CHINA CONSTRUCTION REALTY LTD v. LUCKY DRAGON LTD AND OTHERS

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1237 OF 2012

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HCMP 159/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 159 OF 2015

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(Heard together)

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J U D G M E N T

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BACKGROUND

1.  The development site known as Area 6 in Dalian National Resort, Golden Pebble Beach, Dalian, Liaoning Province (“the Dalian Land”) is at the centre of this dispute.  Before June 1997, the plaintiff had the predominant ownership and control of this land through the following corporate structure:

						The plaintiff, China Construction Realty Ltd.
													(90%)
		Golden Pebble Beach Development Ltd (“GPB”)
			(100%)								(80%)									(100%)
	2nd Defendant, China International Club Ltd. (“CICL”)						Dalian Jinshitan Baotong Real Estate Development Co Ltd (“Dalian JV”)												3rd Defendant, China Entertainment Ltd. (“CEL”)
			(60%)																		(60%)
									(40%)						(40%)
	Dalian International Foreigners’ Entertainment Club Co Ltd (“DIFEC”)													Dalian International Entertainment Co Ltd (“DIEC”)
				The Dalian Land

2.  The plaintiff is a BVI company.  It used to own 90% of the shares of Golden Pebble Beach Development Ltd (“GPB”) (formerly known as Wonderful Investments Worldwide Limited) which is also a BVI company.  The remaining 10% was owned by Asia Management Ltd. (“Asia Management”).  GPB used to control the 2ndand 3rd defendants and Dalian JV.

3.  The 2nd Defendant is a company incorporated in Western Samoa.  The 3rd Defendant is a BVI company.  

4.  DIFEC and DIEC (“the Dalian Companies”) are companies incorporated in the PRC. They together held the land use rights of the Dalian Land. 

5.  Dalian JV and the 2ndand 3rd defendants were at all material times engaged in a project to develop the Dalian Land through their holding of the shares of the Dalian Companies. 

6.  By an agreement dated 26 June 1997 and made between the plaintiff and Sino Business Services Proprietary Limited (“SBS”) (a company incorporated in the State of Victoria, Australia), it was agreed that the plaintiff would sell the 90% shareholdings in GPB to SBS for AUS$46,500,760.00 (“the SBS Agreement”).  The consideration was payable in several tranches as provided in the agreement.  The plaintiff then transferred the 90% GPB shares on or about 26 June 1997 to SBS’s nominee Leisureline Holdings Limited (“LHL”), also a BVI company.

7.  On or about 6 November 1997, LHL acquired 90% of the shares of China Hotel Holdings Limited (“CHHL”), also a BVI company. LHL also transferred the 90% GPB shares to CHHL. 

8.  On or about 5 January 1998, CHHL acquired the remaining 10% of the shareholding in GPB from Asia Management.  LHL thus held 90% of CHHL shares which in turn held 100% of the GPB shares.

9.  SBS paid the first sum of AUS$500,760 to the plaintiff under the SBS Agreement.  It then purported to repudiate the agreement by a letter of 13 November 1998.  It did not make any more payment to the plaintiff.  It also did not return the 90% GPB shares to the plaintiff.  On 9 November 2001, the plaintiff sued SBS in Victoria, Australia for damages for breach of contract or return of the GPB shares.

Lucky Dragon Agreement

10.  In around April or May 2003, whilst the Australian proceedings were pending, SBS, LHL and CHHL procured GPB to enter into an agreement (“the Lucky Dragon Agreement”) with the 1st defendant Lucky Dragon Ltd (“Lucky Dragon”), a company incorporated in Western Samoa, by which GPB sold all its shares in the 2nd and 3rd defendants (100% each) and in Dalian JV (80%) to Lucky Dragon.  The completion date of this agreement was stated to be 28 May 2003.  Lucky Dragon thus acquired the complete ownership and control of the Dalian Land and the land use rights over it. 

11.  The plaintiff said that it only became aware of the Lucky Dragon Agreement on or about 25 September 2003.  It further said that GPB had entered into the Lucky Dragon Agreement secretly and SBS, LHL, CHHL and GPB did not disclose the same to the plaintiff or the Australian court.

12.  On 26 March 2004, the Australian court gave judgment for the plaintiff for AUS$46 million with interest.  SBS did not pay the judgment debt.  It was then wound up on 14 April 2005.  The judgment is still wholly unsatisfied to date.

Lucky Dragon action and judgment

13.  The plaintiff commenced HCA1294/2005 in Hong Kong on 26 September 2005 against SBS, LHL, CHHL, GPB and Lucky Dragon, claiming, among other things, a declaration that the Lucky Dragon Agreement was a disposition of property with an intent to defraud the plaintiff; an order that this agreement and the purported sale and transfer of the shares thereunder be set aside pursuant to section 60 of the Conveyancing and Property Ordinance, Cap. 219 (“CPO”); and damages for conspiracy (“Lucky Dragon action”).

14.  The plaintiff obtained default judgment against all the defendants on 24 August 2006.  At that time, SBS, LHL, CHHL and GPB were under the control of the liquidator appointed as a result of the judgment of the Australian proceedings.  They would thus not have opposed the Lucky Dragon action.

15.  Lucky Dragon however applied for and obtained the setting aside of the default judgment on 2 February 2007.  Suffiad J then tried the action on 9 February 2011 for 11 days.

16.  When the trial was in progress, Suffiad J granted the plaintiff an injunction on 15 February 2011 restraining Lucky Dragon from, among other things, transferring, disposing and/or otherwise dealing with any shares and interests in Dalian JV, the 2nd and 3rd defendants and DIEFC and DIEC, or to take any steps to cause or procure any change in the registered shareholders, directors or legal representatives of these companies.

17.  On 25 March 2011, Suffiad J gave judgment for the plaintiff on its claims against Lucky Dragon and ordered the injunction to continue until further order.

18.  Suffiad J declared in the judgment that the Lucky Dragon Agreement constituted a disposition of property by SBS, LHL, CHHL, GBP and Lucky Dragon with intent to defraud the plaintiff (being the creditor of SBS and LHL).  He further ordered that the Lucky Dragon Agreement and the purported sale and transfer of the Shares to Lucky Dragon be set aside and that Lucky Dragon should pay damages to the plaintiff.

19.  The learned judge also made consequential orders that Lucky Dragon do disclose to the plaintiff whether it was still the legal and/or beneficial owner of the shares in the 2nd and 3rd defendants (100% each) and Dalian JV (80%) or any part thereof.  If the shares or any part thereof had been transferred by Lucky Dragon to another party, Lucky Dragon had to disclose to the plaintiff the details of such transfer(s).

20.  Lucky Dragon launched an appeal which was to be heard on 21 December 2011.  But Lucky Dragon did not want to pursue it and it was dismissed in December 2011.

Empire Star Agreements

21.  The plaintiff says that when enforcing the judgment of Suffiad J, it discovered that the 2nd and 3rd defendants had on about 11 January 2010 purportedly transferred all the shares of the Dalian Companies that it owned (“the 60% Dalian Shares”) to the 4th defendant, Empire Star Holdings Ltd (“Empire Star”) for HK$48 million and HK$36 million respectively (“ES Agreements”).  Empire Star was incorporated in Hong Kong on 13 November 2009. The 60% Dalian Shares indirectly represented the ownership of 60% of the development on the Dalian Land. 

22.  The plaintiff said that this was a repetition of history.  It complained that the ES Agreements effectively stripped the 2nd and 3rd defendants of all their valuable assets.  The plaintiff is again left with an empty judgment.

23.  I have mentioned above that Lucky Dragon had obtained 80% of the shares of Dalian JV from GPB on about 28 May 2003.  Dalian JV was the owner of the remaining 40% shares of the Dalian Companies (“the 40% Dalian Shares”) that indirectly represented the ownership of 40% of the development on the Dalian Land.  On about 10 June 2005 (three months before the commencement of the Lucky Dragon action) Lucky Dragon also purportedly procured Dalian JV to transfer the 40% Dalian Shares to a Qingdao Yuzhe Property Development Co Ltd〔青島愚者房地産開發有限公司〕(“Qingdao Co”), a Mainland company for RMB 26 million and RMB 20 million respectively.

24.  It is the case of Empire Star that the beneficial ownership of the 60% Dalian Shares and 40% Dalian Shares had united in one濟南環山房地產開發有限公司 (“Jinan Co”) in May to July 2009.  The 60% Dalian Shares were in fact sold to Empire Star by Jinan Co under a Framework Agreement on about 14 December 2009 as referred to below rather than by the 2nd and 3rd defendants.  Jinan Co then procured the 2nd and 3rd defendants to enter into the ES Agreements with Empire Star on 11 January 2010.

25.  Empire Star pleaded in §13A of its re-amended defence (“defence”) that by two agreements both dated 1 May 2009 and made by the 2nd and 3rd defendants with Jinan Co, the parties agreed that the 2nd and 3rd defendants would transfer the 60% Dalian Shares to Jinan Co at par values of HK$48 million and HK$36 million respectively (“the 1 May 2009 Agreements”) (a PRC lawyer Mr Ma Roupeng (“Ma”) of a Liaoning East Asia Law Office (“Asia Law Office”), a defence witness said that the currency was wrongly stated as RMB (D1/96 and 97)). 

26.  The two transfers were approved by the Dalian Economic Bureau under approval documents no. 大開經貿 [2009] 377 and 378 both dated 18 November 2009 (D6/1524 and 1525, D9/2268 and 2269).  The approval documents provided that upon these transfers being effected, the Dalian Companies would change from Sino-foreign joint venture companies to Chinese enterprises.

27.  By two further agreements both dated 25 July 2009 and made between Qingdao Co and Jinan Co, the parties agreed that Qingdao Co would transfer the 40% Dalian Shares (Chinese interest) to Jinan Co at RMB 32 million and RMB 24 million respectively (“the25 July 2009 Agreements”) (D9/2427 and 2433).

Framework Agreement

28.  Empire Star also pleaded in §§11 and 12 of the defence that it had purchased the 60% Dalian Shares from Jinan Co through a Framework Agreement.  This agreement was made by Empire Star with Jinan Co and the Dalian Companies on about 14 December 2009 for Empire Star to acquire from Jinan Co (i) the 60% Dalian Shares (that Jinan Co had purchased from the 2nd and 3rd defendants) at RMB 540 million and (ii) the 40% Dalian Shares (that Jinan Co had purchased from Qingdao Co) at RMB 360 million (“Framework Agreement”) (D1/98-105). 

29.  Pursuant to the Framework Agreement, Jinan Co procured the 2nd and 3rd defendants to enter into the ES Agreements with Empire Star on 11 January 2010 under which the 60% Dalian Shares were transferred to Empire Star.  The HK$48 million and HK$36 million stated in the ES Agreements were not meant to be paid by Empire Star to the 2nd and 3rd defendants and nothing was paid to them pursuant to these agreements or otherwise.  The ES Agreements were for registration of the transfer of the 60% Dalian Shares to Empire Star.

Different story on an indirect sale of the 60% Dalian Shares

30.  There is however another version of how the 60% Dalian Shares had come under the control of Jinan Co.  One Peter Choi (“Choi”) gave evidence before Suffiad J at the trial of the Lucky Dragon action.  He was a director of Lucky Dragon since 15 June 2009 and its sole registered shareholder since 18 November 2009.  He did not mention about the 1 May 2009 Agreements by which the 2nd and 3rd defendants transferred the 60% Dalian Shares to Jinan Co at par values of HK$48 million and HK$36 million.  He instead told Suffiad J that Lucky Dragon had entered into a written agreement with Jinan Co (not produced at the trial) selling all its shares in the 2nd and 3rd defendants (which held the 60% Dalian Shares) to Jinan Co in April 2009 for RMB 68 million payable in 4 tranches as follows (“the April2009 Agreement”):

(a)   RMB 8 million in April 2009;

(b)   RMB 10 million in December 2009;

(c)   RMB 25 million in June 2010; and

(d)   RMB 25 million in December 2010.

31.  Choi further said that he had negotiated on behalf of Lucky Dragon with one Li Yu Keung acting on behalf of one Li Ping Mei (“PM Li”) of Jinan Co for the April 2009 Agreement.  The agreement was executed by one Shirley Yeung (“Yeung”) for Lucky Dragon, who was its director until her resignation on 15 June 2009.  (Suffiad J held that this was not a genuine sale but part of the overall scheme to ensure that the Dalian Land was put out of the plaintiff’s reach - §§ 176 to 178 and 321(i) of the judgment.)

32.  Mr Yan, SC, leading counsel for Empire Star disagreed with Choi’s version and submitted that Choi was confused about how Jinan Co had acquired the 60% Dalian Shares.  Mr Lui, counsel for the plaintiff agreed with Mr Yan that Choi’s evidence on this matter was false and there was no such sale.

33.  It should be noted that neither Jinan Co nor Empire Star was a party to Lucky Dragon action and they are not bound by the judgment given in that action.

THE PRESENT PROCEEDINGS

34.  On 17 July, 2012, the plaintiff started this action. It obtained an ex parte injunction from the Deputy Judge Sakhrani on the same day restraining Empire Star from disposing of, among other things, its shareholding in DIEFC and DIEC. 

The statement of claim

35.  The plaintiff pleaded in the amended statement of claim (“statement of claim”) two causes of action.  The first cause is under section 60 of the CPO.  The second is conspiracy.  The conspiracy claim has however been abandoned by Mr Lui (§ 3 of the plaintiff’s reply submissions).  I will say no more about this claim.

36.  In the cause of action under section 60 of the CPO, the plaintiff seeks to set aside the two ES Agreements on the ground that the sale and purchase of the 60% Dalian Shares purportedly under the Framework Agreement and the ES Agreements was a disposition of property by Lucky Dragon and the 2nd and 3rd defendants.  The disposition was with intent to defraud the plaintiff by putting the only assets of the 2nd and 3rd defendants out of its reach.  The plaintiff says that it has been prevented by these agreements from procuring the reversal of the transaction under the Lucky Dragon Agreement and restoring to GPB the ultimate predominant ownership of the Dalian Land and land use rights. 

37.  The plaintiff further pleaded in §54 of the statement of claim that Empire Star had actual or constructive notice that the Framework Agreement and the ES Agreements were made with intent to defraud the plaintiff.  The particulars of notice are:

(1)   notice is to be inferred from the purported sale of the 60% Dalian Shares pursuant to the ES Agreements at a gross undervalue and without commercial justification for it;

(2)   the market value of the Dalian Land as at 11 January 2010 as valued by the plaintiff’s valuer was around RMB 380 million (based on the stage of development in August 2006) (the valuation changed to around RMB 800 million on 26 February 2014 and further changed to around RMB 750 million on 25 March 2014 as pleaded in §10(4) of the plaintiff’s re-amended reply (“reply”)). (If the market value of the Dalian Land should be at RMB 750 million as at 11 January 2010, the 60% Dalian Shares would have a market worth at about RMB 450 million).

(3)   however, the purported considerations under the two ES Agreements were only HK$48 million and HK$36 million respectively (being 60% of the registered capitals of the Dalian Companies respectively) (“thePurported Consideration”);

(4)   there is no evidence that the Purported Consideration had been paid by Empire Star to the 2ndand 3rd defendants;

(5)   when the ES Agreements were made, the Lucky Dragon action was still ongoing.  Empire Star would have noticed the action because:

(i) Yeung, who purportedly acted for the 2nd and 3rd defendants in the ES Agreements and was intimately connected with the Lucky Dragon action, is likely to have informed Empire Star of the Lucky Dragon action which concerned the shares of the 2nd and 3rd defendants and their interests in the Dalian Project held through the Dalian Companies; and

(ii) if proper due diligence had been conducted by Empire Star before making the ES Agreements, Empire Star would have discovered the existence of the Lucky Dragon action; and

(6)   there is no evidence to indicate that the parties had obtained independent legal advice or conducted any due diligence prior to the purchase by Empire Star of the shares of the Dalian Companies pursuant to the ES Agreements.

38.  The plaintiff also asks the court to infer that: -

(i)   Empire Star is and was not a company of substance;

(ii)   the ostensible directors and shareholders of Empire Star from time to time are and were not persons of substance;

(iii)   the ostensible directors and shareholders of Empire Star agreed with Lucky Dragon/the 2nd/3rd defendant to procure the incorporation of Empire Star and procure it to enter into the ES Agreements with a view to frustrate the plaintiff’s efforts to recover its claim in the Lucky Dragon action (and ultimately to enforce the Australian Judgment) and with a view that after the transfer of the 60% Dalian Shares to Empire Star, Empire Star would abide by the orders, wishes or instructions of Lucky Dragon/the 2nd/3rd defendant in relation to such shares; and

(iv)   the signing and purported making of the ES Agreements was not preceded by any negotiations between Empire Star and Lucky Dragon and/or the 2^nd and/or 3rd defendant.

39.  The plaintiff provided the following particulars in §55 of the statement of claim to justify the above inference that it seeks to draw: -

(1)   Empire Star is and was not a company of substance.  It was only incorporated on 13 November 2009 (around 2 months before the making of the 1st and 2nd ES Agreements) as a shelf company in Hong Kong with a share capital of HK$10,000 divided into 10,000 shares of HK$1.00 each. 

(2)   Empire Star had no pre-existing business or track record.

(3)   On 8 December 2009, a Mr Lin Liming (with a Singaporean passport) (“Lin”) was its sole shareholder (holding 1 issued share) and was also appointed its sole director. 

(4)   Shortly thereafter on or about 27 January 2010, Lin transferred his 1 share in Empire Star to a Mr Zhang Xi (“Zhang”), who was also appointed as director in place of Lin on the same day.

(5)   On 19 February 2010, Empire Star issued 99 additional shares and allotted 9 of them to Zhang and 90 of them to one Onwin Enterprises Holdings Limited (“Onwin”) (a BVI company). 

(6)   On 5 March 2010, Zhang transferred his 10 Empire Star shares to a Mr Sun Jui Hung (“Sun”) (a Taiwan resident). Notwithstanding such transfer of shares, Zhang remained the sole director of Empire Star.

(7)   As a result of the aforesaid allotments and transfers of shares, the issued shares of Empire Star are now held as to 90% by Onwin and 10% by Sun.  Zhang is currently still the only director of Empire Star. 

(8)   According to Empire Star’s annual returns filed on 13 November 2010 and 13 November 2011, its registered office was at 20^th Floor, Yat Chau Building, 262 Des Voeux Road Central, Hong Kong, being the address of Messrs Robert C C Ip & Co, solicitors and was used by Empire Star as a correspondence address only.  Empire Star has no business operations at that address or any substantive place of business in Hong Kong since its incorporation.

(9)   Lin, being the sole shareholder and director (and thus the ostensible owner/controller) of Empire Star when the two ES Agreements were executed on 11 January 2010, is and was not a person of substance. He was not in a position to finance a multi-million venture such as the development on the Dalian Land.  He had meagre financial capabilities or resources.  He did not appear to have experience in property development in the Mainland China or elsewhere. He might have been a bankrupt in Hong Kong. 

(10)   Sun, being currently a 10% shareholder of Empire Star, is and was not a person of any substance either and not in a position to finance a multi-million venture such as the development on the Dalian Land.

(11)   Onwin, being a 90% shareholder of Empire Star, is and was not a company of substance and not in a position to finance a multi-million venture such as the development on the Dalian Land.  It was incorporated on or about 8 January 2007 in the BVI.  It did not appear to have any business track record or any substantial properties or other assets. 

(12)   Zhang, being the sole shareholder of Empire Star from 27 January to 5 March 2010 and the sole director of Empire Star from 27 January 2010 to date, does not own and has not owned any landed properties in his name in Hong Kong since 1992.

40.  The plaintiff then contended that: -

(1)   it is inherently improbable that Lucky Dragon and the 2nd and 3rd defendants would procure the transfer of the 60% Dalian Shares merely to an innocent third party; and

(2)   it is inherently more probable that they would procure the transfer of the 60% Dalian Shares to a party who had agreed to abide by their orders, wishes or instructions in relation to the shares so that, although the 2nd and 3rd defendants had ostensibly been divested of the 60% Dalian Shares (and the Hong Kong Judgment would become an empty one), Lucky Dragon and the 2nd and 3rd defendants would continue to enjoy the benefit of those shares.

41.  Regarding the Framework Agreement, the plaintiff pleaded in §57A of the statement of claim that it is not a genuine agreement (or a sham) for the transfer of the 60% Dalian Shares to Empire Star.  The particulars in support of this plea are that:

(1)   The 2nd and 3rd defendants are not parties to the Framework Agreement.

(2)   Jinan Co, the transferor of the 60% Dalian Shares, was not the registered owner/holder of and had no legal title to or beneficial ownership of such shares when the Framework Agreement was allegedly entered into in mid-December 2009. 

(3)   Jinan Co was also not the registered owner of and had no legal title to or beneficial ownership of the 40% Dalian Shares in respect of which it had purportedly agreed to transfer to Empire Star pursuant to Cl. 5.3 of the Framework Agreement. 

(4)   The Framework Agreement was not registered with or approved by the relevant authorities in the PRC and is thus unenforceable as a matter of PRC law. 

(5)   The terms and provisions in the Framework Agreement including essential terms like the seller and consideration for the purported sale are different from those in the ES Agreements, which have been registered with the relevant PRC authorities as representing the actual terms of the purported transfer of the 60% Dalian Shares to Empire Star.

(6)   The ES Agreements contain no reference of the Framework Agreement, notwithstanding that the Framework Agreement was allegedly entered into prior to the ES Agreements.

42.  The plaintiff thus pleaded that the Framework Agreement is unenforceable, ineffective and invalid under PRC law and does not have the effect of transferring to Empire Star the beneficial ownership of the 60% Dalian Shares.

43.  However, the plaintiff has changed stance and does not seek to show positively that the Framework Agreement is a sham.  It simply puts Empire Star to strict proof of each and every element of Empire Star’s case that the 60% Dalian Shares were sold by Jinan Co pursuant to the Framework Agreement to Empire Star.  Once Empire Star has proved that, the plaintiff will have the burden to prove that the sale of these shares to Empire Star was with intent to defraud creditors.  The plaintiff thus maintained all the above attacks on the Framework Agreement as arguments to show that Empire Star has failed to prove that it had indeed purchased the 60% Dalian Shares from Jinan Co pursuant to the Framework Agreement (§§9 and 14 of plaintiff’s reply submissions).

Injunction against Empire Star and alleged breaches

44.  Furthermore, the plaintiff obtained an interlocutory injunction in this action from Deputy Judge Sakhrani against Empire Staron 17 July 2012 (“theInjunction Order”).  The order enjoined Empire Star from, inter alia:

(1)   transferring, disposing, encumbering or in any way dealing with the shares and/or equity interest in the Dalian Companies as held by Empire Star;

(2)   causing or procuring any change in the registered shareholders, directors and/or legal representatives of the Dalian Companies;

(3)   causing or procuring the registering of any change in directors and/or legal representatives in the Dalian Companies in their respective registers of directors and/or with the relevant government authorities; and

(4)   causing or procuring the disposal of, or dealing with or diminishing the value of or in any way encumbering any of the assets of the Dalian Companies including the Dalian Land and the Dalian Land Use Rights.   

45.  The injunction was continued by Deputy Judge Mimmie Chan on 20 July 2012.  Empire Star applied on 26 September 2012 to discharge the Injunction Order, but the application was dismissed by Poon J.

46.  The plaintiff pleaded that Empire Star had committed breaches of the Injunction Order in having:

(1)   mortgaged/charged the shares of DIFEC to盛京銀行股份有限公司大連開發區支行 (Sheng Jing Bank) (“SJ Bank”) on 25 March 2013 (“the2013Share Charge”) as security for a loan of RMB 650 million;

(2)   mortgaged/charged repeatedly the Dalian Land and/or Dalian Land Use Rights by creating and registering with the relevant authorities the various mortgages/charges over the land use rights certificates (大金度國用 (1998) 000004號土地證and 大金度國用 (1998) 000005號土地證) (“the Land Use Certificates”) in respect of the Dalian Land in favour of SJ Bank on or about 17 July 2012, 18 July 2012, 15 November 2012, 20 February 2013 and 22 February 2013 respectively (“the Land Mortgages”); and

(3)   procured Zhang (being at all material times the sole director of Empire Star) and 張昱 (Zhang Yu) (being Zhang’s sister) to be appointed as directors of the Dalian Companies on or around 6 August 2012, in place of Lin and Gao Wen (高雯) who resigned as directors of the two companies at around the same time (“the Change of Directors”). 

47.  Empire Star’s solicitors by a letter dated 6 February 2014 admitted the breaches of the Injunction Order by Empire Star by the creation of the Land Mortgages, the 2013 Share Charge and the Change of Directors, but explained, among other matters, that Zhang had “misunderstood the effect and scope of the Injunction Order”.  Empire Star further alleged that the breaches did not prejudice the financial position of the Dalian Companies.  The plaintiff was therefore not prejudiced.  The reasons are:

(i)   In 2010, the Dalian Companies applied for a loan facility at RMB 800 million from SJ Bank (“the RMB 800M Facility”), which was approved/granted by the bank.

(ii)   From May 2011 to February 2013, 4 sets of security documents were signed between DIFEC/DIEC and SJ Bank for 4 loans.  They are allegedly as follows (“the Four Loans”):

(a)   a loan dated 23 May 2011 for RMB 600 million (“the 2011 Loan”).

(b)   a loan dated 13 July 2012 for RMB 100 million (“the July 2012 Loan”);

(c)   a loan dated 13 November 2012 for RMB 40 million (“the Nov 2012 Loan”); and

(d)   a loan dated 22 February 2013 for RMB 650 million (“the 2013 Loan”).

(iii)   The 2013 Loan was borrowed at the proposal of SJ Bank (“SJ Bank’s Proposal”) to “renew” and/or “consolidate” the 2011 Loan, the July 2012 Loan and the Nov 2012 Loan.

(iv)   The proceeds of the Nov 2012 Loan and the 2013 Loan were “applied towards the ongoing project by the Dalian Companies” and “utilised for the benefit of the Dalian Companies”.

(v)   The 2013 Loan did not increase the liability of DIFEC/DIEC and was “in no way prejudicial to their financial position”.

(vi)   The Dalian Companies had made various repayments to SJ Bank from 2012 to 2013 amounting to RMB 83 million.

48.  By another letter dated 14 November 2014, Empire Star’s solicitors asked for the plaintiff’s consent to vary the Injunction Order to enable the Dalian Companies to take out further loans.  The plaintiff refused the request.  It further asserted that Empire Star’s explanation in this letter on the use of the proceeds of the 2013 Loan was different from that stated in the previous letter of 6 February 2014.  This letter stated that the RMB 650 million (the 2013 Loan) was for repaying the sums due under the 2011 Loan, the July 2012 Loan and the Nov 2012 Loan while the previous letter said that the 2013 Loan was to “renew” and/or “consolidate” the said three loans.  As a matter of fact, I really do not see any difference between the two explanations.

49.  The plaintiff then asked the Court to find and/or infer from the above matters that:

(1)   Empire Star had procured the Land Mortgages and the 2013 Share Charge to diminish and deplete the value of the DIEC Shares and the DIFEC Shares and to put the assets of the Dalian Companies out of the plaintiff’s reach with a view to frustrating the plaintiff’s claim in these proceedings.

(2)   Empire Star (and its sole director Zhang) had procured the Land Mortgages and the 2013 Share Charge knowing at all material times that to do so would constitute breaches of the Injunction Order.

(3)   Empire Star’s explanation that Zhang had misunderstood the effect and scope of the Injunction Order should be rejected, because it had been served with the Injunction Order in July 2012.  It was represented by solicitors and counsel throughout these proceedings.  Further, it had applied on 26 September 2012 to discharge the Injunction Order and was represented by senior counsel at the hearing of the application.  In making the application and filing evidence in support thereof, Empire Star and Zhang ought to have been aware of the effect and scope of the terms of the Injunction Order.

(4)   The statements in the letter of Empire Star’s solicitors dated 6 February 2014 do not represent the true facts.  The statements include, among other matters (i) the allegation concerning the RMB 800M Facility; (ii) the allegation concerning SJ Bank’s Proposal; (iii) the alleged purpose of the 2013 Loan of “renewing” and/or “consolidating” the 2011 Loan, the July 2012 Loan and the Nov 2012 Loan (iv) the alleged use of the proceeds of the Nov 2012 Loan and the 2013 Loan for the benefit of the Dalian Companies; and (v) the allegation that the 2013 Loan did not increase the liability of DIFEC/DIEC. If such allegations were true, Empire Star would have no difficulty in providing and producing the necessary supporting documentation in support of the same.

(5)   The plaintiff also referred to the following to show that Empire Star had concealed from the plaintiff and court its breaches of the Injunction Order (in particular the Land Mortgages and the 2013 Share Charge):

(i)   The Injunction Order required Empire Star to confirm by affirmation, among other matters, whether it still held the legal/beneficial ownership of the DIFEC and DIFEC Shares.  Its company secretary Mr. Lam Kit Man made an affirmation on 30 July 2012 confirming that that was the case.  But he made no mention of any of the Land Mortgages.

(ii)   Empire Star also made no mention of the Land Mortgages in the evidence it filed for the application to discharge or at the hearing of the application before Poon J on 29 January 2013.

(iii)   The Land Mortgages and the 2013 Share Charge were never disclosed to the plaintiff or the court despite their effect of substantially depleting the value of the shares of the Dalian Companies, being the subject matter of these proceedings.

(iv)   Empire Star by two letters from its solicitors to the plaintiff’s solicitors dated 22 May 2013 and 25 October 2013 deliberately misrepresented to the plaintiff that it had not breached the Injunction Order, knowing full well that such statement was untrue by reason of the making of the Land Mortgages, the 2013 Share Charge and the Change of Directors.   

(v)   Despite repeated demands by the letters of plaintiff’s solicitors to Empire Star’s solicitors from 11 December 2013 onwards, Empire Star had refused to provide a full explanation of its breaches of the Injunction Order with supporting documentation.

50.  Despite demands from the plaintiff’s solicitors in letters dated 19 November and 1 December 2014, Empire Star had refused to confirm whether there had been further breaches of the Injunction Order and/or further encumbrances on the shares of the Dalian Companies and the Dalian Land.  An adverse inference should therefore be drawn from the refusal that Empire Star had and continues to have the intention to conceal further breaches of the Injunction Order and/or further encumbrances on the Dalian Shares and Dalian Land from the plaintiff and court.

51.  The plaintiff thus contends that that insofar as Empire Star seeks to rely on section 60(3) of the CPO, and without prejudice to the position that Empire Star has the burden of proof of the requirements under that section, Empire Star has to prove that it had entered into the purported sale and transfer of 60% Dalian Shares in good faith.

52.  The plaintiff thus claims:

(1)   A declaration that the 1st and 2nd ES Agreements (and the Framework Agreement, if the same is genuine) constitute dispositions of property by 1st to 4th defendants with intent to defraud the plaintiff (being the creditor of SBS, LHL, CHHL, GBP and Lucky Dragon);

(2)   An order that the 1st and 2nd ES Agreements (and the Framework Agreement, if the same is genuine) and the purported sale and transfer of the 60% Dalian Shares to Empire Star be set aside;

(3)   A declaration that the Framework Agreement (if the same is genuine) is unenforceable, ineffective and invalid under PRC law and does not have the effect of transferring to Empire Star, or vesting Empire Star with, the beneficial ownership of the 60% Dalian Shares or any shares/equity interests in the Dalian Companies;

(4)   All necessary orders of disclosure, account and inquiry to enable the plaintiff to be informed of the present ownership, whereabouts and status of the 60% Dalian Shares;

(5)   An injunction to restrain any further dealings, disposal, transfer and/or encumbrance of the 60% Dalian Shares by the defendants without prior consent of the plaintiff or further order of the Court;

(6)   All necessary orders compelling the defendants to take all reasonable steps to re-vest the legal and beneficial ownership of the 60% Dalian Shares in CICL and CEL; and

(7)   Damages.

The defence of Empire Star

53.  Empire Star pleaded in the defence that it was not aware of the history of the transfer of the shares of the 2ndand 3rd defendants and the 80% shares of Dalian JV, the Australian proceedings or the Lucky Dragon action.  It only became aware of the Judgment of Suffiad J in the Lucky Dragon action at or around the end of March 2011.

54.  Zhang had a sister Zhang Huafeng.  In mid-November 2009, Zhang Huafeng introduced Zhang to Ma, the PRC lawyer of Asia Law Office.  Ma represented PM Li, the owner of Jinan Co which owned the development at the Dalian Land.

55.  I have mentioned above Empire Stars’ case that Jinan Co had acquired the beneficial interests of the 60% Dalian Shares and 40% Dalian Shares in May and July 2009 respectively before the two ES Agreements were made on about 11th January 2010.

56.  Ma had a meeting with Zhang and Zhang Huafeng in late November 2009.  He told Zhang that Jinan Co owned the Dalian Land development of which 60% was a foreign interest held through the foreign ownership of the 60% Dalian Shares.  The remaining 40% was a Chinese interest held through the Chinese ownership of the 40% Dalian Shares.

57.  Ma further said that owing to Jinan Co’s shortage of funds and the PRC litigation cases against the Dalian Companies for substantial sums, Jinan Co was eager to sell the shares in the Dalian Companies. 

58.  Zhang considered the Dalian Land development had potential for making profit.  He said he would consider investing in it. 

59.  Zhang, Ma and PM Li had a meeting in the following week.  In the meeting, Ma advised Zhang the status of certain confiscation orders on the Dalian Land. Ma gave Zhang a preliminary estimate of the debts owed by the Dalian Companies which did not exceed RMB 500 million. 

60.  PM Li proposed to sell to Zhang firstly the foreign interests of the Dalian Land development held by the foreign ownership of the 60% Dalian Shares for RMB 540 million.  This sum would be applied firstly to discharge the indebtedness of the Dalian Companies and the confiscation orders.  Upon completion of the transfer of the foreign interest in the development, the Chinese interest as held by the 40% Dalian Shares could then be transferred to Zhang.  PM Li also requested Zhang to pay a deposit of RMB 100 million for the Dalian Companies to meet their pressing financial obligations.

61.  Zhang then acquired Empire Star for use as the foreign investor to purchase the 60% Dalian Shares.  (With Empire Star being the shareholder of the 60% Dalian Shares, the Dalian Companies would remain Sino-foreign joint venture companies.)  He requested his friend Lin to be his nominee shareholder and director of Empire Star. 

62.  After extensive negotiations, Empire Star, Jinan Co and the Dalian Companies entered into the Framework Agreement on about 14 December 2009 for the sale and purchase of the Dalian Shares.  However, this sale and purchase of the Dalian Land development through the sale of the shares of the Dalian Companies was limited to two of the three phases of the development.

63.  The Framework Agreement provided, inter alia, as follows:

(1)   Jinan Co warranted that the Dalian Companies and their shares were free of mortgage or guarantee (Cl. 1);

(2)   Jinan Co further warranted that the price for land transfer, municipal administrative charges and all taxes had been paid in full, the land could be used for housing development, it was not laid idle, and there was no possibility of seizure by the government (Cl. 2.5);

(3)   The agreed price for the transfer of the 60% Dalian Shares to Empire Star was RMB 540 million (inclusive of such sums as would be used by Jinan Co to discharge any debts, confiscation orders and mortgage) (Cl. 3.4);

(4)   Upon signing the agreement, Jinan Co and the Dalian Companies would provide to Empire Star, among other things, title documents, planning documents and confiscation orders relating to assets under the name of the Dalian Companies.  They would further provide within 3 working days of signing the agreement the latest financial statements (or audited accounts) and list of debts of the Dalian Companies for the purpose of asset verification and audit (Cl. 4);

(5)   Jinan Co must discharge any debts incurred by the Dalian Companies before the transfer of management right to Empire Star. Jinan Co must first apply the consideration for the share transfer to discharge the liabilities of the Dalian Companies and set aside the judicial confiscation orders (Cl. 4);

(6)   Empire Star had to pay a RMB 100 million deposit within 3 days of signing the agreement.  Jinan Co should apply the deposit to discharge the liabilities of the Dalian Companies and provide receipts and proofs to Empire Star (Cl. 5.1);

(7)   Empire Star was to pay the balance of the purchase price at RMB 440 million on or before 30 December 2009.  Jinan Co must pay this sum to the court which imposed the confiscation orders and the creditors of the Dalian Companies to discharge the confiscation orders and mortgage and to repay the debts.  Empire Star was entitled to monitor the debt repayment by setting up an independent bank account and be provided with receipts and proofs by Jinan Co.  Jinan Co must apply for approval and registration of the change of shareholders and transfer the 60% Dalian Shares held by the original foreign shareholders to Empire Star or its designate (Cl. 5.2);

(8)   On or before 30 April 2010, Jinan Co would be responsible to transfer the 40% Dalian Shares to Empire Star or its designate.  Empire Star should pay RMB 360 million to Jinan Co or the relevant transferors, which sum is inclusive of the consideration and sums required by Jinan Co to repay debts incurred by the Dalian Companies (Cl. 5.3);

(9)   Jinan Co would discontinue its application for official approval of change of registered ownership of the 60% Dalian Shares which application was provided in the agreement it made with the original foreign investors (the 2nd and 3rd defendants).  Instead the original foreign investors and Empire Star would sign the necessary transfer documents for approval and registration with the relevant authorities.  All such agreements entered into before or after signing this agreement would only be used for the purpose of registration and that all matters concerning the transfer of the 60% Dalian Shares should be governed by the Framework Agreement (Cl. 12); and

(10)   Jinan Co warranted that the Dalian Companies had undisputed title over the land use rights and would make full disclosure of the status of their litigation and debts.  Jinan Co would repay all debts incurred before the transfer of shareholding by using the consideration for the share transfer.  It would indemnify Empire Star in respect of any loss which might be caused by its failure to do so (Cl. 14.1).

64.  At the time of signing the Framework Agreement, Zhang was the chairman of New Energy Power Group Ltd, a company listed in the Hong Kong Stock Exchange Ltd (“HKSE”) (stock code 1041) (formerly called Fulbond Holdings Limited (“Fulbond”)).  Zhang intended to inject the Dalian Project into Fulbond.

65.  The Framework Agreement was signed on about 14 December 2009.  Between late December 2009 and early January 2010, Empire Star on behalf of Fulbond commissioned due diligence studies and a valuation report on the Dalian Project to ascertain its legal and commercial viability.

66.  A due diligence report made by Asia Law Office dated 24 December 2009 referred to the history of how Jinan Co had acquired the beneficial interest of (i) the 60% Dalian Shares on 1 May 2009 from the 2nd and 3rd defendants and (ii) the 40% Dalian Shares on 25 July 2009 from Qingdao Co respectively.  (I have referred to the relevant agreements in §§25 to 27 above.)  The transfers of the 60% Dalian Shares had also been approved by the Dalian Economic Bureau on 18 November 2009 under approval documents大開經貿 [2009] 377號 and 378號both dated 18 November 2009 (D6/1524 and 1525, D9/2268 and 2269).

67.  Pursuant to Cl. 12 of the Framework Agreement, Empire Star agreed with Jinan Co that it would enter into share transfer agreements with the 2nd and 3rd defendants, the original foreign investors in the Dalian Companies.  Empire Star pleaded that this was necessary because Jinan Co had not completed the registration of the 60% Dalian Shares in its name and the bulk of the consideration to be paid to Jinan Co for the share transfer was to be used to discharge the liabilities of the Dalian Companies.  Hence, Empire Star entered into the 1st and 2nd ES Agreements with the 2nd and 3rd defendants on 11 January 2010.

68.  The consideration stated in the 1st and 2nd ES Agreements at HK$48 and HK$36 million respectively represented the par value of the capital contribution (equity interest) (出資額) of 60% of DIEC and DIFEC.  This was to fulfil the formal registration requirements of the administrative process for approval of change of shareholders under the auspices of the Dalian Jinshitan National Resort Area Economic Development Bureau (大連金石灘國家旅游度假經濟發展局).  The two agreements were duly registered in the Industrial and Commerce Department (工商局) and could have been obtained by a public search. 

69.  The Dalian Economic and Technology Development Zone Economic and Trade Bureau approved the replacement of the 2nd and 3rd defendants by Empire Star as the foreign investor in the Dalian Companies on 21 January 2010. 

70.  Regarding the plaintiff’s allegation that the Purported Consideration in the two ES Agreements was a gross undervalue and without commercial justification, Empire Star maintained that the consideration for the 60% Dalian Shares was not the Purported Consideration but the RMB 540 million stated in the Framework Agreement.  

71.  Empire Star also pleaded in §28A and 28B of the defence that:

(1)   Between 1997 and 2009 the Dalian Companies had developed the Dalian Land by, among other things, building and selling residential units Dthereon.  Due to serious shortage of funds, they encountered substantial financial difficulties and legal problems.

(2)   As at 30 November 2009, they incurred a deficit of over RMB 510 million.  Their combined liabilities, including unpaid taxes, construction costs, bank loans and interest payments thereupon, were estimated to be around RMB 381 to 427 million.  They were heavily overextended.

(3)   At the same time they faced numerous law suits which resulted in judgment debts, charging orders, and judicial confiscation orders on the Dalian Land referred to above.  They also faced unquantified contingent tax liabilities such as land value added tax and penalties on unpaid taxes.

(4)   The market value of the 60% Dalian Shares was thus around RMB 540 million as at the date of the Framework Agreement.

72.  Regarding the allegation that Empire Star and its ostensible directors and shareholders were of no substance, Empire Star pleaded in §§29 to 37G of the defence that:

(1)   Empire Star was incorporated on 13 November 2009 in Hong Kong as a shelf company with a share capital of HK$10,000 divided into 10,000 shares of HK$1.00 each.  Zhang acquired it to hold the investments in the Dalian Land.  He requested his friend Lin to act as the nominee shareholder and director of the company for him.  Prior to the making of the Framework Agreement and the ES Agreements, the company had no business or track record.

(2)   Zhang has invested in, among other things, property development projects in cities in the PRC, such as Xiamen, Chongqing, Sanya and Xi’an for many years.  He has in recent years acted as director and chairman of BEP International Holdings Limited and Fulbond which are listed on the main Board of the HKSE.  He was at various times a substantial shareholder in these companies.

(3)   When the Framework Agreement was made, Zhang intended to inject the Dalian Project into Fulbond.  But the time for obtaining the Fulbond shareholders’ approval could not fit into the time frame of the Framework Agreement.  He thus abandoned the intention to do so.

(4)   Lin at Zhang’s request transferred the one share in Empire Star back to Zhang on 27 January 2010.  Zhang also became the director of Empire Star upon Lin’s resignation on the same day.

(5)   One Mr Weng Ming (“Weng”) was Zhang’s business partner in a property development in Sanya, Hainan, through a Hong Kong Company Junwah Properties (HK) Limited (駿華置業(香港)有限公司).  Weng was at all material times the majority shareholder of Guangxi Junhe Investment Co Ltd (廣西君合投資有限公司) whose main businesses included paper-making, energy conservation building industry, real estate, strategic and venture capital investment, asset management and capital management.  As at 31st December 2009, it had total assets of over RMB 1 billion, and net assets of RMB 682 million.

(6)   Zhang in about early February 2010 invited Weng and Weng agreed to participate in the investment in the Dalian Project. Weng agreed to contribute around RMB 400 million for purchasing a stake in DIEC and DIFEC. 

(7)   Onwin is a BVI shelf company wholly owned and controlled by Weng.  On 19 February 2010, Zhang caused Empire Star to allot 90 new shares to Onwin and nine new shares to himself.  Onwin thus held 90% of the Empire Star shares and Zhang’s holding was reduced to 10% to reflect the relative sizes of their respective capital contributions. 

(8)   On or about 5 March 2010, Zhang further sold his stake in Empire Star and transferred his ten shares to Sun, a Taiwanese businessman with various investments in Xiamen and a long-time friend of Zhang. Despite these changes Zhang was still entrusted with the project development and remained the sole director of Empire Star.

73.  Regarding the plaintiff’s attack that the Framework Agreement is a sham (which issue has now been abandoned), Empire Star admitted in §40 of the defence that Jinan Co was not the registered owner of the Dalian Shares at the date of the Framework Agreement and the Framework Agreement was not registered with or approved by the authorities in the PRC.  However, the Framework Agreement was to procure the transfer of the 60% Dalian Shares through the 1stand 2nd ES Agreements and it was valid and enforceable under PRC law without being registered or approved.  The 1stand 2nd ES Agreements had also been approved by and registered with the Industrial and Commerce Department (工商局) and could have been obtained by a public search.

74.  Regarding the breaches of the injunction granted by Sakhrani J, Empire Star pleaded in §§44 to 54 of the defence the following:

(11)   Empire Star referred to the explanation in the letter from its solicitors dated 6 February 2014.  It further pleaded that since around 2012, the Dalian Companies had been suffering a serious cash flow shortage due to the poor property market in the PRC and the sluggish sale of residential properties in Phase 2 of the development on the Dalian Land.  It took out the Four Loans from SJ Bank to finance the development. 

(12)   The 2012 Loan was made by SJ Bank pursuant to a pre-approved credit facility of RMB800 million granted verbally by SJ Bank in 2010 upon the written application of the Dalian Companies.  A copy of the application had been provided by Empire Star’s solicitors to the plaintiff’s solicitors under cover of a letter dated 4 February 2014.  Since the total indebtedness did not exceed the RMB800 million credit facility limit granted by SJ Bank, Zhang considered that the 2012 Loan did not have the effect of dissipating the assets of DIEC, DIFEC or Empire Star, or causing any loss to the Plaintiff. 

(13)   The proceeds of the 2011 Loan, July 2012 Loan, and November 2012 Loan were wholly or substantially applied for the ongoing development project and in the ordinary course of the business of the Dalian Companies. 

(14)   The 2013 Loan was borrowed at SJ Bank’s proposal and was wholly used to renew or consolidate the previous three loans by repaying them as the due date of the 2011 Loan for RMB 600 million was imminent despite repayments of around RMB83 million.  Hence, the 2013 Loan did not create fresh indebtedness or increase the liability of DIFEC/DIEC or Empire Star. It was also critical for the viability of the Dalian Project in view of SJ Bank’s power of foreclosure.  Zhang considered that this loan did not dissipate the assets of DIFEC, DIEC or Empire Star, or cause any loss to the plaintiff. 

(15)   The 2013 Share Charge and Land Mortgages (two of which were created before the granting of the injunction on 17 July 2012) were created per the requirements of SJ Bank as collaterals to secure the Four Loans.  Zhang had procured or authorized their creation because he misunderstood that the Injunction Order only enjoined Empire Star, DIFEC, DIEC and their personnel from increasing the liabilities of the companies or dissipating their assets by mortgaging their assets or otherwise thereby causing loss to the plaintiff.  In any event, Empire Star did not seek to conceal, and could not have concealed the Land Mortgages and the 2013 Share Charge as they had been duly registered with the relevant PRC authorities and were open to public inspection.  Zhang also executed personal guarantees to SJ Bank as part of the collaterals for the July 2012 Loan, November 2012 Loan and 2013 Loan. 

(16)   Furthermore, before the Injunction Order was granted on 17 July 2012, the Dalian Land had already been mortgaged to SJ Bank to secure an indebtedness of up to RMB 700 million, and the DIFEC Shares had been charged to the bank to secure an indebtedness of RMB 100 million. 

(17)   The Land Mortgages and the 2013 Share Charge also enabled the Dalian Companies to continue operating their business and to make repayments of around RMB83 million to SJ Bank between January 2012 and February 2013. 

(18)   Regarding the changes of directors of the Dalian Companies, they were procured by Zhang due to Zhang’s misunderstanding that the Injunction Order only enjoined Empire Star, Zhang himself and others acting on his behalf from divesting his control over DIFEC, DIEC and their related companies. The new directors were Zhang and his sister, as his nominee, in place of Lin and Gao Wen who were also his nominees.  There was no question of divesting the control over the companies from him. 

(19)   Empire Star further pleaded that there was no further breach of the Injunction Order. 

   The plaintiff’s reply

75.  The plaintiff repeated in the re-re-amended reply(“reply”) its case in the statement of claim.

76.  The plaintiff also challenged the authenticity of a due diligence report prepared by Asia Law Office dated 24 December 2009, the 1 May 2009 Agreements and the 25 July 2009 Agreements by which Jinan Co obtained all the beneficial interests in the Dalian Shares.  The plaintiff particularly pointed out that the 25 July 2009 Agreements were not registered with or approved by the authorities in the PRC.

77.  The plaintiff however admitted that per the relevant public records, the ES Agreementsdated 11 January 2010 by which the 2nd and 3rd defendants transferred the 60% Dalian Shares to Empire Star had a written approval issued by the Dalian Economic and Technology Development Zone Economic and Trade Bureau on 21 January 2010.

78.  The plaintiff also took issue with Empire Star on whether Zhang could have misunderstood the terms of the Injunction Order.

THE PLAINTIFF’S APPLICATION TO COMMIT EMPIRE STAR AND ZHANG FOR CONTEMPT OF COURT AND EMPIRE STAR’S APPLICATION TO VARY THE INJUNCTION ORDER

79.  I granted leave to the plaintiff on 8 January 2015 to commence contempt proceedings against Empire Star and Zhang for their breaches of the Injunction Order.  The plaintiff duly commenced HCMP 159 of 2015 against them on 16 January 2015.  The plaintiff also asked for dispensation of personal service of the injunction order on Zhang.

80.  Empire Star then issued a summons for variation of the Injunction Order.  Mr Yan, leading counsel for Empire Star and Zhang submitted that the contempt application and the application to vary the injunction are two sides of the same coin.  I agree.

81.  It is Empire Star’s case that if the purchase of the 60% Dalian Shares is not to be avoided under s. 60 of the CPO, then this action should be dismissed and the injunction be discharged.  In that event, it may be unseemly to punish Empire Star and Zhang too hard for failing to observe an injunction order that was wrongly granted in the beginning.  A fortiori if the court should agree with the variation sought despite the discharge of the injunction, the reasons for the variation would mitigate the severity and contumacy of the acts of contempt.

82.  The plaintiff’s case on breaches of the injunction by Empire Star and Zhang and their explanations for the breaches have been particularized in the pleadings that summarized above.

DECISION

83.  Empire Star raised three issues in its defence. The first is whether s. 60 of the CPO has extraterritorial effect.  The arguments focused on s. 60(1) and (3).  

Extraterritoriality of s 60 of the CPO

84.  Mr Yan submitted that the transactions under the two ES Agreements took place in the Mainland in respect of property situated there. The reason being that the Dalian Companies are companies incorporated in the Mainland and the transfers of their shares were carried out in the Mainland in accordance with the law of the Mainland.  He further submitted that s 60 should only apply to disposition of property and interests located in Hong Kong.

85.  In advancing his case, Mr Yan considered Part VII of the CPO as a whole which comprise of ss 59, 60 and 61. These sections provide:

“59. (1) No purchase, made bona fide and without fraud, of any interest inproperty of any kind within Hong Kong shall be opened or set aside merely on the ground of undervalue.

(2) For the purpose of this section, “purchase” (購買) shall include every kind of disposition under or by which any beneficial interest in any kind of property may be acquired.

60. (1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.

61. (1) Every voluntary disposition of land made with intent to defraud a subsequent purchaser is voidable at the instance of that purchaser.

(2) For the purposes of this section, no voluntary disposition shall be deemed to have been made with intent to defraud by reason only that a subsequent disposition for valuable consideration was made.” (emphasis supplied)

86.  Mr Yan submitted that ss 60 and 61 empower the court to avoid fraudulent transactions.  S 59 is to preserve bona fide transactions that do not involve fraud.  Ss 60 and 61 are the obverse of and complimentary to s 59.  Since the operation of s 59 is expressly confined to “any interest inproperty of any kind within Hong Kong”, there is no reason why the legislature would subject transactions of property taking place elsewhere in the world to the scrutiny of the courts in Hong Kong in terms of ss 60 and 61. 

87.  Mr Yan further referred to Craies on Legislation (11th ed) §11.2.3 which says that the general presumption is that in the absence of express provision to the contrary, an enactment will apply generally to things done and people in the territory to which it extends, and not further.

88.  Mr Yan also submitted that it is exorbitant and contrary to international comity for courts in Hong Kong to assume jurisdiction over the validity of transactions involving moveable or immovable property situated elsewhere when such transactions may be valid in their lex situs.  Hence, the territorial limitation in s. 59 should be read impliedly into ss 60 and 61.  If this submission is right, then this action should be dismissed as this court has no jurisdiction over the two ES Agreements.

89.  However, I note that the limit of application of s 59 is “any interest in property … within Hong Kong”.  It is not a limit defined by the territory within which “things are done and the people who do the things are present” as referred to Craies.  The s 59 limit is on the location of the object of the transaction but the limit discussed in Craies is on the location of the transaction or person conducting the transaction.  Hence, I consider that the limit of application in s 59 is not the same limit as discussed in Craies. 

90.  Mr Lui for the plaintiff on the other hand submitted that this court should have jurisdiction over Empire Star. He referred to §11.2.5 of Craies which says:

“The mere fact that an Act confers rights or duties in general terms may suffice to suggest that it is intended to apply to activity anywhere in the world provided that there is a connection with the United Kingdom sufficient to found action for enforcement.

Put another way, ‘[there is a] a presumption that legislation was not intended to have extraterritorial effect … but extraterritorial effect means seeking to regulate the conduct or affect the liabilities of people over whom the United Kingdom has no jurisdiction.’  So where legislation is in general terms, it is not necessary to conclude that there is no intention to control transaction taking place and performed abroad in cases where one party has some kind of practical connection with the United Kingdom sufficient to found effective enforcement.”

91.  Mr Lui further submitted that the application of s 59 is limited to “any interest in property … within Hong Kong”, but there is no similar limitation in ss 60 and 61.  There is thus the contrary intention in ss 60 and 61, which are also within Part VII of the ordinance, that rebuts the general presumption that an enactment will apply generally to things done and people in the territory to which it extends.

92.  Mr Lui further submitted that the application of s 60 without territorial limitation will not lead to injustice and there is no basis to imply such limitation. 

93.  On the question of international comity, Mr Lui submitted that the plaintiff, in seeking to set aside the ES Agreements, is asking the court to exercise jurisdiction over a party to the transactions which is present within the court’s jurisdiction.  I also note the citation in Bennion on Statutory Interpretation (7th ed) 343 of K C Wheare, The Constitutional Structure of the Commonwealth (1960) Clarendon Press, 43 which says:

“It is a mark of sovereign, independent state that its legislature has power to make laws with extra-territorial effect. The nature and extent of this power should not be misunderstood. Extra-territorial legislation simply means legislation which attaches significance for courts within the jurisdiction to facts and events occurring outside the jurisdiction. This does not imply that one state can pass law for another state, or that several systems of law will be in operation regulating a particular sphere within any given state.”

94.  On the whole, I agree with Mr Lui’s submissions on this issue.  I agree that in reading s 60 as part of Part VII of CPO, a territorial limitation should not be implied into s 60.  I also consider that there will not be any conflict with international comity in applying s 60 without the territorial limitation as suggested by Mr Yan.  Mr Yan’s argument that there is no extraterritoriality of s 60 therefore fails.

The law on s 60(1) and who made the disposition ofthe60% Dalian Shares

95.  Mr Yan in his opening referred to the CFA’s decision in Tradepower (Holdings) Ltd v Tradepower (HK) Ltd [2010]1 HKLRD 674 at §88 where Ribeiro PJ formulated the rule in Freeman v Pope:

“I would formulate the applicable rule for cases like Freeman v Pope as follows. Where it is objectively shown that a disposition of property unsupported by consideration is made by a disponorwhen insolvent (or who thereby renders himself insolvent) with the result that his creditors (including his future creditors) are clearly subjected at least to a significant risk of being unable to recover their debts in full, such facts ought in virtually every case to be sufficientto justify the inference of an intent to defraud creditors on the disponor’s part. In cases falling outside the rule, that is, in cases where the disposition is made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before section 60 is engaged.”

96.  Mr Yan submitted that the present case is outside the rule in Freeman v Pope in that there is no evidence of insolvency of the disponor at or after the disposition of the 60% Dalian Shares.  Hence, the plaintiff must show an actual intent to defraud creditors as an inference properly to be drawn on the available evidence before section 60 is engaged.

97.  Mr Yan also referred to the finding of Suffiad J in the judgment of the Lucky Dragon action that the sale by Lucky Dragon (by the April 2009 Agreement) of all its shares in the 2nd and 3rd defendants (which carried the 60% Dalian Shares) to Jinan Co was not a genuine sale.  Mr Yan submitted that the judgment is not binding on Empire Star as it was not a party to the Lucky Dragon action and there is no res judicata or issue estoppel as between the plaintiff and it.  He also said that Suffiad J did not have the benefit of the evidence that was presented in the trial of this action including the 1 May 2009 Agreements.  These two agreements which provided for the sale by the 2nd and 3rd defendants of the 60% Dalian Shares to Jinan Co had been approved by the Dalian Economic Bureau under documents no. 大開經貿 [2009] 377 and 378 both dated 18 November 2009 (D6/1524 and 1525, D9/2268 and 2269). The learned judge also did not have the benefit of the evidence of the negotiation of the Framework Agreement and the substantial payments made by Empire Star to Jinan Co thereunder resulting in the official approval to the transfers of the 60% Dalian Shares to Empire Star.

98.  Mr Lui for the plaintiff agreed with Empire Star that Choi’s case that the shares of the 2nd and 3rd defendants had been allegedly sold by Lucky Dragon to Jinan Co pursuant to the April 2009 Agreement was false.  He submitted that there was no such sale.  He also did not suggest that I shouldadopt the findings of Suffiad J in the judgment of the Lucky Dragoon action (§§ 16 and 17 of the plaintiff’s closing submission).

99.  Hence, I do not have to consider whether there was the sale of shares of the 2nd and 3rd defendants to Jinan Co as described by Choi merely orally.

100.  The plaintiff pleaded that it was Lucky Dragon that had procured the 2nd and 3rd defendants to transfer the 60% Dalian Shares to Empire Star with intent to defraud the plaintiff.  The 2nd and 3rd defendants were indeed in the control of Lucky Dragon until 25 March 2011.  Prima facie, the transfer the 60% Dalian Shares to Empire Star appeared to have been procured by Lucky Dragon. The plaintiff also put Empire Star to strict proof that the Framework Agreement is genuine.  The plaintiff does not admit that Jinan Co was the beneficial owner of the 60% Dalian Shares before they were transferred to Empire Star.  It says that Jinan Co was just a vehicle for effecting a scheme to defraud it as the creditor of Lucky Dragon and the 2nd and 3rd defendants (§17 of the plaintiff’s reply submissions).

101.  Empire Star however says that it was Jinan Co that had pursuant to the Framework Agreement procured the 2nd and 3rd defendants to transfer the 60% Dalian Shares to it. 

102.  The plaintiff also says in the alternative that if Jinan Co was the beneficial owner of these shares at the material time, then the 2nd and 3rd defendants did not have any legal interest in the shares to transfer to Empire Star.  I do not quite follow this argument.  If Jinan Co was the beneficial owner of these shares and the 2nd and 3rd defendants were merely legal owners, then Jinan Co could have compelled them to transfer the shares to Empire Star.  It is also the case of Empire Star that Jinan Co did not become the registered owner of these shares as its application for change of registered ownership of these shares was withdrawn before completion pursuant to the Framework Agreement.

103.  Mr Lui also submitted that since Lucky Dragon and the 2nd and 3rd defendants did not defend this action, an adverse inference must be drawn against them on whether the 60% Dalian Shares were transferred to Empire Star with an intent to defraud the plaintiff.  Hence, I should find that Lucky Dragon was the disponor. 

104.  However, Mr Lui overlooked the fact (as highlighted by Mr Yan in his reply submissions) that the plaintiff had through GBP resumed control of the 2nd and 3rd defendants since 25 March 2011. That was more than a year before the commencement of this action on 17 July, 2012.  Hence, the 2nd and 3rd defendants, which were then in the plaintiff’s control, would not have done anything to oppose this action.  Regarding Lucky Dragon, judgment was given against it by Suffiad J on 25 March 2011 in the Lucky Dragon action.  It also abandoned its appeal on 8 December 2011.  With the judgment in the Lucky Dragon action unchallenged, there is no point for it to defend this action.  Hence, I should not infer that the 60% Dalian Shares were transferred by Lucky Dragon as the disponor to Empire Star with an intent to defraud the plaintiff merely because Lucky Dragon and the 2nd and 3rd defendants did not defend this action.

105.  Mr Lui has put Empire Star to strict proof that the Framework Agreement is genuine.  He also submitted that Zhang was dishonest as he knew that Lucky Dragon and the 2nd and 3rd defendants were to defraud the plaintiff.  Hence, the transfer of the 60% Dalian Shares to Empire Star was ultimately procured by Lucky Dragon.

106.  Mr Yan however reiterated in his closing submissions that it was Jinan Co that had procured the transfer of the 60% Dalian Shares to Empire Star and that the 1 May 2009 Agreements and the Framework Agreement are genuine.  If I should accept the 1 May 2009 Agreements as genuine, then Lucky Dragon would have effectively dropped out of the picture from 1 May 2009 (save the execution by Yeung of the two ES Agreements).  The disponor of the 60% Dalian Shares to Empire Star would be Jinan Co.  Mr Yan further pointed out that the plaintiff had not alleged that Jinan Co, in procuring the 2nd and 3rd defendants to transfer the 60% Dalian Shares to Empire Star, had the intention to defraud the plaintiff.

107.  In the light of the difference between the parties, I must decide who was the disponor who transferred or procured the transfer of the 60% Dalian Shares to Empire Star before considering whether the transfer was with intent to defraud the plaintiff.

The disponor of the 60% Dalian Shares to Empire Star – the plaintiff’s pleaded points

108.  I am of the view that the burden of proof that Jinan Co was the disponor of the 60% Dalian Shares to Empire Star rests on Empire Star.  After Empire Star has discharged this burden, it will be for the plaintiff to prove under s 60(1) of the CPO that the sale of these shares to Empire Star was with intent to defraud creditors.

109.  Though Mr Lui does not maintain that the Framework Agreement was a sham, he still used those arguments to say that Empire Star had failed to prove that it had purchased the 60% Dalian Shares from Jinan Co pursuant to the Framework Agreement (§§9 and 14 of plaintiff’s reply submissions). They are pleaded in §57A of the statement of claim and §5 of the reply.  I have summarized them above.  Empire Star has also made some further points to advanced its case.  Mr Lui has also made some additional points in his closing submissions.  I will deal with the points in the plaintiff’s pleadings first and then deal with the other points.

110.  The plaintiff pleaded that the public records of the Mainland authorities showed that the 2nd and 3rd defendants were the registered holders of the 60% Dalian Shares immediately before these shares were transferred to Empire Star in or around January 2010.  But the 2nd and 3rd defendants were not parties to the Framework Agreement.  Mr Yan answered that the 2nd and 3rd defendants had by the 1 May 2009 Agreements sold their 60% Dalian Shares to Jinan Co and the sales had been approved by the Dalian Economic Bureau on 18 November 2009. Hence, when the Framework Agreement was made on 12 December 2009, there was no need to join the 2nd and 3rd defendants as parties thereto.

111.  I agree with Mr Yan.  When the Framework Agreement was made on 12 December 2009, the 1 May 2009 Agreements had already been approved by the authorities and the 2nd and 3rd defendants were bound to transfer the 60% Dalian Shares to Jinan Co or its nominee.   If they were not bound to transfer these shares at the direction of Jinan Co, it would have been necessary to join them as parties to the Framework Agreement. In that event, they would be able to learn about all the terms and conditions of the sale of these shares by Jinan Co to Empire Star to which they were not otherwise privy.  Since they were already bound to transfer the shares at the direction of Jinan Co, there was no reason to include them as parties to the Framework Agreement and let them know about the terms of the sale.

112.  The plaintiff pleaded that the 1 May 2009 Agreements made between the 2nd and 3rd defendants and Jinan Co had not been registered with the Mainland authorities and are unenforceable as a matter of PRC law.  Jinan Co was thus not the registered owner of and had no legal title to or beneficial ownership of the 60% Dalian Shares when the Framework Agreement was made in December 2009.  Mr Yan disagreed.  He submitted that although Jinan Co was not the registered holder of the 60% Dalian Shares, it was the beneficial owner of these shares by reason of the approval by the Mainland authorities of the 1 May 2009 Agreements.

113.  I agree with Mr Yan that Jinan Co was the beneficial owner of the 60% Dalian Shares by reason of the approved 1 May 2009 Agreements though it was not the registered holder of these shares. On the question of enforceability of unregistered sale and purchase agreements in the Mainland, the plaintiff has declined to call its Chinese legal experts to deal with this issue.  It has thus failed to discharge the evidential burden on this issue.  There is nothing to suggest that the approved 1 May 2009 Agreements are unenforceable for want of registration.  I therefore find that the 2nd and 3rd defendants are bound to perform them at the direction of Jinan Co.

114.  The plaintiff pleaded that Jinan Co was not the registered owner of and had no legal title to or beneficial ownership of the remaining 40% Dalian Shares of which it had agreed to transfer to Empire Star pursuant to Cl 5.3 of the Framework Agreement.  The plaintiff however accepted that Qingdao Co was the registered holder of these shares (the transfer of which had been approved by Dalian Foreign Trade and Economic Cooperation Bureau on 6 December 2005 – D9/2424 – 2425 and 2430 – 2431).  Mr Yan however referred to the 25 July 2009 Agreements by which Qingdao Co agreed to sell the 40% Dalian Shares to Jinan Co (D9/2427 and 2433).  He submitted that Jinan Co by entering into these two agreements had become the beneficial owner of the 40% Dalian Shares and was in a position to sell them to Empire Star.

115.  Though the plaintiff has put Empire Star to strict proof of the authenticity of the 25 July 2009 Agreements, it can point to nothing that could cast doubt on their authenticity.  They had been verified by Ma, Robert C C Ip (“Ip”) and Deloitte in their due diligence reports though Ip and Deloitte wrongly stated the date of 25 July 2009 as 10 July 2009 (D9/2409-2410, 2427 and 2433, D10/2470, 2473 to 2475 and D7/1723-13 or D9/2446).  I find that Jinan Co had indeed entered into the 25 July 2009 Agreements with Qingdao Co for the purchase of the 40% Dalian Shares from Qingdao Co.

116.  The plaintiff has also pleaded that the Framework Agreement was not registered with or approved by the relevant authorities in the Mainland and is thus unenforceable as a matter of PRC law.  I have already dealt with the plaintiff’s failure to call its Chinese legal experts to deal with the issue of enforceability of unregistered sale and purchase agreements in the Mainland.  I am not with Mr Lui on this.  I hold that the Framework Agreement is enforceable in the Mainland. 

117.  The plaintiff pleaded that the terms and provisions in the Framework Agreement including essential terms such as the identity of the transferor/seller and consideration are different from those in the two ES Agreements and that the ES Agreements are those that have been registered with the relevant Mainland authorities as representing the actual terms of the sale of the 60% Dalian Shares to Empire Star.  Mr Yan submitted that the Framework Agreement was the master agreement that set out the terms of the transaction.  The sale of the 60% Dalian Shares was only one of the matters covered by this agreement.  Ma has also testified that the ES Agreements were standard form agreements required for transfer of interests in shares in the Mainland.  Mr Yan further referred to the 1 May 2009 Agreements and 25 July 2009 Agreements and say that they are all in the same standard form. 

118.  I note that these agreements all used the par value of the shares as the consideration of the transfer though some correctly used HKD as the currency whilst some wrongly used the RMB as the currency.  I agree that the transfer of the 60% Dalian Shares was one of the matters to be dealt with by the Framework Agreement and that all the agreements between the immediate parties involved in the share transfers used the par value of the transferred shares as the consideration.  I agree that the ES Agreements were just for registering the transfer of the 60% Dalian Shares. They had been approved by the Dalian Economic and Technology Development Zone Economic and Trade Bureau on 21 January 2010 (D1/108, 109 and 142, 143).  That was more than a year before Suffiad J gave judgment in the Lucky Dragon action on 25 March 2011. (I also note that it is the plaintiff’s case that Empire Star should have notice of the Lucky Dragon Action in its due diligence exercise.  But there is no mention of this action in the due diligence report prepared by Deloitte which Mr Lui does not doubt.)

119.  The plaintiff also pleaded that the ES Agreements do not contain any reference to the Framework Agreement notwithstanding that they were said to have been made after and pursuant to the Framework Agreement. Mr Yan submitted that the ES Agreements contain a clause contemplating the possibility of a separate framework agreement.  But I do not consider that provision as a reference to the Framework Agreement.  That provision only contemplated the making of another framework agreement subsequent to the ES Agreements.  They did not refer to the Framework Agreement which had already been made. 

120.  Nevertheless, I do not consider that the lack of reference in the ES Agreements to the Framework Agreement is an indication that the Framework Agreement was not authentic.  The ES Agreements are in standard forms for the purpose of registration only.  There was no need for them to include the terms for the whole transaction.  Furthermore, they are made between Empire Star and the 2nd and 3rd defendants.  I have already mentioned that the 2nd and 3rd defendants were not privy to the transactions effected in the Framework Agreement.  There was thus no need to include in the ES Agreements and thus to let the 2nd and 3rd defendants know any of the terms of the transaction in the Framework Agreement.

121.  The plaintiff also referred to the different signatures of Zhang as used in the Framework Agreement and his affirmation filed in these proceedings. Zhang had testified that Ip had advised him to sign in English in the Framework Agreement.  In any case, once Zhang confirmed in evidence that he had signed the Framework Agreement, I do not consider the use of different signatures a point of significance. 

The disponor of the 60% Dalian Shares to Empire Star – Others points of Empire Star

122.  In addition to answering the plaintiff’s pleaded points, Mr Yan made further submissions to show that it was Jinan Co that was in control of the two Dalian Companies and it had sold the 60% Dalian Shares to Empire Star pursuant to the Framework Agreement.

123.  He referred to Ma’s evidence in his witness statement and oral evidence, which was not challenged.  Ma was appointed to act for the Dalian Companies in January 2007.  The two companies were then in disarray.  Their former chairman王京立 (Wang Jing Li) had just passed away on 18 November 2006 in a traffic accident. 

124.  The two companies had started the development in 2004.  They all along developed some 19,000 square metres with 8,000 square metres carparks until 2010.  They however had huge debts close to RMB 500 million, but could not raise new capital.  There were nearly 100 sets of litigation cases launched by unpaid contractors, unpaid suppliers, creditors and purchasers of properties of phase 1 of the development.  There was no money to pay wages to the staff either. They began dismissing all the staff from October 2007 and kept only the general manager, accountant and three members of the office staff.

125.  DIFEC had signed a development agreement with PM Li on 18 March 2004 (D1/95-1 to 95-3).  PM Li had also advanced to DIFEC four sums totalling RMB 28 million on divers dates from 23 March 2004 to 16 June 2004.  The loan as not repaid.  There is a Chinese judgment from the Intermediate People’s Court of Jinan dated 9 May 2007 showing that interest on the loan was at 30% per annum.  The amount of outstanding interest accrued up to 21 December 2006 was agreed at RMB 20.3 million. Litigation costs were adjudged at RMB 410,530 (D5/1214-1 to 1214-4).  PM Li tried to execute this judgment through the court in September 2008 (D10/2494 to 2494-1) but without success, because the judgment debt was still outstanding and had become RMB 90 million on 31 December 2009 when Deloitte did the due diligence report for Fulbond.

126.  PM Li wanted to have actual security for his debt. He wanted to take over the two companies. Neither the Chinese or foreign side of the two companies was willing to inject more capital into them. The two sides also could not sit down together and negotiate.  They however individually discussed with PM Li on how to resolve the problem.  Both sides agreed that PM Li could take over the companies.  PM Li was thus in control of the two companies. PM Li then appointed an employee of Jinan Co Mr Zheng Hong Lu as the chairman of the two companies in place of Wang Jing Li who had passed away.  Zheng was then the General Manager of the Real Estate Department of Jinan Co.

127.  I note here that Mr Lui has referred to two appointment letters dated 16 May 2007 made by Yeung on behalf of the 3rd and 2nd defendants (D4/942 and D3/747 respectively) appointing Zheng as the managing director of the Dalian Companies.  Mr Lui submitted that Zheng must be connected to Yeung who made the appointments.  However, one must not overlook the fact that as Jinan Co was not the registered owner of the 60% Dalian Shares and could not have made the appointments.  Only the 2nd and 3rd defendants, who were the registered shareholders, could have made the appointments.  From the employment records of Zheng, I find that he was a representative of PM Li or Jinan Co.

128.  There were then nine cases of charging orders.  If the debts were not paid off, the two companies could not carry on with the development. The government would also not approve development plan. 

129.  Ma was busily handling the litigation cases until October 2008.  The operation of the development had ground to a stop.   Ma reviewed the assets situation of the two companies in December 2008.  There were huge debts owed to creditors, outstanding tax payable to the Government, outstanding price for the development land and insufficient payment of capital by joint venture partner.

130.  The huge debts owed by the Dalian Companies have been independently verified by Deloitte in its due diligence report to Fulbond (D7/1723-6 – 1723-11).  There are also over forty settlement agreements produced by Ma to Empire Star (D6/1607 to 1658).

131.  By reason of the situation the two companies were in, Ma was of the opinion that they were not able to continue with the development. He told PM Li and the general manager of the two companies to dispose of the development by selling the shares of the two companies.  They however suggested to continue the development by selling its incomplete units.  They together with Ma then found several partners for this, but owing to the outstanding debts and both the land and account being frozen by the court, the cooperation with the partners could not go ahead.

132.  They then tried to sell the development as a whole at RMB 800 to 850 million.  They listed the offer in soufun.com (搜房网) on 26 June 2009, but with no satisfactory result.

133.  They then appointed four estate agents (including CB Richard Ellis Ltd) to look for purchasers.  There were then negotiations with some developers including Beijing Worldtrade Investment Co Ltd, Poly Property Group Co Ltd and China Resources Co Ltd.  However, owing to the negotiation on price and the need to clear the outstanding debts ahead of the sale, the negotiations did not bear fruit.

134.  Ma in November 2009 came to be acquainted with Zhang Huafeng who introduced him to her brother Zhang.  Ma met Zhang in November 2009 and introduced the development to Zhang.  Zhang in the name of Fulbond negotiated with him through a Beijing lawyer Mr Ding Wei (“Ding”) and Ip, the Hong Kong solicitor. Zhang later changed the purchaser to Empire Star.  Zhang also said in his witness statement that he was represented by Ding and Ip in the negotiation.

135.  Finally, the parties agreed that the purchase price would be RMB 900 million.  They then signed the Framework Agreement on 14 December 2009.

136.  Ma also produced documentary evidence of the advertisement placed on soufun.com (搜房网) on 26 June 2009 (D7/1664-1), a draft agency service agreement with one of the estate agencies (D2/365-46 to 365-51), a draft memorandum with Poly Property Group Co Ltd (D2/365-26 to 365-45) and a draft framework agreement with another developer (D2/365-1 to 365-25) to corroborate his oral evidence.  These documents were produced quite lately because Ma said he only discovered them before he prepared to come to Hong Kong to give evidence at the trial.

137.  Mr Yan also referred to Zhang’s evidence that he was prepared to inject the development into Fulbond.  As a result, Ip advised the insertion of several clauses in the Framework Agreement to cater for this purpose.  Ip also advised on the clauses for ensuring that the purchase price should be applied to discharge the outstanding indebtedness of the two companies. 

138.  Mr Yan also referred to the evidence of Empire Star on what happened after the making of the Framework Agreement to show that the agreement was a genuine one.

139.  There is evidence of the payment of RMB 100 million by entities on behalf of Empire Star to Ma’s office. The payments were in five tranches and proved by documentary evidence that RMB 97 million had come from Zhang Huafeng.  The documentary evidence was produced after the plaintiff had queried in cross-examination (without pleading or forewarning) that the payments to Ma’s office were circular (D2/366-1, 368-1, 368-2 and 368-3).

140.  Mr Yan also referred to the due diligence reports prepared by Deloitte (D7/1123-1 – 1123-34 or D9/2434 to 2466), Ip (D10/2467 to 2480) and Ma’s firm (D9/2340 to 2355, 2356 to 2404, 2405 to 2433 and 2481 to 2494).  Ip had also given a written advice to Fulbond on the purchase of the development (D7/1672 to 1674). 

141.  Mr Lui does not doubt Deloitte’s report.

142.  Empire Star later paid Ma’s office RMB 430 million as part of the purchase price.  Of this sum, RMB 330 million came from Mr Weng as Zhang had in early February 2010 sold 90% of the Empire Star shares to Weng because he could not have arranged the sale of the development to Fulbond.  The remaining RMB 100 million came from Zhang’s company.

143.  Pursuant to cl. 12 of the Framework Agreement, Jinan Co did not proceed with the registration of the 60% Dalian Shares under its name though official approval had been given for the transfer. Instead official approval was later obtained for these shares to be transferred to Empire Star (D3/586 and D4/796). 

144.  Ma also gave oral evidence that he had applied the purchase price to discharge the debts of the two Dalian Companies.

145.  Zhang’s sister Zhang Yu also gave evidence that after the acquisition of the 60% Dalian Shares, she arranged the staff from her family companies to manage the two Dalian Companies.  As a result of her efforts, the two companies entered into an agreement with the Developing Region Branch Office of the Dalian City National Land Resources and Housing Bureau on 29 July 2010 to modify the permitted use of the Dalian Land.  The modification was from pure residential use with plot ratio at 0.15 to residential and partially commercial use with plot ratio at 0.54 which was later further increased to 0. 58. The two companies had to pay RMB 34.95 million for the modification and this sum came from Zhang’s family companies.

146.  The Zhangs also provided RMB 30 million for the release of the Dalian Land from judicial charging order. They had also arranged loans from SJ Bank to fund the development.  Some of these loans were subject to the plaintiff’s complaint of breach of the injunction granted by Deputy Judge Sakhrani.

147.  Mr Yan submitted that all these facts showed that the Framework Agreement was a genuine agreement and that it was Jinan Co that procured the transfer of the 60% Dalian Shares from the 2nd and 3rd defendants to Empire Star.

The disponor of the 60% Dalian Shares to Empire Star – the plaintiff’s points in closing submissions

148.  I now deal with the other points made by Mr Lui in his closing submissions.  These points were made in the context of s 60(3) of the CPO, namely whether Empire Star at the time of its purchase of the 60% Dalian Shares was a bona fide purchaser for value and in good faith.  But I think I can also consider these arguments in the context of whether it was Lucky Dragon or Jinan Co that was the disponor of the 60% Dalian Shares (or whether the Framework Agreement was genuine) and also for the purpose of s 60(3).  The burden of proof of the defence under s 60(3) is on Empire Star.

149.  Mr Lui submitted that the circumstances in which Zhang had procured Empire Star to acquire the 60% Dalian Shares were completely ridiculous.  When he signed the Framework Agreement on 14 December 2009, he had not done any due diligence on the 2nd and 3rd defendants, DIFEC, DIEC, Jinan Co, PM Li or the lawyer Ma.  He also admitted in cross-examination that before investing in this project, he had never invested in real estate in Dalian, not met Ma or heard of Jinan Co or PM Li. His sister had also met Ma only shortly but had not done any business with him.

150.  Furthermore, cl. 5.1 of the Framework Agreement obliged Empire Star to pay RMB 100 million within three days.  The period was too short for any due diligence to be completed and Jinan Co and PM Li were strangers to him.  The Dalian Companies were then heavily in debt. They needed the RMB 100 million urgently to repay the debts.  Even if the due diligence exercise should subsequently reveal problems that would entitle Zhang to withdraw from the Framework Agreement, the RMB 100 million might not then be recoverable from PM Li or Jinan Co.  This situation must have been known to Zhang.  Hence, Mr Lui thus submitted that the arrangement in the Framework Agreement was most dubious.

151.  Mr Lui also referred to the apparent inconsistency between Zhang and Ma on whether Zhang had been told that he would only be allowed to carry out due diligence study after payment of the RMB 100 million deposit.  Zhang said that such was the case but Ma could not recall if he or PM Li had said so to Zhang.  Mr Lui further submitted that if Zhang should have been so told, then he as a reasonable businessman would have been alarmed and refused to proceed to sign the Framework Agreement as the assets sought to be sold under it were problematic.  What Zhang did indeed aggravated the absurdity of his case.

152.  In answer to the point of no due diligence before the Framework Agreement was signed, Mr Yan referred to cl. 4 of the Framework Agreement which provided that Jinan Co would furnish the title documents, planning documents and confiscation orders relating to assets of the Dalian Companies, the latest financial statements (or audited accounts) and a list of debts of the Dalian Companies for the purpose of asset verification and audit after the signing of the Framework Agreement and not before.  That supports Zhang’s evidence that he had to pay the RMB 100 million before he could do due diligence on the project and the two Dalian Companies.

153.  Regarding the payment of RMB 100 million and its recoverability in case of problems revealed in due diligence exercise, Mr Yan replied in §§13 and 14 of his reply submissions that the sum was paid to a law firm to be held on behalf of Jinan Co. and there was no suggestion that Jinan Co would not be able to refund the sum if the Framework Agreement should fall through.  Jinan Co. was also holding the Dalian Development through the Dalian Companies though the development was fraught with problems.  Furthermore, Ma was introduced to Zhang Huafeng through one Cui Xinmin.  Cui owned a football team and was a trusted friend of Zhang and Zhang Huafeng for many years.  I also note that Zhang was then advised by the mainland lawyer Ding and the Hong Kong lawyer Ip.

154.  In the light of these facts and circumstances, I cannot say that Zhang, in entering into the Framework Agreement and paying over the RMB 100 million to Ma’s office before any due diligence was done, was not taking a commercial risk as a businessman but was acting in a dubious way.  I do not accept these submissions of Mr Lui.

155.  Mr Lui also referred to Zhang’s admission that when he discussed with PM Li and Ma on the terms of acquisition of the 60% Dalian Shares, he and his subordinates had already done an internal valuation on the Dalian Land.  This valuation was not much different from the valuation at RMB 1.72613 billion provided to him after he had made the Framework Agreement by a Xiamen valuer.  The 60% Dalian Shares thus had a worth of about RMB 1 billion. Mr Lui thus submitted that the sale of these shares to Empire Star at RMB 540 million was thus at an undervalue.  Yet he did not do any due diligence on the project and the land before signing the Framework Agreement. 

156.  In making this attack, Mr Lui was relying on the valuation of the worth of Dalian Land without taking into consideration the debts of the Dalian Companies.  He said these debts should be ignored as Empire Star was acquiring the Dalian Companies as clean companies without the pre-existing debts. This view is incorrect.  Empire Star was acquiring the two companies together with their debts.  The Framework Agreement indeed provided that the purchase price paid by Empire Star would be applied to pay off the debts first and Jinan Co would only get the surplus after the debts were discharged.  Hence, Empire Star was acquiring the Dalian Companies together with their debts.  The worth of the development arrived at by the valuation of the Dalian Land would have to be reduced by the debts.  Mr Yan also pointed out in §12 of his reply submissions that the Dalian Companies and the Dalian Development were beset with problems.  It was only natural for any businessman interested in acquiring the development to do so at a discount.  Zhang said that was what he did. 

157.  I would further add that the valuation of the Dalian Land by the plaintiff’s valuation expert, though not called, was at RMB 750 million. That was below the RMB 900 million agreed in the Framework Agreement.  Hence, Mr Lui’s submission that the consideration in the Framework Agreement was at an undervalue is flawed. 

158.  Mr Lui further submitted that the due diligence undertaken by Zhang/Empire Star was farcical save the due diligence report prepared by Deloitte (D7/1123-1 – 1123-34 or D9/2434 to 2466). Zhang had engaged Ma to conduct due diligence on the ownership of the Dalian Land by the Dalian Companies, the history of the changes to their shareholders and their debt repayment.  Mr Lui referred to such engagement as ridiculous as Ma would not provide Zhang with anything that would be materially different from what he had already told Zhang.  Hence, Mr Lui said that Ma’s due diligence exercise could not be genuine and this court should not give any weight to the reports produced by Ma.

159.  If Zhang had only instructed Ma’s firm to carry out the due diligence exercise, Mr Lui’s criticism may be valid. However, Zhang also engaged Deloitte and Ip to carry out such exercise.  He also engaged a Xiamen valuer to value the land.  If the reports from Ma’s firm should be consistent with those produced by Deloitte and Ip, then there would be no problem for Zhang to have engaged Ma to conduct such exercise.  Mr Yan also rightly pointed out in §§19 to 21 of his reply submissions that it was advantageous to engage Ma to carry out such exercise as he was familiar with and knowledgeable of the affairs of the two Dalian Companies and the project as a whole having been involved with them since January 2007.  I therefore disagree with Mr Lui on this submission.

160.  Mr Lui also said that Zhang had in cross-examination said that he had not relied on Ip’s due diligence report.  He thus submitted that since Zhang had disowned Ip’s report, this court should likewise ignore completely what is said in this report.  Furthermore, Zhang in so saying had contradicted what he had said in §20 of his witness statement. 

161.  I think Mr Lui is factually incorrectly as Zhang did not say that he had not relied on Ip’s report.  He was cross-examined on Ip’s report the first thing in the morning of 17 July 2015.  He said he only looked at the summary of Ip’s report.  He generally read issues in relation to risks.  Ip gave him legal advice.  But he could not recall which part he had read though he would look at the list of debts at DX/2476 of Ip’s report as he needed to know the debts of the companies.  This submission of Mr Lui thus have no foundation.

162.  I also note that there is a list in the schedule to Ip’s draft report delivered on 6 January 2010 which contained twenty-two sets of litigation brought by the creditors of the two companies with court case references, identity of the creditors and the amounts of the judgment debts that had to be paid to the court so as to unfreeze the development from the court orders (D10/2477 and 2478).  This report has been disclosed in discovery before the trial.

163.  In any case, even if Zhang had said in cross-examination that he had not relied on Ip’s report (which is not the case), it is not a total contradiction of §20 of his statement. It is just that §20 of his statement should not include Ip’s report.  He in fact said in §20 of his witness statement that on the basis of the due diligence reports he obtained, he was satisfied with Jinan Co’s ownership of DIFECE and DIEC.  He was there referring to the valuation report by a valuation company in Xiamen and the due diligence reports prepared by Deloitte, Ip and Ma’s Asia Law Office.  Ma’s office provided two reports on the ownership of the land by the Dalian Companies, the changes to their shareholders and their debt repayment.  He also said before re-examination that he preferred Deloitte’s report which was more professional, closer to reality and was consistent with what Ma had told him.  Mr Lui did not doubt Deloitte’s report.

164.  Furthermore, even if Zhang had not relied on Ip’s report, it does not mean that Ip’s report is not a proper due diligence report save one error on the dates of the acquisition of the 40% and 60% Dalian Shares.  Ip’s report stated that Jinan Co had acquired on 1 May 2009 the 60% and 40% of the DIEC shares from the 3rd defendant and Qingdao Co respectively.  It then acquired on 10 July 2009 the 60% and 40% of the DIFEC shares from the 3rd defendant and Qingdao Co respectively (D10/2470). That is wrong.  The correct position was set forth in Ma’s report in that Jinan Co acquired the 60% Dalian Shares from the 2nd and 3rd defendants on 1 May 2009 and acquired the 40% Dalian Shares from Qingdao Co on 25 July 2009 (D9/2409-2410, 2427 and 2433).

165.  Mr Lui’s next attack is that the use of the purchase price paid by Empire Star for discharge of the debts only benefitted Empire Star and caused disadvantage to Jinan Co as the debts as identified by Deloitte were up to RMB 420 million with a potential of an extra RMB 100 million due to Dalian JV.  The discharge of all these debts would result in the exhaust of the purchase price of RMB 540 million leaving almost nothing for Jinan Co.  On this reasoning, Mr Lui submitted that the benefit to PM Li/Jinan Co in this sale of the 60% Dalian Shares is to enhance only the value of the 40% Dalian Shares still owned by Jinan Co (to the actual contractual value of RMB 360 million) as the two Dalian Companies would be debt free.  Hence, there was doubt if PM Li would have genuinely entered into the Framework Agreement for such small benefit. 

166.  Mr Yan answered this point by repeating his submissions on the history of the two Dalian Companies and the project from 2004 and leading to Ma’s involvement in their running in January 2007 and to the making of the Framework Agreement which I have dealt with in §§116 to 131 above.

167.  I also refer to Ma’s due diligence report on debt repayment by the Dalian Companies and dated 11 January 2011 (D10/2481-2494).  He annexed to the report a list of indebtedness as at that date. The list had been signed and confirmed by Empire Star and DIFEC.  It stated a total indebtedness of RMB 381,044,109.13 (D7/1665, 1685, 1689 and D10/2488). 

168.  Of the sum of RMB 381,044,109.13, part of it at RMB 278.1 million was related to litigation cases.  The Dalian development had been frozen by the court and could only be resumed after this sum was paid to the court (D10/2485).  There were two further sums of RMB 90 million and RMB 50 million owed to PM Li and Jinan Construction Bank respectively.  The development together with its right to use the sea area were further frozen by the court for non-payment of these two sums (D10/2486).

169.  Deloitte had also been engaged by Fulbond to produce a due diligence report on the Dalian Companies as Zhang had at one time considered injecting the development into Fulbond (D7/1723-1 to 1723-34 or D9/2434 to 2466).  The report dated 31 December 2009 stated the indebtedness of the Dalian Companies at RMB 427.145 million as at 30 November 2009 (D7/1723-16 and 1723-30 to 1723-32).  Of this sum, RMB 407.678 million are traced to litigation cases against the two companies, account payables recorded in the accounts of the companies and the balance of other debts.  They are the same debts as shown in the list of debts in Ma’s report referred to above (D7/1665, 1685, 1689 and D10/2488).  

170.  Deloitte had verified each and every of these debts.  For the debts with figures calculated by Deloitte to be higher than as confirmed by Ma (or by the signatures of Empire Star and DIFEC), Deloitte used the higher figures.  For the debts with figures calculated by Deloitte to be smaller than as confirmed by Ma, Deloitte used Ma’s higher figures. Deloitte thus used a conservative approach to estimate the liabilities of the two companies.  It arrived at the total indebtedness of RMB 407.678 million.  That was RMB 26,633,890.87 higher than Ma’s RMB 381,044,109.13.

171.  In addition, there were a number of debts recorded in the accounts as account payables but were not shown in Ma’s list of debts.  They totalled RMB 19.467 million.  Deloitte included them as part of the indebtedness and arrived at a total indebtedness of RMB 427.145 million (D7/1723-16 and 1723-30 to 1723-32).

172.  Of the debts at RMB 407.678 million as estimated by Deloitte, RMB 90 million was due to Jinan Co/PM Li.  This non-payment sum has been referred to above in connection with the court order freezing the development together with the right to use the sea area because of this non-payment and the non-payment of another sum of RMB 50 million owed to the Jinan Construction Bank (D10/2486).  As can be seen in the Chinese judgment of the Intermediate People’s Court of Jinan dated 9 May 2007, this RMB 90 million was derived from a loan of RMB 28 million advanced by PM Li through Jinan Co to DIFEC on divers dates from 23 March 2004 to 16 June 2004 in four instalments. Interest at 30% per annum which accrued up to 21 December 2006 was agreed at RMB 20.3 million.  Litigation costs were at RMB 410,530 (D5/1214-1 to 1214-4). PM Li tried to execute this judgment through the court in September 2008 (D10/2494 to 2494-1).  Deloitte calculated the total interest accrued up to 30 November 2009 at RMB 26.059 million.  The total sum due was at (RMB 28 million + RMB 26.059 million + RMB 411,000 =) RMB 54.470 million.  But Ma advised Deloitte that the Dalian Companies had reached a compensation agreement with PM Li by agreeing to pay Jinan Co/PM Li another RMB 40 million.  The total sum payable thus became RMB 90 million.  However, neither of the Dalian Companies nor Ma could produce any material relating to the compensation agreement (D7/1723-30 and 1723-32).  

173.  PM Li’s benefit in being able to obtain the repayment of debts by the Dalian Companies was not limited to the RMB 90 million which stemmed from the loan of RMB 28 million advanced in mid-2004.  Of the RMB 19.467 million debts taken into consideration by Deloitte because they were recorded in the accounts though not in Ma’s list, a sum of RMB 3 million was due to PM Li personally.  Again, neither of the Dalian Companies nor Ma could produce any material that could explain this RMB 3 million (D7/1723-31 and 1723-32).  It is not clear whether this sum would be repaid as it was not in Ma’s list.

174.  Furthermore, Deloitte had considered that there was a potential liability on the part of the Dalian Companies to pay RMB 100 million to the Chinese partner of the Dalian development.  But PM Li told Deloitte that the two companies and the Chinese partner had agreed that there was no need to pay this sum.  Deloitte did not accept PM Li’s words and considered that in addition to the debts on its list of verified debts totalling around RMB 420 million, there was this further potential liability of the two companies to pay the Chinese partner RMB 100 million.  However, PM Li did not consider this sum as payable (D7/1723-7 §1).  For him, this RMB 100 million would be part of the purchase price from Empire Star that he would receive after the debts of the two companies were paid off. 

175.  Mr Lui further argued in §82. Of his reply submissions that PM Li had transferred RMB 100 million back to Zhang as security for the sale and transfer of the 40% Dalian Shares as those shares were then subject to litigation. Hence, PM Li could not have the benefit of this sum.  However, this sum was only paid to Zhang as security.  If the litigation should turn out to be harmless (which was the view of Ma), then this sum would go back to PM Li eventually. 

176.  The repayment of the debts by the Dalian Companies also benefitted their other creditors.  There was a sum of RMB 50 million due to Jinan Construction Bank in Ma’s list and Deloitte’s list.  That arose from a loan of RMB 22.164 million advanced by the bank to Qingdao Co.  The Dalian Companies became liable for it because of a guarantee they gave the bank.  Interest and legal costs on it were at RMB 9.675 million and RMB 277,000 respectively.  The total sum due was at (RMB 22.164 million + RMB 9.675 million + RMB 277,000 =) RMB 32.116 million. However, Ma put the total sum due at RMB 50 million but could not produce to Deloitte any related material on his calculation. 

177.  In addition, the RMB 19.467 million debts recorded in the accounts and Deloitte’s list but not in Ma’s list of debts included a debt of RMB 4.281 million also due to Qingdao Co.  DIFEC, DIEC and Ma also did not produce any material to justify this debt (D7/1723-31 and 1723-32).

178.  Furthermore, there are recorded in Ma’s list and Deloitte’s list seven loans totalling RMB 17.559 million, two construction debts totalling RMB 720,000, and four account payables totalling RMB 60.875 million that have no related information (D7/1723-30 and 1723-32). 

179.  On Mr Lui’s question of whether PM Li would have genuinely entered into the Framework Agreement for the “small benefit” that he would obtain, the amount of benefit is that which PM Li would have perceived at the time when he entered into the agreement.  The above shows that he should have perceived that he would at least receive the repayment of debts at RMB 90 million and the leftover of the purchase price at RMB 100 million and possibly a personal debt at RMB 3 million as well.  I do not want to guess if he would have perceived other benefits.  But without the transaction in the Framework Agreement, he would not have these perceived benefits.  Jinan Co also would not be able to realize the remaining 40% Dalian Shares for RMB 360 million.  It would instead be stuck with the ownership of the two companies and the project which were beset with problems, debts, and charging orders.  These debts and charging orders would have remained as strangleholds on the two Dalian Companies and the project.  Hence, the Framework Agreement and the consideration thereunder indeed benefitted PM Li/Jinan Co in that they could obtain repayments of debts and Jinan Co’s could realize these two problematic companies into cash.  I therefore disagree with this submission of Mr Lui.

180.  Mr Lui’s next attack is on the payment by Empire Star of RMB 100 million deposit in December 2009 pursuant to the Framework Agreement. He suggested that this was repaid to Empire Star’s agent and used again for paying the balance of the purchase price in February 2010.  Hence, it was a circular payment. However, Mr Yan has rightly objected to this attack as being unfair because it was not raised in the pleadings and was only raised in cross-examination of Zhang. Mr Lui then said in §34 of his closing submissions that the plaintiff had no positive case in this allegation of circular payment and he was only holding Empire Star to strict proof and to dispel legitimate doubt on the geniuses of the payment. I do not think Mr Lui can argue this point in the way he did.  When Empire Star has produced the documents proving payment and referred to it in pleading and witness statement, subject to the witness adopting the witness statement at the trial, that would discharge the evidential burden for proving the payment.  If the plaintiff would like to challenge the payment as circular, it has to raise the challenge in its pleadings and evidence.  It cannot do so in the guise of putting Empire Star to strict proof on the payment.  That is not right. 

181.  In any case, Mr Lui mounting his cross-examination only on the basis of certain credit and debit entries in bank statements.  The credit entries did not show the source of the credits.  Eventually, Empire Star produced some documents to show that the credits totalling RMB 100 million allegedly came from circular payments were in fact from deposits made by Zhang Huafeng.  Mr Lui’s submission on this point is again invalid.

182.  Mr Lui’s next attack is the lack of reliable evidence showing the use of the RMB 540 million for repaying the alleged debts of the Dalian Companies.  He submitted that the genuineness of the repayment was at the heart of the entire deal under the Framework Agreement.  He also referred to the proceedings started by Empire Star against Jinan Co and Ma/Asia Law Office for supply of the documents proving the repayment of debts.

183.  Empire Star has produced a series of e-mail exchanged between Ip and Ma from 29 May 2014 to 16 November 2014 in which Ip sought documents from Ma showing the repayments made with the RMB 540 million (D6/1519-1658). These e-mails and their attachments show that Ip had been pressing Ma for documents evidencing the repayment of debts and payment of other expenditures.  Ma in response provided a number of tables of repayments and other payments and some supporting documents on 24 September 2014.  He further sent some bank reconciliation tables and supporting documents (D6/1556-1587). 

184.  The tables from Ma show that from January 2010 to 15 April 2014, Ma’s office had on behalf of the Dalian Companies made 40 repayments totalling RMB 207,756,505.20 to various creditors.  In addition, DIFEC also repaid RMB 46,223,669.67 to its creditors. A sum of RMB 8,753,933.45 was also incurred and paid for management of the Dalian Companies and project.  Ip checked the tables and supporting documents against the bank reconciliation tables and raised some queries on 23 October 2014 (D6/1588).  Ma then provided some revised bank reconciliation tables and supporting bank documents on 16 November 2014 (D6/1588-1604).  In addition, Ma also provided a bundle of settlements agreements made between DIFEC and its creditors, receipts issued by creditors, receipts of tax payments and some miscellaneous payment records (D6/1607-1658). 

185.  No attempt has been to collate and tally these documents of payments and repayments against the debts listed in the due diligence reports produced by Ma and Deloitte.  One can say that such discovery is not satisfactory for the purpose of litigation as they do not show that the debts in those lists had been paid and discharged properly.  Hence, Ip did not find the accounting exercise by Ma as satisfactory.  However, the tables and documents produced by Ma indeed showed that there were genuine payments and repayments. 

186.  What Empire Star has to show is that it had indeed entered into the Framework Agreement and the agreement was put into effect.  The application of the RMB 540 million for repayment of debts is just one of the facets that should be considered.  The evidence produced by Empire Star which came from Ma is already convincing proof that there has been substantial repayments and other relevant payments though it is not enough to show that the debts shown in the due diligence exercise have all been discharged.  But it is not necessary to show a complete discharge of all such debts before I can decide that the Framework Agreement was a genuine agreement and has been put into effect.

187.  Mr Lui also submitted that Zhang was inconsistent in that he had repeatedly stressed his immense interest in the project that he was willing to undertake risks in order to acquire the shares of the Dalian Companies. He went so far as to say that if Fulbond did not want to acquire the shares, he would do so by himself.  However, he very quickly disposed of the 60% Dalian Shares by allotting to Weng 90% of the Empire Star shares and giving to Sun the remaining 10% in February and March 2010 respectively.  Mr Lui submitted that this is inconsistent with Zhang’s expressed fervour for the 60% Dalian Shares.  But absent Zhang’s fervour for the 60% Dalian Shares, he had no reason to enter into the Framework Agreement in the ridiculous circumstances. 

188.  Mr Yan objected to this attack as being unpleaded. He is right.  Worse still, Zhang was not even cross-examined on it.  Mr Lui just took the point in closing submissions. 

189.  Nevertheless, Zhang had given his reason in §§25 and 26 of his witness statement for his sale of 90% of Empire Star shares to Weng and Sun.  He said after he had abandoned the idea of injecting the project into Fulbond as the time frame did not match, he wanted to take on the project by himself and his friends as he was bullish about the potential of the project.  He then introduced the project to his friend and one-time joint venture partner (in a Sanya, Hainan project) Weng.  He estimated that RMB 1,000 million would be required for the whole project.  Weng was prepared to invest RMB 900 million into it.  He then allotted 90% Empire Star shares to Weng and Weng remitted RMB 330 million for the purchase of the 60% Dalian Shares under the Framework Agreement. 

190.  Regarding the sale of the remaining 10% of the Dalian Shares to sun, he said his other projects in the mainland needed urgent cash injection on 5 March 2010.  Since the Dalian Development was facing many obstacles and capital invested into it will not be recovered in the short term.  He therefore sold the remaining 10% shares to Sun. 

191.  Though he had sold all the shares to Weng and Sun, they still wanted him to remain as director of the Dalian Companies for his experience in real estate development and knowledge of the project.  They also agreed to give him 10% of the profits in excess of 10,000 million.

192.  Zhang was not cross-examined on these two paragraphs. They do not appear to be unreasonable.  There is no reason for me to doubt them.

193.  For the above reasons, Mr Lui submitted that the Framework Agreement could not have been a genuine agreement. 

The disponor of the 60% Dalian Shares to Empire Star – other points

194.  Mr Lui in his reply submissions made a number of further points.  Some of them have been discussed or decided above. Mr Yan in his supplemental reply submissions also pointed out that some of them are neutral points that can be argued for either direction.  But many of them were made without pleading and/or cross-examination of the witnesses.  I do not consider it necessary to deal with them.

Decision on the disponor of the 60% Dalian Shares to Empire Star

195.  I start with the credibility of the witnesses of Empire Star.  I have reviewed and considered above some evidence of Zhang, his sister Zhang Yu, Ma and Ip.  I find that such evidence is truthful and reliable as it is reasonable in the light of the prevailing circumstances.  It is also consistent with the contemporaneous documents produced at the trial.

196.  Ma has explained in some detail the affairs of the Dalian Companies.  He was engaged with their affairs since January 2007 shortly after the death of their former chairman王京立 (Wang Jing Li).  From his study of the documents, he learnt that PM Li had made a development agreement with DIFEC on 18 March 2004 (D1/95-1 to 95-3) under which PM Li had to invest in the development project.  PM Li also advanced RMB 28 million to DIFEC from 23 March 2004 to 16 June 2004.  The loan was not repaid and resulted in a Chinese court judgment dated 9 May 2007.  The total amount outstanding from this loan had become RMB 90 million on 31 December 2009 when Deloitte did the due diligence report for Fulbond.

197.  PM Li assumed control of the two companies and appointed Mr Zheng Hong Lu of Jinan Co as their chairman to take the place of Wang Jing Li who had passed away.  They were then in disarray.  There were charging orders against them.  If the debts secured by the orders were not paid off, they could not carry on with the development.

198.  Ma handled the litigation cases of the two companies until October 2008.  The operation of the development had ground to a stop.   Ma reviewed the assets situation of the two companies in December 2008.  There were huge debts, outstanding tax, outstanding price for the development land and insufficient payment of capital by joint venture partner.  These had been verified by Deloitte in its due diligence report dated 31 December 2009 (D7/1723-6 – 1723-11). There are also over forty settlement agreements produced by Ma to Empire Star (D6/1607 to 1658). 

199.  Ma advised PM Li and the general manager of the two companies to dispose of the development as they were unable to continue with the development.  They tried to find partners, but no cooperation with partners was possible because of the outstanding debts and the land and account were frozen by the court.  They tried to sell the development for RMB 800 to 850 million through soufun.com in June 2009 but with no satisfactory result.  They then appointed estate agents (including CB Richard Ellis Ltd) to look for purchasers.  But negotiations with developers failed because of the price and need to clear the outstanding debts ahead of the sale.

200.  Ma met Zhang in November 2009 through Zhang Huafeng and introduced the development to him.  Finally, Zhang agreed to purchase the two companies for RMB 900 million through the Framework Agreement on 14 December 2009.

201.  Zhang initially wanted to inject the development into Fulbond.  Ip thus advised for some provisions in the Framework Agreement for this purpose.  Ip also advised that the purchase price should be applied to discharge the outstanding indebtedness of the two companies. 

202.  Empire Star then paid Asia Law Office on behalf of Jinan Co RMB 100 million of which RMB 97 million came from Zhang Huafeng.  

203.  Zhang’s sister Zhang Yu then arranged staff from family companies to manage the two companies.  She paid RMB 34.95 million for modification of the permitted use of the land from pure residential use with plot ratio at 0.15 to residential and partially commercial use with plot ratio at 0.54.  The plot ratio was later increased further to 0. 58.

204.  The Zhangs provided RMB 30 million to release the judicial charging order.  They had arranged loans from SJ Bank to fund the development. Some of these loans were subject to the plaintiff’s complaint of breach of the injunction.

205.  In addition to Ma’s narrative on the Dalian Companies from 2004 to their sale by Jinan Co to Empire Star, there is also the evidence of the devolution of the 40% Dalian Shares and 60% Dalian Shares from the 2nd and 3rd defendants to Empire Star. 

206.  The purchase of the 40% Dalian Shares by Qingdao Co from the 2nd and 3rd defendants had been approved by Dalian Foreign Trade and Economic Cooperation Bureau on 6 December 2005 (D9/2424, 2425 and 2430, 2431) though the circumstances and consideration of the purchase was not known.  In any case, the plaintiff accepted that Qingdao Co was the registered holder of the 40% Dalian Shares.  Jinan Co had purchased these shares from Qingdao Co by the 25 July 2009 Agreements though it had not been made the registered owner of these shares (D9/2427 and 2433).  The consideration of the purchase is also unknown.  I have found that it had indeed entered into the 25 July 2009 Agreements to purchase these shares from Qingdao Co.

207.  The 2nd and 3rd defendants had by the 1 May 2009 Agreements sold their 60% Dalian Shares to Jinan Co (D9/2426 and 2432).  The sales had been approved by the Dalian Economic Bureau on 18 November 2009 (D9/2268 and 2269) though Jinan Co later withdrew the application for change of registered owners as it then agreed in the Framework Agreement to procure the transfer of these shares by the 2nd and 3rd defendants to Empire Star.  The consideration of the purchase of these shares by Jinan Co is again unknown.  The transfers of these shares by the 2nd and 3rd defendants directly to Empire Star instead of through Jinan Co preserved the status of the Dalian Companies as Sino-foreign joint venture companies.  They could then be sold to Fulbond as then anticipated by Zhang.

208.  I would note here that the considerations of the purchase and sale by Qingdao Co of the 40% Dalian Shares and the purchase by Jinan Co of the 60% Dalian Shares are all not known because the sale and purchase agreements produced are all in standard form and stated the consideration at the par value of the shares transacted (D9/2426, 2432 and 2427, 2433). The government approvals also stated the par value of the shares as the consideration of the transactions (D9/2424, 2425 and 2430, 2431 andD9/2268, 2269 and D1/108, 109 and 142, 143).

209.  Since the 2nd and 3rd defendants were bound to transfer the 60% Dalian Shares to or at the direction of Jinan Co, there was no reason to include them as parties to the Framework Agreement.

210.  Jinan Co procured the 2nd and 3rd defendants to enter into the ES Agreements with Empire Star.  These agreements were for registering the transfer of the 60% Dalian Shares.  They had also been approved by the Dalian Economic and Technology Development Zone Economic and Trade Bureau on 21 January 2010 (D1/108, 109 and 142, 143).

211.  Cl. 4 of the Framework Agreement provided that Jinan Co would furnish the relevant documents and financial statements of the Dalian Companies to Empire Star for asset verification and audit after the signing of the Framework Agreement and not before.  That supports Zhang’s evidence that he had to pay the RMB 100 million before he could do due diligence on the project and the two Dalian Companies. 

212.  The sale of the 60% Dalian Shares to Empire Star at RMB 540 million was not at an undervalue as Empire Star was acquiring the Dalian Companies together with their debts and problems.  The valuation of the Dalian Land and development had to be reduced by the debts and problems. 

213.  The evidence shows that the benefits perceived by PM Li and Jinan Co to be derived by them from the Framework Agreement at the time of the agreement were not limited to the RMB 90 million which stemmed from the loan of RMB 28 million advanced in mid-2004.  There were also the personal debt of RMB 3 million due to PM Li and the leftover of the purchase price at RMB 100 million after payment of debts.  If there was no Framework Agreement, PM Li and Jinan Co would not have these perceived benefits.  Jinan Co would also not be able to realize the remaining 40% Dalian Shares for RMB 360 million.  It would instead be stuck with the two companies and their problems, debts, and charging orders which would have remained as strangleholds on the two companies and the project.

214.  On the use of the RMB 540 million to repay debts, Empire Star has produced a series of e-mail exchanged between Ip and Ma from 29 May 2014 to 16 November 2014 (D6/1519-1658).  They show a number of tables of repayments and other payments and some supporting documents.  These tables from Ma show that from January 2010 to 15 April 2014, the Dalian Companies had made 40 repayments totalling RMB 207,756,505.20 to various creditors and DIFEC further repaid RMB 46,223,669.67 to its creditors.  A sum of RMB 8,753,933.45 was also paid for management of the Dalian Companies and project.  Ma also provided some settlements agreements made between DIFEC and its creditors, receipts issued by creditors, receipts of tax payments and some miscellaneous payment records (D6/1607-1658). 

215.  Though these documents do not show that the debts in the lists in the due diligence reports had been fully discharged, I am satisfied that they do show that there were genuine payments and repayments. 

216.  Zhang had also explained why he had sold 90% of Empire Star shares to Weng and 10% to Sun.  Zhang was not cross-examined on this.  I also have no basis to say that his reasons for selling were unreasonable.

217.  Looking at the evidence in the round, I am fully satisfied that Jinan Co had acquired the beneficial interest in the 40% and 60% Dalian Shares from Qingdao Co and the 2nd and 3rd defendants respectively though it had not registered itself as the registered owner of these shares.  I am also satisfied that it had genuinely entered into the Framework Agreement agreeing to sell these shares to Empire Star for a total sum of RMB 900 million and the sale of the 60% Dalian Shares for RMB 540 million had been completed.  I also find that the RMB 530 million paid by Empire Star for the 60% Dalian Shares had come from the resources of Zhang and Weng and the same had been applied for discharge of the debts and costs of the Dalian Companies.  (Zhang also explained in §35 of his 1st witness statement that the balance of RMB 10 million was withheld from Jinan Co as security to secure the discharge by Jinan Co of its obligation to resolve the charging order imposed on 337,590 m² of the Dalian Land in December 2006 and the discharge of the other debts.)

218.  In the premises, I am satisfied that Empire Star has proved on a balance of probability that Jinan Co was the disponor or vendor of the 60% Dalian Shares who procured the 2nd and 3rd defendants to transfer them to Empire Star.

S 60(1) – disposition of property made with intent to defraud creditors

219.  The plaintiff pleaded that it was Lucky Dragon that had procured the 2nd and 3rd defendants to transfer the 60% Dalian Shares to Empire Star with intent to defraud the plaintiff.  It was Lucky Dragon that had acted with the fraudulent intent.  The plaintiff says that Jinan Co was just a vehicle for effecting the fraudulent scheme to defraud it.

220.  However, I accept the 1 May 2009 Agreements are genuine. They provided for the transfers of the 60% Dalian Shares from the 2nd and 3rd defendants to Jinan Co.  The two transfers had been approved by the Dalian Economic Bureau on 18 November 2009 (D9/2268 and 2269).  Hence, Lucky Dragon had effectively dropped out of the picture from 1 May 2009 (save the execution by Yeung of the two ES Agreements on behalf of the 2nd and 3rd defendants).

221.  Mr Lui sought to argue in §11 of his reply submissions that the acts of the 2nd and 3rd defendants in entering into the ES Agreements were procured by the fraudsters Yeung and Choi who were in control of them.  That argument is not valid as Yeung had no choice but to comply with the direction of Jinan Co as the 2nd and 3rd defendants had by the 1 May 2009 Agreements already sold the 60% Dalian Shares to Jinan Co.  After the shares were sold, Yeung and Choi and/or Lucky Dragon had no more power over the shares.  The shares were subject to the control of the beneficial owner Jinan Co.

222.  I have also found that it was Jinan Co that had sold these shares to Empire Star pursuant to the Framework Agreement.  It then procured the 2nd and 3rd defendants to transfer them to Empire Star by the ES Agreements.  That means the plaintiff can only succeed in setting aside the sale of these shares to Empire Star if it can prove that Jinan Co that had disposed of these shares to Empire Star with intent to defraud it.

223.  However, I cannot consider whether Jinan Co had disposed of these shares to Empire Star with intent to defraud the plaintiff without giving Jinan Co an opportunity to be heard.  But Jinan Co is not even a party in this action and nobody is representing it here. Mr Yan has also pointed out in §65 of his opening submissions and §10 of his supplemental reply submissions that the plaintiff has not pleaded that Jinan Co, in disposing the 60% Dalian Shares, had any intention to defraud Empire Star or was privy to the alleged conspiracy.  There is also no evidence suggesting the same.  Hence, I cannot even consider this question.

224.  I have also expressed disagreement with the plaintiff’s alternative case that if Jinan Co was the beneficial owner of the 60% Dalian Shares at the material time, then the 2nd and 3rd defendants did not have any legal interest in the shares to transfer to Empire Star.  This argument is clearly wrong.

225.  Mr Lui also submitted that Zhang was dishonest as he knew that Lucky Dragon and the 2nd and 3rd defendants were to defraud the plaintiff.  Hence, the transfer of the 60% Dalian Shares to Empire Star was ultimately procured by Lucky Dragon.  But there is no evidence of such knowledge on the part of Zhang.  Such submissions are also contrary to my finding that it was Jinan Co that had sold and procured the transfers of these shares to Empire Star.

226.  Mr Lui also submitted in §12 of his reply submissions that if the Framework Agreement should be genuine, it should be set aside.  But he did not explain the basis for such course to be taken.  

227.  Since Jinan Co is not a party in this actin and the plaintiff has not pleaded or alleged that Jinan Co had sold the 60% Dalian Shares to Empire Star and procured the 2nd and 3rd defendants to transfer the same to Empire Star all with the intention to defraud the plaintiff, the plaintiff has failed to discharge the burden under s. 60(1).  This finding should be enough to dispose of the action, but I would also consider the application of s. 60(3) in case I were wrong on this finding.

S 60(3) – bona fide purchaser for valuable consideration without notice of intent to defraud 

228.  The burden is on Empire Star to prove that it was a bona fide purchaser of the 60% Dalian Shares for valuable consideration and it did not have notice of the vendor’s intent to defraud the plaintiff at the time of the disposition.

229.  Mr Lui relied on the matters pleaded in §§54, 55 and 57A of the statement of claim in support of his case that Empire Star should have actual or constructive notice of the intent of Lucky Dragon and the 2nd and 3rd defendants to defraud the plaintiff.  These points include the allegation that it was ridiculous for Zhang to have entered into the Framework Agreement or that Zhang/Empire Star should be aware of the Lucky Dragon action.  He also submitted on a large number of other points in his closing submissions.  I have already dealt with all these points above in the context of whether the Framework Agreement was genuine.  At the end, I found for Empire Star.

230.  Empire Star’s key element in its defence under s 60(3) is the payment of the RMB 530 million for the 60% Dalian Shares.  It says that this was also consistent with the consideration in the Framework Agreement at RMB 900 million for all the Dalian Shares.  I have found that the Framework Agreement is a genuine agreement and the RMB 900 million was way above the valuation by the plaintiff’s expert at RMB 750 million.  I have also held that the RMB 900 million was not an undervalue for all the Dalian Shares together with the development project as there were a lot of debts and problems hindering the progress of the development.

231.  I have also found that the RMB 530 million paid by Empire Star for the 60% Dalian Shares had come from the resources of Zhang and Weng and the same had been applied for discharge of the debts and costs of the Dalian Companies.

232.  I find that Empire Star has proved on a balance of probability that it was a bona fide purchaser of the 60% Dalian Shares for valuable consideration and it did not have notice of Jinan Co’s intent to defraud the plaintiff at the time of the disposition.

JUDGMENT INHCA 1237 OF 2012

233.  In the light of my findings above, I find that the plaintiff has failed in this action.  I accordingly dismiss this action.  I also discharge the injunction granted by Deputy Judge Sakhrani on 17 July 2012. 

234.  Though Empire Star has lost the issue of extraterritoriality of s. 60, that is a very minimal part of the action.  I do not think it would have a significant impact on the issue of costs.  I therefore make a costs order nisi that the plaintiff should pay the defendant the costs of this action and the costs reserved by Deputy Judge Sakhrani on 17 July 2012 and by Deputy Judge Mimmie Chan 20 July 2012.

HCMP 159 of 2015 - CONTEMPT APPLICATION AND APPLICATION TO VARY THE INJUNCTION

The injunction, breaches, contempt proceedings and application for variation

235.  The injunction granted by Deputy Judge Sakhrani on 17 July 2012 enjoined Empire Star from, among other things:

(1)   transferring, disposing, encumbering or in any way dealing with the shares and/or equity interest in the Dalian Companies as held by Empire Star;

(2)   causing or procuring any change in the registered shareholders, directors and/or legal representatives of the Dalian Companies;

(3)   causing or procuring the registering of any change in directors and/or legal representatives in the Dalian Companies in their respective registers of directors and/or with the relevant government authorities; and

(4)   causing or procuring the disposal of, or dealing with or diminishing the value of or in any way encumbering any of the assets of the Dalian Companies including the Dalian Land and the Dalian Land Use Rights. 

236.  The plaintiff complained that Empire Star had committed the following breaches of the injunction:

(1)   the making of the 2013 Share Charge on 25 March 2013 as security for a loan of RMB 650 million;

(2)   the appointment of Zhang and Zhang Yu as directors of the Dalian Companies on or around 6 August 2012 in place of Lin and Gao Wen who resigned as directors of the two companies at around the same time; and

(3)   the making of the Land Mortgages on or about 17 July 2012, 18 July 2012, 15 November 2012, 20 February 2013 and 22 February 2013 respectively.

237.  Empire Star by a letter of its solicitors dated 6 February 2014 admitted these breaches.

238.  The plaintiff started these contempt proceedings seeking:

(20)   an order of committal against Zhang under Orders 45 r 5(1) and 52 r 1;

(21)   an order of committal against Zhang for aiding and abetting the breaches of injunction by Empire Star;

(22)   a writ of sequestration against the property of Zhang;

(23)   a writ of sequestration against the property of Empire Star;

(24)   dispensation of personal service of the injunction order on Zhang; and

(25)   costs.

   Disposal of the application to vary the injunction

239.  Empire Star also applied for variation of the injunction for, among other things, the retrospective permission of the acts that constitute the breaches. 

240.  As a result of the dismissal of the action and discharge of the injunction, the application by Empire Star to vary the injunction is no longer necessary.  I therefore give leave for this application to be withdrawn.  I will deal with the costs of the application below.  I now deal with the contempt proceedings.

The relevant legal principles governing contempt proceedings

241.  Order 45 r 5(1) provides:

“(1) Where—

(a) a person required by a judgment or order to do an act within a time specified in the judgment or order refuses or neglects to do it within that time or, as the case may be, within that time as extended or abridged under Order 3, rule 5, or

(b) a person disobeys a judgment or order requiring him to abstain from doing an act,

then, subject to the provisions of these rules, the judgment or order may be enforced by one or more of the following means, that is to say—

(i) with the leave of the Court, a writ of sequestration against the property of that person;

(ii) where that person is a body corporate, with the leave of the Court, a writ of sequestration against the property of any director or other officer of the body;

(iii) an order of committal against that person or, where that person is a body corporate, against any such officer.” (emphasis supplied)

242.  Zhang, as a director of Empire Star, can be punished for contempt under Order 45 r 5(1) by an order of committal and a writ of sequestration. He can also be punished for aiding and abetting the breaches of injunction by Empire Star (Cartier International BV and Ors v Kaybee International Ltd [1985] HKLR 127 at 130 I to 131 B, per Huggins V-P and Nicolas Pappadis and Anor v Chan Shing-sheung, Barry and Ors [1989] 2 HKLR 511 at 518 G to H per Hunter JA.

243.  In order to commit a director of a company for contempt under Order 45 r 5(1), the applicant has to satisfy some procedural requirements.  Rogers V-P said in Excel Noble Development Limited and Ors v Wah Nam Group Limited and Ors, CACV 910 OF 2000 at p 12:

“Leaving aside the question of aiding and abetting a breach of an injunction by a company, the liability of an officer for a company’s breach of an injunction is thus dependent upon that officer carrying out his own responsibilities as an officer of the company. In that context, it can be seen that the procedural requirements in relation to mandatory injunctions, in particular, reflect the following: first that the officer must be fully aware of the terms of the order with which the company must comply, second that the officer must have that knowledge at a time when he can use his position as an officer to secure compliance and third that the officer should be aware that, if he does not so use his position, steps may be taken against him personally to enforce compliance.” (emphasis supplied)

244.  Therefore, the plaintiff has to prove beyond reasonable doubt that (i) Zhang was fully aware of the terms of the order that Empire Star had to comply, (ii) he had that knowledge at a time when he could use his position as a director of Empire Star to secure compliance and (iii) he should be aware that, if he did not so use his position, steps might be taken against him personally to enforce compliance.

245.  Before a director can be committal for aiding and abetting the breaches of injunction by his company, it is also necessary to prove beyond reasonable doubt that the director had notice of the order (see Cartier International BV at 131 B to C).

246.  Zhang was never served with the injunction order personally.  He lived in Xiamen, Fujian Province.  He has set out his correct address in his 1st and 2nd affirmations filed on 26 September and 4 December 2012 respectively for discharge of the injunction (C1/37 and C1/66).  But no attempt was made by the plaintiff’s solicitors to serve the injunction with or without a Chinese translation on him at that address.  He said in §17 of his 2nd supplemental witness statement that he only received a copy of the order from Ip in December 2014.  Hence, the plaintiff is seeking dispensation of personal service of the order on him.

247.  Mr Lui in §§66 to 80 of his closing submissions argued for enforcement of the order under Order 45 r 7(6) despite lack of personal service and also dispensation of personal service under Order 45 r. 7 (7).  These two rules provide:

“(6) An order requiring a person to abstain from doing an act may be enforced under rule 5 notwithstanding that service of a copy of the order has not been effected in accordance with this rule if the Court is satisfied that, pending such service, the person against whom or against whose property it is sought to enforce the order has had notice thereof either—

(a) by being present when the order was made, or

(b) by being notified of the terms of the order, whether by telephone, telegram or otherwise.

(7)   Without prejudice to its powers under Order 65, rule 4, the Court may dispense with service of a copy of an order under this rule if it thinks it just to do so.”

248.  For enforcement under Order 45 r 7(6), Mr Lui relied on the decision in CitybaseProperty Management Ltd v Kam Kyun Tak and Siu Wai Fong Angel HCA 9676 of 2000, dated 10 April 2002 per Ma J (as he then was).  §14 of the decision said:

“14. Before considering whether a contempt has been committed where the breach of a court order is involved, the court must be satisfied of the following:

(1) The relevant order, together with an appropriate penal notice, must generally have been personally served on the alleged contemnor: RHC Order 45, rule 7(2)(a), (4). This, however, is the general rule. Personal service will not necessarily required to be shown in relation to an order requiring a person to abstain from doing something, if the person to be served (the alleged contemnor) was present in court when the order was made or that person was notified of the terms of the order whether by telephone, telegram or otherwise: see Order 45, rule 7(6); Hong Kong Civil Procedure 2002 at paragraph 52/2/8. The court however retains a discretion whether or not to enforce an order where it has not been personally served: Order 45, rule 7(6) is in permissive terms.

(2) The relevant order must also contain, as I have said, a penal notice. Where there has been a failure in this regard, the court nevertheless has the power to enforce the order subject of course to the exercise of its discretion: see Order 45, rule 7(6); Hong Kong Civil Procedure 2002 at paragraph 45/7/6. However, it is in my view essential that the alleged contemnor shall have been told, whether by being present in court or by being notified by telephone, telegram or otherwise, that the consequences of breaching any order made is to be held in contempt of court and liable to a process of execution. This I regard as a natural consequence of Order 45, rule 7(4) which requires a penal notice to be endorsed on the relevant order. In my view, whether the penal notice is made in writing or given orally, the alleged contemnor must be made aware of the consequences of a breach of the relevant order. It would be an extremely rare exercise of discretion under Order 45, rule 7(6) for the court to dispense with this requirement and in principle, I cannot conceive of any circumstances in which it would be right to dispense with such a requirement: c.f. Hong Kong Civil Procedure 2002 at paragraph 52/2/9.” (emphasis supplied)

249.  For dispensation of personal service, there are also some requirements that the plaintiff has to prove beyond reasonable doubt before the court will grant such relief.  Kwan J (as she then was) said in §39 of the judgment in Lau Yee Ching v Wong Tak Kwong & Ors, HCCW 807/2004:

“39. Before dispensing with the requirement of service and also the penal notice, the court would have to be satisfied ‘beyond reasonable doubt’ that the alleged contemnor knew the terms of the orders relied on, that he was well aware of the consequences of disobedience, and that he was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge (Benson v Richards [2002] EWCA Civ 1402, paragraphs [29] and [41], per Carnwath LJ; see also Citybase Property Management Ltd v Kam Kyun Tak (No. 1) [2003] 2 HKC 98, paragraphs 14(1) and (2), per Ma J; and Hong Kong Civil Procedure 2004, Volume 1, paragraph 52/2//9).” (emphasis supplied)

250.  Hence, the plaintiff has to prove beyond reasonable doubt that Zhang (i) knew of the terms of the order; (ii) was well aware of the consequences of disobedience; and (iii) was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge.

Zhang’s evidence on his understanding of the injunction

251.  Zhang said in §25 of his 1st supplemental witness statement and §16 of his 2nd witness statement that Ip had in the afternoon of 17 July 2012 explained to him the relevant terms of the injunction order and matters that he should take note of.  But Ip did not give him a copy of the order or a written translation of it.  The order had many terms and was in English.  He did not quite understand English.  He could only recall his then understanding as follows. 

252.  He understood from Ip’s explanation that Empire Star, he himself and other relevant people should not reduce the responsibility or power of influence owned by Empire Star and him over the Dalian Companies by replacing their directors. 

253.  He also understood from Ip that Empire Star, the Dalian Companies and the people in the relevant group companies should not further increase the financial burden of the relevant group companies or to do so through mortgage or disposal of relevant assets.

254.  He further explained in §16 of his 2nd witness statement that he thought that the injunction was not to interfere or obstruct the normal and lawful business of Empire Star or the Dalian Companies like the development of the Dalian Land.

Replacement of directors

255.  Regarding the replacement of directors, Zhang explained it in §§26 and 27 of his 1^st supplemental witness statement as follows.  The then directors of the Dalian Companies, Lin and Gao Wen were appointed by Zhang.  They represented the interest of Empire Star in the boards of the companies.  They told Zhang in the beginning of August 2012 that they did not want to remain to be directors anymore because of this action.  Since Zhang was most familiar with the business of the two companies and Zhang Yu had assisted him in handling their business, he therefore procured the board of Empire Star to appoint him and Zhang Yu as directors of the two companies on 6 August 2012. 

256.  Zhang’s understanding of the injunction was that the responsibility and power of influence owned by Empire Star and him over the Dalian Companies should not be reduced.   Since Lin and Gao Wen were his nominated directors and did not take part in the daily affairs of the two companies. Replacing them by Zhang and Zhang Yu as directors only increased Zhang’s control of the companies.  Zhang therefore thought that the replacement did not infringe the injunction.  He only realized that there was the technical breach when he received the letter from the plaintiff’s solicitors in December 2012 and upon further explanation by his solicitors.

The loans from SJ Bank and security for the loans

257.  Zhang explained this in §§28 to 29 of his 1^st supplemental statement and §§6 to 13 of his 2nd supplemental statement as follows.  At the end of 2010, Zhang arranged the Dalian Companies to apply to SJ Bank for the RMB 800M Facility to support the development project.  The application was verbally approved by the manager of the branch of the bank at Dalian Development Zone, Mr Zhang Yong in April 2011. But on each occasion of borrowing, the Dalian Companies had to execute a loan agreement and provide mortgage and security.  From May 2011 to February 2013, the loans borrowed by the Dalian Companies from SJ Bank and the properties mortgaged are as follows:

Date	Amount (RMB)	Properties mortgaged
23 May 2011	593 million (reduced from 600 million)	Land, project undertaking
12 July 2012	100 million	Shares, land, project undertaking
17 July 2012	Granting of injunction
13 November 2012	40 million	Land, project undertaking
22 February 2013	650 million	Shares, land, project undertaking

258.  Regarding the borrowing and mortgage provided in November 2012, Zhang explained that in November 2012 when the loan agreement was signed and mortgage provided, he erroneously thought that since SJ Bank had already given verbal approval to lend the RMB 800M Facility to the Dalian Companies, the companies were therefore only exercising their borrowing rights within the limit of borrowing and without siphoning away the relevant assets or causing any loss to the plaintiff or the relevant group companies. He thus thought that he had not infringed the injunction. 

259.  He so advised his solicitor who relayed the same message to the plaintiff’s solicitors.

260.  Regarding the borrowing of RMB 650 million and mortgage provided in February 2013, this was suggested by SJ Bank.  The purpose was to renew and consolidate the three loans then in existence (which were advanced in May 2011, July 2012 and November 2012).  The reason being that the May 2011 loan was for two years and was about to expire and to be repaid.  In consideration of the then progress of repayment, it was decided to borrow another RMB 650 million (to repay the existence loans). Zhang at the time thought that the loan and mortgage in February 2013 was only for extension of loan term and renewal.  There was no new loan constituted or loss caused to the plaintiff or siphoning away of assets of the group of companies.  Zhang thus did not realize that he had infringed the injunction. 

261.  Zhang also produced documents to show that he had given personal guarantees to SJ Bank in July 2012, November 2012 and February 2013 to secure the loans of RMB 100 million, RMB 40 million and RMB 650 million respectively.  He further said that the responsibility he assumed in the project showed that the project was a genuine one.

Zhang’s understanding of injunction not correct

262.  Save the application for the RMB 800M Facility. Zhang was not cross-examined on these matters.  I do not think Zhang’s alleged understanding of the injunction is truly reflective of the force and effect of the injunction. For example, the injunction does not permit the making of Land Mortgages regardless if it would further increase the financial burden of the Dalian Companies or interfere or obstruct the normal and lawful business of Empire Star or the Dalian Companies.

Ip’s evidence on his explanation of the injunction to Zhang

263.  Ip did not mention in his witness statements on how he had explained the contents of the injunction order to Zhang.  He was cross-examined on it.  Below is the transcript of this part of his cross-examination:

“Q: This is the injunction order I referred to. You read it and explained it to Mr Zhang, is that right?

A: Briefly.

Q: When? Now the date of this order was 17 July 2012.

A: Yes. I remember receiving a telephone call from my secretary, who happened to be the company secretary of the 4th defendant at the time, asking me to go back to office. Ms Lam Kit Man. She called me, I think sometime around 530 p.m. on 17th.

Court: So she was also Empire Star’s secretary?

A: Company secretary.

Court: Company secretary, I see.

Court: Because you assisted Mr Zhang in purchasing this company.

A: I also provided the registered office for …

Court: That’s why Ms Lam was the company secretary.

A: Yes.

Court: Rather than a secretary handling the day to day matters in Empire Star’s own office. Not that kind of relationship.

A: No. And that was the reason why the injunction was served on my office.

Court: Nothing particular about that. The injunction was served on her as the company secretary of Empire Star and she gave you a phone call?

A: Yes. So I went back to office immediately. And then I skimmed through the injunction order itself immediately. And then I called Mr Zhang, I think after 6 o’clock. When I get back and have a look at the injunction, I called him to inform him of the fact that we have received on behalf of Empire Star an injunction order.

Q: Page 219?

A: That’s right. Yeah.

Q: There is a penal notice.

A: Um.

Q: Did you explain, did you read the penal notice or translate the penal notice to Mr Zhang?

A: I did not. I did not.

Q: Were you not aware that penal notice to an injunction order was the most important part of an injunction order because the lay man wouldn’t understand the effect of the injunction.

A: Um.

Q: Were you aware of that?

A: I might be aware of it as a lawyer. But at that material time, it did not occur to me that I need to read all those to him, because I just wanted to explain to him the effects of the injunction.

Q: So you did not explain the consequences of a breach of injunction order to Mr Zhang. Is that your evidence.

A: That’s right. Yeah.

Q: As to the substance, the core paragraphs of the injunction starting on page 220. Did you explain each and every paragraph to Mr Zhang?

A: I remember that I did not actually read and translate each and every paragraph of the injunction to him.

Court: It is a very important document, is it right?

A: I understand.

Court: And it is important for Mr Zhang to be aware of each and every prohibition in the order, right?

A: Yes.

Court: And therefore when you were acting as his lawyer, you would find that you have an onerous duty to convey accurately what are the things that he’s not allowed to do by the order of this court, right?

A: I agree.

Court: Did you discharge your duty properly as an officer of this court?

A: I just briefly explained to him the …

Court: So you did not?

A: I did not.

Court: Why did you not take this matter seriously and explain the order in detail to Mr Zhang and to ensure his understanding of it? Why did you not do it but just to briefly tell him what the order said? Bearing in mind of your awareness of the importance of the document.

A: I must confess that it is rather unfortunate.

Q: Did Mr Zhang say anything in reply?

A: I remember that he said he will gather information and ask me to prepare the necessary defence to defend the proceedings.

Court: Ask you to …

A: Defend the proceedings.

Q: Did Mr Zhang have any other legal advisers at the time as far as you were aware?

A: Not that I am aware of.

Q: So you did not explain the consequences or you did not explain the penal notice to him, you did not explain the paragraphs in detail to him. Did you explain it to him in full afterwards, after that day?

Court: Did there come any other opportunity when Mr Ip explained the order in full and accurately to Mr Zhang? Do you hear that Mr Ip?

A: Yes, yes. I remember in about late 2013 when we received a complaint of contempt of breach of injunction order that I discussed and explained to him fully the terms of the injunction order paragraph by paragraph. I think that was sometime in late 2013.

Court: And from his reaction, your comprehension is that he understood your explanation. Is that right?

A: After that, I think so.” 

Ip’s evidence believable?

264.  Ip was then a seasoned solicitor.  He was a partner of his firm. The transcript shows that he was fully aware that the injunction order was an important document.  Upon receiving the phone call from Ms Lam, he went back to the office immediately.  He skimmed through the order immediately.  Then he called Mr Zhang.

265.  He knew that it was important for Zhang to be aware of each and every prohibition in the order.  He was aware of the serious consequence is his client Zhang should breach the injunction.  One would expect that he would have taken all reasonable steps to let Zhang know the meaning and effect of the order so that Zhang would not get into the trouble of contempt of court.  It was Ip’s duty as an officer of this court and as the solicitor of Zhang to do so.

266.  There was therefore every reason to suppose that Ip would have explained the terms of the injunction order, the penal notice and the consequences of breach to Zhang in detail and with care.  One would also expect that he would have translated the order into Chinese and faxed and/or couriered a copy of the order together with the translation to Mr Zhang as soon as reasonably practicable.  All these would have assisted Zhang in observing the order and not get into trouble by infringement.

267.  However, Ip said in evidence that he had not done any of these things that a prudent, seasoned and responsible solicitor would have done.  Despite his knowledge that the injunction order was an important document, he said he did not read and translate each and every paragraph of it to Zhang but just briefly explained it to him.  He also did not translate the penal notice or advise the consequences of a breach of the order to Mr Zhang.  He also did not prepare any Chinese translation of the document for Zhang. 

268.  He admitted in the witness box that he had an onerous duty to convey accurately to Zhang the things that Zhang was not allowed to do by the order of this court.  But he did not do so.  He also admitted that he had failed to discharge his duty properly as an officer of this court. He confessed that it was rather unfortunate that he had so conducted himself.  His admission, if believed, shows that his conduct was disappointing and saddening.

269.  However, I find Ip’s evidence surprising, amazing and incredible.  His evidence on what he did from the moment he received the call from Ms Lam showed a sense of dispatch and seriousness.  But once he talked to Zhang on the phone, his conduct became casual and careless.  I cannot see why there could have been such contradicting change in the way he discharged his duty upon his talking to Zhang.  I have a grave doubt on the truthfulness of Ip’s evidence on this issue as shown in the transcript above.  It is highly possible that Ip might have forfeited his professional integrity and reputation to rescue his client Zhang. If that is the case, then it is most lamentable. 

JUDGMENT ON THE CONTEMPT PROCEEDINGS

270.  Mr Lui submitted in §§59 to 63 of his closing submissions that there was no room for Zhang to have arrived at his alleged misunderstanding of the injunction and I should reject the same.  However, Zhang was not cross-examined on this.  I do not think Zhang’s alleged misunderstanding is so unreasonable that I can reject it without his being given a chance to explain himself in cross-examination.

271.  Furthermore, even if I should reject Ip’s evidence on how he had explained the injunction to Zhang, which I am inclined to do, and Zhang’s alleged misunderstanding, I still have no evidence to make a positive finding beyond reasonable doubt that Ip had explained the injunction, the penal notice and the consequences of breach clearly to Zhang and Zhang (i) knew of the terms of the order; (ii) was well aware of the consequences of disobedience; and (iii) was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge.  The mere rejection of Ip’s evidence on his explanation to Zhang of the injunction and Zhang’s alleged misunderstanding is not enough for me to come to such positive finding beyond reasonable doubt.

272.  Since the plaintiff has failed to prove beyond reasonable doubt that Zhang (i) knew of the terms of the order; (ii) was well aware of the consequences of disobedience; and (iii) was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge, I cannot dispense with personal service of the injunction on Zhang.  For the same reason, I cannot commit Zhang as a director of Empire Star for contempt under Order 45 r 5(1) or find that Zhang had aided and abetted Empire Star in breaching the order or enforce the order under Order 45 r 7(6).

273.  Since Zhang was the director who had procured Empire Star to commit all the acts subject to complain in these proceedings, Zhang’s success in defending these proceedings must mean that Empire Star has also succeeded in its defence herein.

274.  In the premises, I dismiss these proceedings as against both Empire Star and Zhang.  I also make an order nisi that the plaintiff should pay Empire Star and Zhang the costs for defending these proceedings and the costs of Empire Star’s application for variation of the injunction.

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1237 OF 2012

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HCMP 159/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 159 OF 2015

____________

____________

(Heard together)

_____________

D E C I S I O N

_____________

1.  This is a summons issued on 30 June 2015 by Empire Star Holdings Limited (“Empire Star”) the 4th defendant in HCA 1237/2012, Zhang Xi (“Zhang”), the 1st respondent, and Empire Star, the 2nd respondent in contempt proceedings HCMP 159/2015 for:

(1) Empire Star do have leave to file and serve a supplemental witness statement of Zhang Yu as per the copy annexed thereto; and

(2) Zhang and Empire Star do have leave to file and serve the second affirmation of Zhang Yu as per the copy annexed thereto within three days from the order to be made.

2.  Mr David Vrijmoed (the principal of the present solicitors for Empire Star and Zhang) filed an affidavit on 30 June 2015 in support of the summons.

3.  The background of this case has been summarised by Poon J in a decision dated 12 April 2013 which dismissed Empire Star’s application to discharge an in injunction granted to the plaintiff.

4.  I have also mentioned about the background briefly in my decision on 19 December 2014 dealing with some appeals on discovery and interrogatories.

5.  In gist, the plaintiff used to hold 90 per cent of the shares of a company (“GPB”).  GPB, through intermediaries held the shares of two companies (“the Dalian companies”).  The Dalian companies held a piece of land in Dalian, China.

6.  The plaintiff sold the GPB shares to a company, SBS for AUD46,500,760.  The sum was to be paid in instalments. SBS got the GPB shares but only paid AUD500,760.  The plaintiff sued and obtained judgment against SBS in Australia for AUD46 million.  SBS did not pay up and was wound up.  It had, however, sold to the 1st defendant herein the shares of its intermediaries that held the shares of the Dalian companies.

7.  The plaintiff then sued SBS, the 1st defendant and other relevant companies and obtained judgment on 25 March 2011 which set aside the sale of shares by SBS to the 1st defendant.  However, two companies owned by GBP which together ultimately held 60 per cent of the shares of the Dalian companies had sold these shares to the Empire Star in January 2010. The plaintiff then brought this action to set aside the sales of these shares under section 60 of the Conveyancing and Properties Ordinance, Cap 219.  The plaintiff says that the sales are voidable as they were entered into with intent to defraud the plaintiff as a creditor and are part of a conspiracy and fraudulent scheme to put the Dalian land out of the plaintiff’s reach.

8.  Only Empire Star defends this action.  It says that the two sales of shares of the Dalian companies to it were bona fide transactions done for valuable consideration in good faith and without notice of any intent to defraud the plaintiff.  The defence is based on section 60(3) of the Conveyancing and Properties Ordinance. 

9.  The plaintiff obtained an ex parte injunction from Deputy Judge Sakhrani on 17 July 2012.  The injunction enjoined Empire Star from transferring or encumbering the shares or assets of the Dalian companies, or to change the registered shareholders, directors or legal representatives of these two companies or registering such change. 

10.  In fact the Dalian companies had on 13 July 2012 and under the management of Empire Star borrowed RMB600 million from a Sheng Jing Bank (“SJB”).  The first loan was secured by a mortgage on the Dalian land held by the two Dalian companies.

11.  On 13 July 2012, the Dalian companies as managed by Empire Star borrowed a further sum of RMB100 million from SJB.  This second loan is also secured by mortgages on the Dalian land and building works thereon.  Earlier on 12 July 2012, Empire Star also charged the shares of one of the two Dalian companies to secure this loan.

12.  As I have said above, Deputy Judge Sakhrani granted the injunction to the plaintiff on 20 July 2012.

13.  On 13 November 2012, the Dalian companies as managed by Empire Star borrowed a third loan of RMB40 million from SJB which is also secured by a mortgage on the land and by guarantees by Empire Star, one of the Dalian companies, and Zhang.  This was the first breach of the injunction. 

14.  Empire Star alleged that there were repayments to SJB between 30 January 2012 to 26 February 2013 totalling RMB83 million. 

15.  Empire Star had on 6 August 2012 appointed Zhang and his sister Zhang Yu as directors of the Dalian companies. This is the second breach of the injunction.

16.  On 22 February 2013, the Dalian companies as managed by Empire Star borrowed a fourth loan of RMB650 million from SJB.  This loan was also secured by mortgages on the Dalian land and/or land use rights, and a mortgage on the shares of one of the two Dalian companies.  This is another breach of the injunction.

17.  Empire Star admitted all the breaches.  Zhang said that the first three loans were borrowed for the purposes of developing the Dalian land and they had been so used.  The fourth loan was a rollover of the first three loans. 

18.  Regarding appointment of directors, Zhang said that it was because the previous directors, who were his nominees, had resigned.  Hence, he allowed himself and his sister to be appointed as directors of the companies because the companies needed directors to function.

19.  Empire Star’s solicitors also advised the plaintiff’s solicitors in the beginning of 2014 that Empire Star would apply to vary the injunction so as to purge these breaches.  But no such application had been made until January this year.

20.  On 20 Januarythis year, leave was given for the plaintiff to amend the Statement of Claim to incorporate the breaches of the injunctionby Empire Star and Zhang as steps in further perpetration of the conspiracy and fraudulent scheme to put the Dalian land or its worth out of the plaintiff’s reach.  

21.  On 21 January this year, the plaintiff also commenced HCMP 159/2015 to commit Empire Star and Zhang for contempt of court by reason of the breaches of the injunction. 

22.  On 28 January this year, Empire Star applied retrospectively for variation of the injunctionorder so as to purge its contempt. 

23.  By the summons of 30 June this year, Empire Star seeks leave to make use of the supplementalwitness statement of Zhang Yu to adduce evidence at the trial of the action to purportedly explain how the four loansborrowed from SJB were used in the developmentof the land owned by the Dalian companies. 

24.  Empire Star and Zhang also applied by this summons to rely on the second affirmation of Zhang Yu in the contempt proceedings for the same purpose.  The second affirmation merely repeated the supplementalwitness statement.

25.  The plaintiff opposes this application.  Zhang Yu’s supplementalwitness statement and second affirmation are purportedly for explaining some documents contained in 10 three-inch Lever Arch files. The explanations are supposedly contained in 10 groups of tables running to some 190 pages with some in small prints that are exhibited in Zhang Yu’s supplementalwitness statement.  

26.  The entries in the bundles of tables are references to and explanations of the copy documents and the 10 Lever Arch files. Zhang Yu said in her supplemental witness statement that these documents evidenced transactions that took place between 1 March 2010 and 31 December 2014.  Hence, these documents were all in the possession of Empire Star at all material times. 

27.  In fact, the tables and documents disclosed do not represent all the transactions conducted with the use of the loans from SJB.  Mr Ling, counsel for Empire Star and Zhang confirmed to me this morning that the 10 Lever Arch files contained documents of a general nature such as yearly audited accounts and bank statements.  But the bulk of documents in the files are vouchers of expenses.  They covered the four years of operation of the Dalian companies.  They should show where the loans from SJB had been applied.  But they are only a selective demonstration of the expenditures. 

28.  Miss Zhang Yu also pointed out in paragraph 47 of her supplemental witness statement that there had been several thousand transactions in those years.  For land development and other development costs which are said to be covered in tables 3 and 4 respectively, they are only the transactions of a worth of RMB500,000 or above.  For the development costs as shown in tale 5, they are only for the transactions of RMB200,000 or above. The copy documents evidencing these transactions are in the 10 files.  For those transactions that are not referred to in the tables exhibited in her supplemental witness statement, the related documents are likewise not included in the 10 files. 

29.  Furthermore, all original documents, including those the copies of which are in the 10 files, are in the office of the Dalian companies in Dalian.  Mr Ling said that all these originaldocuments can be shipped to Hong Kong within four working days if the plaintiff should require them for the purpose of inspection. 

30.  Mr Ling’s main ground in support of the summons is that the documents were asked for by the plaintiff.  He said the supplemental witness statement of Miss Zhang Yu and the copy documents in the 10 files are said to satisfy the plaintiff’s request.

31.  In fact, the plaintiff’s request stemmed from the 7th affirmation of Zhang.  This affirmation was filed on 28 January 2015 in support of the application by Empire Star and Zhang to vary the injunction so as to purge the contempt. 

32.  The 7th affirmation of Zhang exhibited two audit reports prepared by one Liaoning Tianhe United Accounting Affairs Agency (“Tianhe”).  One report was on the borrowing of loans by the Dalian companies.  The other report was a special audit report dealing with the spending of the loans.  The documents that Tianhe had considered in compiling the two reports were, however, not produced. 

33.  Furthermore, the former solicitors of Empire Star and Zhang advised the solicitors of the plaintiff by a letter dated 25 February 2015 that the special audit report prepared by Tianhe had some invalid entries or arithmetical errors although the overall conclusion was not materially affected.  The plaintiff’s solicitors were further advised that Tianhe was re-examining that report to ensure accuracy and the corrected report would be furnished to the plaintiff when it was prepared.  However, the corrected report was never provided and no explanation was ever given on why not. 

34.  On 31 March, the plaintiff’s solicitors asked the former solicitors of Empire Star and Zhang to produce 22 categories of documents.  They included the documents that Tianhe had considered when compiling the two reports abovementioned.  I would say that this letter is just a reminder to Empire Star and Zhang of their discovery obligation, at least to the extent of the documents considered by Tianhe, as these documents are relevant to the breaches of the injunction which have been incorporated in the cause of action by amendment on 20 January. 

35.  They are also relevant to the application by Empire Star and Zhang to vary the injunction to purge the contempt of court.  Hence, Empire Star and Zhang cannot say that their late discovery was because of a late request by the plaintiff.  In fact, the deadline for filing of witness statements was 25 March 2015.  They should, therefore, have been disclosed before that date.

36.  Though the plaintiff’s request for specific discovery was made on 31 March, the former solicitors for Empire Star and Zhang only made a substantive reply on 22 April bearing in mind the commencement of a trial on Monday 13 July 2015.

37.  In the reply of 22 April the solicitors refused to disclose a number of categories of documents on various grounds.  For those documents that they agreed to disclose, including those considered by Tianhe, they said that copies of the documents would be disclosed within 14 days which was on or before 6 May.  However, on 6 May the solicitors again asked for a seven day extension.

38.  On 14 May, the former solicitors of Empire Star and Zhang provided the 10 Lever Arch files of copy documents to the plaintiff’s solicitors, together with some bank statements and audit reports.  There was, however, no index or description to accompany the documents.  These documents were also not accompanied by any list of documents.  They are also not of good quality but are just legible with many small prints.  They are accounting documents, but they cannot be understood without the aid of description or explanation.  I do not think this is proper discovery.  

39.  On 16 June, the present solicitors of Empire Star and Zhang produced a sixth supplemental list of documents.  The plaintiff’s solicitors asked on the same day for copies of documents on the list.  The solicitors of Empire Star and Zhang then replied on 19 June that the copies of items 3 to 30 in the sixth supplemental list were the documents in the 10 files.

40.  Then Empire Star and Zhang suddenly on 30 June issued the said summons for leave to put in the supplemental witness statementand second affirmation of Zhang Yu at the trial.

41.  I have already mentioned that Zhang Yu seeks to introduce in her supplemental witness statement10 groups of tables running up to 190 pages with a lot of contents in small print.  They also do not show all of the purported transactions, but only those of larger values. 

42.  These tables were in fact prepared by a Hong Kong accountant, Mr Poon, of MCF CPA Limited.  Mr Poon only started work in mid-May this year.  If the plaintiff should have considered it necessary to have these tables for use at the trial, they should have been prepared months ago and produced before the deadline for filing of witness statements. 

43.  Empire Star and Zhang made the excuse the officer in charge of the accounting department was on maternity leave and could only come back to assist Mr Poon in mid-May.  But there is no explanation of why other staff in the department could not have assisted Mr Poon.

44.  To make things worse, Mr Poon had finished his work at the end of May, but the summons was not issued until 30 June resulting in further delay.  There is no explanation for this further delay either. 

45.  If I should allow this summons, the plaintiff will be placed in a most difficult situation having to grapple with these tables and the copy documents in the 10 files, and to prepare for the trial at the same time.  I have already mentioned that the trial will commence on next Monday, 13 July.  I do not think it fair for me to allow the summons. 

46.  Mr Ling suggested that the trial may not take up the 18 days allotted, and perhaps commencement can be deferred for a few days for the plaintiff to consider the tables and documents, and also to check the originals if the plaintiff should decide to do so. 

47.  Though this amounts to moving a milestone day, I would not dismiss Mr Ling’s suggestion on this ground as the trial will still be conducted within the allotted time, but I do not think I can at this stage consider it safe to defer the commencement of the trial for a few days as there are more issues to be canvassed at the trial than at the time of setting down because the breaches of injunction are now incorporated as part of the cause of action. 

48.  Finally, there is an unless order made by consent fixing the time at 9.30 am on 20 April 2015 for all supplemental witness statements to be filed and served.  This summons cannot be allowed unless relief can be given from the sanction of the deadline in theunless order.  

49.  Mr Ling applied verbally this morning for relief from the sanction.  However, I consider it not in the interests of the administration of justice to allow the summons as it will be most unfair to the plaintiff.  I also do not consider that Empire Star or Zhanghas a good explanation for the failure to comply with the unless order.  I would highlight their delay until mid-May this year to compile the tables and their failure to take out the summons at the end of May or early June but waited until 30 June to do so.  Hence, I would not grant relief under Order 2 rule 5(1)of the Rules of the High Court.

50.  Mr Lui, counsel for the plaintiff, also relied on the cases of Liu Chen v Chan Poon Wing & Anor HCPI 779/2006 and dated 7 October 2009; Kinetics Medical Health Group Company Ltd & Ors v Dr Tse Ivan Cheong Yau HCA 1115/2010, dated 8 May 2013; Hongkong Changyi Real Estate Development v Neo China (Group) Infrastructure Investment Limited & Ors HCA 1576/2011 dated 25 February 2014.These cases show that belated discovery of documents that may prejudice the other side in the conduct of a trial or assessment of damages is not permitted.

51.  Mr Ling said that there was no request for discovery in those cases, but the plaintiff here made a request for specific discovery on 31 March. I have already said that this request was only a reminder of the discovery obligation of Empire Star and Zhang, and they should have discharged the obligation in mid-March.

52.  In any case, Empire Star and Zhang had failed to respond to the plaintiff’s request with a reasonable sense of dispatch bearing in mind the imminent trial date.  To allow them now to rely on the 190 pages of tables and several thousand pages of accounting documents at the trial will prejudice the plaintiff’s conduct of the trial. 

53.  I therefore dismiss this summons with a costs order nisi that Empire Star and Zhang do pay the plaintiff the costs of this summons to be taxed.

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1237 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 plaintiff to amend its Statement of Claim. The background of this action has been set out in a decision of Poon J dated 12 April 2013 which dismissed the 4th defendant’s application to discharge an injunction granted to the plaintiff by Deputy Judge Sakhrani and a decision of interrogatory appeals given by me on 19 December 2014. I am not going to repeat the background here.

2.  The plaintiff in this action seeks to set aside the sales of 60% of the shares of two Dalian companies to the 4th defendant. The two Dalian companies hold a piece of land in Dalian.  The plaintiff claims that the transfers of shares to the 4th defendant were dispositions of property with intent to defraud the plaintiff.  The plaintiff thus seeks to set aside the transfers under section 60 of the Conveyancing and Property Ordinance, Cap 219.

3.  The plaintiff also claims that the transfers were acts of a conspiracy to injure the plaintiff by putting the said shares of the Dalian companies beyond the plaintiff’s reach. 

4.  After the institution of this action, the plaintiff obtained an injunction from Deputy Judge Sakhrani enjoining the 4th defendant from disposing of the shares or assets of the two Dalian companies or to change their shareholders, directors or legal representative.

5.  Regrettably, the 4th defendant has breached the injunction by mortgaging the land and land use rights held by the two companies and the shares of one of them in return for some loans purportedly advanced to and applied for the benefit of the two companies.  There were also changes of directors of the two companies.  The 4th defendant admitted these breaches and had intimated in the beginning of 2014 that it would apply to vary the injunction so that the breaches could be legitimised retrospectively.  However, no such application has been made, even up to now.

6.  The plaintiff has sought to obtain discovery and apply interrogatories on the 4th defendant in relation to these breaches of injunction, but failed, as there is no pleading of the breaches in support of its claim.

7.  The plaintiff now applies to plead the injunction and the breaches of it in support of its claims.  The plaintiff says that the breaches of the injunction are, in fact, actions taken by the 4th defendant in pursuance of the conspiracy.  The purpose was to siphon away the asset worth of the two Dalian companies so as to deprive the value of the shares of these two companies in case the plaintiff should succeed in this action.

8.  The 4th defendant opposes this application on the ground that the breaches of injunction are post-writ allegations and constitute allegations of a fresh conspiracy taking place post-writ.

9.  Furthermore, Mr Ling for the 4th defendant, also referred me to Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271 at 32(h) to 321(b) and drew the analogy that the alleged conspiracy now the plaintiff seeks to plead is something that happened separately from what the plaintiff has alleged to have happened prior to the issuance of the writ of this action. 

10.  I agree with the plaintiff that these allegations that the plaintiff now seeks to plead are allegations of further steps of the conspiracy already pleaded.  It is the plaintiff’s case that these breaches of injunctions are steps taken in perpetration of the alleged conspiracy and they are not a separate conspiracy as in the case of Kuwait Oil Tanker.  I accept that one may regard these allegations as steps taken in perpetration of the conspiracy and they took place whilst the plaintiff was in the chase for the shares of the two companies which started from the plaintiff’s institution of the Australian litigation, followed by the Hong Kong action which merged in the judgment of Suffiad J and continued in the present action. 

11.  Hence, I take the view that these allegations are not averments of a fresh post-writ conspiracy and I allow the plaintiff’s application.

Ms Sara Tong, instructed by Winston Chu & Co, for the plaintiff

Mr C W Ling, instructed by Edwards Wildman Palmer, for the 4th defendant

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1237 OF 2012

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D E C I S I O N

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1.  There are four appeals against a decision of Registrar Lung made on 8 July 2014. Two appeals are launched by the plaintiff and two by the 4^th defendant.

2.  The decision was given on an application by the plaintiff for specific discovery of documents by the 4^th defendant and an application by the 4^th defendant for withdrawal of some interrogatories served by the plaintiff on the 4^th defendant.  The Registrar also extended time for the 4^th defendant to make its application.

BACKGROUND

3.  The background of this case has been summarised by Poon J in a decision dated 12 April 2013 which dismissed the 4^th defendant’s application to discharge an injunction granted to the plaintiff.   I do not wish to repeat the background here.

4.  The gist is that the plaintiff used to hold 90 per cent of the shares of a company (“GPB”) that held, through intermediaries, the shares of two companies (“the Dalian companies”) which in turn held a piece of land in Dalian, China.

5.  The plaintiff sold the GPB shares to a company, SBS for AUD46,500,760.  The sum was to be paid in instalments.  SBS got the GPB shares but only paid AUD500,760.  The plaintiff sued SBS in Australia and got judgment for AUD46 million.  SBS did not pay up and was wound up.  However, SBS had already sold its shares of the intermediaries that held the shares of the Dalian companies to the 1^st defendant herein.

6.  The plaintiff then sued SBS, the 1^st defendant and other relevant companies to set aside the sale of shares to the 1^st defendant.  The plaintiff obtained judgment on 25 March 2011.  However, two companies which together had held 60 per cent of the shares of the Dalian companies had sold these shares to the 4^th defendant in January 2010.  The plaintiff then brought this action to set aside the sales of these shares under section 60 of the Conveyancing and Properties Ordinance, Cap 219 on the ground that the sales are voidable as they were entered into with intent to defraud the plaintiff as a creditor and are part of a conspiracy and fraudulent scheme to put the Dalian land out of the plaintiff’s reach.

7.  Only the 4^th defendant defends this action.  The 4^th defendant’s defence is that the two sales of shares of the Dalian companies to it were bona fide transactions done for valuable consideration in good faith and without notice of any intent to defraud the plaintiff.  This defence is based on section 60(3) of the Conveyancing and Properties Ordinance. 

THE INJUNCTION

8.  The plaintiff obtained an ex parte injunction from Deputy Judge Sakhrani on 17 July 2012.  The injunction enjoined the 4^th defendant from the transferring or encumbering the shares of the Dalian companies or their assets, or to change the registered shareholders, directors or legal representatives of these two companies or registering such change.

BREACHES OF THE INJUNCTION

9.  It later transpired that the following matters had happened.  On 13 July 2012, the Dalian companies under the management of the 4^th defendant had borrowed RMB600 million from a Sheng Jing Bank (“SJB”). The loan was secured by a mortgage on the Dalian land held by the two Dalian companies.

10.  On 13 July 2012, the Dalian companies borrowed another sum of RMB100 million from SJB.  This loan is also secured by mortgages on the Dalian land and building works thereon.  Earlier on 12 July 2012, the 4^th defendant also charged the shares of one of the two Dalian companies to secure this loan.

11.  On 20 July 2012, Deputy Judge Sakhrani granted the injunction to the plaintiff.

12.  On 13 November 2012, the Dalian companies borrowed a further sum of RMB40 million from SJB which is also secured by a mortgage on the land and by guarantees by the 4^th defendant, one of the Dalian companies, and Mr Zhang Xi, a director of the 4^th defendant.  This was a breach of the injunction. 

13.  The 4^th defendant alleged that there were repayments to SJB between 30 January 2012 to 26 February 2013 totalling RMB83 million.

14.  On 22 February 2013, the Dalian companies again borrowed RMB650 million from SJB.  This loan was again secured by mortgages on the Dalian land and/or land use rights, and a mortgage on the shares of one of the two Dalian companies.  This is another breach of the injunction.

15.  Furthermore, the 4^th defendant had on 6 August 2012 appointed Zhang Xi and his sister Ms Zhang Yu as directors of the Dalian companies.  This is yet another breach of the injunction.

PURPORTED EXPLANATIONS OF THE BREACHES

16.  The 4^th defendant admitted all the breaches.  Zhang Xi said on its behalf that the first three loans were borrowed for the purposes of developing the Dalian land and they had been so used.  The last loan was a rollover of the first three loans. Regarding appointment of directors, it was because the previous directors, who were nominees of Zhang Xi, had resigned.  Hence, Zhang allowed himself and his sister to be appointed as directors of the companies as the companies needed directors to function.

17.  The 4^th defendant’s solicitors also advised the plaintiff’s solicitors in the beginning of this year that the 4^th defendant would apply to vary the injunction so as to legitimise these acts.  But no such application has been made till now.

THE APPLICATIONS

18.  The plaintiff on 11 March 2014 served 14 interrogatories on the 4^th defendant.  These are all in relation to the 4^th defendant’s breaches of the injunction.  The 4^th defendant issued a summons on 3 April 2014 seeking an order for the withdrawal of these interrogatories and for an extension of time for the issuance of this summons.

19.  The plaintiff also issued a summons on 17 March 2014 for specific discovery of documents by the 4^th defendant.  Those items of documents relevant to these appeals are items 1, 2, 3, 4, 6, 7 and 10 in the schedule of documents annexed to the summons for specific discovery.

THE DECISION OF THE REGISTRAR

20.  At the hearing before the Registrar, the plaintiff also took the point that the 4^th defendant was in contempt of court and had not purged its breaches of the injunction.  Hence, the plaintiff submitted that the Registrar should exercise his discretion not to hear the 4^th defendant on the applications (see Hadkinson v Hadkinson [1952] P 285 and para 52/0/14 of HKCP [2015] vol. 1).  The Registrar did not agree with the plaintiff.  He heard the summonses and gave a decision on 8 July 2014. 

21.  The Registrar in his decision ordered the 4^th defendant to make specific discovery of items 1, 2, 3, 4, 6 and 7 in the schedule of documents.  These documents relate to the matters pleaded in the 4^th defendant’s defence.  The Registrar also allowed the 4^th defendant’s application and ordered the withdrawal of the plaintiff’s interrogatories.  He also treated the plaintiff’s application for the Hadkinson order as a discrete issue and made no order as to costs for it.

THE APPEALS

22.  Both sides appealed.  The plaintiff appealed against the dismissal of specific discovery of item 10 of the schedule of documents and the order for withdrawal of its interrogatories. The documents described in item 10 of the schedule relate to the breaches of the injunction.

23.  The 4^th defendant appealed against the order for specific discovery of items 1, 2, 3, 4, 6 and 7 in the schedule and the costs order of no order as to costs for the Hadkinson application.  The documents sought in items 1, 2, 3, 4, 6 and 7 relate to the matters pleaded in the 4^th defendant’s defence.

THE DEFENCE OF THE 4^TH DEFENDANT

24.  It is necessary to go into the substance of the 4^th defendant’s defence in order to understand the plaintiff’s application for specific discovery of items 1, 2, 3, 4, 6 and 7 in the schedule.

25.  The 4^th defendant pleaded that it had entered into a framework agreement dated 14 December 2012 with a company in Jinan, Shandong Province (“the Jinan Company”) to purchase 60 per cent shares in each of the two Dalian companies.  The purchase price was RMB540 million.  This sum was mainly for use in paying off the debts and liabilities of the two Dalian companies which were said to be in excess of RMB510 million.  The RMB540 million was allegedly funded by three companies which are herein called the Xiamen Company, Chongqing Company, and Guangxi Company.

26.  Of this sum, RMB530 million had been paid to a law firm in Liaoning Province, the Liaoning East Asia Law Office (“LEA”).  A lawyer, Mr Ma of LEA applied this sum to pay off various debts of the two Dalian companies.  These debts included judgment debts as well as potential legal suits.

THE DOCUMENTS SOUGHT BY THE PLAINTIFF

27.  I now deal with the items of documents relevant to this appeal.  Item 1 is for invoices, demands, judgments, court orders, correspondence and all documents evidencing the alleged debts and liabilities owed by the two Dalian companies in December 2009 when the framework agreement was entered into.

28.  Items 2 and 3 overlap.  They relate to the payments of the debts of the Dalian companies.  Item 2 refers to all bank transfer forms, receipts, debit/credit notes and all accounting documents and records evidencing payments of the alleged debts from December 2009 to date.

29.  Item 3 refers to all bank transfer forms, receipts, debit/credit notes and all accounting documents and records evidencing the alleged payment of RMB430 million from the account of LEA from 21 December 2009 to 30 September 2013 as stated in the witness statement of the lawyer, Mr Ma.  Mr Ma said in his witness statement that he had been engaged by the Jinan Company to make repayments to the creditors of the Dalian companies.

30.  Item 4 refers to documents evidencing potential legal actions against the Dalian companies as at November 2009, which have been pleaded in schedule 2 of the Amended Defence of the 4^thdefendant.

31.  Items 6 and 7 relate to the funding of the RMB540 million for the 4^th defendant’s purchase of the 60 per cent shares of the Dalian companies.  Item 6 refers to all bank, financial and accounting records of the Xiamen, Chongqing, and Guangxi Companies showing the payments allegedly made by these entities in the total sum of RMB530 million to the account of LEA between December 2009 and February 2010 as pleaded in schedule 1 of the Amended Defence.

32.  Item 7 refers to all receipts and/or written acknowledgements issued to the 4^th defendant, the Xiamen, Chongqing, and Guangxi Companies, and/or other entities for the RMB530 million referred to in item 6 above.

33.  The plaintiff has filed a supporting affidavit by its solicitor, Mr Li Kit-wai for its application on 17 March 2014. The 4^th defendant filed the 4^th affirmation of Mr Zhang Xi on 13 May 2014 to oppose the application.  In addition, the 4^th defendant also placed before the Registrar the 5^th affirmation of Zhang at the hearing to supplement his 4^th affirmation.

34.  Zhang, in his 4^th and 5^th affirmations, made a number of assertions, including that the documents requested by the plaintiff in the six items above are irrelevant to the issues in this action.  But Mr Yan SC, leading Mr Ling for the 4^th defendant rightly chose not to argue this point.  They focused their arguments on the 4^th defendant’s possession, custody and power of the requested documents in the past and present.

POSSESSION, CUSTODY AND POWER OF THE DOCUMENTS

Item 1

35.  For the item 1 documents, Mr Li, on behalf of the plaintiff referred to the 4^th defendant’s Amended Defence.  It pleaded that the Dalian companies had debts and liabilities in excess of RMB510 million which rendered the deal not clinched at an undervalue.  But Mr Li said the 4^th defendant had failed to produce the underlying documents evidencing such debts save a due diligence report prepared by Deloitte dated 31 December 2009. Mr Li further said that the 4^th defendant, being the major shareholder of the Dalian companies, should have the possession, custody and power of the documents under this item.  These documents should also have been reviewed by the 4^th defendant and/or its advisers at the time of its acquisition of the shares of the Dalian companies and by Deloitte in the due diligence exercise.

36.  Mr Zhang, in opposition, said that the 4^th defendant never had the item 1 documents in its possession, custody or power.  He further explained that Deloitte did the due diligence report, not as the agent or on the instructions of the 4^th defendant, but for another company, Fulbond Holding Company Limited (“Fulbond”) which had been invited to consider purchasing the shares of the Dalian companies before the 4^th defendant was invited into the picture.  Hence, Deloitte did not owe any duty to the 4^th defendant to disclose to it any document that Deloitte had reviewed in the course of preparing the due diligence report.

37.  This assertion has factual support as Deloitte’s due diligence report did say that it was prepared pursuant to Fulbond’s engagement and it was submitted to the board of Fulbond.

38.  Mr Zhang further said that the 4^th defendant only held 60 per cent of the shares of the Dalian companies.  The other shareholder is a Qingdao Company which holds the other 40 per cent shares.  The Qingdao Company is a mainland company and unrelated to the 4^th defendant.  Hence, the 4^th defendant does not have sole control of the boards of the Dalian companies.

39.  It is a matter of fact that the Qingdao Company is the registered holder of 40 per cent of the shares of the Dalian companies, and one Mr Wong is directly appointed by this company to sit on the boards of the Dalian companies.  The plaintiff also does not allege that the 4^th defendant holds anything more than 60 per cent of the shares of the Dalian companies.

40.  Mr Zhang also said that the debts and liabilities in question were incurred prior to the 4^th defendant having acquired the 60 per cent shares of the Dalian companies.

41.  He also alleged that his sister, who is also a director of the Dalian companies, had between November 2013 and April 2014 requested Mr Wong of the Qingdao Company for these documents but Mr Wong said he could not locate them.

42.  Finally, Mr Zhang said that the 4^th defendant and the Jinan Company had a mutual understanding that the 4^th defendant would not interfere with phase 1 of the development on the Dalian land and the sale of that part of the development, or to bear any responsibility thereof.  Hence, the Jinan Company had not provided any document relating to phase 1 to the 4^th defendant.  The documents under item 1 relate to phase 1.  Hence, the 4^th defendant never had the possession, custody or power of them.

Item 2

43.  Mr Li referred to the witness statement of Mr Ma the lawyer, which stated that Mr Ma was responsible for arranging repayments of the debts of the Dalian companies to the tune of approximately RMB500 million.  The 4^th defendant has also disclosed a table of repayments and outstanding debts.  But the 4^th defendant had not produced any document to evidence the actual repayments and the source of funds for the alleged repayments.  Mr Li again relied on the fact that the 4^th defendant is a 60 per cent shareholder of the Dalian companies.

44.  Mr Zhang, in opposition, said that the table was supplied by Mr Ma who was responsible for arranging the repayments. He also said that the 4^th defendant did not have and never had the item 2 documents.  He also said that Mr Ma had represented the Jinan Company in negotiating for the framework agreement, and the framework agreement provided that the Jinan Company had the responsibility to repay the debts.  Mr Ma’s firm, LEA received the RMB530 million in such capacity.  It represented the Jinan Company and not the 4^th defendant in making the repayments.

45.  Regarding the provisions in the framework agreement that the Jinan Company had the responsibility to make the repayments, Mr Zhang is factually correct. The provisions are in clauses 4 and 5.2 of the framework agreement.

Item 3

46.  Regarding the documents in item 3, Mr Li referred to schedule 1 of the 4^th defendant’s Amended Defence.  It pleaded that RMB530 million had been paid out of the account of LEA from 21 December 2009 to 23 February 2010 for discharge of the debts of the Dalian companies.  But the 4^th defendant produced no document to prove such payments out of the account of LEA.  Mr Li further said that the 4^th defendant should have these documents in its possession, custody or power given that Mr Ma, who was responsible for making the repayments, was the lawyer of the Dalian companies, and the 4^th defendant was their major shareholder. 

47.  I have already referred to Mr Zhang’s ground of opposition above.  He also said that the documents under item 3 belonged to LEA or its client the Jinan Company and Mr Ma did not provide them to the 4^th defendant despite repeated request by Mr Zhang’s sister, Zhang Yu, and the 4^th defendant’s solicitor Mr Robert Yip between mid October 2013 and April 2014.  He also said that the 4^th defendant did not have and never had these documents in its possession, custody or power.

Item 4

48.  Mr Li referred to schedule 2 of the Amended Defence.  It pleaded that there were potential legal actions against the Dalian companies and these were their liabilities.  He said there must be written correspondence and/or demands from the claimants evidencing the dispute, and that such documents in the normal course of events should have been reviewed by the 4^th defendant and/or its advisers when the 4^th defendant acquired the shares of the two companies.  They should thus be in the possession, custody or power of the 4^th defendant.

49.  Mr Zhang said in opposition that these documents, if they should exist, would be related to potential legal actions regarding phase 1 of the development.  He further said that the 4^th defendant did not have and never had them in its possession, custody or power.

Item6

50.  Mr Li referred to the schedule of the Amended Defence which pleaded that RMB530 million out of the purchase price at RMB540 million had been paid by the Xiamen, Chongqing and Guangxi Companies to the account of LEA.  But the 4^th defendant had only provided the remittance slips which do not show the ultimate source of funds used by the three companies to pay LEA.

51.  He further said that such documents should be in the 4^th defendant’s possession, custody or power as the Xiamen and Chongqing Companies were owned and controlled by Mr Zhang.  He also said that Mr Weng Ming, who owned indirectly 70 per cent of the 4^th defendant, also had the majority beneficial interest (63 per cent) in the shares of the Guangxi Company.

52.  Mr Zhang’s only ground for disagreeing with Mr Li is that these three companies and the 4^th defendant are different legal personalities.

Item7

53.  Mr Li said that the RMB530 million was paid to LEA as part of the purchase price for the shares of the Dalian companies. There must therefore be receipts issued presumably by the Jinan Company acknowledging payment of these sums and the receipts should be in the possession, custody or power of the 4^th defendant being the purchaser and the entity on whose behalf the payments were made. 

54.  Mr Zhang replied that his sister, Zhang Yu and the 4^th defendant’s solicitor Mr Robert Yip had between October 2013 and April 2014 repeatedly asked Mr Ma for such documents, but Mr Ma had refused on the ground of commercial secrecy.  He further said that if the 4^th defendant should be able to obtain such documents, he would produce them as soon as possible. 

THE APPLICABLE LAW

55.  There is no dispute on the law of discovery.  The parties, however, argued on whether the documents in question are in the power of the 4^th defendant.  Miss Eu, leading Miss Tong for the plaintiff also stressed in reply submissions that the 4^th defendant should have and/or have had the documents in its custody.

56.  Custody is mere corporal holding and does not leave much room for legal arguments. The expression “power” has, however, necessitated some judicial analyses and pronouncements.  In the present case, the question is whether the 4^th defendant, being the 60 per cent shareholder of the two Dalian companies, has the documents in its power.  Lord Diplock said in Lonrho Ltd & Anor v Shell Petroleum Co Ltd & Anor [1980] 1 WLR 627 at 6535E to 636A:

“Your Lordships are not concerned with any other consequences of the relationship between parent and subsidiary companies than those which affect the duty of a parent company of a multi-national group, whose company structure is that of the Shell or B.P. groups, to give discovery of documents under RSC, Ord. 24; and this, as I have pointed out, depends upon the true construction of the word ‘power’ in the phrase ‘the documents which are or have been in his possession, custody or power.’

The phrase, as the Court of Appeal pointed out, looks to the present and the past, not to the future.  As a first stage in discovery, which is the stage with which the subsidiaries appeal is concerned, it requires a party to provide a list, identifying documents relating to any matter in question in the cause or matter in which discovery is ordered.  Identification of documents requires that they must be or have at one time been available to be looked by the person upon whom the duty lies to provide the list.  Such is the case when they are or have been in the possession or custody of that person; and in the context of the phrase ‘possession, custody or power’ the expression ‘power’ must, in my view, mean a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else.  Provided that the right is presently enforceable, the fact that for physical reasons it may not be possible for the person entitled to it to obtain immediate inspection would not prevent a document from being within his power; but in the absence of a presently enforceable right there is, in my view, nothing in Order 24 to compel a party to a cause or matter to take steps that will enable him to acquire one in the future.”

Mr Yan has also referred me to the statements of Denning LJ in Re Tecnion Investments Limited [1985] BCLC 434 at 437 g-h, and 439 c-e:

“…  In particular, it is not suggested and, in my view, rightly not suggested that the mere fact that a party to litigation is a director of a company and has, as a director, a right to inspect the documents of the company for the purposes of the company’s business makes those documents of the company documents in the power of the director for purposes of general discovery in litigation to which the director in his personal capacity happens to be a party.”

“The same point on one-man companies was canvassed in the Court of Appeal in the case of Lonrho v Shell Petroleum Co Ltd and there is one short paragraph in the judgment of Shaw LJ ([1980] QB 358 at 376, [1980] 2 WLR 367 at 378:

‘There are no doubt situations, such as existed in B v B … where on the established facts a company is so utterly subservient or subordinated to the will and the wishes of some other person (whether an individual or a parent company) that compliance with that other person’s demands can be regarded as assured. Each case much depends upon its own facts and also upon the nature, degree and context of the control it is sought to exercise.’

So the basic question is whether the other companies are under the unfettered control of the respondents so as to be their alter egos in accordance with the exception to the general rule as possibly envisaged by Lord Diplock.  …”

Both Lonrho v Shell and Tecnion have been applied in Hong Kong in Innovisions Limited v Chan Sing Chuk Charles & Ors [1992] 2 HKLR 306.

57.  Miss Eu also relied on an Australian case Schlumberger Holdings Ltdv Electromagnetic Geoservices ASA [2008] EWHC 56 and Linfa Pty Ltd v Citibank Ltd [1995] VR 643 which are cases where the parent company was ordered to make discovery of documents of its subsidiaries. These cases were rightly decided on the basis of the legal principles abovementioned. The observation of Mr Floyd J in para 21 of his judgment in Schlumberger should also be noted:

“21.     I accept that the mere fact that a party to a litigation may be able to obtain documents by seeking the consent of a third party will not on its own be sufficient to make that third party’s documents disclosable by the party to the litigation.  They are not within his present or past control precisely because it is conceivable that the third party may refuse to give consent.  But what happens where the evidence reveals that the party has already enjoyed, and continues to enjoy, the cooperation and consent of the third party to inspect his documents and take copies and has already produced a list of documents based on the consent that has been given and where there is no reason to suppose that that position may change?  Because that is the factual situation with which I am confronted here.  In my judgment, the evidence in this case sufficiently establishes that relevant documents are and have been within the control of the claimant.  I should emphasise that my decision does not turn in any way on the existence of a common corporate structure.  My decision depends on the fact that it appears from the evidence that a general consent has in fact been given to the claimant to search for documents properly disclosable in this litigation, subject only to the caveats contained in paragraph 4 of Mr Griffins’s witness statement concerning corporate acquisition documents and unreasonably onerous requests.”

58.  The reasoning of Hedigan J in Linfa has however been strongly disapproved of in another Australian decision of the Supreme Court of South Australia in Taylor v Santos Ltd [1998] SASC 6838.  The Full Court applied Lonrho v Shell.

59.  Another issue is the conclusiveness of Mr Zhang’s 4^th and 5^th affirmations where he said that the 4^th defendant did not have and never had the documents requested in its possession, custody or power.  Miss Eu referred me to Disclosure, 4^th edition by Matthews and Mallek at para 6.543:

“Whilst the affidavit of discovery was normally regarded as exclusive, it would not be so where it could be shown that there had been an insufficiency of discovery.  This insufficiency could be established from:

(a)    the pleadings, the list and affidavit of documents themselves or documents referred to therein;

(b)    any other source that constitutes an admission of the existence of a discoverable document not so far discovered;

(c)    an apparent exclusion of documents from discovery by a party under a misconception of the case.”

ANALYSES AND DECISIONS ON THE DISCOVERY APPEAL

Item 1

60.  The documents evidencing the debts shouldhave indeed come into existence before the 4^th defendantacquired the shares of the Dalian companies.  I cannot go behind Mr Zhang’s assertion that these debtswere the concerns of the Jinan Company and that his sister had asked Mr Wong, who represented the Qingdao Company for these documents but to no avail.  There is also insufficient material in Mr Li’s affidavitfor me to conclude that the Dalian companies were or are in the unfettered control of the 4^th defendant, or the 4^th defendant’salter egos.

61.  The Deloittedue diligence report was also not prepared on the instructions of or for the 4^th defendant.  It of course seems odd, as I have remarked in the course of the hearing, that the 4^th defendant,as the purchaser, would not have verified the debts before committing to the purchases.  But I cannot go behind Mr Zhang’s affirmations.

62.  In the premises, I have no basis to require the 4^th defendantto make discovery of the item 1 documents.  I therefore allow the 4^th defendant’s appeal in relation to discovery of the documents under item 1.

Items 2 and 3

63.  These two items overlap and are covered by more or less the same grounds. They deal with documents evidencing the repayment of the debts referred to in item 1 above.  Mr Zhang said that it was the responsibility of the Jinan Company to make the repayments, and Mr Ma’s firm represented the Jinan Company in discharging this task.

64.  The framework agreement does say that it is for the Jinan Company to make the repayments, but the 4^thdefendant also has the right to have the first-hand information to apprise itself of the status of the repayments of the debts.  Clauses 4 and 5.2 of the framework agreement, which Mr Zhang referred to and the 4^thdefendant relied on, provided that it was for the Jinan Company to make the repayments.  But clause 5.2 provided more than that.  The 4^thdefendant has pleaded this clause in para 12(7) of its Amended Defence as follows:

“(7) Empire Star was to pay the balance of the purchase price, namely, RMB440,000,000 on or before 30 December 2009. The Jinan Company must pay the sum to the court imposing the confiscation orders and creditors of DIEC and DIFEC, in order to repay their debts and to discharge the confiscation orders and the mortgage.  Empire Star was entitled to monitor the process of debt repayment by setting up an independent bank account and being provided with receipts and proofs by the Jinan Company.  …  (Clause 5.2)”

65.  It is unfortunate that Mr Zhang and those advising him had overlooked the latter part of clause 5.2 which has been fully and accurately pleaded in the Amended Defence.  If they should have read the whole of clause 5.2, they would have realised that the 4^th defendant has a presently enforceable right to obtain from the Jinan Company (and its agent LEA) the receipts and proofs of repayments obtained by the Jinan Company (or LEA on its behalf) in undertaking the process of debt repayment.

66.  Though Mr Li did not particularly mention clause 5.2 of the framework agreement in his supporting affidavit, had Mr Zhang and those advising him exercised due care when reading clauses 4 and 5.2 of the agreement, I see no reason why they would not have been aware of the 4^th defendant’s presently enforceable rights to obtain the documents in question.  The 4^th defendant, in refusing to make discovery of these documents, had thus laboured under a misconception of the effect of the framework agreement.  The 4^th defendant should exercise its presently enforceable right by referring the Jinan Company (and Mr Ma) to Clause 5.2 as a whole and ask the Jinan Company to perform this clause by providing or procuring LEA to provide to it the receipts and proofs of repayments.

67.  In the premises, I dismiss the 4^th defendant’s appeal against the discovery order for items 2 and 3.

Item 4

68.  For the documents evidencing the potential legal actions, Mr Zhang said that they related to phase 1 of a development which was the concern of the Jinan Company to the exclusion of the 4^th defendant and the 4^th defendant never had possession, custody or power of these documents.  I cannot go behind this statement.

69.  If the potential legal actions should have been paid off, the receipts and proofs of payments would be disclosable under items 2 and 3, otherwise the 4^th defendant would have no power to make discovery of them.

70.  In the premises I allow the 4^th defendant’s appeal against discovery of the item 4 documents. 

Item6

71.  Regarding the bank, financial and accounting records of the Xiamen and Chongqing Companies, Mr Zhang did not deny Mr Li’s assertion that he owned and controlled these two companies.  His only disagreement for the 4^th defendant to make discovery is because of the different legal personalities between the 4^th defendant and his two companies.

72.  Though Mr Zhang has already sold his 10 per cent interest in the 4^th defendant to another person, he is still a director of the 4^th defendant.  He has done his best to assist the 4^th defendant in defending this action.  He has also filed two witness statements for the 4^th defendant and will testify for it at the trial.  He has also made two affirmations to oppose this application of the plaintiff.

73.  Given all the goodwill and willingness on his part to assist the 4^th defendant in this action, I see no reason why he would not procure his two companies to provide the item 6 documents as these two companies are under his undisputed ownership and control.  His refusal to assist in disclosing these documents of his companies is obviously because of his misconception that different legal personalities is a bar.  It is not.  He has every liberty to assist and to continue to assist the 4^th defendant in this action (see Schlumberger as cited above).

74.  I therefore dismiss the 4^th defendant’s appeal against the discovery of the item 6 documents insofar as they are the documents of the Xiamen and Chongqing Companies. 

75.  Regarding the item 6 documents that belong to the Guangxi Company, Mr Weng Ming is the owner of 90 per cent of the 4^th defendant and 63 per cent of the Guangxi Company.  There is no information as to the identity or attitude of the 37 per cent owner of the Guangxi Company. The plaintiff has not demonstrated a presently enforceable right of the 4^th defendant to documents owned by Guangxi Company.

76.  I therefore allow the 4^th defendant’s appeal against the order for discovery of the item 6 documents insofar as they are the documents of the Guangxi Company.

Item7

77.  This item is for receipts and/or written acknowledgements issued by the Jinan Company or LEA on its behalf to the 4^th defendant or the three source of funds companies.  Mr Zhang’s opposition is that Mr Ma had refused to provide him these documents because of commercial secrecy.  However, I think Mr Zhang is again labouring under a misconception as to who should be approached for such documents. Mr Ma and/or the Jinan Company may only have copies as the originals should have been given to the 4^th defendant or to the Xiamen, Chongqing and Guangxi Companies.

78.  I therefore dismiss the appeal of item 7 to the extent of the documents that belong to the 4^th defendant and the Xiamen and Chongqing Companies and allow the rest of the appeal of this item.

79.  The plaintiff has also made some points purportedly in support of the contention that the 4^th defendant has an unfettered control over the two Dalian companies and that these two companies, the Jinan Company and the three source of funds companies had all consented to provide documents to the 4^th defendant for discovery purpose.  This is to rely on the Schlumberger decision.

80.  The Schlumberger decision can no doubt support my decision in relation to the item 6 documents above, but it cannot apply to these facts because they were raised only in the reply submissions before the Registrar.  The 4^th defendant was not given a chance to deal with them.  I therefore would not take these facts into consideration.

COST OF THE APPEAL ON SPECIFIC DISCOVERY

81.  In the light of the partial success and partial failure on both sides in this appeal, I would make a cost order nisi that there be no order as to costs for this appeal.

THE PLAINTIFF’S APPEAL AGAINST THE WITHDRAWAL OF INTERROGATORIES

82.  I should mention that the withdrawal of interrogatories is in tandem with the Registrar’s dismissal of discovery for the item 10 documents as these documents relate to the breaches of injunction.

83.  One more matter under the item 10 specific discovery application is the plaintiff’s request for clearer copies of certain documents supplied by the 4^th defendant.  Mr Zhang has said in his affirmations that he has already given the best possible copies and he could provide no better ones.  I cannot go behind this statement.  I therefore would not require the 4^th defendant to provide any better copy pursuant to that request. 

84.  The interrogatories seek information in respect of Zhang’s explanation in paragraphs 28 to 29 of his supplemental witness statement on the 4^th defendant’s breaches of injunction. They are summarised in the plaintiff’s written submissions as follows:

Interrogatory 1 - Information as to the purpose of the four loans.

Interrogatory 2 - Information as to the payment and whereabouts of the proceeds of the four loans.

Interrogatory 3 - Information as to the use of the proceeds of the four loans.

Interrogatory 4 - Information as to the purported application by the 4^th defendant for the alleged RMB800 million facility and the alleged grant/approval of such facility by SJB.

Interrogatory 5 - Information as to SJB’s alleged proposal for “renewal” and “restructuring” of the 2011 loan, the July 2012 loan and the November 2012 loan, and the alleged replacement by the 2013 loan.

Interrogatories 6, 7 and 8 - Information as to the security agreements entered into in respect of each of the four loans, which ones are still valid and whether any of them have been released/terminated.

Interrogatories 9 and 10 - Information as to any repayments of the four loans and the amounts outstanding under each of them.

Interrogatories 11 to 14 - Information as to the purpose of the 2012 share charge and the 2013 share charge and whether they are still valid or otherwise have been released/terminated.

85.  The crux of the matter is the relevance of the interrogatories to the issues in this action.  The 4^th defendant says that the breaches have no bearing on the issues, but the plaintiff argues otherwise.  The plaintiff says that the breaches are a continuation of the scheme to frustrate the judgments obtained by the plaintiff.  The breaches are to milk the cow by extracting the worth of the two Dalian companies by mortgaging the land they held and the shares of one of them.  These breaches are not pleaded, but can be pleaded by the plaintiff as a continuation of the fraudulent scheme.

86.  Ms Eu submitted that the fact that the breaches are a process of the milking which can prove that the sale of shares of the two Dalian companies to the 4^th defendant was a dishonest deal.

87.  I agree that the proving of milking may provide additional support to the plaintiff’s claim, but the conclusion of dishonesty in the sale of shares is not a must.  Hence, the proving of the existence or otherwise of milking may or may not prove the existence of dishonesty in the sale of shares.

88.  Furthermore, the breaches of the injunction are a discrete episode and can be made a relevant issue in the action by the plaintiff pleading it.  I do not agree that the plaintiff can rely on it at the trial without pleading it.  Otherwise the plaintiff may refer to anything at the trial which may impinge on the 4^th defendant’s integrity and rely on the same to impinge on the sale of the shares.  That will be unfair to the 4^th defendant as it may not be able to prepare for such unpleaded attacks.

89.  Ms Eu also referred to paragraphs 28 to 29 of Mr Zhang’s supplemental witness statement where he had tried to explain and justify the 4^th defendant’s breaches of the injunction. I think such explanation is useless.  The proper way is to purge the breaches and contempt by applying for a variation of the injunction, which the 4^th defendant had intimated in early 2014 that it would do but has not done so far.  The 4^th defendant cannot use Mr Zhang’s explanation to replace the proposed application for variation.  I also do not think that such explanation can purge the breaches.  The explanation is also irrelevant to the issues at the trial and Mr Zhang may not be allowed to adopt it in his oral evidence at the trial.

90.  In the premises, I dismiss the plaintiff’s appeal against the Registrar’s order for withdrawal of the interrogatories and his dismissal of specific discovery of the item 10 documents.

91.  I also make a costs order nisi that the plaintiff do pay the 4^th defendant the costs of this appeal to be taxed and paid forthwith, with certificate for two counsel.

THE 4^THDEFENDANT’S APPEAL AGAINST THE COSTS ORDER FOR THE HADKINSON APPLICATION

92.  The Hadkinson application was only raised for the first time in Ms Tong’s skeleton submissions for the plaintiff for use at hearing before the Registrar.  In any case, it was fully argued and dismissed by the Registrar by way of a preliminary ruling.

93.  The Registrar did not make any order of costs for this discrete matter.  He drew an analogy of this application with an application to strike out for delay.

94.  Mr Yan submitted that an application to strike out for delay is to remedy the prejudice to the defendant because of the impossibility of a fair trial as may be occasioned by inordinate delay.  Hence, even if the application should fail, the court may still deprive the successful respondent of its cost because of its delay. 

95.  However, the Hadkinson principle does not exist simply to punish a contemnor and punishment is for contempt proceedings.  Therefore the Registrar should not have penalised the 4^th defendant on costs for the Hadkinson issue because of the 4^th defendant’s breaches of the injunction.  It is open to the plaintiff to launch contempt proceedings to punish the 4^th defendant for those breaches.  Hence, Mr Yan submitted that the Registrar should have ordered costs in favour of the 4^th defendant as costs in this instance should follow the event.  I agree with Mr Yan’s reasoning.  I agree that the Registrar has erred in law in this instance by drawing the said analogy and made no order as to costs.

96.  I therefore allow the 4^th defendant’s appeal and order that the costs before the Registrar for the Hadkinson issue be to the 4^th defendant to be taxed and paid forthwith.  I also make a costs order nisi that the 4^th defendant should have the costs of this appeal to be taxed and paid forthwith with certificate for two counsel.

THE COSTS ORDER FOR STAY OF EXECUTION OF THE ORDER FOR DISCOVERY

97.  I now deal with the costs of the 4^th defendant’s application for stay of execution of the Registrar’s order for specific discovery pending the 4^th defendant’s appeal.

98.  The plaintiff did not agree that such costs should follow the event though the plaintiff eventually consented to the stay.  Before consent was given by the plaintiff, the 4^th defendant had already issued the summons.  The 4^th defendant’s explanation for issuing the summons is that the time given to the 4^th defendant to perform the order for discovery was short and for the sake of prudence it had to issue the summons at the time that it did.

99.  I agree with the 4^th defendant and I order that the costs of that application be in the cause of the appeal.  Since I have made no order as to costs for the appeal on specific discovery, that would also be the order for the application to stay.

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1237 OF 2012

_________________________

_________________________

__________________________

DECISION ON COSTS

__________________________

The adjourned hearing

1. The written Decision was delivered on 8 July after the hearing, leaving the issue of costs for determination today.

2. The factual background has been set out in the Decisiondelivered on 8 July 2014 at paragraphs 17-23.  It is unnecessary to rehearse it for the present purposes.

3. In the hearing of the summonses, the following issues had been dealt with:

a.  the Hadkinson Order application;

b.  the plaintiff’s summons for specific discovery;

c.  the 4^th defendant’s application for leave to submit its application to the Court for the plaintiff to withdraw its interrogatories out of time, which was granted by the Court and the 4^th defendant agreed to pay the plaintiff’s costs;

d.  the 4^th defendant’s summons for Zhang Xi’s 5^th affirmation to be served out of time for which the 4^th defendant had conceded to pay the costs of and occasioned by it; and

e.  the 4^th defendant’s summons for the plaintiff to withdraw its interrogatories.

4. I consider it would be fair to assess the costs by reference to each of the issues above.

The Court’s discretion on costs

5. It is trite that costs are a matter of discretion of the Court[1] to be exercised judicially by reference to the relevant authorities.  Order 62 rule 5 of the RHC must be the starting point, the relevant parts of which are:

5.   Special matters to be taken into account in exercising discretion

  (O. 62, r. 5)

(1)  The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account- (L.N. 152 of 2008)

(aa) the underlying objectives set out in Order 1A, rule 1; (L.N. 152 of 2008)

(e) the conduct of all the parties; (L.N. 152 of 2008)

(f) whether a party has succeeded on part of his case, even if he has not been wholly successful; and (L.N. 152 of 2008)

 (2) For the purpose of paragraph (1)(e), the conduct of the parties includes-

(a)  whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b)  the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c)  whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d) conduct before, as well as during, the proceedings. (L.N. 152 of 2008)

Parties’ proposals

6. The respective counsel who had appeared before this Court attend this hearing today.

7. The plaintiff proposes that the 4^th defendant should pay 80% of the plaintiff’s costs for the summons of specific discovery; the plaintiff should pay the 4^th defendant’s summons for interrogatories and the 4^th defendant should pay the plaintiff the costs of the summons for leave to file the 5^th affirmation of Zhang Xi and for leave to hear the interrogatories summons out of time, all with certificates for counsel to be assessed and paid forthwith.

8. The 4^th defendant proposes that the costs of the Hadkinson application should be given to the 4^th defendant, same as the costs for the interrogatories withdrawal application taken out by the 4^th defendant.  It agrees to pay 50% of the plaintiff’s costs for the specific discovery summons.

The Court’s approach on assessment of costs

9. The plaintiff complains that the 4^th defendant has failed to provide separate schedules of costs in respect of each of the summonses.  I consider that I am able to deal with the assessment despite no separate schedules are available.  I do not intend to adjourn this assessment for the 4^th defendant to submit the separate schedules of costs.

10. The plaintiff then argues that no separate costs order should be made for the Hadkinson order application because the plaintiff had not taken out a separate summons for it and that even if the plaintiff had not raised the issue, it was incumbent upon this Court to take that issue into account at the hearing since the 4^th defendant is in breach of the Injunction Order.  Ms. Tong refers to the relevant authorities stating that the successful party should have the costs of the application generally even though the court might not accept all the arguments of the successful party unless there are circumstances where the successful party had acted improperly or unreasonably in raising issues which ought not to have been raised[2], in which case the Court may not only deprive the successful party of his costs but may also order him to pay the whole or a part of the unsuccessful party’s costs.  See paragraph 39 of the Judgment of Wang Din Shin’s case.

11. The Court of Appeal in a recent decision in CWG v MH & Others (unreported, CACV80/2013, 30 June 2014) has decided that an application for a Hadkinson Order should be by way of a summons.  The plaintiff asked this Court to deal with this issue saying that it was not necessary to have a separate summons.  The Court had acceded to its request. It will not be fair then for it to say that because there had not been a summons for the order, it should not pay the costs even if it had failed in its application.  In any event, based upon the above authority, this Court does have the power to order the plaintiff to pay the costs of the Hadkinson order application which it had failed if in the circumstances it is fair to do so.  However, for the reasons that follow, I decide that the plaintiff does not have to pay the costs of the Hadkinson Order application to the 4^th defendant.

12. In the assessment of the costs for the Hadkinson Order application, it is not disputed that the 4^th defendant was in breach of the Injunction Order of the Court and up to date, it has not purged the breach. It is analogous to the situation where in an application for striking out of the plaintiff’s claim for inordinate and inexcusable delay on an application by the defendant and the Court, having found that the plaintiff was guilty of inordinate delay, however, refused to exercise its power to strike out the plaintiff’s claim.  In the circumstances, although the defendant had lost its application, the Court might disallow the plaintiff’s costs and ordered that each party should pay its own costs.  This was the decision of Judge G. Lam in Tsang Foo (also known as Fu) Keung and Key Kwong Development Ltd v Chu Jim Mi Jimmy, being sued as the personal representative of the estate of Yu Lai Ying deceased and the personal representative of the estate of Chu Kwok Chung & Others (unreported, HCA7140/1995,  G Lam J. 12 July 2013), in which the learned Judge said at paragraph 122 of his Decision: “Given that the plaintiffs were guilty of very lengthy and inexcusable delay, I would make an order nisi that, despite the dismissal of the defendants’ applications, each party is to bear their own costs.  A similar order was made at first instance in China Nonferrous Metals (Hong Kong) Finance Co Ltd (in liquidation) v South-east Asia Investment Holding Co Ltd [2012] 5 HKC 122.”

13. I shall follow the above example, taking into consideration of Order 62 rule 5(1)(e) RHC.

14. As to the specific discovery summons, I shall order the 4^th defendant to pay 65% of the plaintiff’s costs.  The 4^th defendant does not dispute the amount of $432,023 in the plaintiff’s schedule of costs, I shall order the 4^th defendant to pay a round-off figure of $280,000 to the plaintiff;

15. As to the interrogatory summons, which the plaintiff agrees to pay the 4^th defendant’s costs.  There is no separate costs schedule for this summons.  I have made reference to the plaintiff’s schedule of costs for this summons.  I consider that the costs for this application, taking into account of the overlapping costs in the specific discovery summons, should be $100,000 which I order the plaintiff to pay to the 4^th defendant, subject to set-off.

16. As to the costs for the 4^th defendant’s application for leave to serve the 5^th affirmation of Zhang Xi, the costs of which the 4^th defendant agrees to pay, the costs are assessed at $12,000, subject to set-off.

17. As to the costs for the 4^th defendant’s application to file and serve the summons for interrogatories out of time, the costs assessed are at $4,000, subject to set-off.

The order

18. I shall make an order in terms as follows:

a.  Each party shall bear its own costs for the Hadkinson order application;

b.  In terms of paragraph 14-17;

c.  The costs are to be set-off, the balance is to be paid within 14 days from the date hereof;

d.  The above costs shall cover all costs reserved in the meantime;

e.  Each party shall bear its own costs for today’s hearing.

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1237 OF 2012

_________________________

_________________________

_____________

D E C I S I O N

_____________

THE APPLICATIONS

1.  There are two applications before the Court:

a.   The plaintiff’s application for specific discovery pursuant to its summons filed on 17 March 2014; and

b.   The 4^th defendant’s application by summons filed on 3 April 2014 for an order that the plaintiff’s interrogatories served on the 4^th defendant on 11 March 2014  (the “Interrogatories”) be withdrawn, notwithstanding that the due date for such application for withdrawal had expired under the rules. 

2. These applications are contested.

3. Ms. S. Tong, counsel acts for the plaintiff.  Mr. Ling, counsel acts for the 4^th defendant.

THE HADKINSON ORDER

4. Ms. Tong has raised a preliminary issue that the 4^th defendant should not be heard because it is in contempt of the Court in that it is in breach of the Injunction Orders granted by the court.  The 4^th defendant has not purged its breaches. It is a matter of the court’s discretion.  The 4^th defendant opposes this application.

5. Mr. Ling submits that since the 4^th defendant is in a defensive role, this rule or discretion is not applicable and has never been applied.  In this case, the 4^th defendant is defending the plaintiff’s application.  According to the modern approach, the starting point for the court’s exercising of discretion is that refusing to hear a party, even a contemnor, is a strong thing only to be justified by grave considerations of public policy.  It is a step which a court will only take when the contempt itself impedes the course of justice and there is no other effective means of securing his compliance.[1]

6. Ms. Tong relies upon X Ltd v Morgan-Grampion (Publishers) Ltd [1991] 1 AC 1 (HL) at p.46 per Lord Bridge to found her argument that the court has the discretion not to hear a party who is in contempt of court, for his own benefit, unless and until the contempt has been purged.  At 46E-F, Lord Bridge of Harwich cited Denning LJ in Hadkinson v Hadkinson p.258 as follows:

“……Apply this principle, I am of opinion that the fact that a party to a cause has disobeyed an order of the court is not of itself a bar to his being heard, but if his disobedience is such that, so long as it continues, it impedes the course of justice in the cause, by making it more difficult for the court to ascertain the truth or to enforce the orders which it may make, then the court may in its discretion refuse to hear him until the impediment is removed or good reason is shown why it should not be removed.” (emphasis added)

7. It can be seen at once that the court is concerned with its course of justice being or to be impeded.  It is on this basis that the court should exercise its discretion to refuse to hear the party in order to remove this impediment.

8. In the case of Arrow Nominees Inc and Another v Blackledge and Others [2000] 2 BCLC 167, the Court of Appeal held that the object of the rules as to discovery was to secure the fair trial of the action in accordance with the due process of the court and accordingly a party was not to be deprived of his right to a proper trial as a penalty for disobedience of those rules, even if such disobedience amounted to contempt for or defiance of the court, if that object was ultimately secured.  But where a litigant’s conduct amounted to such an abuse of the process of the court as to render further proceedings unsatisfactory and to prevent the court from doing justice, the court was entitled and bound to refuse to allow that litigant to take further part in the proceedings and, where appropriate, to determine the proceedings against him.[2]

9. The nature of the order sought by the plaintiff is restrictive of the 4^th defendant’s constitutional right of access to court under Article 35 of the Basic Law and Article 10 of Bill of Rights.  The Court of Final Appeal in Ng Yat Chi v Max Share Limited & Others (2005) 8 HKCFAR 1 had extensive discussion on this issue.  This is a guaranteed right under the Basic Law.  However, it is not an absolute right and can be taken away if it is an abuse of the court proceedings, subject to the tests as provided in the judgment.[3]  PJ Ribeiro in the judgment at paragraph 73 said:

“…In relation to BL 35 and BOR 10, it has firmly been established in the jurisprudence of the European Court of Human Rights in relation to the closely analogous right of access under Art 6(1) of the European Human Rights Convention, that such right is by its nature not absolute, but may be subject to limitations. Such limitations are valid if they pursue a legitimate aim, are proportionate to that aim and are not such as to impair the very essence of the right: Ashingdane v UK [1985] 7 EHRR 528 at §57; Tolstoy-Miloslavsky v United Kingdom (1995) 20 EHRR 442 at §59.”

10. The Court of Appeal in TCWF v LKK [2012] HKFLR 500 had dealt with the petitioner taking out the application asking for leave to disclose the documents for enforcement proceedings outside the jurisdiction and at the same time seeking a Hadkinson order against the respondent regarding the proceeding.  The Court of Appeal held that it was a matter of discretion and it said: “Bearing in mind the constitutional right to a fair hearing, in the present circumstances, we regard it as disproportionate to bar the respondent from making any submissions notwithstanding his partial non-compliance with the order of Saunders J..” 502F.

11. In CWG v MH & Others (unreported, CACV80/2013, CACV83/2013 & HCMP264/2014, 3 March 2014) the Court of Appeal heard an application for a Hadkinson order against the husband’s and the mother’s appeals on the grounds that the husband had failed to comply with an Interim Order of payments in full and the mother had failed to comply with the order for discovery.  In exercising its discretion having considering all the relevant factors, the Court of Appeal upheld the Hadkinson order granted by the Deputy Judge.  This is a case where the applicants were the contemnors.

12. Similar to TCWF case, the plaintiff is now seeking an order from this Court to compel the 4^th defendant to disclose the documents as set out in the summons and to answer its questions, the purpose of which must be to advance the plaintiff’s case on the one hand, and on the other asks the Court to deny the 4^th defendant’s right to be heard in this hearing.  Mr. Ling is quite right to point out that the 4^th defendant is now responding to the plaintiff’s summons to attend this hearing.  There is no evidence that the 4^th defendant’s alleged contempt would impede the course of the orders that the plaintiff asks this Court to make against it.  Quite the contrary, if the 4^th defendant is debarred from being heard, the Court will not be assisted by its counsel to make submissions on its behalf for the Court to come to a fair conclusion.

13. The Court of Final Appeal in Poon Hau Kei v Hsin Chong Construction Company Limited & Another (2004)HKCFAR 148 at §21 referred to “Bank of America v  Chai Yen [1980] 1 WLR 350 at p.353 D, Lord Lane, delivering the advice of the Privy Council, said “the essence of any rule of procedure must be fairness”. The same is true of any rule of practice.”  CJ.  Li in Secretary of Security v Sakthevel Prabakar (2004) 7 HKCFAR 187 at §43, said: “One is concerned with procedural fairness and there is of course no universal set of standards which are applicable to all situations.  What are the appropriate standards of fairness depends on an examination of all aspects relating to the decision in question, including its context and its nature and subject matter: R v Home Secretary, ex p Doody [1994] 1 AC 531 at p.560D-G.” 

14. In the discussion of procedural fairness, the Court of Appeal in ST v Betty Kwan & Others (unreported,CACV115/2013, 26 June 2014 where the Chief Judge at paragraph 25 of the Judgment highlighted “effective representations” being the important requirement of fairness and he cited R (West) v Parole Board [2005] 1 WLR 350 “… (5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result…”

15. It is one thing for the court to exercise its power to prevent abuse of its process where the contemnor makes an application to court to advance its interest in the proceedings, but quite another where it is summoned before the court but is disallowed to defend itself.  We should never lose sight of the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties under O.1A, r. 2(2) of RHC.

16. In the circumstances, I consider that the plaintiff is unable to pass the proportionality test as laid down in Ng Yat Chi and I exercise my discretion to hear the 4^th defendant on the plaintiff’s application for specific discovery and on interrogatories.

THE FACTUAL BACKGROUND

17. I have had the benefit of reading Poon J’s judgment in the previous hearing on the discharge of the injunction delivered on 12 April 2013.  For the purpose of this Decision, I shall state the facts of this matter as brief as the applications require.

18. As the preamble to the background, this is the plaintiff’s exercise to catch the defendants in a hide and seek game in order to obtain the fruit of its judgment granted by the Australian court in 2005 against the buyer defendant in a sale and purchase of a piece of land in Dalian in China, together with the development of the project whereby the defendant as the purchaser had failed to pay to the plaintiff the installment payments and was therefore in breach of the contract.  Having obtained the judgment, the plaintiff then discovered that the interests in the land and the project were transferred to Lucky Dragon, the 1^st defendant.  The plaintiff took out an action against Lucky Dragon, only to find subsequently that it had, by two agreements, assigned the assets of its subsidiaries to Empire Star, the 4^th defendant in this action.

19. The plaintiff was the dominating owner (60%) of a valuable piece of land in Dalian and the land development project thereon (the “Dalian Land”) through a number of its subsidiaries, the 2^nd defendant and the 3^rd defendant being two of them.  The other subsidiaries are Golden Pebble Beach Development Ltd (“GPB”), Dalian Jinshitan Baotong Real Estate Development Co Ltd (“Dalian JV Company”), Dalian International Foreigners’ Entertainment Club Co Ltd (“DIFEC”) and Dalian International Entertainment Co Ltd (“DIEC”).  DIFEC and DIEC are the holders of the Dalian Land.

20. By an agreement dated 26 June 1997 (“the SBS Agreement”), the plaintiff agreed to sell the shares of its subsidiaries to Sino Business Services Proprietary Limited (“SBS”) for AUS$46,500,760.00, payable in tranches as stipulated therein.  SBS had nominated its subsidiaries to take over the plaintiff’s shares.  However, SBS had failed to pay the tranches as agreed. The plaintiff instituted legal proceedings in Victoria, Australia to seek damages for breach of contract or alternatively the return of the shares and they obtained judgment against SBS.

21. However, before the judgment was granted by the Australian Court, without the knowledge of the plaintiff, SBS had procured GPB, its subsidiary to enter into an agreement with the 1^st defendant (“the Lucky Dragon Agreement”) under which all the equity interests held by GPB, the Dalian JV Company, the 2^nd defendant and the 3^rd defendant were all transferred to the 1^st defendant.  The plaintiff might then obtain an empty judgment.

22. The plaintiff then commenced another action (HCA1294/2005) against SBS and its subsidiaries and the 1^st defendant for defraud and to set aside the Lucky Dragon Agreement.  It succeeded to obtain a judgment from the court after trial.  However, in the course of enforcing the judgment, the plaintiff discovered that sometime in 2010, the 2nd and 3rd defendants had, by two agreements, already transferred their equity interest in DIFEC and DIEC to the 4th defendant for the consideration of HK$48 million and HK$36 million respectively (“the Empire Star Agreements”).

23. The plaintiff complained that the Empire Star Agreements effectively stripped the 2nd and 3rd defendants of all its valuable assets.  The plaintiff is again left with an empty judgment.  Hence, the plaintiff took out this action for injunction against the defendants.

THE PARTIES’ PLEADED CASE

24. The plaintiff’s case relies upon:

a.  the facts found by the court before Mr. Justice Suffiad that the transfer of the beneficial interest in the Dalian Land by GPB to Lucky Dragon was not a genuine transaction, but rather was a scheme to channel off the entire interests and assets of Dalian Land to Lucky Dragon in order to put them beyond the reach of the plaintiff;[4]

b.  the Empire Star Agreements by which Lucky Dragon transferred the interest and assets of the Dalian Land through its subsidiaries to the 4^th defendant was a fraud to defraud the plaintiff as the creditor, which is evidenced by Lucky Dragon having knowledge of such a scheme[5] and the 4^th defendant having actual or constructive notice of such a fraudulent scheme by reference to the circumstances as pleaded in paragraphs 54, 55 and 56 of the Statement of Claim, in particular for the present purposes: share prices at gross undervalue, no evidence of payment of share price by the 4^th defendant for the shares, due diligence would enable the 4^th defendant to have knowledge of the litigation between the plaintiff and Lucky Dragon in Hong Kong; no evidence of obtaining independent legal advice prior to the shares agreements; and

c.   by virtue of section 60 of the Conveyancing and Properties Ordinance, Cap.219, the Empire Star Agreements should be set aside.

25. The 4^th defendant’s defences to the plaintiff’s pleaded case above are:

a.  no admission to Lucky Dragon’s scheme, but only admitted the transfer of the equitable interest of the shares of Luck Dragon’s subsidiaries to it for the consideration of HK48 million and $36 million[6] respectively;

b.  denial of knowledge of Lucky Dragon’s intention to defraud the plaintiff and denial of purchase of the shares under the Empire Star Agreements at gross undervalue;[7]

c.   the transactions were for valuable consideration and in good faith, relying upon section 60(3) of the Conveyancing and Properties Ordinance, Cap.219; in particular, the 4^th defendant pleaded it had no knowledge of the judgment against Lucky Dragon before the end of March 2011[8]; upon signing the Framework Agreement, the 4^th defendant commissioned for itself or for Fulbond due diligence studies and a valuation report on the Dalian Project, ascertaining its legal and commercial viability[9]; pursuant to the Framework Agreement, the 4^th defendant arranged for the transfer of RMB530 million to Jinan Company for the purchase of the shares of DIEC and DIFEC[10]; the share price was not undervalued, taking into account of the debts and liabilities of DIEC and DIFEC[11].

THE PLAINTIFF’S SUMMONS FOR SPECIFIC DISCOVERY

26. The plaintiff has altogether 11 items of documents to be discovered from the 4^th defendant.  They are long descriptions as set out in the schedule attached to the plaintiff’s summons.  I do not intend to set them out in full in this Decision.  I propose simply to make reference to the items here.  As pointed out by Mr. Ling, although the margin of the summons stated that the application is made under Order 24 rule 7, some of the documents requested are referred to in the pleadings and the witness statements, which should be covered under Order 24 rule 10 instead.  This is, however, a technical defect, which Mr. Ling has not taken, rightly in my view, seriously as it will not prejudice the 4^th defendant’s position in its opposition to the application.  I shall deal with the summons accordingly.

27. Reference has been made to the 5^th affidavit of Mr. Li Kit Wai, the solicitor acting for the plaintiff, in support of the plaintiff’s application and the 4^th affirmation of Mr. Zhang Xi for the 4^th defendant in opposition.

28. On the first day of the hearing on 24 June 2014, the 4^th defendant submitted the 5^th affirmation of Zhang Xi, in which he affirmed that he did not have or ever had the documents under other categories not covered by his 4^th affirmation.  Ms. Tong raised no objection to it being adduced and considered by this Court in this hearing and the 4^th defendant agreed to give costs of and occasioned by its late applications and the 5^th affirmation.  With Zhang Xi’s 4^th and 5^th affirmations, the 4^th defendant now says that it does not have or ever had the possession, custody or power over the documents sought by the plaintiff.

29. Ms. Tong has summarized the contents of the items in her written submission as follows:

“(1) Items 1-3: The Alleged debts of DIEC and DIFEC (approx. RMB 510 million) at the time the subject transaction was entered into in December 2009, and the alleged repayments of such debts (RMB 430 million) subsequently using the purported consideration paid by D4 under the Framework Agreement.

(2) Item 4: The alleged “potential legal actions” which DIEC and DIFEC faced at the time of the subject transaction.

(3) Item 5: The alleged application made to the Dalian authorities for the cancellation/revocation of the Jinan Company’s registration as 60% shareholder of DIEC and DIFEC.

(4) Items 6-7: The alleged payment of the RMB530 million by the Xiamen Company, the Chongqing Company and the Guangxi Company as the consideration under the Framework Agreement, and the source of such funds.

(5) Item 8-9: The alleged beneficial interest of Zhang in the Chongqing Company and the Guangxi Company and Mr. Weng in the Guangxi Company.

(6) Item 10: D4’s breach of the Injunction Order.

(7)  Item 11: Originals of various documents disclosed by the parties herein.” 

Discussion on the relevant legal authorities

30. Respective counsel have made submissions on the relevant legal principles for my consideration.

31. The 4^th defendant now says that in the 4^thand 5^th affirmations of Zhang Xi, the 4^th defendant does not have and has never been given possession, custody or power over the documents.  The 4^th defendant relies upon In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999, 24 October 2003)that the applicant has to prove by affidavit evidence that the documents are relevant; that the other party has or had in its possession, custody or power of the documents; that the other party may oppose that the discovery is unnecessary;[12] that the court may grant the order upon a prima facie case as to relevance and possession and being satisfied that discovery is necessary[13]; that the affidavit in answer is conclusive at the interlocutory stage unless it is shown to be insufficient by its contents or by admissions made in the proceedings, in which event, a further affidavit may be ordered.[14]

32. Miss Tong has referred me to the case of Lee Sai Nam v Li Shu Chung & Ors (unreported, HCA 1711/2009, 10 January 2014), and submits that an affidavit is not regarded as conclusive where it can be shown that there has been insufficiency of discovery, demonstrated by (i) the pleadings, the list and affidavit of documents themselves, or documents referred to therein; (ii) any other source that constitutes an admission of the existence of a discoverable document not so far discovered; (iii) an apparent exclusion of documents from discovery by a party under a misconception of the case (see Lee Sai Namsupra at §§55-57).  See also §24/7/1 of HKCP2014, Vol.1.

33. Ms. Tong has also referred me to various documents in the bundle of documents, which show that of the four directors of DIEC and DIFEC, three were nominated by the 4^th defendant.[15]  Recently, two of the nominated directors of DIEC and DIFEC had been replaced by Zhang Xi and his sister, both too, are the 4^th defendant’s nominees.  Also, from the lists of documents filed by the 4^th defendant, it can be seen that many of the documents belonging to the business of DIEC and DIFEC were produced by the 4^th defendant, which demonstrates, as submitted by Ms. Tong, either the 4^th defendant has the power to all the documents of DIEC and DIFEC or alternatively DIEC and DIFEC must have given general consent to the 4^th defendant to inspect their documents.  By virtue of the decision in Schlumberger Holdings Limited (a company incorporated in the British Virgin Islands) v Electromagnetic Geoservices as (a company incorporated in Norway) [2008] EWHC 56 where Mr. Justice Floyd at paragraph 21 stated:

“I accept that the mere fact that a party to a litigation may be able to obtain documents by seeking the consent of a third party will not on its own be sufficient to make that third party’s documents disclosable by the party to the litigation. They are not within the present or past control precisely because it is conceivable that the third party may refuse to give consent. But what happens where the evidence reveals that the party has already enjoyed, and continues to enjoy, the co-operation and consent of the third party to inspect his documents and takes copies and has already produced a list of documents based on the consent that has been given and where there is no reason to suppose that that position may change? Because that is the factual situation with which I am confronted here. In my judgment, the evidence in this case sufficiently establishes that relevant documents are and have been within the control of the claimant. I should emphasize that my decision does not turn in any way on the existence of a common corporate structure. My decision depends on the fact that it appears from the evidence that a general consent has in fact been given to the claimant to search for documents properly disclosable in this litigation…”

Mr. Ling is challenging whether the plaintiff has the evidence that DIEC and DIFEC had given general consent to the 4^th defendant in respect of all their documents. However, given the nature of the documents belonging to DIEC and DIFEC disclosed by the 4^th defendant in its explanation on the breach of the Injunction, it can be shown that the corporate documents such as the accounts of the companies, the security documents and guarantees were disclosed by the 4^th defendant.

On the issue of whether the 4^th defendant has “power” over the corporate documents of DIEC and DIFEC on the basis that the 4^th defendant has nominated directors in the board of those companies and under Hong Kong law, the directors would, by virtue of their office, have an unfettered right to inspect the companies’ documents so long as it is not exercised for an improper purpose, Mr. Ling has submitted his 4^th written submissions with his 5^th list of authorities on this issue. He refers to B v B (Matrimonial Proceedings: Discovery) [1978] Fam 181 at 188F where Dunn J. held that a director owes fiduciary duties to the company and to the shareholders.  He is not allowed to abuse his position as a director to inspect the company’s documents or to take copies of them “for his own purposes unconnected with the business of the company.” 188 F. It is in this context that the company’s documents are not within his power and the learned Judge said: “It is a question of fact in each case whether or not a director has such an enforceable right; much will depend upon the structure of the company.” 188G.  It cannot be argued that a director must not abuse his position as a director of the company.  The significant issue for discussion for this application is that the directors nominated by the 4^th defendant are not required to abuse their position as directors of the companies.  They are to obtain the companies’ documents to show that the sale of the companies’ shares to the 4^th defendant were, as alleged by the 4^th defendant in its defence, genuine transactions at an arm’s length for valuable consideration under section 60 (3) of the Conveyancing and Properties Ordinance, Cap. 219. DIEC and DIFEC have the right to oppose the directors’ right of inspection of their corporate documents if they have the reasons to suspect that the directors are abusing their positions as directors.  But this is a matter for the court to determine; such issue will not, in my view, affect the directors’ statutory rights under section 375 of the Companies Ordinance, Cap. 622.

34. Mr. Ling has also referred to Re Neath Rugby Ltd (No.2) [2009] BCLC 427 and at 436, Stanley Burnton LJ held at paragraph 42 of his judgment: “In my judgment, the fact that a director of a company has been nominated to that office by a shareholder does not, by itself, impose any duty on the director owed to his nominator.  The director may owe duties to his nominator if he is an employee or officer of the nominator, or by reason of a formal or informal agreement with his nominator, but such duties do not arise out of his nomination, but out of a separate agreement or office.”  This is in support of his proposition that the nominator, whilst subject to the usual discovery obligations, can have no power (in the discovery sense) over the company’s documents.[16]  It should be noted that in this authority, the plaintiff was claiming against the defendant, its nominee, as a director of one of the local rugby clubs for breaching his duties as the nominee under an agreement with the plaintiff in that the defendant had put his personal interest before the plaintiff’s interest. It should also be borne in mind that the defendant had interest in the local rugby club in question.  Here, the Court of Appeal was referring to the general principle that the nomination itself does not create any duty between the nominee to his nominator.  Such duty is to be determined by their agreement.  In the present case, it is obvious that the nominees of the 4^th defendant as directors of DIEC and DIFEC have no interest whatsoever in the companies themselves.  They appear to be mere agents for the 4^th defendant, acting in accordance with the instructions of the 4^th defendant in the operation of the companies.  It will be for the nominees, ie Mr. Zhang and his sister as directors of the companies to tell the court the agreement between themselves and the 4^th defendant.  For the present application, there is no such evidence before the court.

35. Ms. Tong also relies upon another Australian case Linfa PTY Ltd v Citibank Ltd [1995] V.R.643, in which the court held that the court may order a company to give discovery of documents in the possession of its subsidiary either because of the company’s commercial-corporate power over its subsidiary or in the exercise by the court of general power under the rules.  Whether a court would order a company to discover documents of its subsidiary under such circumstances would depend upon the facts of the particular case.  The facts of this case were that the subsidiaries were not operating at separate legal entities.  They were both staffed by the defendant’s staff and were not operating on their own behalf but on behalf of the defendant.  The court therefore held that the defendant had possession, power and control over the relevant documents physically within the possession of the subsidiaries.  However, Mr. Ling points out that the Australian case may have peculiar features like commercial-corporate power, under the Australian law, which distinguishes it from this case.  I agree that the legal principle as set out in this case should be treated with caution. However, he is unable to assist me by pointing out the relevant difference between the Australian law and the Hong Kong law.  Suffice it to say for the present purpose, there is no evidence that this case bears similarity of facts as Linfa.

36. Mr. Ling relies upon the authority of Innovations Ltd. v Chan Sing-chuk & Others [1992] 2 HKLRD 306 where the Court adopted the decision of Lord Diplock in Lonrho Ltd v Shall Petroleum [1980] 1 WLR 627 that “the expression of power means a presently enforceable legal right to obtain from whoever actually holds the documents inspection of it without the need to obtain the consent of anyone else.”  at 311(35) (emphasis added).

37. A presently enforceable right means the legal entitlement, which can be enforced by legal proceedings, if necessary, against the holder or the controller of the documents.  An example of this will be a shareholder’s statutory right under section 152FA of the Companies Ordinance, Cap.32 to inspect the company’s documents provided that the application is made in good faith and the inspection applied for is for a proper purpose.[17]  Mr. Ling agrees that the legal principles apply to the new Companies Ordinance with the same statutory provision.  Another example is a director’s right under section 375 of the Companies Ordinance, Cap. 622.

38. With the above authorities in mind, I shall now deal with each of the items as set out in the plaintiff’s summons.

Item 1

39. The request is directed at documents showing debts owed by DIEC and DIFEC at the time of the signing of the Framework Agreement.  The 4^th defendant disputes that there is no evidence that it has the unfettered control over the documents (“the issue of power”).  However, the 4^th defendant admits that it had nominated three directors to the board of DIEC and DIFEC, it is obvious that the 4^th defendant has power over the documents through its nominee directors in DIFEC and DIEC, bearing in mind that the nominated directors have no interest in the companies.  Alternatively, the 4^th defendant must have the legal enforceable right as a shareholder of DIEC and DIFEC to inspect those documents under section 152FA of Companies Ordinance, Cap. 32 (section 740 under the new Companies Ordinance, Cap. 622 with the same provision).  See discussions on B & B and Re Neath Rugby Ltd (No 2).

40. Although the 4^th defendant has on affirmation stating that it does not have and has never had possession, custody or power over the documents, on the face of the evidence available, his affirmation is simply not true.  They are the documents in support of the 4^th defendant’s pleaded case as shown above.  The documents are clearly relevant to the issues in dispute and it is necessary to have the documents in order to have a fair trial.

41. The 4^th defendant then submits that disclosure of the underlying documents is unnecessary and oppressive, given their likely volume, and the utter absence of any evidence to counter the relevant findings in the Deloitte Report, which is annexed to the Defence[18]. It is uncertain of the status of this annexure as parties agree that no leave has been obtained for it as an expert report.  However, on the cover of the report, the Accountants’ firm has stated it expressly that it was compiled for its client and should not be used by any third party, for which it has no responsibility.  It has also warned the user of the report that due to the constraints of time and scope of work, they were not given audited materials and for this reason, the accountants were unable to verify the truthfulness of such materials and they do not guarantee the reliability of the materials and for which the Accountants’ firm does not take the responsibility.  The same reservations appear in the 工作範圍和基礎- 財務盡職調查 and 德勤計算的負債金額與法律顧問認定的負債金額差異説明。[19]  It is unfair for the 4^th defendant to ask this Court to order the plaintiff to rely upon this report whereas its accountants have stated that the materials may not be reliable for its own use.  It cannot be denied that the scope of the documents is wide and large, though they should be confined to the stated purpose.  However, given the circumstances of this matter and its historical background, it is understandable that the plaintiff has no faith in the transactions as genuine and made in good faith as alleged by the 4^th defendant, the 1^st defendant having been found by the court as dishonest and fraudulent, harming the plaintiff.  It cannot be said to be oppressive.  The 4^th defendant, in the circumstances and for the fair trial, has to make a further affidavit to disclose those documents.

Item 2

42. It requests discovery of documents regarding the repayment of debts owed by DIFEC and DIEC.  The issue of power over the documents as the objection raised by the 4^th defendant must fail on the analysis under item 1.  Mr. Ling also submits that “sources of funds used for such repayment” are too wide for practicable purpose.  However, Mr. Ling agrees that it is the 4^th defendant’s pleaded case that the 4^th defendant had, through Xiamen Company, Chongqing Company and Guanxi Company paid off the debts of DIEC and DIFEC.  Upon enquiry by this Court, Mr. Ling also accepts that the documents recording the repayments of the debts did not contain the information as to who paid the money to those companies.  As this issue is in dispute and must be relevant for the trial, they should be disclosed at this stage or the plaintiff will be taken by surprise.  For the same reasons as above, I attach no weight to the 4^th defendant’s 4^th affirmation.  These documents are necessary for a fair trial between the parties.  The 4^th defendant should make an affidavit disclosing the documents under this item.

Item 3

43. They are the documents regarding the alleged payment of RMB430 million from the account of Liaoning East Asia Law Offices.  The 4^th defendant’s objection on the ground of no power fails.  As submitted by Mr. Ling, this figure emanates from Exhibit 5 to the Witness Statement of Ma Roupeng where he sets out in a table the state of a separate client account for Jinan Company, it must be relevant. In the supporting affidavit of Mr. Li, lawyer Ma was acting for DIEC and DIFEC[20], the 4^th defendant, being the nominator of their directors, it should be in a position to direct its nominated directors in DIEC and DIFEC to obtain those documents from the lawyer.  There is no evidence that lawyer Ma will raise objection to the request.  As the payments are mentioned in the witness statement of lawyer Ma, it follows that there should be documents evidencing such payments through the lawyer.  I discard Zhang Xi’s 4^th and 5^th affirmations.  The 4^th defendant should make an affidavit to disclose those documents for the fair trial.

Item 4

44. It refers to the documents regarding the alleged potential legal actions against DIEC/DIFEC as at November 2009.  The 4^th defendant’s arguments that the documents belong to DIEC and DIFEC, not the 4^th defendant’s.  For the reasons stated in item 1 relating to power, fail.  The 4^th defendant’s 4^th affirmation cannot assist the 4^th defendant as the documents are specifically pleaded in the Defence.  The Deloitte Report bears serious defects as admitted by the accountants.  It cannot be relied upon.  If there had not been any lawsuit, the 4^th defendant can simply make an affirmation to confirm the fact.  The 4^th defendant should file and serve an affidavit for the disclosure of the documents under this item.

Item 5

45. They are the documents regarding the alleged application for cancellation/revocation of the Jinan Company’s registration of its interests in DIEC/DIFEC.  The 4^th defendant now in the 5^th affirmation of Zhang Xi says that he had inquired with Dalian Economic Bureau, which said that the documents had been destroyed.  He had not kept any copy of the documents, nor the 4^th defendant.  His lawyer Ma also had not kept any copy.  The plaintiff in Mr. Li’s 5^th affidavit, is unable to show that the 4^th defendant has or had had the documents requested.  Absent any other evidence to show the contrary, this Court has to accept the evidence in accordance with Prudential case.  No order will be made for this item.

Item 6

46. In this category the plaintiff seeks disclosure of all bank, financial and accounting records of the Xiamen Company, Chongqing Company and Guangxi Company in respect of the RMB530 million laid out for the purchase of the DIEC and DIFEC Shares.  The 4^th defendant admits that Xiamen Company, Chongqing Company and Guangxi Company are the companies through which the 4^th defendant paid the RMB530 million for the shares of DIEC and DIFEC.[21]  Mr. Ling submits, however, that there had been bank transfer slips accounting for RMB 530 million.  But he agrees that the bank transfer slips do not show where the money had come from.  Since the plaintiff disputes the good faith of the transactions, it is legitimate for it to require the 4^th defendant to prove who had paid the money to Xiamen Company, Chongqing Company and Guangxi Company.  They are clearly relevant to the issues in dispute.  If the disclosed documents show that the money came from Lucky Dragon, then, as Mr. Ling said, the plaintiff will succeed to prove its case.  The 4^th defendant should have power over the documents relating to the RMB530 million.  For a fair trial, the 4^th defendant has to make an affidavit to disclose those documents.

Item 7

47. They are the receipts and/or written acknowledgement in respect of RMB530 million allegedly paid to Liaoning East Asia Law Offices.  The 4^th defendant’s argument is that there had been no receipt or written acknowledgment issued to the 4^th defendant and in the 5^th affirmation of Zhang Xi for the 4^th defendant, the 4^th defendant says that the East Asia Law Offices had given the particulars of the receipt of the RMB530 million.  The 4^th defendant does not have the documents.  However, in Zhang Xi’s 5^th affirmation, paragraphs 11 and 12, he said that the 4^th defendant did not have the power to produce the documents which might be in the power of Xiamen Company, Chongqing Company and Guangxi Company, which is not correct since it has been shown that they were the companies used by the 4^th defendant to pay the RMB530 million for the shares.  Since the 4^th defendant admitted that it had used the three companies as its vehicles to pay RMB530 million to pay off the debts of DIEC and DIFEC, it must have the power over the documents relating to the money it had paid the three companies.  As such, the 4^th defendant should make an affidavit to produce those documents.

Item 8

48. They are documents showing Mr. Zhang Xi’s purported 100% beneficial ownership of the Xiamen Company and the Chongqing Company.  Zhang Xi’s 5^thaffirmation has confirmed that the 4^th defendant does not or ever had the documents because those documents has never existed.  There is no evidence from the plaintiff to show that the contents of Zhang Xi’s 4^th affirmation are not true or insufficient other than Mr. Li’ 5^th affidavit at paragraph 37, which is only a bare assertion that the 4^th defendant should have the documents, unsupported by evidence.  I shall accept Mr. Zhang’s affirmation evidence.  No order will be made for this item.

Item 9

49. They are the documents evidencing the shareholding and directorships of Onwin Enterprises Holdings Limited, Guangxi Company, 深圳市華強 興業投資有限公司and 深圳市中廣城實業發展有限公司.  In paragraph 43 of the plaintiff’s supporting affirmation, there is no evidence to support that the documents sought are or were in the possession, custody and power of the 4^th defendant.  I agree with Mr. Ling that the plaintiff has failed to show that the documents sought are within the possession, custody or control of the 4^th defendant.  This item should be dismissed.

Item 10

50. They are the documents in relation to the 4^th defendant’s breach of the Injunction Order.  The plaintiff submits that these documents are relevant as they will show the ill-intent of the defendants in the scheme to defraud the plaintiff and the court should allow counsel at the trial to ask questions on this issue.  They are also relevant because the plaintiff would make use of the documents to make another application for a Hadkinson order at the trial.

51. The 4^th defendant disputes that the plaintiff’s discovery for the documents are solely for the purpose of impeaching the credit of the 4^th defendant, which is prohibited under the law as decided by the Court of Appeal in Bekhor v Bilton [1981] 1 QB 923, at 939G and the documents are irrelevant and unnecessary. In this case, the defendant was found to be in breach of a Mareva Injunction. The plaintiff applied to the court for an order that the defendant should make an affidavit setting out, among other things, the value of the assets and the whereabouts of them within the jurisdiction, all of which amounted to establishing breach by the defendant of his undertaking of the court order.  The Judge made the order.  On appeal, the Court of Appeal (by majority) allowed the appeal for the reason that the documents “did not relate to one or more of the matters in question in the cause or matter.”  939E  The court should “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.” (rule 8 of Order 24) 939G.  Here the breach of DHCJ Sakhrani’s Injunction Order is not pleaded in the Statement of Claim and as such not an issue in the trial.  Mr. Ling also submits that to allow the documents to be discovered and the interrogatories to be administered simply means the plaintiff can raise another conspiracy among the defendants without a proper pleading, which should be prohibited under the law.

52. For the reasons that I shall give for the summons on interrogatories, I hold that the documents are irrelevant to the issues in dispute and as such, they should be disallowed.

Item 11

53. They are the original of documents disclosed in 4^th defendant’s List of Documents.  The 4^th defendant has in Zhang Xi’s 4^th affirmation said that the Empire Star Agreements had been kept in the Trade Department.  The 4^th defendant does not have the original documents.  The plaintiff cannot show by evidence that the 4^th defendant has the original documents, its application relating to those documents be dismissed.

THE INTERROGATORIES

54. I now come to discuss the 4^th defendant’s summons requesting this Court to order the plaintiff’s interrogatories be withdrawn pursuant to Order 26 r.3(2) RHC.

55. This application is in relation to the plaintiff’s application under Order 26 r.3, in which the plaintiff set out 14 interrogatories, all relating to four loans obtained by DIEC and DIFEC from Sheng Jing Bank.  For the present purposes, I do not propose to set them out here.  I will simply make reference to them if necessary.

56. The 4^th defendant is late to take out the application.  It has failed to take out the application within 14 days after service of the plaintiff’s interrogatories, the delay being 9 days.  The 4^th defendant asks for leave to file and serve its summons out of time, which the plaintiff opposes.

57. The Court has to consider the factors under Order 2 r. 5 RHC:

(a) the interests of the administration of justice;

(b) whether the application for relief has been made promptly;

(c) whether the failure to comply was intentional;

(d) whether there is a good explanation for the failure to comply;

(e) the extent to which the party in default has complied with other rules and court orders;

(f) whether the failure to comply was caused by the party in default or his legal representative;

(g) in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h) whether the trial date or the likely trial date can still be met if relief is granted;

(i) the effect which the failure to comply had on each party; and

(j) the effect which the granting of relief would have on each party.

58. Taking the circumstances together and for the administration of justice, there being no obvious prejudice to the plaintiff, I grant leave to the 4^th defendant to file and serve the summons out of time and the hearing should accordingly proceed as respective counsel are well-prepared for argument.

59. The jurisdiction for interrogatories is provided under Order 26 r.1 RHC:

1.   Discovery by interrogatories (O. 26, r. 1)

(1)  A party to any cause or matter may in accordance with the following provisions of this Order serve on any other party interrogatories relating to any matter in question between the applicant and that other party in the cause or matter which are necessary either-

  (a) for disposing fairly of the cause or matter; or

  (b) for saving costs.

(3)   A proposed interrogatory which does not relate to such a matter as is mentioned in paragraph (1) may not be administered notwithstanding that it might be admissible in oral cross-examination of a witness.

Discussion on the relevant authorities

60. Counsel have cited the relevant authorities in support of their arguments, which may require some discussion to resolve their differences.  I shall set out the relevant authorities as follows:

a.   Mr. Ling: The meaning of “relating to any matter in question… …in the cause or matter” in Order 26 r.1 refers to the issues to be decided in the litigation as decided in Bekhor Ltd. v Bilton [1981] 1 QB 923, at 948F-G, per Griffiths LJ; see also 939-940C, per Ackner LJ, at 952C-953A, per Stephenson LJ;

b.   The first case cited by Ms. Tong relates to the proposition that a party needs not show that costs “will necessarily be saved” as long as the interrogatory is necessary if “any saving of costs is to be achieved”Baroness Dunn v Li Kwok Po David [1994] 2 HKC 597 at 600E-H per Barnett J.  This proposition relates to whether the plaintiff has to establish that the interrogatories are for saving costs.  However, I do not find this case useful for our present discussion. In this case (a libel case) the defendants argued that provided that the plaintiffs were able to establish that the interrogatories were for disposing fairly of the cause or matter or for saving costs, the court had no jurisdiction to allow the interrogatories and they must be withdrawn.  See 599D.  The Judge disagreed with defence counsel’s interpretation of the statutory provision under rule 1.  He took the view that if the answer to the interrogatory was necessary, saving of costs would be achieved.  That is why he said at 600F “An answer favourable to the interrogator would have to be a foregone conclusion.”  Mr. Ling has not raised this issue of saving costs in his written submission.  I do not intend to discuss this issue further here.  Suffice it to say, I do not think that the plaintiff has to establish that the interrogatories are for saving costs before this Court considers its application.  But I consider it is clear that the Court has the discretion to exclude them if they are not for a fair disposal of the matter or for saving cost as provided under rule 1 (1)(a) and (b).

c.  The second case cited by Ms. Tong is Marroit v Chamberlain (1886) 17 QBD 154 (CA), per Lord Esher MR at p.163.  Ms. Tong submits that interrogatories which relate to any matter in question in the cause or matter are admissible, and the right to interrogate is not confined to facts directly in issue, but extends to any facts the existence or non-existence of which is relevant to the existence or non-existence of the facts directly in issue.[22] This refers to the parameter of relevance for interrogatory.  Ms. Tong goes further to propose that the test of relevance, which she submits,is fairly wide by the Court of Appeal in Lau Tak Wah v Hang Seng Bank Ltd (unreported, CACV 621/2001, 18 July 2001).  I shall discuss these cases below.

d.   The Marroit is a libel case.  The defendant pleaded justification and he took out the interrogatories to require the plaintiff to give the answer, disclosing the source of information the plaintiff obtained.  The plaintiff refused to comply with the requests, saying that it intended to call them as witnesses. In the discussion, the Court of Appeal remarked at page 163:

“The law with regard to interrogatories is now very sweeping. It is not permissible to ask the names of persons merely as being the witnesses whom the other party is going to call, and their names not forming any substantial part of the material facts; and I think we may go so far as to say that it is not permissible to ask what is mere evidence of the facts in dispute, but forms no part of the facts themselves. But with these exceptions it seems to me that pretty nearly anything that is material may now be asked. The right to interrogate is not confined to the facts directly in issue, but extends to any facts the existence or non-existence of which is relevant to the existence or non-existence of the facts directly in issue.” (emphasis added)

e.  It is important to note the exceptions stated by the Court of Appeal.  The Court of Appeal stated clearly that the interrogatory must go to the substantial part of the material facts. On this basis, the Court of Appeal allowed the interrogatories to be administered because they formed a substantial part of facts material to the case upon the issue of justification.[23]

f.   Lau Tak Wah is a passing-off case whereby the plaintiff claimed against the bank for using his image and name to promote its credit cards business without his licence.  The plaintiff also pleaded that the defendant had misrepresented to the public that the plaintiff had endorsed its product, which the plaintiff denied.  The defendant denied passing-off. It further denied misrepresentation.  The plaintiff interrogated the defendant, among other things, on the number of applications for credit cards and the number of applications where the applicants selected the plaintiff’s image.  The defendant refused to answer saying that they were irrelevant to the issues in dispute.  The Court of Appeal held at §17:

“In our judgment, these interrogatories cannot be labeled irrelevant or immaterial to the plaintiff’s reputation and goodwill as an advertiser, promoter and endorser of goods and services, notwithstanding that the prime facie ambivalence of the particulars response to each of the questions may not, in themselves, directly be probative of this issue. Mr. Kotewall was surely correct in asserting that it was not the position that interrogatories are to be permitted only if conclusive on any given issue. To the contrary. the established position is that interrogatories may be ordered when, at the least, they relate to facts the existence ornon-existence of which is relevant to the existence or non-existence of matter directly in issue, whilst the test of relevance is satisfied if the potential relevance of the subject matter interrogated suffices. The information now sought will almost certainly emerge at trial, whereat it is highly unlikely that such questions would be excluded as irrelevant, and, as Mr. Kotewall further observed, it is far better that they the plaintiff has this information (which is entirely within the knowledge of the defendant) at this relatively early stage so that it can assist in preparation of the plaintiff’s case.” (emphasis added)

g.   The Court of Appeal also held that interrogatory must relate to facts relevant to the matter directly in issue.  The existence of the facts supports the plaintiff’s case whereas the non-existence of which destroys the plaintiff’s case.

h.   It is clear that the above authorities confirm the legal principle that the interrogatory must relate to “a matter in question” between the parties and must be “necessary” either for disposing fairly of the cause or matter or for saving costs.

i.   Ms. Tong relies upon the legal principle in Lee Nui Foon v Ocean Park Corp. (No.2) [1995] 2 HKC 395 on the admissibility of interrogatory.  This authority confirms the above legal principle that the interrogatories must relate to a matter in question between the parties.  The court further held that the court retained an overriding discretion as to whether or not to allow them to be administered even if they were relevant.[24]

j.   In the Decision of Kao Lee & Yip (a firm) v Donald Koo Hoi Yan & Others (unreported, HCA8847/1993 23 April 2002, Ma J (as he then was), the law of interrogatory has taken a further development where the learned judge, adopting a more restrictive approach, held that to order interrogatory once admissibility was demonstrated was wrong, emphasizing the importance of necessity.  At paragraph 7 of the Decision, he said:

‘Before dealing with the interrogatories themselves, I should first set out the applicable principles governing applications of this kind :

(1)  The general principle is that interrogatories are admissible where they go to support the applicant’s case or destroy the opponent’s : see Hong Kong Civil Procedure 2002 at paragraph 26/4/7.  The width of this general principle is similar to the Peruvian Guano principles governing discovery of documents.

(2)  However, this only goes to the question of admissibility.  Whether a court will in its discretion allow interrogatories is entirely a different matter.  Too often in the past, there has been a tendency to order interrogatories once admissibility is demonstrated.  This is wrong.

(3)  In the exercise of its discretion, the court must bear in mind that interrogatories will be ordered only where they are necessary either for disposing fairly of the cause or matter, or for saving costs : cf RHC, Order 26, rule 1(1); Hong Kong Civil Procedure 2002 at paragraph 26/4/11.  This is the key consideration going to the exercise of discretion.

(4)  The particular factors that a court will take into account in deciding whether or not to exercise its discretion are well known : see Lee Nui Foon v. Ocean Park Corporation (No.2) [1995] 2 HKC 395; Hong Kong Civil Procedure 2002 at paragraphs 26/4/5 to 26/4/34.  It is not necessary for me to repeat these principles at length.

(5)  I would, however, draw special attention to the case of Det Danske Hedeselskabet v. KDM International plc [1994] 2 Lloyds 534.  There, Colman J referred to various considerations (or “yardsticks” as he termed them) for the court to bear in mind when considering the question of interrogatories: see page 537 (col.1).  I set out one of these considerations in full :

“Fifthly, requests for information ascertainable by cross examination at the trial are inappropriate unless the party questioning can establish that it is essential for the proper preparation of his case that such information is made available to him before trial, in the sense that if the matter is left until cross examination at the trial that party will, or probably will be irremediably prejudiced in his conduct of the trial or the trial may be unduly interrupted or otherwise disorangised by the late emergence of the information.”

(6)  The administering of interrogatories is not for the purpose of enabling a party to indulge in some sort of deposition taking exercise or to enable him to have a “dry run” in cross examination against the other side prior to trial.  As I have already said, the key consideration is the factor of necessity referred to the RHC, Order 26, rule 1(1).’

61. The above set out clearly the relevant legal principles for interrogatory applicable to this application.

62. The interrogatories relate to the four loans between the period of May 2011 and February 2013 mentioned in Zhang Xi’s supplemental witness statements.[25] The plaintiff submits that they are necessary for the purpose of fairly disposing of various issues in this action, in particular, the issues of the four loans, which the 4^th defendant was unable to explain.[26]  It is difficult to envisage what relevance they have in relation to the issues of dispute in the action as set out in paragraphs 24 and 25 supra.  The plaintiff is asking the court to set aside the Empire Star Agreements on the basis that the 4^th defendant had notice or constructive notice that those agreements were procured by Lucky Dragon in its fraudulent scheme.  See paragraph 54 of the Statement of Claim.  The interrogatories are obviously issues after the action.  They are the interlocutory injunctive reliefs granted by the court.  The trial judge does not have to determine those issues at the trial.  As the plaintiff has repeatedly said in the submissions, the 4^th defendant had admitted breach of the injunction.  It will be for the plaintiff to enforce the order against the 4^th defendant.  The fact that the plaintiff’s counsel can cross-examine Mr. Zhang at trial is not a reason to allow the interrogatories unless they are relevant to the issues in dispute.  See 26/4/6 of the White Book 2014 Vol. 1.

63. Obviously, the plaintiff is minded to make use of the 4^th defendant’s breach of the court’s injunction to demonstrate the misconduct, ill-intent or even dishonesty of the 4^th defendant. But this has been established as, according to the plaintiff, the 4^th defendant has admitted the breach.  According to the plaintiff,there is simply no defence to the 4^th defendant in relation to the breach of the interlocutory injunction.

64. The plaintiff may be interested in how the loans were made use of and whether they had been misappropriated.  However, these are not the issues pleaded in the Statement of Claim.  To bring the four loans into the trial of the matter seems to be unnecessary and will escalate the costs and waste time for the trial.

65. The importance of pleadings has been brought to our attention by the Court of Final Appeal in Sinoearn International Ltd. v Hyundai – CCECC Joint Venture (a firm) FACV 22/2012 delivered on 30 September 2013.  The Court of Final Appeal had criticized the court below allowing the plaintiff to run the argument of parallel issues without proper pleadings, which caused confusion to the trial, the appeal and finally the Court of Final Appeal and procedural unfairness.  The parties must clearly plead all their issues in the pleadings so that each party knows what the issues are and prepare for their cases accordingly.[27]  The Court of Final Appeal held that without proper pleadings, there would be confusion, not only at the trial, but also in the appeals, all the way going to the Court of Final Appeal.  Pleadings are not mere formalities, but are disciplines ensuring procedural fairness in the adversarial system. [28]

66. For those reasons, I am not satisfied that the plaintiff has established that the interrogatories are relevant to the issues for the trial, still less that they are necessary for the purpose of a fair trial or saving costs.  The 4^th defendant succeeds in its application and the plaintiff should withdraw the interrogatories.

67. I shall make an order of the plaintiff’s application for specific discovery in terms as follows:

a.  In terms of the summons in respect of items 1-4 and  6-7;

b.  Items 5 and 8-10 be dismissed;

c.   Costs to be dealt with.

68. I shall also make an order of the 4^th defendant’s summons on interrogatories in terms as follows:

a.  The plaintiff’s interrogatories as set out in the summons be withdrawn;

b.  Costs to be dealt with.

69. As to the issue of costs of the applications, as suggested by respective counsel, it will be adjourned to next Monday at 10 am for counsel’s submission and this Court’s decision.

HCA 1237 of 2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1237 OF 2012

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D E C I S I O N

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1.  This is the 4^th defendant’s application for discharge of the injunction, granted ex parte by DHCJ Sakhrani on 17 July 2012 and as continued by a consent order made by DHCJ M Chan (as she then was) on 20 July 2012 (“the Consent Order”); or alternatively for fortification of the plaintiff’s undertaking as to damages.

2.  The background may be summarized as follows.

A.  BACKGROUND

A1.  SBS Agreement

3.  Situated at the development site at Area 6 in the Dalian National Resort, Dalian, Liaoning Province is a valuable piece of land (“the Dalian Land”).  Before June 1997, the plaintiff had the ultimate predominant ownership and control of the Dalian Land through the following corporate structure :

4.  The Dalian JV Company, the 2^nd and 3^rd defendants were at all material times engaged in a project to develop the Dalian Land.

5.  By an agreement dated 26 June 1997 (“the SBS Agreement”), the plaintiff agreed to sell its 90% shareholdings in GPB (“the WIW Shares”) to Sino Business Services Proprietary Limited (“SBS”) for AUS$46,500,760.00, payable in tranches as stipulated.  Pursuant to the SBS Agreement, the plaintiff transferred the WIW Shares to Leisureline Holdings Limited (“LHL”), nominated by SBS, on or sometime after 26 June 1997.

6.  On or about 6 November 1997, LHL acquired 90% of the shares of China Hotel Holdings Limited (“CHHL”).  At the same time, LHL transferred the WIW Shares to CHHL.  On or about 5 January 1998, CHHL acquired the remaining 10% of the shareholding in GPB from Asia Management Limited.

7.  SBS had paid the first tranche of the price under the SBS Agreement in the sum of AUS$500,760.00.  However, by letter dated 13 November 1998, it purported to repudiate the SBS Agreement.  It had since failed to make any further payment for the balance of the price or return the WIS Shares to the plaintiff.  On 9 November 2001, the plaintiff commenced proceedings in Victoria, Australia to seek damages for breach of contract or alternatively the return of the WIW Shares.

A2.  Lucky Dragon Agreement

8.  In around April or May 2003, while the Australian proceedings were still pending, SBS, LHL and CHHL had, secretly and without disclosing the same to the plaintiff or the Australian court, procured GPB to enter into an agreement with the 1^st defendant (“the Lucky Dragon Agreement”) under which all the equity interests held by GPB in the Dalian JV Company, the 2^nd and 3^rd defendants were all transferred to the 1^st defendant.  The completion date of the Lucky Dragon Agreement was stated to be 28 May 2003.  The 1^st defendant had since purportedly acquired the ownership and control of the Dalian Land and the land use rights.  The plaintiff only became aware of the Lucky Dragon Agreement on or about 25 September 2003.

9.  On 26 March 2004, the Australian court gave judgment in favour of the plaintiff for the sum of AUS$46 million with interest.  SBS failed to pay the judgment debt and was wound up on 14 April 2005.  The judgment remains wholly unsatisfied to date.

A3.  HCA1294/2005

10.  The plaintiff then commenced HCA1294/2005 in Hong Kong on 26 September 2005 against SBS, LHL, CHHL, GPB and the 1^st defendant, claiming for, among other things, a declaration that the Lucky Dragon Agreement constituted a disposition of property with an intent to defraud the plaintiff; an order that the Lucky Dragon Agreement and the purported sale and transfer of the shares made thereunder be set aside pursuant to section 60 of the Conveyancing and Property Ordinance[2] (“Section 60”); and damages for conspiracy.

11.  The plaintiff obtained default judgment against all the defendants on 24 August 2006.  The 1^st defendant then successfully set aside the default judgment on 2 February 2007.  The trial of the plaintiff’s claims against the 1^st defendant then took place before Suffiad J on 9 February 2011, which lasted for 11 days.

12.  On 15 February 2011, in the middle of the trial, the plaintiff applied for and obtained an interlocutory injunction restraining the 1^st defendant from, among other things, transferring, disposing and/or otherwise dealing with any shares and interests in the Dalian JV Company, the 2^nd and 3^rd defendants, DIEFC and DIEC, or to take any steps to cause or procure any change in the registered shareholders, directors or legal representatives of these companies.

13.  On 25 March 2011, Suffiad J entered judgment in favour of the plaintiff on its claims and further ordered that the aforesaid injunction be continued until further order.

A4.  Empire Star Agreements

14.  In the course of enforcing the said judgment, the plaintiff discovered for the first time that back in January 2010, the 2^nd and 3^rd defendants had already transferred their 60% equity interest in DIFEC and DIEC to the 4^th defendant for the respective consideration of HK$48 million and HK$36 million (“the Empire Star Agreements”).

15.  The plaintiff complained that the Empire Star Agreements effectively stripped the 2^nd and 3^rd defendants of all its valuable assets.  The plaintiff is again left with an empty judgment.

A5.  Present proceedings

16.  On 17 July 2012, the plaintiff obtained the ex parte injunction from the Deputy Judge Sakhrani, restraining the 4^th defendant from disposing of its shareholding in DIEFC and DIEC.  The ex parte injunction was continued by the Consent Order, which read :

“BY CONSENT, IT IS ORDERED that :-

1. The Order of Deputy High Court Judge Sakhrani made on 17 July 2012 be continued until trial or further Order of the Court.

2. Costs of the application by way of Consent Summons dated 19 July 2012 and costs of the plaintiff’s Summons dated 17 July 2012 be in the cause of this action.

3. There be liberty to apply.”

17.  By summons dated 26 September 2012, the 4^th defendant took out the present application for discharge and fortification of undertaking damages.

B.  PRELIMINARY OBJECTION

18.  The plaintiff took a preliminary objection, arguing that the 4^th defendant is debarred from making the application by virtue of the Consent Order.

19.  The applicable principles have been well summarized by Au J in Keep Bright Ltd v Super Auto Investments Ltd :[3]

“(1) The Court would only generally consider varying or discharging an interim injunction or an undertaking on good grounds or change of circumstances being shown : Chanel v FW Woolwich & Co Ltd [1981] 1 WLR 485 at 492D-E.

(2) Further, in an interim order where it is made effectively by consent, or following an inter-partes hearing when both parties were legally represented and had full opportunities to bring to the court’s attention matters relevant to the making of the order, the person seeking to vary the interim order is not entitled to do so as of right or to re-argue it as if it was a re-hearing. The burden is on the party seeking to vary the order to show either there has been some significant change of circumstances or it has become aware of facts that it could not have reasonably found out at the time of interim order: Dynamic Creations Ltd v Mint Gem & Jewelry Manufacturing Co Ltd (unrep, HCA 378/2006, 12 April 2006) at paras 42 & 44 per Chu J (as she then was); Butt v Butt [1987] 1 WLR 1351 at 1353F-G per Nourse LJ.

(3) However, the position may be different if the parties had contemplated at the time of the interim order that the issues thereunder would be revisited or where the injunction by its terms show that it was not substantively disposed of but adjourned sine die generally with liberty to apply.  The parties may be able in those circumstances to re-open the arguments afresh:  Butt v Butt, supra, at 1353H-1354D, 1354F-G (Nourse LJ), 1355 (Mustill LJ); Gantenbrink v BBC [1995] FSR 162 at 164-165 (Sir Donald Nicholls VC).”

20.  Here, the plaintiff obtained the ex parte order on 17 July 2012, returnable on 20 July 2012.  At about 5:30 pm on 17 July 2012, the order and the relevant papers were served on the solicitors acting for the 4^th defendant.  A notice to act was then filed on 19 July 2012.  On the same day at about 3 pm, the plaintiff’s solicitors wrote (by way of fax) to the 4^th defendant’s solicitors, asking the latter to confirm in writing by return before 4 pm that same day whether the 4^th defendant would consent to the order in terms of the inter parte summons, failing which they would treat the 4^th defendant as opposing the summons.  The 4^th defendant’s solicitors immediately wrote back.  They first complained about the lack of time to respond and then went on to say :

“ The large bundle of documents were delivered to the 4^th Defendant after office hours on the 17 July 2012. Instructions were only confirmed to us to act for the 4^th Defendant yesterday afternoon. It is only fair and reasonable to allow us time to peruse the papers and to take preliminary instructions from client.

In any event, the hearing tomorrow is merely a return date fixed for 15 minutes so that the Court may give directions as to filing of further evidence in the event our client wishes to oppose your client’s summons. As such, we doubt the need to instruct Counsel to attend tomorrow.

In view of the press of time, our client is prepared to consent to paragraph 1 of your summons dated 17 July 2012 with liberty to apply and costs be reserved.”

21.  A consent summons was then signed.  At the short hearing before Deputy Judge Chan, the Consent Order was made based on the consent summons.

22.  When the circumstances leading to the making of the Consent Order is properly understood objectively, it is tolerably clear that when the Consent Order was made, the solicitors contemplated that the injunction would be revisited at a later stage if the 4^th defendant so desired, after legal advice had been obtained from counsel.  The injunction had not been substantively disposed of before the Deputy Judge.  Effectively, the matter was adjourned sine die, giving the 4^th defendant time to take legal advice while protecting the plaintiff’s position by continuing the ex parte order in the meantime.  The 4^th defendant is not debarred from making the discharge application as the plaintiff now contends.

23.  The plaintiff’s preliminary objection fails.  I proceed to deal with the substance of the defendant’s discharge application.

C.  DISCHARGE APPLICATION

24.  In mounting the discharge application, Ms Tam, SC for the 4^th defendant, relied on four grounds :

(1) No serious issue to be tried;

(2) Material non-disclosure;

(3) No risk of dissipation of assets; and

(4) Delay and lack of urgency.

I will deal with them in turn.

C1.  Serious question to be tried

25.  This ground can be disposed of shortly.

26.  Section 60 provides :

“(1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

27.  The burden rests on the transferee to show valuable consideration and good faith and no notice of intent to defraud for the purpose of Section 60(3) : Honour Finance v Poon Ting-chau & Anor;[4]Lloyds Bank Ltd v Marcan & Ors.[5]

28.  The plaintiff claimed that the 4^th defendant had accepted the transfer of the shares in DIFEC and DIEC in a conspiracy aimed at defrauding the plaintiff, the judgment creditor of the 1^st defendant.  The purported sale pursuant to the Empire Star Agreements were grossly undervalued when the market value of the shares was around RMB22 million to 789 million, depending on the state of the development of the Dalian Land.  The plaintiff contended that the Empire Star Agreements were caught by Section 60.

29.  I have read the evidence and the submissions placed before the ex parte Judge.  There can be doubt in my mind that the plaintiff had shown a serious question to be tried on the evidence then available.

30.  The defence of the 4^th defendant is to be found in its defence filed on 3 October 2012.  The evidence in support of the discharge application is filed by Mr Zhang Xi, a director of the 4^th defendant.  In short, the 4^th defendant alleged that it had signed a Framework Agreement dated 14 December 2009 with 濟南環山房地產開發有限公司 (“the Jinan Company”) for the sale of the shares in DIEFC and DIEC for RMB540 million.  The sum was to be used first to clear substantial debts of up to RMB500 million incurred by DIFEC and DIEC and set aside the judicial confiscation orders in respect of the Dalian Land.  The 4^th defendant had caused full due diligence to be conduct in respect of the Dalian Land and obtained reports on valuation and the legal rights to use the Land.  Mr Zhang also exhibited copy remittances to show that sums totaling RMB530 million were paid on behalf of the 4^th defendant to the firm of PRC lawyers acting for Jinan Company pursuant to the Framework Agreement.

31.  Ms Tam argued that the evidence shows that the Empire Star Agreements were bona fide transactions for market consideration and that there is no substance at all in the alleged link or conspiracy between the 4^th defendant and the 1^st defendant to defeat the plaintiff’s claim arising from the judgment of Suffiad J.

32.  In my view, Ms Tam is in effect asking me to conduct a mini trial on affidavit, make findings in favour of the 4^th defendant and to conclude that it has discharged the burden of proof under Section 60(3).  With respect, this is simply impermissible.  Further, as rightly submitted by Mr Huggins, SC, for the plaintiff, there are doubts in Mr Zhang’s evidence and hence the veracity of the 4^th defendant’s case.  For example :

(1) There is no evidence to show that the Jinan Company did hold the 60% equity interests in DIEFC and DIEC as alleged in the Framework Agreement.  To the contrary, according to public records and what was stated in the Empire Star Agreements, the 2^nd and 3^rd defendants held those 60% interests at the material time.  The inconsistency of the purported owner(s) of the 60% interests in DIEFC and DICE is not satisfactorily explained.  Mr Zhang said that the Jinan Company was the holder of the 60% interest but registration of such shareholding had not completed.  This allegation is not borne out by any evidence at all.

(2) Mr Zhang said that Framework Agreement contained the actual terms of the transaction and the Empire Star Agreements were only used for registration purposes and do not reflect the parties’ actual agreement.  The 4^th defendant’s PRC law expert said it is common practice in the Mainland to have agreements drawn up for the purpose of seeking approval from the authorities and to have separate agreements to lay out the actual terms agreed between the parties.  This point is strongly disputed by the plaintiff’s PRC law expert.  For my part, I have grave doubt if this so-called common practice, which is misrepresentation, to say the least, is legal.  Further, the Framework Agreement was not registered under the relevant PRC regulations.  And without proper registration, the Framework Agreement is not enforceable.  Mr Zhang has not explained why the 4^th defendant and the Jinan Company would be content to enter into an unenforceable agreement for such a substantial transaction.

(3)     Mr Zhang said it was he who signed the Framework Agreement. But his purported signature differs from the one he affixed to his affirmations, raising a legitimate doubt it he did sign the Framework Agreement.  Mr Zhang has not explained the discrepancy.

(4) The Empire Star Agreements made no reference to the Framework Agreement, which is most odd.

(5) All due diligence and valuation reports were allegedly issued only after the Framework Agreement was already entered into, pursuant to which the 4^th defendant had already committed to paying RMB100 million as deposit within 3 days.  (Mr Zhang said the payment was already made by 21 December 2009.)  It makes no commercial sense for the investigations to be conducted or completed only after the deal had already been struck.

(6) There are doubts, which I do not repeat here, in the bank remittances.  I can see the force of the plaintiff’s submission that these might not be genuine payment records.

33.  I reject Ms Tam’s submission and find that there is a serious question to be tried on the plaintiff’s claim against the 4^th defendant.

C2.  Material non-disclosure

34.  Ms Tam took a number of points on material non-disclosure.  They all are completely answered by Mr Huggins as follows.

	Alleged Material Non‑Disclosure	Answer
(1)	Payment of RMB 530 million by the 4th defendant to Jinan company for the shares in DIFEC and DIEC, evidence of which would have been disclosed to the plaintiff had it made inquiries with the 4th defendant before applying for injunctive relief.	It is simply not feasible for Plaintiff to have made inquiries with the 4th defendant before applying for injunctive relief, given the plaintiff’s case that there was a serious risk of dissipation.
(2)	The fact that the sums of HK$48 million and 36 million stated in the Empire Star Agreements were merely the par value of the equity interest for the purpose of administrative approval, rather than the actual consideration for the sale, as would have been apparent from publicly available documents concerning DIFEC and DIEC.	The Empire Star Agreements were the only agreements that were apparent from the public records.  There is nothing which could have alerted the plaintiff that the consideration therein stated did not reflect the actual agreed consideration for the sale.  Indeed, the plaintiff does not accept that the Framework Agreement (which had not been registered) is a genuine document nor is it accepted that it is “common practice” to have a separate agreement for registration purposes only.
(3)	Mr Zhang’s positions in publicly listed companies, as well as his successful acquisitions of majority shareholdings in those companies, which would have dispelled any suspicion that the 4th defendant was “not a company of any substance.”	As regards Mr Zhang, the plaintiff had conducted public searches as regards assets under his name and his shareholdings and directorships, which was specifically alluded to in the supporting affirmation plead before the ex parte judge.  In any case, Mr Zhang’s positions in the listed companies do not say anything about the 4th defendant’s financial capabilities, particularly given that he is no longer a shareholder of the company.
(4)	The substantial debts owed by DIFEC to judgment creditors resulting in registered charges on the Dalian land, which would have affected the court’s view on the adequacy or otherwise of the purported consideration.	It is not accepted that the Dalian Land is as a matter of fact encumbered with the alleged charges.  Even on the 4th defendant’s own case, they allegedly paid RMB540M for 60% interest in the Dalian Land.  It cannot therefore be possibly disputed that the consideration under the Empire Agreements represented a gross undervalue.
(5)	The existence of the Framework Agreement containing detailed terms of the sale (including the actual consideration for the transaction) referred to in Clause 4 of the Empire Star Agreements.	Clause 4 of the Empire Star Agreements did not refer to the Framework Agreement or indeed any supplemental agreement that had been entered into between the parties.
(6)	The fact that the Empire Star Agreements and the consequent changes in the shareholders of DIFEC and DIEC were all matters of public record and subject to approval and registration by PRC authorities (as confirmed by the plaintiff’s own expert evidence), which would have put paid to the allegation that the transactions had been deliberately concealed from the plaintiff.	The ex parte Judge was indeed informed that the Subject Agreements and the changes in shareholding were matters of public record.  Indeed at the ex parte hearing, Ms Sara Tong told the Judge that it was through a public search that the plaintiff discovered the same.  But this transaction was deliberately concealed from the plaintiff throughout HCA 1294/2005 by Lucky Dragon.
(7)	The fact that the sale by Lucky Dragon to Jinan Company of its 60% interest in CICL and CEL in April 2009 was also (at least for a period of time) a matter of public record, concealment being quite impossible if the transaction were to receive official approval and registration.	Even on the 4th defendant’s own case, the alleged sale by Lucky Dragon to Jinan Company of 60% interest in CICL and CEL in April 2009 was “not completed”.  Suffiad J found that this alleged sale was not genuine.
(8)	The inability of the plaintiff, a BVI investment vehicle, to honour its cross-undertaking in damages, as shown by its lack of assets within the jurisdiction.	The plaintiff fully disclosed that it is an offshore company in Mr Shan Chang’s 1st Affirmation.  Mr Shan Chang also confirmed in his 2nd Affirmation that the plaintiff would honour its undertaking and has sufficient resources to do so.  Where the evidence of the plaintiff did not raise any genuine doubt as to its ability to honour its undertaking as to damages, and the defendants raised no realistic doubt as to such ability, there is basis for the defendant to require the plaintiff to make full and frank disclosure of its financial position as this would be “fishing” for evidence.

35.  The complaints about material non-disclosure all fail.

C3.  Risk of dissipation

36.  Ms Tam argued that the risk of dissipation is largely inferred from the conspiratorial nature of the impugned transactions and the lack of substance on the part of the 4^th defendant.  Given the evidence now placed by the 4^th defendant, there is no evidence of either allegation.  Further, all the transactions including the Empire Star Agreements were carried out openly in accordance with the requirements in the Mainland for registration and approval.  Whatever might be said about the 1^st defendant and others, the plaintiff’s attempt to paint the 4^th defendant with the same conspiratorial brush is unwarranted.  But as I have demonstrated, the evidence adduced by the 4^th defendant has failed to dispel the conspiratorial nature of the plaintiff’s claim.  The risk of dissipation is still there.

37.  Ms Tam next submitted that since the Empire Star Agreements, the 4^th defendant has taken no step to dispose of the shares in DIFEC and DIEC.  It shows that the risk of dissipation is minimal.  I disagree. In my view, the mere fact that the 4^th defendant has not taken any step so far to dispose of the shares does not detract from such an obvious risk of dissipation.

38.  This ground fails.

C4.  Delay and urgency

39.  Ms Tam complained that the plaintiff has not explained when and how it came upon the Empire Star Agreements.  They were executed in January 2010 and presumably registered with the Dalian authorities shortly thereafter.  There was a period of 2 ½ years of inaction on the part of the plaintiff.  The lapse of time has not been explained.  However, as rightly submitted by Mr Huggins, there is no evidence as to when the Agreements were registered.  More importantly, the basis of going ex parte was secrecy. It was in fact made clear to the ex parte Judge that the application was made by reason of a need for confidentiality due to the risk of dissipation.

40.  This ground also fails.

C5.  Conclusion

41.  For the above reasons, the 4^th defendant’s application for discharge is dismissed.

D.  FORTIFICATION

42.  I now turn to the 4^th defendant’s application for fortification of the plaintiff’s undertakings as to damages.

43.  The plaintiff is a BVI company.  Ms Tam argued that the 4^th defendant would suffer a significant loss as a result of the injunction which the plaintiff would be unable to make good from assets available within the jurisdiction or elsewhere.  The 4^th defendant as the 60% shareholder in DIFEC and DIEC would have to continue to finance the Dalian project, having already paid RMB530 million for the stakes.  There is no evidence that the 4^th defendant intends to sell its stake in DIFEC and DIEC but since it is, ex hypothesi, enjoined from so doing it would be unable to reap the fruits of its substantial investment until the action is tried and determined.  Furthermore the injunction has caused and will continue to cause significant damage to the 4^th defendant’s reputation, and may affect the intended acquisition of the other 40% (Chinese) interests in DIFEC and DIEC.  As a rough and ready estimate the 4^th defendant would put the appropriate amount of fortification at HK$10 million.

44.  Mr Huggins contended that a defendant seeking fortification of an undertaking must show a likelihood of a significant loss arising as a result of the injunction and a sound basis for the belief that the undertaking will be insufficient (ie the plaintiff would be unable to make good the loss).  The 4^th defendant has not provided any evidence as to what loss it will likely suffer as a result of the injunction, which simply preserves the status quo and essentially restrains the 4^th defendant from encumbering/disposing of the shares in DIEC and DIFEC and the Dalian Land pending trial.  Should there be any genuine need for the 4^th defendant to deal with these assets, they can apply to the court for a variation with the necessary evidence showing a change in circumstances.  In the absence of any evidence as to what damages the 4^th defendant is likely to suffer as a result of the injunction, there is no justification for an order for fortification of the plaintiff’s Undertaking.  Further, the 4^th defendant has not provided any evidence justifying the proposed quantum of fortification in the sum of HK$10M that it seeks from the plaintiff in the event that the court does order fortification.  There is simply no evidence to suggest that the 4^th defendant is likely to suffer losses of this amount at all.  Given the lack of evidence, there is no factual basis upon which the court should order fortification of the plaintiff’s undertaking.

45.  I agree with Mr Huggins’ submissions entirely.

46.  The application for fortification is therefore refused.

E.  COSTS

47.  Costs should follow the event.  I make an order nisi that the 4^th defendant do pay the plaintiff the costs of its failed applications, to be taxed if not agreed, with a certificate for two counsel.

Mr Adrian Huggins SC leading Ms Sara Tong, instructed by Winston Chu & Co, for the plaintiff

Ms Winnie Tam SC leading Mr C W Ling, instructed by Edwards Wildman Palmer, for the 4^th defendant