ZIMMER SWEDEN AB v. KPN HONG KONG LTD AND ANOTHER

HCA 2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2264 OF 2013

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REASONS FOR DECISION
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1.  There were two applications for stay of execution of:

(a) the costs order dated 30 April 2015;

(b) the costs order dated 12 June 2015.

Both were taken out by the plaintiff (“these applications”). 

2.  The former costs order was related to the plaintiff’s summary judgment application, and the decision on whether its claim involves “fraud” so that the application should fall outside the summary judgment procedure (which was decided in the defendants’ favour).  The latter costs order was related to the plaintiff’s application for leave to appeal (which was also decided in the defendants’ favour).  The costs have already been assessed summarily (“the assessed costs”).

3.  These applications were dismissed.  Below are the reasons for the dismissal.

4.  It has been decided in the decisions respectively handed down on 30 April 2015 and 12 June 2015 that:

(1) the plaintiff’s claim was one based on “fraud”;

(2) there was no merit in the plaintiff’s application for leave to appeal;

(3) the costs of those applications should follow the event.

The plaintiff’s arguments put forth during these applications have not changed my view about the above matters.

5.  I also agree with the defendants that, having decided in their favour on the merits on both occasions which led to the costs orders, it would require exceptional circumstance(s) to justify these applications to be decided in the plaintiff’s favour (merits of the intended appeal being a factor for granting a stay of execution).

6.  The exceptional circumstance relied upon by the plaintiff is the amount earlier paid into court as security for the defendants’ costs (“the said security”).  The plaintiff argued that the assessed costs should be paid out of the said security.

7.  The problem with that argument is that the said security was fixed without taking into account the two applications which led to these applications.  If the assessed costs were paid out of the said security, the amount intended by the earlier court order to provide security for costs to the defendants would in effect be depleted to the extent of the amount paid out.  There is no valid reason to justify such a course to be taken.

8.  The plaintiff’s further argument that there is a risk that any sum paid to the defendants might not be recoverable afterwards is sufficiently met by the defendants’ earlier proposal that the assessed costs be paid into court instead.

9.  In short, by reason of the above matters, no valid justification has been put forth to support these applications.

HCA 2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2264 OF 2013

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D E C I S I O N

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1.  In a decision handed down on 30 April 2015, I found in the defendants’ favour on the determination of a preliminary issue (and consequently dismissed the plaintiff’s summary judgment application) (“the said decision”).

2.  Not satisfied with the said decision, the plaintiff applies for leave to appeal against it.

3.  The background leading to, and the nature of this action, has been summarized in the said decision, and will not be repeated.

4.  It should be apparent from the contents of the said decision that I felt bound to reach the said decision adopting the test set out, and the manner in which that test was applied, in the two court of appeal decisions (chronologically):

(a) Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94;

(b) A-1 Business Ltd v Chau Cham Wong Patrick [2009] 5 HKLRD 579

(especially the A-1 decision) (see in particular para 8, 10 to 12 and 14, the said decision).

5.  In gist, in contending that leave to appeal should be given on the ground of reasonable prospect of success in the intended appeal, the plaintiff submits that I have erred in:

(1) having misread the above court of appeal decisions (especially the A-1 decision);

(2) failing to find that the above court of appeal decisions are distinguishable on the facts.

6.  With respect, I do not consider the above submissions to have merit.

7.  Relying on para 20 and 21 of the A-1 decision, the plaintiff argues that the passages of the court of appeal judgment quoted in the said decision are not the ratio decidendi of the A-1 decision.  Instead (so the plaintiff asserts), the A-1 decision was based on an express plea of dishonesty (which does not feature in this action).  I disagree; the language of those paragraphs (especially para 20 thereof) indicates the contrary.  It reads:

“Even if one is to view the case strictly from the plaintiff’s claim, the plaintiff’s pleaded case also clearly involves allegations of dishonesty … ” (emphasis supplied).

That the paragraph starts with the phrase “even if” shows that the court of appeal intended the “other” approach (that the plaintiff’s claim based on misappropriation cannot be viewed in isolation, and divorced from the plaintiff’s response to the defence (para 15 thereof)) to be primary approach.

8.  I also disagree with the other ground in support of this application, namely, that the above issue involves a point of general importance.  The relevant test has been formulated clearly by the court of appeal.  The manner in which the test is to be applied has also been made clear.

9.  Leave to appeal is therefore refused.

10.  The parties agree that the costs of this application should be the defendants’ if it is determined in their favour.  There will accordingly be a costs order that those costs be paid by the plaintiff to the defendants.

11.  I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  For this purpose:

(a) the defendants be at liberty to lodge with court and serve a statement of costs within 7 days from today;

(b) the plaintiff be at liberty to lodge with court and serve a statement of objections within 7 days thereafter.

HCA 2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2264 OF 2013

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DECISION

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Introduction

1. By its summons dated 18 December 2015, Zimmer Sweden AB (“Zimmer Sweden”) applies for my determination of four reserved costs in its favour.

2. This court handed a decision dated 2 May 2014 (“the Decision”) whereby the application of Zimmer Sweden for the continuation of two ex parte Mareva injunctions and a gagging order were granted and the application of KPN Hong Kong Limited (“KPN”) and Brand Trading Limited (“BT”) to discharge the said ex-parte orders on the ground of material non-disclosure was rejected.

3. In the Decision, I made a costs order (“the Costs Order”) that KPN and BT do pay Zimmer Sweden its costs to be taxed if not agreed excluding the costs of and occasioned by the application of BT for security for costs. There is no application to vary the Costs Order on whatever basis and it was sealed and perfected on 3 June 2014.

4. This court did not however deal with the four reserved costs orders previously made by other judges at all in the Decision.

5. The four reserved costs orders (“the 4 Reserved Costs Orders”) were made in the following hearings:

a.  the ex parte hearing before DHCJ Leung on 21 November 2013 wherein a Mareva injunction was granted against KPN (“the 1^st Mareva Injunction”);

b.  the ex parte hearing before L Chan J on 23 November 2013 wherein a Mareva injunction was granted against BT (“the 2^nd Mareva Injunction”);

c.  the ex parte hearing before DHCJ Yau on 25 November 2013 wherein the gagging order was made against both KPN and BT (“the Gagging Order”);

d.  the inter-partes hearing before DHCJ B Chu (as she then was) on 29 November 2013 continuing the two Mareva injunctions and the Gagging Order and giving directions for the filing of evidence for the purpose of the applications in respect of the said orders before this court (“the Directions Order”).

The Defendants’ Objection

Functus Officio

6. Mr Chang, for the defendants, raises a legal objection to the plaintiff’s application and submits that this court could and should have determined the 4 Reserved Costs Orders in the Decision even in the absence of the parties’ submissions. Now that the Costs Order has been sealed and perfected, this court is functus officio and has no further jurisdiction in this matter.

7. To reinforce his objection, Mr Chang relies on Lu Jun v Yu Qi and Ors, unreported, HCCW 282/2010, 28.11.2013 where Mr Recorder Patrick Fung SC refused to accede to the application of the petitioner to deal with the reserved costs orders made by other judges in interlocutory applications after the Recorder had already ordered the respondents to pay the petitioner the costs of the proceedings on an indemnity basis after trial. The learned Recorder concluded that the proceedings were already concluded when he made the foregoing disposition in regard to the costs of the proceedings. Hence, the Recorder concluded that he was functus officio and had no jurisdiction to deal with the petitioner’s application.

8. I am not convinced that this court is functus officio in respect of the 4 Reserved Costs Orders. The Costs Order was only made at the interlocutory stage and the plaintiff’s claim is far from its final adjudication. The 4 Reserved Costs Orders remain unresolved and the parties are entitled to have them determined by this court or any other courts before a final costs order of the proceedings is made.

9. I maintain this view notwithstanding the definition of “costs reserved” in Hong Kong Civil Procedure 2015 Volume 1 §62/1/3 at p.1129 referred to me by Mr Chang. The definition there is set out as follows:

““costs reserved” means that the costs will be lost and will not be allowed on taxation unless the court makes a specific order dealing with them at the conclusion of the proceedings (British Natural Premium Provident Association v Bywater [1897] 2 Ch.531, Beckley v Colley (1904) 48 Sol. Jo.261; How v Earl Winterton (No.4) (1904) 91 L.T.763)”

10. Mr Chang argues that in the context of the 4 Reserved Costs Orders, the proceedings must be referred to the inter-partes hearing relating to the ex parte orders. Thus, in accordance with the definition, when at the conclusion of the inter-partes hearing this court did not make a specific order, such reserved costs will be lost.

11. Alternatively, Mr Chang submits that if the proceedings can mean the entire action, this court should only make a specific order dealing with them at the conclusion of the present action and it is now premature to make any determination on the 4 Reserved Costs Orders.

12. I cannot accept his submissions. I do not think that the 4 Reserved Costs Orders had to be determined at the conclusion of the plaintiff’s application to continue the ex parte orders lest the reserved costs should be lost and disallowed on taxation. Whilst I agree that this court is in a good position to make the determination, I maintain the view that so long as the entire proceedings are still on foot and alive and there is no order made in regard to the costs of the entire proceedings, the parties are at liberty to apply to this court or any other courts for a determination of any reserved costs orders.

13. Moreover, all of the three English cases referred to in the foregoing definition concerned applications to deal with reserved costs of interlocutory applications after the entry of final judgments amounting to the conclusion of such proceedings. They are no authorities supportive of Mr Chang’s contention. It should be noted that in the British Natural Premium Provident Association case, Byrne J expressly indicated that he would not allow costs reserved not mentioned at the trial after judgment had been passed and entered except under very special circumstances. It follows that even the entry of final judgment is no absolute bar to the determination of a reserved costs order.

14. Secondly, in my view, the definition merely makes it clear that a specific order dealing with a reserved costs order is required before the conclusion of the proceedings for the purpose of taxation. The definition, when properly interpreted, cannot possibly be meant to preclude the court from dealing with reserved costs orders on any occasions other than at the conclusion of the proceedings.  

15. Having concluded that this court has jurisdiction to deal with the 4 Reserved Costs Orders now, I proceed to consider the reserved costs of the 1^st and 2^nd Mareva Injunctions and the Gagging Order first.

16. Ms Fewins points out that as with the Costs Order, these reserved costs should be granted in favour of the plaintiff, following the event. Mr Chang submits that the defendants did not take any part in those ex parte hearing and should not be made liable for any costs reserved therein.

17. Mr Chang further draws my attention to the following dictum of Rogers VP (with whom Le Pichon JA agreed) in King Fung Vacuum Ltd & Ors v Toto Toys Ltd & Ors [2006] 2 HKLRD 785 at §27:

“The tradition order on interlocutory injunctions has been that the successful party in any application for an interlocutory injunction would have his costs in the cause. Following the American Cynamid decision, the practice has frequently been to make both parties’ costs, costs in the cause. There is no justification if one applies American Cynamid principles for giving the successful party his costs in any event, or worse still an immediate order as to costs, unless of course that party has acted improperly or is in some way to be penalized. It could be, for example, that if a plaintiff seeks an interlocutory injunction and the application is totally baseless and does not even establish, for example, that there is a matter fit to be tried, that the Court would then consider that such an order might be made. But those would be very special circumstances. Normally an order of either costs in the cause, or perhaps the successful party’s costs in the cause would be appropriate.”

18. This general approach was adopted by DHCJ H. Wong SC in Guccio Gucci S.P.A. v Cosimo Ludolf Gucci and Ors., unreported, HCA1582/2008, 5.9.2009. At §31, the deputy judge observed that in an interlocutory application such as that case, where the court was not concerned with making final determination of the merits of the case, an apportionment of costs based on the court’s provisional view on the merits of the various issues involved is particularly inappropriate. The deputy judge went on to point out that good reasons must be shown before the court would depart from the usual course of ordering costs in the cause.

19. On these authorities, Mr Chang submits that the reserved costs in respect of the 1^st and 2^nd Mareva Injunctions and the Gagging Order should be made costs in the cause.

20. I agree with the general principles expounded in the foregoing authorities and indeed they are well established. The Costs Order, though at one stage the defendants wrote to this court to ask for a variation, is not the subject matter of this application and I need not explain it in detail. Suffice it to say that when I made the Costs Order I had other different considerations. I had particular regard to the fact that the only live issue was whether the plaintiff had shown a serious question to be tried on the evidence with respect to its proprietary claim on the monies sitting in the respective accounts of the 1^st and 2^nd defendants. The defendants all along did not argue about the balance of convenience. They, in my judgment, particularly after the Civil Justice Reform, should have taken a realistic approach to decide on their position and the inter-partes contest could well have been avoided.  

21. However, for its ex parte hearings, they were plainly indispensable and without them the plaintiff could not have obtained the interlocutory protections it presently enjoys. These applications were allowed on untested evidence only and there is no reason why the general principle explained above should not be applicable. I conclude that such reserved costs should be made costs in the cause accordingly.

22. I would approach the reserved costs under the Directions Order in a different manner.  

23. Mr Chang agrees that the Costs Order can still be varied under the slip rule pursuant to Order 20 r.11, Rules of the High Court after being sealed and perfected: Wong Hung Kar Kee Mimi v Severn Villa Ltd [2014] 1 HKLRD 1088. There, Au-Yueng J pointed out that the slip rule had been applied to correct orders where there was omission of counsel to seek costs and/or interest.

24. The Direction Order was made in the course of the call-over hearing of the inter-partes applications and the hearing was an essential part of those applications. There is nothing to suggest that it could have been dispensed with. My manifest intention of my making of the Costs Order was to allow the plaintiff’s to recover its costs from the defendants in respect of those applications having found their opposition to be unmeritorious. There is no reason why I should disallow the plaintiff’s costs of the call-over hearing at all given the Costs Order. It was merely an omission on my part to expressly state that the Costs Order should also include the reserved costs under the Directions Order.

25. In the premises, I think it is an appropriate case that this court should exercise its discretion and invoke the slip rule to amend the Costs Order to make it clear that the costs of the plaintiff of such applications under the Costs Order should also include the reserved costs under the Directions Order. I opine that it is right for me to do so though Ms Fewins does not expressly suggest this course. I should also make it clear that I am not convinced that the defence would suffer any prejudice as a result in the absence of cogent evidence.

26. For completeness, there was a debate between Ms Fewins and Mr Chang as to whether the Costs Order was an order nisi subject to variation. In light of my clear indications both at the end of the hearing and in my written reply to the defendants’ solicitors directing the defendants to make a proper application to vary the costs order nisi by summons if so advised, it should be abundantly clear to the parties that it was indeed meant to be an order nisi. The parties could have applied to this court to rectify the omission to include the express reference in the Costs Order. In any event, I see no reason why the plaintiff cannot now ask this court to apply the slip rule and include in the Costs Order a reference to the reserved costs of the call-over hearing.

Conclusion and Orders

27. For the reasons given above, I accede to the application of the plaintiff to deal with the 4 Reserved Costs Orders despite the objection of the defendants. For the reserved costs under the Directions Order, I would order that the defendants do pay the plaintiff such costs forthwith to be taxed if not agreed. I would also order that the Costs Order be amended accordingly to reflect this disposition.

28. As regards all other reserved costs under the 1^st and 2^nd Mareva Injunctions and the Gagging Order, they should be made costs in the cause.

29. This application is necessary to dispose of the 4 Reserved Costs Orders. Each party has its role to play in necessitating the present application. I believe that the fairest costs order in respect of the plaintiff’s summons should be costs in the cause. I so order on a nisi basis.

30. Lastly, I thank Ms Fewins and Mr Chang for their helpful assistance.

HCA 2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2264 OF 2013

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DECISION
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1. The plaintiff commenced this action in November 2013 alleging that:

(a) it was the victim of a telephone and e-mail fraud committed in October 2013 whereby about EUR977,000 was transferred as directed by the fraudster(s) (“the transferred sum”);

(b) part of the transferred sum was deposited into the bank accounts of the defendants (“the claimed sum”).

The causes of action pleaded are “unjust enrichment” and “money had and received” on the defendants’ part.

2. The defendants deny the claim, asserting in gist that the claimed sum represented payments they received from their ordinary trading business.

3. Further to commencing this action, the plaintiff took out an application for summary judgment in September 2014 (amended in December 2014).  An issue arose as to whether the application falls within or outside of RHC Ord 14, namely, whether it involves:

“an action which includes a claim by the plaintiff based on an allegation of fraud” (Ord 14 r 1(2)(b)).

If it does, then logically the summary judgment application would suffer from a procedural defect.

4. The defendants’ case that the “preliminary issue” ought to be decided in their favour can be summarized as follows.

5. In denying the defendants’ case that they were bona fide recipients for value of the claimed sum, the plaintiff would have to establish:

(1) two of the three suppliers averred to by the defendants did not sell to the defendants; the third supplier was fictitious;

(2) an invoice relied upon by the defendants is a forged document;

(3) the 1^st defendant has used a false address.

The essence of the plaintiff’s case is said to be that the defendants received the claimed sum for no consideration (and for no valid or legitimate reason) and not in good faith, and it is likely they received the same as parties connected to the fraud (para 10, Fewins affirmation (filed on the plaintiff’s behalf)).

6. The plaintiff disagrees and contends that no fraud allegation has been made against the defendants.

7. In order to properly decide the above dispute, it is crucial to ascertain whether the law ascribes to the word “fraud” a wide (or narrow) meaning for the purpose of Ord 14 r 1(1).  At the risk of over-simplification, the English authorities were inclined towards to a narrow meaning: Hong Kong Civil Procedure 2009, Vol 1, para 14/1/1:

“… The exclusion should be construed narrowly and is confined to an action based on fraud strictly defined … [It does not] include an action based on a resulting or constructive trust or for money had and received, even though fraud may have been the means by which the funds claimed came to be used” (emphasis supplied).

(partly restated in Hong Kong Civil Procedure 2015, Vol 1, para 14/1/1, pp 252-3)

On the other hand, the majority of the Hong Kong authorities were inclined towards a liberal meaning.

8. An authority which has binding effect on this court is the court of appeal’s decision in A-1 Business Ltd v Chau Cham Wong Patrick [2009] 5 HKLRD 579.  Because of its importance to the determination of the present dispute, a few words will be spent on the decision.

9. The plaintiff in the A-1 decision sued its directors for breach of fiduciary duties by misappropriating the plaintiff’s assets (including the transfer of a substantial sum from the plaintiff’s account to the personal account to reduce a personal loan).  The defendant denied the claim, asserting that the transfer was a dividend payment to directors.  The plaintiff refuted the assertion, and accused the defence as involving fabricated documents after the fact to create a fictitious declaration of dividend.

10. In dismissing the plaintiff’s appeal against the dismissal of its summary judgment application, the court of appeal decided that the plaintiff’s claim was caught by the “exclusion rule” (Ord 14 r 1(2)(b)).  The court opined that the rule should not be confined to actions in which there was a claim for damages for fraud, but also any action where there were underlying allegations on which the claim was based would constitute an allegation of fraud.

11. The court of appeal in the A-1 decision quoted from its earlier judgment in another appeal,  Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94:

“… the rule is not confined to excluding actions in which one of the claims is a claim for damages for fraud, what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud” (para 19 thereof).

12. In adopting and applying the above test, the court of appeal said the following in the A-1 decision:

“In order to establish that the transfer was a misappropriation of the plaintiff’s assets, the plaintiff clearly has to address the defence [that the transfer was for a legitimate purpose] and this clearly will involve an allegation of dishonesty on the part of the defendants … ” (para 15 thereof).

It should be noted the dishonesty in question was:

“… after the event falsification of documents to create a fictitious declaration of dividend from the plaintiff to A-One Investments which was used by A-One Investments to repay a loan obtained from the first defendant” (para 13 thereof, quoting from the first instance decision).

13. In this action, the reply avers:

“[Strauss Group Ltd, a supplier of the defendants] did not issue the invoice to [the 1^st defendant] and has declared the invoice [put forth as evidence of a trading transaction] is a fake …” (para 9 thereof).

The averment was elaborated in an affirmation filed by the plaintiff:

“… At page 12 of the exhibit is an email from the Finance Director of [Strauss Group Ltd] , Ronen Shamgar, stating that the invoice which [the 1^st defendant] alleges it was sent by [Strauss Group Ltd] was not issued by [Strauss Group Ltd]” (para 42, Jefferis 2^nd affirmation).

14. Thus, even if the other allegations of falsities referred to in para 5(1) and (3) above, the allegation of falsifying and uttering a forged document would mean at least this part of this action falls within the test set out, and the manner in which the test was applied, in the A-1 decision.

15. For the above reasons, I will decide the issue in the defendants’ favour.  Following from what was said in para 3 above, the summary judgment application should be dismissed accordingly.

16. The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

17. The parties agree that the costs of this dispute should be the defendants’ if the issue is determined in their favour.  There will accordingly be a costs order that those costs be paid by the plaintiff to the defendants.

18. I consider summary assessment of costs to be appropriate.  The above costs shall thus be so assessed.  For this purpose:

(a) the defendants be at liberty to lodge with court and serve a statement of costs within 7 days from today;

(b) the plaintiff be at liberty to lodge with court and serve a statement of objections within 7 days thereafter.

HCA2264/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2264 OF 2013

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DECISION

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Introduction

1.  Zimmer Sweden AB (“Zimmer Sweden”) was allegedly victimized in a fraud perpetuated in Sweden and was swindled out a total sum of EUR487,000 in mid October 2013. Part of the said sum allegedly ended up in the respective bank accounts of KPN Hong Kong Limited (“KPN”) and Brand Trading Limited (“BT”) in Hong Kong. Zimmer Sweden brought this action to recover such monies and obtained two separate ex-parte injunctions, first against KPN by DHCJ Leung on 21 November 2013 (“the 1^st Injunction”) and then against BT by L Chan J on 23 November 2013 (“the 2^nd Injunction”) to enjoin them from dealing with the monies in their respective bank accounts to a specified extent. Zimmer Sweden further obtained a gagging order from DHCJ Yau against both KPN and BT also on an ex-parte basis (“the Gagging Order”). This is the first encounter of the parties for substantive arguments and I am seized with several applications.

2.  First, Zimmer Sweden applies for the continuation of the 1^st and 2^nd Injunctions and the Gagging Order. Both KPN and BT seek to discharge the two Injunctions on the ground of material non-disclosure and oppose their continuation.  Alternatively, they ask for fortification of Zimmer Sweden’s undertaking as to damages. They also seek to discharge the Gagging Order. Lastly, by summons dated 11 February 2014 (“the Security for Costs Summons”), KPN and BT jointly apply for security for costs in the sum of HK$1 million up to and including the stage of exchange of witness statements by reason of the fact that Zimmer Sweden is a foreign company.

Undisputed facts by way of evidence filed at the ex-parte stage

3.  The bulk of the evidence placed before the ex-parte judges by Zimmer Sweden is not controversial and can be summarized as follows.

4.  Zimmer Sweden, based in Gothenburg, Sweden, is a part of a worldwide consolidated group trading in medical products. The headquarters of the group are located in the US. Ms Forsberg was at the material time the Finance Manager of Zimmer Sweden.

5.  On 14 October 2013, Ms Forsberg received a call from a man purported to be Mr Crines who was at the material time the Executive Vice President, Finance and the Chief Financial Controller of Zimmer Sweden’s parent company in the US. The man, whose identity remains unknown, was later found to be a fraudster (“the 1^st Fraudster”).

6.  The 1^st Fraudster alleged that he was calling from Switzerland and represented to Ms Forsberg over the phone that the Zimmer Group needed to raise funds within the group for an acquisition of a company on a confidential basis. Ms Forsberg asked Ms Quist, the Accountant of Zimmer Sweden to follow up the demand of the 1^st Fraudster.

7.  A lady calling herself Ms Laura Peter (“the 2^nd Fraudster”) telephoned Ms Quist subsequently and she purported to be an attorney acting on behalf of Mr Crines. The 2^nd Fraudster sent an invoice to Ms Quist demanding payment of EUR487,000 (“the Sum”) in favour of a company called Enara UAB aka UAB Kosona (“Kosona”) with a bank account with DNB Bank in Lithuania.

8.  On 14 October 2013, the Sum was transferred to the said account of Kosona as a result and the transfer was evidenced by a bank confirmation (“the Transfer”). The 2^nd Fraudster emailed Ms Quist to acknowledge receipt of the bank confirmation.

9.  On 21 October 2013, the 1^st and 2^nd Fraudsters separately called Ms Forsberg again to ask for further funds for the alleged acquisition. The 2^nd Fraudster sent an invoice to Ms Forsberg demanding payment of EUR490,000 (“the 2^nd Sum”) in favour of a company called Latman Invest Corp (“LIC”) with a bank account with AS Rietumu Bank (“ASR Bank”) in Latvia. They represented to Ms Forsberg that the deal would be announced on 25 October 2013 and both loans would be repaid on 26 October 2013.

10.  Pursuant to the invoice, Ms Forsberg made a transfer of the 2^nd Sum to the account of LIC with ASR Bank. The said transfer was evidenced by a transfer receipt. Ms Forsberg emailed the said transfer receipt to the 2^nd Fraudster and the 2^nd Fraudster acknowledged receipt of the document by way of a return email.

11.  On 22 October 2013, Ms Forsberg tried to call Mr Crines at the office of the Zimmer Group in Switzerland but in vain. She was told that Mr Crines had all along been in the US. She started to doubt about the two transfers and then she called the 1^st Fraudster. Knowing that the fraud was close to discovery, the 1^st Fraudster hung up and could never be reached ever again.

12.  Zimmer Sweden tried to stop the said transfer of the 2^nd Sum but in vain. The 2^nd Sum has nothing to do with KPN and BT and this action concerns the Transfer and the Sum only. KPN and BT became embroiled in this matter due to the following transactions.

13.  On 15 October 2013, Kosona converted the Sum save EUR10,000 into USD628,862.20 and transferred the same into three tranches (USD220,000, USD240,000 and USD 168,000) to the bank account of KPN with HSBC (No. 817031743848) (“theKPN Account”).  Certain bank charges were deducted from the three sums by HSBC and hence the resultant balance stood at USD628,417.29.

14.  Subsequently, on diver dates in October 2013, KPN made the following transfers totaling USD296,641 into the account of BT with HSBC (No.817-638257838) (“the BT Account”).

Date	Amount (USD)
15 October 2013	43,735
16 October 2013	(i) 69,476 (ii) 69,946 (iii) 29,621
17 October 2013	44,381
25 October 2013	39,482
	296,641

15.  Both KPN and BT have the same registered address at Unit 808, 8/F, Star House, 3 Salisbury Road, Tsim Sha Tsui, Kowloon, Hong Kong (“the Unit”). They also share the same service company, ABA Services Limited (“ABA”) as their common company secretary using the Unit as its office.

16.  A male known as Peddappaiah Nagaraja Kotagaralahalli (“Nagaraja”) is the common director of KPN and BT. He has been charged with a holding offence of dealing with property known or believed to represent proceeds of an indictable offence under section 25 of the Organised and Serious Crimes Ordinance, Cap.455.

17.  Mr Chang, counsel for KPN and BT, informs this court that Nagaraja was brought before a magistrate for mention on or about 10 March 2014 and the criminal case has been adjourned for further police investigation. The defence also handed up a copy of the charge sheet showing that the KPN Account is the subject matter of the holding charge.  

Steps taken by the parties after the commencement of these proceedings

18.  Before dealing with the controversial evidence of the parties and their respective applications, I shall give a brief account of the procedural history. The evidence adduced by Zimmer Sweden at the ex-parte stage consisted of the affirmation evidence of Ms Fewins, of Messrs. Stephenson Harwood, solicitors for Zimmer Sweden. Ms Fewins has all along been the handling solicitor in this action.

19.  In the very beginning, Zimmer Sweden sued KPN only by its Writ dated 21 November 2013. On the same day, Ms Fewins filed an affirmation and she relied on it to obtain the 1^st Injunction against KPN only. 

20.  Further, on or about 22 November 2013, one Ms Yan who was a legal assistant of Mannheimer Swartling liaised with the Hong Kong police in respect of the fraud complained of by Zimmer Sweden. A lady police officer called Madam Chan told Ms Yan that approximately HK$600,000 of the alleged fraud proceeds was transferred from KPN to BT. Ms Yan was provided with the details of the bank accounts of KPN and BT.

21.  Ms Fewins was duly notified of the foregoing information and hence in no time her 2^nd affirmation and an amended writ with BT being made a party were prepared. On 23 November 2013, Ms Fewins again applied successfully on behalf of Zimmer Sweden both an order to allow amendment of the Writ and the 2^nd Injunction on the strength of her 1^st and 2^nd affirmations.

22.  On 25 November 2013, Ms Fewins had a telephone conversation with a male identifying himself as Mr Kotagaralahalli (Nagaraja) of KPN, who called to tell her that he had received the court documents relating to these proceedings served on KPN on the registered office address of KPN, i.e., the Unit (“the Conversation”). The gentleman insisted on the innocence of KPN. On the same day, for fear that KPN may tip off other fraudsters to dissipate the Sum to frustrate tracing, Ms Fewins made her 3^rd affirmation and applied for the Gagging Order and a disclosure order against HSBC on a confidential and ex-parte basis. DHCJ Yau granted the applications and hence Zimmer Sweden obtained two orders both dated 25 November 2013.

23.  The return dates of the 1^st and 2^nd Injunctions fell on 29 November 2013 and DHCJ B. Chu made an order to the effect that both the Injunctions and the Gagging Order be extended until further order. Directions for filing evidence were also given, pursuant to which the parties have filed voluminous evidence. At the outset, Zimmer Sweden further sought indulgence to file the 2^nd affirmation of Neil Miller (“NM”) out of time. Mr Chang also on behalf of the defence applied for leave to file the 2^nd affirmation of Benjamin Muller (“BM”), who claims to be in charge of the trading operation of KPN and based in London. These applications were unopposed and hence granted.

Controversial evidence filed at inter-partes stage

24.  The defence has filed evidence to show that the monies that KPN and BT have handled were ordinary trade proceeds transferred to their respective accounts and have nothing to do with any fraud. For the purposes of these applications, it suffices to give a summary of the disputed evidence and I should start with the defence’s account.

25.  Mr Mendel Gluck (“MG”) in his affirmation explains the innocent background of KPN and BT. He claims to have become the 91% shareholder of KPN through his nominee company incorporated in the Republic of Panama in 2011. MG acquired KPN for the purpose of a joint venture with the Sri Lanka government in respect of an old sugar plant and according to the Sri Lankan requirements he needed to acquire a Hong Kong company to be the mother company. KPN comprises the initials of Nagaraja and used to be a dormant company. MG came to know Nagaraja through the introduction of his partner.

26.  Subsequently the joint venture did not materialize and MG used KPN for general trading purposes. MG decided to engage his old friend BM to run an office in London in charge of the trading activities of KPN. KPN commenced trading (mainly in household and health and beauty products) in March 2013 and BM has throughout run the business for MG and Nagaraja is a mere nominal director.

27.  BT was set up by MG and BM also for trading purpose in London. There have been fund flows from KPN to BT from time to time as loans.

28.  BM in his affirmation explains the transfers. In September 2013, his friend Mr Simon Teitelbaum (“ST”) looked for large stocks for Christmas for his client and he turned to BM. Eventually, ST targeted at products of three brands, namely, Head & Shoulders (“H&S”), Pantene and Johnson & Johnson (“J&J”).

29.  BM managed to get M & M Dearot Inc (“M&M”) to supply ST with the H & S products required. M&M sent KPN an invoice dated 1 October 2013 for USD200,322.00. As evidenced by its bank statements, on 3 October 2013, KPN allegedly paid M&M a total sum of USD 49,700.00 as part payment from the KPN Account. On 8 October 2013, KPN issued an invoice to Kosona asking for USD 219,954.15.

30.  For Pantene products, BM sourced from Strauss Group Limited (“SG”), an Israeli company. BM exhibited an invoice of SG dated 8 October 2013 for USD228,099.00 being the price of various Pantene products (“the SG Invoice”). As evidenced by its bank statements, on 9 October 2013, KPN allegedly paid SG a total sum of USD 57,000.00 as part payment from the KPN Account. On 10 October 2013, KPN issued an invoice to Kosona asking for USD 239,952.60.

31.  Lastly, BM sourced from Birida Gida Limited (“BG”), a Turkish company, the J & J stocks required by ST. BG issued an invoice dated 9 October 2013 for USD151,030.40 and purportedly in partial settlement, a sum of USD 60,000 was paid out of the Account on 10 October 2013. On the following day, KPN issued an invoice for USD168,742.00. It is noteworthy that when KPN made such partial payments on behalf of Kosona, all KPN knew about Kosona were its name and its address in Lithuania.  

32.  Since October 2013, BM has chased ST for payment of the foregoing invoices issued to Kosona even with threats, as shown by certain email exchanges exhibited. KPN also produced certain shipping documents relating to the foregoing products sourced for ST’s client.

33.  Eventually, ST’s client transferred a total sum of USD628,417.29 into the KPN Account by three separate payments on or about 15 October 2013 purportedly in payment for the foregoing products. KPN then paid the balance of the purchase price to M & M, SG and BG in early November 2013.

34.  Before making the payments, in late October 2013, KPN first transferred its monies in Swiss Francs to a foreign exchange company in the US named Freedex Express Ltd (“Freedex”) to turn them into US dollars. Freedex is claimed to offer KPN better exchange rate. In the end, Freedex not only changed monies for KPN but also made payments on its behalf to M&M, SG and BG together with another supplier pursuant to the instructions of KPN.

35.  Certain banking documents were produced to evidence these payments. Apparently, Freedex gave instructions to Barclays Bank PLC (UK) (“Barclays”) to transfer a sum of USD150,622 to M&M on 4 November 2013, a sum of USD 171,099.00 to SG on 7 November 2013 and a sum of USD 91,0030.40 to BG on 5 November 2013. Three documents of Barclays were produced to show the said three transfers from Freedex (“the Barclays’ Documents”).   

36.  In gist, the evidence of KPN suggests that the Sum was received as genuine trade proceeds and KPN had no knowledge, actual or constructive, of its alleged illegitimacy.

37.  In regard to the transfers of the total sum of USD 296,641 from KPN to BT in October 2013, BM maintains that these were ordinary trade loans between two related business entities.

38.  It should be mentioned that Nagaraja made an affirmation while he was in custody. His evidence is brief and simply makes the point that he has only been a nominal director of KPN and he had no involvement whatsoever in its business operation.

39.  Zimmer Sweden mounted a vehement challenge to the evidence of KPN and BT. It instructed a firm of investigators based in London, namely, Ten Intelligence Limted (“TIL”) to carry out intensive investigations into all the alleged business transactions made by KPN. The findings of TIL were contained in a report dated 3 March 2014 exhibited to the 1^st Affirmation of NM, who is the Chief Executive Officer of TIL.

40.  Ms Man, counsel for Zimmer Sweden, helpfully summarized by way of a table the relevant findings of TIL in juxtaposition with the corresponding allegations of the defence. I do not find it necessary to set out all the contradictions here and I would merely mention those major findings pertinent to the bona fide of the alleged transactions.

41.  First, alarmingly, M&M is found to be a property management company dealing with real estate in Buffalo, New York and could not have supplied hair and beauty products to KPN.

42.  SG was found to a food and beverage company. Its Account Executive Mr Odem Alagem confirmed by way of an email dated 2 March 2014 that SG did not deal in Pantene products as alleged at all. Further, NM contacted Mr Ronen Shamgar, the Financial Director of SG. He examined the SG Invoice and came to the firm conclusion that it was a forged document looking substantially different from their invoices. He also confirmed that SG had never dealt with KNG. He sent NM an email dated 12 March 2014 to recap his observations.

43.  TIL’s investigation also revealed that there is no company existing in the name of Birda Gida Limited. The closest is one called Birida Gida Ic ve Dis Ticaret Scnayi Ltd Sti incorporated in Turkey in 2002, which shared the same address with BG. TIL approached Mr Riza Davutoğlu (“RD”) who was one of the shareholders and Chairman of the said company. RD indicated that BG did not trade in Johnson & Johnson products as alleged. RD also produced a catalogue of the products traded by BG which did not include any of products sold by reference to the trade name of Johnson & Johnson.

44.  The documents produced by the defence including the SG Invoice also look suspect. First and foremost, in the three remittance advices showing the deposits of the monies into the KPN’s Account, the payment details inexplicably referred to real estate while there was no mention about any trade of commercial products.    

45.  The Barclays’ Documents are also under attack. KPN claims that it first transferred monies in Swiss Francs to Freedex for exchange purposes before payments were made to the three suppliers by Freedex in accordance with its instructions. In the banking documents produced by the defence, the beneficiary bank of Freedex was stated to be Mizrahi Tefahot Bank Ltd (“MTB”) and not Barclays. Mr Christopher Jefferis, Director of Zimmer Sweden, contacted the managers of MTB and was told that MTB never used the services of Barclays for any transfers of US dollars in any one of its accounts to other accounts.

46.  Freedex appears to be dubious too. BM is a director of two other English companies named Fredex Express Limited and Gold Fredeex Limited. They shared the same address with BM and three other companies of which MG is a director. The address was found to be the business address of a firm of accountants.

47.  TIL further paid a site visit to the purported London office of KPN on 5 March 2014 and it was found out that the premises were derelict awaiting demolition. About the residential address of BM, it was found out that there was no 17A on Grovelands Road and in any event the property on 17 Grovelands Road belonged to another person.    

48.  BM in his 2^nd affirmation exhibited two documents respectively issued by HSBC and the Haringey Council in England showing that his residential address was a valid one. He, moreover, pointed out that the London office of KPN was in fact closed down in mid February 2014 and all other occupants of the same building were told to vacate he said building too.

49.  Lastly, I should mention that it is the evidence of Ms Fewins that after the grant of the two Injunctions, Nagaraja contacted her by emails. After some exchange, Nagaraja called Ms Fewins indicating that he was in town and had received the legal documents from Zimmer Sweden. Ms Fewins was eager to meet Nagaraja but he told her that MG would be in a better position to explain to her their innocence.

50.  Eventually, MG called Ms Fewins in the afternoon of 25 November 2013. MG identified himself to be an employee of KPN and he was an advisor. MG told her that he had been telephoned by an individual a few months ago who expressed his interests in purchasing shampoo products from KPN for his new company Kosona. MG tried to persuade Ms Fewins that KPN was innocent but he indicated that he knew the 1^st Fraudster personally. He said the 1^st Fraudster had an address in Israel and he had all the information relating to the 1^st Fraudster so that Zimmer Sweden could track him down. He told Ms Fewins that they should work together against the 1^st Fraudster and the present proceedings should be discontinued.

51.  On the following day, Ms Fewins had a meeting with Nagaraja at her office. He told her that MG handled all the dealings with Kosona and he was not involved. He further produced certain sales documents to Ms Fewins to prove the innocence of KPN and BT. At the end, neither he nor MG disclosed any information about the 1^st Fraudster to Ms Fewins.

Material non-disclosure

52.  I first deal with the application of KPN and BT for discharge of the two Injunctions by reason of material non-disclosure. Mr Chang refers me to the summary of the legal principles relating to material non-disclosure in ex-parte applications given by DHCJ Au-Yeung (as she then was) in Velatel Global Communications Inc and Anor. v Chinacomm Limited & Ors. unreported, HCA1978/2011, 26.10.2012. Those principles are well-established and there is no debate about them. Ms Man acknowledges the duty of Zimmer Sweden to make a full and fair disclosure of all the material facts at the two ex-parte hearings. Such a duty also extends to matters of law: Memory Corp plc v Sidhu [2000] 1 WLR 1443 at 1454 C-G per Robert Walker LJ. With such principles in mind, I turn to the five complaints of the defence.

53.  First, Mr Chang submits that that Zimmer Sweden failed to bring to the ex-parte judges’ attention that service could be effected on the defence on the Unit through ABA. Instead, in the affirmation evidence, Ms Fewins asserted that KPN appeared to have ceased operating or is simply a front for carrying out fraudulent activities based on the findings of a lady staff of Zimmer Sweden law firm in Sweden who had paid a visit to the Unit on 13 November 2013. The lady staff was unable to locate KPN from checking the list of companies occupying Star House. Further, she failed to see a company operating any business inside the Unit. She looked through the frosted glass and it seemed to her that there were shelves or cabinets placed right behind the door, blocking the entrance from inside. She took some photographs to evidence her observations.

54.  Mr Chang submits that Ms Fewins should not have relied solely on the said lady staff of another firm to make the site visit and her assertion was unfounded. ABA in fact used the Unit as its office and those instructing Mr Chang was told by one Mr Leung of ABA that there were staff working in the Unit during office hours.

55.  I find no substance in this complaint. There is no direct and cogent evidence to show that the observations of the said lady staff were erroneous. There is no contrary evidence to the allegation that there was no signage outside the Unit or within Star House. Nor is there any evidence that KPN did operate its business inside the Unit on 13 November 2013. The defence said nothing about the alleged unusual scene of the entrance of the Unit being blocked from inside. The mere fact that the Unit was subsequently good for valid service does not mean that such observations were not validly made on 13 November 2013. There was no inaccurate information provided to the ex-parte judges in so far as the observations of the said lady staff were concerned. Based on those observations, Ms Fewins at the ex-parte hearing before DHCJ Leung submitted that KPN was no longer in operation. From the transcript of the said hearing, it can be seen that the deputy judge did not accept the evidence sufficient to justify such a conclusion. Notwithstanding its being rejected, the submission of Ms Fewins was not in any way misleading in my judgment.

56.  Ms Man points out that in any event the defence turned up at the inter-partes hearing on 29 November 2013 necessarily meaning that the legal documents had been successfully served on them. She submits that there can be no material non-disclosure.

57.  Mr Chang submits that the duty of full and frank disclosure is a continuing obligation and once the services were effective on the Unit, the ex-parte judges should be informed so that they could reconsider whether Zimmer Sweden had a good arguable case that KPN and BT had a hand in the fraud and whether there was a real risk of dissipation, even before the inter-parte hearing.

58.  I cannot agree with Mr Chang. It is never the evidence or submission of Zimmer Sweden that ABA did not serve its function as KPN’s company secretary in the Unit. In her 3^rd Affirmation dated 25 November 2013, Ms Fewins disclosed the fact that Nagaraja had told her that he had received the court documents served on the Unit. The fact that the Unit is good for service through ABA does not mean that KPN and/or BT continue to carry on their respective businesses inside the Unit. Further. as mentioned, the 1^st Injunction was granted not on the basis that KPN and/or BT ceased their respective businesses inside the Unit. I do not find the valid service of the Injunctions on the Unit a material fact of which the ex-parte judges should be immediately informed. I should also point out that from the transcript of the hearing before L Chan J, it can be seen that Ms Fewins did inform the judge that the Writ (issued on the date of the 1^st Injunction) was successfully served on KPN.

59.  Next, Mr Chang complains that Zimmer Sweden failed to warn the ex-parte judges that the evidence of Ms Fewins in support of the applications for injunctions contained unverified, multiple hearsay materials. He submits that Ms Fewins failed to make any independent inquiry or verification of her instructions from the legal advisor of Zimmer Sweden in Sweden and her allegations were hence based on unsatisfactory hearsay evidence. In this regard, Mr Chang relies on Anthony Chan J’s dictum in UES International (HK) Ltd v Mritima Maruba SA, unreported, HCA632/2011, 19.11.2013, §15 to the effect that solicitors should only give evidence on behalf of their client as a matter of exception which can be justified.

60.  Mr Chang also complains that Zimmer Sweden did not act fairly in obtaining the 2^nd Injunction in that the possible defence of BT was not mentioned to L Chan J. Again I see no merit in this submission.

61.  In the first place, I do not think the ex-parte judges required any warning. Being professional, the ex-parte judges must be aware of the nature of the evidence placed before them. They could not be oblivious of the fact that the supporting evidence came from a practising solicitor in Hong Kong made on instructions. The evidence was all about a fraud with an international element perpetuated outside this jurisdiction. Zimmer Sweden, in addition to reporting the matter to the Hong Kong police, asked for urgent relief soon after the fraud was discovered. In these circumstances, it was not unreasonable for its handling solicitor to make affirmations on its behalf on an urgent basis at the ex-parte stage.

62.  Further, as mentioned, the evidence placed before the ex-parte judges was not really in dispute. The defence of KPN and BT is just that they are not involved in the fraud. I fail to see why the Injunctions were not justified merely because Ms Fewins did not have personal knowledge of the alleged fraud. In any event, this has nothing to do with any material non-disclosure.

63.  Mr Chang further submits that Zimmer Sweden failed to highlight to the ex-parte judges that it had no assets in Hong Kong.

64.  The evidence before the ex-parte judges was that Zimmer Sweden has a substantial business overseas supported by its audited accounts. It did not allege that it had any assets in Hong Kong. In the skeleton submissions placed before the ex-parte judges, Ms Fewins merely mentioned about the substantial nature of Zimmer Sweden. I do not think the ex-parte judges were under any misapprehension that Zimmer Sweden being a Swedish company had any assets in Hong Kong. I do not accept that as a matter of inflexible rule that a foreign company with no assets in Hong Kong must invariably be ordered to fortify its cross-undertaking in damages. I do not find such a lack of assets in Hong Kong a material fact which Zimmer Sweden should have underlined to the ex-parte judges.     

65.  Mr Chang then goes on to complain about the failure on the part of Zimmer Sweden to disclose the Conversation and the subsequent disclosure of the sales documents by Nagaraja to Ms Fewins when they met on 26 November 2013. Mr Chang submits that though these took place after the grant of the Injunctions, nevertheless, Zimmer Sweden owes the ex-parte judges a continuing obligation to make full and frank disclosure.

66.  I cannot accept this submission. Zimmer Sweden is never obliged to take the words of Nagaraja (which were subsequently contradicted by the affirmation evidence filed by the defence) and the authenticity of the sales documents he disclosed at face value. The Injunctions were already served on the defence and they expressly provided that the defence could apply to vary or discharge the Injunctions. I do not see in those circumstances why it was incumbent on Zimmer Sweden to immediately file an affirmation even before the return date to mention the purported defence whilst the defence could simply sit on the Injunctions.

67.  Lastly, Mr Chang complains about the brevity of the skeleton submissions of Ms Fewins placed before the ex-parte judges. Each of them consisted of two pages only.

68.  To start with, I cannot see how the brevity of the written submissions can amount to any material non-disclosure. There is no specific matter in the evidence said to have been omitted from the written submissions. At best, it can be argued that the ex-parte judges were not given helpful assistance before the hearings. However, as the transcripts show, the ex-parte judges needed little further assistance on the evidence placed before them during the hearings and they were able to conclude that Zimmer Sweden was in need of urgent relief on such evidence.

69.  In conclusion, I find that there is no material non-disclosure that justifies the discharge of the Injunctions. Hence, I reject the application of KPN and BT to discharge the Injunctions.

Continuation of the injunctions

70.  Then I proceed to consider whether the Injunctions should be continued in light of the evidence filed at the inter partes stage. I wish to say something about the applicable principles first.

71.  Though the parties are prepared to argue on the basis that the Injunctions sought are Mareva injunctions, they also accept that on the evidence, Zimmer Sweden actually asserts a proprietary claim in the monies in the KPN Account and the BT Account. As such, it is primarily seeking proprietary injunctions. 

72.  In A v C [1981] 1 QB 956, the plaintiffs claimed to have been victimized by a conspiracy to defraud committed by the 1^st to 5^th defendants and in the result they paid a sum of GBP 383,872.44 to the bank account of a person identified as W.L. with the 6^th defendant bank. The plaintiffs applied for an injunction to restrain the defendants from disposing of the said amount or any lesser amount standing in the credit of the 1^st to 5^th defendants’ accounts or the said account with the 6^th defendant bank and two other incidental disclosure orders.      

73.  Robert Goff J (as he then was) took the opportunity to highlight the difference between proprietary injunctions and Mareva injunctions and had this to say (at §958D to E):

“In this connection, it is to be borne in mind that the injunction and associated relief were being sought in respect of two separated matters: (a) the second plaintiff’s proprietary claim to the sum of L383,872.44 paid by them to the sixth defendant for the account of W.L., and (b) both plaintiffs’ claim to a Mareva injunction against the first five defendants, all of whom are resident outside the jurisdiction. Of course, the basis of these two forms of injunctive relief is different, the first being granted to restrain the disposal of assets of which the second plaintiff claims to be the beneficial owners, and the second being granted to prevent a possible abuse, viz. The abuse of foreign parties causing assets to be removed from the jurisdiction in order to avoid the risk of having to satisfy any judgment which may be entered against them in pending proceedings in this country.

I take first the proprietary claim. In such cases, there is good authority that the court may make orders with the purpose of ascertaining the whereabouts of the missing trust fund.”

74.  Robert Goff J continued to refer to London and County Securities Ltd. v Caplan (unreported), May 26, 1978 and Mediterrania Raffineria Siciliana Petroli S.p.A. v Mabanalt G.m.b.H. (unreported) December 1, 1978 wherein injunctions were granted in aid of tracing claims. For the former case, Robert Goff J quoted the following words of Templeman J (as he then was):

“… a case of interlocutory relief granted to preserve the assets which were the subject of the litigation and are the subject of criminal proceedings. It is a case where, unless effective relief is granted, justice may well become impossible because the evidence and the fruits of crime and fraud may disappear.”

75.   His Lordship further had this to say:

“Now these cases provide ample authority that, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court not only has jurisdiction to grant an injunction restraining the disposal of that property; it may in addition, at the interlocutory stages of the action, make orders designed to ascertain the whereabouts of that property.”

76.  In Madoff Securities International Ltd and Anor. v Raven and Ors. [2012] 2 All ER (Comm) 634, Flaux J dealt with an application for a proprietary injunction and had this to say about the different applicable test (at §§127-128):

“MSIL seeks a proprietary injunction against the Kohn defendants. It is essentially common ground that there are three elements which the claimant has to demonstrate for the grant of a proprietary injunction, following the approach prescribed by American Cyanamid Co v Ethicon Ltd (No.1) [1975] A.C. 396; [1975] 2 W.L.R. 316 : (1) that the claimant has shown that there is a serious issue to be tried on the merits; (2) that the balance of convenience is in favour of granting an injunction; and (3) that it is just and convenient to grant the injunction.

In other words, both the basis for a proprietary injunction and the circumstances in which it will be granted are different from the case of a freezing injunction: see Polly Peck International Plc v Nadir (Asil) (No.2) [1992] 2 Lloyd's Rep 238 at 787 per Lord Donaldson M.R. In particular, unlike in the case of a freezing injunction, it is not necessary to show any risk of dissipation of assets and, even if there has been delay in making an application which might lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted: see Cherney v Neuman [2009] EWHC 1743 (Ch) per H.H.J. Waksman QC sitting as a Judge of the High Court at [101]–[102].”

77.  To J in Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited and Anor., unreported, HCA 1934/2011, 9.7.2012 also noted the difference between a proprietary injunction and a Mareva injunction and accepted that they could be applied for at the same time despite the difference in their applicable tests. His Lordship explained as follows:

“…is also wrong to argue that a Mareva injunction was not appropriate where the primary case against the 1^st defendant is solely proprietary in nature.  There are no constraints on the nature of a claimant’s cause of action or on the types of monetary relief which he may seek.  A Mareva injunction is designed to protect the claimant against the dissipation of assets against which he might otherwise execute judgment whether immediately or in the future: see Gee’s Commercial Injunctions, 5^th edition at paragraphs 3.029 and 5.009.  So long as the claimant has a claim against the defendant and that the defendant has assets which may be used to satisfy judgment, a claimant may apply for a Mareva injunction to restrain the defendant from dissipating his assets. A claimant’s right to a proprietary injunction is different.  It is issued to preserve assets which a claimant has a proprietary claim so that they can be turned over to the claimant if he is successful in the action   A proprietary injunction is easier to obtain and not subject to the usual liberties inserted into Mareva relief and there is no need to prove risk of dissipation.  It is a better relief than Mareva injunction, provided that the property has not been dissipated.  Where there is risk that the property has been dissipated, then it is prudent to apply for a Mareva injunction in aid or as a “top-up” protection in support of the proprietary injunction.”

78.  Mr Chang agrees to the foregoing principles and accepts that for the Injunctions to be continued, Zimmer Sweden does not need to show risk of dissipation. He further agrees that the balance of convenience is in favour of the continuation of the Injunctions. The live issue appears to be whether there is a serious issue to be tried on the merits.

79.  Before turning to the substantive arguments, it is pertinent to take note of the wise words of Parker L.J. in Derby & Co. ltd. v Weldon [1990] Ch.48 at pp.57-58 (with which May L.J. and Nicholls J agreed) to the effect that the court must not try to resolve conflicts of evidence on affidavit, or to decide difficult questions of law which call for detailed argument and mature consideration in interlocutory injunction applications after citing the speech of Lord Diplock in American Cyanamid [1975] AC 396.

80.  In his able submission, Mr Chang takes a legalistic approach and seeks to persuade this court that Zimmer Sweden has no discernible cause of action against KPN and BT.

81.  First, Mr Chang vigorously criticises the Statement of Claim. These, it is only pleaded that the Transfer was procured by fraudulent representation and that the Transfer being proceeds of fraud is traceable to the monies in the KPN Account and the BT Account. It goes on to say that it is unconscionable for KPN and BT to retain any part of the Sum and hence they become constructive trustees of the Sums holding the same on trust for Zimmer Sweden. It is further pleaded that KPN and BT are each liable to repayment and/or restitution of all monies received by any of them, being monies had and received by each of them.

82.  Mr Chang complains that no cause of action is pleaded against KPN and BT. He helpfully draws my attention to the elaboration of tracing by Millet L.J. in Boscawen and Ors. v Bajwa and Anor. [1996] 1 WLR 328 at 334D-F. He rightly points out that tracing in itself is neither a claim nor a remedy but a process whereby the plaintiff can trace what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. Unless he can show the retention by him of a beneficial interest in the property which the defendant handled or received, he could not raise an equity against the defendant’s unjust enrichment was at his expenses. It should also be borne in mind that it is still a prerequisite of the right to trace in equity that there must be a fiduciary relationship calling equitable jurisdiction into being.

83.  Mr Chang is also right in pointing out that neither knowing receipt nor dishonest assistance is pleaded against KPN and BT. No plea of fraud is pleaded, either. All in all, there is no unjust factor shown on the pleading save the plea of mistake to disentitle the retention of the Sum by KPN and BT.

84.  Ms Man, not being the author of the pleading, accepts that the statement of claim properly requires improvement. Nevertheless, she contends that the essential facts are present and they sufficiently entitle Zimmer Sweden to restitutionary remedy against KPN and BT. She further relies on the following dictum of Deputy Judge Woo in JS Microelectronics Ltd v Achhada [2013] 1 HKLRD 334 at §38:

“This case involves fraud and deceit; the evidence of it and that necessary for assisting in the tracing of the loot will unlikely be readily available. Indeed, I venture to say that after discovery, it may be necessary to amend the statement of claim further.”

85.  In that case, the deputy judge allowed the continuation of a Mareva injunction and dismissed the application to strike out the claim. Ms Man submits that this court is in a similar situation.

86.  I think it is a red herring to examine on the inadequacies of the pleading. This court is required to consider whether the plaintiff is entitled to interlocutory relief on the evidence. This court has to consider the totality of evidence and not just the pleading to decide or not whether the plaintiff can meet the threshold. Of course if the matters pleaded materially differ from those disclosed in the evidence, normally the reliability of the plaintiff’s evidence would be called into question. But this is not the case here.

87.  On the evidence of Zimmer Sweden, Mr Chang raises the point that even if equitable tracing is available in the case of mixed funds, Zimmer Sweden has failed to identity its monies in the account of Kosona in that it failed to ascertain the credit balance in the said account before the Transfer and hence the payments made to KPN could come from its own funds.

88.  As rightly pointed out by Ms Man, indeed Zimmer Sweden did produce a bank statement of the account of Kosona. It shows that it had a zero balance before the Transfer on 14 October 2013. This challenge is invalid.

89.  Further, Mr Chang raises a legal argument and submits that the plea of constructive trustees is doomed to failure even KPN and BT took a knowing part in the fraud. He relies on the recent judicial reluctance to follow the well known observation of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 69 at 716:

“I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v Wilson [1913] 2 KB 235, 244; R Leslie Ltd v Sheill [1914] 3 KB 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co v Shapira [1980] 1 WLR 1274, 1282C-E: see also McCormick v Grogan (1869) LR 4 HL 82, 97.”

90.   In Shalson and Ors v Russo and Ors. [2005] Ch281, Rimer J decided not to follow the foregoing observation. At §11, Rimer J pointed out that the authorities cited by Lord Browne-Wilkinson actually provided less than full support for the general proposition in the foregoing passage. Rimer J held that in any rate, he did not accept the proposition that property transferred under a voidable contract induced by fraud will immediately (and prior to any rescission) be held on trust for the transferor.

91.  Mr Chang further relies on the dictum of Millett LJ in Paragon Finance v DB Thakerar & Co [1999] 1 All ER 400 at 409e. There, Millett LJ explained the nature of a constructive trust in the following term:

“The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always give relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be ‘liable to account as constructive trustee’. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are ‘nothing more than a formula for equitable relief’: Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 at 1097, [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J.”

92.  On the other hand, Ms Man draws my attention to the recent observation of Stephen Morris QC sitting as a deputy High Court judge in Armstrong GmbH v Willington Networks Ltd [2012] 3 WLR 835 at §§127-129. The duty judge was aware that the observation of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council was doubted but in his judgment, in so far as it relates specifically to the case of theft or a bare transfer (and perhaps also where there is a contract between A and B which is void), it is accepted as representing the law: see Goff & Jones, para. 4-040 and Chitty, para 29-160. Ms Man thus submits that it is still good in law that the fraud perpetuated on Zimmer Sweden imposes a constructive trust on the fraudulent recipients including KPN and BT.

93.  Notwithstanding this interesting controversy about the nature and applicability of a constructive trust, Mr Chang accepts that it is not necessary for this court to express any firm view on this complicated legal issue. He eventually accepts that it is at the very least arguable that the observation of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale remains good law.

94.  In my view, stripped of legal niceties, on the evidence it is clearly shown that there are serious issues to be tried between the parties and Zimmer Sweden has shown a good arguable case against KPN and BT. I am convinced that it has a sound claim for restitution and that it will be entitled to proprietary remedy relating to the Sum. KPN and BT do not begin to argue that Kosona was entitled to any payments by Zimmer Sweden. The bone of contention is clearly about the genuineness of the alleged transactions among Kosona and KPN and BT. In the event that the alleged transactions were found to be bogus, their defence of change of position and bona fide purchaser for value can hardly succeed and it is difficult to see how it is just for KPN and BT to hold on to any part of the Sum.

95.  I am very much convinced on the evidence that Zimmer Sweden has a good arguable case to prove that there was no genuine trading between Kosona and KPN and the transfers of the Sum to the KPN Account was not for bona fide commercial purpose. For the purpose of this application, I should refrain from making a forensic analysis of the conflicting evidence. Suffice it to say, I have come to this conclusion despite the affirmation and documentary evidence adduced by the defence. I have also taken into account the defence plea of change of position and bona fide purchaser for value. It appears to me that the defence is required to give further explanations in light of the untested rebuttal evidence of Zimmer Sweden emanating from TIL.

96.  In the premises, I also conclude that it is just and convenient to continue the Injunctions. Mr Chang applies for a variation of the Injunctions so that each of KPN and BT can have a maximum of HK$10,000 per week on legal advice and representation. It appears to be a reasonable request and I have heard no objection. I agree to the proposed variation.   

Fortification of the cross-undertaking as to damages

97.  The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification and there is no obligation on a plaintiff to give full and frank disclosure of financial circumstances to oppose an order for fortification (or to argue for a lesser amount): per Deputy Judge Coleman SC in Hui Chi Ming v Koon Wing Yee & Ors [2011] 2 HKC 185 at §§44-45.

98.  BM provides the evidential basis for the application for fortification. He claims that both KPN and BTL have been forced to stop their business operations completely since they could not trade without an active bank account. On the basis of a loss of a profit of HK$1.3 million per month for KPN alone and assuming the trial would take place within 12 months from the grant of the Injunctions, KPN asks for a sum no less than HK$15.6 million as fortification.

99.  I am not persuaded that there is a need for fortification and that HK$15.6 million is the appropriate quantum. The only ground advanced by the defence is that Zimmer Sweden is a foreign plaintiff having no assets in Hong Kong. That alone, however, can hardly justify an order for fortification in my view and all the circumstances should be considered to determine whether there is a genuine need for fortification. As submitted by Ms Man, there is no challenge to the financial standing of Zimmer Sweden. Their financial ability to honour the cross-undertaking in damages should therefore not to be doubted. Nor is there any evidence that Zimmer Sweden may not be willing to honour the cross-undertaking given to the court in November 2013, bearing in mind a breach of the cross-undertaking may attract serious legal, in addition to financial, consequences.

100.  With respect to quantum, I am not persuaded by the evidence of KPN that it would suffer any loss at all. With one bank account frozen, KPN could still carry on business provided that it has viable financial resources. There is nothing to stop KPN and BT to open a new bank account to continue trading. There is indeed inadequate evidence of KPN’s fund situation. I am not convinced that there is a causal link between its purported loss of business and the imposition of the Injunctions. 

101.  Ms Man submits that the KPN Account should be frozen by the police by reason of the criminal prosecution of Nagajara anyway and any hardship suffered by KNP is not attributable to the Injunctions. Mr Chang informs this court that the police did not freeze the KPN Account. This is surprising to me since the charge concerns the KPN Account and I would have thought that it must be frozen until the close of the criminal prosecution. I find force in Ms Man’s submission and this provides an additional reason why I find KPN unable to prove loss due to the Injunctions.

102.  I should add that in any event I am not persuaded by its monthly profit loss of HK1.3 million since the grant of the Injunctions. I do not think it is right for me to come up with a figure myself to be a real estimate of the loss of KPN for the purpose of fortification, as suggested by Mr Chang in the circumstances of this case.

103.  In the premises, I refuse to order fortification. 

Gagging Order

104.  Mr Chang submits that a gagging order is an exceptional remedy and should not be lightly granted as it prima facie infringes freedom of speech. The burden is on Zimmer Sweden to justify the need of such an order. He helpfully refers me to A Co v B Co [2002] 3 HKLRD 111. There, Ma J (as the Chief Justice then was) explained the purpose of a gagging order as follows:

“A gagging order is granted where there are grounds to believe that once a wrongdoer is aware he is being pursed, steps may be taken by him to frustrate any claim that may be made against him or any investigations being carried out.”

105.  Mr Chang submits that now that KPN and BT are parties to these proceedings and their respective accounts have been frozen, the Gagging Order serves no useful purposes. I cannot agree with him.

106.  As pointed out by Ms Man, Ms Fewins has been told by MG that he knew the 1^st Fraudster personally and he could provide to her all his contact information. Obviously Zimmer Sweden can have a valid claim against a fraudster who has defrauded it. Given the position of Zimmer Sweden that KNP and BT worked in concert with the 1^st Fraudster, I accept that there is a reasonable risk that the personnel of KNP and BT may tip off the 1^st Fraudster and all his accomplices so that other viable recovery actions would be hindered or rendered nugatory.

107.  On the other hand, there is no hardship alleged if the Gagging Order is to be continued and I fail to see any. The Gagging Order cannot be onerous to KPN or BT in terms of compliance. In the circumstances, I opine that I should exercise my discretion to continue the Gagging Order.

Security for Costs Summons

108.  It is accepted by the parties that under Order 23 rule 1(1), Rules of the High Court. This court has a wide discretion to order security for costs if the plaintiff is a foreign plaintiff. To exercise the discretion properly, this court would order security if this court thinks it just to do so having had regard to all the circumstances of the case. It is not an inflexible or rigid rule that a foreign plaintiff should provide security for costs.

109.  Ms Man urges me to take into account the unchallenged financial strength of Zimmer Swiss as evidenced by its audited accounts and the good merits of its claim. She submits that the overall justice of the case requires a refusal of the security application.

110.  I cannot say I am not impressed by the merits of the claim of Zimmer Swiss but I am not satisfied that Zimmer Swiss has clearly demonstrated that it has a high degree of probability of success at trial. Ms Man confirms that there is no allegation that an order for security would stifle the genuine claim of Zimmer Swiss. Looking at the matter in the round, I believe it is only fair to order security so that the defence would not be exposed to the risk of an empty costs order.

111.  I have perused the estimated schedule of costs of the defence. A sum of HK$1 million is asked for up to the stage of exchange of witness statements. Taking a broad brush approach, I opine HK$600,000 is a reasonable figure as security for KPN and BT’s costs up to and including the stage of exchange of witness statements and I so order such a security to be made within 28 days of today either by way of payment into court the said amount or by provision of an irrevocable bank guarantee in the said amount.  

Conclusion and Orders

112.  To conclude, I refuse to discharge the Injunctions and I order them to be continued in their full terms and effects without any fortification in cross-undertaking as to damages save that I allow an increase on their weekly allowance for legal expense from HK$5,000 to HK$10,000 for each of KNP and BT.

113.  Moreover, I order that the Gagging Order be continued and I accede to the security for costs application. I order that Zimmer Sweden do provide security in the sum of HK$600,000 within 28 days of today either by way of payment into court the said amount or by provision of an irrevocable bank guarantee in the said amount. 

114.  Zimmer Swiss is the overall winner and it should be entitled to be paid its costs forthwith, to be taxed if not agreed except the costs of and occasioned by the Security for Costs Summons, which should be paid forthwith by Zimmer Swiss to KNP and BT, to be taxed if not agreed. For the purpose of taxation, I should point out that the actual hearing of the Security for Costs Summons was minimal and lasted not more than 10 minutes.

115.  Lastly, I thank Ms Man and Mr Chang for their invaluable assistance.