for the misstatement.

8.  The basis on which the US$390,000 was advanced by the shareholders to CEC was that the same remains funds belonging to the shareholders and are to be returned to the shareholders upon the same being paid out of court.”

C.  THE RELEVANT PRINCIPLES

14.  In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, R (a financier) made a loan to a company on terms that it was to be paid into a special account opened by the company which was to be used solely for the purposes of paying a dividend.  The company went into liquidation without having paid the dividend.  R brought an action against the company claiming the money in the special account on the basis that the loan had been advanced for a specific purpose; it was held by the company in trust for that purpose and, that purpose having failed, the money was subject to a resulting trust in favour of R.  These submissions were upheld by the House of Lords, Lord Wilberforce observing that:

"The mutual intention......and the essence of the bargain was that the sum advanced should not become part of the assets of [the company] but should be used exclusively for payment of a particular class of its creditors, namely those entitled to the dividend.  A necessary consequence from this, by process simply of interpretation, must be that, if for any reason, the dividend could not be paid, the money was to be returned to [R], the word "only" or "exclusively" can have no other meaning or effect."

15.  The decision of the House of Lords in Quistclose was applied by the English Court of Appeal in Common Professional Examination Boardex parteMealing-McCleod [2000] All ER (D) 588, which concerned a loan by a bank to the appellant to enable the appellant to comply with an order requiring her to provide security for the respondent's costs of the appeal.  The loan was advanced expressly on terms that the cash advanced (a) should be used exclusively for the purposes of complying with this order and (b) until used for this purpose, it should be held on trust for the bank.  The appeal was subsequently withdrawn, albeit on terms requiring the respondent to pay the appellant's costs.  Nevertheless the High Court ordered that the sum paid into court by the appellant by way of security be paid out to the respondent in satisfaction of previous orders for costs made in the respondent's favour.  That order was set aside by the Court of Appeal on the basis of a finding that, as between the appellant and the bank which advanced the loan, a Quistclose trust had arisen.  In giving judgment, Sir Christopher Slade said as follows:

“The decision in Quistclose Investments v Rolls Razor Limited[1970] AC 567 confirmed that it is open to a lender and a borrower, if they so agree, to enter into an arrangement under which money is to be lent to the borrower on terms that the borrower is to become a trustee of the money lent, the terms of the trust being that the money (a) is never to become part of the general assets of the borrower, but (b) is to be used exclusively by the borrower for a specified purpose and (c) except to the extent that it is required for that specified purpose, is to be held on a resulting trust for the lender. That was the nature of the trust found to exist in the Quistclose case. The specified purpose was the payment of a dividend. Since in the events that happened there was a failure of the specified purpose because the relevant dividend could not be paid, the money reverted to the lender.

In the present case, one point concerning the effect of the Agreement is common ground. The moneys lent were to be held by the applicant in trust for the Bank at very least until the payment into court was made. The Judge, however, accepted the respondent’s argument that because clause 2(c) of the Agreement expressly provided that the applicant was to hold the money lent on trust for the bank “until you have used it for this [the stated] purpose” this necessarily meant that the trusteeship ceased altogether and for all purposes immediately the £6,000 was paid into court. As he put it:

“… the only trust which arose was that provided for by clause 2(c) of the Loan Agreement which expressly came to an end when the money was paid into court”.

I respectfully disagree with the Judge’s conclusion on this short point of construction, which in my judgment overlooked the significance of the first sentence of clause 2(c) and, as a result, drew a wrong inference from the second sentence. When the first and second sentences are read together, in my judgement they make it clear that the mutual intention of the lender and borrow was that the load was to be used solely for the “business” purpose of making the payment into court (required to enable the applicant to pursue a career at the Bar) and for no other purpose; they make it clear that the money lent was not to form part of the applicant’s general assets. A necessary consequence of this, by a process simply of construction of the Agreement , was that if for any reason the money was not required, or was no longer required, for the purpose of the payment mito court, it was to be returned to the lender, the sole permissible use by the applicant of the money having been exhausted: (see and compare the observations of Lord Wiberforce in the Quistclose case at p. 580A-B; see also Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd[1985] 1 All ER 155 at p. 165 f-g per Peter Gibson J)

If my conclusions thus far are correct the applicant was not only entitled but bound, in her capacity as trustee, to seek to maintain this trust in favour of the Bank as against her other creditors such as the respondent. The court has given no consideration for the receipt of the moneys; it was effectively in the position of a stakeholder. Now that it was notice of the trust in favour of the Bank, it is in my judgment of Danckwerts J in London County Council v Monks [1959] 1 Ch 239 has no relevance to the facts of the present case since the moneys in court do not form part of the debtor’s general assets.

16.  In Dynasty Line Limited (Provisional Liquidators Appointed) v Sukamto Sia and another, unreported, FAMV 38 of 2009, 26 November 2009, the question which Ribeiro PJ (sitting as a single judge of the Court of Final Appeal) was asked to decide was whether money paid into court to fortify an undertaking in damages on the grant of a Mareva Injunction should be retained in court and made available to satisfy outstanding costs orders made in favour of the defendants after the relevant action had been stayed and the injunction discharged or whether the money should be paid out to the plaintiff.  In deciding that the money should be paid out to the plaintiff, Ribeiro PJ said, at §§12 & 13, as follows:

"12........the key question is whether the [sum paid into court] ever became part of the plaintiff's assets.  That is a question of fact.  What happened in the present case was that when Bokhary PJ granted the stay conditional on fortification being supplied, the provisional liquidators approached the known creditors, showing them the draft order and asking whether anyone was willing to contribute to the fortification.  Mr Johnny Tsao volunteered to do so, his personal assistant’s e-mail to the provisional liquidators stating: “I have instructions from my boss, Mr Johnny Tsao to reply that he is prepared to provide the HK$5 million for the Court of Final Appeal.”  The money was then transferred to the provisional liquidators’ client account and used to acquire a cashier order which was then deposited with the Court.

13. In my view, no basis exists for contending that Mr Johnny Tsao transferred property in the HK$5 million sum to the plaintiff.  There is no basis for suggesting that he intended to make a gift or a loan to the company.  On the contrary, the evidence makes it clear that the money was provided for the sole purpose of providing fortification to meet the Court’s condition for continuing the Mareva injunction.  That involved setting up a fund in court to be applied for the specific contingent purpose of compensating the 2^nd defendant in case he should later be shown to have suffered damage as a result of the continuation of the injunction.  There is no necessity in principle for such a fund to derive from the assets of the plaintiff giving the undertaking.  Insolvent companies are often enabled to take action to preserve or recover assets by creditors who are willing to finance such action by accepting personal liability, such as by providing indemnities or bank guarantees, for the costs and expenses involved and without transferring any property to the company in question.  That is what happened in the present case.”

17.  It is perhaps noteworthy that in Dynasty Line, Ribeiro PJ did not analyse the arrangement between the plaintiff and the funder in terms of giving rise to a Quistclose trust, apparently because of his finding that property in the funds in question was never transferred to P, whether by gift or loan (the money being paid into the provisional liquidators' client account and then used to acquire a cashier order which was paid into court) and therefore, presumably, no trust arose.  Notwithstanding this distinction, the outcome in Dynasty Line was substantially the same as it was in the Common Professional Examination Board case - in both cases, the intention of litigant and funder and the essence of the arrangement between them was that the funds in question should not be regarded as part of the assets of the litigant but were to be used exclusively for the payment into court.

18.  The approach of the English Court of Appeal in the Common Professional Examination Board case has not been followed by the Hong Kong Court of Appeal, at least insofar as cases involving applications for the payment out of court of bail money have been concerned.  In YBL v LWC (No 2) [2017] 2 HKLRD 783, Lam V-P (giving the judgment of the Court) stated as follows (at §§24-29):

“24. When considering Article 11, it is necessary to read it together with Article 10 instead of addressing it as an isolated provision.  The overall question is whether the procedures adopted infringed the right to fair trial.  Thus, the European Court of Human Rights reiterated in its judgments that the guarantees in the equivalent of our Article 11 are specific aspects of the right to a fair hearing in Article 10 which have to be taken into account in the assessment of the overall fairness of proceedings.  The court has to look at the proceedings as a whole having regard not only to the rights of the defence but also the interests of the public and the victims that crime is properly prosecuted: Al-Khawaja v UK (2012) 54 EHRR 23 at [118]; Horncastle v UK (2015) 60 EHRR 31 at [131]; see also R v Sellick [2005] 1 WLR 3257 at [50].

25. Some of the rights pertaining to a judgment debtor in a judgment summons and Order 49B application as a person subject to a criminal charge in the context of Articles 10 and 11 have previously been considered in Hong Kong (though without explicit reference to Articles 10 and 11 of HKBoR): the right to be tried in open court, see L v L; C v C, supra, [46(2)]; C v H [2012] 3 HKLRD 351; that the burden of proof is on the judgment creditor to prove beyond reasonable doubt the judgment debtor’s ability to pay, see Bank of India v Murjani CACV 12 of 1991, 1 May 1991; Hua Chiao Commercial Bank v Alpha Plus International Development [2001] 2 HKC 54; C v C, supra, [45]; CYM v YML, supra, [51].  It is not necessary for us to expand on what had already been canvassed in these judgments except to highlight that the fundamental rights under Articles 10 and 11 are involved in these respects.

26. There are also Hong Kong authorities stressing that committal should be a procedure of last resort: see G v S supra, [21]; CYM v YML, supra, [51] and that the sentence must not be excessive: see G v S supra [21]; C v C, supra [51(3)].

27. Further, as a matter of procedural consideration, it has been held that application for committal should not be heard together with other applications and in general an application for variation should be heard before the judgment summons: L v L, supra; C v C, supra; C v H, supra.  In this respect, though Ma JA suggested in C v C, supra [47] and [48] that there could be exception for an application for variation of a maintenance pending suit order to be heard at the same time of the judgment summons, we note apparently no argument on the implications of Article 11(2)(c) and (f) had been advanced in that case.  Having now taken those provisions into account, we respectfully come to the clear conclusion that a variation application should not be heard together with the judgment summons.  Instead, a variation application should be heard first.  Thereafter, if it is necessary to proceed with the judgment summons, the court should direct a statement to be served and filed by the judgment creditor setting out the charge and the case the judgment debtor has to meet before restoring a judgment summons for hearing in open court.  We shall elaborate on the requirement of Article 11(2)(c) below.

28. We shall examine later whether in the present case the court below has exercised its jurisdiction in accordance with these principles.  However, before doing so, we need to discuss at greater length the other aspects of the rights under Articles 10 and 11 in the context of judgment summons.  We would also need to consider whether Rule 87 can be Articles 10 and 11 compliant and if not, whether the procedure can be salvaged by remedial interpretation.

C.  English developments

29. Mubarak v Mubarak, supra, was decided shortly after the enactment of the Human Rights Act in the United Kingdom[3].  In that case, the English Court of Appeal accepted submissions from counsel for the husband that the minimum rights in terms of presumption of innocence, right to precise articulation of the charge[4], right to adequate time to prepare defence, right to examine evidence were infringed."

19.  It is noteworthy that the decision of Ribeiro PJ in Dynasty Line was not cited in either the judgment of Ma CJHC (as he then was) in Registrar District Court v Li Kai or by Lam V-P in YBL v LWC (No 2).

20.  Mr Jonathan Wong, counsel for Ps, contended that the cases of Registrar District Court v Li Kai and YBL v LWC (No 2) are distinguishable from such cases as Common Professional Examination Board and Dynasty Line, as well as from the present case by reason of the fact that the former concerned bail money and compensation orders under s 73(3) of the Criminal Procedure Ordinance (Cap 221) and, as such, required special consideration. I do not agree. It seems to me that, for the purposes of considering the appropriate disposal of monies paid into court, there is no material difference in principal between monies paid into court as bail money and moneys paid into court for other purposes (such as, in this case, monies paid into court as fortification of an undertaking as to damages).

21.  Mr Wong then argued that, whilst the court may have power pursuant to Order 49 t 9 (1) to order whatever sum standing to the credit of a judgment debtor in court to be utilised for the satisfaction of any judgment sum against him (as held to be the case by the Court of Appeal in YBL v LWC, it had no such power in circumstances where money has been paid into court for the credit of an action rather than to the credit of one party or another. It seems to me that this argument is besides the point. The fact is that, once the purpose of the payment in has been spent (in the case of bail money, by making an attendance at court for which the bail money had stood as security or in the case of a payment into court by way of fortification of an undertaking, by the dismissal of a claim for damages for which the undertaking was given), the money in court does prima facie stand to the credit of the party making the payment.

22.  In all the circumstances, I consider that the principles set out the decisions of the Court of Appeal in Registrar District Court v Li Kai and YBL v LWC (No 2) are of general application in relation to the disposal of monies in court.  This is notwithstanding that the central premise in the judgment of Ma CJHC (as he then was) in Registrar District Court v Li Kai (which was adopted by Lam V-P in YBL v LWC (No 2), to the effect that the court does not recognize anyone other than the party himself as having paid the money into court, seems to run counter to the observations of Ribeiro PJ in Dynasty Line. However, in my view, the Common Professional Examination Board case and Dynasty Line are distinguishable and are best treated as being cases decided on their own special facts:

22.1   in the Common Professional Examination Board case, by virtue of the fact that there, there was an express trust of the money, and

22.2   in Dynasty Line, by virtue of the fact that there, the monies were paid direct into court from the client account of the provisional liquidators and hence never formed part of the company's assets.

D.  THE FACTS IN THE PRESENT CASE - IS THERE A QUISTCLOSE TRUST?

23.  The first point to make in respect of the Acknowledgment of Receipt is that it is signed on behalf of theCEC, not on behalf of the third party funders. There is no evidence as to how it came into being or as to whether or not its execution by CEC was a term or condition of the funding arrangements. On the contrary, the 13^th Affidavit of Mr Woodrum, in which the question of funding was raised for the first time, did not even mention the Acknowledgment of Receipt; it was inconsistent with Mr Woodrum's 21^st Affidavit and had to be corrected by Mr Woodrum's 22^nd Affidavit.

24.  Secondly, whilst there is a provision in the Acknowledgment of Receipt restricting the use of the funds, unlike the facts of the Common Professional Examination Board case, there is no term to the effect that the funds in question were to be held on trust.

25.  Thirdly, whilst the Acknowledgment of Receipt records a purported agreement on the part of the Company "to return US$390,000 to the entities and individuals upon the Court Deposit being released to the Company by the Hong Kong Court", that assumes payment out of the Fund to CEC and addresses the question as to CEC's obligation thereafter.  It does not address the question as to how the funds should be dealt with whilst still in court, after the purpose of the payment into court has been spent.

26.  Fourthly, the Acknowledgment of Receipt records an agreement on the part of CEC to issue promissory notes in respect of the third party funding. There is no evidence that these were ever issued.

27.  All these factors point to the funds advanced by the third party funders as loans to the Company. The funds were mixed with other funds in the Company's bank account. It cannot therefore be said that the Company held the funds on trust for the funders or that the funds remained the property of the funders. Whilst the Acknowledgment of Receipt specified that the funds should be exclusively used for the purposes of the payment into court and required the return of the total sum of US$390,000 to the funders after payment out of court of the Fund, this in my judgment is not sufficient to give rise to a Quistclose trust.

28.  Even if I had found that a Quistclose trust had arisen in this case I would have followed the reasoning of Lam V-P in YBL v LWC (No 2) and determined that the Fund is money standing to the credit of the 3^rd Defendant and should be paid out to the 3^rd Defendant to the extent of the Indebtedness. 

CONCLUSION

29.  I will therefore allow D3's appeal from the Master's Order to the extent of ordering that there be payment out of court to D3 of so much of the Fund as will extinguish the Indebtedness (any balance being paid out to the Ps).  As for the P's summons, I will order that any balance left in court after payment out to D3 of the Indebtedness be paid to the Ps.

30.  I will make costs orders nisi as follows:

30.1  the costs order made by Master H. Au Yeung dated 24 October 2019 be undisturbed but the costs of D3's appeal be D3's in any event;

30.2  the costs of Ps' summons be D3's in any event.

31.  I will leave the parties to prepare draft orders reflecting these orders for the court's approval.

Mr Jonathan Wong, instructed by Norton Rose Fulbright Hong Kong, for the 1^st, 2^nd, 3^rd, 4^th and 5^th Plaintiffs

Mr Nicholas OH, instructed by Lee & Chow, for the 3^rd Defendant

HCA 1062/2012

[2019] HKCFI 1711

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

______________

______________

______________

DECISION

______________

Relevant procedural background

1.  On 19 June 2012, the plaintiffs obtained an ex parteMareva injunction (“Injunction”) against the 1^st to 4^th defendants[1]upon its cross-undertaking that if the court later found that the Injunction has caused loss to the defendants or any other party and decided that they should be compensated for that loss, the plaintiffs will comply with any order the court may make (“Damages Undertaking”).

2.  On 11 November 2013, the Injunction was continued against the 3^rddefendant until the conclusion of trial or further order save that the 3^rd defendant was allowed to withdraw HK$2 million for business expenditure and the plaintiffs were ordered to fortify the Damages Undertaking, which they did by making a payment of HK$3 million into court on 2 January 2014.

3.  On 31 July 2017, after trial, Deputy High Court Judge Kent Yee handed down judgment (“Judgment”) which, inter alia:

(1)   dismissed all the plaintiffs’ claims against the 3^rd defendant;

(2)   discharged the Injunction forthwith;

(3)   entered judgment for the 3^rd defendant on his counterclaim for HK$495,000 less RMB 25,000 for outstanding remuneration; and

(4)   dismissed the 3^rd defendant’s counterclaim for damages for his alleged loss and damage caused by the Injunction.

4.  On 15 September 2017, the plaintiffs applied to renew the Injunction against the 3^rd Defendant pending their intended appeal against the Judgment. On 19 September 2017, DHCJ Kent Yee dismissed such application but, to maintain the status quo, granted an interim renewal of the Injunction until the determination of the plaintiffs’ renewed application to the Court of Appeal which was to be made within 21 days, failing which the renewed Injunction would cease to have effect.

5.  On 27 September 2017, DHCJ Yee further dealt with the parties’ following applications as follows:

(1)   the plaintiffs’ application by the summons filed on 7 August 2017 for payment out of the HK$3 million paid into court as fortification of the Damages Undertaking, which was dismissed, presumably upon the 3^rd defendant’s oral application for an inquiry as to damages as a result of the Injunction against him (“Damages Application”);

(2)   the plaintiffs’ oral application for the cessation of the interim renewal of the Injunction against the 3^rd defendant upon the plaintiffs’ abandonment of their intended appeal against the Judgment, which was granted whereupon the Injunction was discharged; and

(3)   the 3^rddefendant’s oral Damages Application, in respect of which DHCJ Yee gave directions for the filing and service by the 3^rd defendant and the plaintiffs of their respective evidence in support of / opposition to the Damages Application and for a pre-trial review (“PTR”) of the Damages Application before a master in chambers on a date to be fixed.

6.  The PTR of the Damages Application came before Master M Wong (“Master”) on 8 February2018 and 23 April 2018.  Insofar as it is material, at the latter PTR, the Master ordered, inter alia, that the Damages Application be heard on a date to be fixed and that the 3^rd defendant’s 10^th affirmation dated 19 October 2017, the 20^thaffidavit of Douglas Nelson Woodrum dated 21 November 2017 and the 3^rddefendant’s 11^thaffirmation dated 11 December 2017 do stand as the parties’ evidence.

7.  When the Injunction was first obtained against the 3^rd Defendant, the only valuable assets that he had were credit balances in various bank and securities accounts owned and controlled by him amounting to just over HK$15 million, part of which came from the proceeds of sale of his shares in the 1^st plaintiff (US$990,000) in 2009 and 2010 and of his property in Hong Kong at Kornhill (about HK$5 million) in September 2011.

8.  Pursuant to the exceptions of the Injunction as initially granted and as continued, as at 27 September 2017 (i.e. the date on which the Injunction finally ceased to have effect against the 3^rd defendant), the 3^rd defendant had withdrawn sums totalling HK$7.65 million from his said accounts for his personal, business and legal expenses.

9.  The 3^rd defendant’s claim for damages under the Damages Undertaking before the Master was premised upon his having suffered loss in sums totalling HK$7,290,000 in consequence of his having been prevented by the Injunction him from (1) purchasing a property in Hong Kong, in particular, Flat 1404, Block B, Kornhill or Flat 808, Block H, Kornhill which he had viewed on 16 September 2012 in the hope that the Injunction would be discharged at the hearing on 27 November 2012[2]; (2) buying a property in Beijing where he was living and where he was actively looking for a property in the price range of RMB 5 million to RMB 6 million; and/or (3) obtaining a reasonable return at say 8% per annum on the sums restrained.  

10.  The hearing of the Damages Application took place on 16 August 2018 in open court before the Master who dismissed the same with costs to the plaintiffs (“Master’s Order”) by a decision handed down on 12 October 2018.

11.  More particularly, the Master held as follows:

(1)   At [38]: An undertaking in damages is given to the court, not to the party enjoined.  The party enjoined therefore cannot ask the court to enforce the undertaking as of right.  The court is not bound to enforce the undertaking save “under special circumstances” as suggested by the 3^rd defendant.  Rather, the court has absolute and unfettered discretion to decide whether to enforce the undertaking or not.

(2)   At [34] and [40]: Hence, on an application to enforce an undertaking as to damages, the court has to consider 2 separate questions:

(a) First, should the court, as a matter of discretion, order that the undertaking be enforced?

(b) Second, if so, what loss has the defendant suffered in terms of money, was it caused by the injunction and was it too remote?

(3)   At [41]: On the first question, although the court is likely to enforce the undertaking when the injunction should not have been granted, an inquiry as to damages should not be ordered unless there is at least some reasonably arguable case that the injunction has caused the complaining party some loss or damage for which compensation ought to be paid.

(4)   At [42]: The 3^rd defendant has not established a reasonably arguable case for any of the losses allegedly suffered by him.

(5)   At [64]: In view of the lack of cogency of the 3^rd defendant’s evidence on his alleged loss, the court should not exercise its discretion to enforce the Damages Undertaking by ordering an inquiry as to damages.

(6)   At [65]-[66]: Even if there should be inquiry as to damages, for the same reasons, the 3^rd defendant’s loss would be assessed at nil.

12.  By a notice of appeal dated 25 October 2018, the3^rd defendant appealed against the Master’s Order (“CFI Appeal”) to a judge of the Court of First Instance (“CFI”) in chambers under Order 58, rule 1 of the Rules of the High Court (Cap 4A) (“RHC”) and prayed that the Damage Application be allowed, with assessment of the plaintiffs’ liability under the Damages Undertaking at HK$3,160,000 or HK$2,890,000[3].

13.  The CFI Appeal was heard in chambers on 5 March 2019 by Deputy High Court Judge Sakhrani who dismissed the same with costs to the plaintiffs (“Judge’s Order”) at the end of the hearing on jurisdictional ground and handed down written Reasons for Decision on 27 March 2019[4].

14.  More particularly, DHCJ Sakhrani agreed with the plaintiffs that the proceedings before the Master on 16 August 2018 was an assessment of the damages allegedly suffered by the 3^rd defendant as a result of the Injunction pursuant to the Damages Undertaking and, as such, comes within the expression “or otherwise”[5] in Order 58, rule 2(b)[6] of the RHC so that an appeal should lie to the Court of Appeal (“CA”) and not to a judge of the CFI in chambers under Order 58, rule 1.

15.  Before DHCJ Sakhrani handed down his Reasons for Decision on 27 March 2019, the 3^rd defendant had, on 19 March 2019, filed and served a summons applying for leave to appeal to the CA against the Judge’s dismissal of the CFI Appeal (“Leave to Appeal Application”) “out of an abundance of caution”.

16.  Then, on 1 April 2019, the 3^rd defendant filed and served a notice of appeal under CACV 162/2019 to appeal against the Judge’s Order to the CA (“CA Appeal”).

17.  To complete the procedural history, in the meantime, on 15 October 2018, the plaintiffs again applied for payment out of the HK$3 million paid into court by them as fortification of the Damages Undertaking (“Payment Out Application”) on the basis that the purpose of the payment has become spent upon the dismissal of Damages Application. On the other hand, on 18 October 2018, the 3^rd defendant also made a cross-application for payment out of the said HK$3 million or part thereof to him on the account of, inter alia, the unpaid judgment sum (HK$495,000 less RMB 25,000), a number of taxed costs orders and the untaxed costs of the entire action in his favour (“Cross Payment Out Application”).  

18.  On 2 April 2019, the Payment Out Application and the Cross Payment Out Application came before Master Kot. In opposition to the Payment Out Application, the 3^rd defendant relied upon the pending CA Appeal as one of the grounds for resisting payment out to the plaintiffs. According to the 3^rd defendant, counsel for the plaintiffs then argued that the 3^rd defendant’s opposition to the Payment Out Application was tantamount to a stay of execution for which the 3^rd defendant had not applied. In such circumstances, the 3^rd defendant undertook to apply for stay of execution of the Judge’s Order within 14 days and the plaintiffs agreed to an adjournment upon that undertaking. The master therefore adjourned both applications sine die with liberty to restore upon an undertaking by the 3^rd defendant that “he will take out the application for stay of proceedings from the Court of Appeal within 14 days”. I note that the undertaking as described by the 3^rd defendant is not the same in terms as that recorded in the preamble of the sealed order dated 2 April 2019.  However, nothing material turns on such difference.

Application before the court

19.  Against the aforesaid procedural background, before the court now is the 3^rd defendant’s application by summons dated 16 April 2019 for

(1)   stay of execution of the Judge’s Order and the Master’s Order (“Stay Application”); and

(2)   leave to withdraw the Leave to Appeal Application (“Withdrawal Application”).

20.  The plaintiffs do not oppose the Withdrawal Application provided that they be granted costs.

Stay Application misconceived

21.  The Stay Applicaton can be disposed of very shortly.  Although not spelled out in the summons, it appears from the supporting 6^th affirmation of Fred Lee (solicitor for the 3^rd defendant) dated 16 April 2019 that the stay of execution sought by the 3^rd defendant is pending the CA Appeal.

22.  However, the Master’s Order dismissed the Damages Application by the 3^rd defendant.  The Judge’s Order dismissed the CFI Appeal (i.e. the 3^rd defendant’s appeal against the Master’s Order).  Neither of these decisions entails any order (save as to costs) in respect of which the plaintiffs may have to take any enforcement or execution step in order to enjoy the fruits of their success thereunder.  There is nothing to be stayed.  See Joseph Ghossoub v Team V&R Holdings Hong Kong Ltd, HCMP 1074/2015, unreported, 28 October 2016, per Deputy High Court Judge Le Pichon at [24].

23.  The Stay Application is simply misconceived.  The misconception lies in the erroneous view that the 3^rd defendant’s opposition to the Payment Out Application on the ground of the pendency of the CA Appeal is somehow tantamount to a stay of execution pending the CA Appeal.

24.  Wear Me Apparel LLC v Lam Na, HCA 149/2009, unreported, 25 April 2013, cited by the 3^rd defendant, does not on a close look support such view. In that case, the plaintiff did obtain final judgment against the defendant after trial for repayment of a loan in the sum of US$800,000.  The defendant appealed against the judgment to the CA and applied for a stay of execution pending appeal. A stay was granted on condition that the defendant paid into court the judgment sum.  In compliance with such condition, the defendant paid into court US$800,000. The CA dismissed the defendant’s appeal. The plaintiff then applied for payment out of the said sum of US$800,000. The defendant, who enjoyed the right to appeal “as of right” to the Court of Final Appeal (“CFA”) pursuant to the since repealed s 22(1)(a) of the Hong Kong Court of Final Appeal Ordinance (Cap 484) and who had given notice to her intention to appeal to the CFA, had filed and served an affirmation asking for the adjournment of the plaintiff’s application for payment out sine die pending conclusion of her forthcoming application for leave to appeal to the CFA.

25.  Au-Yeung J analysed that an adjournment, if granted, would effectively stay the execution of the judgment for the plaintiff. Section 26(1) of the Hong Kong Court of Final Appeal Ordinance is the only source of power to grant a stay of execution pending an appeal to the CFA. It vests such power in the CA and the CFA. The CFI cannot somehow confer on itself the power to effectively stay execution of a judgment by acceding to a request by the losing party to adjourn the successful party’s application for payment out of the judgment sum paid into court by the losing party to secure an earlier stay of execution on the ground that there is a pending further appeal to the CFA.

26.  Wear Me Apparel LLC v Lam Na is clearly distinguishable. In that case, there was indeed a monetary judgment in the plaintiff’s favour.  The monies in court the payment out of which was sought to be delayed by the defendant until the conclusion of her pending application for leave to appeal to the CFA was in the first place paid into court by the defendant to secure an earlier stay of execution of the plaintiff’s judgment while the defendant appealed against the same to the CA. The plaintiff applied for payment out of such monies in court in enforcement or execution of its judgment. In those circumstances, granting the adjournment sought by the defendant would of course be tantamount to granting a further stay of execution of the judgment for the plaintiff.

27.  On proper analysis, the present case involves the reverse situation.

(1)   First, the plaintiffs have not obtained any judgment, monetary or otherwise[7], against the 3^rd defendant at all.

(2)   Therefore, logically, the 3^rd defendant’s opposition to the Payment Out Application can have nothing to do with the enforcement/execution of any judgment for the plaintiffs.

(3)   Second, the HK$3 million was into court by the plaintiffsthemselves. The purpose of such payment into court is to fortify the Damages Undertaking, i.e. to secure any order that the court may subsequently make that the plaintiffs should compensate the 3^rd defendant for the loss caused to him by the Injunction.

(4)   In seeking an adjournment of the Payment Out Application until the conclusion of the CA Appeal, the 3^rd defendant is in fact asking the court to continue to keep the HK$3 million in court as security for the judgment that the 3^rd defendanthimself hopes to eventually obtain under the Damages Undertaking upon a successful CA Appeal.

28.  So analysed, instead of making the misconceived Stay Application, the parties should have argued the 3^rd defendant’s application for an adjournment until the conclusion of the CA Appeal at the hearing of the Payment Out Application on 2 April 2019.

29.  It therefore remains for the parties to restore the hearing of the Payment Out Application before a master.

30.  In this regard, under Order 22A, rule 1(1) of the RHC:

“…, any money paid into court in an action (whether or not in accordance with Order 22) may not be paid out except in pursuance of an order of the Court which may be made at any time before, at or after the trial or hearing of the action.”

31.  As stated by Au-Yeung J at [9] in Wear Me Apparel LLC v Lam Na, supra, this rule gives wide powers to the court not to order a payment out, which powers are of course to be exercised judiciously, taking into account only matters that can be legitimately considered.  

32.  In the instant case, based on the analysis set out in paragraph 27(3) and (4) above, one would have thought a material consideration is the purpose intended to be served by the payment into court by the plaintiffs.  

33.  And one of the questions raised by the 3^rd defendant’s application for an adjournment grounded upon his pending CA Appeal appears to me to be whether the need for fortification of the Damages Undertaking became spent once the Damages Application by the 3^rd defendant pursuant to the Damages Undertaking was rejected by the Master or once the CFI Appeal was dismissed by the Judge or remains live because of the 3^rd defendant’s pending CA Appeal against the Judge’s Order. It is not appropriate for me to comment any further.

Disposition

34.  For the above reasons, I dismiss the Stay Application with costs to the plaintiffs. In awarding costs to the plaintiffs, I have not overlooked the 3^rd defendant’s statement that it was counsel for the plaintiffs who first raised before Master Kot at the hearing on 2 April 2019 that the 3^rd defendant’s opposition to the Payment Out Application was tantamount to a stay of execution which the 3^rd defendant should have applied for first. However, those acting for the 3^rd defendant did not have to go along with such erroneous suggestion. They should have exercised independent professional judgment and realised the fallacy of such contention by the plaintiffs. Indeed, the plaintiffs’ solicitors have by their 2^nd letter dated 18 April 2019 to the 3^rd defendant’s solicitors pointed out the absurdity of the Stay Application.

35.  The Withdrawal Application is allowed with costs to the plaintiffs.

36.  The plaintiffs have filed and served a statement of costs in the total amount of HK$60,956 for summary assessment under Order 62, rule 9A pursuant to paragraph 7 of the directions given by Au-Yeung J by letter dated 23 May 2019. I now summarily assess the plaintiffs’ costs under the preceding 2 paragraphs at HK$50,000, to be paid within 14 days by the 3^rd defendant.

HCA 1062/2012

[2019] HKCFI 814

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

______________

______________

____________________________

REASONS FOR DECISION

____________________________

Introduction

1.  By a notice of appeal to a judge in chambers under Order 58, rule 1 of the Rules of the High Court (“RHC”) dated 25 October 2018 (“the notice of appeal”) the3^rd defendant gave notice that he intended to appeal against the decision of Master M Wong (“the master”) given on 12 October 2018.

2.  The hearing of the appeal came before me on 5 March 2019.

The jurisdiction point

3.  The plaintiffs raised a jurisdiction point.  It was submitted by Mr Jonathan Wong, for the plaintiffs, that the nature of the proceedings before the master was an assessment of damages and hence, an appeal should lie to the Court of Appeal under Order 58, rule 2(b) RHC and not to a judge of the Court of First Instance in chambers under Order 58, rule 1.

4.  After hearing the submissions of counsel on the question of jurisdiction, I dismissed the 3^rddefendant’s appeal against the decision of the master with costs to the plaintiffs.  I indicated that written reasons would be given later.  These are my reasons.

The relevant background

5.  The plaintiffs obtained a Mareva injunction against various defendants, including the 3^rddefendant, by the order of Tong J on 19 June 2012 which was granted ex parte.  In obtaining the injunction, the plaintiffsgave the usual cross-undertaking in damages as contained in Schedule 2 to the order of Tong J (“undertaking in damages”).  This provided that:

“ If the court later finds that this Order has caused loss to the Defendants or any other party and decides that the Defendant or that other party should be compensated for that loss, the Plaintiffs will comply with any order the court may make.”

6.  The application by the plaintiffs for the continuation of the Mareva injunction against the 3^rddefendant came before Anthony Chan J for hearing on 29 and 30 October 2013. 

7.  By his decision given on 11 November 2013 Anthony Chan J continued the Mareva injunction against the 3^rddefendant until the conclusion of trial or further order with the variations as set out in his order dated 11 November 2013.  Anthony Chan J also ordered the plaintiffs to fortify their undertaking in damages within 14 days from the date of the order with either a payment into court or a bank guarantee of HK$3 million.

8.  The plaintiffs duly complied with the order to fortify their undertaking in damages by making a payment into court of the sum of HK$3 million.

9.  After a lengthy trial before Deputy High Court Judge Kent Yee (“the judge”) the plaintiffs’ claims against D3 were dismissed for the reasons given by the judge in his judgment dated 31 July 2017.  The judgealso ordered, inter alia, that the Mareva injunction be discharged forthwith. 

10.  The judge also entered judgment for the 3^rd defendant on his counterclaim for his outstanding remuneration but dismissed the 3^rd defendant’s counterclaim for damages.  I shall return to this later.

11.  The plaintiffs subsequently applied by a summons filed on 7 August 2017 for payment out of the HK$3 million which had been paid into court as fortification of the undertaking in damages.

12.  By a summons filed on 7 September 2017 the plaintiffs applied for a renewal of the Mareva injunction pending the determination of their appeal against the judgment of the judge dated 31 July 2017. 

13.  The hearing of the plaintiffs’ summons for the renewal of the injunction came before the judge on 15 September 2017.

14.  For the reasons given by him in his decision dated 19 September 2017, the judge ordered that the injunction be renewed until the determination of the plaintiffs’ renewed application to the Court of Appeal to be made within 21 days from the date of his decision.  The judge also said that if the plaintiffs did not make the renewed application to the Court of Appeal within 21 days, the renewal of the injunction granted by him would cease to have effect.

15.  The plaintiffs’ application by the summons filed on 7 August 2017 for payment out of the HK$3 million paid into court as fortification of the undertaking in damages came before the judge on 27 September 2017 (“the 27 September 2017 hearing”).

16.  At the 27 September 2017 hearing there were also the following applications before the judge:

   (1)   an oral application on behalf of the plaintiffs for the cessation of the effect of the interim renewal of the injunction against the 3^rd defendant; and

   (2)   an oral application on behalf of the 3^rddefendant for an inquiry as to damages as a result of the injunction against him.

17.  After hearing solicitors for the plaintiffs and counsel for the 3^rddefendant, the judge made the order dated 27 September 2017. 

18.  On the plaintiffs’ application for cessation of the effect of the interim renewal of the injunction against the 3^rddefendant, the judge ordered that the interim renewal of the injunction against the 3^rd defendantgranted by him on 19 September 2017 shall cease to have effect forthwith with an order for costs in favour of the 3^rddefendant.

19.  On the 3^rd defendant’s application for an inquiry as to damagesas a result of the injunction against the 3^rd defendant, the judge ordered that:  

“ 3. The 3^rd Defendant do within 28 days from today file and serve his evidence in support of his claim for damages as a result of the injunction order by Mr. Justice Tong dated 19 June 2012;

4. The Plaintiffs do within 28 days thereafter file and serve their evidence in opposition to the 3^rdDefendant’s application;

5. The 3^rdDefendant do file and serve his evidence in reply, if any, within 21 days thereafter;

6. There be no further affirmation without leave of the court;

7. The 3^rd Defendant’s application for enquiry as to damages be heard before a Master in chambers on a date to be fixed not before 8 January 2018 for a pre-trial review with one hour reserved;

8. The costs of the hearing of the 3^rd Defendant’s application be in the cause of the application;”

20.  At the 27 September 2017 hearing the judge also dismissed the plaintiffs’ summons for paymentout of the HK$3 million paid into court as fortification of the undertaking in damages with costs to the 3^rddefendant.

21.  The pre-trial review first came before the master on 8 February2018.  It was adjourned to enable the 3^rd defendant to take out applications for expert directions and for cross-examination of the plaintiffs.

22.  By a summons filed on 22 February 2018 the 3^rddefendant took out an application to be heard before the master at the adjourned pre-trial review for leave to adduce expert evidence on quantum of a registered professional surveyor in relation to the open market value of two properties. 

23.  The adjourned pre-trial review came before the master on 23 April 2018. 

24.  At the adjourned pre-trial review on 23 April 2018 the summons filed on 22 February 2018 was amended for the 3^rd defendant to add another expert in the summons namely, an expert on financial services and investments.

25.  The plaintiffs’ and the 3^rd defendant were able to agree that there was no need to adduce the expert evidence of the registered professional surveyor as they could agree on the values of the properties in question. 

26.  As regards the 3^rddefendant’s application for leave to add another expert on financial services and investments, the master dismissed that application.

27.  At the adjourned pre-trial review on 23 April 2018, the master ordered, inter alia, that: 

“ 7. The 3^rd Defendant’s application for an inquiry as to damages (‘the Application’) be heard on a date to be fixed with half a day reserved in consultation with counsel’s diaries;

8. The affidavit evidence filed herein being the 10^th Affirmation of the 3^rd Defendant dated 19 October 2017, the 20^th Affidavit of Douglas Nelson Woodrum dated 21 November 2017 and the 11^th Affirmation of the 3^rd Defendant dated 11 December 2017 do stand as the parties’ evidence;

9. Costs of the pre-trial review be in the cause of the Application.”

28.  The inquiry as to damages took place at a trial in open court before the master on 16 August 2018.  The master handed down his decision on 12 October 2018 (“the master’s decision”).

29.  The notice of appeal was issued on 25 October 2018.

The submissions

30.  Mr Wong submitted that the nature of the hearing before the master was an assessment of damages pursuant to the undertaking in damages.  He relied on Order 58, rule 2(b) RHC and submitted that an appeal from the master’s decision shall lie to the Court of Appeal under Order 58, rule 2(b) and not to a judge in chambers under Order 58, rule 1.

31.  Mr Nicholas Cooney SC, with Mr Nicholas Oh, for the 3^rddefendant, submitted that the hearing before the master was not an assessment of damages. He submitted that what the 3^rddefendant was seeking before the master was compensation and that it was not correct to label the application as one for damages.  It was also submitted that the appeal was against the exercise of the master’s discretion and that it was proper to appeal to a judge in chambers under Order 58, rule 1.

Discussion

32.  It is clear that the undertaking in damages is given to the courtand not to the party enjoined.  Where the injunction is discharged at trial, the party enjoined may apply to the court for the undertaking to be enforced.

33.  As stated at para 29/1/25 of Hong Kong Civil Procedure 2019 Vol 1:

“ An undertaking in damages does not found an independent causeof action to recover losses sustained as a result of the injunction;the defendant’s only remedy is to enforce the cross-undertaking in the proceedings in which the cross-undertaking was given (Wingames Investment Ltd v. Mascot Land Ltd [2013] 1 H.K.L.R.D. 1186; [2013] 5 HKC 45). A cross-undertaking as to damages is given to the court, not to any opposite party, and no action, set-off or counterclaim can be founded upon it (YanfullInvestments Ltd v Datak Ooi Kee Liang (2017) 20 H.K.C.F.A.R 493, applying Wingames Investment Ltd, ibid.)”

34.  As I have said, at the trial before him the judge entered judgment for the 3^rd defendant on his counterclaim for his remuneration but dismissed his counterclaim for damages.  The judge said at para 249 of his judgment:

“ I also enter judgement in favour of [the 3^rddefendant] in respect of his counterclaim regarding his outstanding remuneration. I cannot allow his claim for damages.”

35.  The judge disallowed the 3^rd defendant’s claim for damages which he dealt with at para 7 of his judgment:

“ Moreover, in his counterclaim, [the 3^rd defendant] claims damages for his loss and damage arising from a Mareva injunction granted by A. Chan J against him upon the application of the Group (‘the Mareva Injunction’). This is an unusual claim, and [the 3^rd defendant] has not adduced any evidence to support his alleged loss and damage.In any event, if the Mareva Injunction is found to have been wrongly granted, the Group pursuant to their undertaking should compensate [the 3^rd defendant] for his loss and damage and this should not be canvassed in the trial.”

36.  The judge was clearly right to dismiss the 3^rddefendant’s counterclaim for damages as a result of the Mareva injunction.  This was not a matter for the trial before the judge of the issues between the plaintiffs and the 3^rddefendant.  This was a matter of enforcement of the undertaking in damages.

37.  There is no merit in the submission that the 3^rd defendant’s claim for compensation was not a claim for damages.

38.  Mr Cooney relied on what McCombe LJ said in Abbey Forwarding Ltd v Hone (No 3) [2015] Ch 309 at 333 at para 63:

“ … I reach the conclusion that the law as to the recoverability of loss suffered by reason of a cross-undertaking is as stated byLord Diplock in his dictum in the Hoffmann–La Roche case, but with this caveat. Logical and sensible adjustments may well be required, simply because the court is not awarding damages for breach of contract. It is compensating for loss for which the defendant ‘should be compensated’ (to apply the words of the undertaking). Labels such as ‘common law damages’ and ‘equitable compensation’ are not, to my mind, useful. The court is compensating for loss caused by the injunction which was wrongly granted. It will usually do so applying the useful rules as to remoteness derived from the law of contract, but because there is in truth no contract there has to be room for exceptions.”

39.  I do not see how the observations of McCombe LJ as set out above assists the 3^rddefendant.

40.  The 3^rd defendant’s claim was clearly for damages for the loss he suffered as a result of the Mareva injunction. 

41.  I would observe that in his counterclaim the 3^rddefendant’s claim for the loss he alleged to have suffered as a result of the Mareva injunction is pleaded at para 126 of his amended defence and counterclaim as follows:  

“ … by reason of the matters set out above and the hasty and ill-considered application for an injunction and obtaining of the injunction, the Plaintiffs have caused the 3^rd Defendant loss, including as follows: …”

Prayer (1) of the counterclaim claims damages. 

42.  At the 27 September 2017 hearing before the judge and also at the first pre-trial review on 8 February 2018 and the adjourned pre-trial review before the master on 23 April 2018, the 3^rddefendant was represented by Mr Oh, who also appeared before me as Mr Cooney’s junior.

43.  I would observe that Mr Oh, in his written note dated 19 April 2018 for the adjourned pre-trial review before the master on 23 April 2018, made it plain (at paras 1 and 2) that the hearing of the adjourned pre-trial review was for the inquiry as to damages arising from the Mareva injunction and that:  

“ [the 3^rd defendant’s] claim for damages are under two heads:

(a) Lost investment opportunity in Hong Kong in two properties that the 3^rd defendant had viewed and intended to purchase …;

(b)      Other lost investment opportunities, in particular, investing into a ‘diversified basket of investments’ ….”

44.  It is significant that at para 5 of his said written note, Mr Oh submitted to the master as follows:

“ Nature of the hearing

5.         It is submitted that an inquiry of damages arising from a wrongfully granted Mareva injunction is no different from an assessment of damages, and can be heard before a Master.  Once it is decided that an inquiry should be ordered, the inquiry is to determine the amount of damage and the Court shall look into the causation, remoteness and quantum to determine the amount of damages payable ….” [emphasis added]

45.  At para 39 of the 3^rddefendant’s 10^thaffirmation affirmed on 19 October 2017, which was part of the evidence at the trial before the master, the 3^rd defendant said:

“ In the premises, I would humbly pray for This Honourable Court to assess my damages at HK$7,290,000 or such sum as This Honourable Court shall deem fit.”

46.  As set out at para 29/1/25 of Hong Kong Civil Procedure: 

“ On an application to enforce an undertaking as to damages, there are two separate points to consider: first, as a matter of discretion, should the court order that the undertaking be enforced? Secondly, if so, what loss has the defendant sufferedin terms of money, was it caused by the injunction and was it too remote? (Balkanbank v. Taher (No. 2) [1995] 1 W.L.R. 1056, CA). A judge may leave both questions to be determined at the same time, or, more probably, in an enquiry as to damages or he may decide the first question himself ….”

47.  There are two separate questions to consider:

   (1)   As a matter of discretion, should the court order that the undertaking be enforced? (“the first question”); and

   (2)   If so, what loss has the defendant suffered in terms of money, was it caused by the injunction and was it too remote? (“the second question”).

48.  The judge did not decide the first question himself. He left both the first question and the second question to be determined by the master in the inquiry as to damages.

49.  At para 16 of the master’s decision, the master set out the 3^rddefendant’s claims as follows:

“ The 3^rd defendant’s claims

16. The 3^rd defendant claims damages arising from the Injunction Order which prevented him from:-

(1) Purchasing a property in Hong Kong, in particular,Flat 1404, Block B, Kornhill (‘Property A’) or Flat 808, Block H, Kornhill (‘Property B’);

(2) Purchasing a property in Beijing; and

(3)   Obtaining a reasonable return on the sums restrained.”

50.  And at paras 29 and 30 of the master’s decision, he said:

“ 29. Based on the above, the 3^rddefendant estimates that the loss occasioned by the Injunction Order was as follows:-

(1) If he had purchased Property B and a property in Beijing,HK$7,290,000 (HK$2,890,000 + HK$4,400,000).

(2) If he had purchased Property B and invested in a basket of investments, HK$5,090,000 (HK$2,890,000 + HK$2,200,000).

30.       Thus, the 3^rd defendant asks the court to assess his damages at HK$7,290,000 or such sum as the court deems fit.”

51.  At para 33 of the master’s decision, the master set out the submission of the 3^rddefendant:

“ … the 3^rddefendant submits that as the plaintiffs failed at trial, the injunction was wrongly granted, and the undertaking oughtto be given effect. There are no special circumstances to order otherwise. The inquiry itself should only be concerned with the quantum of damages to be awarded to the 3^rd defendant.”

52.  It is plain that at the trial before the master, the 3^rddefendant was asking the master to assess damages and to award him damages at HK$7,290,000 or such sum as the court deems fit. 

53.  The master also said at paras 34 to 36 of the master’s decision:

“ 34. On the other hand, the plaintiffs submit that on an application to enforce an undertaking as to damages, there are two separate points to consider (see HKCP 2019, paragraph 29/1/25):-

(1) First, as a matter of discretion, should the court order that the undertaking be enforced?

(2) Secondly, if so, what loss has the defendant suffered in terms of money, was it caused by the injunction and was it too remote?

35. A judge may leave both questions to be determined at the same time, or he may decide the first question himself. An order made on an application for an inquiry into damages should spell out clearly what, if any, residual discretion is left to be exercised later and it should, for example, be possible to tell on the face of the order whether the plaintiff is to pay the amount ascertained on the inquiry.

36.       In the present case, DHCJ Kent Yee does not seem to have answered the first question and only ordered that the Application be heard before a master.  The master is therefore required to decide on both questions.”

54.  And at para 40 he said:

“ I therefore agree with the approach of the plaintiffs. The courtshould answer the two questions as submitted by the plaintiffs.”

55.  As the master said at para 36, on the two questions to consider, the judge did not decide the first question himself and only ordered that the application for an inquiry as to damages be heard before a master.  The master was therefore required to decide the first question and the second question at the trial.

56.  Accordingly, the master proceeded with the trial on the basis that both questions were live issues before him.

57.  It was necessary for the 3^rd defendant to establish a reasonably arguable case for the loss that he allegedly suffered as a result of the injunction.

58.  As to the first question, the master found as a fact that the 3^rddefendant did not establish a reasonably arguable case for the loss that he allegedly suffered (para 42 of the master’s decision).  This was a finding made after considering the evidence adduced at the trial before him.

59.  The master gave detailed reasons for his finding at paras 43 to 64 of the master’s decision. 

60.  At para 64 the master said:

“ In view of the lack of cogency of the 3^rd defendant’s evidence in establishing his loss, I am of the view that the court should not exercise its discretion to enforce the undertaking. The first question is therefore answered in the negative.”

61.  The first question was resolved against the 3^rd defendant.

62.  The master then went on to deal with what loss the 3^rd defendant has suffered at paras 65 and 66 of the master’s decision:

“ What loss has the 3^rd defendant suffered?

65. In view of my answer to the first question, there should not be an inquiry as to damages in the first place. Even if I am wrong on the first question, I am not satisfied that the 3^rd defendant has proved that he had suffered any loss as a result of the Injunction Order. The reasons are simply the same as mentioned above. There is a clear lack of cogent evidence to establish the 3^rddefendant’s loss or that such loss was caused by the Injunction Order.

66.       Thus, if I have to proceed to answer the second question,my assessment of the 3^rd defendant’s loss is nil.”

63.  The nature of an appeal from a master to a judge in chambersis dealt with by way of actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time (para 58/1/2 Hong Kong Civil Procedure).  Unlike an appeal to the Court of Appeal under Order 59, no grounds of appeal are required to be set out in a notice of appeal to a judge in chambers under Order 58, rule 1.

64.  I would observe that in the notice of appeal the orders sought by the 3^rddefendant at the hearing of the appeal are:

“ 1. The 3^rd Defendant’s Application be allowed;

2.   The Plaintiffs’ liability for damages under the Undertaking be assessed at HK$3,160,000 or HK$2,890,000 (as the case may be); …”

65.  It appears that for the appeal the 3^rd defendant has reduced his claim for damages but he nevertheless asks the court by way of rehearing to assess damages to him in the sums set out in the notice of appeal. 

66.  Order 58, rule 2 provides that:

“ An appeal shall lie to the Court of Appeal from any judgment, order or decision (other than an interlocutory judgment, order or decision) of a master, given or made- …”

   (b) on an assessment of damages under Order 37 or otherwise …”

67.  There is no merit in the submission that the nature of the proceedings before the master was not an assessment of damages but only an exercise of discretion by the master.  There was no order for a split trial of the first question and the second question.  The master was dealing with both the first question and the second question at the trial before him. 

68.  I have also considered the question whether the master’s decision was an interlocutory decision.

69.  In First Pacific Bank Ltd v Robert H.P. Fung [1990] 1 H.K.L.R. 527 it was held that as a general rule, a judgment or order in an application is to be regarded as interlocutory unless it would have the effect, whatever the result of the application, of finally disposing of the controversy between the parties.

70.  It was also held that where there is a split trial or split hearing, a decision on a “preliminary issue” is not to be regarded as interlocutory simply because it will not be finally determinative of the action whichever way it goes.  Instead a broad commonsense test should be applied, asking whether, if not tried separately, the issue would have formed a substantive part of the final trial.

71.  I would also refer to B + B Construction Ltd and Sun Alliance and London (2000) 3 HKCFAR where the Court of Final Appeal held, inter alia, that deciding whether an order of the Court of Appeal was final or interlocutory, involved an examination of the nature of the application to see if the order would, whether it failed or succeeded, determine the whole action.  In considering the nature of the application, it was necessary to look not only at its form, eg under which order or rule of court it was made, but also at the purpose and substance of the application and the issues to be determined by the court.

72.  In Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co. Ltd & another (2003) 6 HKCFAR 2 the Court of Final Appeal considered, inter alia, the question of whether a judgment was interlocutory or final for the purposes of appeal.

73.  In dealing with the question of whether a judgment is interlocutory or final, Chan PJ said at paras 26 and 27:

“ Whether a judgment is interlocutory or final

26. In deciding whether an order or judgment is interlocutory or final for the purpose of obtaining leave to appeal, the court has preferred the “application approach” to the “order approach”, although it has been said that the former is “right in experience” and the latter is “right in logic” (per Lord Denning MR in Salter Rex & Co v Ghosh [1971] 2 QB 597 at p.601). See also First Pacific Bank Ltd v Robert HP Fung [1990] 1 HKLR 527 and B + B Construction Ltd v Sun Alliance and London Insurance Plc [2001] 1 HKLRD 1, where the application approach was affirmed. This approach was understood to involve an examination of the nature of the application to see whether the order or judgment made upon such an application would, whether it fails or succeeds, determine the whole action.

  27. But it has been recognized that, on the application approach, a judgment, in some circumstances, may be final even if it does not finally determine the whole action, see eg White v Brunton [1984] QB 570; Holmes v Bangladesh Biman Corp [1988] 2 Lloyd’s Rep 120; First Pacific Bank Ltd v Robert HP Fung [1990] 1 HKLR 527.”

74.  After reviewing the authorities he cited, Chan PJ said at para 31:

“ In my view, what one can extract from these cases is that where an order or judgment given in an application does not finally dispose of the whole action but only an issue in the action, it is necessary to consider the purpose and substance of the application, the issue dealt with and determined by the court and the effect of a determination of this issue on the rights of the parties, the further conduct of the proceeding and the final disposal of the whole action. A broad commonsense approach should be adopted. If the issue dealt with and determined by the court is “a substantive part of the final trial” (Holmes v Bangladesh Biman Corp [1988] 2 Lloyd’s Rep 120 at p.124); or “a crucial issue” in the case or a point “that goes to the root of the case” (First Pacific Bank Ltd v Robert HP Fung [1990] 1 HKLR 527 at p.532), or “a dominant feature of the case” (Korso Finance Establishment Anstalt v Wedge & Others (unrep., 15 February 1994) at p.7), then the order or judgment, even if it does not finally dispose of the whole action, should nevertheless be regarded as a final judgment.”

75.  In my view, the determination of the first question by the master after considering the evidence adduced at the trial before him was a final and not an interlocutory decision.  It had the effect of finally disposing of the controversy between the parties.

76.  The word “otherwise” simply means “in another way, or in other ways; by other means …; in another case; in other circumstances …; in other respects ….” (Shorter Oxford English Dictionary 6^thed).

77.  I was satisfied that the nature of the proceedings before the master was an assessment of damages under the “or otherwise” limb in Order 58, rule 2(b) and as such, an appeal lies to the Court of Appeal and not to a judge of the Court of First Instance in chambers.

78.  For those reasons I dismissed the appeal with costs to the plaintiffs.

HCA 1062/2012

[2018] HKCFI 2300

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1062 OF 2012

_________________________

_________________________

_____________________

D E C I S I O N

_____________________

Background

1.  On 19 June 2012, the plaintiffs obtained an ex parte Mareva injunction against the 1^st to 4^th defendants from Tong J (“the Injunction Order”) whereby the disposal of the 1^st to 4^th defendants’ assets in Hong Kong were prohibited with the following exceptions:-

(1)The Injunction Order does not prohibit any defendant from spending HK$20,000 per week towards his ordinary living expenses, HK20,000 per week towards his ordinary and proper business expenses and also HK100,000 on legal advice and representation; and if such amount is exhausted or being insufficient, the defendant may agree to an increase with the plaintiffs, failing which the defendant may apply to the court.

(2)The Injunction Order does not prohibit any defendant from dealing with or disposing of any of his assets in the ordinary and proper course of business.

(3)Any defendant may agree with the plaintiffs’ solicitors that the above spending limits should be increased or that the Injunction Order should be varied in any other respect, but any such agreement must be in writing.

(4)The Injunction Order shall cease to have effect as regards any defendant if that defendant provides security by paying the sum of RMB800,000,000 into court or makes provision for security in that sum by some other method agreed with the plaintiffs’ solicitors or approved by the court.

2.  In obtaining the Injunction Order, the plaintiffs gave their undertaking to the court that if the court later on finds that the Injunction Order has caused loss to the defendants or any other party and decides that the defendant or that other party should be compensated for that loss, the plaintiffs will comply with any order the court may make.

3.  On 11 November 2013, Anthony Chan J ordered that the Injunction Order be continued until the conclusion of trial or further order with the following variations:-

(1)The 3^rd defendant be allowed to withdraw HK$2 million for business expenditure and

(2)The allowance of HK$20,000 per week for the ordinary and proper business expenses shall cease upon the release of the aforesaid HK$2 million.

4.  In addition, Anthony Chan J ordered that the plaintiffs must fortify their undertaking as to damages with either a payment into court or a bank guarantee of HK$3 million.                  

5.  On 31 July 2017, after a lengthy trial in 2016, DHCJ Kent Yee gave judgment in favour of the 3^rd defendant and ordered that the Injunction Order be discharged forthwith.

6.  However, on 19 September 2017, DHCJ Kent Yee ordered an interim renewal of the Injunction Order until the determination of the plaintiffs’ application to the Court of Appeal for a renewal of the Injunction Order pending an intended appeal.

7.  By summons dated 7 August 2017, the plaintiffs applied for payment out of the HK$3 million paid into court by the plaintiffs pursuant to the order of Anthony Chan J made on 11 November 2013 being the plaintiffs’ fortification of their undertaking as to damages given to the court in respect of the 3^rd defendant.

8.  The summons dated 7 August 2017 was heard and dismissed by DHCJ Kent Yee on 27 September 2017.  The plaintiffs informed the court at the hearing that they would abandon the intended appeal and hence DHCJ Kent Yee ordered the interim renewal of the Injunction Order to cease to have effect forthwith.

9.  At the same hearing, the 3^rd defendant made an oral application (“the Application”) for an enquiry as to damages as a result of the Injunction Order against the 3^rd defendant.  DHCJ Kent Yee directed that the Application be heard before a master in chambers for a pre-trial review.

10.  The pre-trial review of the Application was heard by me on 8 February 2018 and it was adjourned to enable the 3^rd defendant to take out applications for expert directions and for cross-examination of the plaintiffs.

11.  The 3^rd defendant took out a summons dated 22 February 2018 to seek leave to adduce expert evidence on quantum of a registered professional surveyor, Au Wai Man, but no application was made for cross-examining the plaintiffs.

12.  The summons dated 22 February 2018 was heard by me on 23 April 2018 and it was amended on the same day for the 3^rd defendant to add another expert in the summons, namely Mak Kwong Fai Louis, who is an expert on financial services and investments.

13.  At the same hearing, the plaintiffs and the 3^rd defendant agreed that there was no need to adduce the expert evidence of Au Wai Man as they could agree on the values of the properties in question.  Hence, the application in relation to Au Wai Man was withdrawn.  As to the application in relation to Mak Kwong Fai Louis, I dismissed the same after hearing arguments from the parties, as I did not find the evidence of this expert being relevant to the issues before me.

14.  After the application for expert direction was dealt with, I adjourned the hearing of the Application to a date to be fixed, and as agreed by the parties, I directed that the 10^th Affirmation of the 3^rd defendant dated 19 October 2017, the 20^th Affidavit of Douglas Nelson Woodrum dated 21 November 2017 and the 11^th Affirmation of the 3^rd defendant dated 11 December 2017 do stand as the parties’ evidence.

15.  The Application was then heard by me on 16 August 2018.  This is my decision on the Application.

The 3^rd defendant’s claims

16.  The 3^rd defendant claims damages arising from the Injunction Order which prevented him from:-

(1)Purchasing a property in Hong Kong, in particular, Flat 1404, Block B, Kornhill ("Property A") or Flat 808, Block H, Kornhill ("Property B");

(2)Purchasing a property in Beijing; and

(3)Obtaining a reasonable return on the sums restrained.

17.  When the Injunction Order was first obtained against the 3^rd defendant, he had about HK$15 million of cash balances in his bank accounts, comprising approximately of:

(1)About HK$9,700,000 being deposits in savings/current accounts with Standard Chartered Bank (Hong Kong) Ltd;

(2)HK$171,741.86 being deposits in a savings account with The Bank of East Asia Ltd;

(3)About HK$5,100,000 being the balance in a share trading account with Monex Boom Securities (HK) Ltd; and

(4)HK$72,495.59 being deposits in a savings account with HSBC maintained by the 11^th defendant which was wholly owned and controlled by the 3^rd defendant.

18.  Part of the above cash deposits came from the sale of the 3^rd defendant’s property at Kornhill in September 2011 and another part came from the sale of the shares in the 1^st defendant in 2009 and 2010.  After the sales, apart from the aforesaid cash deposits, the 3^rd defendant had no other valuable asset in Hong Kong.

19.  The 3^rd defendant withdrew the following sums from his accounts pursuant to the exceptions to the Injunction Order:-

(1)HK$170,000 for legal costs, although he was allowed to withdraw HK$200,000;

(2)HK$5,480,000 for personal expenses as he was allowed to withdraw HK$20,000 per week; and

(3)HK$2 million on 23 December 2013 for business expenditure pursuant to the order of Anthony Chan J made on 11 November 2013, but he did not withdraw any other sum for business expenditure before the variation of the Injunction Order.

20.  It is to be noted that based on the above figures, the 3^rd defendant withdrew a total sum of HK$7,650,000.  As he had about HK$15 million in his accounts, he should have been restricted in the use of the balance sum of HK$7,350,000.

21.  Nevertheless, the 3^rd defendant assumes that he could have the use of HK$15 million in his estimate of his loss.  He contends that it was reasonably foreseeable that he would have used his assets to invest in property or the stock market.  The 3^rd defendant had advised the plaintiffs that he wanted to invest in property, and yet the plaintiffs persisted with continuation of the Injunction Order and resisted the 3^rd defendant's application for variation.  The Injunction Order had therefore caused him to be unable to use his assets, and hence his loss.

22.  The 3^rd defendant first bought a property in Kornhill in 2000 and he sold it in 2011 because it required major renovations.  He was, however, looking to purchase a property in better condition in the near future and he had monitored the property market to gauge a suitable time and opportunity to return to the property market.  The 3^rd defendant alleges that this is well supported by the agency agreement signed by the 3^rd defendant with Midland Realty International Ltd on 16 September 2012, and it can be seen from Schedule 1 of the agency agreement that the 3^rd defendant had viewed Property A and Property B.  Even though the viewing took place when the Injunction Order was already in place against the 3^rd defendant, it was before the hearing for continuation of the Injunction Order on 27 November 2012.  However, due to the Injunction Order, the 3^rd defendant was not able to purchase either Property A or Property B.

23.  The 3^rd defendant alleges that he conducted the viewing of Property A and Property B in September 2012 because he had hoped that the Injunction Order could be discharged at the hearing on 27 November 2012 and he would be in a position to commit his funds to the purchase of a property.

24.  Subject to the 3^rd defendant being able to establish liability, the parties agreed that the quantum of the loss suffered by the 3^rd defendant in relation to the loss of opportunity to purchase Property A and Property B are HK$3,160,000 and HK$2,890,000 respectively.

25.  The 3^rd defendant also contends that as he was living in Beijing, he was actively looking for a property in that city.  He was interested in a property in the price range of RMB 5,000,000 to RMB 6,000,000. Assuming that he had purchased a property in Beijing for RMB 5,000,000 in 2012, it would now be worth at least RMB 9,000,000.  After adjusting for foreign exchange loss, he would have lost HK$4,400,000 in such an investment.

26.  If the 3^rd defendant would not have purchased a property in Beijing (which is denied by the 3^rd defendant), he would have used his funds to invest in a diversified basket of investments between high yield investments (purchase of shares listed on the stock exchange of Hong Kong) and lower yield investments in sovereign and high quality corporate bonds and investment funds.

27.  According to the 3^rd defendant, he would have purchased a property in Hong Kong using about HK$4 million (assuming he could obtain a mortgage of about 60%).  He would reserve HK$3 million for a “rainy day”.  As he had HK$15 million in his accounts, that would leave him HK$8 million for acquiring and maintaining a basket of investments.  He has a track record of making a reasonable return say about 8% per annum on his investments.  He reasonably believes that he could have achieved an annual return of 5% on the sum of HK$8 million from 2012 to 2017 (a period of 5 years).  Thus, he could have obtained a return of HK$2.2 million on the sum of HK$8 million.

28.  Another approach to assess the 3^rd defendant's loss of investment returns would be to adopt the Hang Seng Index as a proxy. From 18 June 2012 to 27 September 2017, the Hang Seng Index rose from 19,428 to 27,642, i.e. a return of 42.3%. The return would have been HK$3,384,000 if the 3^rd defendant had been permitted to invest the HK$8,000,000 of cash.

29.  Based on the above, the 3^rd defendant estimates that the loss occasioned by the Injunction Order was as follows:-

(1)If he had purchased Property B and a property in Beijing, HK$7,290,000 (HK$2,890,000 + HK$4,400,000).

(2)If he had purchased Property B and invested in a basket of investments, HK$5,090,000 (HK$2,890,000 + HK$2,200,000).

30.  Thus, the 3^rd defendant asks the court to assess his damages at HK$7,290,000 or such sum as the court deems fit.

The approach

31.  The 3^rd defendant submits that a party covered by an undertaking as to damages has the right to ask the court to enforce the undertaking against the claimant, and the court can do so, either by assessing the damages summarily or by directing that the claimant pay the damages awarded on an inquiry as to damages (see Gee on Commercial Injunctions (6th ed), § 11-035).

32.  The 3^rd defendant also submits that in relation to liability, the following principles appear to apply:-

(1)The initial question is whether the injunction was "wrongly granted". If the claimant fails at trial, then normally it would follow that the injunction was wrongly granted;

(2)This issue is to be decided by the court and should be dealt with before the inquiry as to damages is directed;

(3)The undertaking ought to be given effect to by the court except "under special circumstances".  The court, in deciding whether to enforce the undertaking, has a discretion and each case must be decided on its own facts.

(See Gee on Commercial Injunctions (6th ed.), § 11-035, § 11-041, Yukong Line Ltd v Rendsburg Investments Corp [2001] 2 Lloyd's Rep. 113 at [32], and Graham v Campbell (1877) 7 Ch D 490 at 494)

33.  Following the above principles, the 3^rd defendant submits that as the plaintiffs failed at trial, the injunction was wrongly granted, and the undertaking ought to be given effect.  There are no special circumstances to order otherwise.  The inquiry itself should only be concerned with the quantum of damages to be awarded to the 3^rd defendant.

34.  On the other hand, the plaintiffs submit that on an application to enforce an undertaking as to damages, there are two separate points to consider (see HKCP 2019, paragraph 29/1/25):-

(1)First, as a matter of discretion, should the court order that the undertaking be enforced?

(2)Secondly, if so, what loss has the defendant suffered in terms of money, was it caused by the injunction and was it too remote?

35.  A judge may leave both questions to be determined at the same time, or he may decide the first question himself.  An order made on an application for an inquiry into damages should spell out clearly what, if any, residual discretion is left to be exercised later and it should, for example, be possible to tell on the face of the order whether the plaintiff is to pay the amount ascertained on the inquiry.

36.  In the present case, DHCJ Kent Yee does not seem to have answered the first question and only ordered that the Application be heard before a master. The master is therefore required to decide on both questions.

37.  In my view, the approach adopted by the 3^rd defendant seems to suggest that a party has “the right” to ask the court to enforce the undertaking, and the submission that the undertaking ought to be given effect to by the court except “under special circumstances” seems to suggest that the court has a discretion not to enforce an undertaking only under special circumstances.

38.  I do not agree with this approach.  The undertaking in damages is given to the court, not to the party affected by the injunction.  The party affected does not even have a right to sue on the undertaking by way of a claim in contract (see Gee on Commercial Injunctions (6th ed), § 11-035).  When the party affected does not have the right to sue the party giving the undertaking, it follows that the party affected cannot ask the court to enforce the undertaking as of right.  The court must always have absolute and unfettered discretion to decide whether to enforce the undertaking or not, instead of only “under special circumstances” as suggested by the 3^rd defendant.

39.  As held in Cheltenham and Gloucester Building Society v Ricketts, [1993] 1 WLR 1545, in a case where it is determined that the injunction should not have been granted, the court is likely to enforce the undertaking if asked to do so, though the court retains a discretion not to do so (see HKCP 2019, paragraph 29/1/26).  Thus, the court retains a discretion not to enforce the undertaking even when the injunction was wrongly granted.  It is clear that the party affected may ask the court to enforce the undertaking, but does not have a “right” to do so.  There is no reason to restrict the court’s discretion by saying that the court should refuse to give effect to an undertaking only “under special circumstances”.  The court must consider all the circumstances of the case to decide whether the discretion should be exercised one way or the other.

40.  I therefore agree with the approach of the plaintiffs.  The court should answer the two questions as submitted by the plaintiffs.

Should the court enforce the undertaking?

41.  On the first question, although the court is likely to enforce the undertaking when the injunction should not have been granted, an inquiry as to damages should not be ordered unless there is at least some reasonably arguable case that the injunction has caused the complaining party some loss or damage for which compensation ought to be paid (see HKCP 2019, paragraph 29/1/26).

42.  Considering the evidence before me, I do not find that the 3^rd defendant has established a reasonably arguable case for the loss allegedly suffered by him.

43.  First of all, in relation to the 3^rd defendant’s assertion that he intended to purchase a property in Hong Kong, the only documentary evidence filed by him is the agreement dated 16 September 2012 with Midland Realty which shows that he had viewed two properties in Kornhill in September 2012.  Apart from that, the other evidence just came from the 3^rd defendant’s own bare assertion.

44.  I agree with the plaintiffs that viewing two properties on one occasion cannot be regarded as cogent evidence of a serious intention to purchase a property in Hong Kong when there were no other steps taken to proceed with the purchase.  In fact, this viewing occurred almost 3 months after the Injunction Order was granted in June 2012.  There is no evidence that the 3^rd defendant had viewed other properties before the granting of the Injunction Order.  So it is not a case that the 3^rd defendant was suddenly prevented from proceeding with the purchase of a property in Hong Kong because of the Injunction Order.

45.  The 3^rd defendant was well aware of the Injunction Order when he had the viewing, but hoped that the Injunction Order could be discharged in November 2012.  If this intention to purchase was really serious, there is no reason why the 3^rd defendant did not take any steps to vary the Injunction Order when it was not discharged.

46.  The 3^rd defendant tried to rely on the case of Hone v Abbey Forwarding Ltd [2015] 1 Ch 309 to suggest that the court must be realistic as to the dilemma facing a defendant when served, out of the blue, with a freezing order and applications for variation are not that simple.

47.  However, the considerations in Hone v Abbey Forwarding Ltd cannot be applied to the present case. The 3^rd defendant did take steps to vary the Injunction Order to enable him to have HK$2 million to start a business he had in mind which required a start-up capital of RMB 1.5 million. He could have also applied to court to have HK$4 million for the purchase of property that he had allegedly in mind, if that is indeed true.   

48.  The 3^rd defendant explains that he did not apply to vary the Injunction Order to enable him to purchase a property because he did not feel that it was likely that he would have succeeded in seeking such a variation. It is unclear why he would have that feeling.  In fact, the 3^rd defendant had never made any request to the plaintiffs for such a variation.

49.  There should be no reason for the 3^rd defendant to have that worry because the plaintiffs were quite willing to have such a variation.  As explained by the plaintiffs, they would have agreed to such a request as a landed property is a secure and valuable form of asset. 

50.  It is in fact more difficult for the 3^rd defendant to obtain a variation so as to enable him to invest in a start-up business than to obtain a variation to invest in a landed property, as the money could easily be used up in a star-up business without any return.  It is hard to believe that the 3^rd defendant would find no problem in applying for a variation for business expenses and yet feel that a variation for investing in property would be unlikely.

51.  The 3^rd defendant suggests that such an application would only further diminish the funds available to fund his defence of these proceedings.  Even if that was the case, it just shows that the 3^rd defendant was prevented from purchasing a property because of the proceedings instead of the Injunction Order.  The 3^rd defendant must prove that the loss was caused by the Injunction Order and not by the existence of the litigation (see MGA Entertainment Inc v Toys & Trends (Hong Kong) Ltd (2014) 17 HKCFAR 27).

52.  In fact, according to the 3^rd defendant, his legal expenses were in the sum of about HK$5 million.  So it is understandable that he would not want to diminish the funds available so as to have enough funds for his legal expenses.  This could be the real reason why he did not apply for a variation to enable him to purchase a property, but this reason is unrelated to the Injunction Order.

53.  Moreover, at the hearings concerning the continuation of the Injunction Order, counsel for the 3^rd defendant did not mention anything about the 3^rd defendant’s intention to purchase a property in Hong Kong to the court (as confirmed by all the written submissions), even though it was mentioned in the 3^rd defendant’s affirmation in opposition (the 2^nd Affirmation of the 3^rd defendant dated 27 July 2012).  Anthony Chan J also did not mention anything about this in his Decision dated 11 November 2013.  The variation mentioned in His Lordship’s Decision is only concerning the 3^rd defendant’s business expenses.

54.  If the 3^rd defendant really had a serious intention to purchase a property in Hong Kong, this matter would not have been omitted by his counsel in written submissions.  If the 3^rd defendant’s counsel had mentioned this matter to the court, it is also unlikely that His Lordship would have omitted to deal with this issue in his Decision.  I accept the plaintiffs’ submission that this matter was in fact not pursued at the hearings.

55.  In fact, in his 4^th Affirmation, the 3^rd defendant states that “Given the recent government intervention, prices are softening and this may be the right time to buy (or at least to actively look for a property)”.  This shows that the 3^rd defendant is only thinking about buying but has no serious intention to commit to a purchase at that stage. It is therefore not surprising at all that the 3^rd defendant did not pursue with any application for variation of the Injunction Order to enable him to buy a property in Hong Kong.

56.  However, the 3^rd defendant is seeking damages based on the assumption that he would have bought a property in Hong Kong in or about September 2012.  There is simply no or insufficient evidence to support such a contention.

57.  Another reason given by the 3^rd defendant in not seeking variation for him to buy a property in Hong Kong is that it was not possible for him to obtain a mortgage from a bank given the Injunction Order and the proceedings.  If it is due to the proceedings, the alleged loss would not have been caused by the Injunction Order.  There is also no basis to suggest that the 3^rd defendant could not obtain a mortgage because of the Injunction Order.  The 3^rd defendant was unemployed at that time and hence could not provide any regular income proof.  Hence, it would be difficult for him to obtain any mortgage in any event.  There is also no evidence that he had tried to obtain a mortgage and was rejected because of the Injunction Order.  It is simply groundless for the 3^rd defendant to suggest that he could not obtain a mortgage because of the Injunction Order.

58.  In the circumstances, I find that there is no or insufficient evidence to support the 3^rd defendant’s contention that he suffered any loss in the property market in Hong Kong because of the Injunction Order.

59.  As to the contention that the 3^rd defendant would purchase a property in Beijing, there is absolutely no documentary evidence to support such a contention.  No evidence has been adduced to show the property market situations or the property values in Beijing apart from the 3^rd defendant’s own bare assertions.  The 3^rd defendant’s bare allegation that he was actively looking for a property in Beijing is in fact inconsistent with his earlier evidence that his intention was to return to Hong Kong which he regarded as his home.  Counsel for the 3^rd defendant did not even mention this loss in their written submissions.

60.  Thus, there is no reason at all for me to accept such a bare and inconsistent assertion of such a loss.

61.  Likewise, there is no documentary evidence adduced to show that the 3^rd defendant had any intention to invest in a basket of investments at the material time, nor anything to show his knowledge or past experience in shares investments.  On the contrary, the 3^rd defendant explained in his affirmation that he left his money idling and did not actively but conservatively manage his investments because he did not have the time to do so during his last years of employment.

62.  It is not clear what the 3^rd defendant meant when he said he would manage his investments conservatively.  In the ordinary course, a conservative portfolio would consist of investment products which are held long-term and would not be traded actively.  Thus, the 3^rd defendant’s own evidence does not support that he had much experience in such investments.

63.  In the circumstances, I do not accept that the 3^rd defendant would have invested his money in a basket of investments as alleged by him. His calculations of his loss in such alleged investments are also speculative and without any concrete proof.

64.  In view of the lack of cogency of the 3^rd defendant’s evidence in establishing his loss, I am of the view that the court should not exercise its discretion to enforce the undertaking.  The first question is therefore answered in the negative.

What loss has the 3^rd defendant suffered?

65.  In view of my answer to the first question, there should not be an inquiry as to damages in the first place.  Even if I am wrong on the first question, I am not satisfied that the 3^rd defendant has proved that he had suffered any loss as a result of the Injunction Order.  The reasons are simply the same as mentioned above.  There is a clear lack of cogent evidence to establish the 3^rd defendant’s loss or that such loss was caused by the Injunction Order.

66.  Thus, if I have to proceed to answer the second question, my assessment of the 3^rd defendant’s loss is nil.

Conclusion

67.  By reasons aforesaid, the Application is dismissed and the 3^rd defendant is not entitled to claim any damages against the plaintiffs.  I also make a costs order nisi that the 3^rd defendant do pay the plaintiffs costs of the Application with certificate for counsel to be taxed if not agreed.

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1062 OF 2012

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DECISION

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1.  This court handed down a judgment on 31 July 2017 after the trial principally between the plaintiffs and Mr Ma (“the Judgment”) in which the claim of the plaintiffs against Mr Ma was dismissed and the counterclaim of Mr Ma was allowed. At the same time, this court ordered that the Mareva Injunction obtained by the plaintiffs against Mr Ma[1](“the Injunction”) be discharged forthwith for the avoidance of doubt. The Injunction was expressly continued until the conclusion of trial.

2.  By summons dated 7 September 2017 (“the Summons”), the plaintiffs apply for a renewal of the Injunction pending the determination of their appeal of the Judgement. Due to the summer vacation, the time for appeal has not yet expired and the plaintiffs have only a draft notice of appeal to support their application.

3.  Mr Cooney SC, for Mr Ma, confirms that he is ready to argue against the present application without any affirmation in opposition filed on behalf of Mr Ma. For the present purposes, I can assume that the matters stated in the draft 19^th Affidavit of Douglas Nelson Woodrum to be true and correct.

4.  In this Decision, I shall adopt the abbreviations used in the Judgement.

Jurisdiction and applicable threshold

5.  There is no dispute that this court has jurisdiction to renew the Injunction pending appeal. Mr Wong (together with Ms Ngai), for the plaintiffs, refers this court to Ketchum International Plc v Group Brick Relations Holdings Limited and Ors. [1997] 1 WLR 4[2]. While confirming that a first instance court and the Court of Appeal have concurrent jurisdiction to grant an injunction pending appeal, Stuart-Smith LJ set the threshold to be at least as high as that has to be satisfied when the court considers whether or not to grant leave to appeal, i.e. a good arguable appeal.

6.  Next, Mr Wong cites to this court the Court of Appeal’s decision in SMSE v KL [2009] HKLRD 125 in which Le Pichon JA stated the relevant test applicable to an application for leave to appeal. For leave to be granted, there should be shown a reasonable prospect of success and prospects of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable”.

7.  Three conclusions reached by this court in the Judgment are targeted at the intended appeal of the plaintiffs.  The first one relates to the allegation of unauthorised borrowings incurring unnecessary substantial amount of interest. The remaining two complaints concern the allegation of misappropriation of funds belonging to the Group in the respective amounts of US$64.5 million and US$29.3 million.

8.  Common to all these challenges of the plaintiffs is their allegation that this court has misunderstood their pleaded case and therefore failed to assess the competence of Mr Ma in his capacity as the CAO of the Group to find out whether he was in breach of his contractual and statutory duties owed to the Group.

Unauthorised borrowings

9.  First I turn to the allegation of unauthorised borrowings. It is complained in the draft Notice of Appeal that this court erroneously identified the incurrence of the unauthorised loans to the knowledge of Mr Ma and his connivance as the only pleaded complaint of the plaintiffs. In fact, it is an alternative plea only.

10.  This court, as shown in the Judgment, has all along been aware of the pleaded allegations of breach of contractual and statutory duties on the part of Mr Ma including those contained in the Answers to the Request of the 3^rd Defendant for Further and Better Particulars of the Statement of Claim (“the Answers”) under this head of complaint. I have explained in the Judgement why I perceive the case of the plaintiffs against Mr Ma to be essentially about his knowing participation in or connivance at the fraud[3].

11.  The allegations of breach of contractual and statutory duties have to be understood in the proper context. The plaintiffs’ allegations relating to the unauthorised borrowings are contained in paragraphs 54 to 58 of the Statement of Claim.

12.  In paragraph 54, indeed the plaintiffs plead that while there were alleged breaches of the contractual and statutory duties on the part of D2, D4 and Mr Ma, the person under complaint is clearly D4 only and he alone is alleged to have caused or procured the Group to incur substantial debts.

13.  In paragraphs 55 to 57, the plaintiffs explain why the unauthorised loans were unnecessary and how the interest incurred depleted the revenue of P1.

14.  In paragraph 58, the plaintiffs plead against, among other persons, Mr Ma as follows:

“Further or in the alternative, the said indebtedness was incurred with the knowledge or connivance of` each of the 1^st to 4^th Defendants having regard to the fact s that the 1^st Defendant held the positions … and the 2^nd, 3^rd (Mr Ma) and 4^th Defendants were respectively …, the Chief Accounting Officer and … of the 1^st Plaintiff … and thus of the Group. In the premises, each of the 1^st to 4^th Defendants acted in breach of his duties … and is liable for all loss and damage caused by the said breaches and/or is liable to account therefor.” (Emphasis added)

15.  In paragraph 59, the plaintiffs plead a case of an account.

16.  The plaintiffs in their prayer for relief claim damages and/or an account against the 1^st to 4^th defendants including Mr Ma under paragraph 58 only and no mention is made about paragraph 54.

17.  Mr Ma requested for further and better particulars of his breaches under paragraph 54. In the Answers, the plaintiffs further averred that Mr Ma ought to have been identified the unauthorised borrowings caused by D4 and he should have brought to the attention of the board in a proper performance of his role as the CAO of the Group but he failed or refused to do so. Mr Ma would receive truthful information during the performance of his duties including the trial balances of P3 and P4 and such information would disclose those dubious transactions and he should have investigated into them. Instead, he caused or permitted false and misleading financial information of the Group to be published.

18.  I should add that such answers given by the plaintiffs reinforce my conclusion on the true nature of the pleaded case of the plaintiffs. There, the plaintiffs expressly allege that the wrongdoings of D4 were carried out with Mr Ma’s participation, knowledge and/or connivance as the CAO of P1 and that Mr Ma had failed and/or refused to have the true financial position recorded in the CFSs and bring them to the attention to the board of P1.

19.  Pausing here, my factual finding is that those accounting documents submitted to Mr Ma actually differ from those documents purportedly evidencing the unauthorised loans recovered by the Group.[4] In other words, Mr Ma was also provided with false information. This should be sufficient to effectively dispose of the allegations of Mr Ma’s breach of contractual and statutory duties.

20.  In the opening submissions of the plaintiffs[5], the claim for damages was expressly not pursued and the plaintiffs asked for an account only out of their allegation of unauthorised borrowings. It is clear that the restitutionary relief of an account is sought on the basis of Mr Ma’s knowing participation and/or connivance at the fraud and not his alleged breach of contractual and statutory duties.

21.  In their closing submissions[6], it was submitted that the starting point was that Mr Ma principally through his inaction and omissions was in glaring breach of his contractual and statutory duties and the question for this court is whether such blatant breaches further justify an inference of connivance.

22.  In light of all these, I am unable to find any merit in the present criticism of the plaintiffs on my failure to deal with their pleaded case of Mr Ma’s alleged breach of his contractual and statutory duties in relation to the unauthorised borrowings.

Misappropriation of funds

23.  A similar complaint is being made about this court’s dealing with the pleaded case of the plaintiffs in regard to the misappropriated or unaccounted funds. The plaintiffs now complain that, apart from considering the plea of misappropriation, this court should have held that Mr Ma was in breach of his contractual duties in that he failed to detect the fraud undoubtedly perpetrated on the Group over a long period of time.

24.  In the Statement of Claim, the relevant allegations can be found in paragraphs 81 to 85. First, in paragraph 81, it is pleaded that a number of funds have disappeared or have not been accounted for in the accounts of P1 when they were under the control of Mr Ma, among other persons. Particulars of such missing or unaccounted funds are given and among them, two sums are material for present purposes. First, it is alleged that a sum of US$64.5 million has been transferred out of the Group and could not be traced. Second, it is alleged that a sum of US$29.3 million being the consideration received in respect of the allotment of 3.7 million shares of P1 to one Mr Wu has disappeared. The said sum should have been deposited into a bank account of P1.

25.  Paragraph 82 makes it clear that Mr Ma, among other persons, operated or controlled the bank accounts of P1 outside the PRC.         

26.  Paragraph 83 principally concerns Ms Fu and her alleged connection with Mr Wu and Mr Chan relating to the alleged disappearance of US$29.3 million. It is noteworthy that it is alleged that Ms Fu had a conspiracy with Mr Chan and Mr Ma in procuring the allotment of the 3.7 million shares of P1 in the absence of actual receipt of the consideration of US$29.3 million by P1.

27.  In paragraph 84, it is asserted that the misappropriations were caused or procured by the defendants including Mr Ma wrongfully and in breach of their service agreements with Ms Fu conspiring with Mr Ma, together with other persons. There is, however, no mention of any particular provision in the service agreement of Mr Ma which is alleged to have breached by Mr Ma.

28.  In paragraph 85, it is claimed that the missing or unaccounted funds have been misappropriated from P1 by Mr Ma and other persons and so all of them should account to P1. Further or alternatively, the 1^st to 5^th defendants including Mr Ma converted the funds to their own use.  

29.  Again, the plaintiffs in their prayer for relief claim damages and/or an account against the 1^st to 5^th defendants including Mr Ma under paragraph 85, which plainly alleges actual misappropriation of the funds, and no mention of paragraph 84 is made.

30.  In any event, I cannot accept that the plaintiffs’ pleaded case is on the simple basis that it was Mr Ma’s incompetence or failure to report to the board of the Group that caused or permitted the misappropriation of funds of the Group.  

31.  The Answers clearly show that the allegation of the plaintiffs about the missing or unaccounted funds is about Mr Ma’s actual participation in and/or connivance at the wrongful misappropriation.

32.  First, in their answer given in relation to paragraph 84, the plaintiffs repeat the pleaded assertion that Mr Ma caused or permitted the various misappropriation of funds from the bank accounts of P1. Then, they refer to the particulars in the Statement of Claim. These are not further and better particulars at all.

33.  Lastly the plaintiffs refer to an earlier answer given in relation to paragraph 83 concerning the alleged conspiracy among the defendants. There, it is expressly averred that Mr Ma had participated in or connived at the wrongful act of procurement of the allotment of the 3.7 million shares of P1 without consideration. The plaintiffs further aver alternatively that Mr Ma should have received truthful information contained in the financial documents such as trial balances of P1 and should have known that US$29.3 million had never been received. Instead of reporting this matter to the board of P1, Mr Ma concealed the wrongful acts of the other defendants.

34.  To recap, as pleaded in the Statement of Claim and the Answers, the case of the plaintiffs is that in respect of the sum of US$64.5 million, Mr Ma caused or permitted the misappropriation of the said sum from the bank accounts of P1 in breach of his contractual duties without any particulars as to how Mr Ma caused or permitted the misappropriation. Mr Ma is further alleged to have misappropriated or converted to his own use the same. Damages or an account is sought for the latter plea of misappropriation or conversion only. Mr Ma’s defence is that the said sum was transferred from P1’s account to CCT HK for payments of expenses of the offshore entities of the Group and Deloitte raised no concern about such payments.

35.  In regard to the sum of US$29.3 million, in light of the Answers, it was never received by the Group at all. There could be no misappropriation of the said sum from the Group by any one as such. I fail to see how the plaintiffs could still run a case of misappropriation or conversion of the said amount against Mr Ma.

36.  In the premises, I do not accept that it is reasonably arguable that I erred in disposing of the pleaded case of misappropriation of funds on the basis that there was no misappropriation or conversion of the same by Mr Ma. I merely adhered to the pleading. I do not believe that the plaintiffs’ intended appeal has a reasonable prospect of success and the threshold is not met.

Risk of dissipation and balance of convenience

37.  For completeness, I continue to consider the risk of dissipation and the balance of convenience. I also would consider the complaints raised by Mr Cooney regarding the conduct of the plaintiffs in these proceedings.

38.  I accept that by reason of the fact that Mr Ma is an ordinary resident in Beijing and the liquidity of his assets in Hong Kong comprising cash balances in local bank accounts only, there is a real risk of dissipation of Mr Ma’s assets in the absence of an injunction and the monetary claim of the plaintiffs, if accepted eventually, would thereby be rendered nugatory.

39.  Under the Injunction, as an exception, Mr Ma is entitled to withdraw certain specific amounts from his bank accounts either on a lump sum basis or weekly basis for his ordinary living expenses and business expenses. Up till now, Mr Ma has withdrawn more than HK$9 million from his bank accounts.

40.  There is no evidence about any serious financial hardship suffered by Mr Ma arising from the Injunction. He has not sought to increase the amounts that he is now entitled to withdraw as an exception to the Injunction.

41.  Under these circumstances, the balance of convenience should be tilted in favour of the renewal of the Injunction pursuant to the Injunction if the plaintiff’s intended appeal is a good arguable one.

Other matters

42.  Mr Cooney draws my attention to the following matters which in his submission amount to an abuse of process. First, he points out that the plaintiffs have in effect imposed a de facto injunction despite the Judgment by their failure to file and serve a sealed judgment (which was only served on Mr Ma in the last minute of the business day preceding the hearing of the Summons) and by their failure to inform the relevant parties of the dismissal of the Injunction by the Judgment in breach of their undertaking expressly stated in the Injunction. Therefore, Mr Ma is still unable to withdraw monies from his bank accounts without any constraint.

43.  Mr Wong accepts that the plaintiffs have failed to honour their relevant undertaking and the breach is continuing without any explanation proffered by the plaintiffs.

44.  For the late filing and serve of the sealed judgment, Mr Wong highlights to this court that a corrigendum was made on 1 September 2017 and so there had been some delay. However, this cannot explain away the 2-week delay after the corrigendum was issued.

45.  Mr Cooney submits that by reason of these matters constituting an abuse of the court process, this court should dismiss the plaintiffs’ application. Mr Wong argues that these matters do not fall within the definition of an abuse in the context of a striking out application.

46.  My view is that, regardless of whether such matters are an abuse of the court process, this court is entitled to take them into account in considering whether an injunction, as an equitable remedy, should be granted and, in this case, renewed.

47.  This court has serious concern about the plaintiffs’ apparent breach of their undertaking in the Injunction. It is, however, a matter best left to be canvassed on other occasions. I should not express any view on this until the picture is clearer with evidence filed by both parties in respect of this alleged breach.

48.  For the late service of the sealed judgment, again, absent any chance to give explanation by the plaintiffs, I should not hold the delay against them in the present exercise.

49.  Lastly, Mr Cooney complains about the plaintiffs’ delay in making the present application. He submits that the plaintiffs should not have made the full use of the summer vacation to lodge an appeal and have waited for 10 weeks to make the present application given the urgency of the renewal of the Injunction.

50.  I agree that the plaintiffs could have made the present application more promptly. I believe that they somehow feel secured with the de facto injunction by their failure to notify the banks. In any event, I am not convinced that delay is a cogent factor to refuse a renewal of the Injunction.

Conclusion and disposition  

51.  By reason of the foregoing analysis, I come to the conclusion that the plaintiffs do not have a good arguable appeal with a reasonable prospect of success. The minimum requirement before a court would consider even granting an injunction pending appeal cannot be met. I should, therefore, dismiss the plaintiffs’ application on this basis.

52.  However, the following extract from Gee, Commercial Injunctions, (6^th Edn., 2016) at §24-035 (p.868) appears to be apposite:

“even if the court of first instance is not minded to grant the injunction pending an appeal, the court will normally maintain the status quo pending the hearing of an application to the single judge or the Court of Appeal (as the case may be).”

53.  I have already explained my view on the risk of dissipation and the balance of convenience. Coupled with the fact that the plaintiffs have indicated that they would definitely lodge an appeal against the Judgement within this month, I believe I should maintain the status quo and allow an interim renewal of the Injunction pending the determination of the plaintiffs’ prompt application to the Court of Appeal for a renewal of the Injunction pending appeal.

54.  Hence, in addition to the dismissal of the Summons, I further order that the Injunction be renewed until the determination of the plaintiffs’ renewed application to the Court of Appeal to be made within 21 days from today.  I should make it clear that if the plaintiffs do not make the renewed application to the Court of Appeal within 21 days, the renewal of the Injunction by this court would cease to have effect.

55.  There is no reason why costs should not follow the event. I make a costs order nisi that the plaintiffs should bear the costs of Mr Ma of and occasioned by the Summons, to be taxed if not agreed.

56.  It remains for me to thank Mr Wong, Ms Ngai and Mr Cooney for their helpful assistance in this matter.

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1062 OF 2012

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JUDGMENT

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1.  The plaintiffs are a group of overseas companies in the business of the provision of post-secondary and online educational services in the PRC (“the Group”). They brought this action against the 1^st to 5^th defendants for damages for the massive financial loss resulting from the alleged breaches of their respective duties and/or other tortuous acts. The 6^th to 13^th defendants were joined in these proceedings only for the purposes of the injunctive relief obtained by the plaintiffs by reason of their holding of the assets of the 1^st to 5^th defendants.

2.  In a nutshell, the case of the Group is that in the wake of a reshuffle of the management in the Group, all of the 1^st to 4^th defendants were removed from their respective key managerial positions in late 2011 and early 2012. Thereafter, the new management allegedly discovered that there had been a number of abnormalities and irregularities in the operation of the Group, incurring heavy financial losses allegedly attributable to the misconducts of the 1^st to 5^th defendants.  More precisely, the Group, having conducted a hugely profitable business with sizable cash balances over the years, had been reduced to impecuniosity due to a massive fraud perpetuated by, among other persons, the defendants.

3.  Given the default of the respective unless orders made against the 1^st and 4^th defendants, the plaintiffs have entered final judgement against them. Furthermore, immediately before the commencement of the trial, the Group withdrew their claim against the 2^nd defendant and agreed to pay him costs in the sum of HK$230,000. Therefore, for the purposes of this trial, there are only two defendants left, namely the 3^rd and 5^th defendants.

4.  The involvement of Ms Fu, the 5^th defendant, in these proceedings is very much limited, and has hardly gone beyond the pleading stage. She has long been absent from the relevant hearings including this trial. The great majority of the Group’s allegations are targeted at the 1^st to 4^th defendants. Among them, only the 3^rd defendant, namely, Mr Jim Ma (“Mr Ma”) persists in his defence. This trial essentially is a fight between the plaintiffs and Mr Ma only.  In spite of this, I do not overlook that the Group is still required to prove their pleaded allegations against D5, despite her lack of evidence in support of her defence as well as her non-attendance.

5.  Mr Ma denies liability. The main thrust of Mr Ma’s defence is that he was also ignorant of such abnormalities and irregularities, and despite his position in the Group, he should not be held responsible for them and he also could not be expected to be able to curb them.  He contends that he was in the same plight with the Group, and if the Group was defrauded, he was as well.  

6.  Mr Ma, on the other hand, has a counterclaim for his outstanding monthly salary from November 2011 to March 2012 with credit given to a sum of RMB 25,000 already received. His monthly salary was HK$99,000 and the amount that he now claims is about HK$470,000. The Group does not contest this claim.

7.  Moreover, in his counterclaim, Mr Ma claims damages for his loss and damage arising from a Mareva injunction granted by A. Chan J against him upon the application of the Group (“the Mareva Injunction”). This is an unusual claim, and Mr Ma has not adduced any evidence to support his alleged loss and damage. In any event, if the Mareva Injunction is found to have been wrongly granted, the Group pursuant to their undertaking should compensate Mr Ma for his loss and damage and this should not be canvassed in the trial.

8.  The issues in the main trial between the Group and Mr Ma are, firstly, what exactly Mr Ma’s positions in the Group was or were and thus what his duties and obligations were. Secondly, whether there were such abnormalities and irregularities in the operation of the Group. Thirdly, whether Mr Ma was accountable for such abnormalities and irregularities in view of the findings of the first issue.

9.  I should first give an introduction of the relevant parties and an account of the background facts. For the former, I may simply adopt the neutral part of the statement of claim to which the defence of Mr Ma has no gainsay. For the latter, in addition to the uncontroversial averments in the statement of claim, I also with respect adopt the summary made in the decision of A. Chan J dated 11 November 2013 whereby the Mareva injunction, among other things, was granted against Mr Ma (“the Decision”).

Parties

10.  The 1^st plaintiff (“P1”) is a company incorporated in Delaware, the United States of America with its principal place of business in Hong Kong. It had been listed on the NASDAQ stock market from October 2007 until it was delisted on 2 May 2012.

11.  The 2^nd plaintiff (“P2”) is a BVI company and a wholly owned subsidiary of P1. P2 entered into certain service agreements with each of the 1^st to 4^th defendants as their employer.

12.  The 3^rd plaintiff (“P3”) and the 4^th plaintiff (“P4”) are wholly owned subsidiaries of P1 incorporated under the laws of the People’s Republic of China as wholly foreign owned entities (“WFOEs”) with their principal place of business located in Shanghai (“the Shanghai Office”).

13.  The 5^th plaintiff is another WFOE within the Group with its principal place of business situated in Beijing (“the Beijing Office”)

14.  Until 26 March 2012, Mr Chan, the 1^st defendant, (“D1”) had been, among many other positions in the Group, a director and the Chairman and Chief Executive Officer (“CEO”) of P1 and P2; a director, the Chairman and their Legal Representative of P3 and the General Manager, Executive Director and Legal Representative of P4.

15.  Until his resignation on 26 March 2012, Mr Antonio Sena, the 2^nd defendant, (“D2”) was the Chief Financial Officer (“CFO”) and Secretary of P1 and P2 and a director, the General Manager, and Legal Representative of P5 until his removal from such positions on 20 April 2012.

16.  Mr Ma was the Chief Accounting Officer (“CAO”) and Vice President of P1 and P2 until his removal from such positions on 11 April 2012. Whether he was also the supervisor of P5 is a live issue.

17.  Mr Jiang, the 4^th defendant, (“D4”) was the Chief Investment Officer and President of P1 and P2 and a director of P3 until his removal from such positions on 29 March 2012.

18.  Ms Fu was locally born and had accounting experience. She assisted the financial side of the Group and her exact role is in dispute.

Background facts

19.  The background facts common to all the allegations of the Group are mostly uncontroversial. Firstly, I will give a summary of such facts pleaded in the statement of claim of which I am satisfied are supported by undisputed evidence.

20.  I shall start by providing more information about the business of the Group. The Group is a profit-making, post-secondary education and e-learning surfaces provider and they have an international clientele. The major business was carried on by P1.

21.  P1’s business had been divided among two main lines of business, viz, an e-learning and training services group (“ELG”), and a traditional university group (“TUG”).

22.  The TUG business offered bachelor and diploma programs to students in the PRC, and it involved three universities in the Mainland. They are the Foreign Trade and Business College of Chongqing Normal University (“FTBC”) in Chongqing, Lijian College of Guangxi Normal University (“LC”) in Guilin, and Hubei Industrial University Business College (“HIUBC”) in Wuhan.

23.  All these educational institutions were owned by P1 through such other companies under its ultimate control. For present purposes, it is not necessary to spell out the rather complicated corporate structures. Suffice it to say that P5 is one of the WFOEs which held the holding companies of LC and HIUBC until they were wrongfully transferred out of the Group.

24.  The TUG business generated approximately US$46.4 million in revenue for 2010, as reported in the annual report of P1 by way of Form 10-K filed with NASDAQ on 24 February 2012.

25.  It is convenient at this juncture for me to now give an introduction of the document known as Form 10-K. When P1 was listed, it was subject to various obligations imposed by NASDAQ and the Securities and Exchanges Commission of the US (“SEC”). One of such obligations is that P1 was required to submit a Form 10-K, that is, an annual comprehensive summary report of a listed company’s performance, to the SEC at the end of each fiscal year. A Form 10-K is a bulky document containing all the relevant information reflecting the true financial condition of a listed company including all its subsidiaries in even more detail than an annual report. It usually contains audited financial statements. On the other hand, a Form 10-Q is a listed company’s quarterly report containing fewer details.

26.  Another document worthy of a specific mention is Form 8-K. This is a form that is filed by listed companies in the US to inform their shareholders, and the general public, of unscheduled material events that are important to shareholders.

27.  For the preparation of Forms 10-Ks and 8-Ks in fulfilment of its statutory duty, P1 had to prepare and submit quarterly consolidated group financial statements (“CFSs”). Deloitte Touche Tohmatsu CPA Ltd (“Deloitte”) was the external auditor of the Group and it audited the CFSs.

28.  P3 and P4 are Mainland companies owned by P2 and they perform the corporate treasury function holding key bank accounts for P1. P3 has a registered capital of approximately RMB220 million, and P4 approximately RMB 190 million.

29.  P2 had no business operation on its own after 2007. It merely performed the personnel function for the Group and entered into service agreements with the staff of the Group including the 1^st to 4^th defendants.

30.  In late 2011, there was a proxy contest. The shareholders of P1 were at loggerheads over the constitution of the board, leading to a contentious proxy contest in an annual general meeting held on 10 January 2012. This proxy context gave rise to a series of SEC filings and Delaware litigation in the US from December 2011 to January 2012. The protagonists were one Mr Sherwood on the one hand, and D1 on the other. Eventually Mr Sherwood prevailed and his nominees were appointed to the newly constituted board despite the objections raised by D1.  

31.  Shortly afterwards, at the request of the shareholders of P1, a firm of forensic accountants FTI Consulting (“FTI”) was engaged by the audit committee of P1 (“the Audit Committee”) in late 2011 to conduct an independent verification of P1’s bank balances and fixed deposits in the PRC as at 30 June 2011.

32.  The new management also experienced grave difficulties in gaining access to the accounting documents of the Group, most of which had already been destroyed or gone missing. To the dismay of the new management, despite the apparent profitability of the business of the Group, as a result of the investigation carried out by FTI, they found out that the Group was actually impecunious with their major businesses having already been transferred away.  Unsurprisingly, they direct their acquisitions at the 1^st to 5^th defendants.

33.  In this Judgment, I shall focus on those pleaded allegations against Mr Ma and Ms Fu. The allegations against Mr Ma could be broadly described as follows:

 (1)  obstruction of the audit process and destruction of documents;

 (2)  unauthorised borrowings;

 (3)  pledges of time deposits;

 (4)  dissipation of cash balances;

 (5)  misappropriations of the funds of the Group;

 (6)  transfer of colleges; and

 (7)  mismanagement of the ELG business.

34.  The Group complains about the large-scale destruction, and/or removal of the accounting documents of the Group allegedly under the instruction of D1 thereby seriously impeding their investigation. Mr Ma is not able to argue otherwise. Another handicap of the Group is that, as acknowledged by their former senior counsel as demonstrated in the Decision, there is no direct evidence of any involvement of Mr Ma.

35.  This is also the submission of their current counsel, Mr Wong assisted by Ms Ngai. One of the repeated statements made in the oral evidence of Mr Woodrum, the current CFO of the Group, was that he did not witness (eyeball in his language) any wrongful acts committed by Mr Ma personally but he was sure that Mr Ma must have had a hand in it by reason of his position(s) within the Group. Notwithstanding the enormous amount of documentary evidence placed before me by the Group, there is not a single document indicative of the active involvement of Mr Ma in the wrongdoings.

36.  Mr Wong pitches the case of the Group lower than Mr Woodrum. He submits that there is a reasonable inference of connivance on the part of Mr Ma at the wrongs done to the Group given the key position assumed by him, and had Mr Ma put in place efficient financial controls such wrongs could have been nipped in the bud.  Mr Wong submits that Mr Ma was in breach of his duties as CAO of the Group.

37.  As Mr Wong fairly puts it, the Group’s claim is one of inferences. There is no photograph of Mr Ma reviewing the genuine bank statements and ledges of the Group. In Mr Wong’s submission, the Group’s case is one that requires this court to make inferences on primary facts. He submits that the primary facts irresistibly show that Mr Ma must have knowledge of the fraud and wrongdoings and yet opted not to do anything to stop them.

38.  In his closing submissions, Mr Wong invites this court to reach the following factual conclusions:

(1)  the corporate governance of the Group under the management of D1 was extremely poor and such deficiencies, had been identified by the external auditors including Bossfounder and Deloitte;

(2)  the prevailing financial controls were patently lacking and Mr Ma had unjustifiably, contrary to the content of his Service Agreement, the public announcements of the Group and the representation letters signed by him, sought to shift the blame on Bossfounder and Deloitte;

(3)  notwithstanding his blanket assertions, Mr Ma did receive the accounting documents such as the authenticated bank statements, which disclosed the dubious transactions and hence Mr Ma was aware of them;

(4)  Mr Ma merely minimizes his role and distances himself from the wrongs committed against the Group and he had failed to detect a systematic fraud practised on the Group on an exemplary scale over a substantial period of time;

(5)  whatever financial controls which were put in place had (1) necessitated funds recycling to “create” a bank balance to show receipts of funds which ought to have been received by the Group and (2) allowed the systematic occurrence of transactions which were highly irregular and did not serve any commercial purpose.

39.  It was quite obvious that the corporate governance of the Group was problematic and the financial controls left much to be desired. As a result, dubious transactions took place and the Group has suffered substantial loss. But this does not necessarily follow that Mr Ma should be personally liable and accountable for such loss.

40.  It is imperative to bear in mind the exact causes of action against Mr Ma in the pleading. Although very often the emphasis of Mr Wong is on Mr Ma’s failure to install effective internal financial controls in breach of the duties under his service agreement, it must be remembered that this is not a case of professional negligence. Nor is it a case of common law negligence. The alleged breach of contract and the PRC statutory duty is premised upon the allegation of Mr Ma’s connivance at all the wrongdoings injurious to the financial interests of the Group and/or his actual involvement in certain fraudulent transactions, and not upon his alleged incompetence or negligence. Such alleged conducts of Mr Ma are arguably criminal in nature.

Relevant legal principles

41.  Before I deal with the substantive merits of the parties’ respective cases, it is apposite for me to remind myself of the legal principles germane to (a) standard of proof, (b) connivance and (c) inferences to be made on circumstantial evidence. In this regard, both Mr Wong and Mr Cooney S.C., together with Mr Oh, for Mr Ma, have very helpfully supplied the relevant authorities to this court.

42.  For the applicable standard of proof in this trial, first I should refer to the Court of Final Appeal’s decision in Solicitor (24/07) v Law Society of Hong Kong [2008] 2 HLRD 576. There, Bokhary PJ, after reviewing a number of authorities in Hong Kong as well as in other Commonwealth jurisdictions, affirmed the applicability of the renowned Re H (minor) principle and had this to say at §116,

“The more serious the act or omission alleged, the more inherently improbable must it be regarded. And the more inherently improbable it is regarded, the more compelling will be the evidence needed to prove it on a preponderance of probability.”

43.  It should be noted that there, the Court of Final Appeal was deciding on the appropriate standard of proof for disciplinary proceedings in Hong Kong. The parties here do not have quarrel over the applicability of their conclusion to civil proceedings. The standard of proof required here is still the balance of probability to be satisfied by more compelling evidence.

44.  Now I turn to the notion of connivance. Mr Cooney invites my attention to the decision of DHCJ Albert Wong (as he then was) in HKSAR v Li Fung Ching Catehrine [2012] 3 HKLRD 377. In the absence of any definition of the term “connivance” in the Employment Ordinance, the deputy judge, when considering the offence of connivance thereunder, made reference to its dictionary meanings in the following dictionaries at §§62-65:

“indulgence and non-interference of misconduct” – The New Longman Advanced Chinese Dictionary

“assistance in wrongdoing by conscious failure to prevent or condemn or tacit permission whilst the word “connive” means shutting one’s eyes to something.” – The Shorter Oxford English Dictionary

“turning a blind eye to an action one ought to oppose and tacit permission.” – The English-Chinese dictionary of Joint Publishing

45.  The deputy judge concluded that to connive at somebody’s act, whether or not one agrees or disagrees with the act is not important, what is important is that one fails to stop it from happening knowingly.

46.  For completeness, this court also derives assistance from Black ‘s Law Dictionary (10^th edn.), which defines “connivance” as the act of indulging or ignoring another’s wrongdoing, especially when action should be taken to prevent it and “connive” as knowingly overlooking another’s wrongdoing.

47.  In light of the foregoing dictionary definitions, I am of the view that one can be held to have connived at somebody’s wrongdoing only if he or she had knowledge of the wrongful act, and he or she was in a position to prevent the wrongful act from being committed or continued. Knowledge of the wrongful act is an essential element of connivance.

48.  Pausing here, I note that the Group’s pleaded case of connivance is based on the position(s) of Mr Ma within the Group.

49.  For inferences, Mr Wong very fairly draws my attention to the following dictum of Ribeiro PJ in Ming Shiu Chung & Ors. v. Ming Shiu Sum & Ors. (2006) 9 HKCFAR 334 at §§78-79 & 82:

“78. Whether, at the end of the day, the court is entitled to draw the inference sought by the plaintiffs therefore depends on the evidence as a whole, the evidence both for and against such inference…. That is a matter of inference and what I stated in Nina Kung alias Nina T H Wang v Wang Din Shin (FACV No 12 of 2004, 16 September 2005), albeit there stated in relation to drawing an inference of forgery, equally applies in the present case:

“Where ...... the court is invited to reach a conclusion of forgery as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question.” (§185)

79. As was there pointed out, Dixon CJ stressed in Jones v Dunkel (1959-1960) 101 CLR 298 at 305, that a court is not entitled to

“...... choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied.” (at 305)

82. The problem is not confined to a question of logic. The evidence falls far short of compelling a “lack of knowledge” conclusion. It is at best equivocal and, with respect, was not fully considered by the Court of Appeal… Other matters relied on by each side do not resolve the overall equivocality of the evidence. The plaintiffs have therefore, in my view, plainly fallen short of establishing that the father signed in a state of ignorance. I would have reached this conclusion simply applying the balance of probabilities. They certainly fail to satisfy a Re H standard of proof.”

50.  I pause again to note that the major primary fact from which an inference of culpability is urged to be drawn by the Group is that Mr Ma assumed the position of CAO within the Group and the supervisor of P5. Mr Wong submits that, given the magnitude and the duration of such wrongful acts committed against the Group, they could not have escaped the attention of an honest CAO, as observed by A Chan J in the Decision.

51.  On the other hand, Mr Cooney warns against the dangers of relying on circumstantial evidence to establish one’s case, referring to the following paragraph in Breslin v Murphy [2013] NICA 75 at §45:

“Both civil and criminal cases can depend on circumstantial evidence. In the context of a civil law tort claim circumstantial evidence involves the plaintiff relying upon evidence of various circumstances relating to the claim which taken together the plaintiff claims establish liability on the part of the defendant because the proper conclusion to be drawn on a balance of probabilities is that the defendant is liable. In the criminal law context the standard direction to the jury includes a direction to the jury that it is not necessary that each fact upon which the prosecution relies taken individually proves that the defendant is guilty. The jury must decide whether all of the evidence has proved the case. Pollock CB in the well-known case of R v Exall [1866] 4 F&F used the well-known rope analogy:

“It has been said that circumstantial evidence is to be considered as a chain, and each piece of evidence as a link in the chain, but it is not so, for then if any one link breaks, the chain would fall. It is more like the case of a rope comprised of several cords. One strand of the cord might be insufficient to sustain the weight but three strands together may be quite of sufficient strength. Thus it may be in circumstantial evidence there may be a combination of circumstances no one of which would raise a reasonable conviction or more than a mere suspicion, but the three taken together may create a conclusion of guilt with as much certainty as human affairs can require or admit of.”

The standard criminal law direction to juries in criminal cases goes on to point out that circumstantial evidence must be examined with care for a number of reasons. Such evidence can be fabricated. It must be seen whether or not there exists one or more circumstances which are not merely neutral in character but are inconsistent with any other conclusion than that the defendant is guilty. This is particularly important because of the tendency of the human mind to look for and often to slightly distort facts in order to establish a proposition, whereas a single circumstance which is inconsistent with the defendant's guilt is more important than all the others because it destroys the conclusion of guilt on the part of the defendant. The principles there stated apply equally in the context of a civil law claim subject to the modification that whereas the prosecution must prove its case beyond reasonable doubt plaintiffs in a tort claim need only prove the case on a balance of probabilities albeit bearing in mind that in a case such as the present the evidence required must be sufficiently cogent to dispel the inherent unlikelihood of individuals involving themselves in a serious terrorist outrage of this kind.”

52.  I should scrutinise the witnesses’ evidence in light of the foregoing authorities.

General observations about witnesses of the parties

53.  The Group had three witnesses whereas Mr Ma alone testified for himself.  Mr Feng was the CEO of P1 from March 2012 to August 2014. He has assumed several key positions of P5 since 20 April 2012. Due to his late involvement, he did not have much personal knowledge of the key matters in dispute and those of his evidence, consisting of hearsay evidence and opinion, is not really that helpful.

54.  Mr Woodrum, the current CEO and CFO, is also a shareholder of P1. He is responsible for overseeing the financial side of the Group. Again, he had little personal knowledge of the crucial matters. He impressed me as an honest person, but I could not totally accept and work on his allegations. His frustration with Mr Ma was very obvious, and somehow understandable. He was eager to attach liability to Mr Ma due to his strong suspicions about him, despite his admitted lack of direct evidence. Mr Ma was the remaining target at trial and Mr Woodrum left no stone unturned to pin the blame on Mr Ma. He at one stage even alleges under cross-examination that Mr Ma falsified the accounting documents of the Group, even though such allegations do not feature in the pleading and Mr Wong expressly confirms that no such claim is made against Mr Ma. This court would be careful in the assessment of his evidence and should exclude all of his opinions and surmise from consideration.

55.  Mr You was the assistant to D4 and was based in the Shanghai Office. His evidence mostly related to events taking place after the removal of Mr Ma. He allegedly went to Mr Ma’s office in Beijing in August 2012 and could only recover some old documents of the Group. He also paid a visit to the three colleges of the Group in mid 2012 on the instructions of Mr Feng and Mr Woodrum to carry out investigations. He gave me the impression that he was not very sure about his evidence and he did not appear to be a reliable witness.

56.  Mr Ma’s personal information will be given below. In the witness box, perhaps owing to his good education, Mr Ma appeared to be a deep-thinker speaking with clarity, confidence and precision. He was very intelligent and analytical. He was subject to lengthy and vigorous cross-examination and he never lost his patience and composure throughout. He paid close attention to the questions posed to him and sounded well-reasoned in his answers, though he was noticeably defensive. I was impressed with his demeanour, but I should be mindful that demeanour can be deceptive and is not always reliable.

Mr Ma’s background, position(s) and duties within the Group

57.  There is a heated debate about Mr Ma’s positions and duties within the Group and this is the first issue I have to resolve. Before dealing with this controversy, I shall outline Mr Ma’s background. The following personal information of Mr Ma contained in his witness statement is not challenged.

58.  Mr Ma was born and bred in Hong Kong and is now in his mid-40s. As a student, he excelled at mathematics and secured a full scholarship to his master degree course in finance at Cambridge University. It was no mean feat. After graduation in 1994 with a master degree in finance and another master degree in engineering, Mr Ma returned to Hong Kong in 1994 and started working for Lippo Securities Limited (“Lippo”) as an associate director providing mergers and acquisitions and initial public offering advice to its corporate clients. During his employment with Lippo, Mr Ma obtained the qualification as a chartered financial analyst in 1997 through his success in public examinations. Mr Ma makes it clear that he does not have any professional accounting training and is not a qualified accountant. To this, there is no contrary evidence.

59.  In or around 1999, Mr Ma was recruited to work for the Group by P2 when it was its infancy stage only. On 11 April 2012, Mr Ma left the Group pursuant to a written notice issued by P2.

60.  In the Form 10-K filed on 11 September 2006, the description was that Mr Ma joined the Group in 1999 as Vice President of Finance. Mr Ma was responsible for the financial reporting, cultivating/maintaining investor relationships and other corporate finance activities.

The Group’s case

61.  Mr Ma signed the service agreement with P2 dated 4 January 2010 (“the Service Agreement”) whereby he was appointed the Executive in the employment of P2. Clause 3.1 of the Service Agreement, under the heading of “Duties”, provided the following:

“3.1 The Executive shall during the Term:

3.1.1 serve the Company in his capacity as Chief Accounting Officer with such executive and management responsibilities and duties (consistent with the Executive’s position as Chief Accounting Officer of the Company) as may from time to time reasonably be assigned to the Executive by the Chief Executive Officer of the Company (“CEO”) and/or the board of directors of the Company (the “Board”), including all of the powers and duties usually incident to such position for a U.S. listed public company, and specifically including but not limited to (a) creation and maintenance of proper financial controls; (b) development and submission of financial reports in accordance with U.S. Securities and Exchange Commission requirements; (c) development of corporate governance policies and procedures; (d) managerial accounting; (e) treasury functions; (f) accounting functions, including accounts payable and receivable; (g) cost controls; (h) payroll; (i) management of legal functions; (j) support of activities to identify and enter into additional joint ventures with universities; and (k) support of activities for attracting new capital and financing.

3.1.2 devote the whole of his working time, attention and abilities during normal business hours and such additional hours as may reasonably be required to administer the duties associated with his position; and

3.1.3 use his best endeavors to promote and protect the interests of the Company and shall at all times keep the Board promptly and fully informed of all matters relating to or in connection with the performance and exercise of his duties under the Agreement.

3.2 The Executive shall work in Hong Kong or the PRC which the Board may require for the proper performance and exercise of his duties under this Agreement.

3.3 The Executive shall be required to work such hours as are reasonably necessary to fulfill his duties under this Agreement.”

11.3.2 The Executive (…) shall deliver to the Company in accordance with the directions of the Board, all keys security passes, credit cards, the Documents and other property belonging to all relating to the business or affairs of the Company or any Group Company, including all copies of all Documents containing all referring to Confidential Information which may be in his possession or under his control and shall not retain copies, extracts or notes of any of the same.”

62.  Although only Mr Ma and P2 were privy to the Service Agreement, the Group’s case is that Mr Ma owed such duties to P1 and indeed the entire Group.

63.  Subsequently, Mr Ma was appointed the CAO and Vice President of P1 after the listing on NASDAQ in 2007. The unchallenged evidence is that being the CAO, he was the head of the Group’s accounting and treasury function. Mr Ma was the one that dealt with Deloitte on behalf of the Group and he was provided with the bank statements and the accounts every quarter by the subsidiaries. Each of the subsidiaries in the Group would submit trial balances to Mr Ma on a monthly basis for his preparation of the CFSs. These CFSs comprised profit and loss accounts, balance sheets and cash flow statements on a consolidated basis. All these documents should reveal all the actual transactions undertaken by the Group.

64.  As the CAO, Mr Ma had duties and obligations under various US federal laws and regulations and Delaware corporate law for a US issuer, including the development and submission of reports in accordance with the SEC requirements. He had obligations under the US Sarbanes-Oxley Act (“SOX”) to provide certifications in respect of P1’s financials which formed part of his US securities duties.

65.  Apart from his US securities duties, the pleaded case of the Group is that Mr Ma had certain statutory duties in accordance with the PRC Company Law. I need not set the relevant provisions out here and the following should suffice.

66.  Article 148 provides that the directors, supervisors and senior managers shall comply with the PRC laws and bear the obligations of fidelity and diligence to the company.

67.  Article 149 provides that no director or senior manager may act dishonestly in dealing with the properties, both tangible and intangible, of the company.

68.  Lastly, Article 150 provides that any director, supervisor or senior manager violates any law, administrative regulation or the bylaw during the course of performance of his duties shall be liable for compensation to the company for any loss caused.

69.  The Group contends that these provisions in the PRC company law apply to Mr Ma by reason of his position as the supervisor of P5. They say that the records filed with the State Administration for Industry and Commerce, a Mainland authority overseeing business undertakings in the PRC, (“AIC Records”) relating to P5 plainly show that Mr Ma had such a title. It was an application form for a change of the registration record of P5.[1]

70.  Furthermore, in the course of cross-examining Mr Ma, Mr Wong indicated that the alleged position as the supervisor of P5 is only relevant to the Group’s allegation regarding the wrongful transfer of colleges and Mr Ma was in breach of Article 150 of the PRC Company law.

71.  Mr Ma had to ensure compliance with the relevant accounting standards and practices, designing internal control systems to avoid fraud and misappropriation. This includes ensuring that material information was communicated to him, enforcement of accounting policies, internal audits, tax, liaison with external auditors, implementation of audit report recommendations and the management of financial risk for the group including liquidity risk management, cash management, investment management and capital structure (such as share issurance and repurchase). He was at the nerve centre of the finance and treasury functions of the Group and he had to report the performance of his duties to both D1 and D2.

72.  In providing the CFSs to Deloitte for the purpose of the filing of Form 10k, on behalf of P1, D1, D2 and Mr Ma signed a representation letter (“the Representation Letter”) giving the following confirmations about their responsibilities:

a. The fair presentation in the condensed consolidated interim financial statements in conformity with generally accepted accounting principles;

b. The design and implementation of programs and controls to prevent and detect fraud;

c. Establishing and maintaining effective internal control over financial reporting.

73.  Further, in the Representation Letter, D1, D2 and Mr Ma also confirmed that they had no knowledge of any fraud or suspected fraud affecting the company involving:

a. management,

b. employees who have significant roles in the company’s internal control over financial reporting and

c. others if the fraud could have a material effect on the condensed consolidated interim financial statements.

74.  In the Form 10-K for the fiscal year ended 31 December 2010, as the independent registered public accounting firm reporting to the board, Deloitte said this (“the Deloitte Observations”):

“A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material witnesses have been identified and included in management’s assessment:

1. Lack of sufficient skilled resources in the finance team to meet the demands of rapidly expanded businesses which resulted in a delayed closing process.

2. Lack of contemporaneous documentation of certain decisions made by the Board of Directors.

3. Accounting for the prepaid surface the – during 2011, the company reinterpreted its position related to the evaluation of the contractual requirement for non-current advance referred to as the prepaid service fee. As a result of that process, the company concluded it lacked adequate and effective controls to ensure all contractual requirement as well as relevant accounting guidance were conceded in determining the appropriate accounting for the prepaid service fee. This material weakness contribute to the restatement to the previously reported consolidated financial statements for the year ended December 31, 2010, as discussed in note 27 to the consolidated financial statements under the caption second restatement.

The material weaknesses were considered in determining the nature and extent of audit as applied to our audit of the consolidated financial statements and financial statements surge as of and for the year ended December 31, 2010, of the company and this report does not affect our report on our such financial statements and financial statement schedule.

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in internal control – integrative framework issued by the committee of sponsoring organisation of the Treadway Commission.”

MrMa’s case

75.  Mr Ma has a very different view on his positions in the Group as well as his duties and obligations to perform.

76.  First and foremost, Mr Ma denies that the express provisions in the Service Agreements truly reflected his actual duties by reason of an estoppel. His evidence is that prior to January 2010, he did not have any written agreement with the Group, except one he signed when he first joined P2 in 1999. In 2009, D2 approached him and asked him to sign a service agreement with P1 for the purpose of the listing of P1 in the US.

77.  When Mr Ma read the provisions relating to his duties in that service agreement, in particular clause 3.1.1 thereof, he found that the duties specified therein were inconsistent with the duties undertaken by him in that the scope was much wider.

78.  Mr Ma duly raised this concern with D2. He took particular exception to the inclusion of the following duties: managerial accounting, treasury functions, accounting functions, payroll, cost control and management of legal functions. He had neither legal nor accounting qualification and so he could not perform such functions. D2 assured Mr Ma that the service agreement was drafted by the US lawyers for the Group in fulfilment of the US regulations only and despite the express term, his duties would remain the same and all such additional duties stated in the service agreement would be undertaken by such professionals engaged by the Group. D2 represented to Mr Ma that the service agreement was merely a formality. All the foregoing assurances and representation given by D2 to Mr Ma were made orally (“D2’s Assurances”).

79.  However, due to Mr Ma’s concern about tax liability in the US, it was not executed.

80.  In January 2010, D2 requested Mr Ma to sign the Service Agreement with P2. It was identical to the unsigned service agreement with P1. Mr Ma noted that the same provisions relating to his duties and obligations were there, but simply relied on D2’s Assurances and did not repeat his concerns. Under these circumstances, Mr Ma signed the Service Agreement.

81.  In his pleadings, Mr Ma makes a plea that the Group is estopped from relying on Clause 3.1 of the Service Agreement.

82.  Mr Ma based in Hong Kong from 1999 to 2001. Since 2002, Mr Ma had worked from the office of the Group in Beijing. On his own evidence, which was not challenged, Mr Ma’s work from 2002 to 2007 included dealing with professionals engaged to conduct due diligence and prepare legal documentation and preparation and submissions of CFSs on a quarterly basis in accordance with the US regulations. From 2004 to 2007 when the holding company of P2 was listed in Singapore Stock Exchange (“SSE”), there were additional duties including dealing with the enquiries of SSD, and working with auditors on the quarterly and annual reports.

83.  It is important to note what Mr Ma said about his actual duties from 2007 onwards.

84.  In his pleading, Mr Ma makes it clear that he had no responsibilities for operation matters, business strategy or decision-making. He reported directly to D2 and acted on his instructions. Subsequently, on issues of corporate restructuring, he acted on the instruction of D1. He emphasizes that he was not a director and never a member of the board. Mr Ma further sets out his duties in the following terms:

(a)  preparing a CFS for the Group for each quarter. Mr Ma would be provided with the accounts for each of the subsidiary companies and once these had been made compliant with the relevant international accounting principles (first IFRS and subsequently from 2007 onwards, US GAAP), Mr Ma would consolidate them into a consolidated financial statement. Mr Ma played no role in the preparation of the accounts provided to him by each subsidiary company and had no power to comply their creation or provision;

(b)  providing the final quarter consolidated financial statements to the auditors, Deloitte, for use by them in performing quarterly reviews and audit. Deloitte would conduct its reviews or audit procedures on the basis of consolidated financial statements provided to them by Mr Ma. Mr Ma also provided support to Deloitte such as helping them to get the necessary information and when they were conducting field audit. Mr Ma would prepare accounting memoranda based on US GAAP accounting literature and would discuss accounting treatment with Deloitte;

(c)  working with professionals such as Deloitte on tax issues of the Group;

(d)  providing financial information explaining or underlying the CFSs to D2 (CFO) for presentation to the Audit Committee at their telephone meetings held approximately quarterly. Mr Ma also attended these meetings by telephone in case there were questions about the information provided by him;

(e)  working with the internal auditors engaged by the Group to ensure compliance of P1 with the SOX requirements since the listing of P1 on NASDAQ;

(f)  building financial models for presentation to financial analysts and potential investors in fund-raising rounds to acquire colleges in the PRC;

(g)  assisting D2 in drawing up an annual audit budget for the Group for board approval and

(h)  assisting with corporate restructuring of the Group such as advising and working with external professionals on accounting aspects of restructuring and on listing requirements. Mr Ma did not carry out the actual filing of documents with the authorities, arranging for the signing of documents or the execution of share transfers, which were undertaken by the legal team in the PRC.

85.  On his own evidence, Mr Ma was responsible for the preparation and submission of CFSs for the Group on a quarterly basis in accordance with the US regulations since about 2001. To this end, the following documents (collectively “the Received Documents”) were provided to Mr Ma:

(a) profit and loss account and balance sheet from each subsidiary (there were at least 15 of them after 2010);

(b) general ledger covering the relevant quarter from each subsidiary;

(c) monthly bank statements and bank reconciliation statements covering the quarter for all bank accounts;

(d) a closing checklist decided by the internal auditors  setting out those tasks that the financial manager of each subsidiary should have completed before closing of the accounts for the subsidiary for the quarter. This provided an additional safeguard to ensure compliance with the SOX requirements.

86.  It is equally important to note what Mr Ma expressly pleads to be outside the ambit of his duties. He denies that he was responsible for preparation of any underlying accounting data from the subsidiary companies, or any transfer or handling of any company funds of the Group. He avers that he had no power or responsibility to control these activities. He also distances himself from the auditing work of the Group. The external audit for the consolidated group accounts was undertaken by Deloitte. The Deloitte people would conduct a field audit paying visits to the offices of the PRC subsidiaries. They would directly communicate with the personnel of those PRC subsidiaries for discussion and requests for additional information if necessary. They would also perform sample checks on accounting vouchers and obtain independent bank confirmation of transactions. Mr Ma merely provided assistance to them, and did not perform any of the audit tasks himself for the subsidiaries.

87.  The PRC subsidiary companies were additionally required by PRC law to conduct an external audit in accordance with the accounting rules and principles of the PRC. A local accredited accounting firm was instructed to undertake these external audits in which Mr Ma had no involvement.Under cross-examination, Mr Ma disclosed that the external contractor was Legend House.

88.  Mr Ma was assisted by a PRC registered accountant in his work from 2007 onwards on his evidence. The identity of the professional accountant was not disclosed.

89.  I should add that the Group relies on an allegation in the defence of Ms Fu that she personally sent all such accounting vouchers, checks and remittance advice prepared by her in respect of the Group’s transactions in Hong Kong to Mr Ma to show that Mr Ma was in possession of the basic accounting information in respect of P1’s subsidiaries in Hong Kong. Since Ms Fu failed to file any evidence or testify to support this allegation, I can only disregard this in the absence of any documentary proof.

90.  With respect to internal auditing, in 2007, the Group appointed Protiviti Shanghai Co. Limited (“Protiviti”) and from 2009 to 2011, replaced Provititi with Primatrix Management Consulting Ltd. (“Primatrix”), which was later renamed to be Bossfounder (Beijing) Management Consulting Ltd. (“Bossfounder”) in 2011, to provide internal audit services for the Group. Primatrix was an independent professional firm specialising in auditing.

91.  In their respective internal audit reports, it was expressly stated that they were engaged to independently review the system of internal control as established by the management. This included its adequacy and integrity vis-a-vis the objectives served as well as to make appropriate recommendations thereof. They were to assess the scope of compliance with SOX.

92.  The Internal Audit Report of P1 dated 14 March 2011 prepared by Primatrix was available to this court. In the Primatrix Report, the conclusion made was that on the deficiencies evaluation process, Primatrix any significant deficiencies and material weaknesses in the internal controls over financial reporting.

93.  In the Internal Audit Report of P1 dated 12 March 2012[2] prepared by Bossfounder, the following limitations of internal audit were spelt out (“the Bossfounder Limitations”):

The internal audit procedures rely on mission and representations made available to the Bossfounder by the management of P1 and Hubei and price enquiries and observations and limited tests of transactions on a sample basis, covering the detailed assessment objectives. Accordingly, the internal audit procedures may not detect all fraud, defalcations and irregularities.

Our work as internal auditor does not in any way diminish the responsibility of P1’s management. The design, development, implementation and operation of internal control systems are the responsibility of individual P1 and Hubei managers. They are accountable for ensuring that adequate controls exist in the areas of their responsibility and should not rely solely on periodic visits as a means of monitoring the adequacy and integrity of controls.

94.  Mr Ma’s evidence is that his duty was to assist these internal auditors in their work who would make recommendations for internal procedures. Once their recommendations were accepted, these internal auditors would guide the implementation of the new internal procedures and conduct on-site inspection to ensure compliance.

95.  The Group cannot agree with the position of Mr Ma. They insist on the binding effect of the relevant provisions in the Service Agreement, in particular clause 3.1.1, and aver that if factually Mr Ma did not perform such duties which he now alleges not to be within his remit, he must be in breach of the Service Agreement.

96.  On the other hand, though accepting that a supervisor has statutory duties to perform in accordance with the PRC company law, Mr  Ma denies that he was ever appointed supervisor of P5. He maintained that he never signed anything to accept the position as a supervisor. Nor was he aware of this alleged appointment until he read the affirmation evidence of the Group. He also contends that a supervisor is not actually vested with any power of investigation and, generally speaking, in practice the role of a supervisor is mere window dressing in the PRC.

97.  Mr Ma accepted under cross-examination that he received the financial reports of P5, and he would review them but he did not do so qua the supervisor of P5.  

98.  Mr Ma further explained that D2 was the legal representative of P5 and he was directly accountable to D2. D2 might put his name down as the supervisor of P5 in the AIC records without actually telling him about this purported appointment. He had never come across any documents showing his designation as the supervisor of P5.

Analysis ofMrMa’s positions and duties

99.  On the evidence, I reject Mr Ma’s defence of estoppel. I do not believe Mr Ma raised objections to his duties set out in clause 3.1.1 of the draft service agreement in 2009. I am well aware of Mr Ma’s lack of accounting qualifications. However, on his own evidence, prior to 2009 he also performed accounting functions for P2 when its holding company was listed on SSE.  He also dealt with SSE on behalf of P2’s holding company. The said duties included in clause 3.1.1 should not cause him serious concern so much so that he had the urge to discuss the provision with D2 immediately.

100.  I am unable to accept that D2’s Assurance was made by D2 as a matter of fact. I do not believe that there was such a discussion about §3.1.1 between D2 and Mr Ma. D2 undoubtedly would be in a position to assist Mr Ma to establish his estoppel defence. Even after D2 dropped out of the picture on the first day of the trial, Mr Ma should have made an effort to procure his supportive testimony but, for unknown reasons, Mr Ma did not do. The adverse inference to be drawn is that D2’s evidence in this regard could not support his case.

101.  Nor can I accept that Mr Ma could establish that D2 had the authority to make D2’s Assurance on behalf of P2 or the Group. I also accept Mr Wong’s submission that no detriment is pleaded and the plea of estoppel by representation is deficient.

102.  For completeness, I should mention that in the course of the defence case, Mr Cooney made an application to amend the defence to include a defence of estoppel by convention. Mr Wong opposed the application on the ground of unexplained lateness, though he confirmed that no further evidence was required to be adduced from the Group to deal with the proposed defence.

103.  I rejected the application on the spot. First, as a matter of principle, it was made unduly late without any valid reasons given. More importantly, I do not accept the proposed amendments could constitute a valid defence of estoppel by convention. It is now settled law that the doctrine only applies where parties to a transaction act on an assumed state of facts or law: Unruh v Seeberger (2007) 10 HKCFAR 31 per Ribeiro PJ at §141.

104.  In the proposed amendments, the alleged assumption shared by P1, P2 and Mr Ma is that, whilst Mr Ma would act as CAO of P1, Mr Ma would not be responsible for, and did not assume duties, whether towards P1 or P2, for a number of functions forming part of his contractual obligations under §3.1.1 of the Service Agreement. This means that the contractual obligations would not be enforceable against Mr Ma, or that the entire Service Agreement would not be binding on Mr Ma.

105.  I opine that the alleged assumption is unable to found a valid defence of estoppel by convention. In Scottish and Newcastle Plc v. Lancashire Mortgage Corporation Limited [2007] EWCA Civ, Mummery LJ made this very clear in the following terms:

“This form of estoppel does not apply, however, to a representation or to a promise made by one party to the other as to future conduct, which is relied on and acted on by the other to his detriment. The essence of estoppel by convention is the assistance of a factual or legal state of affairs, the truth which has been assumed or assented to by the parties and is shared by them as the basis of their relationship with each other.”

106.  If the alleged assumption means that, despite the clear wording in the Service Agreement, Mr Ma did not have to perform such duties and hence he did not assume any practical responsibility for such duties because P2 would not enforce clause 3.1.1 against him, it only relates to the future conduct of the parties or a statement of intention.

107.  If the alleged assumption means that Mr Ma did not assume any legal responsibility under the said provision at all, this would mean that it was not binding on him and P2 had nothing to forbear. This is too far-fetched and in fact unsupported by Mr Ma’s own evidence. Mr Ma did not completely deny all the obligations under the Service Agreement.  

108.  For these reasons, I was unable to accept the late application of Mr Ma. Mr Ma should pay the costs of the Group relating to this application, to be taxed if not agreed.

109.  Returning to the duties of Mr Ma within the Group at the material times, I accept his unchallenged evidence relating to the tasks that he had to perform for the Group, in particular, his dealing with the Received Documents and his preparation and submission of CFSs. Despite his lack of accounting qualifications, such tasks actually entail sound accounting experience and working knowledge of the relevant accounting regulations and principles. It is really surprising that without any formal training or accounting qualifications, Mr Ma could assume the position of CAO even with the assistance of a professional PRC accountant.

110.  Insofar as the question as to whether Mr Ma was the supervisor of P5, I accept Mr Ma’s evidence that he had never expressly agreed to assume this position. I am aware that the Group was unable to adduce any documentary evidence to prove that Mr Ma ever acted in such capacity. The AIC record relied upon per se could not evidence Mr Ma’s acceptance of this position. I accept Mr Ma’s evidence that he had never come across the AIC record, which was filed at the incorporation stage.

111.  On the other hand, Mr Ma knew that there should be such a key position in P5 and a supervisor had his specific duties though he thought that it was commonplace in the PRC that such positions were only nominal in nature.  Mr Ma accepted that he was, in practice, the person in charge of the Beijing Office of P5, and also performed similar duties on behalf of P5.  There is no reason why Mr Ma could and did not identify who the actual supervisor of P5 was. I do not believe that in the course of his provision of service to P5, he never came across the actual supervisor if another individual assumed the position. I find it more probable that Mr Ma was the supervisor of P5 even though initially he had not expressly given his consent to be appointed as such. His knowing and voluntary performance of the duties of a supervisor could be taken as his tacit approval of his appointment to be the supervisor of P5.

112.  Nevertheless, I find this issue to be only a red herring. Whether Mr Ma was formally appointed as the supervisor of P5 does not alter the fact that he could not violate any law, administrative regulations or bylaws during the course of his employment with the Group and if any loss caused to the Group, he should be liable for compensation. Under the common law, any employees of the Group would be liable to indemnify the Group against such loss.  Article 150, and hence the alleged breach of PRC statutory duties, do not give any extra mileage to the plaintiffs’ claim at all.

113.  I should make it clear that my rejection of Mr Ma’s defence of estoppel by representation does not mean that I cannot accept Mr Ma to be a truthful witness in other respects. He was merely defensive, tryingvery hard to distance himself from the questionable accounting transactions and wrongdoings committed against the Group. In doing so, he made a desperate attempt to rid himself off the obligations imposed upon him by the Service Agreement.

Obstruction of the audit process and destruction of documents

Obstruction

114.  Mr Wong in his opening submissions indicated that the Group now relies on these allegations as a backdrop only. They no longer pursue a claim for damages for the obstruction of the audit process, but they continue to pursue the declaratory and injunctive relief.

115.  In my view, by these allegations, the Group clearly intend to prejudice Mr Ma by showing his close ties with the wrongdoers, and his reluctance to assist investigation, thereby strengthening their case of connivance. In his closing submissions, Mr Wong does not actually address me on the declaratory and injunctive relief. 

116.  I should nevertheless briefly deal with these allegations. It is first alleged that after the proxy contest, D1 started to actively and wrongfully prevent the new management from investigating the affairs of the Group.

117.  The first step that D1 and his accomplices, including Mr Ma, did was allegedly their prevention of Deloitte from completing their 2011 year-end audit (“the 2011 Audit”), resulting in the delisting of P1 by NASDAQ on 2 May 2012.

118.  The original deadline for P1 to file the 2011 Audit, by way of a Form 10-K to be filed with SEC, was 15 March 2012. At the meeting of the Audit Committee on 8 February 2012, D2 already indicated that the 2011 Audit would be behind schedule. He explained that the delay was due to the public holidays and hence field work could not be carried out at the Shanghai Office.

119.  Despite the repeated requests of the board, coupled with the pressure given by Deloitte, D1, D2, D4 and Mr Ma were alleged to have failed to diligently carry out the audit process.

120.  On or about 17 February 2012 at 7:07 a.m., Mr Woodrum sent an email to the Audit Committee members and Mr Ma (“17/2 Email”). In the email, Mr Woodrum specifically asked D2 and Mr Ma to obtain supporting documentation for the FTBC RMB 80 million cash transfers (as will be elaborated below) to Deloitte, as soon as possible, as they needed to audit this item quickly.

121.  On or about the same day, Deloitte issued an audit plan stating their difficulties due to non-availability of certain financial information concerning the Group (“the Audit Plan”). In the Audit Plan, the risk of material misstatements due to fraud or error was also identified. Mr Woodrum circulated the Audit Plan to the members of the Audit Committee as an attachment to his email dated 17 February 2012 at 9:11a.m..

122.  On 29 February 2012, the Audit Committee was informed that the audit was behind schedule and the Shanghai Office’s financials were not available. Field work there had not been commenced.

123.  On or about 15 March 2012, the arranged fieldwork trip to the Shanghai Office of Deloitte was aborted due to the non-cooperation of the Shanghai Office personnel.

124.  It goes without saying that the original deadline was missed. On 16 March 2012, D1 had to file a Form 12b-25 to notify the public about the delay in filing its Form 10-K. Thereafter, the new management of P1 pressed D1, D2 and Mr Ma to complete the audit process but in vain.

125.  In view of the impasse, the board issued an open letter to the shareholder of P1 dated 2 April 2012. This letter informed them that D1 and his accomplices had refused to provide the necessary financial information so as to allow Deloitte access to the Shanghai Office in order to complete their field work and as a result P1 was unable to issue the 2011 Audit pursuant to the requirements of SEC.

126.  The most direct allegation against Mr Ma is that from 26 March 2012 when the new management managed to take over control of both the Beijing and Shanghai offices, to the termination of Mr Ma’s employment on 11 April 2012, Mr Woodrum could not reach Mr Ma by any means, and Mr Ma ignored all of Mr Woodrum’s emails and telephone messages to him concerning the progress of the audit.

127.  Mr Wong urges this court to make a factual finding that Mr Ma deliberately obstructed the 2011 Audit with a view to stalling the investigation of the problems identified in the Audit Plan, including the dubious FTBC transfer. Mr Wong submits that this finding provides grounds to infer that Mr Ma connived at the wrongdoings committed against the Group.

128.  I have considered the explanations of Mr Ma. In essence, he shifted all the blame onto the Shanghai Office, over which he claimed to have no control. He explained that the aborted field audit was due to the unavailability of D4. On his part, he did travel to the Shanghai Office in the afternoon of 15 March 2012 to assist.

129.  Despite Mr Ma’s explanations, I am of the view that he could definitely have done much better to assist the 2011 Audit. Though I accept that he was not responsible for the abortion of the field audit, he could have seriously demanded the Shanghai Office to cooperate with Deloitte. I do not accept Mr Ma’s evidence that he did not have any control over the Shanghai Office. He might not have had the managerial or supervisory role in the Shanghai Office but the accounting staff of the Shanghai Office must be accountable to him given that he was the CAO. Mr Ma must be responsible for ensuring that Deloittecould do their job properly with the cooperation of the subsidiaries within the Group. As rightly referred to me by Mr Wong, the emails of Bossfounder show that Mr Ma was the one to deal with the external professionals on behalf of the internal accounting offices within the Group.

130.  Nor do I accept Mr Ma’s explanation that he thought Mr Tseung, an independent director and a member of the Audit Committee, had taken over his task. He could not have lost sight of his position and his responsibility to ensure compliance with the NASDAQ and SEC’s filing requirements.

131.  I am unable to accept Mr Ma’s allegation that he had completed his part in the audit process by 21 March 2012. There were clearly outstanding issues as pointed out by Deloitte. As the CAO, Mr Ma should have made reasonable endeavours to ensure that the 2011 Audit could be completed in good time. Further, there is no evidence that he had complied with the request of Mr Woodrum in the 17/2 Email to start with.  

132.  However, his indifference to or his nonchalant attitude towards to the 2011 Audit cannot be equated with deliberate obstruction without further ado. There is no evidence that Mr Ma ever caused or instruct any staff of the Group to hinder the progress of the 2011 Audit by non-cooperation or otherwise. I cannot accept the hearsay evidence that Mr Ma had ever told Cheng Ying, Finance Manager of the Shanghai Office, that the 2011 Audit would be put on hold.

133.  In the proxy contest, Mr Ma already indicated his reluctance to work with the new management. His nonresponse to Mr Woodrum’s messages, which I find to be intentional, was clear evidence of his reluctance.  His vacation taken from 2 to 9 April 2012, when the Audit Committee was screaming for help speaks volume for his care about the Group, or rather the lack of it.

134.  It should be noted that the 2011 Audit was in itself fraught with difficulties: such as the non-cooperation of the Shanghai Office, D2’s apparent indifference and the non-payment of the professional fees of Deloitte and the list goes on. There is every reason for Mr Ma to be less than zealous to perform his duties to assist the Group in the completion of the 2011 Audit, under these circumstances.

135.  In my view, Mr Ma could and should have done more for the Group amidst the saga of the 2011 Audit being its CAO, but I am not concluding that he was negligent or in dereliction of any duties. This is not the pleaded issue, and I do not have the relevant evidence emanating from the relevant people, such as Deloitte and the staff in the Shanghai Office.

136.  Suffice to say, I am not satisfied that the allegation that Mr Ma obstructed the 2011 Audit is borne out by evidence.  To make a claim against Mr Ma for the loss caused by the delisting of P1, as a result of the failure to file its Form 10-K in time, is plainly unreasonable and Mr Wong, very sensibly, abandons the claim.

Destruction

137.  The evidence in support of the allegation that Mr Ma destructed the documents of the Group in both the Shanghai Office and the Beijing Office to thwart the new management’s investigation is tenuous. Again, very sensibly, Mr Wong in his closing submissions says little about this. I cannot accept this allegation.

138.  First, as accepted by Mr Woodrum, Mr Ma was stationed in Beijing and had no apparent control of the premises of the Shanghai Office. He also accepts that there is no evidence as to how and when Mr Ma ever caused the documents in the Shanghai Office to be destroyed.

139.  Regarding the alleged destruction of documents in the Beijing Office, the evidence of Mr Mr Feng and Mr Woodrum was unsatisfactory. Mr Feng could not have entered the Beijing Office in late March 2012 when Mr Ma was still in the office. He must be mistaken.

140.  Mr You allegedly paid a visit to the Beijing Office in August 2012 when there were only pre-listing documents of the Group found. Even if I accept that he went to the right premises, I am unable to accept that it was Mr Ma who destroyed the documents originally stored thereat. The visit was made only 4 months after Mr Ma had walked away and there is no evidence that Mr Ma had exclusive access to the Beijing Office. Mr Ma could not be held liable for any loss or damage to any property of the Beijing Office so long a time after the termination of his employment.

141.  Further, I am inclined to accept the evidence of Mr Ma, that Mr You had very probably gone to the wrong premises. I accept Mr Ma’s evidence that the operation office was located in Block C, Golden Tower whereas Mr You went to another office of the Group in Block B2, Golden Tower as shown in the photographs. I could not accept the allegation that it was Li Wei who accompanied Mr You during his visit, and that as Li Wei worked in the operation office, he could not be mistaken. This allegation is not supported by any evidence.

Unauthorised borrowings

142.  On or about 28 April 2012, Mr Woodrum found an envelope left by an anonymous person on his desk in the Shanghai Office. The envelope contained some ledgers showing a number of loans extended to the subsidiary companies of the Group in the PRC from 2010 to 2011.

143.  These loans added up to the total amount more than RMB780 million at rates of interest between 1.5% to 6.5% per month.

144.  The complaint of the Group is that all of these loans were unauthorised and that they were not necessary for operation purposes. P1 was supposed to be a cash rich company, which needed no loans. Furthermore, they were suspect because the lenders of such unauthorised loans included D4 and his associates. These unauthorised loans incurred interest in the total amount of about RMB 70 to 80 million per year.

145.  Mr Woodrum obtained a number of long agreements and corresponding guarantees as a result of his investigation and the legal proceedings against D1 in the PRC. The information contained in the ledgers was proved to be accurate, and the unauthorised loans were confirmed.

146.  Mr Woodrum found these loans to be suspicious. Some of the lenders were unknown individuals and P4 was the borrower. The loans were paid into the bank account of P3 with Bank of Huaxia. For present purposes, it is not necessary to set out the details of these loans.

147.  Further investigation revealed that these unauthorised loans were recorded in the trial balances, bank statements and the AIC records but were nowhere to be found in the CFSs included in Forms 10-K prepared by Mr Ma.

148.  The AIC records were prepared and submitted by the accounting staff in the Shanghai Office to the PRC government authorities and they accurately tallied with the financial records of P3 and P4. The AIC records and the same financial documents were allegedly submitted to Mr Ma for his preparation of the CFSs. There is no reason why the same true picture of the financial condition of the Group was not disclosed in the CFSs.

149.  The pleaded case of the Group, in respect of these unauthorised loans against Mr Ma, is that they were incurred with the knowledge or connivance of Mr Ma in his capacity of the CAO. It is further alleged in their Answers to Request for Further and Better Particulars of the Statement of Claim that Mr Ma should, in the course of his performance of his job duties, receive the true and accurate information including the trial balances of P3 and P4 detailing every bank transaction. Nevertheless, he failed to investigate into suspicious transactions apparent in such trial balances, thereby causing, or permitting the publication of false and misleading financial information of the Group.

150.  In the evidence of Mr Woodrum, he even went further to allege that Mr Ma must have falsified and manipulated the financial information submitted to him by the accounting staff of the Group in his preparation of the CFSs for the submission to Deloitte.

151.  Mr Woodrum came to this conclusion upon his comparison of the financial information reflected in the AIC records of P3 and P4 and those set out in the corresponding Forms 10-K. He found that there were inexplicable discrepancies. For example, in the AIC records as of 31 December 2009 of P3 and P4, the total amounts receivable of P3 and P4 were RMB 474 million, whereas in the corresponding Form 10-K, those of the Group were RMB 54 million only. In addition, the total accounts payable of P3 and P4 were recorded in the AIC records were RMB 272 million, whereas those of the Group were RMB 16 million in the corresponding Form 10-K.

152.  Mr Woodrum pointed out that P3 and P4 were the most significant subsidiaries of the Group in terms of their corporate treasury function, and the significant discrepancies between their AIC records and Forms 10-K must be due to the falsification and manipulation of the financials at the Group level by Mr Ma and D2. Mr Woodrum highlighted the unlimited access of Mr Ma to the financial books and records at all levels by virtue of his position as the CAO.

153.  Other discrepancies were also found between the trial balances, the CFSs and Forms 10-K. For example, a bank debt totalling approximately RMB190 million was recorded and described as borrowings in the trial balances of P3 as of 31December 2009. I pause to note that this debt is the subject matter of another complaint.

154.  This debt did not feature in the CFSs and the corresponding Form 10-K.  Mr Woodrum fairly pointed out that in a balance sheet included in the AIC records, the bank debt of RMB 190 million was recorded, whilst in another balance sheet covering the same period, the said bank debt was not recorded. I do not understand why there are two versions of the balance sheet in the AIC records.

155.  Similar discrepancies exist, and I need not detail them here. It is clear that the information contained in the CFSs and Forms 10-K by Mr Ma was questionable.

156.  Mr Ma did not defend the propriety of these unauthorised loans. He also agreed that it was not in the ordinary business of the Group to incur high interest for loans. His simple defence is that he was unaware of all these unauthorised loans. From the Received Documents obtained from the subsidiaries for the purpose of his preparation of CFSs, he could not detect these unauthorised loans.

157.  Mr Ma maintains that the information and documents that he provided to Deloitte were the same as those he received from the Group and its subsidiaries. He was not aware of any fraudulent conduct in the accounts of the subsidiaries, let alone participating in them. He was very much in the same position of the Group in that he might also have been misled by false information.

158.  Mr Ma further pointed out that the documents now relied upon by the Group were in fact not trial balances. They were merely bank sub-ledgers being part of the general ledger. On a quarterly basis, Mr Ma would receive a general ledger in an Excel computer file from each subsidiary. To recap, Mr Ma received from each subsidiary on a quarterly basis the Received Documents and he worked on these documents to produce translation worksheets (the PRC accounting standard to the US GAAP standard), consolidation worksheets, disclosure item worksheets and working papers. Then Mr Ma would send all of the foregoing documents to Deloitte. 

159.  Mr Ma categorically denies ever having received and seen such sub-ledgers showing the unauthorised loans. He claims that had he done so, he would have reported these matters to D2, the Audit Committee and Deloitte. Absent any good explanation, he would even have made a report to SEC.

160.  I have to adhere to the pleaded case of the Group. The pleaded complaint is the incurrence of the unauthorised loans to the knowledge of Mr Ma and his connivance. The further and better particulars given somehow altered the basis of the complaint to the failure of Mr Ma to investigate into such dubious loans. The evidence even contains allegations of actual falsification and manipulation of the financial formation of the Group by Mr Ma. I should not allow any improper extension of the pleaded case.

161.  To establish the pleaded case, it has to be proved that, in the first place Mr Ma was cognisant of the unauthorised loans. The Group relies on the allegation that some accounting documents including the alleged trial balances evidencing these unauthorised loans were submitted to Mr Ma. The Group does not rely on any other means whereby Mr Ma could gain knowledge of these unauthorised loans.

162.  However, there is simply no evidence that Mr Ma actually received such revealing documents. Mr Ma denies having read such documents, and there is simply no contrary evidence. In this regard, I cannot rely on the uncontested allegations pleaded in the Defence of Ms Fu by any evidence.

163.  I should still deliberate whether it is more probable, on a balance of probabilities, that Mr Ma actually received these documents. The unauthorised loans were dubious in the first place. They cried out for explanations. P3, P4 and/or the subsidiaries had every reason to conceal these unauthorised loans from the US authorities from their origin. To this end, they had to ensure the same concealment from all the internal and external professional auditors, unless all of them acted in concert.

164.  It should be noted that it is not the case of the Group, at least in these proceedings, that Deloitte worked in collaboration with the old management, including D1, D2, D4 and Mr Ma, to make use of false accounts to deceive SEC and NASDAQ. The Group actually rely on the documents of Deloitte, including the Audit Plan and the Deloitte Observations, to establish the failure of Mr Ma to deal with the accounting problems within the Group.    

165.  For the external audit, Deloitte had to carry out field audits. It had full access to all the accounting documents of the companies within the Group including such revealing documents for the purpose of field audits. In view of this, it would be a futile exercise for Mr Ma to submit any CFSs containing untruthful information fabricated by him alone, or any other falsified accounting documents created by him. Any dubious transactions would necessarily be revealed by field audits if the Shanghai Office and other subsidiaries had the genuine accounting documents only and not those falsified accounting documents.

166.  To avoid the disclosure of such transactions to the external people including internal and external auditors during their field audits, I believe it is more likely than not that, on such occasions, a set of innocuous accounting documents dovetailing the accounting records submitted to them by Mr Ma, including the CFSs instead of those revealing documents, were made available to them. Otherwise, independent professionals including the Deloitte auditors, were bound to discover and should have taken issues with such unusual borrowings at such high interest rates.

167.  Regardless of what Deloitte said about the internal financial controls of the Group, they never pointed out any inconsistencies between Mr Ma’s accounting reports, and such financial information obtained by them from P3, P4 and the subsidiaries. They did not discover the unauthorised loans under complaint too.

168.  By reason of the foregoing analysis, I cannot conclude that it is more probable that the accounting people in P3, P4 or other subsidiaries submitted those revealing documents to Mr Ma, expecting him to somehow falsify or manipulate the financial information and manufacture false CFSs on his own. I actually have doubt as to whether Mr Ma needed to see all such genuine accounting documents at all if he had to undertake the sinister task of fabricating false accounts independently.

169.  Thus, I prefer the evidence of Mr Ma, and I believe on a balance of probabilities that those accounting documents submitted to Mr Ma differ from those documents evidencing such unauthorised loans recovered by the Group as AIC records. I accept that Mr Ma did not have the knowledge of the unauthorised loans, meaning he could never connive at them.

170.  Before I leave this topic, I should add that I am aware of Mr Wong’s argument that Mr Ma should have checked the accuracy of the SEC filings against the AIC audits/records, and that he should be able to find out any misconducts committed against the Group. I do not think this is a relevant consideration as this court is not asked to assess the competence of Mr Ma by the pleadings.

171.  Further, on the evidence adduced by the Group, it can be seen that even for the AIC records, there are two different versions of the same document in existence. One of them showed the unauthorised loan of RMB 190 million and one did not. There is no certainty that Mr Ma would be given the correct version so as to discover the true position.

Pledges of time deposit 

172.  This complaint is very much similar to the unauthorised loans in nature. The new management discovered the following pledges of the cash deposits with the PRC banks to secure loans extended to third parties:

Date	Cash deposit pledges	Loan amount	Borrower
December 2009	P3/Shenzhen Development Bank Shanghai Hongqiao Branch	RMB 50 million	Unknown
December 2009	P4/Shenzhen Development Bank Shanghai Hongqiao Branch	RMB 50 million	Unknown
December 2010	P3/Huaxia Bank Shanghai Branch	RMB 50 million	Lianyunggang Dai Xi Industrial Co Ltd
December 2010	P4/Shenzhen Development Bank Shanghai Hongqiao Branch	RMB 95 million	Lianyunggang Nangu Industrial Co Ltd
December 2010	P4/Huaxia Bank Shanghai Branch	RMB 100 million	Lianyunggang Bai Shui Yang Metal Trading Co Ltd
December 2010	P3/Bank of Shanghai Pudong Branch	RMB 47.5 million	Lianyunggang Gaoqi Metal Materials Co Ltd
December 2010	P3/Huaxia Bank Shanghai Branch	RMB 100 million	Shanghai Jieyiojing Trading Co. Ltd
December 2010	P3/Shenzhen Development Bank Shanghai Hongqiao Branch	RMB 76 million	Shanghai Ci Qiang Industrial Co. Ltd
December 2010	P3/Shenzhen Development Bank Shanghai Hongqiao Branch	RMB 66.5 million	Shanghai Run Ze Supply Co Ltd
June 2011	P3/Huaxia Bank Shanghai Branch	RMB 100 million	Shanghai Jieyiojing Trading Co. Ltd
November 2011	P3/Huaxia Bank Shanghai Branch	RMB 100 million	Shanghai Songzi Industrial Co Ltd
November 2011	P4/Huaxia Bank Shanghai Branch	RMB 100 million	Shanghai Songzi Industrial Co Ltd

173.  Regarding these unusual pledges, the Group complains in the pleading that:

(a)  the pledges are not reflected in any published accounts of P1;

(b)  D1 signed the purported resolutions of P3 and P4 to authorize such pledges to be created and such purported resolutions bore the forged signatures of Mr Tseung.

(c)  the pledges served no commercial purpose of the Group and on the contrary exposed the Group to the financial risk of forfeiture of their cash balances pledged.

(d)  it has transpired that none of the time deposits pledged still remains with the Group.

174.  The Group alleges that it has suffered:

(a)  loss of the sums pledged by way of deposit;

(b)  interest that should or could have been earned on the monies so deposited had the pledges not been made and/or

(c)  loss of the opportunity to invest the money is or make productive use of them in the business of the Group.

175.  Against Mr Ma, it is pleaded that these pledges were made with his active participation, and or knowledge or connivance.

176.  In his defence, Mr Ma denies any knowledge of the pledges let alone any role played by him in their creation. He avers that the pledges did not appear in any of the bank confirmations provided to him and neither P3 nor P4 disclosed these pledges to him.

177.  In his evidence, Mr Ma fairly accepts that the pledges were highly unusual and that they should have been subject to disclosure according to US GAAP and SEC rules. Both Deloitte and the US lawyers of the Group would be concerned about these pledges.

178.  For the purpose of the external audit, Deloitte would directly communicate with the banks of P3 and P4 and ask for their confirmations. Such bank confirmations would disclose the existence of these pledges, and could not have escaped the attention of Deloitte.

179.  The evidence of Mr Woodrum in this regard does not support the pleaded case of the Group. His evidence does not begin to support the allegation of Mr Ma’s active participation in the creation of these pledges. There is no evidence indicative of Mr Ma’s knowledge of these pledges at all. Mr Woodrum only learnt from a bank of P3 and P4 about the existence of these pledges for the first time late March 2012. He also became aware of these pledges from the emails recovered from a former employee’s computer. There is no suggestion that Mr Ma was similarly informed. Mr Wong fails to identify the basis of the alleged knowledge of Mr Ma of these pledges save his position as the CAO. This cannot suffice.

180.  There is no evidence to the effect that Mr Ma knew that the purported resolutions bore the forged signatures of Mr Tseung. Mr Ma is not cross-examined in this respect at all.

181.  I refuse to place any weight on the hearsay evidence about what Ms Cheng allegedly told Mr Woodrum about the usual arrangement of this kind of pledges. It is only unfair to Mr Ma that her alleged explanation could not be tested by cross-examination.

182.  For completeness, I should point out that the relief claimed is not justified by any appropriate evidence and is devoid of merit.

Dissipation of cash balances

183.  The allegations of the Group under this head are helpfully summarised by Mr Cooney in his closing submissions:

(a)  In late 2011, FTI was appointed by the Audit Committee of the Group to conduct an independent verification of the Group’s bank balances and fixed deposits in the PRC as at 30 June 2011. FTI confirmed, by way of bank confirmations, RMB 830,418.201 out of RMB 858,382,486 of cash balances of the various subsidiaries of the Group as at 30 June 2011 (“the FTI Report”);

(b)  Mr Woodrum prepared spreadsheets showing the transfer out of cash of over RMB 580m from the accounts of P3 between July 2011 and April 2012 and over RMB 182m from the accounts of P4 in December 2011, supported by bank confirmations. Two sums of about RMB50.8 million each in the bank account of P4 were transferred on 27 December 2011 to Shanghai Jieying, one of D4’s trading companies;

(c)  Further, the new management discovered that bank statements of various accounts provided to Deloitte for the Group’s audit were grossly inaccurate and falsified. Mr Woodrum produced the bank statements of the #3333 Account of P3 provided to Deloitte, which show balances of RMB 51m and RMB 307m as at 31 December 2010 and 30 September 2011 (“the Falsified Statements”). This was inconsistent with the statements obtained by the new management from the bank (“the Obtained Statements”), which shows that the balance was only about RMB 77,000 and RMB 71,000 as at 31 December 2010 and 30 September 2011. Mr Wong has confirmed that the plaintiffs’ case against Mr Ma is not that Mr Ma forged or falsified the bank statements, but only that he had known the statements to be forged/falsified.

(d)  The FTI Report stated the balance in the #3333 Account as at 30 June 2011 to be almost RMB 295m but the Obtained Statements show a balance of only RMB 3.7m;

(e)  The inaccuracies in the FTI Report were allegedly caused by what the plaintiffs now frame as a two-part manoeuver: firstly, by preventing FTI from obtaining bank confirmation and physical extraction of the bank statements for the #3333 Account; secondly, by depositing RMB 307m into the #3333 Account in early November 2011, transferring it away to another account with P3 (and shortly transferred away afterwards), to create the false picture that RMB 307m was in the #3333 Account. Mr Woodrum says from FTI’s perspective, since RMB 307m was transferred out of the #3333 Account in November 2011, it must have held those funds in June 2011 as supported by a June 2011 bank confirmation;

(f)  It is alleged that the defendants tried to manipulate and control the date on which FTI would visit the Bank of Shanghai for cash confirmation purposes; and

(g)  There were many payments from P3 and P4 to entities that were not clients of P3 and P4 in the “trial balances”/bank sub-ledger produced by Mr Woodrum.

184.  It is the pleaded case of the Group that, since the effective date of FTI’s cash confirmation, at least RMB762,507,222.22 (“the Misappropriated Sum”) has been removed from P1’s subsidiaries in the PRC. It is further alleged that Mr Ma operated and controlled the bank accounts of P3 and P4. Alternatively, the depletions of the bank balances were carried out with the knowledge or connivance of Mr Ma by reason of his position. It is alleged that Mr Ma misappropriated the Misappropriated Sum and should now account to the Group for the same.

185.  Basically, Mr Ma adopts the same position vis-a-vis the allegation of unauthorised borrowings. He insists that he had no knowledge of all the alleged cash dissipation.

186.  In the first place, contrary to the allegation of the Group, the bank accounts of P3 and P4 were never controlled or operated by him and he did not have the bank chops to make any transfers out of such bank accounts. The bank chops were kept in the Shanghai Office. I accept Mr Ma’s explanation in the absence of any contrary evidence.

187.  Mr Ma highlighted to this court that Deloitte has obtained bank confirmations independently from the banks after the submission of financial information by the Shanghai Office. Deloitte detected no dubious dissipations. Nor did he. This was indeed a large-scale fraud.

188.  There is no evidence that Mr Ma took any part in this outrageous wrongdoing. There is nothing suggestive of his knowledge of such cash dissipations at all. The Group cannot identify any telling documents received by Mr Ma from P3 and P4, which could fix Mr Ma the knowledge of, or should reasonably arouse his suspicion about, these transactions. 

189.  Mr Wong, probably in view of the weak evidential basis of this allegation, submits that had Mr Ma alerted the board to those unauthorised borrowings and pledges back in 2009, stringent internal controls should have been installed and all these cash dissipations from July 2011 onwards could have been avoided.

190.  With respect, this is not the basis of the Group’s claim against Mr Ma. And this court has also found that the unauthorised borrowings and pledges were concealed from Mr Ma and that he should not be held responsible for them in any respects.

191.  For completeness, on the evidence, I am not satisfied that Mr Ma had ever impeded the investigation of the FPI.

Other misappropriations

192.  The Group further alleges four additional misappropriations of their funds in P1’s accounts totalling US$122,971,501.00. I should now deal with them in turn.

US$25 million

193.  Firstly, it is alleged that approximately US$25 million was held by Great Wall Acquisition Corporation (“GWAC”), a NASDAQ listed company and a predecessor of P1, which acquired P1 in December 2006 through share exchange. The said amount has been transferred out of the Group and now cannot be traced.

194.  This allegation is not supported by the evidence of Mr Woodrum. He accepts that some of the said amount in the range from US$2.5 to 3 million could be traced to an entity called Mozart Management Company Limited (“Mozart”). He mentioned t for the first time in the witness box.

195.  Mr Ma in his witness statement explained that said amount was spent for the following purposes:

(a)  Payment to shareholders in Chinacast Communication Holdings, a member of the Group on SSE as acquisition consideration;

(b)  Profession expenses incurred in relation to the general offering in Singapore and we were stick over by P1 in the US;

(c)  Capital injection into the PRC subsidiaries of P2 for the purpose of increasing the registered capital.

(d)   Other expenses of the offshore entities of the Group including salaries of officers.

196.  The account of GWAC, held with DBS bank in Singapore, was closed after the general offering. Deloitte reviewed the account and raised no concern.

197.  There is no contrary evidence. Mr Woodrum, not without reluctance, agreed under cross-examination that the said amount was spent in the foregoing manners except the capital injection, of which he did not have any knowledge. There is no reason why I should not accept Mr Ma’s explanation.

198.  Mr Wong criticises Mr Ma on his inability to explain the purpose of the two remittances to Mozart. I do not think this is of any materiality to the issue as to whether the said amount was misappropriated.

199.  I have perused the documents evidencing the two remittances. They were made in March 2017 by Chinacast Technology (HK) Ltd (“CCT HK”), a wholly owned subsidiary of P2 in Hong Kong, and not P1. Mr Ma’s failure to recall these remittances made so many years ago without any prior references thereto is perfectly understandable and causes me no concern.

200.  I reject this allegation of misappropriation. It is baseless.

US$64.5 million

201.  The pleaded case is that between January 2008 to December 2011, a sum of US$60.5 million in identified wire transfers was transferred from P1’s account with Signature Bank in New York to a Bank of China account in the name of CCT HK in Hong Kong from January 2008 to December 2009. The said sum was then transferred out of the Group and cannot be traced now. US$41 million out of the said sum represented proceeds of a secondary stock offering of shares in P1 in December 2009 underwritten by Roth Capital Partners LLC in December 2009.

202.  In his defence, Mr Ma explains that the said sum was transferred from P1’s account to CCT HK for payment of expenses of the offshore entities of the Group including payroll and professional fees, capital injection into the PRC subsidiaries of P2 to increase the registered capital and payment of the acquisition costs of colleges by the PRC subsidiaries. Mr Ma contends that Deloitte raised no concern about the use of the said sum.

203.  It is worthy of note that the cause of action is actual misappropriation of the said sum by Mr Ma and conversion of the said sum to his own use. Even if this court if not satisfied with the explanation of Mr Ma for the use of the said sum, it does not mean that Mr Ma misappropriated the said sum or converted the said sum to his own use. It is for the Group to adduce compelling evidence to show, on a balance of probabilities, that Mr Ma committed such a serious wrongdoing against the Group, which is arguably a criminal offence.

204.  To begin with, in respect of P1’s account, there is clear evidence that only D1 and D2 were authorized to request wire transfer as per the records of the Signature Bank. The transfer under complaint was not caused by Mr Ma.

205.  On the other hand, though Mr Ma accepts that he was one of the signatories for some of the bank accounts of the offshore subsidiaries of P1, including CCT HK, his pleaded case is that he had not signed any cheque or transfer since 2001.

206.  The Group has failed to adduce any evidence that any part of the said sum was transferred out of the account of CCT HK by Mr Ma. Nor can it be proved that Mr Ma has any relationship with any of the transferees in receipt of any part of the said sum. There is in particular no allegation and evidence that Mr Ma is in any way connected with Thriving Eagle Investments Ltd (“Thriving Eagle”), which is a BVI company apparently owned and controlled by D1.

207.  In the premises, the allegation of Mr Ma’s misappropriation or conversion of the said sum must be rejected, regardless of whether this court accepts his explanation for the use of the said sum by the Group.

US$5 million

208.  The pleaded case is that in January 2010, D1 subscribed the shares of P1 through Thriving Eagle for approximately US$5 million. The new management could not locate this subscription proceeds of US$5 million in any of the Group’s accounts.

209.  In his defence, Mr Ma avers that the said sum was received by P3 in the PRC and Deloitte was convinced.

210.  Even in his evidence, Mr Woodrum did not make any allegations against Mr Ma in respect of this sum of US$5 million. The main targets are D1 and D2. There is no evidence that any part of the sum of US$5 million has ever been in the possession of, or under the control of, Mr Ma.

211.  In the circumstances, I reject the allegation that Mr Ma has ever misappropriated or converted to his own use any part of the sum of US$5 million.

US$29.3 million

212.  The pleaded case is that US$29.3 million was raised by the allotment of 3.7 million shares of P1 to one Mr Wu in May 2010 for the acquisition of HIUBC. The said sum ought to have been deposited into a bank account of P1 but it has gone missing despite the new management’s investigation.

213.  Again, in his defence, Mr Ma avers that the said sum was received by P3 in the PRC and Deloitte was convinced.

214.  On the evidence of Mr Woodrum, two BVI companies, namely, Motivation International Investment Co Ltd (“Motivation”) and China South Investments Ltd (“China South”) were allotted the shares on 2 June 2010 upon payment of the said sum of US$29.3 million purportedly into the account of CCT HK. His allegation is that no such payment was actually made by Mr Wu, Motivation and China South.

215.  Given this allegation, I cannot understand how the Group can make an allegation of misappropriation and conversion of the said sum of US$29.3 million.  

216.  The only evidence against Mr Ma in respect of this allegation is that Mr Ma produced some paid-in slips purportedly as evidence of the payment deposits into the account of CCT HK.

217.  Mr Ma explained in court that he was asked by D2 to look for such pay-in slips, and he obtained the same from Cheng Ying of the Shanghai Office. He was not told why D2 needed them and he was not in any way involved in the transaction. I accept his explanation.

218.  I therefore conclude that the case of misappropriation and conversion of the said sum of US$29.3 million cannot be made out against Mr Ma.

Transfer of colleges

HIUBC

219.  The gravamen of the complaint under this head is that in about March 2012, MA wrongfully caused or procured the transfer of the three colleges out of the Group into the hands of a number of persons without consideration and failing and/or refusing to bring this to the attention of the board in breach of the Service Agreement.

220.  P1 held interest in HIUBC through Wujan Jiyang which in turn was held by Shanghai Rubao, one of P1’s WOFEs. In February 2011, Shanghai Rubao transferred its interest in Wuhan Jiyan to P5. The AIC records of P5 show that P5 then transferred its shares in Wuhan Jiyang to D4 (70%) and Shi Shicheng (“Shi”) (30%) at no consideration on or about 5 March 2012.

221.  At the time of the transfer, Shi was an employee at HIUBC and a close business associate of D4. On 5 April 2012, D4 and Shi transferred their shares to 3 individuals: Wei Hua (40%), Xie Ji Wu (40%) and Zhan Xiao Chun (20%).

222.  The case theory of the Group is that the transfer of the three colleges at nil consideration was to repay the unauthorised borrowings.

223.  The defence of Mr Ma is that, since the transfer of HIUBC and LC were transferred to P5 in March 2011, Deloitte had raised concern that the transfer might carry tax risk under PRC law. Deloitte, on or about 6 May 2011, in its report to the Audit Committee recommended that the management team should revisit the reorganization plan. Mr Ma was not involved in any such decision.

224.  So far as Mr Ma is aware, D1 followed Deloitte’s advice and subsequently consulted Han Kun Law Offices, its lawyers in Beijing and was advised that the transfer should be done under a VIE structure by transferring the colleges to a PRC company whose shareholders were PRC citizens. Mr Ma was not aware of the transfers made in March and April and he took no part in the transfer.

225.  In his evidence, Mr Ma explained what a VIE structure is. “VIE” stands for variable interest entity. A VIE structure is designed to mitigate against the restrictions on operating a business in the PRC, including those on foreign ownership. The structure consists of a VIE, being a PRC company owns and operates the underlying business and is in turn wholly owned by PRC citizens. The VIE enters into an agreement with a WOFE whereby it surrenders its economic benefit and control. In exchange the owners of the WOFE grant owners of the VIE shareholdings or other benefits. This is a common structure for investment into the PRC and is tolerated by the Mainland authorities.

226.  Mr Ma gave a second reason for the transfer of the colleges. He explained that the SEC in October 2011underscored to the Group the risks associated with the existing structure being perceived by the mainland authorities as contravening its regulations concerning foreign ownership of education institutes. P1 consulted its Beijing lawyers in the PRC, and was advised that they should adopt a VIE structure.

227.  Mr Ma reiterated that he took no part in the foregoing transfers in any event. He merely assisted P1 in the preparation of draft agreements for a restructuring of the ownership of the colleges. In his drafts, the three colleges were to be transferred to Shanghai Mengting enterprise Ltd but no such transfer ever materialized in the end.

228.  Mr Wong makes a powerful submission on the evidence that the transfer could not result in a VIE structure. Moreover, the Group has lost control over HIUBC after the transfer in the absence of the necessary safeguards.

229.  I am convinced that in light of the contemporaneous documents including the Deloitte report and the legal advice of Han Kun Law Offices, the transfer was made with a view to adopting a VIE structure. Whether the adoption was complete or effective does not really matter.

230.  More importantly, I accept Mr Ma’s evidence that he had no role to play in the transfer even if he was the de facto supervisor of P5. He did not take part in the decision-making process and the transfer documents were executed without his participation. His draft agreement was not used ultimately. I cannot accept that he should be held in any way liable for the transfer, even if it was wrongful.

231.  In his closing submissions, Mr Wong makes the point that had Mr Ma “blown the whistle” on D1 and D4 earlier, the Group would have removed them, or at least prevented them from further jeopardising the assets of the Group, including the three colleges.

232.  This argument is, in my view, far-fetched and not pleaded. I cannot accept the validity of this argument, particularly given my foregoing findings of Mr Ma’s ignorance of the wrongdoings committed against the Company.   

LC

233.  P5 held interest in LC through China Lianhe, which in turn was held by Shanghai Xijiu, one of P1’s WOFEs. On 15 March 2011, Shanghai Xijiu transferred China Lianhe to P5. In the same month, P5’s shares in China Lianhe were transferred to D4 (70%) and Shi (30%). The AIC records show that China Lianhe is now owned by two unauthorised persons: Zheng Qi Quan (70%) and Yao Fang Can (30%). Included in the trial bundles is a transfer agreement dated 20 March 2012, executed by D2 as the legal representative of P5 on one part, and the two transferees on the other part.

234.  Mr Ma said the same thing about the transfer of LC, of which he had no knowledge.

235.  For the same reason, I reject the pleaded allegations relating to this transfer against Mr Ma. He cannot be liable in any way.

FTBC

236.  P1 held interest in FTBC through Hai Lai Education Technology Ltd (“Hai Lai”) which in turn was held by P1 through P4 and Chongqing Chaosheng Education and Investment Co Ltd (“Chaosheng”). In the Shanghai Office,  signed but undated during the agreements for the transfer of Hai Lai and Chaosheng’s interest to D4 (70%) and Shi (30%) were found.

237.  FTBC has since been transferred out of the Group into the hands of 23 individuals in various percentages. None of these transferees (except Shi Qin Yan, the son of Shi and one of the lenders of the unauthorised borrowings) was known, and there is no record of any consideration having been paid for such transfers.

238.  Mr Ma pointed out that the transfers were made to the knowledge of P1. He did not know the full details of the transfers and detected nothing untowards about them.

239.  Again, for the reasons given above, I reject this allegation as pleaded against Mr Ma. I can find no evidence of his involvement contributing to the completion of the transfers, regardless of the righteousness of the transactions.  

Mismanagement of the ELG business

240.  I shall briefly dispose of this complaint, out of which Mr Wong indicates that no claim against Mr Ma would be made. He insists on adducing evidence relating to this complaint merely to provide the relevant factual matrix for other complaints.

241.  In his closing submission, Mr Wong only addresses this court on the allegation that Mr Ma had illegitimately overstated the revenue of the ELG business. He asks this court to reject Mr Ma’s explanation under cross-examination. However, this allegation is not properly pleaded at all. I refuse to deal with this non-issue.

242.  In any event, I do not think it is in any way relevant to the other complaints resolved above.

Conclusion and order

243.  I appreciate the difficulties of the Group, and in a way I am sympathetic with their plight. No doubt they have been victimised by a group of dishonest people. However, there is no compelling evidence to allow me to draw an inference that, on a balance of probabilities, Mr Ma is one of them.

244.  Much has been said about the alleged incompetence of Mr Ma in avoiding such wrongs done to the Group by failing to put in place effective internal controls. The Representation Letter and the Bossfounder Limitations containing the usual disclaimers indeed show that Mr Ma could not completely delegate his duties as the CAO to such professionals. However, importantly, his competence or negligence should not be the focus of these proceedings.

245.  In passing, I am unable to understand what effective internal controls could have averted this disaster. Mr Wong does not make any suggestion. Nor does the pleading.

246.  The fraud could not have succeeded without the full support of the offices of P3, P4 and all other subsidiaries. The involvement of internal auditors and external auditors having access to the primary accounting documents and being accountable to the Audit Committee makes it improbable that the fraud only began at the level of Mr Ma.

247.  On the evidence, I am not satisfied that it has been sufficiently proved that Mr Ma had any knowledge of the dubious activities taking place below, particularly in the Shanghai Office. 

248.  For the reasons given above, I come to the conclusion that none of the pleaded allegations against Mr Ma can be made out. Accordingly, I dismiss all the claims of the Group against Mr Ma. For completeness, I order that the Mareva Injunction be discharged forthwith.

249.  I also enter judgement in favour of Mr Ma in respect of his counterclaim regarding his outstanding remuneration. I cannot allow his claim for damages.

250.  There is no reason why costs should follow the event. Mr Ma should have his costs of this action including his counterclaim and all such costs previously reserved, if any, to be taxed if not agreed, with a certificate for two counsel. I make an order nisi in this term.

251.  As regards Ms Fu, in Mr Wong’s closing submission, little was said in relation to her liability. Mr Wong indicates that the Group is prepared to drop the case against her, subject to the issue of costs.

252.  In light of the limited participation of Ms Fu in these proceedings, I dismiss the claim against her and order that there should be no order as to costs as between the Group and Ms Fu.

253.  Lastly, I must thank all counsel involved for their invaluable assistance rendered to this court, in particular their excellent written submissions.

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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D E C I S I O N

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1.  There are two summonses before me:

(1) the summons taken out by the 3^rd defendant (“D3”) dated 30 December 2014 for an order that time be extended under para 1(a) of the order of Registrar Lung made on 4 June 2014 for D3 to take out an application for security for costs against the plaintiffs within 14 days; and

(2) D3’s summons dated 14 January 2015 for an order that the plaintiffs do give security for D3’s costs of the whole action in the sum of $5,688,751.

2.  Mr Wong, for the plaintiffs, informed me in the course of his submissions that the plaintiffs did not object to an order being made in the terms of the summons for extension of time.  I, therefore, made an order at the hearing on 30 September 2015 in the terms of para 1 of the summons dated 30 December 2014 with costs to the plaintiffs.

3.  The plaintiffs opposed the application for security for D3’s costs under D3’s summons dated 14 January 2015.

4.  The relevant background to this litigation has been helpfully set out in the decision of Anthony Chan J dated 11 November 2013 at paras 3 to 22 which I gratefully adopt.  It is not necessary to set all this out here. 

5.  Anthony Chan J was at that time dealing with an application by the plaintiffs to continue a Mareva injuction obtained ex parte on 19 June 2012.  By his decision of 11 November 2013, Anthony Chan J, for the reasons he gave, continued the Mareva injunction as varied by him until the conclusion of trial or further order.

6.  The plaintiffs are incorporated outside Hong Kong.  They are companies ordinarily resident abroad with no active business or assets in Hong Kong.

7.  The 1^st plaintiff (“P1”) was incorporated under the laws of the State of Delaware in the USA.  The 2^nd plaintiff (“P2”) is a BVI company.  The 3^rd plaintiff (“P3”), the 4^th plaintiff (“P4”) and the 5^th plaintiff (“P5”) were incorporated under the laws of the PRC.

8.  The 1^st defendant (“D1”) was a director, the Chairman and Chief Executive Officer of P1 and P2 until 26 March 2012.  D1 was also the Chairman and Legal Representative of P3 and the General Manager, Executive Director and Legal Representative of P4 until 26 March 2012.

9.  The 2^nd defendant (“D2”) was the Chief Financial Officer and Secretary of P1 and P2 until 26 March 2012.  D2 was also a director, the General Manager and Legal Representative of P5 until 20 April 2012.

10.  D3 was, inter alia, the Chief Accounting Officer (“CAO”) and Vice President of P1 and P2 at all material times until 11 April 2012.

11.  The 4^th defendant (“D4”) was the Chief Investment Officer and President of P1 and P2 and a director of P3.

12.  The 5^th defendant (“D5”) was an executive of the plaintiffs and was joined as a defendant on 27 August 2012.

13.  The 6^th to 13^th defendants were also joined on 27 August 2012.  No substantive relief is claimed against them.  They were joined only for the purposes of securing injunctive relief for the plaintiffs against them as holders of assets of D1 to D5.

The applicable principles

14.  D3 applies for security for his costs under Order 23; rule 1, RHC as well as under section 905 of the Companies Ordinance (Cap 622).

15.  There is no dispute about the applicable principles.  These are well settled.

16.  If, having regard to all the circumstances of the case, the court thinks it just to do so, it may order the plaintiffs to give such security for D3’s costs of the action as it thinks just (Order 23; rule 1, RHC).  The court’s discretion is in very wide terms and is not to be fettered.

17.  As the plaintiffs are ordinarily resident out of the jurisdiction with no assets within the jurisdiction, it is the usual ordinary or general rule of practice that the court would order a foreign plaintiff to provide security for costs because it is ordinarily just to do so (LeslieFay Companies, Incorporation t/a Breckenridge Sportswear Division v Cheerio Ltd [1990] 1 HKC 463; Goal Setting Consulting Co Ltd v Unigraphs Solutions Asia/Pacific Inc [2006] 3 HKLRD 678, at para 24).

Stifling of the plaintiffs’ claims

18.  The plaintiffs are impecunious.  That is not disputed.  As is set out at paras 28 to 33 of the 13^th affidavit of Douglas Nelson Woodrum (“Woodrum”) the plaintiffs are impecunious and continue to fund the litigation through shareholders’ financing and are subject to very limited resources.  Although for the reasons set out therein Woodrum says that any order for further security for costs will lead to the plaintiffs’ just claims against the defendants being severely hampered or stifled, Mr Wong in his submissions did not press the point that the plaintiffs’ claim would be stifled if an order for security for costs were made. 

19.  There is no merit, in my view, in the suggestion that the plaintiffs’ claims would be stifled if an order for security for costs were made in D3’s favour.  The evidence shows that a substantial shareholder of P1, Fir Tree Partners, would be extremely reluctant to provide any further funding to the plaintiffs and that the other shareholders who look to Fir Tree Partners as the lead funder will likely take a similar position.  In my view, this evidence only shows that the shareholders are reluctant to fund the litigation but does not show that they are unable to do so.  There is no evidence to show that they will not be able to put up further funds to meet an order for security for costs in D3’s favour.

20.  I respectfully agree with what DHCJ Saunders said at para 11 of his decision dated 5 June 2015 when dealing with an application by D2 for security for costs:

“A plaintiff who is able but unwilling to fund litigation does not have his litigation stifled by an order for security for costs. In those circumstances, the litigation is coming to an end because the plaintiff is unwilling to further fund it. That is a commercial decision for a plaintiff to make. The litigation is not coming to an end because the plaintiff has been stifled by an order for security for costs which he is unable to meet.”

21.  As stated at 23/3/4 Hong Kong Civil Procedure 2016:

“Where a funder is funding the legal action of an impecunious plaintiff, this is likely to be a weighty factor in favour of ordering security, as there is a real likelihood that the funder will simply walk away if the action is dismissed.”

22.  I accept that the plaintiffs will face some difficulty in raising the funds to provide for any security for costs ordered but the plaintiffs’ claims will not be stifled if an order were made.

Strong likelihood of success

23.  Mr Wong submitted that the plaintiffs have a strong likelihood of success against D3 and that no order for security for costs should be made in his favour.

24.  I would refer to what Rogers VP said in Sunchase International Group (China) Ltd & others v Vincor Group of Companies (Investment) Ltd & others [2004] 1 HKLRD 731, at p 733:

“ It is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim. The Judge has approached this on the basis that the plaintiffs have a bona fide claim. He has also approached it on the basis that the defendants have a bona fide defence. Mr Wong today says that the Judge should have come to the additional conclusion that the plaintiffs had a substantial chance of success. I do not see that that was the Judge’s function in a case like this. In a simple case that may be so, but here the defendants are contesting the plaintiffs’ claim and there is no way that the Judge could resolve that contest at this stage.”

Le Pichon JA agreed with the judgment of Rogers VP.

25.  Having heard the submissions of Mr Cooney SC, with Mr Oh, for D3 and the submissions of Mr Wong, for the plaintiffs, it is abundantly clear to me that the plaintiffs’ claim against D3 is not a simple and straightforward claim.  In dealing with an appeal by D2 against a master’s decision refusing to order security for costs against the plaintiffs in favour of D2, Anthony Chan J made it plain at para 26 of his decision dated 26 September 2014 that he was neither satisfied that this was an appropriate case for the court to investigate in an interlocutory application the merits of the plaintiffs’ claims nor that the plaintiffs have demonstrated a strong likelihood of success in their case against D2.  I would observe that there was no appeal from the said decision of Anthony Chan J.

26.  Mr Wong further submitted that there was a strong likelihood of success in respect of two claims against D3, namely, the claim relating to unauthorized borrowings pleaded at paras 54 to 59 of the statement of claim and the claim relating to the pledging of time deposits pleaded at paras 60 to 63 of the statement of claim. 

27.  In respect of both these matters, ie unauthorized borrowings and pledging of time deposits, it is clear that the plaintiffs’ case is that these were done with the knowledge or connivance of each of D1 to D4 (paras 58 and 61 of the statement of claim).  The plaintiffs rely on the fact that D3 was the CAO to ask the court to draw the inference that the acts complained of were done with his knowledge or connivance with the other said defendants. 

28.  I would bear in mind that at the hearing before Anthony Chan J on the continuation of the Mareva injunction and as set out in his decision of 11 November 2013 at para 23, it was conceded by then leading counsel for the plaintiffs that there was no direct evidence of any wrongful act committed by D3 whether by himself or with any of the other defendants.  The plaintiffs’ case is that D3 acted together with the other said defendants in the massive fraud committed against them and the case against D3 is based entirely on inferences to be drawn against D3. 

29.  In his defence and counterclaim, D3 has denied the allegations made against him and denies that he is liable to the plaintiffs as alleged or at all.  It was accepted by Mr Wong that the claims made against D2 are the same claims made against D3. 

30.  Witness statements have already been exchanged between the parties. Woodrum’s witness statement runs to 75 pages.  The witness statement of Derek Feng, the Chief Executive Officer of P1 runs to 31 pages.  D3’s witness statement runs to 47 pages.  Needless to say, the plaintiffs’ allegations are hotly disputed.  Voluminous documents and accounting records have also been disclosed in this action.

31.  Mr Wong also relied on certain observations of Anthony Chan J in his decision of 11 November 2013 when he continued the Mareva injunction against D3.  It is plain that the judge was satisfied that a good arguable case had been made out at that stage.  And as he said at para 26 of his decision, a good arguable case is “one which is more than barely capable of serious argument, but not necessarily one which the Judge considers would have been better than 50 per cent chance of success.”  Anthony Chan J did not consider that the plaintiffs had a strong likelihood of success.  He was only expressing the view that the plaintiffs had a good arguable case. 

32.  With the exchange of witness statements that have been made since then, it is abundantly clear to me that the court should not embark on resolving the question of whether the plaintiffs have a strong likelihood of success.  It seems to me that the plaintiffs have a bona fide claim and D3 has a bona fide defence.  Whether the plaintiffs will succeed or D3 will succeed is a matter to be resolved at trial with the benefit of cross‑examination.  It is not the court’s function at this interlocutory stage to come to any view about the merits of the plaintiffs’ claims without the benefit of cross‑examination.  These are matters properly left to trial.

33.  As I have said, this is neither a simple case nor am I satisfied that the plaintiffs have a strong likelihood of success.

Delay

34.  By an order made by Registrar Lung at a Case Management Conference on 4 June 2014 it was ordered that “unless the parties take out the interlocutory applications by 4.00 pm on 25 June 2014, the matter shall proceed as if no application will be taken out”.

35.  As DHCJ Saunders said at para 8 of his decision dated 22 May 2015, the unless order made by Registrar Lung cannot be said to be in the usual form of an unless order and the unless order was not an absolute bar to further interlocutory applications.  I respectfully agree. 

36.  Delay per se is not a bar to an application for security for costs (Peconic Industrial Development Ltd & another v Chio Ho Cheong alias Chan Kai Kit & others (HCA 16255/1999, 26 October 2005, at para 10).

37.  It seems to me that delay per se is not a bar to D3 taking out the application by his summons dated 14 January 2015. By letter dated 30 June 2014 D3’s solicitors gave notice to the plaintiffs’ then solicitors that D3 reserved his rights as to seeking an order for security for costs.  D3 was awaiting the outcome of D2’s appeal against the master’s refusal to make an order for security for costs in his favour.

38.  D3’s evidence is that he only had limited funds to defend this action and he had to be very careful as to how to spend his funds.  As D2 had his application for security for costs dismissed by a master, D3 was deterred from making a similar application.  It was only after D2 decided to appeal that decision that D3 considered that if D2 were to succeed on his appeal would he then be willing to spend the money and effort to apply for security for costs as well.  Hence his giving of the notice on 30 June 2014 by his solicitors that he reserved his rights to seek security for costs pending D2’s appeal. 

39.  D2’s appeal from the master came before Anthony Chan J.  In his decision dated 26 September 2014 Anthony Chan J allowed D2’s appeal against the master and ordered that the plaintiffs do provide security for D2’s costs in the sum of $1,000,000.

40.  There was then some delay by D3 in taking out the application.  The summons for an application by D3 for security for costs was taken out on 14 January 2015.  Prior to that, the summons for extension of time was taken out on 30 December 2014.

41.  In my view, although there has been some delay on the part of D3 in applying for security for costs, the delay does not prevent him from applying for security for costs.  After all, an order for security for costs might be made at any stage of the proceedings (Lessy SARL v Pacific Star Development Ltd & another [1997] HKLRD 1248). 

42.  Mr Wong further submitted that the court should adjourn the question of the quantum of security to be ordered in the light of the recent developments concerning D1 and D2.  P1 has obtained a default judgment against D1 and D2 in Delaware, USA.  P1 has already instituted HCA 1638 of 2015 against D1 and D2 to enforce the foreign judgment against them (“the enforcement proceedings”).  It was submitted that in the event that P1 obtains judgment in the enforcement proceedings, the action would not proceed against D1 and D2 resulting in a substantial saving of costs for the trial.  Mr Wong submitted that the question of the quantum of the security be deferred until after the determination of the enforcement proceedings.

43.  It was also submitted by Mr Wong that the delay by D3 is relevant as to the quantum of the security to be ordered in that it would be inappropriate to make an order in respect of past costs.

44.  The dates for the trial of this action have already been fixed.  25 days have been reserved for the trial which is due to commence on 15 August 2016.  A pre‑trial review is scheduled for 16 June 2016.  The trial date is a milestone date and is immovable except in the most exceptional circumstances (para 13, Practice Direction 7.1).  Thus it is imperative that the parties should not be dilatory in the preparation for trial.  Undoubtedly D3 will have to incur substantial costs for the trial preparation. 

45.  In my view, there is no merit in postponing the decision on the quantum of the security to be ordered until the enforcement proceedings are concluded.  There is no certainty that the enforcement proceedings will be concluded before the trial of this action.  In any event, even if D1 and D2 are no longer involved in the trial of this action, the trial will nevertheless proceed against D3 and D5.  I observe that default judgment has been obtained against D4.  If D1 and D2 do not participate in the trial I accept that there will be a substantial saving of time and costs as it is unlikely to require the 25 days reserved for trial. 

46.  D3 asks for the total of $5,688,751 to be provided as security for costs of the whole action.

47.  According to the skeleton bill of costs the total sum of $5,688,751 is made up of two sums, namely the sums of $2,487,751 and $3,201,000.  The sum of $2,487,751 is in respect of costs incurred up to 7 January 2015 (“the past costs”) and the sum of $3,201,000 is in respect of costs incurred after 7 January 2015 up to and including trial (“the future costs”).

48.  It was pointed out by Mr Wong that in respect of the application for continuation of the Mareva injunction before Anthony Chan J an order was made that costs of that application be the plaintiffs’ costs in the cause as set out in the decision dated 11 November 2013 and that D3 will not recover his costs of that application in any event. 

49.  I accept that there will be some difficulty facing the plaintiffs in raising funds to provide security for costs.  In the light of D3’s delay in making this application, it seems to me that in the interests of justice I ought to require the plaintiffs to provide sufficient security only in respect of the future costs and not for the past costs.  It seems to me that D3 had already decided not to make any application for security for most of the past costs and only changed his mind after D2 decided to appeal against the master’s refusal to make an order for security for costs in D2’s favour.

50.  I have considered the skeleton bill of costs which seems to me to be inflated and excessive.  It was pointed out that in the skeleton bill counsel’s fees were based on a trial estimate of 17 days rather than 25 days.  Be that as it may, it seems to me that counsel’s fees and the time spent on professional work are excessive.  I have also taken into account the fact that it is unlikely that the trial will last as long as 25 days with the non‑participation of D1 and D2 in the light of the enforcement proceedings.  Applying a broad brush approach, it seems to me that a reasonable sum for security for the future costs of D3 up to and including the trial of the action is the sum of $1,700,000.

51.  I order that the plaintiffs do provide $1,700,000 as security for the costs of D3 up to and including the trial of the action.  Such sum is to be paid into court within 28 days from to‑day and until such security is provided there is to be a stay of these proceedings against D3.

52.  I also make an order nisi that the costs of the application by D3’s summons dated 14 January 2015 be D3’s costs in the cause.

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

__________________

__________________

__________________

D E C I S I O N

__________________

The application

1.  This is an application by the 2^nd defendant, Mr Sena, to strike out the statement of claim under Order 18, rule 19(1).  Although the summons, dated 2 January 2015, was formulated as an application brought under Order 18, rule 19(1)(a), (b) and (c), the argument was confined to the usual ground in subparagraph (a), namely that the statement of claim disclosed no reasonable cause of action.

The unless order

2.  Before that application can be considered however, Mr Smith SC for the plaintiffs says that there is a more significant hurdle for Mr Sena to cross.  On 4 June 2014, following what was plainly a careful and comprehensive examination of the state of play in the proceedings Mr Registrar K W Lung made a number of orders at a Case Management Conference (CMC) which had been fixed for that date by an order made by him on 6 December 2013.  The principal question being considered at the CMC was whether or not the case was ready to set down for trial.

3.  Mr Sena’s solicitors, in preparation for that CMC, had prepared the usual Listing Questionnaire.  They were unable to confirm that there were no outstanding interlocutory applications to be dealt with, or that Mr Sena did not intend to take out any other interlocutory applications.  In respect of those two questions the following answers were provided:

“A4 The following interlocutory application and appeal are outstanding:-

1. The Plaintiffs’ application for specific discovery against the 1^st to 5^th defendants by way of Summons on 15^th April 2014.

2. The 2^nd defendant’s appeal against the decision of Master Chow made on 23^rd April 2014 on the 2^nd defendant’s application for security for costs by way of Notice of Appeal filed on 29^th April 2014.

A5-A6 Subject Counsel’s advice, the 2^nd defendant may have a joinder application for contribution/indemnity, an application for specific discovery against the Plaintiffs or other applications.” (sic)

4.  Having heard the solicitors for the plaintiffs, counsel for Mr Sena and the solicitors or counsel for a number of other defendants, the Registrar made the following order:

“1. Matter to be adjourned to be heard immediately after the hearing of the Plaintiffs’ application for specific discovery by summons filed on 15 April 2014 for the 2^nd Case Management Conference, with the following directions:

a. Unless the parties take up the interlocutory applications by 4:00 pm on 25 June 2014, the matter shall proceed as if no applications will be taken out.

b. If the interlocutory applications are taken out and contested, the applications shall be listed before the Registrar for argument.

2. The parties be exempted from filing and serving their Listing Questionnaires for the subsequent Case Management Conference(s) unless the Court otherwise directs or there is a drastic change of the legal proceedings that renders the previous direction is not applicable;” (My emphasis)

5.  On 24 June 2014, Mr Sena took out a number of interlocutory applications, including specific discovery, an application to join third parties, and an application for security for costs. On 25 June 2014, with the consent of the plaintiffs, Mr Sena filed a further application for discovery of particular documents.

6.  The law is clear that where a party fails to comply with an unless order, any sanction for failure to comply imposed by the order takes effect: Order 2, rule 4; see also Daimler AG v Leiduck [2012] HKLRD 119 (CA) at §44, and Marcan Shipping (London) Ltd v Kefalas & Anor [2007] 1 WLR 1864 CA.  Thus, said Mr Smith, after 4:00 pm on 25 June 2014, Mr Sena could not take out any further interlocutory applications without relief against the sanction of the unless order.

7.  An unless order is an important order in the arsenal of devices that might be used to properly bring proceedings to a speedy trial.  It is a Draconian order, and Mr Smith did not challenge my suggestion to him that an unless order should be strictly interpreted and the benefit of any doubt in interpretation given to the party subject to the order.

8.  The unless order in this case is not happily worded and cannot be said be in the usual form of an unless order.  Mr Carolan argued that the proper meaning of the order, when read as a whole, was that if no interlocutory applications were taken out within the time limit the matter would proceed to the next CMC with a view to setting down, as though no applications had been taken out.  It was not, he said, an absolute bar to further interlocutory applications, a situation that could only arise on a clear and plain unless order to that effect.

9.  It would have been possible to have formulated the unless order so that if no interlocutory applications were taken out by a fixed date, the defendants would be barred from any further interlocutory applications prior to setting down.  It may even be that that was what was intended.  But that is not what the order says. 

10.  I accept Mr Carolan’s submission and hold that in the particular circumstances, the unless order is not a bar to further interlocutory applications.  The effect of the order is that the matter should have proceeded to setting down.

The application to strike out the statement of claim:

11.  The indorsement to the writ, issued on 19 June 2012, prepared by solicitors, initially against the 1^st to 4^th defendants, included claims against them for damages for the tort of conversion; damages for breach of fiduciary duty; damages for conspiring to convert the Plaintiff’s property to their use and for conspiring to commit breaches of contract and/or fiduciary duty; and damages for breach of the various defendants respective service agreements.

12.  The original statement of claim, dated 5 October 2012, and served on 5 September 2012, signed by senior counsel, ran to 101 paragraphs and 54 pages.  By that time, the 5^th to 13^th defendants had been added to the proceedings. 

13.  On 21 November 2012, Mr Sena, by his solicitors and counsel filed a defence and counterclaim, comprising 102 paragraphs over 35 pages.

14.  On 15 July 2012, Mr Sena filed a request for further and better particulars.  Questions were asked in respect of a total of 53 paragraphs of the statement of claim.  On 15 October 2013, the answer, over a total of 90 pages, was filed by the plaintiffs.  Other than the deletion of four paragraphs from the counterclaim, and the deletion of two prayers for relief from the counterclaim, which were made on 18 September 2014, no further amendment has been made to the defence by Mr Sena, following the filing of the further and better particulars.

The grounds for striking out

15.  At the heart of Mr Carolan’s is the well‑known rule is that an allegation of fraud must be pleaded “distinctly and with the utmost particularity”: see Bokhary JA in Aktieselskabet Dansk Skibsfinansierring v Wheelock Marden & Co Ltd [1994] 2 HKC 264 at 270B‑C.  It is not allowable to leave fraud to be inferred from the facts; see the cases collected at 18/12/16 Hong Kong Civil Procedure 2015.

16.  It will be seen from the indorsement to the writ that a claim in fraud is not specified with that particular expression.  In fact, the word “fraud” is not used at all in the statement of claim.  Instead, the pleader has elected to describe the steps taken by the defendants of which complaint is made by reference to their fiduciary duties.

17.  Mr Carolan did not seek to contend that the statement of claim must be struck out because the expression fraud was not used.  Instead, his argument was that as no specific actions were alleged against Mr Sena, but instead the absence of steps or actions were alleged, it was only by way of inference that the plaintiffs could say that Mr Sena was involved in any fraud.

The content of the statement of claim:

18.  I do not propose to set out in this judgment the factual background to the proceedings.  Those factual allegations have been comprehensively set out in §§12‑22 of the judgment of Anthony Chan J, dated 11 November 2013, in earlier Mareva proceedings, which I gratefully adopt.  It is plain that there is not the slightest doubt from that description that the case for the plaintiffs is that they have been the victims of an egregious fraud which has had appalling consequences for them. 

19.  As part of claim alleged, the plaintiffs say that the defendants actively obstructed investigations into the removal of funds from bank accounts and destroyed records.  They did so, the claim says, to conceal their wrongful activities.  As an example, those activities are described in §41 of the statement of claim as “wrongful activities”.  Particulars are given.  They might equally have been described as a “fraudulent activities” but no one is left in any doubt as to what is pleaded.

20.  There are further numerous expression in the statement of claim that make it abundantly clear that what is pleaded against the defendants is fraudulent activity.  For example:

(i) §36 says, in relation to Mr Sena and other defendants:

“the taking over control of the Shanghai Office, where both the 3^rd and 4^th share the same facilities and staff, was more difficult as a result of the collaborative obstruction efforts of the 1^st to 5^th Defendants and their accomplices. At the same time, activities were undertaken by or on the instructions of the 1^st and 4^th Defendants to destroy and/or remove records of the in order to conceal or destroy evidence of their wrongdoing.”

(ii) Particulars include an act of obstruction by Mr Sena, described in §36(m).

(iii) Other acts are pleaded in §37 as being an “act of obstruction and destruction” and “impeding the investigation of the various acts of misappropriation and other wrongful activities committed against the Group” by Mr Sena and other defendants.

(iv) under part VI of the statement of claim headed “Wrongful acts against the Group” there are a number of allegations as to activities in which Mr Sena and the other principal defendants had been engaged in over an extended period.  These activities are described as including the diversion of corporate opportunities and resources the personal benefit defendants, misappropriation of over RMB760 million from bank accounts of the plaintiffs; misappropriation of the proceeds of allotment of shares.

(v) §78 describes the depletion of bank balances as being with “the knowledge or connivance of each of the 1^st to 4^th defendants”.

(vi) In §80 the plea is that:

“In the premises the sum of at least RMB762 million has been misappropriated by the 1^st to 4^th defendants who should account for the said Plaintiffs are the same. Further or alternatively the Defendants have converted the said monies to their own use thereby causing loss and damage for which they are liable.”

(vii) §81 is preceded by the title: “(v) Other misappropriation of funds” and contains four paragraphs which set out the nature of the misappropriation alleged.

(viii) §85 pleads that the funds that have disappeared or are unaccounted for had been “misappropriated” by the 1^st to 4^th defendants and alternatively they had “converted the said monies to their own use”.

(ix) §90 constitutes a further allegation of misappropriation by all defendants.

(x) §92 pleads that “the 1^st to 4^th defendants wrongfully caused or procured the transfer (of) these colleges out of the Group and into the hands of the number of persons”.

Discussion:

21.  It may well have been prudent for the pleader to have expressly used the words “fraud” or “fraudulently” in relation to the various activities alleged on the part of the four defendants.  But nobody reading the statement of claim could be left in any doubt by the use of words such as “misappropriated”, “converted”, or “wrongfully,” that what is being alleged against the four defendants are acts of fraud.

22.  What is alleged in respect of Mr Sena is essentially that having been in the position he was, the Chief Financial Officer (“CFO”) of the group of companies, it would simply not have been possible for the fraud that is alleged to have taken place, to have taken place, without his involvement.  Steps that he should have taken, but did not, are clearly pleaded.  It is open to inference that he did not take those steps because he was part of the fraudulent conspiracy has resulted in a very substantial loss to the plaintiffs.

23.  I do not understand it to be argued that it is not possible to find a case of fraud against a man whose role in a fraudulent conspiracy is to shut his eyes to what is taking place.  In this case the plaintiffs point to the duties upon Mr Sena by virtue of this service agreement and his role as CFO, and say that had he performed his duties the plaintiffs would have been warned about what was taking place.  That Mr Sena did not perform his duty and did not warn the plaintiffs, leads, the plaintiffs say, to an inference to be drawn on the balance of probabilities that Mr Sena was part of the conspiracy.

24.  It may well be that the allegations against Mr Sena are skimpy to say the least.  But that is an issue for trial, just as whether there was a good arguable case was an issue in the Mareva injunction stage of the proceedings.  I am not required in this application to judge whether there is a good arguable case against Mr Sena, but merely whether the statement of claim discloses a good cause of action against him.

25.  It may well be that where a pleader pleads fraud, and relies upon inference from facts pleaded to assert the fraud, the case may not be a good arguable case such as to support a Mareva injunction.  But that is a much higher standard required to be established than it is to show that no reasonable cause of action is disclosed by the pleadings.  It may be that the cause of action disclosed by the pleadings is doomed to failure because the inference sought is not ultimately established.  But it cannot be said that an action in fraud or conspiracy cannot be mounted upon facts from which a pleader seeks to draw the inference of fraudulent conduct.  So long as the defendant knows he is facing an allegation of fraud, it is likely that the plea will stand.

26.  Although Order 18, rule (1) itself states that the application to strike out may be made at any stage of the proceedings the law is clear that the application should always be made promptly, and as a rule before the pleadings are closed. 

27.  I have set out in §§12-14 above the course of the pleadings.  It is remarkable that following such extensive pleadings, completed, on the plaintiffs’ part by 15 October 2013, the only step taken by Mr Sena was to reduce the scope of his counterclaim.  If there was any prospect that the statement of claim might be struck out for failing to disclose a cause of action, one would have thought that by that time the absence of a cause of action would be plain. 

28.  Instead, Mr Sena waited nearly a year before reducing his counterclaim, and another 15 months before filing the summons now under consideration.  This snail like progress bears all the hallmarks of a defendant trying to slow the proceedings down.

29.  There may, in some special cases, be a good reason to file a motion to strike out a statement of claim on the ground that no good cause of action is disclosed many months or even years after the statement of claim has been originally served.  But the rule that such an application should be made at the earliest date is sensible and recognises that it is only in plain cases, where a defendant is quite unable to discern what the cause of action against him is, that a statement of claim would be struck out.  Where a defendant is able to plead to the claim, seek further and better particulars, and find no reason to thereafter amend his defence, it will be very difficult for him to establish that no cause of action is disclosed.

30.  Mr Carolan specifically disavowed a submission based upon the absence of the word “fraud” from the statement of claim.  That was sensible. If that word was required this is plainly a case where the plaintiffs should be given an opportunity to make appropriate amendments.

31.  For the foregoing reasons the application to strike out statement of claim is dismissed, with an order nisi for the costs of the application to be paid on a party‑and‑party basis by Mr Sena.

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1062 OF 2012

_________________________

_________________________

_____________

D E C I S I O N

_____________

THE APPLICATION

1.  By application, the plaintiffs seek an order against the 1^st to the 5^th defendants for documents as set out in the schedule annexed with the summons dated 15 April 2014.  Part of the documents requested are electronic documents.

2.  The plaintiffs have come to an agreement with the 1^st and the 5^th defendants[1].  Therefore, the plaintiffs’ application for discovery only concerns the 2^nd, 3^rd and 4^th defendants (collectively called “the defendants” unless otherwise stated).

3.  The 2^nd defendant applies for leave to take out a summons for discovery against the plaintiffs out of time.  Leave was given to the 2^nd defendant to do so.

4.  Pursuant to leave having been granted, the 2^nd defendant’s summons for discovery from the plaintiffs had been adjourned to be heard on a date fixed.

5.  The parties are legally represented.[2]

E-DISCOVERY

6.  The plaintiffs specifically apply for electronic discovery of the various emails and other documents from the defendants.  According to the supporting affidavits for this application, the plaintiffs had already retrieved about 120,000 emails and documents from a hard-disk of the computer of the Group of companies of the plaintiffs where the defendants had worked.  The plaintiffs now ask for electronic documents from the defendants’ personal accounts, but they have not disclosed the number of such electronic documents will be involved.  However, the plaintiffs’ application has also involved other hard-copy documents, which are to be dealt with in the same application.

7.  Although electronic discovery is governed under Order 24 of RHC, because of the nature of the documents, the volume involved and their accessibility, the treatment of electronic discovery is different from the treatment of hard-copy documents discovery.  In Digicel (St Lucia) Ltd & Others v Cable & Wireless plc and Others Morgan J. 23 Oct 2008 [2009]2 All ER 1094, which will be discussed further below,  Morgan J. discussed the reasons for special treatment for electronic discovery.  At §38 of the judgment, he said:

“The Cresswell Report (Electronic Disclosure: A Report of a Working Party Chaired by the Honourable Mr Justice Cresswell, 6 October 2004, http://www.hmcourts-service.gov.uk/docs/electronic_disclosure1004.doc) makes a number of points which it is useful to record. At para 3.3, the report explains why the issues which arise in relation to disclosure of electronic documents are different from the issues which arise in relation to disclosure of paper documents. These reasons include the huge volume of documents which are created and stored electronically, the ease of duplication of electronic documents, the lack of order in the storage of electronic documents, the differing retention policies of the parties, the existence of metadata and the fact that electronic documents are more difficult to dispose of than paper documents.”

At §§41 and 42, he referred to the experiences of the United States where he said:

“It is worth quoting from two decisions of the United States courts. In Byers v Illinois State Police (2002) 53 Fed R Serv 3d 740 the court stated:

'Computer files, including e-mails, are discoverable … However, the Court is not persuaded by the plaintiffs' attempt to equate traditional paper-based discovery with the discovery of e-mail files … Chief among these differences is the sheer volume of electronic information. E-mails have replaced other forms of communication besides just paper-based communication. Many informal messages that were previously relayed by telephone or at the water cooler are now sent by e-mail. Additionally, computers have the ability to capture several copies (or drafts) of the same e-mail, thus multiplying the volume of documents. All of these e-mails must be scanned for both relevance and privilege. Also, unlike most paper-based discovery, archived e-mails typically lack a coherent filing system. Moreover, data archival systems commonly store information on magnetic tapes which have become obsolete. Thus, parties incur additional costs in translating the data from the tapes into useable form.'

The question of the cost of e-disclosure and in particular the cost of restoring back-up disks was discussed in Zubulake v UBS Warburg LLC (2003) 217 FRD 309. The court said:

'The application of these various discovery rules is particularly complicated where electronic data is sought because otherwise discoverable evidence is often only available from expensive-to-restore back-up media.  That being so, courts have devised creative solutions for balancing the broad scope of discovery prescribed in [the rules] with the cost-consciousness of [the relevant rule].  By and large, the solution has been to consider cost-shifting: forcing the requesting party, rather than the answering party, to bear the cost of discovery.'”

Practice Direction PDSL 1.2

8.  The Judiciary has issued the Practice Direction PDSL 1.2 on E-Discovery (“the Practice Direction”), which will be operative on 1 September 2014 for complicated commercial cases.  But it is also applicable to other cases where the Court may direct.

9.  The Practice Direction is designed for practical solutions for the problems that may arise out of e-discovery as paragraph A2 of the Practice Direction sets out the purposes:

“The purpose of this Practice Direction is to provide a framework for reasonable, proportionate and economical discovery and supply of Electronic Documents under Order 24 of the Rules of the High Court (RHC). It is also to encourage and assist the parties to reach agreement in relation to the discovery of such documents in a proportionate and cost-effective manner.”

10.  Therefore, although the Practice Direction has not been in operation as of today, this Court will make reference to those practical guidelines as set out in the Practice Direction, which are general principles so far as they are applicable to the present application for the electronic documents.  For example, the following general principles are applicable to the present application:

“C General principles, scope of discovery and privilege

4. When considering discovery of Electronic Documents, the parties and their legal representatives should bear in mind the underlying objectives under Order 1A, rule 1 of the RHC including the following general principles :

(1) the cost of discovering Electronic Documents must be proportionate to the amounts claimed in the proceedings;

(2) Electronic Documents should be managed efficiently in order to minimise the cost to be incurred;

(3) technology should be used in order to ensure that document management activities are undertaken efficiently and effectively;

(4) discovery should be given in a manner which gives effect to the underlying objectives under Order 1A;

(5) Electronic Documents should generally be supplied in a form which allows the party receiving the Electronic Documents the same ability to access, search, review and display the Electronic Documents as the party giving discovery; and

(6) discovery of Electronic Documents which are of no relevance to the proceedings may place an excessive burden in time and cost on the party to whom discovery is given.”

Reference should be made to the Court’s observations to encourage parties to have strong case management by identifying and simplifying the issues in order to avoid unnecessary massive discovery in Cable & Wireless HKTTelephone Ltd. (formerly Hong Kong Telephone Company Limited) and Another v City Telecom (HK) Ltd. CACV 197/1999 [2000] HKEC 386 C.A.  See HKCP 2012 edition paragraph 24/0/12.

11.  From the proposed directions of the plaintiffs’ summons, it is apparent that they had not taken into consideration the practical issues set out above.  It is therefore envisaged that those proposed directions may not be practicable for electronic discovery.  It is for this reason that this Court has, before the hearing, invited the parties to consider and discuss the matter.  This will be discussed in more detail below.

THE FACTUAL BACKGROUND

12.  The facts of the matter are summarized in the Decision of Mr. Justice A. Chan delivered on 11 November 2013, which I shall respectfully adopt as follows:

“The parties

3. The 1^st plaintiff (“P1”) is a Delaware company which is the ultimate parent company of the CEC Group (“Group”). Until May 2012 it was listed on NASDAQ.

4. The business of the Group consists of the provision of post-secondary and e-learning services in the Mainland, where it operates by means of wholly foreign owned subsidiaries (“WFOEs”). The educational services are provided in two ways, namely, through a traditional university group (“TUG”) and by e-learning services (“ELG”).

5. The other 4 plaintiffs are members of the Group.

6. The 2^nd plaintiff (“P2”) is a BVI company with which each of the first 4 defendants (“D1-4”) entered into a contract of service to provide services for the Group.

7. The 3^rd and 4^th plaintiffs (“P3” & “P4”) are WFOEs in Shanghai and were the most significant of the Mainland subsidiaries in financial terms.

8. The 5^th plaintiff (“P5”) held the shares in two holding companies which respectively operated two colleges belonging to the TUG.

9. The original defendants in these proceedings are D1-4 whose relationship with the Ps was at the material time as follows:

(1) Each defendant had a service contract with P2;

(2) Mr Chan (D1) was a director, the Chairman and CEO of P1 and P2 until 26 March 2012. He was also the Chairman and Legal Representative of P3 and the General Manager, Executive Director and Legal Representative of P4;

(3) Mr Sena (D2) was the CFO and Secretary of P1 and P2 until 26 March 2012. He was also the General Manager and Legal Representative of P5;

(4) Ma (D3) was the Chief Accounting Officer (“CAO”) and Vice President of P1 and P2 and the Supervisor of P5 (Ma does not admit that he was the Supervisor of P5 but there is documentary evidence to that effect);

(5) Mr Jiang (D4) was the Chief Investment Officer and President of P1 and P2 and a director of P3.

10. Ms Fu (D5) was joined as a defendant on 27 August 2012.

11. The other defendants, D6-13, were also joined on 27 August 2012, but no cause of action is pleaded against any of them. They have been joined only for the purpose of extending the Injunction to cover assets held by them which, Ps allege, are held for one of D1-4.

Background to the litigation

12. In 2011, there was conflict at board level in P1 which gave rise to a proxy contest that resulted in new directors being appointed to the board, the appointment of these directors having been opposed by D1-3 (Ma says that he had only supported D1 and D2 passively in the proxy contest). It is alleged by Ps that in the early part of 2012, D1-4 acted together in attempting to obstruct the audit of the two main operating entities of the Group, P3 & P4 (it is right to point out that this was not pressed at the hearing because there was no evidence that Ma played a part in the alleged obstruction). This led to D1 being removed from his positions with P3 & P4 on 26 March 2012. At the same time D2 resigned. Ma was removed from all positions within the Group on 11 April 2012. On 29 March D4’s positions within the Group were terminated.

13. The new management then sought to assert control over all of the Group entities but found that important financial records and other documents held at the offices of P3 and P4 in Shanghai had been removed or destroyed. On 30 March 2012, D1 tried to prevent the new management from entering the premises occupied by P3 & P4 by changing the locks; he had earlier demanded that Mr Feng (the new CEO of the Group) and his team should leave. Personnel in the Shanghai finance office continued to destroy documents and on 16 April some 10 to 15 persons not employed by P1 entered the premises and forcibly took away the hard drives of computers. The chops and other important documentation required to allow for the running of the business had also been taken on the instructions of D1.

14. After obtaining new chops and taking control of the Shanghai companies the new management ascertained, it says, that D1-4 had acted in breach of duty by misappropriating assets of the Group and by diverting corporate opportunities from the Group for their own benefit. These wrongful acts have been pleaded under different headings in the Statement of Claim (“SOC”), which include those summarized below. In short, a fraud of considerable scale had been committed against Ps by people who were in control of them. These companies have been stripped of a massive amount of cash as well as assets of considerable value. Much of their business has also been taken away. P1 has lost its listing status as a result of the wrongdoings and Ps are now impecunious.”

THE PLAINTIFFS’ CASE AGAINST THE DEFENDANTS

13.  The plaintiffs’ complaints against the defendants are mainly for their obstruction of the audit process in early 2012[3], the obstruction of investigation, destruction of records[4] and the wrongful acts against the Group[5], the particulars of which are:

a. diversion of corporate opportunities and resources of the Group for the personal benefit of the defendants;

b. unauthorized borrowings by subsidiaries of the 1^st plaintiff;

c. unauthorized pledging of the 1^st plaintiff’s cash deposits to secure bank borrowings of undisclosed third parties;

d. misappropriation of over RMB760 million from the bank accounts of the 3^rd and 4^th plaintiffs between July 2011 and April 2012;

e. misappropriation of the proceeds of allotment of shares of the 1^st plaintiff;

f. acquisition of the 1^st plaintiff’s colleges, namely, FTBC, Lijiang College, and HIUBC at inflated values;

g. unauthorized transfer of the 1^st plaintiff’s colleges to individual persons outside the Group including the 4^th defendant and his associates; and

h. mismanagement of the ELG business.[6]

14.  To those allegations above, the defendants deny liabilities as pleaded in their Defences.

E-DISCOVERY TO BE MADE UNDER ORDER 24 RHC

15.  The application is made under Order 24 rule 7 of the RHC:

“(1) Subject to rule 8, the Court may at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any document specified or described in the application or any class of document so specified or described is, or has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it. (L.N. 157 of 2003 and L.N. 199 of 2003)

(2) An order may be made against a party under this rule notwithstanding that he may already have made or been required to make a list of documents or affidavit under rule 2 or rule 3.

(3) An application for an order under this rule must be supported by an affidavit stating the belief of the deponent that the party from whom discovery is sought under this rule has, or at some time had, in his possession, custody or power the document, or class of document, specified or described in the application and that it relates to one or more of the matters in question in the cause or matter.”

Order 24 rule 8 of RHC provides:

“(1) On the hearing of an application for an order under rule 3 or 7 the Court, if satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, may dismiss or, as the case may be, adjourn the application and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs. (L.N. 152 of 2008)

(2) No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs. (L.N. 152 of 2008)”

THE RELEVANT LEGAL PRINCIPLES UNDER ORDER 24

16.  The plaintiffs rely upon the legal principles set out in my Decision in The Incorporated Owners of Kodak House II and No. 321 Java Road v Kai Shing Management Services Ltd (unreported, HCA 711/2011, 9 October 2012) at §§9 and 13, which are summarized below:

a. A party seeking an order for discovery must make out a prima facie case that:

(1) the specified document or class of documents exist;

(2) the party against whom discovery is sought has or had the documents in his possession, custody or power;

(3) the documents relate to a matter in question in the action; and

(4) discovery is necessary either for disposing fairly of the cause or matter or for saving costs.

(per To J at paragraph 11 of his judgment in Tullett Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick & Ors HCA 2197 of 2009, 9 June 2011)

b. Even if existence, possession etc. and relevancy were established, discovery would only still be granted if it was necessary for fairly disposing of the cause or matter.  Deak & Co (Far East) Ltd v NM Rothschild & Sons Ltd & Ors (CA)[1981] HKC 78

c. The task of the court will often be to determine when “doing justice to the claim” stops and “fishing” or, to use another analogy “the scatter gun approach” starts.  At that point the onerous nature of the discovery exercise passes from the necessary and permissible to the unnecessary and impermissible”. Mariner International Hotels Ltd v Atlas Ltd & another (unreported, HCA 10714, 10752 and 10821 of 1998 Burrell J., 18 January 2002) at §11;

d. The pleadings in an action define the issues to be tried.  On the other hand the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action.   Cheung JA said in Paul’s Model Art Gmbh & Co KG v U.T. Limited & Ors (unreported, CACV 139 of 2005, 14  December 2005) at paragraph 25.

e. It is also clear that post CJR, the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24.  In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties. Deputy Judge Mimmie Chan (as she then was) in Sunny Tadjudin v Bank of America, National Association (unreported, HCA 322 of 2008, 22 December 2011);

f. Whether a class of documents as a whole is relevant for discovery purposes must depend upon what information it is reasonable to suppose the documents of the class contain and whether such information may enable the plaintiffs to advance their own case or damage that of the defendant.  It must be defined by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim.  What matters for discovery purposes is the claim and the defence to it in the broadest sense and not to the detailed particulars of either claim or defence.  The document or class of documents must be shown by the applicant to offer a real probability of evidential materiality in the sense that it must be a document or class of documents which in the ordinary way can be expected to yield information of substantial evidential materiality to the pleaded claim and the defence to it in the broad sense.  If the document or class cannot be demonstrated to be clearly connected to issues which have already been raised on the pleadings or which would in the ordinary way be expected to be raised in the course of the proceedings, if sufficient information were available, the application should be dismissed.  Colman J in O Company v M Company [1996] 2 Lloyds LR 347, adopted by Mr. Justice Barma had, in his judgment for Moulin Global Eyecare Holdings Limited (in liquidation) (formerly known as Moulin International Holdings Limited) & Ors. v KPMG (a firm) HCA118/2007 delivered on 8 June 2010.

DISCOVERY AGAINST THE 2^ND DEFENDANT

17.  For the discovery against the 2^nd defendant, the plaintiffs seek from the 2^nd defendant:

a. Electronic copies of all emails sent to and from the email addresses tony@sena,com.sg, [email protected], and [email protected] (“D2’s Emails”); and

b. All accounting vouchers, cheques and remittance advice prepared by the 5^th defendant as alleged in paragraph 19 of the Defence of the 5^th defendant (“Accounting Documents”)

The plaintiffs’ supporting affidavit

18.  The plaintiffs rely upon the 4^th affidavit of Douglas Nelson Woodrum filed on 15 April 2014.[7]

19.  In Mr. Woodrum’s supporting affidavit, the plaintiffs have not stated that the electronic documents are for the plaintiffs’ case of conspiracy against the defendants.  The 2^nd defendant submits that the plaintiffs have no evidential basis that they were sought in furtherance of the alleged conspiracy or conspiracies between the 2^nd defendant and other defendants or for the purpose of perpetuating the fraud.[8]

20.  Paragraph 36 of the Statement of Claim pleaded that the 1^st to 5^th defendants and their accomplices had made collaborative obstruction to the 3^rd and 4^th plaintiffs in their taking control of the Shanghai Office and at the same time, activities were undertaken by or on the instructions of the 1^st and 4^th defendants to destroy and/or remove records of the plaintiffs in order to conceal or destroy evidence of their wrongdoing.

21.  The plaintiffs submit that the emails are relevant to the issues to be tried, without reference to the parts of the pleaded issues.[9]

22.  However, knowing that the scope of the emails may be too wide and may be oppressive, the plaintiffs submit that they are not seeking the discovery of irrelevant emails and to the extent that some of the emails in the email accounts in question are irrelevant, the plaintiffs do not seek disclosure of them.  Nevertheless, the plaintiffs have not been able to make any proposal as to how to define and determine, still less to sort out the irrelevant documents.  Nor have they stated that they will allow the 2^nd defendant to make the final determination as to what documents are relevant.  All these questions will give rise to further interlocutory proceedings, which should have been avoided before this application by discussion between the parties themselves without coming to court; or alternatively to be decided by the court before this application.

The 2^nd defendant’s grounds of objection

23.  The 2^nd defendant’s objections to the discovery of the emails are that there is no evidential basis that any of D2’s Emails may be relevant to the plaintiffs’ claim of conspiracy[10]; that the emails are not identified[11]; there is no time frame for the emails to be discovered[12]; there may be private or privileged correspondence with his legal advisers for the purpose of the proceedings[13] and the discovery is fishing and oppressive.[14]

24.  Mr. Woodrum in para 12 of his 6^th affidavit proposed, as an alternative, an Order be made that (1) the 2^nd defendant should try to recover the deleted emails; (2) if that could not be done, should at least disclose all emails sent to and from the 3 email addresses of his in the period from November 2011 to May 2012 “relating to any matter in question including and not limited to communications with the other Defendants, members of the Shanghai office of the 1^st Plaintiff including without limitation Ms Cheng Ying and Mr Carl You, Deloitte and other external advisors of the Group, entities allegedly owned, managed or otherwise controlled by one or more of the Defendants and persons allegedly related to or otherwise associated with any of the Defendants”.

25.  The 2^nd defendant, however, argues that this alternative is not acceptable because the Court simply has no jurisdiction to make an order for those documents and they are also too wide and they are fishing and oppressive to the 2^nd defendant.[15]

THE APPROACH ON E-DISCOVERY

26.  The legal principles stated in paragraph 16 supra apply to e-discovery.

27.  The parties should bear in mind the Court’s approach in its case management role in the discovery exercise, which is set out in the Final Report of the Civil Justice Reform[16]:

“The court should be expected to exercise its case management powers with a view to tailoring an appropriate discovery regime for the case at hand. It should have a residual discretion both to direct what discovery is required – to narrow or widen the scope of discovery required, to include, if necessary and proportionate, full Peruvian Guano style discovery – and in what way discovery is to be given.”

The Peruvian Guano style is the starting point and the scope should be narrowed down[17], particularly for e-discovery in view of its nature – “the proliferation of copies (of emails), the decentralization of records…The ease of inserting multiple addressees in an e-mail makes it easy to send the same message to a number of persons. Documents are also thus sent to multiple recipients as attachments…”[18]

The relevant legal principles for e-discovery

28.  For consideration of the plaintiffs’ application for D2’s Emails, the Court will, apart from those authorities cited in paragraph 16, supra, bear in mind the following legal principles:

a. Discovery must not be oppressive by making order of voluminous documents and it must be for fair trial or saving costs; class documents are classified by nature, not by issues. Deak and Company (Far East) Ltd. v N.M. Rothschild and Sons Limited & Others (unreported, CACV28/1981, Barker JA 4 November 1981).

b. The scope of discovery depends on issues at trial and it should limit discovery to what is necessary and the court should discourage satellite litigation and apply proportionality test of costs and importance of documents.  Full Range Electronics Co. Ltd. v General-Tech Industrial Ltd & Another (unreported, CACV59/1997, Rogers J. (as he then was), 11 June 1997).

c. By analogy, the documents to be discovered are not only relevant, but must also be necessary (for a fair trial or saving costs). Kao Lee & Yip (a firm) v Donald Koo Hoi Yan & Others (unreported, HCA8847/1993, Ma J. (as he then was), 23 April 2002).  See paragraph 7.

d. The party who has failed to comply with the court order and cooperate with the other party for discovery has to pay the extra costs that the other party had incurred in order to gain access to the electronic documents. The Joint and Several Provisional Liquidators of Moulin Global Eyecare Holdings Ltd v Ernst & Young(unreported, HCCW 470/2005, Kwan J. (as she then was) 18 June 2008.  In this case, the respondent had used a software for the electronic information for discovery, which failed to comply with the order enabling the liquidators to have full access to the documents and, as a result, the liquidators had to incur extra cost for discovery. (paras.7 & 8).  See also §26 of  Breezeway Overseas Ltd v UBSAG [2012] SGHC 41[19]

e. Following the CJR, the increasing emphasis is for the court to limit discovery in the context of its duty actively to manage the case; O 24 r 15A of the RHC was introduced giving the power to the court to limit discovery for the purpose of managing the case and furthering the underlying objectives specified in O. 1A.  HSBC Private Bank (Suisse) SA v Mission Bridge Ltd. & Another (unreported, HCA406/2008 DHCJ Lok 18 June 2012).

f. The Court should consider the features of the particular case with a view to making an order tailored to achieving a just outcome, which includes limiting, as far as possible, the costs incurred (see paragraph 27).  Fiddes v Channel 4 TV Corporation & Another [2010] EWCA Civ 516 (24 March 2010). See also §16 of of Breezeway Overseas Ltd v UBSAG [2012] SGHC 41.[20]

g. A “staged” approach can be adopted for appropriate cases so that one may start the search of the electronically stored information with the most important people at the top of the pyramid because very often the opposite party will get everything they want from those people without going down the pyramid (paragraph 22). Goodale & Others v The Ministry of Justice & Others [2009] EWHC B41 (5 November 2009) Senior Master Whitaker, adopted by the Supreme Court of Singapore in Breezeway Overseas Ltd v UBSAG [2012] SGHC 41 by Yeong Zee Kin SAR, 28 February 2012.

h. In case of dispute over privileged documents, a special committee can be set up by the court to handle the issues of sorting out privilege documents from a storage of electronic information. Avowal Administrative Attorneys Ltd & Others v The District Court at North Shore & Another HC AK CIV 2006-404-007264 21 December 2009.

i. In Digicel (St Lucia) Ltd & Others v Cable & Wireless plc and Others Morgan J. 23 Oct 2008 [2009] All ER 1094 where the cost was some £2m in fees together with disbursements of some £175,000, the process took some 6,700 man hours of lawyers’ time [25]; the defendant being criticized by the Judge that the key word search was conducted without agreement by the plaintiff, who successful challenged the appropriateness of the search and the judge held that:

i. the parties should at an early stage in the litigation discuss issues that might arise regarding searches for electronic documents.  Where keyword searches were used they should be agreed as far as possible between the parties [47].

ii. the defendants' solicitors' unilateral action had exposed the defendants to the risk that the court might require the exercise of searching to be done a second time, with the overall cost of two searches being significantly higher than the cost of a wider search carried out on the first occasion.

iii. to determine what was reasonable search, the solicitor in charge of the documents had the burden to do the reasonable search for the documents relevant to the case and the court would determine whether reasonable search should be made, taking into account the proportionality test [51];

iv. where the court found that the defendant had failed to do the reasonable search in the first place, the court would consider directing the parties’ solicitors to discuss the proper directions to be made, if a simple direction was not proper [70]; and

v. positive keyword search might be made as agreed by the parties and it was wrong to adopt the strategy of “leaving no stone unturned [80]”.

j. De-duplication of electronic documents must be ensured and the party which had failed to carry out this process should be ordered to pay the costs to the other party West African Gas Pipeline Company Limited v Willbros Global Holdings Inc [2012] EWHC 396 (TCC) (27 February 2012)  (paragraphs 93 – 95).

The parties’ cooperation

29.  The court expects the parties to be cooperative between themselves and they have an obligation to cooperate with the court under Order 1A rule 3 RHC.  Case management is particularly important for cases which involve e-discovery.  At the moment e-discovery is contemplated, the parties should consider the issues of preservation of the e-information; the categorization of such information; the retrieval of it for disclosure and inspection; whether metadata should be disclosed; the form of the list for the e-documents; the mode of presentation to the other party and ultimately to the court at trial.  The Practice Direction which is operative on 1 September this year will assist the parties to make preparation for the e-documents. See section C - General principles, scope of discovery and privileges of the Practice Direction.

30.  The court will encourage the parties to cooperate with one another to work out the protocol for e-discovery without the court’s intervention, if possible, giving directions on the issues of disputes at each stage if the parties are unable to reach agreement themselves.[21]  On the other hand, the court will impose sanction over the party who is attempting to abuse the system or playing games in e-discovery.  The court expects the parties to conduct e-discovery in a purposive and responsible manner, taking into account of the underlying objectives under Order 1A of CJR.  The e-discovery must be purposive, meaning that the scope must be as narrow as possibly necessary for the purpose of the party’s case only without duplication. If the party does not make the e-discovery with prudence or even abuse the use of e-discovery, the party will be sanctioned by the court and be liable for the costs wasted or incurred by the other party.  See The Joint and Several Provisional Liquidators of Moulin Global Eyecare Holdings Ltd.

Discussion – application for D2’s emails

31.  Bearing in mind of the above legal principles, I shall now consider the plaintiffs’ application against the 2^nd defendant for D2’s Emails.

32.  It is obvious that the plaintiffs’ application for D2’s Emails is for furthering their case against the 2^nd defendant on conspiracy, the plaintiffs having stated their claim against the 1^st, 2^nd , 3^rd, 4^th, and 5^th defendants for conspiring to convert the plaintiffs’ property to their use and for conspiring to commit breaches of contract and/or fiduciary duty in the Indorsement of Claim, which, however, is not in the nature of a pleading and does not form part of the pleadings as held by the Court of Final Appeal in Moulin Global Eyecare Holdings Ltd (in Liquidation)(formerly known as Moulin International Holdings Ltd) v Olivia Lee Sin Mei (unreported, FACV 23/2013, 17 July 2014 Gummow NPJ) at §§28(b) & 30.

33.  The plaintiffs refer to the supporting affidavit saying that in April 2013, they had procured the service of a provider to obtain the Group’s hard drive with over 120,000 emails and other documents relating to the Group.  These documents include emails exchange between the 1^st to 4^th defendants.  The deponent then said that based on the limited emails available, it was clear that the defendants were using the personal emails to communicate among themselves and also with external advisers of the Group including Loeb & Loeb LLP, Deliotte and Vintage Filings, a financial filing firm, in relation to the operation and affairs of the Group.[22]  The plaintiffs further said that the 2^nd defendant should have more emails than those that he had disclosed and they asked for 2^nd defendant’s all emails during the years.

34.  The proper pleadings for conspiracy was illustrated in Pido v Compass Technologies Co Ltd [2012] 2 HKLRD 537, at §17 the Court of Appeal held:

“As a matter of pleading, a case based on conspiracy, must contain the following elements (emphasis added):

a. The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

b. The intention to injure the Plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

c. The acts that were carried out pursuant to the agreement and the stated intention.

d. The damage caused to the Plaintiff.

See : Bullen & Leake & Jacob’s Precedents of Pleadings (16^th edition) Vol. 2 at paragraph 51-02.”

35.  The starting point is whether the application for D2’s Emails is appropriate by reference to the applicant’s supporting affidavit under O.24, r.7(3).  Mr. Woodrum’s 4^th affidavit said that the defendants were at the core of the Group’s management for an extended period of at least 8 years.  They had raided the Group’s offices in Shanghai and Beijing and took away all the documents just as the new management was about to take control.  The defendants used their personal email accounts to communicate on matters concerning the Group, which would contain information as to their collaborative effort to defraud the Group and who had had substantial sums belonging to the Group diverted through their personal bank accounts. On these bases, the plaintiffs said that the documents were clearly relevant.[23]

36.  It is apparent that the discovery of the emails is to establish the agreement and the intention to injure the plaintiffs.  They will be the most cogent evidence for the plaintiffs to establish their case of conspiracy against the defendants.  The question is whether the plaintiffs have pleaded that the defendants had used emails in their collaboration (with particulars in support) to cause damage to the plaintiffs and to establish that there is a storage of the emails of the 2^nd defendant and the basis on which the plaintiffs can make such assumption.  Also, as the emails are in the personal property of the 2^nd defendant, the 2^nd defendant should have possession or power over them.  However, due to the volume and the diversity nature of the emails, it will be incumbent upon the plaintiffs to satisfy the Court that the request is not oppressive and they are necessary for a fair trial or saving costs, regard having been made to proportionality.  See Deak and Company, HSBC Private Bank (Suisse) SA, & Citibank NA. and Kao Lee & Yip (a firm).

37.  In my Decision delivered on 22 July 2014 in Sinodental Investment Ltd & Others v Sin Chung Yin Ronald & Others (unreported, HCA2176/2012), I said at §24 ‘Of course, it does not mean that whenever conspiracy is pleaded in the pleadings, the Court must allow discovery of documents even it is a fishing exercise.  The Court should not exercise its discretion mechanically.  It has to consider the other relevant facts and circumstances as pleaded in the pleadings to be satisfied that the applicants have set up a prima facie case in support of conspiracy against the defendants.  In the exercise of its discretion, the Court must follow the judicial guidelines as Ma J (as he then was) said in Wing Mou Construction Co Ltd (in Liquidation) v Cosmic Insurance Corporation Ltd & Another (unreported, HCCT40/2001, 6 June 2002) at §15(6): “…as with any exercise of discretion by the court, orders should only be made where necessary, just and convenient.” The Court must look at the context of the case itself.’

38.  The plaintiffs have not been able to show, on a prima facie case, that the 2^nd defendant’s personal account does contain such information, not least to point out to me where and during what period of time can those relevant information be found.  Paragraph 10 of the 4^th affirmation of Mr. Woodrum, in which he said that the defendants used their personal email accounts to communicate on matters concerning the Group and as to their collaborative effort to defraud the Group, was not pleaded in the Statement of Claim. There are no particulars in support of such allegations – when or during which period of time they communicated to defraud the Group was not known. Nor was there any evidential basis for the plaintiffs to have such belief.

39.  The plaintiffs then submit that relevance of D2’s Emails has been admitted by the 2^nd defendant himself, referring to §§54-56 [B/104] However, the 2^nd defendant in those paragraphs said that the emails did not have evidential value to establish conspiracy between himself and the other defendants.  He said that they might be relevant to the issue whether he had neglected to discharge his duties of CFO of the Group and whether he was negligent in respect of the filings with Nasdaq and SEC in the maintenance of a proper internal control system; that he had all along been under the supervision of the directors and the Auditor Committee and he would rely upon his email communications with Deloitte and the 4 defendants.[24]

40.  I do not agree that the alleged admissions by the 2^nd defendant assist the plaintiffs’ application for the e-discovery for the following reasons:

a. the burden is on the plaintiffs to show to this Court that the D2’s Emails can either advance their case or damage the 2^nd defendant’s case, particularly on the issue of conspiracy (the Peruvian Guano approach)

b. the relevance of such emails must be found from the pleadings, not from the 2^nd defendant’s affidavit, which in any event, did not assist the plaintiffs’ case because the 2^nd defendant had, on oath, said that the emails had no evidential value to establish the plaintiffs’ conspiracy claim, though this is not conclusive, In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999, Chu J. (as she then was) 24 October 2003) ;

c. though the plaintiffs have pleaded that the 2^nd defendant is jointly liable with other defendants in the acts of torts and breach of the fiduciary duties, the plaintiffs have not been able to identify the element of agreement among the 2^nd defendant and other defendants in their pleadings.  If the agreement is express, the particulars of it should be specifically pleaded.  See the White Book 2014 edition at §18/12/1 and 18/12/8. If the agreement is to be inferred or implied from the circumstances, the factual circumstances must be set out generally.  See the White Book 2014, at 18/12/1 and Sinodental Investments Ltd & Others v Sin Chung Yin Ronald & Others (unreported, HCA2176/2012, 22 July 2014 at §19e).  The bare allegation of conspiracy, absent other circumstances, is clearly insufficient to say that they contain the element of conspiracy, which forms a separate head of tortious claim;

d. even if the plaintiffs can argue that the 2^nd defendant’s email as mentioned in his own affidavit may be relevant to their case, which I find very remote, they are not able to demonstrate to me that those emails are necessary for a fair trial or saving costs because their pleaded case does not rely upon agreement between the 2^nd defendant and the other defendants and also, the scope of the email, for a period of eight years, is too wide, for which the plaintiffs are unable to explain.  Kao Lee & Yip (a firm);

e. there has not been any attempt on the part of the plaintiffs to discuss with the 2^nd defendant as to what reasonable search should be made to the 2^nd defendant’s personal account in order to limit the scope and identify the relevant materials; given the nature of the electronic information, it is the practice that the Court will limit the scope of e-discovery, HSBC Private Bank (Suisse) SA, see also paragraph C General principles, scope of discovery and privilege at 5(3) of Practice Direction.[25]

41.  In fact, the plaintiffs are alive to this difficulty as Mr. Hong submits that the plaintiffs do not seek disclosure of the irrelevant emails.  They submit that the 2^nd defendant is required to disclose all of the emails which are relevant, and to produce them in electronic form to enable the plaintiffs to carry out searches.[26]  This suggestion does not assist the plaintiffs because it is clearly a fishing exercise.

42.  In accordance with Digicel, the plaintiffs are entitled to request the solicitor in charge of the 2^nd defendant’s personal email to make a reasonable search.  If the 2^nd defendant’s solicitor refuses to do so, they may make application to the Court for directions for the reasonable search.  The Practice Direction, which will be operative on 1 September 2014 has provided a comprehensive list of issues that the parties should discuss before the 1^st Case Management Conference taking care of, among other things, preservation of documents, the scope, reasonable search, category of documents, privilege, key-word search, method for de-duplication, staged approach, forms of presentation, costs to be shared etc.  At paragraph 11, it provides that the court will give directions to the parties upon its own motion or upon parties’ application.  Although this provision is only operative as from 1 September, it is obvious that the court does have the power to give directions to the parties for e-discovery before commencement of the Practice Direction under Order 1B of RHC[27].

43.  If such application was made to the Court, the Court would have to be satisfied that the plaintiffs had attempted to agree the reasonable search with the 2^nd defendant before taking out the application[28].  If they were unable to reach an agreement, the plaintiff should inform the Court in the supporting affidavit what proposals had been made and refused by the 2^nd defendant and the reasons for the refusal.  The Court will be in a better position to consider the parties’ proposals and may tailor-make the directions.  See Fiddes.  If the volume of the documents is too much for one exercise of reasonable search, the Court may consider search by stages.  See Goodale & Others.

44.  The plaintiffs have not attempted to agree the reasonable search with the 2^nd defendant.  From the objections raised by the 2^nd defendant, it appears that the 2^nd defendant says that there is simply no such email in support of the plaintiffs’ allegation of conspiracy.

45.  In this case the 2^nd defendant has also raised the issue of intrusion of his privacy and privilege. Appropriate steps should be agreed between the parties to resolve those issues before the application for discovery and if they are unable to reach agreement, the disputed issues should be referred to the court for determination.  See Avowal Administrative Attorneys Ltd.

46.  Therefore, if I were satisfied that there would be relevant emails in the 2^nd defendant’s personal account, which would support the plaintiffs’ conspiracy claims against the defendants, I had the discretion to adjourn the matter for the parties to work out the reasonable search of the 2^nd defendant’s personal emails, adopting a similar approach as decided by Burrell DHCJ in Chinaplus Wines Limitedv Nicholas Frederick Pegna Berry Bros & Rudd Limited & Others (unreported, HCA 905/2011, 13 February 2014) in which the plaintiff sought about 50,000 emails from the 1^st defendant and the Deputy Judge encouraged the parties “to devise a cheaper and more costs effective way of resolving the issue rather than referring it to the court” (para. 16); bearing in mind that it must not be oppressive (Deak and Company & Full Range) and reasonable in the circumstances, referring to Digicel. Where the 2^nd defendant raises privilege, this Court may resort to Avowal Administrative Attorneys Ltd & Others for guidance.

47.  If the parties have failed to make those arrangements before the application for e-discovery, it is reasonably foreseeable that they may have problems in the exercise of e-discovery, resulting in more satellite litigations between the parties and costs will be wasted.  See Full Range, The Joint and Several Provisional Liquidators of Moulin Global Eyecare Holding and West Africa Gas Pipeline Co Ltd.

48.  However, the plaintiffs have obtained about 120,000 electronic documents from the Group’s computer hard disk, in which they found some emails of the defendants.  The plaintiffs have not been able to tell this Court any of those emails are related to the conspiracy of the defendants as pleaded by the plaintiffs.  The basis that the 2^nd defendant’s personal emails would be useful is unknown.

49.  This shows that it is a fishing exercise only.  As such, it will not be allowed.  Although the plaintiffs may amend the pleadings, there is no indication from the plaintiffs whether they will do so or what amendments will be made.

50.  In the circumstances, I consider that the better course is simply dismiss the plaintiffs’ application on their request for D2’s Emails.

51.  If the plaintiffs obtain leave of the Court and amend their pleadings and take out another application for the emails on the re-pleaded case, by then the Practice Direction should have been in operation, the parties should observe the Practice Direction and, subject to the Court’s further directions, the plaintiffs should support their applications by way of affidavit, in which they should, among other things, set out the following matters:

a. They had discussed the intended application with the defendants on the issue of whether the defendants oppose the emails wholesale or the defendants only dispute the scope of the e-discovery;

b. Whether the plaintiffs had made recourse to the Practice Direction and discussed those practical issues such as scope, reasonable search, inspection, privilege and form of presentation at trial etc. with the defendants;

c. The issues of dispute between the plaintiffs and the defendants on the application for the emails for the Court’s determination;

d. The plaintiffs’ proposal for resolving the difference and the objections of the defendants, with reasons in support of their views or proposals (see Digicel and the Practice Direction).

Discussion – D2’s Accounting Documents

52.  As to the Accounting Documents, the 2^nd defendant has in his 9^th affidavit said that he had never been in possession of any of Fu’s Accounting Documents, which is not disputed by the plaintiffs, I shall apply the legal principles in  In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999, 24 October 2003).  The affidavit shall be conclusive for the interlocutory proceedings unless there are other inconsistent evidence in the affidavit itself or the documents referred thereto or in the pleadings, which are absent here.[29]

53.  Although the plaintiffs submit that paragraph 19 of the 5^th defendant’s Defence that the Accounting Documents were sent to the 3^rd defendant by email and 1^st defendant and 2^nd defendant would be copied in those emails and therefore those documents would have been sent to the 2^nd defendant, the wording of paragraph 19 is debatable.  It states:

“The 5^th Defendant wouldprepare the accounting vouchers, cheques and remittance advices for accounting purposes. All receipts and records would be filed and sent to the 3^rd Defendant. The 1^st to 4^th Defendants would be copied into any emails.”

The 2^nd defendant argues that it is unclear that the Accounting Documents were sent to the 2^nd defendant.  I agree that the meaning as proposed by the plaintiffs is arguable.  Besides, this is the 5^th defendant’s Defence, which is contradicted by the 2^nd defendant.  The Court should not embark on cross-examination of the evidence before it and therefore the affidavit of the 2^nd defendant should be final.  See In the matter of Prudential Enterprise Ltd.

54.  I therefore dismiss the plaintiffs’ summons against the 2^nd defendant.

Discussion – D3’s emails

55.  The plaintiffs seek electronic copies of all emails sent to and from the email addressee [email protected] from the 3^rd defendant.  They rely upon the similar reasons as those for their application for the 2^nd defendant’s emails.  They have the same predicaments for the 2^nd defendant as for the 3^rd defendant.

56.  The 3^rd defendant’s objections are that it is unnecessarily wide and that the personal emails were not used for business purposes.

57.  The 3^rd defendant also submits that according to the Decision of A.  Chan J[30]., there was no direct evidence of any wrongful act committed by the 3^rd defendant.

58.  The purpose of getting the emails is for proof of conspiracy against the 3^rd defendant.  Again, the plaintiffs are unable to demonstrate to this Court the element of conspiracy in the Statement of Claim.

59.  For the same reasons in relation to the 2^nd defendant above, I decline to make an order for the 3^rd defendant’s all personal emails as requested by the plaintiffs.  I dismiss their application.

Discussion – D4’s emails

60.  The plaintiffs seek electronic copies of all emails sent to and from the email address [email protected], relying upon similar reasons as for the 2^nd and 3^rd defendants.[31]

61.  The plaintiffs object to admissibility of the 4^th defendant’s opposing affirmation for being out of time and it was not affirmed before a notary public or diplomatic or consular officer of PRC, contrary to O.41, r.12.  It is admitted that the 4^th defendant’s affirmation was not affirmed before a notary public in Shanghai.  As such, the Court has decided to read it de bene esse.  This Court will attach no weight to this affirmation.  Nevertheless, the burden remains on the plaintiffs to show that the order should be made.

62.  The plaintiffs fail to discharge their burden to satisfy this Court that an order for the emails of the 4^th defendant’s personal account to be disclosed should be made on the analysis of the 2^nd defendant’s case above.  This exercise amounts to a fishing exercise, which is oppressive to the 4^th defendant.  As such, the Court declines to make an order as requested for the disclosure of the 4^th defendant’s emails.

Discussion – D4’s bank accounts etc.

63.  The plaintiffs ask for the 4^th defendant’s all bank statements and vouchers of all bank accounts as set out in section 4 of the schedule attached to the summons as from 1 January 2009 to the date on which the relevant accounts were closed.[32]

64.  In support of the application, the plaintiffs rely upon the 4^th affidavit of Mr. Woodrum.[33]  Although the plaintiffs have, prima facie, been able to show that the 4^th defendant’s personal bank accounts are relevant to the issues in dispute, to require the 4^th defendant to disclose all bank statements and vouchers of all bank accounts for the period between 1 January 2009 to their closures, irrespective of the amount involved, is oppressive.  I consider that the scope of the discovery of the personal accounts and vouchers should, in view of the amounts involved, be limited to the amounts of $100,000 or above.

65.  I therefore dismiss the plaintiffs’ application against the 2^nd to 4^th defendants save and except that the 4^th defendant shall within 28 days from the date hereof file and serve an affirmation disclosing all bank statements and vouchers of all bank accounts of $100,000 or above as mentioned above from 1 January 2009 to the date on which the relevant accounts are closed.

Costs and order

66.  As to the costs of the plaintiffs’ application, they should follow the event. I shall now make an order nisi that the plaintiffs shall pay the costs of the 2^nd and 3^rd defendants, with counsel’s certificate for the 3^rd defendant.  As to the 4^th defendant, since the plaintiffs succeed in their application for the accounts and vouchers but fail in the discovery of the emails, there should be no order as to costs between the plaintiffs and the 4 defendant.  The 2^nd and 3^rd defendants’ costs shall be, unless they are agreed, assessed under O.62, r.9A by lodging & serving of their respective schedules of costs within 14 days after this order nisi has become absolute.  The plaintiffs shall within 7 days thereafter lodge and serve the objections.  A hearing of 30 minutes will be fixed thereafter.  This order nisi shall become absolute 14 days from the date of this Decision unless any party meanwhile apply to vary this order.

67.  As a matter of case management for this matter, if the parties pursue e-discovery, they must follow the Practice Direction for E-Discovery unless an order is made by consent.

Mr. Hong, of Fried, Frank, Harris, Shriver & Jacobson for the plaintiffs

Mr. Yeung, of C.L. Chow & Macksion Chan, for the 2^nd defendant

Mr. Oh, instructed by Lee & Chow, for the 3^rd defendant

Mr Marwah, instructed by Jones Day, for the 4^th defendant

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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D E C I S I O N

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1.  This is an application by the plaintiffs against the 3^rd defendant (“Ma”) for the continuation of a Mareva injunction granted ex parte by Mr Justice Tong on 19 June 2012 (“Injunction”).

2.  Despite the fact that Ma has indicated from day one that he intends to apply to have the Injunction discharged (no Summons has actually been taken out for that purpose), this matter has taken an extraordinary length of time to come to court for determination.  This can be quite unfair because Ma is, on his contradicted evidence, badly affected by the Injunction.  The abortion of the substantive hearing to determine this application in April 2013 was caused by the late filing of evidence by the plaintiffs.  This court is duty bound to point out that a party who has obtained an ex parte order must do all that is reasonable to ensure that the dispute over the same is resolved without delay so as to minimise the prejudice to the affected parties.

The parties

3.  The 1^st plaintiff (“P1”) is a Delaware company which is the ultimate parent company of the CEC Group (“Group”).  Until May 2012 it was listed on NASDAQ.

4.  The business of the Group consists of the provision of post-secondary and e-learning services in the Mainland, where it operates by means of wholly foreign owned subsidiaries (“WFOEs”).  The educational services are provided in two ways, namely, through a traditional university group (“TUG”) and by e-learning services (“ELG”).

5.  The other 4 plaintiffs are members of the Group.

6.  The 2^nd plaintiff (“P2”) is a BVI company with which each of the first 4 defendants (“D1-4”) entered into a contract of service to provide services for the Group.

7.  The 3^rd and 4^th plaintiffs (“P3” & “P4”) are WFOEs in Shanghai and were the most significant of the Mainland subsidiaries in financial terms.

8.  The 5^th plaintiff (“P5”) held the shares in two holding companies which respectively operated two colleges belonging to the TUG.

9.  The original defendants in these proceedings are D1-4 whose relationship with the Ps was at the material time as follows:

(1) Each defendant had a service contract with P2;

(2) Mr Chan (D1) was a director, the Chairman and CEO of P1 and P2 until 26 March 2012.  He was also the Chairman and Legal Representative of P3 and the General Manager, Executive Director and Legal Representative of P4;

(3) Mr Sena (D2) was the CFO and Secretary of P1 and P2 until 26 March 2012.  He was also the General Manager and Legal Representative of P5;

(4) Ma (D3) was the Chief Accounting Officer (“CAO”) and Vice President of P1 and P2 and the Supervisor of P5 (Ma does not admit that he was the Supervisor of P5 but there is documentary evidence to that effect);

(5) Mr Jiang (D4) was the Chief Investment Officer and President of P1 and P2 and a director of P3.

10.  Ms Fu (D5) was joined as a defendant on 27 August 2012.

11.  The other defendants, D6-13, were also joined on 27 August 2012, but no cause of action is pleaded against any of them.  They have been joined only for the purpose of extending the Injunction to cover assets held by them which, Ps allege, are held for one of D1-4.

Background to the litigation

12.  In 2011, there was conflict at board level in P1 which gave rise to a proxy contest that resulted in new directors being appointed to the board, the appointment of these directors having been opposed by D1-3 (Ma says that he had only supported D1 and D2 passively in the proxy contest).  It is alleged by Ps that in the early part of 2012, D1-4 acted together in attempting to obstruct the audit of the two main operating entities of the Group, P3 & P4 (it is right to point out that this was not pressed at the hearing because there was no evidence that Ma played a part in the alleged obstruction).  This led to D1 being removed from his positions with P3 & P4 on 26 March 2012.  At the same time D2 resigned.  Ma was removed from all positions within the Group on 11 April 2012.  On 29 March D4’s positions within the Group were terminated.

13.  The new management then sought to assert control over all of the Group entities but found that important financial records and other documents held at the offices of P3 and P4 in Shanghai had been removed or destroyed.  On 30 March 2012, D1 tried to prevent the new management from entering the premises occupied by P3 & P4 by changing the locks; he had earlier demanded that Mr Feng (the new CEO of the Group) and his team should leave.  Personnel in the Shanghai finance office continued to destroy documents and on 16 April some 10 to 15 persons not employed by P1 entered the premises and forcibly took away the hard drives of computers.  The chops and other important documentation required to allow for the running of the business had also been taken on the instructions of D1.

14.  After obtaining new chops and taking control of the Shanghai companies the new management ascertained, it says, that D1-4 had acted in breach of duty by misappropriating assets of the Group and by diverting corporate opportunities from the Group for their own benefit.  These wrongful acts have been pleaded under different headings in the Statement of Claim (“SOC”), which include those summarized below.  In short, a fraud of considerable scale had been committed against Ps by people who were in control of them.  These companies have been stripped of a massive amount of cash as well as assets of considerable value.  Much of their business has also been taken away.  P1 has lost its listing status as a result of the wrongdoings and Ps are now impecunious.

Diversion of resources & business opportunities

15.  Two companies controlled by D4 are operating from two floors adjacent to those where the offices of the Shanghai subsidiaries of P1 are located.  These two companies are ZJX and Harmony Education.  ZJX has taken on projects that should rightfully have gone to the Group and/or has extracted service fees from the Group.  Harmony Education has been passed off by D4 as being affiliated with P1 and has attracted business away from it, thus exploiting its goodwill.  Harmony Education is setting up a university park in Anhui province and there is reason to believe that the Group’s funds have been used for such purpose.

Unauthorized borrowings

16.  D4 had arranged for P3 and P4 to take out loans at high rates of interest from entities associated with him.  There was no need for the loans since the Group’s revenues exceeded the amounts needed to operate the business.

Pledging of time deposits

17.  P3 and P4 had deposits of RMB100m each with Huaxia Bank.  These sums were pledged as security for loans granted to 3 companies, the identities of which have not been disclosed by the bank.  The bank has confirmed that these sums have been transferred away.

Cash balances of P3 & P4 dissipated

18.  At the end of June 2011, the cash balances of P3 and P4 were respectively RMB494.9m and RMB180.1m.  Between July 2011 and April 2012 these cash balances were depleted by transfers out of the various bank accounts so that P3 and P4 were left with cash balances of only RMB13,788 and RMB124,022 respectively.  Thus, over a ten month period the cash balance of P3 was practically eliminated and that of P4 was drastically reduced.

Other misappropriations of funds

19.  A number of misappropriations are pleaded in paras 81-85 of the SOC.

20.  Of particular significance is the transfer of US$64.5m from P1’s account in the USA with Signature Bank to CCT HK.  These monies have disappeared from the Group.  However, documents subsequently uncovered by the new management show that US$30m was paid to a company called Thriving Eagle and that there were numerous other unexplained and highly suspicious transactions.

21.  Between June 2011 and April 2012 transfers of RMB35.6m were made by P3 to D5.  An allotment of 3.7m shares in P1 to two BVI companies connected with D5 was procured in circumstances whereby no payment was made.

Colleges wrongfully transferred

22.  The shareholdings of P5 in the two colleges, namely, HIUBC and Lijiang College have been transferred out of the Group. These shares were transferred in March 2012 to D4 (as to 70%) and one Mr Shi (30%).  Subsequently they were transferred to other persons.  At the time of the transfers from P5 the Legal Representative of P5 was D2 and the Supervisor of P5 was D3.

The case against Ma

23.  This application only concerns Ma.  Ps’ case is that Ma had acted together with D1, D2, D4 and D5 in the massive fraud committed against them. However, there is a special feature with the case against Ma.  It has been acknowledged by Mr Grossman SC, who appeared with Mr Wong for Ps, that there is no direct evidence of any wrongful act committed by Ma, whether by himself or with any of the other Ds.  This feature is the kernel of the arguments in this application.  Mr Grossman argued that given the scale of the fraud it is impossible for the same to have succeeded without the connivance of Ma given his position in the Group. 

24.  On the other hand, Mr Cooney SC, who appeared for Ma, submitted that Ps’ case against Ma is speculative and little more than sweeping him up with the other Ds on the slander basis of his position in the Group.  Ma maintains that he had discharged his duties to the Group properly and was not aware of any wrong being committed against Ps. 

The Issues

25.  With the helpful submissions from both sides, the determination of this application will turn upon, firstly, whether there is sufficient evidence to give rise to an inference that Ma did connive with other Ds in the wrongdoings (the good arguable case issue).  Secondly, whether the balance of convenience is in favour of continuing with the Injunction.

Good arguable case

26.  I start with the appropriate test.  I have been referred by Mr Grossman to Gee on Commercial Injunctions, 5^th edn, §12.024 (citing Mustill J’s dicta in Nenemia Maritime Corp v TraveSchiffahrtsgesellschaft GmbH) – a good arguable case is “one which is more than barely capable of serious argument, but not necessarily one which the Judge considers would have better than 50 per cent chance of success.”

27.  I have also been referred to the case of Helm Hong Kong Ltd v Au Tat Kei, Decky, unrep, HCA 1517/2006, 13 December 2006 at para 6:

“… It is not the function of the Court at this stage to make any finding of fact or attempt to resolve conflicts of evidence disclosed in these various affirmations.  The Court is, however, both entitled and obliged to take into account the apparent strength or weakness of the parties’ respective cases to decide whether the Plaintiff’s case, on the merits, is sufficiently strong to cross the threshold of a good arguable case and on the ultimate question of whether it is just and convenient to continue the Mareva injunction.  I emphasize the word “apparent” because this is still at a relatively early stage in the proceedings.  The real strength or merits of the parties’ case has not been tested by cross-examination.  Discovery has not gone beyond the production of exhibits in the parties’ respective affirmations.”

28.  Mr Cooney has expressed no disagreement with the above statements of law.  It is fair to say that the threshold of good arguable case is not a particularly onerous one.

29.  Helpfully, Mr Grossman has, for the present purpose, distilled his case against Ma into a number of wrongdoings.  It was submitted that, in light of these wrongdoings, it is impossible for Ma to maintain that he did not know about or connive with the fraud practised on Ps.

30.  Before I turn to those wrongdoings, I shall deal with a number of more general points. 

31.  Firstly, although Mr Cooney has made no admission to any fraud having been committed against Ps, on the evidence before the court that is not a matter open to doubt.

32.  Secondly, it is right to say that Ps have been handicapped by the removal or destruction of their documents and records by the wrongdoers and the evidence they have managed to marshal before the court is far from complete.  On the other hand, Ps’ case against Ma must be judged on the basis of the available evidence.

33.  Thirdly, although Ma contracted with P2 for his service, there is no dispute that he, as a matter of fact, served as the CAO of the Group.  Under clause 3.1.1 of his contract, which set out his duties, it was provided as follows:

“… (a) creation and maintenance of proper financial controls; (b) development and submission of financial reports in accordance with U.S. Securities and Exchange Commission requirements; (c) development of corporate governance policies and procedures; (d) managerial accounting; (e) treasury functions; (f) accounting functions, including accounts payable and receivable; (g) cost controls; (h) payroll; (i) management of legal functions; …”

34.  Further, Ma was one of the three signatories of P1’s bank account.  There is no evidence of any abuse on his part in the operation of the account.  However, being one of the signatories underscores the importance of Ma’s position in the Group. 

35.  Fourthly, there is no controversy that one of Ma’s duties as the Group CAO was to produce quarterly consolidated group financial statements (“GFS”). These GFS were needed to meet the requirements of the US Securities and Exchange Commission.  There is no dispute that in order to do so Ma would be supplied by his colleagues with various financial data, including data from various subsidiaries of P1.  However, it is controversial whether Ma was required to check and confirm the data given to him and I shall return to this point below.

36.  Fifthly, it is undisputed that Ma was the person responsible for dealing with the external auditor of the Group, Deloitte.  The GFS were subjected to the audit of Deloitte.  Ma had the responsibility to deal with issues raised by Deloitte in the course of auditing.

Unauthorized borrowings 

37.  According to the GFS (exhibit “DF-2”) for the period ended 30 June 2011, the Group had cash, cash equivalents and term deposits of over RMB858m.  That position was confirmed by a firm of forensic accountants (“FTI”) appointed in late 2011.  Based on FTI’s report dated 19 December 2011, most of the cash balances were kept in the Mainland and P3 and P4 were the two subsidiaries with the most cash. 

38.  According to the GFS for the period ended 30 September 2011, the total amount of cash, cash equivalents and term deposits had increased to over RMB1,087m. 

39.  After the new management had gained control over the Group, and with significant delay which was caused by the removal of documents and company chops, it was found out that within a period of 10 months after 30 June 2011 (July 2011 to April 2012) over RMB762m had been removed from P3 and P4 representing about 80% of the total cash held by the Group as of 30 June 2011. 

40.  Between 2010 and 2011, over RMB780m of loans at rates of interest ranging from 1.5% to 6.5% per month were taken out by the Group’s Mainland subsidiaries, including P3 and P4.  The lenders included D4 and his associates.  Ps say that these high interest loans were unauthorized as the Group had ample cash reserves.  The interest payment required to service such loans amounted to about RMB70-80m per annum.  Plainly, this could well be a method deployed by the wrongdoers to siphon the cash from the Mainland subsidiaries. 

41.  It is pleaded by Ps in the further and better particulars of the SOC (“FBP”) that of the RMB762m which has gone missing (see para 39 above), RMB573m was foreclosed by banks as a result of unauthorised pledges of deposits (see below).  As to the balance of RMB189m, it is believed that it was used to repay creditors who had made unauthorised lending to Ps. 

42.  Ps say that the unauthorised borrowings could not have taken place without Ma’s knowledge or connivance by reason of his role and responsibilities.  In particular, those borrowings were not reflected in the GFS prepared by Ma and thus were hidden from the board of directors of P1. 

43.  I have been taken to a document which shows that there were 11 unauthorised loans taken out by P3 in December 2010 amounting to RMB16m.  These loans can be traced to the bank statements of P3.  However, these loans were not properly reflected in the relevant GFS, which only showed borrowings of RMB1.5m.

44.  The evidence is that Ma was supplied with the bank statements of all the accounts every quarter.  Further, there is uncontradicted evidence that each of the subsidiaries in the Group would submit trial balances to Ma on a monthly basis.  Such documents would contain all the company’s bank transactions. 

45.  Mr Wong, who dealt with part of Ps’ submissions, argued that the above shows that Ma was manipulating the Group’s financial data so that important information was not disclosed. 

46.  Ma’s pleaded case is quite simple.  He was presented with, inter alia, the accounts of P3 and P4 and those material did not reveal any loan taken out by them.  Had there been such loans, concerns would have been raised by Deloitte. 

47.  Mr Cooney was at pains to point out that there is nothing to indicate that Ma was aware of or connived to any wrongdoings. 

48.  I was reminded of the evidence of Ma in respect of the scale of operation of the Group, which was described as far-flung and substantial.  There were 3 universities in different provinces, an ELG business and offices in Beijing and Shanghai.  Each university employed about 1,000 staff and had its own independent accounting department.  The Beijing and Shanghai operations also had their own independent accounting department. Those two accounting departments employed over 40 staff.  Ma said that there was no way for him to manipulate the financial data given its sheer volume. His role was to have an overview of the accounts and, more importantly, to assist Deloitte to present this overview to satisfy regulators, shareholders and directors.  He could only discharge his duties by relying on information and material provided to him. 

49.  Mr Cooney argued with some force that if a fraud was being practised it is possible that Ma was also a victim of the fraud.  He pointed out that Deloitte was unable to detect anything untoward in the course of its audits.  There is no reason, Mr Cooney argued, to believe that Ma should have discovered anything wrong with the accounts he was given. 

50.  There is, potentially, some support for the proposition that Ma was also fooled by the fraud that was being committed.  Ps have uncovered some fraudulent bank statements in the course of investigating these matters (see below).  It is possible that Ma was provided with fraudulent bank statements. 

51.  On the other hand, Ma’s evidence concerning his role and responsibilities in the Group is unconvincing because it is, firstly, inconsistent with the terms of his service contract. 

52.  Secondly, there is very little said by Ma in respect of the checking and confirmation which, as a matter of common sense if nothing else, a person in his position would carry out to ensure that the information given to him was accurate.  My impression of Ma’s evidence is that he sought to minimise his role and distance himself from the wrongs committed against Ps. 

53.  Thirdly, given his responsibility in dealing with Deloitte (there is no suggestion that Deloitte knew of or was party to any wrongdoings), the point that Deloitte was unable to discover any wrongdoing is a two edge sword.  Ma was in the best position to see to it that Deloitte would not uncover anything wrong.  Looking at it from a different angle, it would have been rather difficult for the fraud to evade the detection of both Ma and Deloitte. 

54.  Mr Grossman has made two general points to contradict the suggestion of innocence.  Firstly, Ma has not suggested (certainly not in an unequivocal manner) in any of his affirmations that he was himself a victim of other people’s concealment.  Indeed, I find his evidence in respect of the trial balances which Ps have managed to uncover rather unusual. These documents are inconsistent with the relevant GFS and therefore suggest that the information provided to Ma was not accurately reflected in the GFS. One would have expected that an innocent person in Ma’s position would respond to the evidence by saying that the trial balances that he was provided with were not those documents.  However, Ma’s response is ambiguous (Ma’s 4^th affirmation (“Ma 4^th”), paras 65 and 67).  Apart from repeating that he never tempered with any financial information supplied to him, he questioned the provenance of the trial balances produced by Ps.  One may argue that these are matters of semantics.  On the other hand, this court must form a view on the basis of the evidence before it.  On such evidence, one can fairly say that Ma’s response is not consistent with that of a senior employee who was cheated by the wrongs of his colleagues. 

55.  Mr Grossman’s second point is that Ma had failed to cooperate with the new management in its effort to uncover the fraud.  I was referred to the details pleaded in the FBP (Answer 14(7)). 

56.  Ma’s response to the allegation that he had refused to assist in Ps’ investigation is again rather unusual.  He deposed to the fact that he was dismissed and had to leave his office immediately.  He is not in possession of any document belonging to Ps.  There was little he could do to help Ps (Ma 4^th, paras 19 and 46).  I cannot accept that such a position sits with common sense.  Ma was the CAO of the Group.  He must be in a very good position to assist Ps to uncover what was taken from them and to try to trace their properties.

57.  Mr Grossman’s criticisms are not sterile forensic points.  The court must assess the evidence with common sense. 

58.  Coming back to the unauthorised borrowings, the sheer volume of such borrowings, the duration of their existence and the amount of money required to service the interest payment tend to suggest that it is very difficult for such unlawful acts to have escaped Ma.  I should add that given the fact that P3 and P4 were in possession of a huge amount of cash or cash equivalents, a reasonable CAO would have paid special attention to the finance of these companies. 

59.  Importantly, the evidence shows (see below) that this is not the only complaint of Ps which gives rise to an inference that Ma was a party to the fraud.  Mr Grossman has made a powerful point that this court must consider the culminative effect of the evidence.

Pledging of time deposits

60.  Ps’ case is that between December 2009 and November 2011, numerous pledges were made with the cash deposits of P3 and P4.  These pledges were made for the benefit parties who were unrelated to the Group. These deposits have now been lost.  Ps allege, inter alia, that Ma had permitted these pledges to be made, failed to investigate them and failed to record them in the GFS.

61.  Ma accepts that these pledges were highly irregular.  However, he maintains that they were not disclosed in the financial material supplied to him and therefore he had no knowledge of the same. 

62.  I have already dealt with the general arguments of both sides when I considered the unauthorised borrowings.

63.  I am not convinced about Ma’s explanations. Just looking at the unauthorised borrowings and the pledges, there is a strong inference that there were too many irregularities to have escaped an honest CAO.

Dissipationof cash balances

(i) The RMB762m claim

64.  The details of this claim have been covered in paras 37 to 39 above.

65.  In addition to his claim that he had relied upon the financial information given to him, Ma’s case is that he did not operate or have control over the bank accounts.

66.  Like the first two complaints, I find Ma’s explanation unconvincing.

(ii)   The other misappropriation of funds claim

67.  Between January 2008 and December 2011, US$64.5m was transferred from P1’s account with Signature Bank in the US to ChinaCast Technology (HK) (“CCTHK”) Ltd.  Ma says that this is a wholly owned subsidiary of P2.  However, the 2 shares of CCTHK were owned by D1 and P1 (I do not regard this as a point against Ma).  The funds have since been transferred out of the Group and cannot be traced.

68.  Ma says that those funds were used to pay the expenses of offshore entities belonging to the Group, capital injection into Mainland subsidiaries of P2 and the cost of acquisition of colleges by Mainland subsidiaries. 

69.  Ma explained that in December 2009, as a result of a fund raising exercise Ps were in possession of about US$44m.  That fund was later used in the acquisition of colleges in the Mainland.  According to a public announcement of P1, the acquisition of one such colleges, which was completed in August 2010, required about US$66.2m. 

70.  I have been taken by Mr Wong to the evidence of false bank statements (Mr Woodrum’s 1^st affidavit, para 16).  It appears that Deloitte was provided with bank statements with stated balances which differed dramatically with the truth.  I am not sure how this piece of evidence supports this complaint of Ps.  In any case, it is a point which cuts both sides as I have alluded to in para 50 above.

71.  In light of Ma’s evidence, I would disregard this complaint in my consideration of whether a good arguable case has been made out.

Transfer of colleges

72.  The core of Ps’ TUG business was made up of 3 universities in Wuhan, Lijiang and Chongqing, respectively HIUBC, Lijiang College and FTBC.  The shares in HIUBC were held by P5.  In March 2012, those shares were transferred to D4 and an employee of HIUBC who is said to be closely associated with D4 by the name of Shi (“Shi”).  On 5 April 2012, those shares were onward transferred to 3 other individuals and out of the Group’s control. 

73.  In respect of Lijiang College, P5 was also its shareholder.  P5’s shares in that college were transferred to D4 and Shi in March 2012.  Those shares were transferred to 2 other individuals on 9 April 2012.  Again, the Group has lost control over the college.

74.  P1 held its interest in FTBC through P4 and one Chongqing Chaosheng Education and Investment Co Ltd.  Those interest were also transferred to D4 and Shi on a date unknown to Ps.  However, the record shows that FTBC has also been transferred out of the Group and is now owned by 23 individuals none of whom is known to Ps save for one Mr Shi Qin Yan who is understood to be the son of Shi.

75.  Understandably, in this complaint Ps rely heavily upon the fact that Ma was the supervisor of P5 (that is not a relevant consideration in respect of FTBC).

76.  Ma’s evidence is that the transfers to D4 and Shi were likely to have been carried out in accordance with the advice of Mainland lawyers.  Under Mainland regulations, there was a restriction over foreign ownership of education institutes.  To overcome the same, Ps were advised to adopt a Variable Interest Entity structure (“VIE”) for holding the interest in the colleges.  I was taken to various contemporaneous documents.  For the present purpose, I am satisfied that it is likely that the transfers to D4 and Shi were made to put the VIE into effect.

77.  As regards the second transfer, which is a gravamen of this complaint, I bear in mind that they were made shortly before Ma was dismissed from his position on 11 April 2012.  I am not satisfied that there is sufficient evidence to indicate any wrongdoing on Ma’s part and I shall also ignore this complaint from my consideration.

Conclusion on good arguable case

78.  Despite my rejection of two of the complaints, there is sufficient evidence to meet the threshold.

79.  For completeness, I should mention that Mr Cooney has, quite fairly, not pressed the arguments concerning hearsay evidence and non-disclosure.  It is therefore not necessary to deal with them.

Balance of convenience

80.  The main considerations here are (a) the Injunction, perhaps expectedly, is affecting Ma badly and (b) whether damages are adequate compensation if it subsequently turned out that the Injunction ought not to have been granted.

81.  There is uncontradicted evidence that Ma’s life is in limbo since the Injunction was made.  In particular, he has not been able to find a suitable employment.  One can well understand that Ma will have to disclose these matters to his prospective employer and that would seriously damage his prospects of getting suitable work.  On the other hand, there is force in Mr Grossman’s argument that the difficulty is not caused by the Injunction but by the action against him.

82.  Further, Ma has not been able to start a business which he has conceived because his assets are frozen.  This is quite important in light of Ma’s inability to get a suitable job.  In this regard, Mr Grossman accepts that Ma may seek Ps’ consent for a variation of the Injunction to allow him to start a business.

83.  I take the view that it will be very difficult to assess the compensation which should be paid to Ma in the event that the court held that the Injunction should not have been granted.

84.  Moreover, the evidence is that Ps are impecunious.  This litigation is being funded by P1’s shareholders.

85.  Taking these matters into consideration, I take the view that the Injunction should be continued but with a variation to allow Ma to withdraw HK$2m so as to enable him to start the business he has in mind.  The evidence is that Ma’s share of the start-up capital would be RMB$1.5m.

86.  I have considered whether the ordinary living expenses of HK$20,000 per week should be adjusted in light of the variation.  I have decided against doing so because it normally takes some time before a business can return a profit.  I have also decided against imposing an obligation on the part of Ma to make disclosure on the finance of the new business.  Should there be a material change of circumstances in the future, Ps have the liberty to come back to the court.  However, I believe that the ordinary and proper business expenses allowance of HK$20,000 per week should cease when the HK$2m have been released.

87.  In addition, Ps must fortify their undertaking as to damages within 14 days from today with either a payment into court or a bank guarantee of HK$3m.  This was the lower of the two sums suggested by Mr Cooney.

88.  Further, I am dissatisfied with the progress of this action.  It is essential for a plaintiff who has obtained a Mareva injunction to prosecute his action without any delay.  Ps must also undertake to prosecute this action with all due expedition.

89.  I grant the parties liberty to apply.

Conclusions

90.  The Injunction to be varied as indicated above should continue until the conclusion of trial or further order.  The solicitors for Ps and Ma should endeavour to agree the terms of the Injunction.  Any disagreement should be set out succinctly in a joint letter to the court for resolution.

91.  I make an order nisi that the costs of this application be Ps’ costs in the cause with a certificate for two counsel.

92.  Last but not least, I am grateful for the assistance of counsel in these matters.

(Anthony Chan) Judge of the Court of First Instance High Court

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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REASONS FOR JUDGMENT

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1.  By a summons dated 28 August 2012 the plaintiffs applied for an order that the 1^st defendant be summoned for cross‑examination on the content of his affirmation dated 18 July 2012 filed pursuant to the order of Tong J dated 19 June 2012.

2.  Although by its summons the plaintiffs also applied for an order that the 2^nd defendant be summoned for cross‑examination on the content of his affidavit dated 20 July 2012, the application against the 2^nd defendant was not pursued.

3.  On 25 October 2012, after hearing arguments, I made an order that the 1^st defendant be summoned for cross‑examination on the content of his affirmation dated 18 July 2012 filed herein (“the 1^st defendant’s affirmation”) pursuant to the order of Tong J dated 19 June 2012.  I directed that the cross‑examination be conducted before a master with an expedited hearing date estimated to last for half a day.

4.  I also ordered that the costs of the application be to the plaintiffs, such costs to be taxed if not agreed.

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

6.  On 19 June 2012 on an ex parte application made by the plaintiffs Tong J granted a Mareva injunction freezing the assets of the 1^st to 4^th defendants in Hong Kong up to the value as set out in the order of Tong J.

7.  By the said order of Tong J each of the defendants was also ordered to disclose to the plaintiffs all his assets in Hong Kong of an individual value of HK$250,000 or more giving the value, location and details of all such assets.  The order also provided that the disclosure was to be confirmed in an affidavit to be served on the plaintiffs’ solicitors.

8.  On 19 June 2012 the 1^st defendant’s affirmation was filed pursuant to the order of Tong J.

9.  The 1^st plaintiff is a company incorporated in Delaware, United States of America.  It is the ultimate holding company of companies in the CEC Group.

10.  The 1^st plaintiff was until May 2012 a listed company on the NASDAQ Stock Market in the United States of America.  It was delisted in May 2012.  The plaintiffs’ case is that the 1^st plaintiff lost its listing status as a result of the 1^st to 4^th defendants’ wrongdoings as pleaded in the statement of claim.

11.  The CEC Group has been providing post‑secondary and e‑learning services in the Mainland through wholly foreign owned enterprises (“WFOEs”).  The educational services are provided in two ways namely, through a traditional university group and by e‑learning services.

12.  The other plaintiffs are members of the CEC Group of which the 1^st plaintiff is the ultimate parent company.  The 2^nd plaintiff is a BVI company and was the employer of the 1^st to 4^th defendants pursuant to service contracts.  The 3^rd and 4^th plaintiffs are WFOEs in the Mainland.

13.  At all material times, the 1^st defendant was a director and the Chairman and Chief Executive of the 1^st plaintiff and the 2^nd plaintiffs until 26 March 2012.  He was also the Chairman and the Legal Representative of the 3^rd plaintiff and the General Manager, Executive Director and Legal Representative of the 4^th plaintiff.

14.  In 2011 there were disputes between members of the board of the 1^st plaintiff which led to, inter alia, the 1^st defendant being removed on 26 March 2012 from all his positions within the CEC Group as well as the operating companies in the Mainland including the 3^rd and 4^th plaintiffs.

15.  The new management team put in to take over control of the 3^rd and 4^th plaintiffs found that important financial records and other documents had been removed or destroyed.  

16.  It is the plaintiffs’ case that on 30 March 2012 the 1^st defendant tried to prevent the new management team from entering premises occupied by the 3^rd and 4^th plaintiffs by changing the locks.

17.  It is also the plaintiffs’ case that personnel in the Shanghai finance office continued to destroy documents and on 16 April 2012 persons not employed by the CEC Group entered the premises and forcibly removed the hard drives of computers.  Also taken away were the chops and other important documentation required for the running of the business.

18.  After obtaining new chops and taking control of the Shanghai offices the new management ascertained that the 1^st defendant, inter alia, had acted in breach of fiduciary duties by misappropriating assets of the 3^rd to 5^th plaintiffs and by diverting corporate opportunities from the CEC Group for his own benefit.  The wrongful acts of the defendants including the 1^st defendant have been pleaded in the statement of claim.

19.  As I have said, on 19 June 2012 Tong J granted a Mareva injunction freezing the assets of the 1^st to 4^th defendants in Hong Kong.  He also made a disclosure order against the defendants including the 1^st defendant ordering each of the defendants to disclose assets in Hong Kong over HK$250,000.

20.  On 18 July 2012 the 1^st defendant made the 1^st defendant’s affirmation said to be in compliance with his duty to disclose assets under the order of Tong J.  It is a short affirmation and only discloses two assets.  The 1^st defendant states as follows:

“2. I own a car I bought two years ago at about HK$450,000. It is a Land Rover Defender with license plate PJ 3856.

3. I only have one bank account in Hong Kong. Although the balance in the account is less than HK$250,000, I disclose it for the sake of completeness. It is account no 652‑069451‑833 at HSBC. The current balance is about HK$180,000.

4. I have no other available assets in Hong Kong.”

21.  The plaintiffs apply to cross‑examine the1^st defendant on the contents of the 1^st defendant’s affirmation.

22.  The applicable legal principles are not disputed.

23.  It is clear that the court has jurisdiction to make an order for cross‑examination pursuant to an order for disclosure in aid of Mareva injunctions (House of Spring Gardens Ltd and others v Waite and others [1985] FSR 173).

24.  In Yau Chiu Wah v Gold Chief Investment Ltdand another [2002] 2 HKLRD 832, Ma J (as he then was) summarized the legal principles at paragraph 14 of his judgment.  It is not necessary to repeat these here.

25.  It is important to bear in mind that the object of an order for cross‑examination is to enable a Mareva injunction to be made more effective.  The purpose of the cross‑examination is to obtain more information as to a defendant’s assets and as to the whereabouts of such assets in circumstances where the court has already formed a view that there exists a risk of dissipation of assets.  Here, Tong J has already formed that view by granting the Mareva injunction.

26.  It is also important to bear in mind that the purpose of the cross‑examination is not to enable information to be obtained so as to impugn the defendant’s credit or to investigate whether there has been a breach of the Mareva injunction so as to obtain material for contempt proceedings.

27.  It is also not permissible to conduct the cross‑examination for the purpose of eliciting information to be used at the trial.  The purpose is to locate the defendant’s assets to make the Mareva injunction more effective.

28.  It is also clear that orders for cross‑examination made pre‑judgment are rare.  It is exceptional to make an order for cross‑examination pre‑judgment.

29.  As stated at paragraph 22.023 of Gee’s CommercialInjunctions 5^th edn, such an order would normally only be contemplated where a defendant has already made an affidavit disclosing assets and there are serious justifiable concerns about the disclosure made.

30.  And as stated at paragraph 22.025 of Gee’s Commercial Injunctions :

“The proper purpose of such a cross‑examination is to reveal further information about assets so that they can be located and preserved. Unless the claimant discharges the burden of showing there is some real prospect of achieving this by cross‑examination, the court should decline to make an order.”

31.  As Ma J observed in Yau Chi Wah the court has to undertake a balancing exercise.  Ultimately the key to whether an order should be made lies on the justice of the situation facing the court.  The question for the court is whether the making of an order for cross‑examination would result in justice being achieved.  Conversely, if an order were not made, would there be injustice (Yau Chi Wai at paragraph 14 (4) and (5)).

32.  Mr Smith SC, for the plaintiffs, submitted that the 1^st defendant’s affirmation disclosing his assets was inadequate.  Only two assets are disclosed, a car and one bank account with a credit balance of HK$180,000.

33.  It seems to me that the disclosure made in the 1^st defendant’s affirmation is woefully inadequate and unsatisfactory.

34.  On the evidence, the 1^st defendant and his wife owned a property namely, Flat A on 18^th Floor of No 3 Garden Terrace, Hong Kong (“the property”) which he and his wife purchased in 1998 for HK$16,800,000.

35.  The property was sold by the 1^st defendant and his wife shortly after he had been ousted from the management of the CEC Group.  On the evidence, a provisional agreement for sale and purchase was made on 17 April 2012 for the sale by the 1^st defendant and his wife of the property to Happy Point Investment Ltd (“Happy Point”) for HK$63,000,000.  Although there were mortgages and legal charges on the property as evidenced by the Land Registry searches on the property, by the time of the assignment of the property to Happy Point on 18 May 2012, the mortgages and legal charges had been discharged.

36.  The plaintiffs relied on the bank valuation of HSBC in June 2012 which put the value of the property at HK$74,460,000.  As this was a bank valuation and likely to be conservative, it was submitted on behalf of the plaintiffs that there was evidence that the property was sold at an undervalue.  The plaintiffs also submitted that on the evidence the purchaser Happy Point might be owned or controlled by the 1^st defendant.

37.  It seems to me that the present evidence before the court does not justify an inference that Happy Point was owned or controlled by the 1^st defendant.  The 1^st defendant has in his 2^nd affirmation said that the sale to Happy Point was genuine.  Also produced in evidence was a letter from Messrs Hogan Lovells to the plaintiffs’ solicitors dated 13 July 2012 where they informed the plaintiffs’ solicitors that they were instructed that the sale to Happy Point was an arm’s length transaction and further, that they were instructed to confirm that none of the individual beneficial owners of Happy Point had any relationship with the 1^st defendant and his wife.

38.  Be that as it may, it seems to me that on the assumption that the sale to Happy Point was a genuine sale, there must have been surplus monies paid to the 1^st defendant and his wife on completion of the sale even after discharging the mortgages and legal charges.

39.  The monies representing the surplus proceeds of sale after discharging the mortgages and legal charges and legal expenses must have, it seems to me, been paid into a bank account in the names of the 1^st defendant and his wife.

40.  Mr Cheung, for the 1^st defendant, submitted that the 1^st defendant was only obliged to disclose his assets in Hong Kong to the value of HK$250,000 or more.  He was not obliged to disclose his assets outside Hong Kong.  I accept that under order of Tong J he was only obliged to disclose assets in Hong Kong.  However, it seems to me that it is inconceivable that he only has the assets in Hong that he has disclosed in the 1^st defendant’s affirmation and no more .

41.  What has happened to the surplus proceeds of sale of the property?  On completion of the sale, one would expect cheques or cashier’s orders to be made out in the names of the vendors namely, the 1^st defendant and his wife.  The cheques or cashier’s orders must have been paid into a bank account in Hong Kong.  The 1^st defendant has not said anything about the whereabouts of the surplus proceeds received from the sale of the property.

42.  Mr Smith also submitted that the entering into of the second legal charge against the property by the 1^st defendant and his wife on 2 April 2012 was suspicious.  The second legal charge was entered into between the 1^st defendant and his wife as borrowers and Lakeshore Entertainment Inc, (“Lakeshore”) a BVI company, as lender.  The address given for Lakeshore is an address in Beijing.  Upon visiting that address it was discovered that the address was occupied by Blue Ridge Investment Consulting, a private equity firm established by one Justin Tang.

43.  Justin Tang is an ex‑director of the 1^st plaintiff and in the same camp as the 1^st defendant before they lost control of the board of the 1^st plaintiff and were outsted on 26 March 2012.  Thus, it was submitted that the entering into of the second legal charge was suspicious.  It was submitted that entering into the second legal charge about two weeks before the sale of the property in April 2012 raised a serious issue as to whether it was a genuine legal charge or a sham.

44.  Whether the second legal charge was genuine or a sham, the fact remains that at the time of the completion of the sale of the property the mortgages and the legal charges were discharged.  There must have been a surplus of proceeds which were paid to the 1^st defendant and his wife.  The whereabouts of the surplus proceeds have not been disclosed by the 1^st defendant.

45.  As deposed to in the second affirmation of Derek YiYi Feng, of the plaintiffs, the 1^st defendant was earning a substantial salary of at least HK$1,800,000 per annum prior to his removal from the CEC Group.  His service contract provided for his salary to be paid in Hong Kong dollars.  It is highly likely that his salary was paid into a Hong Kong bank account.  Apart from this, the evidence shows that the 1^st defendant has been involved in different companies and ventures over the last 20 years or so.  Some of these have been based in Hong Kong.  It is highly likely, in my view, that he has received some revenues from these companies which must have been paid into bank accounts in Hong Kong.

46.  There is also evidence that in May 2012 the 1^st defendant and his wife closed out their joint loan account with Bank of Communications.  The 1^st defendant also closed out his current account and savings account held in his sole name with Bank of Communications also in May 2012.  What has happened to the funds in those accounts has not been disclosed.

47.  I am of the view that there are serious concerns about the disclosure of his assets made by the 1^st defendant justifying an order that he be cross‑examined on his affirmation for the purpose of identifying the location and whereabouts of his assets in Hong Kong.

48.  Mr Smith also relied on the fact that the 1^st defendant failed to disclose his interest in Thriving Blue Limited (“Thriving Blue”), the 9^th defendant.  This is a BVI company wholly owned by the 1^st defendant.

49.  According to a filing made by the 1^st plaintiff in December 2009, Thriving Blue held 692,520 shares in the 1^st plaintiff. Thriving Blue held the said shares on behalf of the 1^st defendant, the 2^nd defendant and Michael Santos.

50.  In my view, the fact that the 1^st defendant’s interest in Thriving Blue and his interest in the shares of the 1^st plaintiff held on his behalf by Thriving Blue were not disclosed in the 1^st defendant’s affirmation does not assist the plaintiffs on this application.  By the terms of the order of Tong J the 1^st defendant was only obliged to disclose information on his assets in Hong Kong.  Thriving Blue is a BVI company.  The shares of the 1^st plaintiff held by Thriving Blue on behalf of the 1^st defendant are shares in a Delaware company.  These are not assets in Hong Kong.  The 1^st defendant was not obliged to disclose these assets under the order of Tong J and the fact that he did not do so does not assist the plaintiffs in this application.

51.  Mr Cheung also submitted that the 1^st defendant was not obliged to disclose matters that occurred before the granting of the Mareva injunction.  As the sale of the property took place before the Mareva injunction was granted it was submitted that he was not obliged to disclose what happened to the proceeds of sale.  I am unable to accept the submission of Mr Cheung.  The 1^st defendant is certainly obliged to disclose all his assets in Hong Kong of a value of HK$250,000 or more.  There must have been surplus of the proceeds of sale paid to the 1^st defendant and his wife on completion of the sale of the property.  The 1^st defendant is obliged to disclose the whereabouts and location of such proceeds if indeed they are in Hong Kong.  I am unable to see how the fact that the proceeds of sale were received before the Mareva injunction was granted excuses the 1^st defendant from making a full disclosure of his assets as required by the order of Tong J.

52.  As Ma J said in Yau Chi Wai at paragraph 16 of his judgment, Mareva injunctions are exceptional orders but once granted they must be made effective and practical.  Also, the reason why ancillary orders to a Mareva injunction are made is so that as far as possible, precise assets are located and identified.

53.  It was also submitted on behalf of the 1^st defendant that as there is a pending application to discharge the Mareva injunction due to be heard on 27 November 2012, the plaintiffs’ application to cross‑examine the 1^st defendant on his affirmation should not be granted at this stage.  I disagree.  Unless and until the Mareva injunction is discharged, it is in place.  In my view the disclosure made is woefully inadequate and unsatisfactory.  To make the Mareva injunction more effective it seems to me that it is proper and just to make the order sought at this stage.

54.  It was also submitted that there were concerns that the plaintiffs might use the cross‑examination to obtain material for the trial of the action.  Obviously, that is not a permissible purpose for the cross‑examination.  The purpose of the cross‑examination is to locate the 1^st defendant’s assets in Hong Kong to make the Mareva injunction more effective.  Any improper questioning of the 1^st defendant can be dealt with by the 1^st defendant raising objections to such questions when the cross‑examination takes place.  I do not see any justification for this concern.

55.  For the above reasons I made the orders set out at paragraphs 3 and 4 above.