SHIH HUA INVESTMENT CO., LTD v. ZHANG AIDONG AND OTHERS

HCA 2682/2016

[2021] HKCFI 2808

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2682 OF 2016

________________

________________

________________

D E C I S I O N

________________

1.  On 30 April 2019 I handed down my decision in respect of three applications issued by the Defendant and two parties associated with it relating to the enforcement of undertakings given in support of two injunction orders made in October and November 2016 by Lok J and DHCJ Yee respectively.

2.  The summons issued by the Defendant and dated 10 October 2017 sought the following orders:

“1. Pursuant to the Plaintiff’s undertakings in damages as contained in: (1) Schedule 2 to the Injunction Order granted by the Honourable Mr. Justice Lok on 25 October 2016 (‘1^st Injunction Order’) and (2) Schedule 2 to the Injunction Order granted by Deputy High Court Judge Kent Yee on 22 November 2016 (‘2^nd Injunction Order’) (collectively, the ‘Injunction Orders’):

(a) Damages be summarily assessed and payable by the Plaintiff forthwith;

(b) Alternatively, an inquiry be directed as to the amount of damages suffered by the Defendants herein as a result of the Injunction Orders having been wrongly granted.

2. In the event an inquiry is ordered pursuant to paragraph 1(b) above:

(a) Such inquiry be heard before a Master, who shall make all necessary directions for the conduct of such inquiry; and

(b) The parties do fix a hearing for directions before a Master in consultation with counsel’s diaries, with 30 minutes reserved.”

3.  By a summons dated 5 February 2018 Everglory (Macau) International Co., Limited sought leave to be joined in the proceedings as an intervener and the same substantive orders as I have quoted in the previous paragraph.  By another summons dated 5 February 2018 EG Investment Holdings Limited sought the same orders.  I determined the applications in a decision dated 30 April 2019 (“Decision”), which sets out the background to this matter, which I shall not repeat.  I summarised my decision in [8]–[9] of the Decision.  My reasons for my decision are set out in [10]–[18].

4.  As is quite clear, and not in dispute, I granted the 1^st and 2^nd Interveners’ applications.  So far as the application to enforce the undertakings was concerned my reasons explain that a decision in respect of that application should await the outcome of the appeals of the decisions referred to in the Decision.  However, I had heard full argument from counsel on behalf of the Plaintiff on the matters, which were submitted on its behalf as reasons why I should not enforce the undertakings.  The principle one is explained and rejected in [16].  The upshot was that I had determined that subject to the Court of Appeal’s decision the undertaking should be enforced.

5.  The Court of Appeal dismissed the Plaintiff’s appeal on 21 January 2021.  On 25 March 2021 the Defendants’ solicitors (Jun He Law Offices) (“Jun He”) wrote to the Court requesting that their summonses be restored for directions with three hours reserved.  On 30 March 2021 the Plaintiff’s solicitors (Alvan Liu & Partners) (“Alvan Liu”) wrote to the Court.  They say this: “The Defendants and Interveners now proposed to fix a hearing for determination of the summonses before His Lordship. This proposal is made without regard to the decision made by His Lordship on 30 April 2019.  In paragraph 8 of the Decision, His Lordship decided that ‘This case is not suitable for a summary assessment and the inquiry should be conducted by a Master.  Therefore, if the appeal is unsuccessful directions should be made for conduct of the assessment and inquiry’.”  This suggests that Alvan Liu understood that subject to anything the Court of Appeal might say, I had determined by the Decision that the undertakings should be enforced by an inquiry into damages carried out by a Master and that as the Plaintiff’s appeal had been dismissed and nothing helpful to the Plaintiff said all that was required was directions for the inquiry to proceed.  It would appear that Jun He read the letter in this way because on 29 March 2021 they wrote to the Court saying that all they sought was an inquiry as to damages to be undertaken by a Master and that they had requested a hearing because they understood the Plaintiff’s still resisted the summons.  Alvan Liu replied on 31 March 2021 saying that “The Defendants and Interveners have now clarified their position that they are only trying to have the determination of their right to enforce the subject undertakings.  On that basis, the Plaintiff now sees no reason to suggest another set of directions for his Lordship to consider. The Plaintiff has not changed its stance as alleged by the Defendants.”  It should have been clear to Alvan Liu from Jun He’s letter that this was not what they were doing as they understood that subject to the result of the appeal I had determined that there should be an inquiry conducted by a Master.

6.  On 6 September 2021 a skeleton argument was served by Mr Hingorani on behalf of the Plaintiff.  Mr Hingorani did not represent the Plaintiff at the hearing of the summonses on 12 April 2018. In [1] of his skeleton argument Mr Hingorani submits: “There was no determination of the application nor was any order made.  In particular, the Court did not order the enforcement of the undertaking, contrary to D’s submission.”  It is correct that no order was made other than on the Intended Interveners’ summonses.  However, it was quite clear that I had determined the matter subject to the Court of Appeal’s decision.  Mr Hingorani’s skeleton makes no reference at all to the Court of Appeal’s decision.  As is apparent from Mr Hingorani’s skeleton what he sought to do was to reargue the matter that had already been argued by Mr Chan on behalf of the Plaintiff (as is apparent from Mr Chan’s skeleton argument) on 12 April 2018. That in my view is impermissible.  I informed counsel of this and that all I wished to be addressed on was the directions that should be made by a Master to conduct an inquiry.

7.  The directions of themselves are uncontroversial save for costs.  I will make the directions in [16] of Mr Ho’s skeleton save that [16.3] will provide that the directions hearing shall not take place before 25 February 2022.  It seems to me that this hearing could probably have been avoided and certainly did not need the time reserved or the preparation that counsel’s skeletons demonstrate has taken place.  I will order that the costs of and occasioned by the hearing on 10 September 2021 be paid by the Plaintiff to the 1^st to 4^th Defendants and the 1^st and 2^nd Interveners forthwith such costs to be taxed if not agreed with a certificate for one counsel.  I reserved the costs of the summonses by my decision dated 30 April 2019.  Those costs will be determined after the outcome of the inquiry as to damages.

HCA 2682/2016

[2019] HKCFI 1118

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2682 OF 2016

________________

________________

________________

D E C I S I O N

________________

The Applications

1.  The 1^st, 2^nd, 3^rd and 4^th Defendants (for convenience I shall refer to them collectively as the “Defendants”) have applied by summons dated 10 October 2017 to enforce undertakings as to damages given by the Plaintiffs in Schedule 2 of injunction orders granted by Lok J on 25 October 2016 and DHCJ Yee on 22 November 2016. The Defendants seek an immediate summary assessment of damages, alternatively an inquiry as to damages.

2.  There are also two summonses before me issued by Everglory (Macau) International Co, Ltd and E G Investment Holdings Limited respectively seeking to intervene and be joined in these proceedings and have leave to make the same applications as the Defendants.  Everglory Macau’s application is made as an alternative to the 1^st Defendant’s primary position that the Court should assess Everglory Macau’s loss as his own as he is the ultimate bearer of the loss. 

Background

3.  On 26 July 2017 I made an order that the Action be struck out and the injunctions discharged on the grounds, amongst others,      of abuse of process and material non-disclosure.  My reasons for so ordering were reserved and handed down after this summons came on before me[1].  It is not necessary to repeat here the reasons why I struck out the action and discharged the injunctions.

The Plaintiff’s Position Summarised

4.  The Plaintiff initially agreed to an inquiry as to damages.  Subsequently it changed its mind.  It now argues that the decision whether not to order an inquiry should await the outcome of its appeal of my decision.  As I understand the Plaintiff’s position it argues that the outcome of the appeal may have a bearing on the decision whether to order an inquiry. There are two elements to this argument.  First, the appeal in respect of both the strike out and the setting aside of the injunctions if successful would necessarily result in the inquiry becoming otiose.  Secondly, even if the Court of Appeal agrees that the action was correctly struck out it may express the view that the injunction was properly granted.

5.  The Plaintiff further argues that an inquiry should not be granted in the light of the findings of Anthony Chan J in his decision dated 19 January 2017.

6.  Finally, the Plaintiff argues that even if I am against it and consider that an inquiry should be ordered, I should not hear argument on causation and quantum now and determine the matter on a summary assessment basis as suggested by the Defendants.

7.  In respect of the application issued by the intended Intervenors the Plaintiff argues that this was the first hearing of the summonses and it should be adjourned for argument with directions for the filing of evidence in opposition.

Decision Summarised

8.  I shall start with my decision and then explain my reasons.  In my opinion an inquiry should not be ordered until the appeal has been determined.  This case is not suitable for a summary assessment and the inquiry should be conducted by a Master.  Therefore, if the appeal is unsuccessful directions should be made for conduct of the assessment and inquiry.

9.  The intended Intervenors should be joined now and directions made. 

The Inquiry as to Damages

10.  The Plaintiff argues that whether the undertaking should be enforced is a separate question from the question whether or not the injunction should be discharged[2] and that consequently it does not follow ipso facto that discharge of the injunction results in an inquiry as to damages[3].  However, the Plaintiff acknowledges that an undertaking will normally be enforced unless there are special reasons to do otherwise[4].

11.  The Plaintiff also argues that it has not yet been conclusively decided that the injunction was wrongly granted because the appeal has not been determined.  This in my view is to misunderstand the effect of the discharge and the relevance of the appeal.  As things stand at present it has been conclusively decided that the injunction should be set aside and not re-granted.  This remains the case unless and until the Court of Appeal sets-aside the present order and replaces it with a different one.  What is relevant is whether or not the outcome of the appeal may have a bearing on the decision to order an inquiry.

12.  Mr Joffe submits that the normal practice in Hong Kong,     at least in respect of Mareva injunctions, is to order an inquiry even if the action is going to trial and that this illustrates that there is, without more, no reason to delay an inquiry until after the ultimate determination of the case.  It follows, says Mr Joffe, there is no reason to delay an inquiry simply because of an appeal[5].

13.  As a very general proposition I agree, but in my view whether or not an inquiry should await the outcome of a trial or an appeal will depend on whether or not the decisions and reasons to be made at trial or on an appeal might have a bearing on the decision to order an inquiry.  It could be relevant in the following ways.  Matters might, for example, be established at trial that demonstrate that the complaints that led to the application were well founded and that in the circumstances it would not be appropriate to enforce the undertaking. In the case of an appeal if the Court of Appeal disagrees with a judge that an order was wrongly granted and reinstates the order, it is likely to follow that the undertaking should not be enforced.  It follows that it is a matter in each case of deciding whether or not the outcome of the trial or the appeal may have a bearing on the decision to order an inquiry.

14.  It seems to me that the reasons for the practice of generally not waiting until trial before ordering an inquiry do not apply with equal force in the case of an appeal of the setting-aside of an injunction. If the court’s decision to set aside an injunction is appealed it is likely that the appeal will come on for determination earlier than a trial might reasonably be expected to.  Secondly, it is the correctness of the decision itself which leads to enforcement of the undertaking which is under review in an appeal.  At trial the correctness of granting or setting aside an injunction is unlikely to be addressed.

15.  In the present case it seems to me that the correct approach is to wait for the outcome of the appeal before ordering an inquiry.

16.  The Plaintiff also argues that in any event the undertaking should not be enforced because of the Defendants’ inequitable conduct.  In particular it relies on the judgment of Anthony Chan J dated 19 January 2017.  It seems to me that this is little to the point.       Chan J was persuaded on the basis of the evidence before him, which did not include some of the evidence before me, which he had declined to allow the Defendants to adduce, that the board of the Company should be reconstituted.  He was critical of some of the Defendants’ conduct.  However, I do not see any reason why this should deprive the Defendants of recovery of any loss that was caused by injunctions having been wrongly granted.  They are two discrete matters. Chan J’s decision does not suggest that the Plaintiff inadvertently misled Lok J or DHCJ Yee as a result of the Defendants conduct.  I reject this argument as a ground for declining to order an inquiry if the appeal is unsuccessful.

Intervenors’ Application

17.  The Plaintiff wishes to file evidence in respect of the Intervenors’ application.  It seems to me that this is unnecessary.  The application is straightforward.  All that is sought is that the Intervenors are joined in order that if the Defendants’ primary position is shown to be incorrect, namely, that Everglory Macau’s loss can be assessed as part of the 1^st Defendant’s loss, Everglory can seek recovery directly.  In the case of the 2^nd Intervenor, it seeks its loss because although not named in the injunction it says accounts with HSBC and BOC were frozen since around November 2016 because of its perceived association with the Everglory Group.  It is likely, the 2^nd Intervenor further argues, that it was the Plaintiff’s habit of broadly disseminating the injunction orders that led to HSBC and BOC being given notice of them and acting as they did.  If this is shown to be the case the 2^nd Intervenor should be able to claim for use of the money that was frozen.

18.  The Plaintiff had received the application and supporting evidence eight weeks before it came on and as it was listed with      the Defendants’ substantive application it does not seem to me that it was legitimate to proceed on the basis, as it claims to have done, that the summons would come on for a call over.  If it had doubts its lawyers should have checked with the Intervenors’ solicitors what was intended or with the court if they received an unsatisfactory response. On the basis of the evidence filed by the Intervenors its seems to me that they should be joined and I so order.

Conclusion

19.  I shall reserve the costs of both applications and grant liberty to apply.

HCA 2682/2016

[2018] HKCFI 1335

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2682 OF 2016

________________

________________

_________________________________

R E A S O N S   F O R   D E C I S I O N

_________________________________

1.  On 26 June 2017 I struck out the Statement of Claim in these proceedings and discharged orders dated 25 October and 22 November 2016 (“Orders”). The Plaintiff sought leave to appeal the discharge of the Orders on 30 November 2017. At that time my reasons for the decisions of 26 June 2017 were not available. I dismissed the application.

2.  The Plaintiff accepts that in order to obtain leave it must show that its appeal has a reasonable prospect of success.  It advanced four grounds in support of its submission that this threshold is satisfied:

(1)  Ground 1:

The court erred in striking out the Statement of Claim on the grounds that the Action infringed the Rule in Foss v Harbottle.[1] There are two main components to this contention as it was advanced before me.  First, it is suggested that although the Board is independent at shareholder level there is deadlock.  No authority has been cited (and I do not recall the point being argued before me) in support of the argument that this is a relevant consideration.  It does not seem to me either as a matter of principle or on the facts of this case that this is relevant.

Secondly, it was argued the Rule was not infringed because in practice the Board is not able to assess and pursue the claims in the Action.  This is a disingenuous argument as such financial impediments as the reconstituted Board has in this regard seem to have arisen from the Plaintiff’s failure to provide the finance that had said they would at the time of the reconstitution.

(2)  Grounds 2 and 3:

This concerns my findings that in applying ex parte for the Orders the Plaintiff and its legal team were guilty of improper forum shopping and serious material non-disclosure.  As I understand the argument the Plaintiff contends that the decision to apply for the first order from the Duty Judge rather than the Companies Judge and to provide very limited information about what had transpired in applications in the Petition proceedings did not involve material non-disclosure and, in any event, I should have considered the merits first and, presumably, if I had thought that, but for the material non‑disclosure the Plaintiff was entitled to the Orders, I should notwithstanding the material non-disclosure continue the Orders.

I have dealt with these matters at length in my Reasons of 4 June 2018 (“Reasons”) and I shall not repeat them here.  It seems to me that there was clearly serious material non‑disclosure and that the approach, which the Plaintiff advances for assessing how it should have been dealt with, is wrong in principle.

(3)  Ground 4:

That I was plainly wrong in not ordering a regrant because of the strength of the Plaintiff’s case.  For the reasons explained in my Reasons at [54–61] even ignoring the material non‑material disclosure I was not satisfied the Orders were justified.

3.  I dismiss the application and make a costs order nisi that the Plaintiff pays the Defendants’ costs with a certificate for two counsel.

HCA 2682/2016

[2018] HKCFI 1234

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2682 OF 2016

________________

________________

_________________________________

REASONS FOR DECISION

_________________________________

The Applications and Decisions

1.  On 25 and 26 July 2017 I heard the following applications:

(1)  A summons issued by the 1^st, 3^rd and 4^th Defendants dated 24 November 2016 (a) to discharge an ex parte injunction granted by Lok J on 25 October 2016 and a further ex parte injunction granted by DHCJ Kent Yee on 22 November 2016 (“Orders”) and (b) to strike out the Statement of Claim on the grounds that it constitutes an abuse of process and, alternatively, the Plaintiff has no authority to continue the derivative action.

(2)  Two summonses issued by the Plaintiff dated 26 October and 25 November 2016 respectively for the continuation of the injunctions.

(3)  A summons dated 16 May 2017 by the 1^st to 4^th Defendants seeking fortification of the Plaintiff’s undertakings as to damages in the two injunctions.

2.  On 26 July 2017 I set aside the two injunctions and struck out the Statement of Claim.  Consequently I also dismissed the continuation and fortifications summons.  I ordered that the Plaintiff pay the 1^st to 4^th Defendants’ costs.

3.  At the hearing the Plaintiff was represented by Mr Chua Guan Hock SC and Mr Robert Chan.  The 1^st to 4^th Defendants were represented by Mr Victor Joffe, Mr Justin Ho and Ms Astina Au.  Mr D Whitehead appeared for the directors of the 6^th Defendant, who took a neutral position in respect of the applications.

4.  These are my reasons for the orders made on 26 July 2017.

Background

5.  In the 1990s the 1^st Defendant, Zhang Aidong (“Zhang”) began trading in the petrochemical industry using companies with the name Everglory.  Mr Zhang says that in 2011 he decided to establish a new business trading liquid petroleum gas (“LPG”).  In mid 2012 he negotiated a long term LPG contract with the Tianjin Bohua Group (“Bohua”). Shortly afterwards in June 2012 Mr Zhang met Mr Zhong Jie in Shanghai.  As a result of their discussions it was agreed that Mr Zhong would join Mr Zhang in the new LPG venture.  Mr Zhang says that Mr Zhong led him to believe that he would be able to introduce both substantial customers and suppliers to the new business.  It was agreed, says Mr Zhang, that Mr Zhong would work full time for the new business although Mr Zhang would be in ultimate control of its management.

6.  Mr Zhang caused the 6^th Defendant, Everglory Energy Ltd (“Company”), to be formed on 31 August 2012.  Nineteen thousand shares were issued and allotted equally to Mr Zhang’s company Motivi Point Consultancy Ltd (“Motivi”) and Mr Zhong’s company Shih‑Hua Investment Ltd (“SH”), although Mr Zhang says that 30% of the latter shares were held by Mr Zhong on trust for Mr Zhang in the anticipation that they would in due course be allotted to important employees in the Company as its business developed.  This is in dispute.

7.  During the following four years the Company entered into a three major contracts to supply LPG to Bohua and Oriental Energy.  Despite the Company’s business apparently developing successfully Mr Zhang and Mr Zhong’s relationship deteriorated.

8.  On 20 June 2016 SH issued the unfair prejudice petition in HCCW 198/2016, which was amended on 2 February 2017 (“Petition”), seeking an order that Mr Zhang purchase SH’s shares alternatively an order for the winding up of the Company.

9.  On 15 July 2016 the Company issued a summons for a validation order.  The summons was fixed to be heard before Anthony Chan J on 20 July 2016.  On the evening of 19 July 2016 SH gave notice of its intention to apply at the hearing of the application for a validation order for the appointment of provisional liquidators.  Anthony Chan J granted the validation order, but declined to hear the application for the appointment of provisional liquidators.

10.  Following the hearing before Anthony Chan J, SH sought an urgent hearing before me for the appointment of provisional liquidators.  I read the papers over lunch and heard Mr Ronny Tong SC on behalf of SH in the afternoon.  I summarised what took place in the afternoon of 20 July and subsequently in [1–10] of a letter to counsel for the parties dated 24 July 2017 which I wrote having read the papers in preparation for the hearing commencing on 25 July 2017:

“1. On 20 July 2016 the Judge heard an application by Mr Ronny Tong SC ex parte on notice for the appointment of provisional liquidators over the Company. After reading the papers and a 2‑hour hearing the Judge declined to deal with the matter on an ex parte because he was not satisfied that the matter was sufficiently urgent. The Judge directed that an inter partes summons be issued returnable on an early date and made detailed directions for the filing of evidence and submissions for the prospective summons. The Judge also made at his own motion an injunction.

2. On 22 July 2016 the Plaintiff issued the summons required by the order of 20 July 2016. It was returnable on 8 and 9 February 2017 with 2 days reserved.

3. On 23 August 2016 the Plaintiff issued a new summons seeking the appointment of provisional liquidators to be returnable on Monday 29 August 2016 when the Petition was to come on before the Judge. It appeared from the correspondence sent to court that the basis for wishing to apply for immediate appointment of provisional liquidators was that the Petition would not be opposed and Shih-Hua wished to appoint its preferred provisional liquidators to investigate the matters, which had led to the application on 20 July 2016 as soon as possible as opposed to allowing the Official Receiver to initially play that role. The application was, however, supported by a draft 2^nd affirmation of Yang Shiheng exhibiting a draft report of RSM. I wrote on 25 and 26 August 2016 informing the parties that the summons would not be determined unless it was agreed that provisional liquidators be appointed. The reason being that the Judge had already decided that the matter was not sufficiently urgent to justify an immediate appointment of provisional liquidators.

4. On 29 August 2016 Shih-Hua were represented by Mr Maurellet SC leading Connie Lee. Mr Maurellet explained that 2 creditors of the Company had expressed concern about appointing provisional liquidators because it might constitute an event of default under long term petrochemical supply contracts that is was beneficial to the Company to retain. The way the matter was advanced before the Judge by Mr Maurellet was that Shih-Hua still wanted provisional liquidators appointed, but if the court thought there was substance in the creditors’ concerns the matter be adjourned for 7 or 14 days in order for Shih-Hua to consider reformulating its application and seeking reconstitution of the board pursuant to s725 of the Companies Ordinance, Cap. 622. The Petition and Shih-Hua’s summons was adjourned to 12 September 2016.

5. On 8 September 2016 Shih-Hua issued a summons to reconstitute the board of the Company.

6. The Petition and summons came on before the Judge on Monday 12 September 2016. It became clear during submissions that the Respondents were not prepared to agree to reconstitution of the board, although they were content to have the Petition and summons adjourned in order that discussions concerning the purchase of their shares by Shih-Hua could continue. Mr Maurellet sought the immediate determination of the application to reconstitute the board. This the Judge declined to do for various reason including the fact that he had already decided that the matter was not sufficiently urgent to justify it being heard immediately and that the Respondents position was that it was opposed to the new summons and consequently sometime would be required to address what was a novel application. Having heard the application for the immediate determination of the application to reconstitute the board the following exchange in relation to the urgency of the matter took place.

‘COURT: I accept that the discretion, or the powers in the discretion are very, very broad. My concern is making this kind of order on an interlocutory basis without having it fully argued. Now, so far as your solicitors’ enthusiasm for trying to have this matter dealt with quickly is concerned, I have already refused to deal with the, if I recall correctly, the appointment of provisional liquidators on an ex parte basis. You got the injunction and you got a date for the inter partes application.

MR MAURELLET: In February, my Lord.

COURT: In February, yes. So ...

MR MAURELLET: As your Lordship has seen, there’s some urgency in this matter. Your Lordship may have seen, very briefly, the ...

COURT: Well, there’s urgency in all kinds of matters that turn up, but the fact is I cannot have your solicitors keeping -- you know, continually dreaming up new reasons for barging into court and trying to get to the front of the queue, so you can repeat that over a cup of coffee afterwards, all right. So the position is the position.

If this is largely a commercial problem, they’re going to have to thrash the thing out commercially and I can’t be utilised as a lever for exerting pressure on people, much as it might be useful. There’s a limit to -- so I think the position is this. I think Mr Sussex is right, it shouldn’t be left in abeyance for too long, and if the position is essentially this, either your clients and Miss Chan’s clients do a deal, quickly, and as a result, I assume your client takes over the company and then they sort out whatever needs to be sorted out, including, obviously, the claims of Shell and SK.

Then things just continue in the normal way, which probably means Mr Sussex is going to say it’s now rather more straightforward; it’s an insolvent company, we’re large creditors and this is what we would like done.

MR MAURELLET: Well, just in terms of the timing, assuming we go for the three weeks which was sort of suggested by Mr Sussex, does your Lordship envisage that, on that occasion, we will be dealing substantively with the application to reconstitute the board, because obviously, what we’re trying to ...

COURT: No, because it would be a Monday morning matter. So that needs to be dealt with properly, not squeezed in. Because I’ve also got no idea what that Monday morning will look like. There may be all kinds of emergencies and people rushing into court, or a long list of petitions that have to be dealt with. So I can’t promise you that I would have time to read the papers and argue ...

MR MAURELLET: A bit like the health service where everybody goes to A & E because the general queue is too long.

COURT: Exactly, yes. But there is a danger that that is what happens if one is too accommodating. So, no, I can’t promise you I can sort it out on a Monday morning, so you should assume I can’t.’

7. The Petition and the summons were adjourned to Monday 3 October 2016.

8. It should have been quite clear to Shih-Hua’s instructing solicitors following this hearing, and it is the Judge’s recollection that Mr Liu was in court, that the Judge took the view that there was not sufficient urgency to justify the type of expedited hearings they had by this time sought on a number of occasions.

9. When the Petition and the summons came back on 3 October 2016 once again Shih-Hua’s position was that it wanted an immediate interim remedy despite it having been made quite clear that the Judge did not think that there was any justification for the immediate determination of a contested substantive application to reconstitute the board. After hearing counsel the Judge adjourned Shih-Hua’s summons for argument on the first available date, which as matters transpired was before Mr Justice Anthony Chan on 4 and 5 January 2017.

10. By 3 October 2016, the Judge had heard hearings totaling 3.5 hours in length.”

11.  The injunction that I granted supplemented the validation order and provided that only payments specified in the schedule to the order could be made and other payments in the ordinary course of business not exceeding HK$2,000,000 per month.

The Present Proceedings

12.  On 14 October 2016 SH commenced a common law derivative action, HCA 2862 of 2016 (“Action”) against Mr Zhang, Motivi and three other parties who are not respondents to the Petition, namely, Hua Xueliang, Everglory Petrochemicals and Proud Union International Ltd who it is suggested are Mr Zhang’s nominees, and filed a Statement of Claim.  The relief sought includes various pecuniary claims and an order for the appointment of special managers.  The complaints of diversion of business, breach of duty, knowing assistance and receipt by Mr Zhang and his nominees said to entitle the Company to the relief sought are pleaded in [38–75] of the Statement of Claim.  As one would expect there is a substantial overlap between the complaints in the Statement of Claim and the Petition, which invites the question why it was thought necessary to commence the Action.  The only explanation that has been advanced is set‑out in [64(3)] of SH’s skeleton submissions:

“The Defendants’ position in effect, is that the Plaintiff should be confined to relief in the HCCW, and there should be no relief in the Action, arising out of the same facts.

However, their argument is at odds with well-established principles:-

(a) A shareholder and company are separate entities in law.

(b) A shareholder’s petition seeking just and equitable winding up, and relief for unfair prejudice, has different functions from a derivative action for wrongs done to a company by fraud on the minority, and a company’s entitlement to relief for such wrongs.

(c) A shareholder and company are entitled to different relief, arising from the same facts.

Moreover, there is no credible suggestion that the relief in both proceedings is in the alternative. Or that a winding-up order or buy out order is equivalent to relief in the Action, whether proprietary, or personal, e.g. an account of profits and/or damages.

Further, the conclusions of Anthony Chan J on the claim for ‘buy-out’ relief in the Petition are important (Decision §70):-

‘… there is no evidence on the ability on the part of Zhang or Motivi to buy-out [the Plaintiff ’s] shares in the Company. I note that the suggestions of buy out have so far led to nothing of substance. Secondly, there is evidence of stripping of the Company’s assets by Zhang (and his agents). That must give rise to real doubt whether he is interested to buy-out [the Plaintiff’s] shares in the Company. Further, a buy out order made against Zhang’s wish may be difficult to enforce against him (his roots are apparently in the Mainland) or Motivi, which is a BVI entity.’ (emphasis added)

Winding-up relief was thus preserved, and the Plaintiff amended the Petition to plead why winding-up relief may be the only practical and/or appropriate relief in the HCCW: Amended Petition §105.”

13.  This does not, however, explain why it was thought necessary to commence the Action.  In so far as this passage suggests that it was required to preserve the right to seek a winding-up order, something I had been expressly told by Mr Tong SC on 20 July 2016 SH did not intend to pursue, it makes little sense.  In my view it is a fairly compelling inference that the Action was issued in order to provide a platform for what SH did next.

14.  On 25 October 2017 SH applied ex parte not on notice for an injunction from Lok J.  The order sought and granted was against the 1^st to 5^th Defendants and restrained them from “disposing of, dealing with or diminishing the value of any of the proceeds of sale unpaid or yet to be paid by the Company’s ” customers.

Forum Shopping and the Duty of Full and Frank Disclosure

15.  The application was made by Robert Chan, who had not appeared for SH in any of the applications in the Petition proceedings.  There is only one reference to the Petition proceedings in Mr Chan’s skeleton argument.

“P has since May/June 2016 discovered that whilst in control of D6, D1 (with D2’s assistance) has mismanaged D6 and committed various acts of misconduct to the detriment of D6. This has led to P bringing a petition against D1 and D4 (HCCW 198/2016) on the ‘just and equitable ground’ and, subsequently, the present action.”

16.  I deal with Mr Chan’s oral submissions in detail in [20–21].  However, Mr Chan did not explain to Lok J what had transpired before me at the hearings between 20 July and 3 October 2016.  The Judge was not given or shown a copy of the injunction, which I had granted on 20 July 2016.

17.  The application was supported by a draft affirmation of Yang Shiheng, which was subsequently deposed.  Mr Yang refers to the applications before me in [73] and [77]:

“73. Shortly thereafter, still in the morning of 20 July 2016, the Injunction Order was made by the Hon. Mr Justice Harris, which essentially limited the disposition of Everglory Energy’s funds for ‘ordinary course of business’ payments, to an amount not exceeding HKD2,000,000 each calendar month. The Injunction Order also permitted the making of the payments set out in Schedule 2 thereto (being a ‘cash flow projection’, apparently of ‘ordinary course of business’ payments, listed up to 12 October 2016).

…

77. Following several further hearings, namely on 24 August 2016 (before Master R Lai), 29 August 2016, 12 September 2016 and 3 October 2016 (all before the Hon. Mr Justice Harris), the Petition is now adjourned, and is to be heard on 8 February 2017.”

18.  Mr Yang’s evidence substantially repeats complaints, which were amongst those made in the evidence in the applications before me, which included a report prepared by RSM dated 6 September 2016, which had been before me in a nearly identical form by 24 August and I refer to in [3] of my letter of 24 July 2017.  Given my familiarity with the subject matter of the application one would have expected SH’s solicitors to have approached my Clerk to see if I was available to hear the application.  An additional reason for doing so is the requirement of PD 11.1 that applications concerning the internal management of companies should be made so far as practicable to the Companies Judge. 

19.  Although not directly applicable given the terms of the order sought, it is another reason why I would have expected SH’s legal team to have thought it sensible to have approached my Clerk.  It has not been suggested that they were unaware of PD 11.1.  Mr Chua submitted that PD 11.1 did not restrict a Duty Judge from hearing an application that came within the Practice Direction.  That is, however, not the point as Kwan J (as she then was) observes in [6] of her judgment in The New China Highway Limited.[1] The obligation is “squarely on those making an urgent application to apply to a Companies Judge.  The fact that the Duty Judge has discretion to hear them in a very urgent situation is immaterial”.  The reason for this goes to the purpose for having PD 11.1 and specialist judges.  Applications can be addressed with greater efficiency and confidence by a judge familiar with the subject matter of an application and the relevant principles than one who is not.  For this reason I would have expected SH’s lawyers to have approached my Clerk in the first instance for a hearing.  Even if they had doubts as to the application of PD 11.1 I would have expected them to want the matter to be heard by me as I was already familiar with the case and to have asked my Clerk if I would do so.  No explanation has been advanced for them not taking this obvious course.

20.  In his oral submissions before Lok J Mr Chan said this:

“MR CHAN: My Lord, I need to explain some more of the procedural background for you, because it might not have been clear from my skeleton, but it’s certainly set out in the affirmation preamble, and that is that the HCCW proceedings. In those proceedings, there has been, in the past several months, applications made by our side for the appointment of, at first, provisional liquidators, and then later, we tried to reconstitute the board, as an alternative option, because there is some arguments to be made, that it would constitute an event to default…

COURT: Have you made those applications?

MR CHAN: Those applications have been made, summons have been taken out, and they are going to be heard, my Lord, in January, February. February of next year, which in our submission is just too long to wait, because the diversions…

COURT: Well, if that is the case, that is exactly why you should go before the -- I mean, you cannot -- what you should have done is that you should speed up or for some reason persuade the judge to give an early date.

MR CHAN: We tried that.”

21.  What Mr Chan did not tell Lok J was that the applications before me had been made relying on similar evidence and sought interim relief, albeit in a different form, directed to, amongst other things, the complaints said to justify the urgent application for an injunction before Lok J.  In my view Mr Chan’s explanation of the extent of the overlap between the Petition and the Action was clearly inadequate.  I think it understandable that Lok J, who was not familiar with the background to the matter and was hearing the application at short notice would not have appreciated that the application was being made before him rather than before me because SH’s lawyers, in particular its solicitors, anticipated that I would see the application as an attempt to repackage SH’s previous interlocutory application and decline to deal with it on an urgent basis.

22.  In my view SH and its legal team were guilty of impermissible forum shopping and failed in their duty of full frank disclosure.  In my view it is also a compelling inference that this was not the result of inadvertence.  It resulted from a conscious decision by SH’s solicitor, Alvan Liu, to reformulate SH’s claim with a view to obtaining an interim injunction having failed to obtain in the proceeding months immediate appointment of provisional liquidators or reconstitution of the board and to provide only limited information about how I had dealt with the earlier interlocutory applications to Lok J to minimise the possibility of the Judge referring the application to me.  The subsequent application before DHCJ Yee was, unsurprisingly, subject to the same flaws.

23.  There was, however, a further specific respect in which Mr Chan’s submissions misled Lok J.  Lok J had queried why if there was renewed urgency SH did not renew its application before the Companies Judge in view of the fact that, as Mr Chan accepted, the application was based on the same complaints as those advanced to support the application to appoint provisional liquidators.  Mr Chan said this in response:

“MR CHAN: And also at that time, my Lord should also know that we went to get the forensics, because we had SCs on board, and the advice was to get forensics to accountants, to look at the information, to see whether or not this was -- this is something which could be brought.

COURT: The application …

MR CHAN: And we ended up with a report.

COURT: … to remove D1 as director would be heard in January 2017, and the application for PL would be heard in February 2017.

MR CHAN: Yes. And we got the RSN report which now says that diversion is reasonably established, so now we’ve got the evidence to bring before the court to say that there is substance in those past diversions, and now we are seeking to injunct or restrain further diversions on basis of breach of fiduciary duties, my Lord.  So it’s slightly different.”

24.  Slightly later in the application in answer to a question from Lok J, Mr Chan again relied on what he speaks of as being a new report as justifying the application:

“MR CHAN: So we want a freezing of all the proceeds which come from each cargo..

COURT: Do you have -- then my question is, why didn’t you do it earlier?

MR CHAN: The straightforward and direct answer for my Lord is that we were waiting for the forensics, we didn’t have the evidence to say -- to build our case, my Lord, and of course, at the same time, we were going for PLs, so we’re looking at different directions in a HCCW action, and a derivative action, in that sense, so the angle was completely different.”

25.  The report referred to was prepared by RSM and is dated 6 September 2016.  I have referred to it in [18].  As I have explained the September report is nearly identical to the version I had before me by 24 August 2016.  The impression that Mr Chan gave, namely, that SH has obtained a report, which says something new and which caused SH to decide that it was necessary to issue an action and seek an injunction, was in my view false and misleading.  It appears to have been said by Mr Chan with a view to deflecting Lok J’s concern that if the evidence before him was substantially the same as that which had been before me, which it was, he should decline to hear the application and refer it to me. 

26.  It is critical that in making ex parte applications without notice to the respondent that the applicant gives full and frank disclosure and proceeds with the highest good faith[2]. There is no room for gaming the process by presenting relevant facts in a way which is calculated to obscure their significance.  An applicant cannot, for example, fulfill his obligation by including relevant documents in voluminous exhibits and leaving the judge to identify them[3]. Consequently, in discharging this duty it will commonly be necessary for counsel to ensure in his address that the court properly understands the application and its background[4] particularly if during counsel’s dialogue with the court it becomes apparent the court may not fully understand facets of it.

27.  For the reasons explained in [15–21] in my view SH (1) clearly failed in its obligation adequately to explain to Lok J the applications made in the Petition proceedings and their relationship to the application for an interim injunction and the reasons why the application was not made to me and (2) this failure arose not from in advertence, but was intentional.

28.  The way in which Mr Zhang puts his case in respect of this omission is two-fold.  First, he argues it was an abuse of process to commence the Action and apply for the Orders before the Duty Judge rather than the Companies Judge.  Secondly, the failure to properly inform Lok J of the previous applications and how I had dealt with them was material non-disclosure, although not the only material non-disclosure, and this also justifies discharging the Order.

29.  I agree with Mr Joffe’s submissions that the application before Lok J was an abuse of process.  I reach this conclusion, because of my finding in [22] that the applications to Lok J and DHCJ Yee involved conscious and impermissible forum shopping.  It does not seem to me necessary to consider whether or not issue of the Action in October 2016 was of itself an abuse of process in light of my findings:

(1)  that the Action should be struck out as the alleged wrong doer is no longer in control of the Board, which has been successfully reconstituted on SH’s application (see [30–39]); and

(2)  the failure properly and adequately to inform Lok J of the applications before me, their outcome and my comments constituted serious material non-disclosure.  It was not the only material non-disclosure (see [44–53]). It seems to me that certainly taken cumulatively the material non-disclosure and the abusive nature of the application justify discharging the Orders and refusing to re-grant them.

Re-constitution of the Board

30.  On 4 January 2017 SH’s Anthony Chan J heard four applications:

(1)  An application by SH to reconstitute the Board of the Company by removing Mr Zhang and SH and replacing them with 2 independent professionals.

(2)  SH’s summonses for the appointment of provisional liquidators.

(3)  SH’s application to continue the injunction that I had granted on 20 July 2016.

(4)  An application by Mr Zhang and Motivi Point to strike out the winding-up relief.

31.  The Judges’s decision was handed down on 19 January 2017.  Anthony Chan J ordered that Mr Zhang and SH should be removed from the Board and replaced with two nominees of the opposing creditors, namely, Mr David Bennett and Mr Tong Piu of Grant Thornton Advisory Services Limited and an injunction granted restraining Mr Zhang from exercising director’s powers.  The summons to appoint provisional liquidators was withdrawn, the injunction discontinued and the summons to strike out the winding up relief dismissed.

32.  The consequence of this decision was that Mr Zhang ceased to have any control over the Company.

The Rule in Foss v Harbottle

33.  The Action is a common law derivative action.  The circumstances in which it is permissible for a shareholder to bring such an action are summarised in the judgment of Ribeiro PJ in Waddington Ltd v Chan Chun Hoo:[5]

“11. It is a fundamental principle of company law, expressed as part of the rule in Foss v Harbottle, that where a wrong has been done to a company, it is the company itself which is the proper plaintiff. That principle does, of course, admit of exceptions, the exception generally relevant to derivative actions being the ‘fraud on the minority’ exception. Jenkins LJ explained the position in Edwards v Halliwell,[6]as follows:

… where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.

12. It follows that where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company's behalf, it is incumbent on the shareholder to show that the general ‘proper plaintiff’ rule is displaced and that the case falls within the relevant exception.

13. The derivative action is a procedural device invented by the courts to afford protection to the minority. Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court. But it does not follow from this that there is no threshold requirement to be met by the plaintiff. Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.

14. The time-honoured practice at common law is for the plaintiff to issue proceedings ‘on behalf of himself and the other shareholders other than the defendants’, naming the company on whose behalf the proceedings are brought as one of the defendants. A challenge to the plaintiff's locus generally takes the form of an application by the relevant defendants to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no locus to sue on the company’s behalf. The issue of standing can also arise in other procedural contexts, such as an application to add a party or to amend a pleading so as to introduce a derivative action. It is in such a context that the court has to consider whether the self-appointed derivative plaintiff should be permitted to proceed with the action by way of exception to the proper plaintiff rule.”

34.  The exception to the principle that the proper plaintiff to a claim to remedy a wrong done to a company is the company is permitted when the wrong would otherwise go uncorrected commonly, because the wrong-doers are directors who are in control of the Company.  It is for this reason that in [29] and [30] of the Statement of Claim it is pleaded that:

“29. By reason of the matters pleaded in paragraphs 1 to 25 above, the Plaintiff has no or no reasonable prospect of obtaining the consent of the Company to the institution of this action in the name of the Company for its own benefit, whether at a meeting at the Board of Directors or at a general meeting. If and insofar as is necessary, the Plaintiff also relies on the following particulars:-

Particulars

(1) The Plaintiff and the 1^st Defendant are the only two directors of the Company and the 1^st Defendant is the nominated director of the 4^th Defendant.

(2) According to Article 23(b) of the Company’s Articles of Association, two directors shall constitute a quorum for board meetings.

(3) By reason of the matters pleaded in paragraph 25 above, the Board of Directors has been deadlocked since mid‑2014.

(4) The 4^th Defendant as an alter ego controlled by the 1^st Defendant and the Plaintiff are the only two equal shareholders of the Company.

(5) In view of the shareholding structure of the Company, there is also a complete deadlock as between the Plaintiff on one side and the 4^th Defendant on the other side.

30. According, this action is brought by the Plaintiff as shareholder of the Company for the benefit of the Company.”

35.  If the Board of a company is independent of the wrong-doers and able to take an informed view of the alleged claim and decide whether or not the company should pursue the claim it is not permissible for a shareholder to commence a common law derivative action.  There is no suggestion in the present case that the Board is not impartial and thus, submitted Mr Joffe, the Action infringes the principal described by Ribeiro PJ and should be struck out.  Mr Joffe was not able to produce an authority directly on point, perhaps because the law and its application is sufficiently clear that it has never been disputed.  He did, however, illustrate its application in the insolvency context.  In Ever Joint (Holdings) Ltd v Nice Theme Ltd [7] DHCJ Gill held, in my view correctly, that once a company had been wound up continuation of the action could only be continued by the liquidator.  The reason is explained in a passage from the judgment of Lord Blanesburgh, quoted by the Deputy Judge, in Ferguson v Wallbridge:[8]

“... in their Lordships’ judgment, [the present action] could have been so maintained if the company were not in liquidation. Cook v Deeks [1916] 1 AC 554 is clear authority for this. But could it be so maintained now that the company is assumed to be in liquidation? And the answer must again, as their Lordships think, be in the negative ... The form of action so authorised is necessitated by the fact that in the case of such a claim ... justice would be denied to him if the mere possession of the company's seal in the hands of his opponents were to prevent the assertion at his instance of the corporate rights of the company as against them ... So as soon as the company goes into liquidation the necessity for any such expedient in procedure disappears. Passing over the superficial difficulty that a company in compulsory liquidation cannot be proceeded against without the leave of the Court, the real complainants, the minority shareholders, are no longer at the mercy of the majority, wrongly retaining the property of the company by the strength of their votes.”

Walton J is to similar affect in Fargo Ltd v Godfroy:[9]

“But once the company goes into liquidation the situation is completely changed, because one no longer has a board, or indeed a shareholders’ meeting, which is in any sense in control of the activities of the company of any description, let alone its litigation. Here, what has happened is that the liquidator is the person in whom that right is vested.”

36.  It is quite clear in the present case that in no sense is Mr Zhang in control of the Company or able to influence the decisions of the Board.  It follows in my view that unless the Board wishes to continue the Action it should be struck out.  Various authorities recognize that in the insolvency context the appropriate course may be stay the proceedings and give the liquidator the opportunity to decide whether or not to continue with the action.[10] Mr Joffe accepted that the same was true in the present circumstances, although he argued that as the Board has expressly declined to continue with the Action I should strike it out.

37.  Mr Chua argued that the decisions made in the insolvency context are not relevant and, if I understood him correctly, the reconstitution of the Board and thus the removal of control from the wrong doer from control of the Company did not cause the derivative action to infringe the Rule in Foss v Harbottle.  Mr Chua did not refer me to any authorities to support his submission.  In my view it is wrong.  The only question is whether the Board should be given the opportunity to continue later the Action.

38.  It is necessary to consider how the Board has proceeded to deal with the Action after its reconstitution.  Mr Bennett and Mr Tong were appointed on the basis that their fees for acting as directors would be paid by SH.  As is clear from Mr Bennett’s email to Karen Luk of SH’s solicitors of 22 February 2017 SH did not, as it would appear Mr Bennett and Mr Tong expected, proceed after their appointment to promptly agree commercial terms with them.  This remained the case in the middle of June according to an email from Alvan Liu to Mr Bennett and Mr Tong dated 16 June 2017, although SH had on 9 June 2017 finally made a contribution to their costs of US$150,000.  It would appear the opposing creditors had also provided some finance intended, I get the impression from the correspondence, to fund restructuring efforts.  The new Board was represented at the hearing before me by Mr Damien Whitehead of White & Case.  Mr Whitehead took me to Mr Bennett’s email to Karen Luk of 27 June 2017 in which amongst other complaints directed at SH, Mr Bennett reminds Ms Luk that SH has still not provided the indemnity in respect of the new directors liabilities that it had undertaken to Anthony Chan J to provide.  Mr Whitehead told me that the Board’s position is that the Company is insolvent and that as SH had not provided the funding Mr Bennett and Mr Tong had understood would be forthcoming when they were appointed, they had not been able properly to investigate the claims in the Action and did not intend to pursue them.  SH has provided no explanation as to why it has not funded the conduct of the Action by the Board to date or proposed a scheme for doing so in the future.

39.  It would seem to me that SH has dealt with this matter in a disingenuous way.  It would appear that its application to reconstitute the Board was directed more to ousting Mr Zhang rather than putting in management that could take over the running of the Company’s affairs including the prosecution of the Action.  It appears that SH wishes to retain control of the Action, but in my view this is not an option for them having successfully reconstituted the Board.  In my view the prosecution of the Action by SH as a common law derivative action now clearly infringes the principles described in [33–35] above and [29–30] of the Statement of Claim are unsustainable.  The Action should, therefore, be struck out.

Material Non-disclosure

40.  Mr Chua summarised the principles by reference to which the court assesses whether or not material non-disclosure is sufficiently serious to justify complete discharge of an order in [44(2)] and [44(3)] of his skeleton argument:

“(2) Whether a fact not disclosed is of sufficient materiality to justify immediate discharge of an order without examining the merits depends on the importance of the fact to the issues to be decided by the Court on the application.

(3) The Court considers all relevant circumstances in deciding whether there should be the ‘serious sanction’ of complete discharge of an order including:-

(a) whether the non-disclosure was deliberate;

(b) the excuse or reason for any material non-disclosure;

(c) the importance of the omitted fact to the issues to be decided by the judge, in particular whether the non‑disclosure would have resulted in the original order not being made in the first place, or would only affect the form of the order;

(d) whether the injunction could properly be granted had proper disclosure been made;

(e) the substantial merits of the case, and the balance of convenience;

(f) above all, whether discharge would be out of all proportion or risk a ‘serious potential injustice’ to a plaintiff. For instance, when a plaintiff makes serious allegations of fraud.

Hong Kong 2017 White Book (Vol 1) 29/1/51;
Brink’s Mat v. Elcombe[1988] 1 WLR 1350 (C.A.) (at 1357C–F, 1358D–F, 1359E–F, H);
Memory Corporation v. Sidhu[2000] 1 WLR 1443 (C.A.) (at 1455F–G, 1456A, 1458H).”

41.  Although, in considering whether to discharge an order for material non-disclosure the court weighs the relative significance of the above factors it is apparent from the authorities that considerable weight it attached to the fact of serious material non-disclosure and that where it has taken place as a general rule the order will be set aside and not renewed until trial.[11] As Kwan JA explains in Excel Courage Holdings[12]there is a tension inherent in the assessment of competing considerations: between the need to deal firmly with serious material non-disclosure in order to discourage malpractice which has a deleterious effect on the administration of justice and the risk of setting aside an order and refusing a re-grant causing injustice.  However, in order to tip the scales in favour of a re-grant it cannot be enough for an applicant to show that if the material matters had been disclosed he would still have been entitled to an order.  What is generally necessary is for the applicant to show that the refusal of interlocutory protection would have such a serious adverse effect on the value of any remedy obtained at trial that depriving him of it would be to impose a sanction out of proportion to the wrong done in failing to make proper disclosure.  This is a materially higher threshold than the balance of convenience test applied when considering an application for an interim injunction.

42.  I have already addressed the failure adequately to disclose to Lok J and subsequently DHCJ Yee, the interim applications made in the Petition proceedings.  Although in earlier parts of this decision I have characterised this failure as involving forum shopping the way in which it was perpetrated involved serious material non-disclosure.  Mr Zhang argues that there was also further substantial material non-disclosure in both applications. 

43.  I do not understand it to be in dispute that it was the responsibility of SH and its legal team to ensure that they put before the court all matters that Mr Zhang might argue was relevant whether it be possible defences to the claims or matters such as SH’s financial state that would be relevant to its ability to give a valuable undertaking in damages.  It was not for SH or its legal team to assess how material were such matters.  That was a matter for the court.[13]

44.  Mr Joffe submitted that SH had failed to disclose matters, which were both relevant to the substance of the application and the terms upon which any order should be granted.

45.  First, Mr Joffe argued that SH failed to disclose its own conduct which demonstrated that it was SH’s actions that had brought the Company’s business to a halt.  This was relevant to the assessment of SH’s claim that it was the diversion of the Company’s business by Mr Zhang that had interfered with its ability to carry on business and justified an injunction in order to prevent any further stripping of the Company’s assets and business opportunities.  Mr Joffe relied on the following matters:

(1)  On 1 June 2016 (one month before the Petition was presented), SH wrote to all banks of the Company causing seven of its nine bank accounts to be frozen, thus rendering it unable to meet its ongoing contractual obligations.

(2)  Without any or any legitimate reason, SH refused to give consent to Mr Zhang’s request that the Company be allowed to use its funds to discharge its obligations in the ordinary course of business.  The Defendants as a result had to apply to court for a validation order, which was granted on 20 July 2016.

46.  Mr Joffe argued that these matters were plainly relevant and SH’s legal team must have been aware of them because they had been raised in the Petition proceedings.  It was not for them to decide their substance and relevance.  It was plainly their duty to draw the court’s attention to them, as it was an argument which the Defendants would have made if they had the opportunity of being heard.

47.  Secondly, Mr Joffe argued that SH failed to make sufficient disclosure of its financial status and ability to honour its undertaking as to damages by not drawing attention to the following material facts and, instead, representing to Lok J that it is a “substantial company … involved in the investment holding business for the past 20 years [and …] is able to give the usual undertaking as to damages”. Mr Joffe relied on the following matters:

(1)  SH failed to disclose the fact that SH owed a total of US$5,953,339.03 to the Company including a shareholder’s loan of US$3,000,000 admitted to be owed by SH and an unpaid allotment of US$2,939,752.21).

(2)  SH failed to disclose the fact that it had, shortly prior to the 1st Injunction Order, diverted substantial assets owned by it to Huaxing Gas Ltd, a company incorporated only on 19 July 2016 which has the same shareholder and director as SH, and Stargas Investment Ltd.

(3)  On 30 August 2016 SH transferred its shareholding in Stargas Limited to Stargas Investment Ltd.

(4)  On 21 September 2016, SH transferred all of its shareholding in Quanzhou Huaxing Gas Co Ltd (worth RMB90,000,000) to HGL.

(5)  On 23 September 2016, SH transferred all of its shareholding in Fujian Huaxing Co Ltd (worth US$14,900,000) to HGL.

48.  Mr Joffe submitted that these matters were plainly material to the question of whether SH was good for its undertaking and its duty of full and frank disclosure required SH to inform Lok J of them in order that he could assess what fortification was required if he was satisfied that an injunction should be granted. 

49.  In respect of the 2^nd Order, in particular the alleged proprietary injunction in [2] of the Order against Motivi in respect of of US$7,362,202, Mr Joffe submitted that SH failed to disclose material that would have directly countered its claim that Motivi owed the Company US$7,362,202:

(1)  SH was aware since as early as 3 October 2016 from evidence filed by Mr Zhang in the Petition proceedings that the extract from the Company’s ledger “loan due from shareholders” as at 30 June 2016 prepared by F. S. Li Associates Ltd (“Extracted Ledger”) showed that there was no outstanding liability due from Motivi to the Company, yet failed to bring this to the court’s attention whether in its evidence or in Mr Chan’s skeleton.

(2)  Even assuming that SH justifiably proceeded on the basis that there had been no repayment by Motivi, it was still misleading for SH to inform the court, as it did in 33(f) of Mr Yang’s 2^nd affirmation, that the injuncted amount included a shareholder’s loan to Motivi in the amount of US$5,310,000.  US$5,310,000 is the aggregate amount of the seven tranches of the shareholder’s loan shown in the Extracted Ledger in US$.  However, the aggregate of the seven tranches shown there in HK$ is HK$20,237,205 , the equivalent of about US$2,594,513.  The discrepancy is explained by an obvious error in the statement of the loan tranche dated 17 December 2015 whereby the amount of HK$2,325,300 was mistakenly stated to be US$3,000,000 rather than US$300,000.  This caused the total amount of the loan to be overstated in the accounts of the Company as at 30 June 2016 prepared by F. S. Li Associates Ltd, exhibited to Mr Zhang’s evidence filed in the Petition proceedings. This was re‑exhibited to Mr Zhang’s 1^st affirmation in response to the 1^st Injunction Order.  Mr Yang only exhibited to his 2^nd affirmation those parts of the Accounts which do not show the repayment of the loan by Motivi.

50.  F. S. Li Associates Ltd has confirmed in a letter dated 25 October 2016 that there was a typo in the description of the transaction dated 17 December 2015 stating the loan as “US$3,000,000” instead of “US$300,000”. Consequently, the total amount of the loan was only about US$2,610,000 or HK$20,237,205.

51.  Mr Joffe submitted that this error was so obvious that it should have been picked up by someone making proper inquiry, bearing in mind that SH was looking at the Extracted Ledger with a view to determining the appropriate amount to be injuncted. SH was aware of this because the discrepancy between the HK$ entry and the US$ entry was specifically mentioned on page 4 of the 1^st RSM Report.

52.  It seems to me that even if SH was not sure whether the HK$ figure or the US$ figure was the correct one, it ought to have at least disclosed the possibility of there being an error and that the total value of the loan was only US$2,610,000. For it to simply turn a blind eye to this possibility and pick the figure that gave it a higher injuncted amount was contrary to its obligation to give full and frank disclosure.

53.  SH’s response to these criticisms is largely that the issues are contentious and the court is not concerned at this stage to determine disputed questions of fact.  This misses the point.  It seems to me that the matters to which I have referred, particularly the question of the amount of Motivi’s loan, was not dealt with properly by SH and its legal team.  A pattern emerges, which suggests either an indifference to the obligation to consider conscientiously what needs to be disclosed to the court or on occasions a conscious omission of unhelpful evidence.  It seems to me that SH and its legal team manifestly failed in their obligations to make full and frank disclosure in a number of aspects and that the Orders should be set aside.  As I have determined that the Action should be struck out the question of re-granting the Orders does not arise.  If I had not struck out the Action I would have approached an application to grant new orders on the basis that this was a serious case of material non-disclosure. 

Should the Order be re-granted?

54.  Lok J granted an injunction to restrain the Defendants, other than the Company, from “in any way disposing of, dealing with or diminishing the value of proceeds of sale unpaid or yet to be paid by the” Company’s customers including Bohua and Oriental Energy Co Ltd (“Oriental”) in respect of the supply of any LPG or propane supplied to them by the Everglory Petrochemical Ltd.  (3^rd Defendant), Proud Union International Ltd (“PUI”) (5^th Defendant), Everglory (Macau) International Co Ltd or Decen International Ltd.

55.  SH makes the following claims in the Action, which it relied on as showing that it had a prima facie case and that there was a need for an urgent injunction to restrain in particular Mr Zhang from diverting the Company’s interests under two long-term gas contracts.  First, that Mr Zhang controlled PUI and that he caused the Company’s interest in transactions carried out pursuant to a long term sales contract with Oriental to be diverted to PUI.  The transaction was for the sale of propane with a value of US$18,703,065.60. Secondly, that Mr Zhang had caused the Company to “book out” (as it is described in the Statement of Claim) scheduled shipments of cargos from Shell to companies controlled by Mr Zhang rather than the Company’s end buyers, in particular Bohua.

56.  I have already referred to the RSM Report.  As I understand it, this evidence was heavily relied on by SH both in the applications before Lok J and DHCJ Yee and also before Anthony Chan J.  The Report suggests that on the basis of, what RSM acknowledge was the limited documents provided to them, PUI was controlled by Mr Zhang and PUI invoiced Oriental for a cargo of LPG delivered to Oriental.  In addition RSM suggest that there is evidence that Mr Zhang caused certain purchases from Shell (its supplier) to be cancelled for no apparent reason with consequent compensation being paid to Shell.

57.  In the evidence before me was a report prepared by Briscoe Wong Advisory Ltd (“BW”) dated 24 November 2016 which was not before Lok J, DHCJ Yee or Anthony Chan J.  This report analyses the conclusion reached in the RSM Report.  In short, BW who had access both to more documents than RSM and also Mr Zhang, explain that on the basis of the material with which they had been provided they consider that RSM’s report contains a number of mistaken critical assumptions.  First, there is no evidence to suggest that PUI is controlled by Mr Zhang, rather PUI was a customer of Oriental and paid for the cargo rather than invoiced Oriental for it.  BW have seen one invoice from EPL marked “For Customs Purpose Only” amongst the papers, but nothing to suggest that either PUI or EPL sought payment for the cargo from Oriental.  BW also consider in detail a 2^nd transaction for a cargo of 46,805,692MT of LPG purchased from Shell.  The order was placed pursuant to a long term contract with Zhejiang Shaoxing Sanyuan Petrochemical Co Ltd (“Sanyuan”).  The Company issued a prepayment invoice to a Lee Fung, which was nominated as the buyer by Sanyuan.  EPL issued three invoices to Oriental again marked “For Customs Purposes Only”.  The Company, however, received US$16,147,963.74 from Lee Fung and has issued two further debit notes to Lee Fung, which at the time of preparation of the Report had not been settled.

58.  BW opine that in neither case does the information available to them support the conclusion that these transactions involved the diversion of monies to entities controlled by Mr Zhang. 

59.  So far as the book-outs are concerned RSM conclude that these took place as a result of the Company informing Shell of the closure of some of its bank accounts and the presentation of the Petition, which called into question its ability to pay for any cargo that was shipped.  In these circumstances the Company anticipated that it could not take delivery.  Shell then arranged the book-outs.

60.  BW also address a number of other criticisms and concerns identified by RSM explaining that they also do not support the suggestion that Mr Zhang was diverting business and monies away from the Company.

61.  On the basis of the evidence that I have read I consider it doubtful whether SH is able to demonstrate a prima facie case of a material breach of duty by Mr Zhang let alone any scheme to defraud the Company, which is the import of SH’s claim.  However, assuming for present purposes that a prima facie case has been demonstrated:

(1)  I am not satisfied that the evidence shows that unless enjoined Mr Zhang and the entities he controls will divert future payments.  I am made more confident in reaching this conclusion by the appointment of independent directors.  There is nothing to suggest that Mr Zhang currently intends to divert any monies due to the Company to his own entities now the directors have been appointed and they have obtained control of the Company’s bank accounts.

(2)  I am certainly not satisfied that there is sufficient risk of loss to the Company and consequently to SH to make it unjust to refuse to re-grant the Orders as a penalty for what I have found to be a serious failure to make full and frank disclosure of material matters before Lok J and DHCJ Yee.

Conclusion

62.  I shall make the following orders:

(1)  The Orders of 24 November 2016 and 22 November 2016 be discharged.

(2)  The Action be struck out.

(3)  The summonses of 26 October and 25 November 2016 be dismissed.

(4)  I make no order save as to costs in respect of the summons dated 16 May 2017 seeking fortification.

(5)  A costs order nisi that the costs of each summons be paid forthwith by the Plaintiff to the 1^st to 6^th Defendants to be taxed if not agreed.  In respect of the costs of the 1^st to 4^th Defendants there be a certificate for two counsel and the costs of the applications to discharge the Orders of 24 November 2016 and 22 November 2016 be taxed on an indemnity basis.

  

  

HCA 2682/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2682 OF 2016

____________

____________

_______________

DECISION

_______________

Introduction

1.  This court handed down a decision dated 7 November 2016 (“the Decision”) whereby all of the plaintiff’s applications for an order for payment into court and a disclosure order and the relevant defendants’ application for interim fortification of the undertaking were dismissed. This court also made a costs nisi that there should be no order as to costs.

2.  By summons dated 21 November 2016 (“the Variation Summons”), the relevant defendants apply for a variation of the costs order nisi. By another summons dated 17 February 2017 (“the Amendment Summons”), the relevant defendants apply for leave to amend the Variation Summons. The parties proposed that these applications should be disposed of on paper. This court agreed and has thus received the parties’ respective written submissions.

3.  In this document, I shall adopt the same abbreviations used in the Decision. I should also refer to the Decision for the background facts.

4.  The plaintiff does not oppose the Amendment Summons. The relevant defendants agree to pay the plaintiff its costs of and occasioned by the amendment. However, the parties disagree on the quantum of costs payable to the plaintiff.  I therefore grant leave to the relevant defendants to amend the Variation Summons as per the draft Amended Summons annexed to the amendment summons. I shall resolve their differences on the quantum of costs at the end of this decision.

5.  Now I deal with the Variation Summons with reference to the Amended Summons. By the Amended Summons, the relevant defendants seek a variation of the costs order nisi to the effect that costs be in the cause of the plaintiff’s summons dated 26 October 2016 and paragraph 1 of the relevant defendants’ summons dated 24 November 2016. As regards costs of their variation application, it should be disposed of in the like manner.

6.  Mr Ho, for the relevant defendants, in his written submission, asks for a different variation. He asks for the following two costs orders be granted in lieu of the costs order nisi:

(1)   Costs of the interim fortification application should be 50% of such costs be costs in the cause of the relevant defendants’ Fortification Application.

(2)   Costs of the disclosure and payment into court applications should be such costs be the relevant defendants’ costs in the cause of the Continuing and Discharge Applications.

7.  I should briefly explain the background leading to the making of the costs order nisi. The plaintiff’s applications for an order for payment into court and a disclosure order and the relevant defendants’ application for interim fortification of the undertaking were made on the return day of the plaintiff’s summons after it obtained an ex parte Mareva injunction (“the Injunction”) against the relevant defendants. The plaintiff intends to apply for a continuation of the Injunction (Continuation Application) whereas the relevant defendants intend to discharge the Injunction (Discharge Application) and oppose its continuation. Further the relevant defendants seek fortification of the undertaking given by the plaintiff in respect of the Injunction. The parties agree that they have to file evidence for the purpose of all their applications and there should be a date fixed for the substantive hearing of their applications. Nevertheless, they found it necessary to make those applications to this court for interim relief pending the resolution of their applications.

8.  This court was not impressed with all three applications and dismissed them accordingly. In the Decision, this court gave brief reasons for the costs order nisi in the following terms at §54:

“I am minded to take a broad-brush approach to deal with the costs of these three applications. Since neither parties succeeds in their application(s) and the time spent in the plaintiff’s applications and the relevant defendants’ application was more or less the same, I believe that the fairest order is that there be no order as to costs. I shall make an order nisi to this effect.”

9.  In making the costs nisi, this court in fact took the starting point that costs should follow the event for all these unmeritorious and unnecessary interlocutory applications. There were three events. The plaintiff was defeated in its two applications whereas the relevant defendants were defeated in their application. The plaintiff in principle should pay the relevant defendants their costs of its failed applications and the relevant defendants should pay the plaintiff its costs of their failed application. Then the court proceeded to consider the time spent on each applications and came to the conclusion that they were more or less the same. Based on this conclusion, adopting a broad-brush approach, this court opined that neither party should pay the other side any costs and hence the costs order nisi was made.

10.  The relevant defendants seemingly fail to understand the logic behind the costs order nisi. Their present application is made on an erroneous basis.

11.  Mr Ho first submits that the costs of preparation of the evidence by way of the Affirmation of Zhang Aidong for the purpose of the relevant defendants’ interim fortification application has not been wasted and would be subsequently relied upon in their substantive fortification application. There is every possibility that the relevant defendants may succeed in their substantive fortification application and therefore would be granted a costs order in their favour. In such an eventuality, the relevant defendants should recover the costs of the preparation of the Affirmation of Zhang Aidong. It follows that at least 50% of the costs of the interim fortification application should be made in the cause of their fortification application.

12.  The costs order nisi certainly does not debar the relevant defendants from their recovery of the costs of the Affirmation of Zhang Aidong in such an event at all. This court was fully aware that all the evidence before the court would be used in the substantive hearing. The costs order nisi was made having in mind the time spent on the oral arguments of the applications at the hearing on the return day only and hence the legal costs incurred as a result.

13.  As regards the costs of the disclosure and payment into court applications, Mr Ho submits that in the likely event that the relevant defendants succeed in the Continuation and Discharge Applications, they should be entitled to costs of these applications as well. Since the disclosure and payment into court applications of the plaintiff are patently ancillary to and prompted by the Injunction, the relevant defendants should also recover costs of these applications. However, even if the relevant defendants failed to discharge the Injunction and to oppose its continuation, the plaintiff may still not be entitled to costs of the disclosure and payment into court applications.

14.  In the circumstances, Mr Ho submits that costs of the disclosure and payment into court applications should be the relevant defendants’ costs in the cause of the Continuing and Discharge Applications.

15.  I am unable to accept his submissions. In the Decision, I explained that I found both the disclosure and payment into court applications to be unnecessary to afford interim protection to the plaintiff given the Injunction. I accepted as the starting point of consideration that the plaintiff should bear the costs of its failed applications. Such a costs liability has nothing to do with the actual merit of the Continuation and Discharge Applications and the costs order nisi was made regardless of their outcome.

16.  The plaintiff did argue that the disclosure and payment into court orders sought were ancillary to the Injunction. However, this does not mean that the costs of such applications should not warrant separate considerations. In terms of costs, these applications were distinct from the Continuation and Discharge Applications. Even if the latter are granted at the end, it does not necessarily follow that these applications should be made.

17.  In the normal course of event, even if the plaintiff succeeds in its two Applications after the substantive hearing, it still has to pay the relevant defendants’ costs of its failed applications. Under the costs order nisi, the plaintiff is spared from is liability to pay such costs merely because the relevant defendants are at the same time spared from their liability to pay the plaintiff’s costs of their failed interim fortification application.   

18.  I am not convinced that the costs orders proposed by Mr Ho is appropriate in the circumstances. I can see no sufficient reason to vary the costs order nisi.

19.  This Variation Summons is devoid of merit and must be dismissed accordingly. The fact that it was only served on the plaintiff some six weeks after it had been taken out and the repeated changes of their position cry out for an explanation. Costs must follow the event and the relevant defendants must pay the plaintiff its costs of and occasioned by this application.

20.  The plaintiff has lodged with this court two statements of costs. One relates to the Amendment Summons and the other one relates to the Variation Summons. The parties agree that summary assessment is appropriate.

21.  By the former statement of costs, the plaintiff seeks to recover HK$13,450 from the relevant defendants as costs of and occasioned by the Amendment Summons.  Such costs include, to my surprise, a counsel brief in the amount of HK$2,000.

22.  I fail to see any substantive work done on the part of the plaintiff in respect of the Variation Summons prior to the Amendment Summons. The Variation Summons has not been supported by any affirmation evidence. The consistent stance of the plaintiff is that the costs order nisi should not be varied anyway. It is unreasonable to claim any substantive legal costs in respect of the Amendment Summons.   The claim for the costs incurred by the plaintiff’s solicitors for their 30-minute legal research is embarrassing. The counsel brief, however modest the sum involved may seem, is not justifiable.

23.  Adopting a broad-brush approach, I can only allow the legal costs of the handling partner for 1 hour in the sum of HK$4,000 in respect of the Amendment Summons.

24.  By the latter statement of costs, the plaintiff claims the sum of HK$37,250. It includes the preparation of the 2^nd Affidavit of Liu Kwok Alvan, the handling partner of the plaintiff in the sum of about HK$10,000 and counsel brief of HK$4,000.  

25.  This is a very simple application clearly in lack of merit. It is astonishing that the plaintiff found it necessary to file an affidavit in opposition even in the absence of any supporting evidence filed by the relevant defendants. I have perused the affidavit not without reluctance. With respect, it is of no assistance and it merely shows poor judgment on the part of the plaintiff’s legal advisors.

26.  The counsel brief is really modest. It was at the outset agreed that there should be paper disposal of the Variation Summons. Mr Ng’s written submissions are capable of dealing with all the arguments advanced on behalf of the relevant defendants. The supporting work to be undertaken by the plaintiff’s solicitors should be minimal. I believe 1.5 professional hours of the handling solicitor and the like professional hours of his assistant solicitor would suffice. Accordingly, I only allow a total sum of HK$13,750 (HK$4,000 + 6,000 + 3,750).

27.  In conclusion, the Variation Summons of the relevant defendants is dismissed and the relevant defendants should forthwith pay the plaintiff its costs summarily assessed at HK$17,750.

HCA 2682/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2682 OF 2016

____________

____________

_______________

DECISION

_______________

Introduction

1.  On the return day of the plaintiff’s summons (“the Summons”) after obtaining an ex-parte order (“the Order”) made by Lok J on 25 October 2016, both the plaintiff on the one part and the 1^st, 3^rd and 4^th defendants (collectively “the relevant defendants”) on the other part made interlocutory applications though in principle they agree on the usual directions to be given for the substantive hearing of the Summons.

2.  The plaintiff applies for an order for payment in and a disclosure order in aid of the Order. The relevant defendants ask for fortification of the undertaking as to damages given by the plaintiff under the Order.

Brief background facts

3.  I shall give a brief account of the background facts leading to these applications.

4.  The plaintiff brought this derivative action on behalf of the 6^th defendant (“the Company”) as its 50% shareholder against all the defendants. The 4^th defendant is the other 50% shareholder of the Company. Both the 4^th and 5^th defendants were incorporated in the BVI and are controlled by the 1^st defendant. The 1^st defendant is a PRC resident and he and the plaintiff are the only directors of the Company.

5.  The 2^nd defendant was the deputy general manager of the Company. The 3^rd defendant is a locally incorporated company with a Chinese trade name confusingly similar to that of the Company and is controlled by the 1^st defendant. The 1^st defendant is its sole director.  

6.  The major business of the Company is in the trade of liquefied petroleum fuel (“the Product”) and it involves back-to-back trading with its purchase of fully refrigerated propane from its suppliers and sub-sale of the same to its customers. For its trade purpose, the Company signed a few long-term contracts with its suppliers and customers approved by the plaintiff. It was a hugely profitable business having a niche market. However, the relevant defendants now allege that it is insolvent.

7.  Since mid 2014, the plaintiff has been prevented from being involved in the affairs of the Company and since May 2016, he has been totally excluded. 

8.  Owing to such exclusion, among other complaints, the plaintiff presented a petition against the 1^st defendant (“the Petition”), the 4^th defendant and the Company for a buy-out order or alternatively an order that the Company be wound up on just and equitable grounds.

9.  I should add that in the course of the Petition proceedings (HCCW198/2016), the 1^st defendant disclosed that in August 2016, termination notices had been given to Oriental Energy Co Ltd (“Oriental”) and Bohua Petroleum Co, Limited (“Bohua”) to terminate their respective long-term sales contracts. The plaintiff says that these termination notices were issued without its knowledge and detrimental to the commercial interest of the Company.

10.  In the case of Oriental, the Company had one 3-year sales contract and one 6-year sales contract whereas Bohua had one 10-year sales contract with the Company. The plaintiff challenges the authenticity and validity of these termination notices.

11.  The plaintiff’s suspicions about the 1^st defendant’s conduct prompted him to commission RSM Corporate Advisory (Hong Kong) Limited (“RSM”), a firm of forensic accountants, to conduct investigation into the affairs of the Company. There are four major areas of suspected wrongful activities.

12.  First, there were suspicious transactions whereby the business of the Company was seemingly diverted to the 3^rd and 5^th defendants. Second, there are four documents of the Company bearing a forged chop of the Company. They consisted of 2 shareholders’ resolution, 1 board resolution and the 2014 Audited Accounts of the Company dated 16 September 2015. Third, there was misappropriation of the funds of the Company in its HSBC account. Fourth, there were unauthorized loans to the 4^th defendant as its shareholder.   

13.  In its report dated 6 September 2016, RSM concluded that the first and second suspicions are reasonably established whereas the other two require further review and investigation pending more access to the records of the Company.

14.  In regard to the first suspicion, the RSM report highlighted the gravity of the wrongdoings of the 1^st and 2^nd defendants. They caused the Company to cancel a series of scheduled cargoes from its long-term suppliers such as Targa Liquids Marketing and Trade LLC and Shell International Eastern Trading Company (“Shell”) in June to August 2016 when they were ready to be delivered to its long-term customers including Oriental and Bohua. It was found that at the end the contractual interests and/or receivables of the Company were diverted to either the 3^rd defendant or the 5^th defendant on the strength of a guarantee letter signed by the Company and an addendum signed by the 3^rd defendant on behalf of the Company. In effect, the 3^rd defendant and the 5^th defendant replaced the Company to fulfill the supply obligations of the Company under the long-term sales contracts with Oriental and Bohua. RSM concluded that this may have caused millions of US dollars loss to the Company and such loss may continue.  For present purposes, I need not go into further detail of the alleged breaches of the fiduciary duties of the 1^st defendant.

15.  The plaintiff relies on the RSM report in both the Petition proceedings and the present action, which was commenced on 16 October 2016.

16.  In the Statement of Claim, the plaintiff, among other things, seeks a declaration that each of the 3^rd defendant and the 5^th defendant holds proceeds of their sale of the Product to Oriental and Bohua as constructive trustee for the Company on the ground of knowing receipt and an order against each of them for taking of an account and making of all necessary inquiries.

17.  It should be noted that the plaintiff’s allegation is that for the January and May 2016 diversion to the 3^rd defendant and the 5^th defendant, the Product supplied by them to Oriental in the stead of Company was actually purchased by the Company from Shell. It is however unknown whether the 3^rd and the 5^th defendants ever paid consideration to the Company for the Product they sold to Oriental due to the lack of records.

18.  The triggering event leading to the ex-parte application is that the plaintiff had recently received information that the 3^rd defendant or another company associated with the 1^st and 2^nd defendants would soon make deliveries of a total of 91,252.47 MT of the Product to Bohua in two batches and the 1^st and 2^nd defendants had already purchased such product from 3 suppliers to complete the transactions.

19.  The plaintiff contends, as accepted at the ex-parte hearing, that there is a serious question to be tried as to whether as a result of the alleged breach of their fiduciary duties by the 1^st and 2^nd defendants, there has been a wrongful diversion of the Company’s rights and interests under its long-term contracts with Oriental and Bohua to companies associated with or controlled by the 1^st defendant and/or the 2^nd defendant such as the 3^rd and 5^th defendants, Everglory Macau and Decen.

20.  The injunctive part of the Order (“the Injunction”) provides that all the defendants except the Company shall be until trial or further order restrained from in any way disposing of, dealing with or diminishing the value of any proceeds of sale unpaid or yet to be paid by the Company’s customers (collectively “the Funds”) including Bohua and Oriental in respect of the supply of the Product supplied by the 3^rd defendant, the 5^th defendant, Everglory (Macau) International Co., Limited (“Everglory Macau”) or Decen International Limited (“Decen”). The 1^st defendant is one of the directors and shareholders of Everglory Macau whereas the 2^nd defendant’s wife owns Decen.  

21.  It should be noted that the Funds are confined to the receivables not yet paid and to be paid by the Company’s customers.

The plaintiff’s applications

22.  By the Summons, the plaintiff applies firstly an order that the Funds be paid into court. It further seeks a disclosure order to compel the defendants to disclose to the plaintiff in writing at once when any of the Funds shall become payable, giving the value and corresponding cargo information (including the price and quantity of the Product being delivered, the location of the delivery and the relevant contract in question) in respect of such amount.

Payment in order

23.  Mr Chua SC, together with Mr Chan appearing for the plaintiff[1], argues that payment into court the Funds is just, appropriate and necessary for three reasons. First, he points out that the Order was applied for and granted ex parte by reason of secrecy. Second, he submits that cash has been acquired by the defendants as a result of their alleged wrongdoings. Third, it is inappropriate to permit the defendants to retain control of any sale proceeds in light of the plaintiff’s good arguable case against them and the serious risk of dissipation of the Funds.

24.  Both Mr Chua and Mr Joffe, appearing for the relevant defendants together with Mr Ho, refer to this court the guiding principles relating to the making of orders for the delivery up of chattels laid down by the English Court of Appeal in C.B.S. United Kingdom Ltd. v Lambert [1983] 1 Ch.37 (C.A.). They are not controversial. Of particular relevance to this application is the requirement that there should be clear evidence that the defendant is likely, unless restrained by order, to dispose of or otherwise deal with his chattels in order to deprive the plaintiff the fruits of any judgment he may obtain.

25.  This requirement poses a difficult hurdle for the plaintiff in the present application. At the ex-parte hearing, the plaintiff did not apply for an order for payment in. Now, the Order is already in place to restrain the defendants to deal with or dispose of the Funds. There is no new evidence to suggest that notwithstanding the Order, the Funds are likely to be dissipated by any of the defendants already enjoined. In the circumstances, I do not find it just and convenient to order a delivery up of the Fund at this stage. I refuse to accede to this application.

26.  That being my conclusion, I need only deal with the major arguments of Mr Joffe briefly. First, he also argues that a delivery up order would cause additional hardship to the relevant defendants since the Funds frozen are actually required for satisfaction of the genuine needs of the relevant defendants. I cannot agree with him given the clear effect of the Order.

27.  Mr Joffe further argues that there is insufficient evidence to link the 1^st defendant with some other entities receiving the Funds from the Company’s customers. Some of them such as Everglory Macau and Decen are not even party to these proceedings.

28.  I note that in the affirmation of the 1^st defendant just filed (“D1’s Affirmation”), he does not conceal his ties with the 3^rd defendant and Everglory Macau with his disclosure of their trade information.

29.  As regards the 5^th defendant, in D1’s Affirmation, the 1^st defendant does not expressly deny any association. On the other hand, the plaintiff asks this court to draw the inference of the association between the 1^st defendant and the 5^th defendant by reason of the inexplicable diversion of business from the former to the latter. Nothing has been heard from the 5^th defendant though I am aware that service on the 5^th defendant was only effected by DHL Express at its BVI address after 26 October 2016.[2]

30.  In regard to Everglory Macau and Decen, and indeed any other unnamed companies with which the 1^st and/or 2^nd defendants are associated, they are not yet joined as parties in these proceedings but the plaintiff seeks to enjoin them from dealing with or disposing of the Funds by the Order by reason of the plaintiff’s allegation that they are constructive trustees. I accept the submission of Mr Joffe that this is an unsatisfactory aspect of the Order.

31.  Another valid point made by Mr Joffe is that the plaintiff is asking too much to have the entire amount of the Funds to be paid into court. I have doubt too as to whether the entire amount without deduction of any costs incurred in the course of generating these incomes could be the subject matter of the constructive trust even if all the allegations of the plaintiff are accepted.

Disclosure order

32.  Now I turn to the plaintiff’s application for a disclosure order. Mr Chua makes this application on the basis that the defendants (except the 6^th defendant) are sued as constructive trustees and the Funds in equity belong to the Company. He submits that the disclosure order sought is both necessary and ancillary to the Injunction so as to ensure and/or enhance its effectiveness.

33.  It is imperative for me to first identify the nature of the Injunction and then to consider whether the disclosure order sought is appropriate. On the first issue, the following passage in Snell’s Equity (23^rd Ed., 2015) at §26-006 is apposite:

“If the principal is to have a claim under a constructive trust, the fiduciary must have received a specific fund of property that is identifiable as the profit arising from his breach. Otherwise, the principal is limited to a personal claim for the monetary value of the fiduciary’s profit. Once the principal has established that the specific fund is held for him on a constructive trust, he may also enforce proprietary claims to its traceable proceeds.

The constructive trust may attach to two kinds of profit. It may derive from the fiduciary’s unauthorized dealings with a fund of property that was previously treated as the principal’s equitable property. Alternatively, the constructive trust may attach to a fund of property that the fiduciary received from a third party, and for which he was liable to account to the principal by specifically delivering it up to him.”

34.  The Injunction is hence proprietary in nature and is not an ordinary Mareva injunction. Mr Chua draws my attention to the following oft-cited dictum of Templeman L.J. quoted by Ackner L.J. in Bekhor Ltd v Bilton [1981] 1 QB 923 (CA) at 937H-939A:

“A court of equity has never hesitated to use the strongest powers to protect and preserve a trust fund in interlocutory proceedings on the basis, if the trust fund disappears by the time the action comes to trial, equity we will have been invoked in vain.”

35.  I would I accept that it is an established principle that a court should not be slow to protect a trust property, especially when there is credible evidence that the defendant is untrustworthy and dishonest. However, I am not convinced that the disclosure order sought is really necessary and ancillary to the Injunction.

36.  In the first place, the Funds are clearly defined in the Injunction. They are to be paid by the Company’s customers to fulfill their payment obligations under their respective sales contracts placed with the defendants or their associated companies. Even without the disclosure now demanded by the plaintiff, there should be no difficulties in identifying all such sale proceeds in due course.  

37.  Nor should there be any difficulties in locating the Funds in light of the Injunction. They are the receivables of the defendants which the defendants cannot deal with or dispose of in view of the Injunction. In the absence of any evidence of their imminent breach of the Injunction, even bearing in mind the alleged dishonesty of the 1^st defendant and the 2^nd defendant, I do not find it necessary to order disclosure at this stage.

38.  Furthermore, the information now sought to be disclosed by the plaintiff can hardly be said to be ancillary to the Injunction. First, it is irrelevant as to when the Funds are to be paid to the defendants. In any event, they must remain intact under the Injunction. As regards cargo information and the terms of the sale contracts entered into between the Company’s customers and the defendants, I fail to see how such information is necessary to ensure the effectiveness of the Injunction and to preserve the Funds at all. On the other hand, the plaintiff may obtain such information by proper means in due course in these proceedings.

39.  I am then driven to the conclusion that I should not exercise my discretion to order disclosure as applied for by the plaintiff at this stage.

The relevant defendants’ application for fortification

40.  In the Order, the plaintiff gives the usual undertaking as to damages, as volunteered in its supporting affirmation. The relevant defendants now rely on D1’s Affirmation to apply for fortification of the plaintiff’s undertaking.

41.  Mr Joffe helpfully refers to the following passage in Gee’s Commercial Injunctions (6^th Edn., 2016) at§11-027 for the governing principles:

“Whether fortification of a cross-undertaking is appropriate, and if so for how much, is a matter of discretion for the court. As a general proposition, the enjoined party must show a good arguable case in support of its application for fortification, and does not have to prove the need for fortification on a balance of probabilities. This involves taking into account:

(i) an intelligent estimate, being informed and realistic although not necessarily entirely scientific, of the likely amount of any loss which might be suffered by the applicant for fortification by reason of making the interim order;

(ii) that the applicant has shown a sufficient level of risk of loss to require fortification, which involves showing good at arguable case to that effect; and

(iii) that the making of the interim order is or was a cause without which the relevant loss would not be or would not have been suffered.

All three items involve proof of some risk that loss will be suffered as a result of the injunction. Assertion of risk is insufficient, there must be some real evidence, which objectively establishes that risk.

... The court may consider it appropriate not to require fortification when arguably the claimant is unable to provide security by reason of the very conduct of which complaint is made in the proceedings and in respect of which he has a good arguable case for redress.” (emphasis supplied)

42.  Mr Chua underscores the highlighted part of the passage to this court.

43.  With these principles in mind, I examine D1’s Affirmation. On the issue of loss and hardship caused or likely to be caused by the Injunction, he claims that the trade activities of the 3^rd defendant and Everglory Macau will be seriously hampered if the Funds are frozen. He asserts that they have to paid US$10 million to US$20 million for each transaction to purchase the Product from their suppliers. If they are restrained from using the Funds, they would lack sufficient working capital to carry on their trade in the Product.

44.  Moreover, the 1^st defendant alleges to have received calls from the bankers of the 3^rd defendant and Everglory Macau whom were notified by the plaintiff of the Order. They told the 1^st defendant that the credit rating and the existing credit facilities of the 3^rd defendant and Everglory Macau would be adversely affected. Hence, the 1^st defendant concludes that the Order has a devastating effect on the business of the 3^rd defendant and Everglory Macau.

45.  With regard to the inability of the plaintiff to honour its undertaking, the 1^st defendant points out that the plaintiff is a foreign company and its only asset within the jurisdiction is its shares in the Company.  Now that the Company is insolvent, the plaintiff can have no valuable asset in Hong Kong to honour its undertaking.

46.  The plaintiff is also said to be heavily in debt and the Company has presented a winding up petition in the BVI against the plaintiff.

47.  Mr Chua submits that as a matter of fairness, the plaintiff should be allowed to put in an affirmation to deal with the allegations in D1’s Affirmation and so the fortification application should be adjourned for full argument.

48.  I agree with Mr Chua but I do not think there should be a separate hearing to determine the fortification application. There are already many interlocutory applications in the Petition proceedings to be resolved between the parties. I am minded to direct that the fortification application to be disposed of together with the remaining part of the Summons. 

49.  Mr Joffe agrees to this course but he nevertheless presses for an order for fortification for the interim period in view of the dire financial consequences flowing from the Injunction.

50.  On the available evidence, I am unable to accept the relevant defendants’ application for interim fortification. I am not impressed with the evidence of the 1^st defendant, which in my view consists of mere assertions not supported by solid evidence. 

51.  There is no credible evidence as to how much working capital that the 3^rd defendant and Everglory Macau presently have. The 1^st defendant does not disclose the quantum of the Funds as well. I am not satisfied on the evidence that they are unable to carry on their trade without the Funds. In addition, the bankers’ alleged advice is not supported by independent evidence and lacks cogency. I cannot be satisfied that the relevant defendants have shown a sufficient level of risk of real loss to order interim fortification.

52.  I therefore refuse to order fortification in the interim. The plaintiff should have 14 days from the date hereof to file and serve its affirmation in opposition to the relevant defendants’ fortification application and the relevant defendants should within 14 days thereafter file and serve their evidence in reply, if any. There shall be no further affirmation without leave and the fortification application is to be determined together with the Summons and the relevant defendants’ application to discharge the Order if it is made.

Conclusion

53.  To sum up, I dismiss the plaintiff’s applications for an order for payment into court and a disclosure order. I further dismiss the relevant defendants’ application for interim fortification of the undertaking.

54.  I am minded to take a broad-brush approach to deal with the costs of these three applications. Since neither parties succeeds in their application(s) and the time spent in the plaintiff’s applications and the relevant defendants’ application was more or less the same, I believe that the fairest order is that there be no order as to costs.  I shall make an order nisi to this effect.

55.  Lastly, I thank counsel on both sides for their helpful assistance.