SUN YAN v. SUPERB JADE LTD AND OTHERS

HCA 813/2014

[2023] HKCFI 2650

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 813 OF 2014

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BETWEEN

(by Original Action)

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AND BETWEEN

(by Counterclaim)

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REASONS FOR DECISION ON COSTS

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1.  These are two applications to vary the costs order nisi I made in the Judgment handed down on 30 May 2023 (“the Judgment”).

2.  For the purpose of this Reasons for Decision on Costs, I would adopt the same abbreviations that were used in the Judgment.

3.  In the Judgment, I made the following costs order nisi (“the Nisi Order”): (i) the costs of the Original Claim be to the Plaintiff (Sun) and the costs of the Counterclaim be to the Defendants in the Counterclaim (Sun, SWS and Shum) to be taxed if not agreed; (ii) there be certificate for 2 counsel for the Plaintiff in the Original Claim (Sun) and the 1^st Defendant in the Counterclaim (Sun).

4.  Sun applies to vary the Nisi Order to the effect that Super Jade should not be ordered to bear the costs of the Original Claim and the Counterclaim since Super Jade is beneficially owned by Sun as found by the court. On the other hand, SWS applies for its costs of the Counterclaim to be paid by Super Jade and Lin jointly and severally on an indemnity basis to be taxed if not agreed with certificate for 2 counsel. I refer these two applications as “the Sun’s Application” and “the SWS’s Application” respectively.

5.  By letter dated 28 June 2023, W K To & Co (“WKT”) indicated on behalf of Lin and Brother Zhao that:

(i) Lin and Brother Zhao would take a neutral stance on the issue of whether Super Jade should pay SWS’s costs of the Counterclaim;

(ii) Lin would have no objection to SWS’s request that Lin should pay SWS’s costs of the Counterclaim on an indemnity basis with certificate for 2 counsel;

(iii) as to the costs of the SWS’s Application, Lin would request that there be no order as to costs as between Lin and SWS.

6.  With the permission of the court, WKT, Yung, Yu, Yuen & Co (solicitors for Tang) and Nixon Peabody CWL (solicitors for Shum) were excused from attending the hearing.

7.  After hearing the submissions from Sun and SWS, I varied the Nisi Order in the following manner:

(i) the costs of the Original Claim be paid by the 2^nd to 4^th Defendants (Lin, Tang and Brother Zhao) to the Plaintiff (Sun);

(ii) the costs of the 2^nd Defendant in the Counterclaim (SWS) be paid by the Plaintiffs in the Counterclaim (Super Jade and Lin) to be taxed on an indemnity basis;

(iii) the costs of the 1^st and 3^rd Defendants in the Counterclaim (Sun and Shum) be paid by the 2^nd Plaintiff in the Counterclaim (Lin) to be taxed on a party-and-party basis;

(iv) there be certificate for 2 counsel for the Plaintiff in the Original Claim (Sun) and the 1^st Defendant (Sun) and the 2^nd Defendant (SWS) in the Counterclaim; and

(v) costs of the Sun’s Application and the SWS’s Application be paid by the 1^st Defendant in the Counterclaim (Sun) to the 2^nd Defendant in the Counterclaim (SWS).

8.  I now give my reasons for such decision.

9.  The background of this case and the reasons for ruling the case in favour of Sun, SWS and Shum have been fully set out in the Judgment and I do not want to repeat the same here.

10.  I first deal with the Sun’s Application. So far as the Original Claim is concerned, it was actually Sun on the one camp and Lin and Brother Zhao on the other who were fighting over the ownership of Super Jade. As Super Jade is the subject matter of the dispute, it was proper for Sun to join Super Jade as a party to the proceedings. However, as the court eventually found that Sun is the beneficial owner of Super Jade, there is no reason why Super Jade should be ordered to pay for the costs of Sun in respect of the Original Claim. Hence, I vary the Nisi Order to the effect that only the other Defendants, i.e. Lin, Tang and Brother Zhao, would have to pay for Sun’s costs in respect of the Original Claim.

11.  Both the Sun’s Application and the SWS’s Application touch on the costs of the Counterclaim. I first deal with the question as to whether Super Jade should be ordered to pay for the costs of the Defendants in the Counterclaim, i.e. Sun, SWS and Shum.

12.  In my judgment, as between Super Jade and SWS, the former should be ordered to pay for the costs of the latter. Insofar as SWS is concerned, it was only dealing with Super Jade in respect of the opening and operation of the SWS Account. For that, Sun had authorised Lin to open and operate the SWS Account in the name of Super Jade. Under such circumstances, there is no reason why Super Jade should not be asked to pay for the SWS’s costs in respect of the Counterclaim.

13.  In fact, under Clause 5 of the Application Form submitted by Super Jade to SWS in applying to open the SWS Account, Super Jade had agreed to be bound by the Terms and Conditions relating to the sale and purchase of securities (Cash Account) (“the Terms and Conditions”). Under Clause 16.4 of the Terms and Conditions, Super Jade undertook to indemnify SWS in respect of any damages, costs and expenses (including but not limited to legal expenses on a full indemnity basis) reasonably and properly incurred by SWS in the enforcement of any of the provisions of the Terms of Business. Further, by Clause 16.6 of the Terms and Condition, Super Jade further agreed to indemnify SWS fully and completely against all costs, claims, liabilities and expenses arising out of or in connection with the performance or exercise of their duties or discretion under the Terms of Business or arising out of or in connection with any breach by Super Jade of the obligations of Super Jade to SWS or if any representation or warranty made by Super Jade becomes untrue or inaccurate.

14.  It is quite clear that the Counterclaim arose because of the misrepresentation that Lin was the beneficial owner of the SWS Account. As Sun had authorised Lin to make such untrue representation on behalf of Super Jade, Super Jade should be asked to honour its obligations under the said clauses to indemnify SWS of the costs associated with the Counterclaim. That should be the case even if the court eventually found that Super Jade is beneficially owned by Sun. In a way, Sun himself has to bear great responsibility for causing the dispute in the Counterclaim to arise.

15.  As specified in the said clauses, SWS’s costs should be paid on an indemnity basis. Adopting such basis, it cannot be regarded as unreasonable for SWS to have engaged 2 counsel to defend the Counterclaim. I therefore allow SWS to obtain certificate for 2 counsel.

16.  The agreement for full indemnification should only apply to the contractual arrangement for the opening and the operation of the SWS Account as between Super Jade and SWS, and hence the costs of Sun and Shum in respect of the Counterclaim should only be paid on a party-and-party basis. There is no issue that only Lin (and not Super Jade) would have to pay for the costs of Sun and Shum in respect of the Counterclaim.

17.  As between Sun and SWS, Sun should be regarded as the loser for both the Sun’s Application and the SWS’s Application. The end result is that Super Jade has to pay the costs of SWS in respect of the Counterclaim on an indemnity basis. As Sun is the only party opposing the making of such order, he should pay for the costs of SWS for both applications. I therefore so ordered.

Mr Brian Lo, instructed by Johnny K K Leung & Co, for the Plaintiff (by Original Action) and the 1^st Defendant (by Counterclaim)

Mr Samuel Chan and Mr Anson Wong Yu Yat, instructed by Fred Kan & Co, for the 2^nd Defendant (by Counterclaim)

W K To & Co, for the 1^st, 2^nd and 4^th Defendants (by Original Action) and the 1^st and 2^nd Plaintiffs (by Counterclaim), attendance excused

Yung, Yu, Yuen & Co, for the 3^rd Defendant (by Original Action), attendance excused

Nixon Peabody CWL, for the 3^rd Defendant (by Counterclaim), attendance excused

HCA 813/2014

[2023] HKCFI 1433

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 813 OF 2014

_____________

(by Original Action)

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(by Counterclaim)

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JUDGMENT

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1.  This is a dispute about the beneficial ownership of all issued shares (“the Superb Jade Shares”) in Superb Jade Limited (“Superb Jade”) and, as it follows, the funds and assets held by Superb Jade. It is common ground that the merits of the claims depend very much on the factual findings to be made by the court.

2.  This case comprises:

(i)   the original claim (“the Original Claim”) commenced by Mr Sun Yan (“Sun”) as the Plaintiff against a total of 4 Defendants, namely: (a) Superb Jade; (b) Mr Lin Li Dong (“Lin”); (c) Ms Tang Jing (“Tang”); and (d) Mr Zhao Jiangqi (“Brother Zhao”);

(ii)  the action by counterclaim (“the Counterclaim”) commenced by Superb Jade and Lin against: (a) Sun; (b) Shenyin Wanguo Securities (HK) Ltd (“SWS”); and (c) Ms Shum Lai Na (also known as Ms Selina Shum) (“Shum”).

3.  Pursuant to §6 of the Order made by this court dated 9 July 2019, the indemnity proceedings between SWS and Shum are stayed pending the determination of the other claims in this action.

A.  BACKGROUNDS OF THE PARTIES

4.  The backgrounds of the parties can be summarized as follows.

A.(i)  Sun

5.  Sun came from the Mainland but has since become a Hong Kong resident.  Sun claims that, by the time Superb Jade was acquired in July 2009, he was already a seasoned investor with strong investment experience, expertise and network.

6.  Sun graduated from the School of Industrial Economics and Business Administration of Shanghai University of Finance and Economics in 1986.

7.  In around 1991, Sun set up a company known as “廣東省惠州市大亞灣投資發展有限公司” (“Sun’s Investment Company”) and was responsible for its investment business.  Since then, Sun made handsome profits and thereafter continued to accumulate experience and enhance business connection in the investment sector.

8.  In around 1988, Sun met Ms Liu Yang (“Liu”).  Liu has been known to be a prominent figure among global market players in the private equity circle.  According to Sun, the market often tended to hold positive views on projects in which Liu was or said to be interested.

9.  Sun claims that, due to the close relationship between Liu and Sun and the former’s appreciation of the latter’s skill, experience and acumen in investment, Liu, in around 2008, invited Sun to assist in the investment projects undertaken or to be undertaken by the Atlantis Group.  As a result, Sun had represented the Atlantis Group in different investment projects and often served as a director on the board of investee companies as designated by Liu or the Atlantis Group. Although there was at the time no formal employer and employee relationship, Sun did maintain a close working relationship with the Atlantis Group.  On the invitation of Liu, Sun was appointed a director of Atlantis in February 2010.

10.  At the same time, since June 2010, Sun has been and still is employed as an Investment Consultant in the Capital Market Department of Burwill Properties Ltd, which is a wholly owned subsidiary of Burwill Holding Ltd (which is a company whose shares have been listed on the Main Board of the Hong Kong Stock Exchange since 1983).

A.(ii)  Lin and Brother Zhao

11.  Lin was at all material times and still is a resident in Shanghai.  Lin has conducted a restaurant or fast food chain business (“the Restaurant Business”) known as “家家長沙米粉” in Shanghai through a Mainland company known as “上海家家美餐飲管理有限公司” (“Lin’s Mainland Company”) since 2000.

12.  Lin’s Mainland Company has severed its relationship from the chain “家家長沙米粉” since around 2003.  Indeed, in 2014, the Restaurant Business comprised only a single outlet.  At all material times, the registered capital of Lin’s Mainland Company was RMB300,000.

13.  Like Lin, Brother Zhao was at all material times and still is a Mainland resident.  He is the natural elder brother of Lin.  Despite being natural brothers, the two of them have different surnames because: (1) Brother Zhao inherited the surname of their father; (2) Lin, on the other hand, inherited the surname of his mother and is also the adopted son of his mother’s brother known as Mr Lin Jinrong.

14.  According to Lin and Brother Zhao, they first came to know Sun in around 1989.  Since then, they developed close relationship and eventually became a family when Sister Zhao married Sun as further elaborated below.

A.(iii)  Sun’s immediate family

15.  Madam Zhao Jianwu (“Sister Zhao”) is the natural elder sister of Lin.  Sister Zhao is also the younger natural sister of Brother Zhao.

16.  Sun set up his own business in the early 1990s.  By early 1992, Sister Zhao (having graduated from the School of Geographic Sciences of East China Normal University in 1989) started to work as a secretary in Sun’s company (i.e. Sun’s Investment Company).

17.  After around 10 months, Sun married Sister Zhao on 14 December 1992 in the Mainland and thereafter maintained a matrimonial home in Shenzhen (“the Matrimonial Home”).  Their only son, Mr Sun Zhibing (孫知兵) (“Zhibing”), was born in 1995 in the Mainland. Sun and Sister Zhao were involved in divorce proceedings in the Hong Kong Family Court.

A.(iv)  Tang

18.  Tang was at all material times and still is a Mainland resident.  According to Sun, Tang is a friend and former work subordinate of Brother Zhao at a Shenzhen-based securities firm called “蔚深證券有限責任公司”.  On Tang’s case, she was only a colleague but not a subordinate of Brother Zhao.

A.(v)  Superb Jade

19.  Superb Jade is a company incorporated in the British Virgin Islands (“BVI”) on 22 July 2009.  On the face of the corporate documents (but subject to Sun’s claims and explanation regarding how Lin became his nominee or trustee), Lin was at all material times and still is the only registered shareholder and director of Superb Jade.  On the evidence, it does not appear to be in dispute that Superb Jade has no independent business as such, but was at all material times used to hold investments or assets.

A.(vi)  SWS

20.  SWS was at all material times and still is a company incorporated in Hong Kong, carrying on the business of regulated activity in dealing in securities as prescribed under Schedule 5 of the Securities and Futures Ordinance (Cap. 571) (“SFO”) and also a licensed corporation under the SFO.  SWS’s involvement in this Action arose out of a securities account opened and maintained by Superb Jade with SWS (“the SWS Account”) and the disputed dealings concerning the SWS Account.

A.(vii)  Shum

21.  Shum was at all material times a licensed representative engaged by SWS.  She was assigned to manage the SWS Account in her capacity as the account executive of SWS.

22.  Sun accepts that he and Shum are both from Hangzhou and that they have been acquainted with each other.  They played golf occasionally.  Sun was a customer of SWS who has been operating his own trading under his own account through Shum so that Shum recognizes him.

B  THE PARTIES’ RESPECTIVE CASE

23.  I then try to summarize the parties’ respective case as follows.

B.(i)  Sun’s case

24.  I first start with Sun’s case.

25.  In around May 2009, Sun was presented with an investment opportunity. Whilst considering whether to invest, Sun believed it would be appropriate to set up layers of offshore special purpose vehicles for these private equity investments for ease of subsequent exists and for tax planning reasons.  However, given the uncertainty over the prospects of the private equity projects to be procured by Sun which might have a bearing on the reputation of Atlantis (at which, as noted above, Sun was known in the market to be responsible for assessing private equity investments) and for fear of exploitation by investee personnel of Atlantis’ reputation to promote their own interests, Sun was minded to use nominees to hold the special purpose vehicles that in turn would hold the intended joint investments.

26.  In this regard, Sun felt that he had to be cautious.  Due to his association with the Atlantis Group, the use of any special corporate vehicle in his own name might still cause outsiders to consider the investment as one made by Sun on behalf of the Atlantis Group.  Sun did not want people to make stories out of such association (be it positive or negative).  Hence, in order to distant the potential investment from the Atlantis Group, Sun caused Superb Jade to be set up for the purpose of holding the potential investment.

27.  By reason of their long-standing friendship, Sun first asked Brother Zhao if he could assist him in holding all the shares in a corporate vehicle as his nominee or agent.  In response, Brother Zhao told Sun that it was inconvenient for him to act as Sun’s nominee or agent, and suggested Sun to ask his younger brother, Lin, to do so.  As a result, Sun approached Lin and Lin agreed to act as Sun’s nominee or agent of a corporate vehicle (i.e. Superb Jade).

28.  On around 22 July 2009, Superb Jade was set up on Sun’s instructions through a registered agent with the assistance of Ms Amy Zhang (“Amy”) who was the secretary of Liu.  All the set-up costs (including the share capital and the administrative costs) were paid by Sun.

29.  However, the potential investment eventually did not develop past the negotiation stage.  This happened at around the time when Superb Jade was incorporated.  Sun nevertheless decided to: (1) keep Superb Jade as his corporate vehicle to hold assets of various classes; and (2) maintain Lin as his nominee or agent to hold the Superb Jade Shares as well as to act as his nominee director.

30.  It was under such circumstances that Lin became the sole registered shareholder and director of Superb Jade.  However, by reason of the aforesaid background, Lin was and still is no more than Sun’s trustee, nominee or agent in respect of the Superb Jade Shares as well as all assets held by Superb Jade.

31.  Sun has provided an account about his alleged investment in World Charm Holdings Ltd (“World Charm”), which is one of the major assets that was once held in the name of Superb Jade.  It was an investment made by Sun through Superb Jade in an enterprise engaging principally in the production and licensing of movies, television drama series and television advertising in the Mainland, represented by 106,700 shares of World Charm (“the World Charm Shares”).  This investment was made by Sun in around March 2011 at the purchase price of HK$49.8 million, which price was settled by Sun. Besides, Sun was at all material times in possession of the originals of the share certificate for the World Charm Shares.

32.  World Charm was a 45% shareholder of a company known as China Entertainment Media Group Ltd (“CEMG”), which was the holding company of the aforesaid enterprise.  On 21 October 2011, ChinaVision Media Group Ltd (“ChinaVision”) (a company listed on the Hong Kong Stock Exchange) entered into a sale and purchase agreement with, among others, World Charm for the acquisition of the entire issued share capital of CEMG. The consideration for this acquisition was to be satisfied by the allotment of new shares by ChinaVision. As a result, Superb Jade (which held 10.67% shareholding in World Charm) received a total of 241,950,000 new shares allotted by ChinaVision.  The said 241,950,000 new shares of ChinaVision (“the ChinaVision Shares”) were deposited into the SWS Account upon Sun’s instructions.

33.  After the ChinaVision Shares were deposited into the SWS Account, part of them were sold and the sale proceeds were used to acquire other securities through the SWS Account. Hence, Sun says that the assets held in the name of Superb Jade were held by Superb Jade and Lin as nominees or trustees on behalf of Sun.  In any event, there is no suggestion or evidence to show that Lin or Brother Zhao paid for the World Charm Shares or the ChinaVision Shares.

34.  In early May 2014, Sun discovered that the company kit and the chop of Superb Jade (“the Company Kit and Chop”), which had at all material times been in his possession, had gone missing.

35.  Since around 7 May 2014, Lin procured Superb Jade to withdraw cash held in the SWS Account.  Upon notification by Shum, Sun gave instructions to her to acquire shares of Tencent Holdings Ltd (“the Tencent Shares”) using the fund in the SWS Account, hoping that this would prevent Lin of making any withdrawal from the SWS Account.  Despite this, Lin attended the office of SWS on 7 May 2014 and eventually succeeded in withdrawing a sum of HK$14,707,995.54.  According to Sun, this sum of money was then transferred or paid to designations beyond his reach.

36.  It is Sun’s case that Lin, Tang and Brother Zhao were and still are holding the various amounts so transferred and that they are traceable proceeds.  It is on this basis that Sun obtained injunction orders against Superb Jade, Lin, Tang and Brother Zhao to protect his interests in the assets held by Superb Jade and also to assert his tracing claims.[1]

B.(ii)  The case of Lin, Superb Jade and Brother Zhao

37.  I then turn to the case of Lin, Superb Jade and Brother Zhao (collectively referred to as “the Lin’s Parties”).   According to their primary case, Lin has been conducting the Restaurant Business in the Mainland since around 2000.   In around 2009, “in order to pave way for expansion of his business and to enjoy tax benefit, Lin planned to change the [Restaurant] Business to a business to be owned and operated by a wholly foreign owned enterprise in the [Mainland] (“WFOE”) and he therefore planned to set up a BVI company, which would then hold his shareholding in the [Restaurant] Business”.  Due to his trust and confidence in Sun and also in view of Sun’s working experience in Hong Kong, he engaged Sun’s assistance in setting up Superb Jade on 22 July 2009 and opening the SWS Account on 3 November 2009.  To Lin’s knowledge, Shum was a close acquaintance of Sun and they were both from Hangzhou.  Since Shum was an account executive in SWS, Sun referred Lin to her to set up the SWS Account for and on behalf of Superb Jade.

38.  For the huge amount of assets then in the SWS Account, the Lin’s Parties claim that in around 1992 (shortly before Sun married Sister Zhao), Brother Zhao obtained a sum of RMB750,000 as consultancy fee from a state-owned enterprise.  Due to prevailing local regulations in the Mainland at the time, this sum of RMB750,000 could not be paid to Brother Zhao directly (as he was a natural person) but had to be paid to a corporate entity nominated by him.  As Brother Zhao did not own any corporate entity at the time, the consultancy fee was paid to Sun’s business (i.e. Sun’s Investment Company).

39.  Without Brother Zhao’s approval, Sun applied the entire amount of RMB750,000 to purchase employee stocks (“the Shenzhen Properties Shares”) of a company known as Shenzhen Properties & Resources Development (Group) Ltd (“Shenzhen Properties”) through the connection of Sun’s uncle (who was then working in Shenzhen Properties).  Contrary to Sun’s expectation, the Shenzhen Properties Shares so acquired could not be traded in the open market until 2006 (after Mainland’s reform of her financial rules and regulations).  As a result, Sun was not able to, and never did, refund the sum of RMB750,000 to Brother Zhao.  In the meantime, Sun experienced financial difficulties and it was Lin and Brother Zhao who supported Sun and his family.

40.  In around 2006, following the reform of the Mainland financial rules and regulations, the Shenzhen Properties Shares were sold at huge profits (as the price increased about 50 times since 1992).  In around May 2011, Sun and Lin had the following discussions: (1) Sun was grateful for the support of Lin and Brother Zhao, including the fact that Brother Zhao did not demand repayment of RMB750,000; (2) Sun knew a Mr Dong Ping (“Dong”), who was famous in the movie industry in the Mainland.  Instead of making direct repayment to Lin and Brother Zhao, Sun suggested that he would use the sale proceeds derived from the sale of the Shenzhen Properties Shares to invest in a company of Dong (which turned out to be CEMG).  Brother Zhao was later informed of Sun’s proposal and also agreed.  It was under such circumstances that Superb Jade acquired the World Charm Shares and subsequently received the allotment of the ChinaVision Shares.

41.  On this basis, it is alleged that all the assets in Superb Jade had been given by Sun to Lin and Brother Zhao as “gifts”, and that they had become sole and absolute owners thereof.  For this reason, they also allege that Sun has no interest, whether legal or equitable, in Superb Jade or in the assets held by Superb Jade.

42.  Further, it is pertinent to note that in around March 2014, Alibaba Investment Ltd decided to invest in ChinaVision by entering into a subscription agreement with it.  Indeed, in August 2014, ChinaVision changed to its present name of “Alibaba Pictures Group Ltd”.  As a result, the share price of ChinaVision went up substantially.  It is alleged that Sun regretted to have given the ChinaVision Shares to Lin and Brother Zhao after learning the sharp increase of the share price of ChinaVision.

43.  The Lin’s Parties also run a half-hearted alternative case.  It is contended that Sun was privy to certain alleged market misconduct or illegal activities which render Sun unable to claim beneficial interest over any assets deriving from the ChinaVision Shares.  In his final submissions, Mr Lam, SC, counsel for the Lin’s Parties, submits that Sun was in contravention of ss 9(1) and (2) of the Prevention of Bribery Ordinance (Cap 201).  However, as demonstrated below, this claim is based on speculation rather on facts.

B.(iii) Sun’s reply to the case of the Lin’s Parties

44.  Sun disputes the allegations made by the Lin’s Parties.

45.  First, Sun admits that he did receive the said sum of RMB750,000 in around early 1993. However, there was no trust arrangement in respect of this sum and that the entire amount of RMB750,000 had been fully repaid to Brother Zhao.

46.  Second, Sun denies that he had ever purchased any Shenzhen Properties Shares by using any part of the said sum of RMB750,000. Instead, Sun acquired 100,000 shares in Shenzhen Properties by using his own money in the amount of RMB860,000.  Such shares were eventually disposed in July 2014 and Sun made a profit of around RMB233,800.

47.  Third, without prejudice to Sun’s case that the allegation of non-payment of the World Charm Shares is irrelevant, Sun denies that the consideration for the World Charm Shares had not been paid.  Instead, the payment was made in two trenches, namely: (1) HK$33 million in around March to May 2012; and (2) HK$16.8 million in 2013.[2]

48.  Fourth, Sun denies the case of gift put forward by Lin and Brother Zhao.

49.  Fifth, Sun denies any allegation of illegal conduct or market misconduct.

B.(iv)  The Counterclaim

50.  Superb Jade and Lin also bring a counterclaim based on conspiracy, breach of contract and breach of confidentiality and fiduciary duty against Sun, SWS and Shum.

51.  Superb Jade and Lin claim that, in the morning of 7 May 2014, Lin gave written withdrawal instructions to SWS to withdraw all the funds in the SWS Account (“the Withdrawal Instructions”) at the United Centre Office of SWS.  Lin was told by the staff that the Withdrawal Instructions would be strictly complied with by SWS.  Subsequently, Lin received a phone call from Shum that, allegedly by reason of an agreement with a third party, she had already caused Superb Jade to use all the available funds to purchase the Tencent Shares.  Immediately after, Lin called to ascertain whether SWS had complied with the Withdrawal Instructions and queried about the unauthorised purchase of the Tencent Shares.  Later, Lin learnt that the SWS Account was only left with cash in the amount of HK$14,707,955.54.

52.  The pleaded case of the Counterclaim is as follows:

(i)   According to the Standard Terms and Conditions governing the SWS Account,in particular pursuant to Clause 10(b), all instructions given to SWS must be in writing.

(ii)  Further, there are also implied terms or duty of care owed by SWS to Lin and Superb Jade, namely that SWS would carry out the instructions of Lin and Superb Jade, which SWS failed to do so; and that SWS would observe the duty of confidentiality to Superb Jade and Lin by keeping all information given by them in strict confidence, which SWS breached it by informing Sun of the Withdrawal Instructions.

(iii) Shum and SWS also owed fiduciary duties to Lin and Superb Jade by virtue of the cash account application form submitted on 3 November 2009, which they have committed a breach by allowing the purchase of the Tencent Shares and not strictly complying with the Withdrawal Instructions.

(iv) It is alleged that Sun and Shum have conspired together to injure Superb Jade or Lin.

(v)  SWS is vicariously liable for Shum’s wrongdoing.

53.  As defence to the Counterclaim, Sun claims that he was entitled to cause Superb Jade to purchase the Tencent Shares and to ignore the Withdrawal Instructions as the beneficial owner of the assets or shareholdings of Superb Jade.

54.  SWS’s defence is two-fold: (i) SWS cannot be vicariously liable for Shum’s misconduct because Shum is not an employee or agent of SWS or she had acted outside the scope of her employment or agency relationship; and (ii) SWS did not owe the duties as claimed by Lin and Superb Jade and there was no breach of any duties whether as alleged or at all.

55.  Shum supports Sun’s case that he is the beneficial owner of the assets or shareholdings of Superb Jade.  She therefore only carried out the instructions according to the beneficial owner of the SWS Account.

B.(v)  The core issue

56.  It follows from the aforesaid that the core issue in this case is to identify the true beneficial owner of the SWS Account and the shares and assets of Superb Jade.   The merits of the Counterclaim also depend on the court’s finding on this core issue.

57.  Perhaps it would be convenient for me here to deal with one pleading point raised by Mr Lam.

58.  Mr Lam refers me to the amendment of pleading made on 15 July 2019.  Prior to the amendment, Sun’s claim is one based on the trust of the assets in the SWS Account held in the name of Superb Jade. However, the amendment in 2019 makes it clear that Sun’s trust claim also covers the Superb Jade Shares.  Mr Lam submits that such late amendment undermines the credibility of Sun’s claim.

59.  I disagree.  Sun’s claim has been clear from the outset.  It has always been Sun’s case that Lin was his nominee in setting up both Superb Jade and the SWS Account.  Under such circumstances, it only follows that Sun had to make the amendment in the pleading to cover both the shares and the assets.  The amendment only tidies up the claim in law with no material changes in the supporting factual allegations.

C  WITNESSES AT THE TRIAL

60.  The following witnesses testified at the trial:

(i)   Sun who testified in support of his own case;

(ii)  Zhibing who was called by Sun as a witness;

(iii) Lin and Brother Zhao who testified in support of their case;

(iv) Mr Leslie Wong (“Wong”) who testified in support of SWS’s case; and

(v)  Shum who testified in support of her own case.

61.  Before I consider the merits of the claims, I will make some preliminary observations about the credibility of each individual witness.  I deal with them in the order in which they testified at the trial.

C.(i)  Sun

62.  The most important witness in support of Sun’s case must be Sun himself.

63.  Sun is highly educated and has been engaged in investment business for over two decades. He was employed by several listed companies and is undoubtedly experienced in private equity.

64.  He provided the court with an account about his background, the reason for the setting up of Superb Jade and the SWS account, the dealings and the transactions involving the assets in the SWS Account, his dealings with Lin, Brother Zhao and Shum throughout the years.  He maintained that he is the beneficial owner of Superb Jade and the SWS Account.

65.  For the reasons given in the latter part of this Judgment, I accept his evidence as the truth.

66.  Sun is certainly a sophisticated businessman.  With his background and the skill, knowledge and connections obtained throughout the years, he would be able to make use of corporate vehicles to conceal his interests in various transactions or his relationship with the interested parties.  The full backgrounds for the sale and purchase agreement of the World Charm Shares might not have been revealed at the trial, but one cannot deny that the transaction bore the footprint of Sun rather than that of Lin.  He may not be a businessman of high moral standard.  Yet, this is not a trial on his moral responsibility.  His background, the control he maintained over Superb Jade and the SWS Account and the highly sophisticated transactions involving the assets in the SWS Account throughout the years certainly support Sun’s evidence that he is the beneficial owner of Superb Jade and the SWS Account.

67.  Even though there are some minor discrepancies between Sun’s oral testimony at trial and the contents of his witness statements, such discrepancies are not sufficient to render Sun an incredible or unreliable witness.  Even honest witness can make mistakes during the course of the legal proceedings or during trial.  What is important is to consider Sun’s evidence as a whole.  There are also minor issues including: (i) the use of Shum’s address in the affirmation filed for the application of Mareva injunction; and (ii) the making of affirmations despite Sun is a Christian.  Whilst these matters were raised during cross-examination, it cannot be seriously suggested that such minor matters can materially affect the credibility or reliability of Sun.  Sun at the time would not and has not gained any advantage from such minor matters, and there is simply no basis to suggest that these were deliberate attempts to hide anything.

C.(ii)  Zhibing

68.  Obviously, Zhibing was torn between his father on the one hand, and his mother and his uncles on the other hand.  He was only 14 years old when Superb Jade was incorporated. Sun agreed that he would not discuss business with Zhibing and he would not discuss the incorporation of Superb Jade with him.  Zhibing admitted that he has no knowledge as to the exact financial situation of the family in 2003; no direct or personal knowledge of why Superb Jade was set up; no direct or personal knowledge as to why a securities account in Superb Jade’s name was opened at SWS; and no direct or personal knowledge as to the circumstances in which the ChinaVision Shares were deposited into the SWS Account on 6 February 2002.

69.  Nevertheless, Zhibing’s evidence is relevant on the following issues: (i) the general financial condition of his family throughout the years; (ii) the general financial condition of the Restaurant Business at the relevant times; and (iii) the showing of the WeChat message by his mother as further elaborated below (“the WeChat Message”).

70.  Zhibing is plainly a straightforward witness who is trying his best to assist the court and there is no basis to doubt his testimony.

71.  After the dispute arose, it is clear that Zhibing had chosen to believe his father.  It has been suggested that Zhibing is under the influence of Sun, partly because Sun still provided financial assistance to him.   However, I agree with Mr Yuen, SC, counsel for Sun, that, given his education level and his upbringing, Zhibing must have appreciated the solemnity and seriousness of giving testimony in court.   Furthermore, I do not accept that the provision of financial assistance would have motivated Zhibing to fabricate evidence in favour of his father.  After all, he has his own source of income from the university, and there is no indication that Sun has ever threatened to cut his financial support.

72.  Zhibing testified about the showing of the WeChat Message to him by his mother.  Sister Zhao did not testify at this trial, which is understandable as someone in her position would not want to be seen as siding with either camp. Although no formal witness statement has been provided, one should not ignore the WeChat Message provided by Sister Zhao:

(i)   §1 of the WeChat Message clearly stated that Superb Jade was incorporated by Sun using Lin as his nominee.

(ii)  The WeChat Message was sent not to Sun’s solicitors, but the solicitors acting for the Lin’s Parties. The contents of the message are probably true, as Sister Zhao wanted to ensure that the legal team acting for the Lin’s Parties knew the truth.

(iii) The WeChat Message was sent on 31 July 2018, i.e. almost 2 years after delivery of the Judgment in FCMC 7824/2015 (dated 21 September 2016) (whereby HH Judge Bruno Chan dismissed Sister Zhao’s divorce petition on the ground that Sun had no substantial connection with Hong Kong).  In other words, by the time of the WeChat Message, there was no pending legal proceedings between Sun and Sister Zhao.  Further, there is no evidence that any divorce proceedings have been commenced by Sister Zhao in the Mainland.  It follows that Sister Zhao would not have had any motive to support Sun’s claim over Superb Jade with a view to getting a share thereof through divorce proceedings.

73.  Zhibing confirmed that her mother showed him the WeChat Message.  There is a suggestion that Sister Zhao did so in order to remedy their mother-and-son relationship.  Zhibing denied this, which is understandable.  If one looks at the situation from Zhibing’s perspective, what he was after at the time was an explanation from his mother as to what happened and why she behaved in the way she did.  The legal proceedings could not have been in the forefront of Zhibing’s mind.  Instead, what is important is that Zhibing explained that his mother sent the WeChat Message to the solicitors for the Lin’s Parties hoping that they would not continue with the legal proceedings. The reasonable inference to be drawn is that Sister Zhao wanted to tell Zhibing that she was doing something to remedy the situation, i.e. to ask her brothers (Lin and Brother Zhao) to stop the legal proceedings and to withdraw the claim over the shares and assets of Superb Jade.  In so doing, Sister Zhao must know that Superb Jade belongs to Sun. If she knows Superb Jade belongs to Lin, sending the WeChat Message would only irritate Lin and would not achieve her purpose. Hence, the WeChat Message is an important piece of evidence supporting Sun’s case.

74.  Mr Lam also makes a point that, given Sister Zhao’s character, Sun has made an untrue allegation against her that she was greedy and conspired with her brothers to misappropriate his assets.  However, one must bear in mind the trauma experienced by Sun when he found about the missing of the Company Kit and Chop and the withdrawal of the assets from the SWS Account.  Taking into account the then tense marital relationship between them, it would only be natural for Sun to have made such kind of allegation, which he subjectively believed to be true, against Sister Zhao.

C.(iii) Lin

75.  Lin graduated in 1992 from “南京郵電大學” and worked in Shanghai since 1996.  Between those years, he had worked as an engineer at “富士通軟件公司” and “海南藥業”.  In 2000, he started the Restaurant Business.

76.  Lin told the court about his background, the reason for the setting up of Superb Jade and his dealings with Sun throughout the years.  His case has been summarized in the earlier part of this Judgment and I do not want to repeat the same here.[3]

77.  As compared with Sun, Lin has a more humble background and is a less sophisticated businessman.   I reject Lin’s evidence for the various reasons given in the latter part of this Judgment.

C.(iv) Brother Zhao

78.  Brother Zhao is also a highly educated and sophisticated businessman.  He has experience in the finance and securities industry. However, as he said in cross-examination, the nature of his jobs was very different from that of Sun.

79.  He provided the court with an account about his dealings with Sun throughout the years, in particular the payment of RMB750,000 into Sun’s account and the “gifting” of the World Charm Shares in the SWS Account to Lin. His evidence basically supports the case of the Lin’s Parties.

80.  Likewise, I reject Brother Zhao’s evidence for the various reasons given in the latter part of this Judgment. 

C.(v)  Wong

81.  Wong, the Chief Operating Officer of SWS, is an experienced executive in the securities industry.  His evidence covers, inter alia, the procedures that should be followed in opening an account in SWS, the measures adopted by SWS to monitor the account after it had been opened and details of the internal investigation done after the incident.  His evidence highlights the importance of verifying the true and full identify of a client, and all account executives should be very familiar with these procedures.  It is clear that Wong was not involved in any of the events which gave rise to the disputes between Sun on the one part and Lin, Brother Zhao and Tang on the other.

82.  Wong was meticulous, careful and straightforward when giving evidence.  Given the role of SWS in this dispute and his position in SWS, it is common ground that there is no motive for Wong to lie in the present case.  Subject to his opinion on the nature of “人頭戶” (front man account), I accept his evidence as the truth.

83.  Wong was asked questions concerning the expression “人頭戶”.  According to Sun’s case, the SWS’s Account is a “人頭戶” in the sense that the beneficial ownership belongs to someone other than the account holder.  Wong seemed to suggest that the expression “人頭戶” was used by people in the local securities industry to mean securities accounts maintained for the purpose of carrying out illegal or irregular activities.

84.  I agree with Mr Yuen that one should approach Wong’s evidence in this regard with some caution:

(i)   Wong was called as a factual witness and not an expert witness, and so despite his experience in the local securities industry, his opinion on the meaning of “人頭戶” is inadmissible.

(ii)  During cross-examination, Wong fairly accepted that there is no universal definition of the term “人頭戶”, and different people may use the term with different meanings.

(iii) Given the Mainland background of Sun, there is no evidence that the meaning of “人頭戶” as understood by the local securities industry is the same as understood by persons coming from the Mainland.

(iv) Most importantly, there is no evidence to suggest that either Sun or Shum had used the term “人頭戶” in the course of the opening or operation of the SWS Account.  On the contrary, Shum explained that Sun and her communicated in the Hangzhou dialect and that they did not use such an expression.

85.  Hence, even if such expression had been used by Sun or Shum (which I do not accept it to be the case), I do not find that what they meant was that the SWS Account was used for or associated with illegal or irregular activities.

C.(vi)  Shum

86.  Another crucial witness is Shum.

87.  It is quite clear that various parts of her oral testimony given at this trial are not consistent with her witness statement or her previous Chinese statement given to SWS during the course of SWS’s internal investigation.  In the previous statements, she somewhat evaded the question as to when she knew that Lin was a nominee.  In her oral testimony at trial, she clearly confirmed that Sun is the true beneficial owner of Superb Jade and the SWS’s Account and she knew such fact when the account was opened. By making such positive assertion, she is prepared to take all the blame herself, in particular her failure to follow the required rules in reporting the identity of the true owner of the account handled by her.

88.  Having considered her evidence carefully, I accept what she told the court in her oral testimony are the truth.  Taking her evidence as a whole, the only reasonable inference to be drawn is that Shum at all material times knew that the SWS Account and another SWS’s account held in the name of Lin (“Lin’s SWS Account”)[4] were beneficially owned by Sun, irrespective of whether Sun had told her so expressly.   My reasons are as follows:

(i)   Sun was the one who operated these two accounts and not Lin.  In particular, Sun (and not Lin) was invariably the one who gave instructions to Shum.

(ii)  It was Sun who checked the state of the SWS Account from time to time, whereas Lin never did so.

(iii) Sun called up Shum in early May 2014 to tell her about the missing of the Company Kit and Chop and expressed his concerns.

(iv) On 7 May 2014, Shum told a staff in SWS, 鄭凱華 (“Cheng”), that the money in the SWS Account did not belong to Lin.

89.  It appears from the evidence that initially Shum did not (subjectively) sense anything wrong when she opened the two accounts for Superb Jade and Lin.  It was only on 7 May 2014 that she found herself caught in a dilemma.  That is why she felt confused and did not know what to do.  It was against this background that Shum tried to navigate between her duties owed to SWS and the Securities and Futures Commission (“SFC”) on the one hand and the true position (i.e. the SWS Account and Lin’s SWS Account both belong to Sun) on the other.  This explains the unsatisfactory features in her evidence whether in her statements or oral testimony.

90.  In considering the credibility of her oral testimony, I can perhaps ask the following questions: (i) If Shum did not at the material times know that Sun was the beneficial owner of the SWS Account and Lin’s SWS Account, why would she find it necessary to protect Sun?  (ii) Why is she prepared to take all the blame herself (even to the extent of sacrificing her career) with a view to support Sun’s case? 

91.  There is no evidence that Shum derived any benefit from doing so.  There may be a slight suggestion that Shum may take up the alternative job of being a golf teaching professional, but losing her licence in the securities industry is not a small stake that can explain the “favour” she did for her friend.  In my judgment, the reason why Shum changed her testimony in the witness box is because she understood that her original version could not survive after the scrutiny by the court, and she had no option but to tell the truth in the witness box.

92.  There may be an issue as to whether Shum had told SWS during the internal investigation or to her former solicitors that Lin was only a nominee.  As Shum had been caught in a situation of losing her licence on the one hand and telling the truth on the other, it would be unsafe for the court to attach any weight to what she might have said in the past. Rather the court should focus on what she actually did (including her oral confirmation of the orders with Sun and the conduct of protecting Sun in May 2014) in deciding the beneficial ownership of the SWS Account.

C.(vii)  Witnesses not called to testify at the trial

93.  A number of witnesses have provided witness statements but were not called to testify at the trial.  Since the testimonies of these witnesses as contained in their respective witness statements are not challenged, the parties accept that they can or should be taken into account by this court in considering the merits of the case.

94.  The first one is 郭秉杰 (“Guo”).  Guo’s witness statement deals with Sun’s purchase of the Shenzhen Properties Shares in detail and is supported by contemporaneous documents.  As further elaborated in the latter part of this Judgment, Guo’s testimony rebuts the case of the Lin’s Parties that: (i) Sun made 50 times profit from his investment in the Shenzhen Properties Shares; and (ii) as a result, Sun gave the World Charm Shares to Lin and Brother Zhao so as to repay Brother Zhao’s kindness of not pressing him to repay the sum of RMB750,000.

95.  The second and third ones are Ms Mavis Fan (范微微) and Cheng who were then staff members of SWS.  Their witness statements deal with the events that took place on 7 May 2014.

96.  In §13 of Cheng’s witness statement, she said that in one of the telephone conversations she had with Shum in the afternoon of 7 May 2014, Shum told her that the money in the SWS Account did not belong to Lin.  I agree with Mr Yuen that such contemporaneous response by Shum is important.  At that time and in the context of such a telephone conversation with her colleague, Shum would not have had any motive to lie, which very much supports Sun’s case that he is the beneficial owner of the SWS Account.

C.(viii)  Absence of possible witnesses

97.  In his closing submissions, Mr Lam submits a list of possible witnesses that he claims Sun should have called to testify at the trial, and adverse inference should be drawn against Sun for his failure to do so.

98.  The list includes: Liu, Amy (staff working in Atlantis), Ms Liu Lu (Sun’s secretary)(“Lu”), Mr Zhao Chao (Director of World Charm and ChinaVision)(“Zhao Chao”), Dong, Mr Terry Wong (staff of ChinaVision) (“Terry”), Ms Vivaldi Lam (staff of ChinaVision)(“Vivaldi”), Ms Yang Qin (who allegedly help Sun to make the payment for the purchase of the World Charm Shares)(“Yang”).  On Sun’s evidence, Vivaldi, Lu, Dong and possibly Terry knew that he was the beneficial owner of Superb Jade.

99.  I do not propose to deal with each possible witness here.  It suffices for me to say that the present dispute has nothing to do with these persons.  They may be able to tell the court some peripheral facts which may only be relevant to the backgrounds of the parties, but they are not expected to have personal knowledge about the beneficial ownership of Superb Jade or the SWS Account.  Some of them (such as Vivaldi, Lu and Terry) were only junior staff who helped Sun to take care of various daily matters.  They did not have extensive dealings with Sun, and their involvement (such as Lu and Vivaldi) can be seen from the relevant contemporaneous documents.  Hence, I refuse to draw any adverse inference against Sun for the absence of these possible witnesses at the trial.

D  MERITS OF THE ORIGINAL CLAIM

100.  Having carefully considered the evidence, I have no doubt in my mind that Sun is the beneficial owner of the Superb Jade Shares and the assets held in the name of Superb Jade.  My broad reasons are as follows:

(i)   Sun’s reasons for the setting up of an offshore company (i.e. Superb Jade) are more convincing.

(ii)  The control of the operation of the SWS Account had all along been vested in Sun.

(iii) The dealings and the transactions involving the assets in the SWS Account are more consistent with Sun’s version of events, and not that those assets were gifts or originated from gifts from Sun as alleged by the Lin’s Parties.

(iv) Sun was the one who paid for the setting up costs and annual fees relating to Superb Jade.

101.  I will elaborate on these reasons below.

D.(i)  Reasons for the setting up of Superb Jade and the SWS Account

102.  The parties have given different versions for the reasons for the setting up of Superb Jade.  Sun’s case has been summarised in Section B.(i) above.  On the other hand, Lin claims that, in light of possible business expansion, he wanted to acquire a BVI company for tax benefits and potential listing in the future.  In his oral testimony, he also added that the costs for incorporating an offshore company was low and the required registered capital was only US$1.

D.(i).1  Background of the parties and the initial reasons for the setting up of Superb Jade and the SWS Account

103.  Taking into account the backgrounds of the parties, Sun’s version is certainly more convincing.

104.  Sun’s background has been summarised in his witness statements and oral testimony, in particular:

(i)   By around 1991, Sun had already set up his own business.

(ii)  By around 1992, due to his involvement in real estate development and funding, Sun had already accumulated wealth to the extent of RMB10 million (his “first bucket of gold”).  It is not disputed that, back in 1992, RMB10 million was a lot of money in the Mainland.

(iii) Sun came to know Liu in around 1998 and have since become good friend.  Since then, Sun did from time to time assist Liu in investment projects.

(iv) During cross-examination, Sun also confirmed that he was involved in both investment and high-tech companies during the period from 2000 to 2009.

(v)  On 1 January 2009, Sun entered into an agreement with China Grand Forestry Green Resources Group Limited (“China Forestry”) whereby he was appointed as an “Executive”.

(vi) From February 2010 to April 2014, Sun formally participated in the affairs of the Atlantis Group.

105.  Sun has his own BVI company known as Crescent Investment Holding Co. Ltd. (“Crescent”).  There is also a BVI company known as Glory China International Ltd (“Glory China”) which was held by his wife (Sister Zhao).

106.  In his testimony, Sun explained how he used these offshore companies in different manners:

(i)   Crescent was used as a vehicle to perform services or operate projects outside the Mainland.  This explains why Crescent was used by Sun to enter into the Marketing Services Agreement with Heng Xin China Holdings Limited (“Heng Xin”).

(ii)  Since the initial investment negotiation fell through, Superb Jade was used to hold assets for Sun. This explains: (a) why the World Charm Shares and the ChinaVision Shares were placed into the SWS Account; and (ii) why there were the subsequent buying and selling of shares by Sun through the SWS Account.

(iii) As regards Glory China held by Sister Zhao, it was not used at the material time.

107.  On the other hand, Brother Zhao explained that the nature of his work was not the same as Sun’s, though there were some similarities at one stage.  Nevertheless, as between Brother Zhao and Lin, it is clear Brother Zhao is the one who was at the material times more familiar with offshore companies.

108.  Lin worked in two companies before venturing into food business.  In 2000, he started the Restaurant Business in the Mainland.  It is not disputed that Lin never had any experience in dealing with BVI or other offshore companies before May 2009.  According to Lin, he relied on the experience of Sun in helping him to set up the offshore company.

109.  Having considered the backgrounds of the parties and their alleged reasons for setting up Superb Jade, I find that Sun’s version is more convincing.

110.  Given Sun’s background, he was familiar with the investment industry and thus has knowledge of the use and operation of offshore companies.  All these explain why Sun chose to hold assets through nominees or trustees, a case which he has consistently maintained (even in the previous matrimonial proceedings involving Sister Zhao^[5]). This is also not disputed by Lin and Brother Zhao.  On Lin’s own case, it was because of Sun’s knowledge of offshore company that he asked Sun to assist in the setting up of Superb Jade.

111.  Sun has provided detailed explanation as to why he saw the need to ask Lin to be his nominee in respect of Superb Jade.  The crux of Sun’s reason is that he did not want people to associate his personal investments with those of Liu or the Atlantis Group.  Such an intention on the part of Sun is understandable.  As Sun explained, the circle of the investments (especially private equities) that Sun dealt with is a small circle, at least some people would know the relationship between Sun and Liu or the Atlantis Group.  Indeed, Sun explained that by 2009, he was widely known in the market as someone connected to and representing the Atlantis Group.  Such background provides a credible explanation about Sun’s desire to disassociate his personal investments from investments made by the Atlantis Group.

112.  Mr Lam makes the following attacks against Sun’s evidence:

(i)   The reasons given by Sun for the setting up of Superb Jade are not always consistent and he always added new reasons for the same.

(ii)  Sun’s alleged reputation of his connection to the Atlantis Group and potential investment opportunities are only bare assertions unsupported by evidence.

(iii) The alleged potential investments were still in the negotiation stage when Superb Jade was set up in around May 2009.

(iv) It was impossible for Sun to distance himself from the investments as he had to be involved in the negotiation in any event and the investment circle was a small one.

(v)  Sun could hold shares in his own name as, for BVI companies, the public would not be able to find out who the registered shareholders of the company are.

(vi) There is confusion in his evidence as to when he made the oral agreement with Lin for the nominee arrangement.

113.  Despite Mr Lam’s able submissions, I do not find that these observations would undermine the credibility of Sun’s evidence.  Sun was involved in a unique investment circle.  It is true that people negotiating with Sun would know Sun and his background, but Sun was at the material time not a full-time employee of the Atlantis Group.  Sun at the time had his own personal investments.  Indeed, shortly before Superb Jade was incorporated, he was appointed an Executive of China Grand Forestry Green Resources Group Limited.  Hence, unless and until Sun made clear his capacity, people could not be sure as to under which capacity Sun was acting during any negotiation.

114.  It is true that the public would have difficulty in finding out the shareholders and directors of a BVI company, but yet in an investment transaction, it would not be surprising that corporate documents would have to be produced (as part of the documents required for completion).  If he were to find a nominee to hold the investments for him, it would not at least on paper reveal his interests or connections with the investments.

115.  I also do not accept that Sun has been changing his explanation for acquiring Superb Jade.  It has all along been his case that Sun wanted to set up Superb Jade to “avoid unnecessary troubles”, as stated in his first affirmation made in support of the ex parte Mareva injunction application.  In the subsequent witness statements, Sun provided further substance to support such allegation.  This is quite understandable in view of the development of the case and the queries raised by the Lin’s Parties at different stages of the proceedings.  I also do not find that there is any confusion in Sun’s evidence as to when the nominee agreement was made.  Unlike a normal commercial contract which is easy to identify a particular contract date, the present nominee agreement involved a less formal arrangement between friends.  It would be too pedantic to pick on the exact date.

116.  Mr Lam also challenges why Sun had chosen Lin and not Brother Zhao or Sister Zhao to be his nominee.  Sun had also appointed Sister Zhao as his nominee in two companies in 2009, and he queries why Sun did not appoint her as his nominee for Superb Jade as well.

117.  Given the relationship between the parties, there is no substance in these complaints.  Even on Lin’s own case, there was a great deal of trust between the parties by that time.  Further, taking into account Sun’s connections and the scale of his possible investments, I do not find it surprising that he sought to establish a network of offshore companies held by different nominees.  The business profile of Sun certainly fits the sort of arrangement alleged by him for his possible investment plan in the future.

118.  The timing for the setting up of Superb Jade is also consistent with Sun’s case.  There is no serious dispute that Sister Zhao was Sun’s nominee in holding the shares in China Glory.  The fact that both Superb Jade and China Glory were set up at more or less the same time cannot be a matter of pure coincidence.

119.  On the other hand, I do not find that Lin’s version for the setting up of Superb Jade is convincing.  It does not sit well with his more humble and less sophisticated background.

120.  First, regarding intended listing, I find it surprising that such reason was not mentioned in Lin’s pleadings and only appeared in his witness statement.  Unlike Sun which had a more complicated and sophisticated plan, Lin’s plan was a simple one to a less sophisticated businessman.  The omission to mention this reason earlier certainly undermine the credibility of his case.  In any event, as Lin accepted during cross-examination, the intended listing was a “long way to go”.  Further, when a company intended to go listing, the team of professional advisers would advise the corporate structure (including whether there was any need to incorporate an offshore company to be the listing vehicle or otherwise).  There is no plausible explanation as to why Lin would have incorporated an offshore company for intended listing with such intended listing still had a long way to go.

121.  Second, regarding possible tax benefits, it is most surprising that Lin had not consulted any professionals (such as accountants, lawyers, etc) before incorporating Superb Jade.  I agree with Mr Yuen that, as a matter of business or common sense, one would expect that Lin (as a businessman of some experience) would have sought some preliminary advice before incorporating Superb Jade.  At the very least, if Lin’s story is true, he would be interested to find out how much tax could be saved.  The total absence of prior professional advice certainly undermines the credibility of Lin’s explanation.  Lin’s explanation that he simply followed his friends’ suit in setting up offshore company or WOFE without any concrete idea does not add any weight to his case.  The lack of his understanding about these important matters is surprising.

122.  Third, regarding possible business expansion, it is plain that the Restaurant Business was not doing well in 2009. During cross-examination, Lin was taken through the tenancy agreements and related documents in respect of the shops or workshops included in the table under §26 of his 1^st witness statement.  Some of the shops were closed presumably due to poor business, and it is also difficult to see how shop or workshop in university or industrial areas could generate handsome profits.  More importantly, Lin did not produce any accounts of his business.  If his business was good, one would expect him to do so as that would be the best evidence to show that he had a basis to consider business expansion or restructuring.

123.  Further, Zhibing testified that he had visited Lin’s shop in Shanghai and on one occasion had the chance to look at the accounts.   He confirmed that the business was not good.  It is also not disputed that the “joining fee” of RMB200,000 was paid by Sun (although Lin claimed that he asked Sister Zhao to pay it for him).  Despite Lin’s allegations of repayment, there is no documentary evidence of repayment. Besides, both Lin and Sister Zhao must have had bank accounts in the Mainland, and so Lin could have procured the transfer of this sum to pay for the “joining fee” instead of asking Sister Zhao to pay on his behalf (knowing that Sister Zhao was at the time a housewife). Lin could also have procured the transfer to Sister Zhao if he had repaid this sum.

124.  The poor Restaurant Business and the dubious financial position of Lin certainly do not sit well with his account of acquiring an offshore company for possible business expansion in the future.  There is also no reason to explain why Lin needed a readily available offshore company when he could always acquire such vehicle in the future.

125.  Fourth, for the explanation regarding low costs for setting up offshore company, one would still not incur such costs unless there is really a need for doing so.  As demonstrated above, Lin did not have any need to have an offshore company readily at hand so that he could make use of it as and when the need arose.   On the other hand, Sun had to deal with many investments at the time, and it would be in his interest to have some offshore companies readily at hand.

126.  Apart from the aforesaid, it is also difficult to explain why Lin decided by himself to use an offshore company for possible expansion of the Restaurant Business when such business was a partnership business involving other partners.  On his own admission, Lin did not discuss the plan to set up an offshore company with his two business partners who owned the remaining 25% interest in the Restaurant Business. This is, to say the least, very odd even if one takes into account Lin’s assertion that the two business partners were silent partners and did not participate in the management of the food business. The use of offshore company for business expansion would affect their interests.  One would expect at least a notification or a discussion.

127.  Further, when Superb Jade was incorporated, only Lin was the shareholder.  If the intention was to use Superb Jade to hold the Restaurant Business, it is difficult to understand why his two business partners were not made 25% shareholders.  On Lin’s case, he had not even discussed this matter with his two business partners. This again is contrary to any commercial or common sense.

128.  It is also surprising that the costs for setting up Superb Jade and its annual fees were not reflected in his business account.  Not only would the costs and annual fees be part of the business costs, the two business partners would have to make their 25% contribution. The total absence of such accounting entries and the payment of these costs by Sun show that Lin’s story is not credible.

129.  It would now be convenient for me to deal with another challenge against Sun’s case.  It is submitted by Mr Lam that Sun’s case is not consistent with the information obtained from the public documents:

(i)   There were and are strict regulations concerning disclosure of beneficial interests in listed companies.  For this reason, the substantial shareholders (i.e. those holding more than 5%) were required to complete declaration forms. On 26 October 2011, Lin was asked to confirm the information stated in the “Individual Substantial Shareholder Notice” and “Corporate Substantial Shareholder Notice” regarding the ChinaVision Shares.  Lin was stated to be the “substantial shareholder” and the “controlling shareholder” of Superb Jade, and the remark in the attachment stated that Superb Jade was “wholly-owned” by Lin.

(ii)  The same information was contained in another set of disclosure forms which were attached to an email dated 1 February 2012 from Terry of ChinaVision to Lin (which were copied to Sun’s email account).  According to Sun, Lu would take care of his emails.

(iii) Lin was stated in the annual report of ChinaVision for 2011 as maintaining “100% beneficial interest in Superb Jade”.

130.  Mr Lam submits that, if Sun’s evidence is true, the necessary implication is that he together with all these persons conspired, and participated, in the making of false public documents.  This would be a very serious matter constituting criminal offences.

131.  In my judgment, the things mentioned above actually explain why Sun wanted to engage a nominee to hold his investments despite that someone might still know about his interests in the investments.  At least, the public documents do not show his involvement.  For the staff helping Sun to complete the relevant documents, it was probable that they just followed the instructions of their “boss” without thinking too much about the legal implications of their conducts.  Further, without knowing the full details of the dealings between Sun and Lin, they might not be able to appreciate what they did might be improper.

132.  For Sun, by trying to conceal his involvement in these investments, he may not be a person of high moral or business standard.  Yet this is not a trial on his moral or criminal responsibility.  Sun is the kind of sophisticated businessman who would have engaged in such kind of arrangement.  He is prepared to walk on thin ice, and he would not consider concealing his interests a serious matter.  The same applies to Shum who assisted him to set up the SWS Account.  After all, trust and holding assets for someone else are not new concepts.  For these reasons, I reject Mr Lam’s challenge in this regard.

D.(i).2  Subsequent use of Superb Jade for other purposes

133.  The parties have also invited me to consider the subsequent use of Superb Jade in order to assess the credibility of the evidence.

134.  Sun’s evidence is that “at around the time when [Superb Jade] was incorporated, the potential investment projects with the Investors did not develop past the negotiation stage and ultimately did not result in any investment. However, [he] decided to keep [Superb Jade] as [his] corporate vehicle to hold assets of various classes and procure [Superb Jade] to set up a securities account for that purpose.”  He also said that [Superb Jade] has thereafter become the primary depository of [his] investments and to avoid multiple fund transfer.”  Sun said that this change of mind took place shortly after the incorporation of Superb Jade.

135.  Mr Lam challenges such explanation by saying that, upon such change of circumstances, there was no longer any reason to hide his identity as the true beneficial owner of Superb Jade.  If he decided to keep Superb Jade simply to hold his assets, he could have asked Lin to transfer the Superb Jade Shares back to him. Further, Sun had another BVI company i.e. Crescent.  It was incorporated on 4 November 2009, about 3 months after the incorporation of Superb Jade.  If the change of circumstances took place before the incorporation of Crescent, why did Sun need to set up another company serving the same purpose? And if the change of circumstances took place after that, why did Sun need to keep Superb Jade at all, or use it for a purpose already served by Crescent?

136.  In reply to such queries, Sun said that Crescent was not used to hold his assets, rather it was used to operate projects outside the Mainland such as signing the service agreement with Heng Xin.  Again, Mr Lam argues that such answer is inconsistent with his earlier allegation in the witness statement and the substantial assets held in the name of Crescent.

137.  Mr Lam has also pointed out the fact that the SWS Account had been left dormant until February 2012 (which was more than 2 years after the SWS Account was opened in November 2009), which does not support Sun’s allegation that he intended to use such company as his “primary depository” of his investments.  He also submits that Sun has failed to give a satisfactory explanation as to why he would need another securities account at SWS when he already had one under his own name at SWS.

138.  In my judgment, such line of challenge is extremely unrealistic given the nature of the business operated by Sun.  Sun is an opportunistic businessman who would make use of his connections to make money when opportunity arises.  He set up different corporate vehicles which would be ready to be used for different opportunities or investments.  As explained by Sun, there may be change of circumstances every day in a fluid business world, and so it would be quite unrealistic to expect Sun to give a detailed explanation to justify every business decision, or sometimes inaction, on his part.  What is most important is that, as further elaborated in the latter part of this Judgment, Sun had made use of Superb Jade and the SWS Account to deal with substantial investments and assets which were unlikely to be gift to Lin.  I accept the explanation given by Sun to be a genuine one.

139.  On the other hand, I do not find that Lin’s account as to the change of use of Superb Jade and the dormancy of the SWS Account is convincing.  He stated in his statement that because the stock market in Hong Kong at that time was too volatile, he did not use the SWS Account for trading of shares.

140.  Again, such answer raises more questions:

(i)   If Superb Jade was used for future expansion of the Restaurant Business, why did he need to open the SWS Account for the trading of stocks and equities?

(ii)  Had Lin notified the two partners of the Restaurant Business that he used Superb Jade, which would be the corporate vehicle for the Restaurant Business, to trade in stocks and equities?

(iii) If Lin just wanted to trade in stocks and equities without involving the Restaurant Business, why did he not just use a personal account in his own name (which he did set up eventually, i.e. Lin’s SWS Account) to do so?  There was simply no need to cause Superb Jade to set up an account in SWS.

141.  For these reasons, I prefer to accept Sun’s evidence in this regard.

D.(ii)  Control over Superb Jade and its assets and the SWS Account

142.  I agree with Mr Yuen that the control over Superb Jade and its assets and the SWS Accounts is a material consideration in deciding the question of beneficial ownership.

143.  On the case of either camp, the parties had been placing great trust on the others by reason of their friendship and family relationship.  It was due to such trust that Sun did not ask Lin to sign any nomination agreement or declaration of trust.  On the other hand, according to the case of the Lin’s Parties, Brother Zhao asked Sun to hold the sum of RMB750,000 (which was a huge sum at the time) with no written documentation as well.  Hence, the absence of documentation is very much a neutral factor.

144.  Yet, according to Sun, he was the one who kept the Company Kit and Chop since its incorporation.  In more recent years, Sun kept the Company Kit and Chop separately in a drawer in a cabinet of his study room and a drawer in a table of his single bedroom at the Matrimonial Home.

145.  On the other hand, Lin claims that, as he frequently visited the Matrimonial Home, he left the Company Kit and Chop there for convenience, which were at all material times under the possession and control of Sister Zhao.  During cross-examination, Lin clarified that he only left the Company Kit and Chop at Sister Zhao’s Matrimonial Home after 2011 (i.e. after Sun made arrangement in respect of the World Charm Shares).  Hence, even with such change in the evidence, there is no dispute that the Company Kit and Chop were kept at the Matrimonial Home after 2011.

146.  Brother Zhao, on the other hand and for the first time, suggested during cross-examination that he found the company chop of Superb Jade in a safe jointly used by him and Lin in Shanghai.  Apart from the fact that it was a new allegation, it is inconsistent with the evidence of Lin, who did not suggest that he had at any stage kept the company chop at his safe in Shanghai.

147.  In any event, the purported explanation put forward by Lin does not sit well with his own case.  First, the Company Kit and Chop were not difficult to store or keep.  If Superb Jade was beneficially owned by Lin, one would expect him to keep the Company Kit and Chop at all times. There is simply no reason to leave it to Sister Zhao as Lin alleged.  Second, as admitted by Lin himself, if his reason for acquiring an offshore company were true, he understood and expected that there would be procedures to follow with the relevant Chinese authorities so that a WFOE structure could be used for the Restaurant Business.  Hence, there is no reason to place the Company Kit and Chop with Sister Zhao.  Third, the reason given by Lin for his change of evidence (i.e. put the Company Kit and Chop with Sister Zhao only after 2011) cannot be true.  If his story is true, he could have asked for all relevant documents be sent to him for signature, and he could then affix the company chop.  For these reasons, I reject Lin’s evidence regarding the safe-keeping of the Company Kit and Chop.

148.  Mr Lam submits that there is some doubt in Sun’s evidence regarding the possession of the Company Kit and Chop, for examples: (i) Sun did not say in his first affirmation that he kept the company chop in his bedroom separately from the company kit; and (ii) Sun said he did not know, approve or authorize the opening of a securities account in Chung Nam Securities Limited (“the Chung Nam Account”) in 2010 in the name of Superb Jade, and yet the Company Kit and Chop were clearly necessary, and must have been used, when the Chung Nam Account was opened.

149.  I do not find that these immaterial matters would undermine the credibility of Sun’s case.  Where exactly he put the Company Kit and Chop within his residence can hardly be regarded as a significant matter, in particular there is no dispute that the Company Kit and Chop were kept at the Matrimonial Home after 2011.  Further, without knowing the details of the procedures for the opening of the Chung Nam Account, I do not want to speculate what really happened by that time.  There might be different possibilities, such as Lin obtaining the Company Kit and Chop for a short while with or without Sun’s knowledge or the Chung Nam Account be opened without going through the formal procedures.  In any event, given his extensive exposure and Superb Jade was only one of his companies, it is unrealistic to expect Sun to recall all the details about the use of the Company Kit and Chop.

150.  In fact, Sun’s footprints are all over the places regarding the opening and operation of the SWS’s Account.   It is not seriously disputed that:

(i)   the opening of the SWS Account was arranged by Sun;

(ii)  Sun was the one who gave instructions to operate the SWS Account;

(iii) regarding the transactions done through the SWS Account, Shum confirmed execution of instructions with Sun (覆盤) before repeating the confirmation to Lin (apparently so that the confirmation could be recorded through SWS’s telephone recording system).

151.  On the other hand, according to Shum, Lin, until 7 May 2014, had never given any instructions to operate the SWS Account.  Sun would make enquiries about the state of this account, but Lin had never done so before 7 May 2014.  Shum’s evidence in this regard has not been seriously challenged by the Lin’s Parties.

152.  Further, it is understandable that the conversations between Sun and Shum were not “officially” recorded.  The whole arrangement was to get round the rules and regulations requiring the disclosure of the true ownership of the account.  There may also be an issue as to whether Shum believed that there was a formal authorization authorising Sun to operate the account.  If she believed that there was one, Mr Lam submits that she should have confirmed the transactions with Sun through the official recording system.  However, since I find that Shum at all material times knew that the account was a nominee account and she was prepared to bend the rules to assist Sun to open and operate such account, whether she believed that there was a proper authorisation is neither here nor there.  Indeed, such written authorisation might raise suspicion on the part of SWS about the true ownership of the account.

153.  Mr Yuen poses two pertinent questions for me to consider: If Superb Jade is beneficially owned by Lin, why would Lin have behaved in such a way?  If Shum did not understand Sun to be the one in control of the SWS Account, why would she have behaved in the way she did?  According to him, the answer is likewise obvious: Lin is only a nominee and thus he left everything to Sun.  Until 7 May 2014, Lin had shown no interest in the operation of the SWS Account.  I agree with such observation.

154.  Mr Lam relies heavily on the answers given in the account opening form (including the supply of the correspondence and email address of Lin) and the signing of the personal guarantee to show that Lin is the beneficial owner of the SWS Account.  However, if the parties did make the agreement for the setting up of Superb Jade as alleged by Sun and Shum was prepared to offer the necessary assistance, which I find it to be the case, then one would not be surprised by the answers stated in the account opening form.  Any contrary answers or the supply of the address of another person (which might raise suspicion about the true ownership of the account) would mean that they would not be able to carry out the arrangement as agreed.  In fact, the way in which Shum handled the transactions in the SWS Account as mentioned above speaks volume about the true ownership of the SWS Account.

155.  Further, given the then close relationship between the parties, it would not be surprising that Lin agreed to be Sun’s nominee and signed the personal guarantee.  Even on Lin’s own case, there was considerable trust between the parties by that time.  It is true that Lin could withdraw money from the SWS Account, but according to Sun, the account was still under his control because all the acts had to be done through the Account Executive and he subjectively believed that he could control both Lin and the Account Executive, i.e. Shum.  Given the trust between the parties, I accept it to be a genuine answer.

156.  It is also necessary for me to mention about another account in SWS opened in the name of Lin personally (“Lin’s SWS Account”).

157.  On the evidence, the following is clear and cannot be seriously challenged:

(i)   As explained by Sun, it is necessary to open a personal account so as to deal with the option (“the Magic Option”) granted by Magic Holdings International Ltd (“Magic”).  Lin does not appear to dispute this.

(ii)  Sun procured Lin to deal with the Magic Option as he did not want to upset the other directors, and that was why his personal account was not used.

(iii) Indeed, when cross-examined by Mr Samuel Chan, counsel for SWS, Lin apparently did not even know whether Lin’s SWS Account was a cash account or a margin account.  This shows that Lin did not care because he was only acting as Sun’s nominee.

(iv) More importantly, Sun was a non-executive director of Magic, while Lin had no dealings with Magic at all.  In the circumstances, there was no way that Lin would suddenly be granted the Magic Option.  Indeed, Lin has not come up with any satisfactory explanation in this regard.  Hence, like the SWS Account, the footprints of Sun (and not Lin) were all over the places regarding the opening and operation of Lin’s SWS Account.

158.  Mr Lam submits that there is no documentary evidence to show Sun’s entitlement to the Magic Option.  However, Sun was a non-executive director of Magic which supports his entitlement to the Magic Option.  On the other hand, Lin cannot demonstrate how he was able to acquire such profitable option.  Mr Lam submits that it was Lin who borrowed money from the SWS Account in order to fund the purchase of the Magic Option which attracted the payment of interest.  However, if what Sun told the court were true, it was only natural for Sun to borrow money using his own account to pay for the Magic Option.  What is important is how the loan was repaid.  There is no suggestion by Lin that he had the financial ability to repay the loan, and Sun’s account must therefore be the truth.

159.  Under such circumstances, I agree with Mr Yuen that the opening and operation of the Lin’s SWS Account reinforce Sun’s case that Lin was at all material times his nominee.  Lin’s conduct in respect of the Lin’s SWS Account and the Magic Option was only a continuation of his role as Sun’s nominee in respect of Superb Jade.  It was only because the Magic Option had to be dealt with through a personal account that Sun procured Lin to open the Lin’s SWS Account (instead of dealing with it through Superb Jade’s SWS Account).

160.  Superb Jade also had a bank account in the Bank of China, which was apparently opened at around the same time as the SWS Account. The authorised signatory of such account was Lin and all bank statements were sent to Lin’s address.  Mr Lam likewise relies on these facts to support that Lin is the beneficial owner.  Again, the opening of such account can be regarded as part of the nominee arrangement.  Further, despite the purported explanation given by Lin, Sun’s possession of the two blank express transfer applications of the Bank of China certainly adds weight to his case.  Hence, I also accept Sun’s evidence in this regard.

D.(iii)  Dealings and transactions involving the assets in the SWS Account

161.  Further, the dealings and transactions involving the assets in the SWS Account are more consistent with Sun’s case rather than that of the Lin’s Parties.

162.  There is no serious dispute that Superb Jade had substantial assets in the SWS Account.  The assets originated from the 106,700 World Charm Shares. According to Sun’s case, Superb Jade acquired the World Charm Shares on 30 March 2011 at the price of HK$49.8 million, which in turn were transformed into the ChinaVision Shares which were then deposited into the SWS Account on 6 February 2012.  Sun claimed that these were normal and arm’s length commercial transactions.

163.  Sun said he came to know Dong and Zhao Chao in about April 2010, which would be less than one year before the acquisition of the World Charm Shares.  Zhao Chao was at that time the sole shareholder of World Charm.  Sun said Dong introduced him to the opportunity of investing in CEMG, a subsidiary of World Charm (which held 45% therein).  CEMG was incorporated in Cayman Islands on 4 January 2011. 106,700 World Charm Shares would constitute 10.67% interest in World Charm, and about 5% interest in CEMG.

164.  In order to justify why there were such substantial assets, the Lin’s Parties provide the explanation as mentioned in §§38 to 42 above.  I do not want to repeat the same here.

165.  It is an essential case of the Lin’s Parties that the assets held by Superb Jade are gifts from Sun as a general gesture for the sum of RMB750,000 advanced from Brother Zhao to Sun.  According to them, Brother Zhao procured the sum of RMB750,000 to be transferred to corporate bank account controlled by Sun because Brother Zhao himself did not have corporate account to receive the money.  Sun then used the money to invest in the Shenzhen Properties Shares, and thus could not repay Brother Zhao.  However, Sun subsequently represented to Brother Zhao (and also Lin) that he had made handsome profits from the investment in Shenzhen Properties Shares to the magnitude of 50 times.

166.  Sun admitted having received the money but explained that the same had been repaid by various set-offs (which were pursuant to an understanding reached at the time when he agreed to receive the money from Brother Zhao).

167.  Having carefully considered their evidence, I accept Sun’s version as the truth.  I agree with Mr Yuen that the extracts from Sun’s notebook is an important piece of evidence in support of Sun’s case.  Though Sun did not make any particular reference to these extracts in his witness statements, they are still contemporaneous records prepared by Sun.  At the time when the records were prepared, Sun could not possibly have thought that there would be this litigation.  Hence, there is simply no basis to suggest that the entries in the extracts are fabricated.  In any event, these extracts have been disclosed in the course of discovery, and yet no notice has been served on behalf of the Lin’s Parties under O 27, r 4(2) of the RHC disputing the authenticity.  In the circumstances, there is little basis to challenge the authenticity of these extracts.

168.  These extracts from the notebook, as explained by Sun, recorded the receipt of the said sum of RMB750,000 and some of the set-offs explained in Sun’s witness statements.  Further, it refutes the allegation that Sun used the sum of RMB750,000 to invest in Shenzhen Properties Shares and thus could not make repayment.

169.  Mr Lam argues that, if the notebook were a true record, it is surprising that the extracts do not cover: (a) the sum of RMB200,000 paid by Sun for Lin’s payment of “joining fee”; and (b) the set-off in respect of the golf membership.

170.  However, the payment of RMB200,000 by Sun is supported by evidence.  On the other hand, there is no documentary evidence to show any repayment.  The best Lin can do is to make mere assertions.  It may be said that the said sum of RMB200,000 was paid on Lin’s behalf and has nothing to do with Brother Zhao.  Yet given the then close relationship between the parties, it is not surprising at all that Brother Zhao agreed to bear the sum of RMB200,00 for Lin (just like Sun agreed to pay the sum when requested or asked by his wife, according to Lin’s own case).

171.  As for the golf membership, Sun’s explanation during his testimony is totally understandable (i.e. Brother Zhao’s embarrassment due to the drop in price).  On the evidence, it can be seen that: (a) it was Brother Zhao who introduced the golf membership to Sun; (b) Brother Zhao at the time thought it was a good investment, and he himself acquired one.  In the circumstances, even though technically Sun did not purchase the golf membership from Brother Zhao, it is not difficult to understand that Brother Zhao would feel embarrassed.  Given the relationship between the parties, such embarrassment would very well have caused Brother Zhao to make a modest “compensation” to Sun.

172.  I agree that these extracts may not contain the full details or the purpose of each payment.  This is quite understandable.  To Sun, these extracts were reminders only.  Normally a person would only record such details as they consider sufficient in such kind of documents.  One would not expect that the notebook would be used in subsequent litigation.  I would imagine that if the entries in these extracts were complete and perfect, the Lin’s Parties would then complain that it is a fabricated document.

173.  For these reasons, I accept Sun’s evidence that he had repaid the sum of RMB750,000 to Brother Zhao.  But even if no full repayment had been made, it does not affect the result of the case.  The subjective belief of full repayment on the part of Sun and the absence of any demand for repayment by Brother Zhao negate any suggestion that he gifted the profit deriving from sale of the Shenzhen Properties Shares to Lin or Brother Zhao.

174.  Another important element of the case of the Lin’s Parties is the subsequent “gift” to Lin.  They rely on this as the only basis to explain why Lin can claim the fruits of the China Vision Shares now sitting in the SWS Account (and also the cash withdrew on 7 May 2014).   Lin said that it was in about May 2011 that Sun informed him that he would give the shares to him and Brother Zhao as a gift in return for the financial assistance they had provided to him in the past and also Brother Zhao’s forbearance in not demanding for repayment of the RMB 750,000.  Brother Zhao said that Sun informed him of this matter in a meeting at a hotel in Beijing on or about 3 June 2011.

175.  I agree with Mr Yuen that such contentions on the part of the Lin’s Parties cannot withstand scrutiny.

176.  First, there is the witness statement of Guo.  The evidence of Guo destroys the case of the Lin’s Parties that Sun made 50 times of profit from his investment in Shenzhen Properties Shares.  In fact, the profit was only RMB188,256 (i.e. sale proceeds of RMB1,048,256 less original purchase price of RMB860,000).  Since the Lin Parties chose not to cross-examine Guo, there is no basis for them to challenge the contents of Guo’s witness statement.  In the circumstances, an important reason for making the alleged gift is simply missing.

177.  Second, it is claimed that the alleged gift was also to repay the alleged generosity of Lin as Lin allegedly helped Sun out when he was in financial trouble.  However, there is no concrete evidence to show that Sun was ever in financial trouble. The allegation of the Lin’s Parties is no more than mere assertion.  On the contrary, Zhibing testified that he did not recall any deterioration in the living standard of the family.  On the contrary, the living standard improved since 2003 (with concrete examples).  Further, Lin has produced no documentary evidence that he had provided financial assistance to Sun or his family.  Hence, the only other reason for the alleged gift also disappears.

178.  More importantly, I have serious doubt as to whether Sun is the kind of person who would have been so generous to Lin and Brother Zhao.  There is no evidence to show that Lin himself paid for the Magic Option.  Hence, according to the case of the Lin’s Parties, Sun had gifted them twice, one on the World Charm Shares and the other on the Magic Option (that could not possibly be obtained by Lin without Sun’s entitlement as the non-executive director of Magic).  Both instances (of the actual gift of World Charm Shares and a rare chance to get Lin’s hands on the shares of Magic through the privileged route of a share option made available by Sun) involved substantial benefits and gigantic windfalls to these two brothers that cannot possibly be explained or placated by Sun’s apparent senses of guilt to them for unduly procrastinating and not repaying their goodwill and financial assistance to him years ago.  According to Lin and Brother Zhao (and this must be true), Sun was a seasoned investor with keen eyes for profitable commercial deals. Hence, the “gift” story does not fit the facts of the case.

179.  The Lin’s Parties say that Sun was wealthy by that time which somewhat justifies the making of such substantial gift.  But on their own case, the financial condition of Sun was at one stage very poor which purportedly explains why Sun was so grateful for their financial assistance. In my judgment, there is simply no evidence to show that there was such huge fluctuation in Sun’s financial condition.

180.  In fact, the respective accounts about the financial condition of Sun given by Brother Zhao and Lin do not sit well with each other.  According to Brother Zhao, he had paid in financial assistance of less than RMB0.5 million to relieve the plight of his sister’s family.  Brother Zhao described Sun to be an “ambitious gambler” in shares and he should be guarded with care in relation to his advice on investment and shares speculation. Lin, on the other hand, said he entrusted Sun with no reservation on shares dealings in the SWS Account.   He gave such evidence with a view to justify why he did not take part in the daily operation of the SWS Account. Which version is correct?  If Sun is the kind of person described by Brother Zhao, why would Lin had entrusted Sun to take care of “his company” (i.e. Superb Jade) and allowed him to trade in volatile securities through the SWS Account?   Such conflicting versions about Sun’s character and financial condition raise serious doubt about the credibility of their case.

181.  I also find it odd that, even if Sun had owed money from Brother Zhao as alleged, Sun had decided to make the “gift” to Superb Jade which they say is a company owned by Lin.  Though Brother Zhao may be an elder brother of Lin, the size of the “gift” does not justify such generosity.    Hence, I do not find that the story of the Lin’s Parties is credible.

182.  Further, it is not in dispute that part of the ChinaVision Shares were sold over the period from 2 May 2012 to March 2014, and sale proceeds in the region of HK$82 million were paid into accounts designated by Sun.  Sun claims that it shows he was the beneficial owner of Superb Jade and its assets.  On the other hand, it is the case of the Lin’s Parties that these sums of money were “bonuses” gifted to Sun.

183.  I agree with Mr Yuen that such a way of giving “bonus” to Sun is most odd.  If they thought HK$49.8 million was good enough, Lin and Brother Zhao could simply have told Sun to sell all the ChinaVision Shares, pay them HK$49.8 million and ask Sun to keep the rest.  There is no need to adopt such a complicated scheme to effect bonus to Sun.  Further, if one looks at the account statements, there had been instances where the net balance was allowed to go below HK$49.8 million.  Lin must have been aware of this, since he received the daily statements of the SWS Account. This goes to show that the alleged explanation of “bonus” is false.  It follows that the ChinaVision Shares were not a gift, and that Sun placed his own shares into the SWS Account and thereafter disposed it in the way and at such time as he thought fit.

184.  In fact, there is confusion in the case of the Lin’s Parties about who was the ultimate beneficial owner of the cash and shares that remained in the SWS Account after “re-gifting” HK$82 million to Sun: Lin said he owned the whole lot but Brother Zhao had a share; Brother Zhao said 3 persons had to share the spoils (he himself, Lin and Brother Zhao’s wife).  Such confusion certainly undermines the credibility of their own case.

185.  Mr Lam also tries to attack Sun’s case by pointing out the suspected irregularities relating to the sale and purchase of the World Charm Shares such as: backdating of the agreements, incorrect information contained in the sale and purchase agreement and declaration, the absence of proper valuation of the shares, probable misleading information provided to the public, doubt as to whether Sun had paid the price of HK$49.8 million.  Mr Lam submits that, having regard to these suspicious features, the transactions could not be normal or arm’s length commercial transactions.

186.  In reply, Sun gave a detailed account in court as to how he paid the purchase price, but Mr Lam submits that the account is not credible.

187.  I do not propose to deal with these challenges in details here.  It suffices for me to say that the counter-party, Zhao Chao, had issued a written confirmation that he received the purchase price.  Mr Lam again attacks the confirmation by saying that it was made too late and Sun should have called Zhao Chao to testify in court.  But no one is seriously challenging that Sun was by that time the owner of the World Charm Shares, and so it serves very little purpose by calling Zhao Chao as an additional witness.  As his evidence would not be material to the determination of the core issue in this case, his absence should not be a factor weighing against Sun’s case.

188.  More importantly, I do quite understand the purpose of these challenges.  Are the Lin Parties seriously suggesting that they paid for the World Charm Shares themselves?  There is no such suggestion.  If there were any regularities, Sun was still the beneficial owner of the World Charm Shares.   As I have repeated many times in this Judgement, such transaction bears the footprint of Sun and the transaction fits his business profile.  On the other hand, no one would believe that Lin was the one who had engineered such kind of transaction.  Further, as further elaborated below, the alleged illegality and irregularity, which the Lin Parties have failed to establish, are not grounds to deny Sun’s beneficial ownership claim.

189.  For these reasons, I reject the allegation of the Lin’s Parties that there was any gift from Sun whether as alleged or at all.  Instead, it is clear that Sun was making use of the SWS Account to deal with his own assets and investments.

D.(iv)  Payment of setting up costs and annual fees of Superb Jade

190.  On the evidence, there cannot be any doubt that Sun was the one responsible for the cost of the setting up and maintenance of Superb Jade.  Indeed, it is not in dispute that Amy, who was a secretary in Atlantis, was the one responsible for handling the matters.  This is also supported by documentary evidence.

191.  I agree with Mr Yuen that Lin’s evidence in this regard is far from satisfactory.  Not only did Lin deny that Sun paid for the costs and annual fees, he alleged that even Sun himself did not know the amounts in question.  Lin eventually admitted during cross-examination that Sun paid for such costs and annual fees.

192.  I accept that Sun paid for these expenses.  He would not have done so unless Superb Jade is beneficially owned by him.  One may say that these costs may not be substantial, but there is still no reason for Sun to have paid for such expenses.  In particular, according to Lin’s own case, Superb Jade was his company acquired for the future expansion of the Restaurant Business.  Such expenses should form part of the costs of the Restaurant Business, and there is no reason for Sun to have paid these expenses in particular there are other partners for the Restaurant Business.

193.  Hence, these payments support Sun’s case.

D.(v)  Other considerations

194.  There are also some other considerations which may be relevant in deciding the beneficial ownership of Superb Jade and the SWS Account.

D.(v).(1)  The Chung Nam Account

195.  First, the Lin’s Parties are relying heavily on the Chung Nam Account held in the name of Superb Jade to support their case.  As Sun only learnt about the existence of the Chung Nam Account in the course of these proceedings, Mr Lam submits that Lin must be the beneficial owner of Superb Jade.

196.  The following facts can be gathered about the Chung Nam Account:

(i)   As one can see from the monthly statement dated 1 December 2010, the holder of the account was Superb Jade and the correspondence address was Lin’s address in Fujian.

(ii)  The account was apparently opened without the consent and knowledge of Sun.

(iii) The market value of the asset in the Chung Nam Account on 1 December 2010 was HK$17.4 million worth of shares of Hao Tian Resources Group Limited (“Hao Tian Shares”).

197.  According to Lin’s evidence, this represents a gift from his biological father, who is a retired judge in the Mainland.  Lin confirmed that Sun had no interest whatsoever in the Hao Tian Shares.  Brother Zhao also confirmed that in 2010, Lin’s biological father gave Lin HK$18 million which was utilised to buy Hao Tian Shares.  Brother Zhao believed that this was something his brother deserved for their father had not taken proper care of Lin in the past.  However, Mr Lam submits that all these are really beside the point.  He invites me to consider the following question: if Superb Jade really belonged solely to Sun as he claimed, why would Lin (and also his father) put valuable property which, on Sun’s admission, had absolutely nothing to do with him into Superb Jade?

198.  Despite the able submissions of Mr Lam, I do not find that the existence of the Chung Nam Account would undermine the credibility of Sun’s case.

199.  First, Lin has not produced any documents other than a selective collection of statements. There is no evidence as to when the account was opened, how it was opened and why it was opened.

200.  Second, the alleged gift by Lin’s biological father is equally mysterious.  Not only is it difficult to understand why a retired judge in the Mainland could save up to HK$18 million, it is equally difficult to understand why the entire gift consisted of shares in one company.   What is even more puzzling is Lin’s allegation that his biological father would choose to use not Lin’s personal name, but the name of an offshore company (i.e. Superb Jade), to open a corporate securities account in Chung Nam Securities Ltd, using the address of Lin’s adopted father in Fuzhou City as the correspondence address.  The alleged arrangement is so utterly strange that casts serious doubt on the credibility of Lin’s beneficial ownership claim.

201.  It is true that Sun knew nothing about this account until the commencement of these proceedings.  However, as the source of the funds for acquiring the shares in the Chung Nam Account is dubious and the whole transaction brings up more questions than answers, it raises a suspicion as to how the Chung Nam Account was opened in the first place.  Lin could have made use of Superb Jade to hold certain dubious assets, and I would not be surprised that Sun knew nothing about such account.  As Superb Jade was an offshore company in his name (there is no evidence that Lin owned other offshore company), it explains why Lin put the assets under the name of Superb Jade which he did not want other people to know about.  Hence, I do not find that the existence of the Chung Nam Account can take the case of the Lin’s Parties any further.

D.(v).(2)  Reactions and the conducts of the parties in May 2014

202.  The parties have also made submissions relying on the conducts of the parties in May 2014 in support of their cases.  However, on the case of either camp, the parties might have reacted in the way they did, and so I do not believe that their reactions and conducts can advance their respective case any further.

203.  But having said that, the conduct of Shum deserves some consideration here.  Prior to that, she did not considerate it “improper” by assisting Sun to operate the nominee account.  The dispute between the parties on 7 May 2014 therefore put her in a difficult position.  Nevertheless, she still regarded Sun as the true owner of the SWS Account: (i) she continued to follow the instructions of Sun in buying the Tencent Shares; and (ii) she told her colleagues that Lin could not withdraw money from the SWS Account.  If Lin were the rightful beneficial owner of the SWS Account, she should have had no difficulty in following the instructions of Lin.  To disobey Lin’s instructions under such circumstances would virtually mean that she was involved in some kind of conspiracy with Sun, but in my judgment, there was no reason or incentive for Shum to get herself involved in such kind of conspiracy.  On the other hand, since she knew that Sun was the beneficial owner, she considered it natural to follow his instructions and to protect his interests.

D.(v)(iii)  Internal investigation by SWS

204.  Another relevant consideration is the internal investigation carried out by SWS.  In this regard, what Shum said in the investigation and in the witness box are not the same.  It is quite clear that Shum was trying to protect herself during the investigation when she said she only knew about the true ownership of the SWS Account at a much later stage.  When the worst thing happened and she had to testify in the court, she had no choice but to reveal the truth.[6]

205.  There may be an issue as to whether Shum told SWS during the investigation about the true ownership of the SWS Account.  As I have analyzed in §92 above, no matter whether she had done it or not, it would not affect my judgment that Shum was telling the truth in court.

E  THE ALTERNATIVE PLEA AS TO ILLEGALITY

206.  The Lin’s Parties have pleaded an alternative case that the trust should not be recognized or enforced due to illegality.

207.  Whilst a number of very serious allegations were made against Sun, there is no serious dispute that the entire alternative case rests on the allegation of non-payment for the World Charm Shares.  There is simply no evidence to substantiate the other serious allegations against Sun.

208.  The Lin Parties claim that the alleged sale and purchase of the World Charm Shares was plainly a sham transaction.  Sun had not in fact paid the alleged price of HK$49.8 million, and so one would wonder what was the purpose behind such transaction.

209.  I agree with Mr Yuen that such alternative plea is built on speculation and not evidence.

210.  First, there is clear evidence of payment.  As analysed in §§187 and 188 above, the most important evidence is the confirmation by Zhao Chao.  There is no basis to doubt the veracity of this confirmation of payment.

211.  Second, Sun, whom testimony I accept as the truth, has explained how he arranged Lin to effect payment and the same are supported by evidence.

212.  Third, absence payment, it is difficult to see how Sun could obtain the World Charm Shares and then the China Vision Shares. The purported answers given by Lin or Brother Zhao were no more than mere speculation.

213.  Mr Lam then submits that, even if Sun did pay HK$49.8 million for the World Charm Shares, this sum was far less than the market value of the shares.  Again this is mere speculation.  Whether the consideration was at arm’s length depends on the circumstances facing the parties at the relevant time, and it would be dangerous for the court to reach any conclusion on the adequacy of the consideration based on the speculation of the parties.

214.  In any event, this alternative plea must fail as a matter of law.  Even if a party has performed illegal or improper actions, they may still be able to obtain relief provided that they do not have to rely upon their illegality in order to establish their claim.[7]  Applying this principle in the present case, the alleged illegality is completely irrelevant. Sun does not have to rely on the conduct which Lin or Brother Zhao alleged to be illegal or irregular.  The crux of the matter is the fact that Lin agreed to be Sun’s nominee or trustee back in May 2009.  What happened afterwards in respect of the World Charm Shares or the China Vision Shares are completely irrelevant.  Once this court held that Lin was Sun’s nominee, Lin does not have any right to deal with the assets held in the name of Superb Jade (irrespective of how they came into the hands of Sun or Superb Jade).

215.  For these reasons, I reject the alternative case of the Lin’s Parties.

216.  There is another interesting observation here.  The Lin’s Parties suggest that the World Charm Shares are gifts.  On the other hand, they are complaining about illegal conduct.  Mr Yuen has posed a pertinent question: Why would Sun commit illegal conduct to effect a gift to the Lin’s Parties?  It does not make any sense at all.  Again, this shows that the case of the Lin’s Parties is full of contradictions.

F  MERITS OF THE COUNTERCLAIM

217.  Mr Lam very fairly agrees that the Counterclaim will only get off the ground if the Lin’s Parties succeed in the defence of the Original Claim.  In other words, if the court is to accept Sun’s case that Lin is only a nominee or trustee, the Counterclaim must fail.  I therefore dismiss the Counterclaim.  It is also worth mentioning that the market value of the Tencent Shares in the SWS Account has increased significantly since the Counterclaim was issued on 10 February 2015.  Hence, even if the Counterclaim has any merit, which I do not find it to be the case, the judgment would be one for nominal damages only.  In any event, conspiracy is only actionable on proof of loss and to the extent of the loss.[8]

218.  For the same reason, it is not necessary for me to consider whether SWS should be held either primarily liable for failing to comply with the Withdrawal Instructions or vicariously liable for any wrongdoing on the part of Shum.  Even if this case may go elsewhere and a contrary view is taken about the propriety of my factual findings, since I reject the evidence of the Lin’s Parties, it is not appropriate for me to rule on these academic issues.  After all, these issues involve mixed law and fact, and so it serves very little purpose for me to make my rulings based on the factual findings I made in this Judgement.

G  FINAL ORDER AND REFERRAL FOR INVESTIGATION

219.  Mr Remedios, counsel for Tang, has informed the court at the outset of the trial that Tang would adopt the same position as that of the Lin’s Parties, and she would drop any additional defence raised in her pleading.

220.  For these reasons, I grant judgment against all the Defendants in the Original Claim in terms of the relief claimed in the Re-Amended Statement of Claim.  I also dismiss the Counterclaim.

221.  I make a costs order nisi that: (i) the costs of the Original Claim be to the Plaintiff and the costs of the Counterclaim be to the Defendants in the Counterclaim to be taxed if not agreed; (ii) there be certificate for 2 counsel for the Plaintiff in the Original Claim and the 1^st Defendant in the Counterclaim.  The order nisi shall be made absolute 21 days after the date of the handing down of this Judgment.

222.  The evidence of this case shows that Shum might have breached certain rules and regulations which she was required to observe as an authorised person in the trading of securities under the SFO.  I have invited submissions as to why the court should not refer the case to the relevant authority for investigation.  Having heard the submissions from Mr Chan, counsel for Shum, I do not find that there is any reason why the court should not do so.  I therefore refer this case to the SFC to investigate whether Shum is a fit and proper person authorised to trade in securities.

HCA 813/2014

[2021] HKCFI 2971

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 813 OF 2014

_____________

(by Original Action)

_____________

(by Counterclaim)

_____________

_____________________

DECISION ON COSTS

_____________________

1.  This is the paper application to vary the costs order nisi I made in the Decision handed down on 24 July 2020 (“the Decision”).

2.  I would adopt the same abbreviations that were used in the Decision.

3.  The costs order nisi was made in respect of the Further Security Summons taken out by the Defendants identified in the Decision.  The background for the application and my reasons for allowing the application have been set out in the Decision and I do not want to repeat the same here.

4.  In the Decision, I made a costs order nisi that the Plaintiff shall pay the Defendants half of the costs of the Further Security Summons and the Amendment Summons.  Both parties apply to vary such order:

(i)   by way of summons dated 6 August 2020, the Plaintiff seeks an order that half of the costs of the Further Security Summons and the Amendment Summons be the Defendants’ costs in the cause;

(ii)  by summons dated 7 August 2020, the Defendants seek to affirm the costs order nisi save that such costs should be summarily assessed and paid forthwith.

5.  Prior to the scheduled hearing of the Further Security Summons on 22 July 2020, the Plaintiff had offered to pay the Defendants further security of $1.7 million by way of a letter dated 20 July 2020 (“the Letter”). The Defendants had not given a response to the Letter.

6.  In support of the application to vary the costs order nisi, Mr Lo, counsel for the Plaintiff, submits the following:

(i)   Relying on the case of First Laser Ltd v Fujian Enterprises (Holding) Co Ltd[1], the “usual and only reasonable” costs order in similar circumstances should be the defendant’s cause in the cause.  The reason is that, if the foreign plaintiff eventually succeeds in the trial, the security “need not have been given in the first place.”

(ii)  There are authorities suggesting that where the amount of security awarded is much lower than that requested, the costs of the application should be in the cause.[2]

(iii) By reason of the offer made in the Letter, the Plaintiff should only be asked to pay the Defendants half of their costs in the cause. The sum offered ($1.7 million) is extremely close to the further security eventually ordered ($1.8 million).  Had the original scheduled hearing on 22 July 2020 stood, the Letter dated 20 July 2020 might not be a material factor in deciding costs.  But due to the vacation of the hearing, the Defendants were not required to file their submissions until 23 July 2020.  In the circumstances, the Defendants had ample time to consider the Letter and accept the offer to avoid incurring the costs of the submissions.

7.  In reply, the Defendants submit that First Laser shall not be taken to have established any general proposition and each case must depend on its own facts.  Further, they say that the present case is akin to Wingames Investment Ltd v Mascot Land Ltd[3], in which DHCJ Pow SC ordered the plaintiffs to pay to the defendants two-thirds of the costs of the application even if the defendants did not get the full amount of the security requested.  In the present case, the Plaintiff had tried very hard to establish that there was no material change of circumstances which justified the ordering of further security.  The Plaintiff had failed in such contention with the result that the court had ordered the provision of further security. For the offer made in the Letter, it was made in the eleventh hour which gave no sufficient time to the Defendants to consider the offer or to conduct meaningful negotiation.

8.  It is trite that question of costs is a matter of discretion by the court.  It is fact-sensitive and each case has to be decided on its own facts.  In any event, the cited cases are for reference only and they are not binding on this court insofar as the exercise of discretion is concerned.

9.  I can certainly see the logic and the reasoning of the approach adopted in First Laser.  However, the costs order should, on some occasions, be tailored to cater for the fact that the plaintiff may have spent a lot of unwarranted effort in pursuing unarguable or unmeritorious arguments.  Adopting the approach in First Laser, the Defendants will get their costs in any event if they succeed in their defence.  The question to be asked in the present case is therefore, assuming that the Plaintiff eventually succeeds in her claim, whether the Plaintiff would still have to pay the Defendants for their costs resulting from her failure to oppose the application for further security.

10.  In my judgment, the answer should be no. Applying the reasoning in First Laser, if the Plaintiff eventually succeeds in her claim, the order for security need not have been given in the first place.  Though the Plaintiff tried to oppose the provision of further security by arguing that there was no change of circumstances, I do not find that the conduct of the Plaintiff is so unreasonable to the extent that, even if she succeeds in her claim, she should be asked to pay for the costs of the Defendants in applying for further security for their costs in conducting an unmeritorious defence.  I agree that the observations of To J in First Laser are also applicable in the present case.

11.  There is no serious dispute that the Plaintiff should only be asked to pay for half of the costs of the Further Security Summons and the Amendment Summons.

12.  I do not find that the making of the offer in the Letter should be a significant factor in determining the question of costs as it was made in the eleventh hour of the application.

13.  By reason of the aforesaid decision on costs, I do not need to deal with the Defendants’ request for summary assessment of their costs.

14.  Hence, I allow the Plaintiff’s variation application but dismiss the Defendants’ one.  Costs should follow the event.  I make a costs order nisi that the costs of both variation summonses be to the Plaintiff which shall be made absolute 14 days after the handing down of this Decision on Costs.

HCA 813/2014

[2020] HKCFI 260

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 813 OF 2014

________________________

________________________
(by Original Action)

(by Counterclaim)
________________________

_________________________________

SUMMARY ASSESSMENT OF COSTS

_________________________________

1.  This is the summary assessment of costs in respect of the costs order I made on 20 November 2018.

2.  By the summons dated 5 July 2018 (“the Summons”) taken out by the 1^st, 2^nd and 4^th Defendants in the Original Action (“the Relevant Defendants”) against the Plaintiff in the Original Action (“the Plaintiff”), the Relevant Defendants asked the court to order the Plaintiff to provide further and better particulars of his Reply to the Defence of the 4^th Defendant in the Original Action.

3.  The first hearing took place before me on 12 October 2018 which was attended by counsel on both sides.  I adjourned the Summons for substantive hearing before me on 21 November 2018 with 1 hour reserved.

4.  On 15 November 2018, the Plaintiff filed an answer to the Relevant Defendants’ request for further and better particulars.

5.  Shortly before the substantive hearing, the parties agreed to dispose of the Summons by way of consent summons dated 20 November 2018, under which they agreed for the court not to make any order under the Summons, and that the Plaintiff would pay to the Relevant Defendants the cost of and occasioned by the Summons which would be summarily assessed.  On the same day, I made an order in terms of the consent summons.

6.  This is the summary assessment of such costs.

7.  The Relevant Defendants filed the Statement of Costs dated 22 November 2018 claiming for costs in the sum of $127,974.

8.  The Plaintiff filed the List of Objections on 29 November 2018.  The Plaintiff claims a deduction of $90,086.

9.  After pursuing the List of Objections, the differences between the parties lie mainly on quantum rather than matters on principle such as whether counsel should be engaged to handle the application.

10.  In my judgment, the amount claimed by the Relevant Defendants is on the high side, in particular the time engaged in the perusal of documents is obviously excessive.  On the other hand, the amount of deduction claimed by the Plaintiff is unreasonable.  For example, $5,000 is much too low for the counsel’s fee even for the purpose of attending the call-over hearing on 12 October 2018.  Counsel had to get herself acquainted with the application even on the call-over hearing, in particular such hearing was attended by counsel on both sides.  On the whole, I find that the amount of the counsel’s fee claimed is reasonable.

11.  As summary assessment of the Relevant Defendants’ costs, I reduce the amount claimed by about 20%.  The amount assessed is therefore $102,000.

Johnny K K Leung & Co for the Plaintiff (by Original Action)

W K To & Co for the 1^st, 2^nd and 4^th Defendants (by Original Action)

HCA 813/2014

____________

____________

_______________

D E C I S I O N
_______________

Introduction

1.  On 23 October 2015 I handed down my decision dismissing the application of the 1^st and 2^nd Defendants by Original Action (“the Applicants”) for further fortification against the Plaintiff by Original Action (“Sun”). The Applicants were then represented by Mr Alfred Liang of counsel.

2.  On 6 November 2015, the Applicants took out a summons applying for leave to appeal my decision.  On 5 January 2016, they took out a second summons seeking leave to amend the Draft Notice of Appeal attached to the summons dated 6 November 2015.  Save for the issue of costs, Sun does not object to the amendments sought.  The amendments are accordingly allowed with costs to Sun. The Applicants are now represented by Mr Ronny Wong SC and Mr Newton Mak.  Sun is represented by the same legal team, ie Mr Anson Wong SC and Mr Benny Lo.

3.  In dismissing the application for fortification, I concluded in paragraph 35 of my decision that the Applicants have failed to show a real likelihood of substantial loss as a result of the grant of the Mareva injunction; all they needed is to be protected from the costs of the litigation if the action is dismissed against them; and the fortification in the amount of $1,000,000 paid into court is sufficient for that purpose.

4.  The Applicants advanced six proposed grounds of appeal.  Mr Anson Wong, leading counsel for Sun argues that most if not all of the proposed grounds are based on reliance on evidence not adduced or submissions not advanced at the original hearing and/or a selective reading or misreading of my decision.  

Applicable legal principles

5.  Counsel have no dispute that I have correctly summarised the legal principles applicable to fortification in paragraphs 11 and 12 of my decision.  These principles are reproduced hereunder:

“The legal principles applicable to fortification are well settled. The court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order[1]. Usually, merit of the parties’ case is not a necessary consideration. However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant. The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification[2]. He must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes the plaintiff will be unable to make good that loss[3]. The court will approach these issues by taking a broad view of the evidence, usually without the need of a detailed enquiry. Whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle adverse inference as to his ability to meet his cross-undertaking in damages to be drawn [4].

The same principles are applicable to an application for further fortification.  But in addition, a defendant seeking further fortification is usually required to show change in circumstances which justify further fortification.  In the present case, as the original fortification was a ballpark figure offered by the Plaintiff’s counsel in response to questions from the bench and was made in the absence of the Applicants, I do not find it necessary for the Applicants to show proof of change in circumstances.”

In essence, the party seeking fortification bears the burden of satisfying the court that there is a likelihood that it will suffer significant loss as a result of the injunction and the appropriate quantum.  In approaching these two issues, the court will take a broad view of the evidence without the need of a detailed enquiry. 

6.  Counsel also have no dispute that to obtain leave to appeal, the Applicants have to satisfy the court either (1) that the proposed appeal has a reasonable prospect of success, or (2) that there is some other reason in the interest of justice why the appeal should be heard[5].  Reasonable prospect of success involves the notion that the prospect of succeeding must be more than fanciful, without having to be probable: SMSE v KL[6].  Although the fact that there is, ex hypothesi, a reasonable prospect of success would heavily influence the court’s exercise of discretion, even if the court comes to that view, it still retains in an appropriate case, discretion not to grant leave: Ho Yuen Ki Winnie & Anr v Ho Hung Sun Stanley & Anr[7].

7.  For an appellate court to interfere with the judge’s exercise of discretion, it must be established that the judge has misunderstood the law or the evidence or that the exercise of his discretion was plainly wrong such that it was “outside the generous ambit within which reasonable disagreement is possible”: Re Shun Kai Finance Co Ltd[8]

8.  While the appellate court has power to entertain new points in an appeal, it is clearly and firmly established that new points which are fact sensitive or otherwise affect the course of evidence or conduct of the case at the substantive hearing below should not be allowed.  The same approach is applied when leave to appeal from an interlocutory decision is sought on the basis of some new points which had not been canvassed at the substantive hearing below: LehmanBrown Limited v Union Trade Holdings Inc & Ors[9].

Ground (1) – confusing the Applicants’ intention in mitigation with their likely intention but for the injunction

9.  This ground of appeal is directed at the underlined parts of paragraphs 25 and 29 of my decision.  For completeness, I quote those paragraphs and the preceding one more extensively hereunder:

“24. Mr Liang depicts two scenarios under which the Applicants would suffer potential significant loss. First, he submits that the Applicants would suffer significant loss if the value of the shares in the SWS Account plummets during the time in which the Mareva injunction continues to be in force. Second, the Applicants would suffer loss of making a good harvest even if the value of the shares should surge. These shares are volatile and their prices fluctuate widely. The risk of loss under the two scenarios is always there. The question is how real is that risk and whether the loss is likely to be substantial. Given the volume of shares involved, the loss, if it occurs, is likely to be substantial. Just a ten cent change in the price of the Alibaba shares means $8 million. The remaining question is how real is that risk. In assessing that risk, the court shall place itself in the shoes of the Applicants with their experience in the dealing of the securities concerned and their intention, ask what the Applicants would have done in the circumstances and then postulate the outcome. The Applicants shall not be given the benefit of hindsight of the market condition and price movement.

25. The Applicants are particularly concerned about the 80 million Alibaba shares. Lin said he intended to sell those shares or part of them with the proceeds to be paid into court in order to mitigate the Applicants’ loss, but that was refused by Sun. That was in February 2015 when the share price was in the region of $1.60 per share. His intention then was to lock-in the profit at that price and have the proceeds of sale paid into court without using them in further trading. In the subsequent months, the share price went up to just above $4.90 and then fell to about $3.50 at the time of this hearing and has since fallen further to about $2.00 as at the time of this decision, still well above the intended selling price of $1.60. The Tencent shares performed likewise. The Tibet 5100 and Poly Culture shares did not perform as well, but they carry less weighting in the portfolio. As at the date of this decision, the parties are much better off not selling the Alibaba shares than selling. I would notbindthe Applicants to their intention of selling the shares at $1.60 had they not been restrained from trading in the shares.But given their avowed intention to sell, it is most probable that they wouldnothave sold the shares otherwise than below the current market price, which is 25% higher than their target price. They cannot say, with the benefit of hindsight, they would have sold at peak level or at the level at the time of the hearing or at the current market level. As matters now stand, the Applicants are much better off not selling than selling. Furthermore, according to historical data, the share prices are now at the lower end of the range. It is unlikely that there would be much downside from here until conclusion of the proceedings. The likelihood of significant loss as result of plummeting in the value of the shares is not real. The first scenario of the shares plummeting depicted by Mr Liang has not materialised.

…

29. The Applicants’ case under this scenario is that they lost the opportunity of making profit by selling at higher level, buying back at lower level and then ride with the surge.  This scenario is premised on a long term rising trend with a significant correction which provides a buy back opportunity.  It is not open to the Applicants to argue with benefit of hindsight what they would have done at what price levels.  As the historical data show, the share price surged from $1.60, peaked at about $4.90 and then declined to the current level of $2.00.  Again, given their avowed intention to sell at $1.60 if not restrained, the Applicants would have sold the shares not much above that level and most probably not above the current level (which was $2.00).   The probability is that once sold, the Applicants would have no opportunity of buying back at lower level, whether as the share price soared to the peak level of $4.90 or as it turned south thereafter down to the present level.  The correction which is the basic premise of this scenario never occurred deep enough.  As the current price is already near the lower end of this very extended price range, it is unlikely that there would be much downside from here.  The deeper correction necessary to provide an opportunity to buy back is unlikely to occur.  Thus the likelihood of loss of profit from trading of the shares is unreal.  On the contrary, it would be Sun who would suffer significant loss if the Applicants were not restrained and in the event that Sun succeeds in this litigation.  Furthermore, this scenario of selling at high level and buying back at low level is quite inconsistent with Lin’s intention of locking-in the profit and paying the proceeds of sale into court.”

(The parts relied on by the Applicants are underlined.  My emphasis are highlighted in bold print.)

10.  Relying on the parts underlined, particularly the phrase “given their avowed intention to sell at $1.60”, Mr Ronny Wong argues that I failed to recognise that the Applicants’ intention to sell at $1.60 in the particular context meant their intention consequential upon the injunction having been imposed on them, which would be materially different under ordinary trading circumstances in the absence of the injunction.  I shall not summarise Mr Ronny Wong’s submission in full.  In essence, he submits that I erred in construing the evidence by equating the Applicants’ intention to sell and lock in profit when subjected to the restraint under the injunction with what would have been their intention under unrestrained trading circumstances and in total ignorance of the contemporaneous evidence of the Applicants’ past trading history.

11.  With respect to Mr Ronny Wong, I adopted the proper approach by reminding myself in paragraph 11 of my decision that the relevant issue was the likelihood of significant loss arising as a result of the injunction.  Then, in paragraph 24 of my decision, I proceeded to assess that likelihood by placing myself in the shoes of the Applicants with their experience in dealing with the securities concerned and asked what would they have done in the circumstances and then postulated the outcome. 

12.  It must be borne in mind that the Applicants bear the burden of showing the likelihood of significant loss.  If, given their experience, they wished to rely on what they would have actually done or intended to do but for the injunction, they have to satisfy me as to their past trading experience, what was the likely price movement and the cause or reason for such movement, the volume and the price at which they would sell and buy back and the loss they would suffer as a result of the restraint.  Instead, what the Applicants relied on was volatility of the shares only, particularly the Alibaba shares.  That is far from proving likelihood of loss.

13.  Much has been argued by Mr Ronny Wong about the Applicants’ experience in share trading.  However, the Applicants did not impress me that they had a previous history of share trading, not to mention the trading of Alibaba shares.  The Applicants’ experience in trading shares is a disputed issue.  It is Sun’s evidence that he called the shots, placed orders with Shum, the account executive of Shenyin Wanguo Securities (HK) Limited (“SWS”) responsible for the securities account in question and then instructed the Applicants to execute the necessary documents.  Sun’s evidence is supported by the evidence of Shum.  The Applicants did not seem to dispute their evidence.  The Applicants’ case is that Sun placed orders and traded with their authority and subject to their confirmation: see paragraph 16 of my decision.  In the circumstances, it is open to me not to place much weight on the argument based on the Applicants’ experience.

14.  In the light of the approach I adopted in assessing the likelihood of loss, it is clear, and with respect, that Mr Ronny Wong misconstrued my decision.  In paragraphs 23 to 30 of my decision,  I was considering two scenarios, first, of the value of the shares plummeting, and second, of the value fluctuating in which the Applicants could have repeatedly sold and bought and made profits.  Just immediately preceding the second underlined quote in paragraph 25 of my decision, I expressed clearly that “I would not bind the Applicants to their intention of selling the shares at $1.60 had they not been restrained from trading in the shares”.  This sentence clearly reflects that I had in mind that the Applicants would have intended and done otherwise if they were not subject to the restraint of the injunction.

15.  In paragraph 29 of my decision, I went on to consider the second scenario.  I was directing my mind to “selling at higher level, buying back at lower level and then ride with the surge”.  These words clearly indicate that I had in mind the possibility of the Applicants repeatedly trading by selling at high level and buying back at low level which Mr Ronny Wong said I had overlooked.  I said that this scenario was premised on a deeper correction.  I then concluded, on the state of the evidence then before me, that the correction never occurred and had not been shown by the Applicants to be likely to occur and hence there was no likelihood of significant loss.  The Applicants not having satisfied me that there was a likelihood of deeper correction to make a buy back, there could be no likelihood of repeated sell and buy transactions.  On the state of the evidence presented before me at the time of the hearing, it was unnecessary for me to specifically mention in my decision repeated trading under that scenario.  But that does not mean I have not fully considered the Applicants’ case that if unrestrained they would have sold and bought repeatedly and made profits.  The reality was they had failed to show that there was a real likelihood of significant loss of such trading profits.

16.  As for the third underlined quote relied on by the Applicants, I was merely referring to the lack of mention in the Applicants’ offer of replenishing the shares sold by buying back at low level.  Had the Applicants intended to trade regularly, they would have offered to sell the shares at $1.60, pay the proceeds of sale into court, not just to stay there but with a condition or indicated intention that the proceeds be made available for buying back at lower level to replenish the shares sold.  That was what I meant when I said their intention to sell at high level and buy back at low level was inconsistent with their intention as expressed in their offer.  I might not have expressed as clearly as I could have because the deep enough correction was then in my view unlikely to occur as the price had soared up to $4.90.  A price significantly below $1.60, say $1.30 which was 26.5% of the climax was a long way south.

17.  Now, eight months down in time, the correction occurred. Probably, this was the result of global factors, such as the unrest in the Middle East, the drop in oil prices, the strength of the US dollar, the change in US monetary policy, and Chinese factors.  None of these factors have been advanced before me.  My assessment of the likelihood might turn out to be erroneous. But that does not mean I erred in applying the law and the appropriate tests in assessing the likelihood of loss.  My conclusion was reached on the basis of the evidence then before me.  The Applicants have miserably failed to discharge the burden of showing likelihood of significant loss.

Ground (2) – failure to adopt the proper approach in construing evidence

18.  Bluntly put, Mr Ronny Wong’s criticism of my decision under this ground is that despite quoting the proper test in my decision I did not properly apply it.  He submits that had I properly applied the test, ie by placing myself in the shoes of the Applicants with their experience in the dealing of the securities concerned, I would have found in favour of the Applicants.  I have dealt with these criticisms in paragraph 10 above.  There is no substance in these criticisms.

19.  Mr Ronny Wong submits that I should have taken into account the Applicants’ past trading history.   I have dealt with this issue about the Applicants’ past trading history in paragraph 12.  For reasons as stated therein, I am entitled to form a provisional view that the Applicants’ assertion of trading history is not credible and that it was Sun who called the shots.  Accordingly, I gave no weight to that assertion in my decision.

20.  However, I shall go on to consider Mr Ronny Wong’s arguments.  He refers to the record in the securities account showing the sale of 55 million Alibaba shares in three lots, leaving 80 million shares; the sale and purchase of Tencent shares in lots of 10,000 reaping profits and re-investing the proceeds in the same or different shares, which I had not mention in my decision.  Accordingly, he argues that had I put myself in the shoes of the Applicants with their experience in the dealing of the Alibaba shares during the March 2014 and 2015 price surges, the Applicants would have made more than $50 million in profits.  He made some calculations based on the above past practice and submits that the Applicants would not have sold all the Alibaba shares in May 2014 or in February 2015 when the price went up from $1.30 to $1.60 but by stages; that but for the injunction the Applicants would have sold some of the Alibaba shares in around April 2015 at the midway price of $3.63 when the price surged up to $4.40; and that the Applicants were deprived of the opportunity of reaping significant profits or cutting loss by trading in a volatile and fluctuating market. 

21.  In all fairness to Mr Ronny Wong, his calculations are conservative.  Those profits could have been made had the Applicants so traded.  But the Applicants had advanced no evidence of what they would have done, at what price they would have sold and bought back and for what volume of shares, and why those target prices were likely to be achievable.  The points raised in Mr Ronny Wong’s submissions are new points which had never been argued at the original hearing.  That is not permissible under the principle in LehmanBrown Limited. At the hearing, the Applicants had not produced even the fundamentals, let alone no investment expert evidence, to support the postulated price movements.  They just relied on volatility of the shares and fluctuation in price.  Even though fluctuation may be assumed, such fluctuation may be in an overall uptrend or downtrend or just horizontal, each with different effects.  There was simply no evidence of what the Applicants would have done or intended to do.  What Mr Ronny Wong is seeking to argue today is to superimpose what he suggests the Applicants would have done with the benefit of hindsight on historical data.  There is no dispute that the Alibaba shares are news sensitive.  There is nothing to postulate what news would hit the market, when and the effect.  The Applicants had a difficult burden to discharge and have failed to discharge it.  As for the suggestion that the Applicants would have sold the Alibaba shares by stages, this is covered under the next proposed ground of appeal.

Ground (3) - error in finding that the Applicants intended to sell all the Alibaba shares in the region of $1.60 in February 2015

22.  In short, under this ground the Applicants argue that I erred in finding that they intended to sell all the Alibaba shares in February 2015 immediately or around the same time in February 2015 at $1.60 or around $2.00.  This argument is targeted at the underlined part in paragraph 25 of my decision.  Mr Ronny Wong submits that even if I were right to say that the Applicants would have acted the same way with or without the injunction, I should have found that they would have only sold at most part of the Alibaba shares in February 2015, leaving some shares available for taking profits during the April 2015 price surge from $2.86 to $4.40 and for taking further profits by re-investing the sale proceeds.

23.  From paragraph 25 of my decision, it is manifestly clear that what was said therein was not premised on an assumption that the Applicants would have sold all the shares in Alibaba at once or around the same time when the price reached $1.60.  My statement that “I would not bind the Applicants to their intention of selling the shares at $1.60 had they not been restrained from trading” cannot be any more unequivocal.  When I referred to their “avowed intention to sell”, I did not refer to any price. When I referred to the probability that “they would not have sold the shares otherwise than below the current market price”, I clearly had in mind sale by stages throughout an extended period taking advantage of higher prices which might become available and not a total sale of all the shares at one go.  I only made reference to the market price at the time of my decision, which then stood at $2.14.  That included a 25% allowance over the target price of $1.60. Allowing for sale by stages at prices starting from the low end of $1.60, my estimate that the Applicants “would not have sold the shares otherwise than below the current market price” was premised on sales by stages at prices very well above the then market price at the time of my decision to bring the average price down to the then market price of $2.14.  Depending on the amount of shares sold at the low end, my estimate must have been premised on some of the shares being sold at or near $3.00.  But of course, in the light of the evidence, it would not be unreasonable to assume that all the shares were sold before the height was reached.

24.  Mr Ronny Wong may criticise my estimation as speculative.  It is easy to criticise with hindsight.  It is easy to argue what the Applicants would have done, at what prices they would have sold and for what volume of shares.  But one cannot lose sight of the burden of proof and the court’s position as the sole arbitrator of fact.  The Applicants bear the burden of proof.  Mr Ronny Wong’s above arguments have never been advanced before me at the original hearing.  The Applicants failed to satisfy me for what volume and at what prices they would sell by stages.  What Mr Ronny Wong is seeking to do is to superimpose what he argues the Applicants would have done on the historical price based on hindsight.  I may not have been correct in my estimate.   There was no evidence of the fundamentals of these shares before me, let alone no expert evidence to interpret those fundamentals.  I could only adopt an empirical approach based on the historical prices before me. My finding that the Applicants “would not have sold the shares otherwise than below the current market price” is a finding of fact, which no appellate court could fairly say is outside the realm of reasonable disagreement.

25.  As for Mr Ronny Wong’s argument that the Applicants were prevented from re-investing the proceeds of sale, it is bald and speculative.  There was simply no evidence of such intention, what shares, for what volume and at what price the Applicants would intend to invest in, and how and why profits would have been made.  If the Applicants intended to buy back the Alibaba shares, there was no evidence of what volume and for what price they would buy back.  As I have found, on the state of the evidence before me, it was not envisaged that a deep enough correction would occur as to make a buy back possible and the likelihood of loss real.  Now that a correction to below $1.60 occurred, any buying back by stages from below $3.00 to $1.60 would have resulted in loss.

26.  Considered in the round, this proposed ground of appeal is largely based on hindsight and has no reasonable prospect of success.

Ground (4) – failure to consider likelihood of significant loss due to loss ability to re-invest proceeds of sale: the “Samtani argument”

27.  Under this ground, Mr Ronny Wong submits that even if I was correct in finding that in the absence of the injunction, the Applicants would have sold all the Alibaba shares in around February 2015, I should have considered the loss of opportunities to re-invest the sale proceeds.  He also repeats his argument that there is no factual basis to suggest that the Applicants would have intended to lock-in the proceeds without re-investing them.  He quotes Samtani v Samtani[10] as authority for his proposition that a plaintiff is required to fortify his undertaking to pay damages for the defendant’s loss arising from his inability to use the preserved funds pending trial.  He argues that assuming the Applicants had sold all the 80,000,000 Alibaba shares at $2.00 in February 2015, they would have acquired $160 million in cash but were deprived of the opportunity of using the funds during these two years.  As the share price has dropped below $1.60, the costs of borrowing is not offset by any gain from keeping the shares.  Mr Ronny Wong therefore argues that the Applicants’ loss should be measured by the costs, ie interest, of borrowing the same amount of cash during these two years while litigation is pending.

28.  Samtani v Samtani was a case of a partnership dispute between two siblings in which the plaintiff sought a Mareva injunction restraining the defendant from disposing of some landed properties belonging to the partnership.  Deputy High Court Judge Au-Yeung, as she then was, considered the plaintiff’s claim was fraught with difficulties and refused his application for injunction.  The parties had no disagreement about selling the properties nor did the plaintiff require the defendant to obtain his prior consent before sale.  All that he required was that 60% of the proceeds of sale be put into a designated account pending trial of the action.  Having regard to the defendant’s conduct, the learned judge considered something ought to be done for the security of what might be partnership properties and granted the preservation order requiring the defendant to pay the proceeds of sale into a designated account.  The question then arose was the loss of the defendant’s opportunity to invest his share of the proceeds of sale.  The plaintiff agreed to provide fortification.  It was under those special factual circumstances that the learned judge ordered the plaintiff to fortify his undertaking by paying an amount equivalent to 5% of those net proceeds of sale into court. 

29.  In a later decision referred to me by Mr Anson Wong, XY, LLC and Jesse Zhu (a.k.a. Jia-Bei Zhu and Jesse Jia-Bei Zhu) and Grand Network Technology Ltd[11], the same learned judge did not follow Samtani.  She said that Samtani had its own special features in that the plaintiff agreed to provide fortification in the face of a partnership claim that had lots of difficulties. She said that it was pointless to compare the facts in one case to another when exercising the discretion on whether or not to order fortification.  I do not think Samtani established any legal principle that whenever a defendant is restrained from disposing of disputed assets, the plaintiff has to fortify his undertaking as to damages in an amount equivalent to the costs of borrowing the funds restrained for the estimated duration of the period pending trial. Rather, it is a case which was determined on the basis of the general principles applicable to fortification and on the judge’s finding that the plaintiff’s claim was fraught with difficulties but was willing to provide fortification and the defendant has shown likelihood of significant loss for being deprived of the opportunity to re-invest the proceeds of sale.

30.  In the present case, the crucial issue is likelihood of significant loss.  Merit of the parties’ case is not a necessary consideration whether to order fortification.  This is so even if the plaintiff has a meritorious claim.  If the plaintiff has not, it weighs against him as in the case of Samtani.  Likewise, failure to show a meritorious defence to a meritorious claim weighs heavily against an application for fortification. This is because under that scenario the defendant usually is unable to show likelihood of significant loss.  In paragraphs 19 to 22 of my decision, I assessed the parties’ case as follows:   

“19. Sun has adduced solid evidence of a nominee arrangement which was so understood by Shum. The applicants have not. In fact, there are many holes still to be plugged in their case. On their case, Brother Zhao is the owner of funds, not Lin. Lin may have no valid defence or locus standi to sue in the counterclaim and Brother Zhao is not a party to the counterclaim. The Applicants’ case does not fit well with the timing of the incorporation of Superb Jade and the setting up of the SWS Account in 2009, which was three years after the price of the stock skyrocketed 50 times. There may also be issues of PRC laws involved.

20. The Applicants’ conduct is also inconsistent with an aggrieved party whose rights have been infringed and whose property is at stake. They must have been aware that the SWS Account had been frozen since May 2014. They instructed solicitors to accept service of these proceedings by late October 2014. Yet, it was not until when they filed their defence and counterclaim in February 2015 that they sought further fortification. Their conduct suggests that they realised the weakness in their case or that they saw no real need for further fortification.

21. On the other hand, Sun has established by incontrovertible bank records the surreptitious manner in which Lin dissipated Superb Jade’s assets. It is inexplicable why, if he were the true beneficial owner and had nothing to hide, he would have adopted such an extremely tortuous route to remove assets which were rightly his.

22. All these undermine the credibility of the Applicants’ case.  But, as I have said, merit is usually not anything of significance in an application for fortification.  If lack of merit of Sun’s case is to be relied on, the burden of proof is on the Applicants.  As an overall impression, I cannot say that Sun’s case is so thin and flimsy that it could have any significant bearing in an application for further fortification.” 

In these paragraphs, I dismissed the Applicants’ argument about the weakness of Sun’s case and remarked on the many difficulties of the Applicants’ defence.   These remarks demonstrate the failure on the part of the Applicants in establishing the likelihood of significant loss.  In my view, the Applicants’ reliance on Samtani is misplaced.  On the evidence presented before me at the original hearing, they failed to show likelihood of significant loss.

Ground (5) – Error in speculating that the shares of Alibaba would not have much downside

31.  This ground is based on my comments in paragraphs 25 and 29 of my decision that it is unlikely that there would be much downside from the date of hearing until conclusion of the proceedings.  Mr Ronny Wong criticised my finding as speculative.  He argues, firstly, that I erred in not taking into account the price surge in March 2014 when the share price jumped from below $0.64 to $1.83.  He argues that had I had regard to those prices, I would have considered that the price surge in March 2014 was speculative and not supported by fundamentals and further downside below $1.60 possible.  Second, he argues that I failed to rationalise what I meant by not having “much downside” as I found that even a small change by $0.10 in the Alibaba shares can produce substantial loss.

32.  On the evidence before me, the correction which is the basic premise of the Applicants’ claim for loss never occurred deep enough.  It was on the basis of the historic price between May 2014 and the price as at the date of my decision and the fact that it was already near the lower end of this very extended price range that I came to the view that it was unlikely that there would be much downside from there.  I could only come to that conclusion by adopting an empirical approach based on the historical prices before me.  There is no dispute that the pre-May 2014 prices were never presented to the court at the original hearing.  Indeed if I had evidence that just two months earlier the price had surged from $0.64, I would have estimated the downside differently.  But based on the evidence then before me, my estimate was the best I could have reached.  I could not have used any more precise language.  My estimate could not even be described as a calculated guess.  My estimate, or guestimate or speculation, or whatever the Applicants would label it, is nevertheless a finding of fact, albeit a provisional one. It may turn out to be wrong post facto.  But that does not mean I erred in law and in my finding of fact.  The Applicants could only blame themselves for not producing evidence of the March 2014 prices.  I do not consider there is any substance in this ground of appeal.

33.  Mr Ronny Wong argues that I could have taken judicial notice of the pre-May 2014 prices in just the same way as I did in taking into account the prices between the date of the original hearing and the date of my decision.  In my view, taking judicial notice of post-hearing prices not available to the parties at the time of the hearing stands on a very different footing from taking into account prices which were available to the parties at the time of the hearing but which the parties deliberately or inadvertently did not seek to rely.  The former is done at the initiative of the court during the course of its deliberation in respect of facts which were not available to the parties at the time of the hearing.  The court is well entitled to do so as the court has to make a decision which is realistic.  However, to take judicial notice of facts which were known to the parties but which the parties did not seek to rely or did not consider relevant, the court would be entering into the arena which it is not permitted to do.  More importantly, it would flout the rules of pleadings.  It must be borne in mind that it is the pleadings which define the party’s case.  By taking judicial notice of facts not relied on by a party, not only would that party be thrust with a case which it never intended to present, its opponent would also be thrust with a case which it never anticipated and which it had no chance to argue or rebut.  It is precisely for that very reason that new evidence of this kind which would materially affect the court’s decision that the principle under LehmanBrown enjoins the parties from adducing new evidence and raising new arguments based on that new evidence.  Furthermore, Mr Ronny Wong’s association of the March 2014 price surge with the lack of fundamentals in the Alibaba shares is speculative as there was neither evidence about those fundamentals nor expert opinion on the interpretation of those fundamentals.

34.  As for Mr Ronny Wong’s suggestion of my failure in rationalizing what I meant, with respect, the failure is his.  I have said what I said.  Even a ten cent drop in price (which is equivalent to 4% to 5% reduction in price) may be translated into a significant loss of $8 million. What I said in effect was that despite the easy threshold the Applicants failed to show, as the evidence then stood, that they were likely to suffer significant loss.

35.  For reasons as I have explained, the Applicants may not discharge the burden of proving a reasonable prospect of success on appeal by relying on hindsight and materials not before the court at the time of the original hearing.  This court cannot be criticised as having erred in failing to take the pre-May 2014 prices into account in assessing the downside.  This ground of appeal has no chance of success.

Ground (6) – the amount of fortification paid is insufficient

36.  At the ex parte hearing of Sun’s application for injunction on 12 May 2014, Deputy High Court Judge Lok (as he then was) ordered him to pay $1 million as fortification of his undertaking of all damages in respect of the injunction.   Mr Ronny Wong argues that I failed to consider that the same is used for multi-purpose and is insufficient.

37.  With respect, that argument is misconceived.  My finding was that the Applicants failed to show likelihood of significant loss. There is therefore no question that Sun’s undertaking should be fortified for likely damages.  Accordingly, I considered all the protection the Applicants need is to be protected from the costs of the litigation, treating as if the amount paid into court were security for costs and for that purpose the amount is sufficient.  The Applicants have put forward no evidence of the level of likely costs.  It is open to them to make an application for further security for costs insofar as they can justify the same, if their concern is on their costs exposure.  That concern cannot be a valid ground of appeal.  To succeed in their appeal, the Applicants have to rely on the other grounds.  

Conclusion

38.  For the above reasons, I am of the view that the Applicants have failed to show that the intended appeal has a reasonable prospect of success or that there is any other reason in the interests of justice why the appeal should be heard.  Accordingly, their summons dated 6 November 2015 (as amended) seeking leave to appeal from my decision is dismissed with costs and with certificate for two counsel, to be taxed if not agreed.

HCA 813/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 813 OF 2014

____________

(By Original Action)

(By Counterclaim)

____________

_______________

DECISION
_______________

Introduction

1.  This the hearing of the summons filed on 10 February 2015 by 1^st and 2^nd Defendants by Original Action (“the Applicants”), seeking an order for further fortification against the Plaintiff by Original Action and for discharge of the gagging order in paragraph 4 of the Mareva injunction order made by Deputy High Court Judge Lok, as he then was, on 12 May 2014.  The gagging order was discharged by consent.  The outstanding dispute between the parties is the application for further fortification.

2.  Sun Yan (“Sun”) is the Plaintiff by Original Action and the 1^st Defendant by Counterclaim.  He is married to Zhao Jianwu (“Sister Zhao”) in December 1992. They are resident in Shenzhen in the People’s Republic of China (“PRC”).  On 27 January 2014, Sun obtained a work permit issued by the Hong Kong Immigration Department for employment with Burwill Properties Ltd (“Burwill”) under the Admission Scheme of Mainland Talents and Professionals. 

3.  Sun’s wife, ie Sister Zhao, has two brothers, Lin Li Dong (“Lin”) and Zhao Jianqi (“Brother Zhao”). 

4.  Lin is the 2^nd Defendant by Original Action and the 2^nd Plaintiff by Counterclaim herein.  He is the sole shareholder and director of Superb Jade Limited (“Superb Jade”).

5.  Superb Jade is a company incorporated in the British Virgin Island on 22 July 2009.  It is the 1^st Defendant by Original Action and the 1^st Plaintiff by Counterclaim herein. 

6.  Shenyin Wanguo Securities (HK) Limited (“SWS”) is a company incorporated under the laws of Hong Kong.  It carries on business of regulated activity in dealing in securities as prescribed under Schedule 5 to the Securities and Futures Ordinance.  It maintains a securities trading account for Superb Jade (“SWS Account”).  Shum Lai Na (“Shum”) is an account executive of SWS responsible for the SWS Account.  SWS and Shum are not parties to the Original Action but are respectively the 2^nd and 3^rd Defendants by Counterclaim.

7.  On or about 7 May 2014, while Sun was on a trip in Istanbul, Lin procured Superb Jade to withdraw $14,707,955.54 (the “Misappropriated Sum”) from the SWS Account.  Sun was alerted of the withdrawal by Shum and flew back to Hong Kong immediately.  On 9 May 2014, he was informed by Shum that Lin had successfully transferred the Misappropriated Sum from the SWS Account to Superb Jade’s account with Bank of China (Hong Kong) Ltd (“BOC”).  Upon inquiry with BOC, Sun discovered that the Misappropriated Sum had been subsequently transferred from Superb Jade’s account with BOC to Lin’s personal account with BOC.  Shum also told Sun that Lin was seeking to instruct SWS to set up an electronic account with which Lin could transfer all the shares in the SWS Account to another account with another brokerage firm.

8.  On 12 May 2014, Sun commenced the present action.  He obtained an ex parte injunction from Deputy High Court Judge Lok, as he then was, restraining the Applicants from removing from Hong Kong or in any way disposing of or dealing with or diminishing the value of the assets in SWS Account and its account with BOC.  The court also ordered Sun to pay $1,000,000 into court as fortification.  The payment was duly made.  The injunction was continued by order of Lam J at an inter partes hearing on 16 May 2014 in which the Applicants did not appear. 

9.  As result of further injunction orders against the Applicants, BOC and Hong Kong and Shanghai Banking Corporation (“HSBC”), Sun was able to trace the Misappropriated Sum and/or its proceeds.  It transpired that the Misappropriate Sum was first channelled by Lin from Superb Jade’s SWS Account to Superb Jade’s account with BOC and thence to Lin’s personal account with BOC within 34 minutes.  On the same day, Lin purchased a cashier order for $8,690,000 and paid the same into his personal account with HSBC.  From 17 to 21 May 2014, after procuring a number of substantial transfers amongst his accounts with HSBC, Lin drew two cheques for $3,329,557 and $3,900,000 in favour of Tang Jing, the 3^rd Defendant herein, which were deposited into her account with BOC.  Thereafter, Tang Jing paid a number of substantial sums into Cypress House Asset Management Co Ltd and various sums in United States currency into her account with Bank of America, New York.

10.  Sun filed his statement of claim on 12 November 2014.  The Applicants filed their defence and counterclaim on 10 February 2015.  On the same day, they took out the present summons seeking further fortification and discharge of the gagging order.  The gagging order was discharged by consent as the tracing exercise had been accomplished.

The legal principles on fortification

11.  The legal principles applicable to fortification are well settled.  The court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order[1].  Usually, merit of the parties’ case is not a necessary consideration.  However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant.  The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification[2]. He must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes the plaintiff will be unable to make good that loss[3].  The court will approach these issues by taking a broad view of the evidence, usually without the need of a detailed enquiry.  Whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle adverse inference as to his ability to meet his cross-undertaking in damages to be drawn [4].   

12.  The same principles are applicable to an application for further fortification.  But in addition, a defendant seeking further fortification is usually required to show change in circumstances which justify further fortification.  In the present case, as the original fortification was a ballpark figure offered by the Plaintiff’s counsel in response to questions from the bench and was made in the absence of the Applicants, I do not find it necessary for the Applicants to show proof of change in circumstances.

13.  The Applicants seek fortification in the sum of 40,000,000.  The basis of their application are:

(1) Sun’s case is so flimsy that it is a factor in favour of extending protection to the Applicants;

(2) the original fortification of $1,000,000 was a ballpark figure which does not represent a real starting point for the purposes of computing a proper and reasonable amount;

(3) since the SWS Account consists of highly volatile shares in companies listed in the Hong Kong Stock Exchange, the Applicants are likely to suffer potential significant loss if restrained from trading in the shares; and

(4) there are fundamental concerns as to Sun’s ability to pay damages, given his flimsy connection with this jurisdiction.

Merit of the parties’ case

14.  Usually, merit of the parties’ case is not a necessary consideration.  However, Mr Liang argues that Sun’s case is so flimsy that it would be unjust not to order further fortification for the protection of the Applicants. 

15.  The essence of Sun’s case is that the assets in the SWS Account are held on trust by Superb Jade for his benefit.  At all material times until 30 April 2014 when he joined Burwill, he was a director of Atlantis China Star Fund Ltd.  To avoid unnecessary complication, he instructed Lin to set up Superb Jade as a nominee company to hold assets as trustee for him and nominated Lin as director.  He instructed Lin to open the SWS Account in the name of Superb Jade to hold assets for him.  In that connection, he liaised with Shum of SWS; and Shum knew about the nominee arrangement.  Until May 2014, he had kept the company kit and company chop of Superb Jade under his custody in his residence in Shenzhen.  He conducted transactions for Superb Jade using the SWS Account by giving direct telephone instructions to Shum without involving Lin.  Lin only signed the necessary transaction documents under his instruction and sent the signed documents to him through his secretary.  He would then apply Superb Jade’s company chop on the documents and sent them to Shum.  Third parties whom Sun dealt with would also send documents to Sun for execution by Superb Jade.  Then, on 30 April 2014, Sun discovered that the company kit and company seal of Superb Jade in his Shenzhen residence had disappeared.  He suspected his wife had stolen them because she was unhappy with his having affairs with other women.  Eventually, the company chop was used to execute documents used to effect the transfer of the Misappropriated Sum.  His account of the above arrangement relating to the operation of the SWS Account is fully supported by contemporaneous emails between his secretary, Superb Jade’s company secretary, Shum and Lin.  That Shum alerted Sun on 7 May 2014 of Lin’s transfer of the Misappropriated Sum also corroborates Sun’s evidence that the nominee arrangement had been made known to Shum. 

16.  The Applicants disputed the above trust arrangement and offered an explanation about the operation of the SWS Account. Their case is that shortly before Sun married Sister Zhao in 1992, Brother Zhao entrusted Sun with RMB750,000, which he earned as consultancy fee from a state-owned enterprise.  However, under the then prevailing regulations, the money could not be paid to a natural person.  Hence, with Sun’s agreement, it was paid to Sun’s investment corporation in Daya Bay in Shenzhen to be held on trust for Brother Zhao.  Then Sun used the money to purchase certain employee stocks.  Contrary to Sun’s expectation, those stocks could not be traded in the open market under the then regulations.  In view of Sun’s financial difficulties at the time, Brother Zhao refrained from demanding repayment.  Then, following the relaxation of the relevant rules and regulations in 2006, the price of those stock skyrocketed by 50 times.  Brother Zhao continued entrusting Sun with the said sum of RMB750,000.  In 2011, as a token of gratitude towards Brother Zhao and Lin, Sun proposed to Lin that he would repay Brother Zhao and Lin together with all profits arising from the stock through an investment vehicle, namely Superb Jade, which was owned and controlled by Lin.  Lin agreed to the proposal.  While Sun gave Shum instructions for sale and purchase of shares, they were given under Lin’s authorisation and subject to Lin’s confirmation.  Lin said that the company kit and company chop were left at the matrimonial home of Sister Zhao and Sun for convenience; and were at all material times under the possession and control of Sister Zhao.  That account explains the source of funds in the SWS Account and the arrangement in the operation of the SWS Account which misled Shum to believe there was the nominee arrangement.  In April 2014, Sister Zhao discovered Sun had extra-marital affairs.  Lin and Brother Zhao also suspected Sun was trying to renege on his agreement of repaying the sum of RMB750,000 by way of Superb Jade.  Hence, they took advantage of Sun’s trip to Europe and the sea cruise with his mistress to withdraw the Misappropriated Sum.

17.  Sun did not dispute the receipt of the said sum of RMB750,000 from Brother Zhao, but denied it was trust property.  His case is that the said sum had been fully repaid to Brother Zhao between March 1993 and March 2000 and he gave certain particulars of the repayment.  He also admitted his marriage had broken down but alleged that was as early as 1996. 

18.  Two major issues in this case are the source of funds for acquisition of the assets in the SWS Account and the trust arrangement.  Mr Liang argues that Sun’s case is not supported by documentary evidence.  That is equally true of the Applicants’ case.  The court should not turn an interlocutory application such as this into a mini-trial by affidavit. Indeed, there are so many issues of fact in dispute that it is impossible for me to come to even a provisional view one way or the other. 

19.  Sun has adduced solid evidence of a nominee arrangement which was so understood by Shum.  The applicants have not.  In fact, there are many holes still to be plugged in their case.  On their case, Brother Zhao is the owner of funds, not Lin.  Lin may have no valid defence or locus standi to sue in the counterclaim and Brother Zhao is not a party to the counterclaim.  The Applicants’ case does not fit well with the timing of the incorporation of Superb Jade and the setting up of the SWS Account in 2009, which was three years after the price of the stock skyrocketed 50 times.  There may also be issues of PRC laws involved. 

20.  The Applicants’ conduct is also inconsistent with an aggrieved party whose rights have been infringed and whose property is at stake.  They must have been aware that the SWS Account had been frozen since May 2014. They instructed solicitors to accept service of these proceedings by late October 2014.  Yet, it was not until when they filed their defence and counterclaim in February 2015 that they sought further fortification.  Their conduct suggests that they realised the weakness in their case or that they saw no real need for further fortification.

21.  On the other hand, Sun has established by incontrovertible bank records the surreptitious manner in which Lin dissipated Superb Jade’s assets.  It is inexplicable why, if he were the true beneficial owner and had nothing to hide, he would have adopted such an extremely tortuous route to remove assets which were rightly his.

22.  All these undermine the credibility of the Applicants’ case.  But, as I have said, merit is usually not anything of significance in an application for fortification.  If lack of merit of Sun’s case is to be relied on, the burden of proof is on the Applicants.  As an overall impression, I cannot say that Sun’s case is so thin and flimsy that it could have any significant bearing in an application for further fortification. 

Likelihood of significant loss

23.  I now turn to the first of the two main considerations in deciding whether to grant further fortification.  The SWS Account has a large portfolio of shares which includes 80 million shares in Alibaba Pictures Group Limited (stock code 1060), 423,000 shares in Tencent Holding Limited (stock code 700), 1,500,000 shares Tibet 5100 Water Resources Holdings Ltd (stock code 1115) and 24,100 shares in Poly Culture Group Corporation Limited (stock code 3636).   Depending on the time of valuation, the portfolio is worth between $100 million to $300 million between the time of the Applicants’ application for further fortification and the date of hearing.

24.  Mr Liang depicts two scenarios under which the Applicants would suffer potential significant loss.  First, he submits that the Applicants would suffer significant loss if the value of the shares in the SWS Account plummets during the time in which the Mareva injunction continues to be in force.  Second, the Applicants would suffer loss of making a good harvest even if the value of the shares should surge.  These shares are volatile and their prices fluctuate widely.  The risk of loss under the two scenarios is always there.  The question is how real is that risk and whether the loss is likely to be substantial.  Given the volume of shares involved, the loss, if it occurs, is likely to be substantial.  Just a ten cent change in the price of the Alibaba shares means $8 million.  The remaining question is how real is that risk.  In assessing that risk, the court shall place itself in the shoes of the Applicants with their experience in the dealing of the securities concerned and their intention, ask what the Applicants would have done in the circumstances and then postulate the outcome.  The Applicants shall not be given the benefit of hindsight of the market condition and price movement. 

25.  The Applicants are particularly concerned about the 80 million Alibaba shares.  Lin said he intended to sell those shares or part of them with the proceeds to be paid into court in order to mitigate the Applicants’ loss, but that was refused by Sun.  That was in February 2015 when the share price was in the region of $1.60 per share.  His intention then was to lock-in the profit at that price and have the proceeds of sale paid into court without using them in further trading.  In the subsequent months, the share price went up to just above $4.90 and then fell to about $3.50 at the time of this hearing and has since fallen further to about $2.00 as at the time of this decision, still well above the intended selling price of $1.60. The Tencent shares performed likewise.  The Tibet 5100 and Poly Culture shares did not perform as well, but they carry less weighting in the portfolio.  As at the date of this decision, the parties are much better off not selling the Alibaba shares than selling.  I would not bind the Applicants to their intention of selling the shares at $1.60 had they not been restrained from trading in the shares.  But given their avowed intention to sell, it is most probable that they would not have sold the shares otherwise than below the current market price, which is 25% higher than their target price.  They cannot say, with the benefit of hindsight, they would have sold at peak level or at the level at the time of the hearing or at the current market level.  As matters now stand, the Applicants are much better off not selling than selling. Furthermore, according to historical data, the share prices are now at the lower end of the range.  It is unlikely that there would be much downside from here until conclusion of the proceedings. The likelihood of significant loss as result of plummeting in the value of the shares is not real. The first scenario of the shares plummeting depicted by Mr Liang has not materialised.

26.  In respect of the second scenario, Mr Liang adopts the following argument of counsel in Hui Chi Ming v Koon Wing Yee and Others[5]:

“ Mr McCoy’s real submission is that the 3^rd defendant, who is an experienced, successful investor in securities, has lost “many investment opportunities” as a consequence of the Mareva injunction.  He estimates that had he been able to take those opportunities he would have been $15 million better off net of the profit already realized on the Easyknit shares”.

Deputy High Court Judge Burrell accepted that argument and ordered fortification of $6 million against a frozen portfolio of $3 billion, ie a fortification of 0.2% of the value of the frozen portfolio.

27.  Mr Wong argues that Hui Chi Ming is distinguishable from the present case because in that case the need for fortification was conceded.  The dispute was on quantum.  Besides, the defendant in that case was an experienced investor whereas Lin is not.  I do not think the distinctions have any relevance insofar as the argument that the Applicants are prejudiced by being prevented from making profits which they otherwise could have made.  As for the distinction based on the Applicants’ lack of trading experience, it is only a matter for quantum.  

28.  Next, Mr Wong argues that as the likely loss is impossible of quantification, no fortification should be ordered.  My quick answer is that no court should be deterred from making such an order which it is just to make merely because of difficulties in assessing quantum.  I shall deal with the issue of quantum, if, after due consideration, I consider fortification appropriate. 

29.  The Applicants’ case under this scenario is that they lost the opportunity of making profit by selling at higher level, buying back at lower level and then ride with the surge.  This scenario is premised on a long term rising trend with a significant correction which provides a buy back opportunity.  It is not open to the Applicants to argue with benefit of hindsight what they would have done at what price levels.  As the historical data show, the share price surged from $1.60, peaked at about $4.90 and then declined to the current level of $2.00.  Again, given their avowed intention to sell at $1.60 if not restrained, the Applicants would have sold the shares not much above that level and most probably not above the current level.   The probability is that once sold, the Applicants would have no opportunity of buying back at lower level, whether as the share price soared to the peak level of $4.90 or as it turned south thereafter down to the present level.  The correction which is the basic premise of this scenario never occurred deep enough.  As the current price is already near the lower end of this very extended price range, it is unlikely that there would be much downside from here.  The deeper correction necessary to provide an opportunity to buy back is unlikely to occur.  Thus the likelihood of loss of profit from trading of the shares is unreal. On the contrary, it would be Sun who would suffer significant loss if the Applicants were not restrained and in the event that Sun succeeds in this litigation.  Furthermore, this scenario of selling at high level and buying back at low level is quite inconsistent with Lin’s intention of locking-in the profit and paying the proceeds of sale into court. 

30.  As at this stage of the analysis, I am not satisfied that the Applicants have proved a likelihood of substantial loss as a result of the Mareva injunction.  That would mean the end of the Applicants’ application for further fortification.  All the protection they need is to be protected from the costs of the litigation, in the event that Sun loses.

Sun’s ability to compensate loss

31.  The next major issue is Sun’s ability to compensate for loss in the event that the Mareva injunction should not have been granted.  Sun is a PRC citizen.  He is married and has at least one son.   His wife and child (or children) are staying in Shenzhen.  He maintains his matrimonial home and office in Shenzhen.  Since 27 January 2014, he was admitted into Hong Kong on the strength of a work permit issued under the Admission Scheme of Mainland Talents and Professionals for employment with Burwill.  He spends half of his time in Shenzhen and half of his time in Hong Kong. Prior to 30 September 2014, he stayed in hotel accommodation during his visits to Hong Kong.  Thereafter, he rented his own accommodation in Convention Plaza.  As disclosed in his affirmation which is supported by documentary evidence, Sun holds assets in Hong Kong totalling over $11 million under his personal name and other assets of around $40 million under the name of Crescent Investment Holding Co Ltd of which he is the sole director and shareholder.  He affirmed that he has no intention of removing those assets out of Hong Kong.   

32.  Mr Liang raises two main concerns, namely Sun’s flimsy connection with Hong Kong and the nature and quality of his assets disclosed.  He submits that Sun does not have any real property in Hong Kong.  He finds it suspicious why Sun used Shum’s residential address as his correspondence and usual address in his affirmation in support of his ex parte application for injunction.  He points out an omission of the floor of his present address in his recent affirmation.  He also suggests it was suspicious why it was only until recently that Sun chose to rent his accommodation despite his regular visits to Hong Kong for a long period of time at least since his employment with Burwill in 2010, but prior to obtaining the work permit under the Admission Scheme of Mainland Talents and Professionals in 2014.

33.  Indeed, Sun has been very selective if not secretive in disclosing his employment in Hong Kong.  In his first affirmation, he said he was a director for Atlantis China Star Fund Ltd until 30 April 2014.  He then produced his work permit to work for Burwill since 27 January 2014.  But in his second affirmation, he disclosed that he had been employed by Burwill as early as June 2010.  Though these inconsistencies and his use of Shum’s address are not of much significance, they suggest Sun is selective in telling the truth. 

34.  In my view, Sun’s connection with Hong Kong is very flimsy.  He was born and educated in the PRC.  He has family and connections in the PRC.  He has a son or children in the PRC.  He has a luxurious property and motor car in Shenzhen.   It is not known if he has other real properties elsewhere in the PRC.  If a plaintiff has roots in Hong Kong, such as family, immovable property, employment or business in Hong Kong, it is less likely that he will, in the event he is found liable in damages, uproot himself and abscond to evade his legal liability.  It is more likely that he will honour his undertaking to pay damages, if called upon to do so in order that he may continue his life in Hong Kong.  By way of contrast, all that Sun has in Hong Kong is his employment with Burwill, a rented accommodation, and $51 million worth of assets in his bank account and in Crescent Investment Holding Co Ltd.  As submitted by Mr Liang, his assets are very liquid and could be easily removed out of the jurisdiction.  His roots are in the PRC rather than in Hong Kong.  He is essentially a foreign plaintiff. 

Conclusion

35.  As Sun is essentially a foreign plaintiff with only flimsy connection with Hong Kong, it would be just and proper to order fortification for the protection of the Applicants.  However, as the Applicants have failed to show a real likelihood of substantial loss as result of the Mareva injunction, all the protection they need is to be protected from the costs of the litigation, in the event that Sun loses.  Fortification in the amount of $1,000,000 had been ordered and paid into court.  In my view, the Applicants are adequately protected.  Accordingly, the application of the 1^st and 2^nd Defendants by Original Action for further fortification is dismissed.  I also make an order nisi that they shall pay the costs of the Plaintiff by Original Action.