NATURAL DAIRY (NZ) HOLDINGS LTD (IN PROVISIONAL LIQUIDATION) v. CHEN KEEN (alias JACK CHEN) AND OTHERS

HCA 2218/2017

[2026] HKCFI 460

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2218 OF 2017

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D E C I S I O N

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A.  Introduction

1.  For reasons which will be apparent from below, and which include the connection with related criminal proceedings, this matter has proceeded slowly through the interlocutory process, though a Case Management Conference is fixed for 12 February 2026.

2.  In the meantime, the present consideration relates to matters only as between the Plaintiff (“P”) and the 1^st Defendant (“D1”) and the 3^rd Defendant (“D3”).

3.  On 31 December 2025, I heard two summonses:

(1)  D1’s summons dated 5 April 2024, seeking security for costs up to the exchange of witness statements in the estimated sum of HK$4.4 million; and

(2)  D3’s summons dated 11 November 2019 but amended on 2 May 2024, seeking to strike out selected paragraphs of the P’s Amended Statement of Claim (“ASOC”).

4.  At the hearing, P was represented by Ms Sharon Yuen of Counsel. D1 and D3 were each represented by Mr Brian Fan of Counsel. At the end of the hearing, I reserved my decision.

5.  This is my Decision.

B.  Background

6.  In so far as is necessary, I can set out the material background relatively succinctly. Though I have been given much more of the detail, I do not think it needs to be rehearsed for the purposes of this Decision.

7.  P is a Cayman Islands-incorporated company which was listed on the Hong Kong Stock Exchange (“SEHK”). Trading in P’s shares was suspended from 7 September 2020 until its listing was cancelled on 28 November 2022.

8.  D1 was the Joint Chairman, Executive Director and CEO of P from 7 May 2009 to 15 September 2009. It is P’s case that D1 remained a shadow or de facto director of P thereafter.

9.  D3 is D1’s wife.

10.  The 2^nd Defendant (“D2”) was a business associate of D1. At all material times, she was the sole director and owner of UNBZ Trustee, the vehicle used as the vendor in the material transaction acquisition (“Acquisition”).

11.  The 4^th Defendant (“D4”) is a Hong Kong company controlled by D1. The 5^th Defendant (“D5”) is a BVI company owned and controlled by D2.

12.  In these proceedings, P (under the control of Joint Provisional Liquidators) claims against D1 for breach of fiduciary duties with respect to the Acquisition entered into by P with entities under the control of D2 to acquire a number of dairy farms and assets to operate a dairy business in New Zealand.

13.  In short, in May 2009, entities under the control of D2 purchased the dairy assets for a total consideration of NZ$259 million. It is P’s case that P was not aware of this, but D1 (by then a director of P) was aware of this. Thereafter, P entered into agreements with entities under the control of D2 to acquire the same dairy assets in New Zealand at NZ$500 million – i.e. at almost double the price. The allegation is that D1 stood in a position of undisclosed conflict, secretly working with D2 to sell the assets to P at a highly inflated price.

14.  There is no dispute that P raised substantial funds for the Acquisition including through convertible notes and an optional bond, aggregating HK$955 million (“CDO Funds”).

15.  P claims substantial funds belonging to P and raised by P for the Acquisition had been paid out and diverted, of which a significant amount ended up with D1 and/or D3. At its most basic, the allegation is that the Acquisition was effectively a scheme operated by D1 and D2 to siphon off funds from P specifically raised for the Acquisition. It is said that various conduits were used to seek to conceal the misappropriation, and that some funds were used to purchase New Zealand properties (“NZ Property”) and discharge mortgages on property (“Mortgaged Properties”). Of the sums transferred to D3, of particular relevance are (1) the sum of HK$68.95 million (“D3 HK$68.95m Payment”) (routed through D4’s two accounts and D1’s personal solicitors) and (2) the sum of HK$24,221,420 (“D3 HK$24.2m Payment”) (routed through Nation Resources Ltd, a subsidiary of P).

16.  P also claims against D2 and the other Defendants for accessory liability in assisting D1 in his alleged breach of fiduciary duties (knowing receipt and dishonest assistance), and in conspiracy against all Defendants.

17.  These underlying events have also given rise to criminal proceedings.

18.  D1, D2 and an Eric Yee faced two counts of conspiracy to defraud the Stock Exchange of Hong Kong Ltd and P. D1 also faced a further count of dealing in property known or believed to represent the proceeds of an indictable offence, with the property said to be the alleged proceeds of the conspiracy to defraud. The accused were convicted after trial on both counts of conspiracy to defraud, and D1 was also convicted on the money laundering offence.

19.  Following an unsuccessful appeal to the Court of Appeal (“CA”), there was a further appeal to the Court of Final Appeal (“CFA”). The convictions were quashed and a retrial was ordered: see (2019) 22 HKCFAR 248. The basis of quashing the convictions was as a result of a duplicity problem arising from a situation of two conspiracies charged with different dishonest means alleged in a single count. It is of note that the CFA decided the final appeal without needing to address and decide two other grounds of appeal advanced, merely noting that they had some merit when leave was granted to bring the appeal.

20.  Upon retrial, D1 was convicted on four counts of conspiracy to defraud. He was sentenced to 7 years and 3 months imprisonment. But, D1 was acquitted of the additional count of money laundering.

21.  The matter is under an appeal, which has been argued and heard in January 2025, but where judgment is awaited. The appeal included two grounds similar to those on which the CFA had previously granted leave, but which it did not see the need to resolve in light of its rulings on other matters. It can also be noted that Macrae VP granted bail pending appeal to D1.

22.  D3 was charged with the offence of money laundering. She was convicted, but her conviction was quashed by the CA. At the re-trial before another District Judge, D3 was subsequently acquitted of all charges.

C.  Material Procedural History

23.  In 2019, D3 issued a summons seeking security for costs, which was ultimately ordered.

24.  D3 also issued a summons seeking to strike out certain paragraphs (“Impugned Paragraphs”) of the then statement of claim (SOC”). Originally, D3’s strike-out application was fixed for hearing on 29 September 2020. However, on the eve of the hearing, P was ordered to pay security for costs to D3, and P’s action against D3 was stayed pending payment. Consequently, the hearing was adjourned.

25.  In the meantime, on 7 October 2020, DHCJ Eva Sit SC (as she then was) heard an application for worldwide Mareva injunctions and proprietary injunctions against D1 to D4. She held (“Injunction Decision”) that a good arguable case had been established by P, and that it was appropriate in the circumstances to grant injunctive relief.

26.  Specifically, she held that a good arguable case had been established by P (1) against D1 for breach of fiduciary duty, to the extent of HK$776.07 million of the CDO Funds; (2) against D2 for dishonest assistance, to the same extent as D1 given her assistance was with respect to the entering of the SPA for the Acquisition and the receipt of consideration payable thereunder; and (3) against D3 for dishonest assistance, with respect to the D3 HK$68.95m Payment and her shares of the NZ Property and the Mortgaged Properties.

27.  Therefore, DHJC Eva Sit SC granted: (1) worldwide Mareva injunctions against (a) each of D1 and D2 up to HK$776.07 million, and (b) D3 up to the value of the HK$68.95m payment and her share of the NZ Property and Mortgaged Properties; and Proprietary injunctions against (a) D1 with respect to his share in the NZ Property and the Mortgaged Properties, and (b) D3 with respect to her share in the NZ Property and the Properties and the D3 HK$68.95m payment.

28.  In June 2022, P applied to amend its SOC, including to parts possibly significant to the present application. Neither D1 nor D3 objected to these amendments, which were therefore made in the ASOC. D1 and D3 also proceeded to file consequential amendments.

D.  D3’s Strike-Out Application

D.1  Introduction

29.  Following the amendments to the pleadings, D3 later amended and restored her strike-out application.

30.  As a result, D3 seeks an order that §§130-132, §146, §§194-199, and §§217-220 of the ASOC be struck out on one or more of the following grounds: (1) they disclose their reasonable cause of action; and/or (2) they are scandalous, frivolous or vexatious; and/or (3) they may prejudice, embarrass or delay the fair trial; and/or (4) they are otherwise an abuse of process of court.

31.  Those grounds are, of course, the well-known grounds provided for in Rules of the High Court (“RHC”) Order 18 rule 19.

D.2  Applicable Principles

32.  The principles generally applicable on an application made under that rule are trite, and can be traversed succinctly. Striking out is only for plain and obvious cases. There should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The Court does not seem to decide difficult points of law in striking out proceedings. If the Court does not think the matter to be clear beyond reasonable doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious or obviously unsustainable, then, there should be no striking out.

33.  No evidence is admissible under the “no reasonable cause of action” ground. The Court simply looks at the pleading, assumes the truth of the facts as they are stated, and determines whether the claim is actionable in law. A point is “frivolous” when it is incapable of reasoned argument, without foundation or cannot possibly succeed. The “prejudice, embarrass and delay fair trial” ground applies to the situation where a party introduces a pleading which is unnecessary, and which tends to prejudice, embarrass or delay the trial of the action. The power to strike out for abuse of process connotes that the process of the Court must be used bona fide and properly and must not be abused. A prime example would be where the plaintiff begins a case without solid foundation hoping that something will turn up in the course of the proceedings.

34.  As to the pleading of fraud or conspiracy, it is settled that it must be distinctly pleaded with utmost particularity and distinctly proved, and it is not permissible to leave such pleas to be inferred from the facts.

35.  Indeed, in The New China Hong Kong Group Limited (In Creditors’ Voluntary Liquidation) v Ng Kwai Kai, Kenneth [2011] HKCFI 519 at §65, Fok JA (as he then was, sitting as an additional Judge of the Court of First Instance) also stressed the importance of particularizing facts properly in cases of fraud or dishonesty. Not only is it trite that fraud or dishonesty must be "distinctly alleged and as distinctly proved" and that it must be "sufficiently particularised", particulars of facts which are consistent with honesty are not sufficient. It is not open to the Court to infer dishonesty from facts which have not been pleaded or from facts which have been pleaded but are consistent with dishonesty.

36.  But it has also been pointed out that the practical reality of modern commercial life must also be considered. Fraud and conspiracy by their very nature are clandestinely difficult to uncover, so quite often proof is not readily obtained. Therefore, in an application to strike out a fraud or conspiracy claim, the Court will look at the application with care to these considerations. The broad question for the Court is whether from the facts as pleaded it can be argued that the defendants efficiently know the plaintiff’s case on the conspiratorial combination or agreement that they have to meet: see, for example, Ubiquiti Networks International Ltd v Chan Kim Chuen (unreported, HCA 1606/2016, 26 May 2017) at §81.

37.  I also keep in mind – as Ms Yuen invites me to – the observations of DHCJ Douglas Lam SC in Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd (unreported, HCA 3023/2016, 2 May 2017) at §50, namely that a case brought by a plaintiff who seeks to trace and recover monies paid to the defendants as a result of an apparent fraud, and which monies have been subsequently onward transferred, may differ somewhat from ordinary commercial disputes where the court has to decide between two competing versions of events. The plaintiff may have no personal knowledge of the circumstances for the reasons for the money transfers, and whether the recipients are part of the apparent fraud or in fact innocent parties. The Court may need to form a broad brush view based on inherent improbabilities by reference to the available contemporaneous materials.

D.3  Preliminary Objections

38.  Ms Yuen raised 2 preliminary objections to the D3 Strike-Out Application, namely that:

(1)  the timing of D3’s application is peculiar; and

(2)  D3’s attempt to strike out the dishonest assistance claim against her in its entirety on the “no reasonable cause of action” limb is inconsistent with the Injunction Decision.

39.  I will first deal with these preliminary objections, each in turn.

D.3.1  Timing of Application

40.  After P provided security for D3’s costs in October 2020 (and the strike-out hearing was subsequently re-fixed for 20 January 2021), on 17 November 2020 D3 proposed to adjourn that hearing sine dine on the basis that she did not have sufficient funds to proceed on the strike-out hearing.

41.  In June 2022, P applied to amend its SOC, including proposed amendments to the paragraphs which D3 previously sought, and now continues to seek, to strike out. D3’s Strike-Out Application was not restored for over 3 years until April 2024, when D3 applied to amend the reference to SOC in the Summons to the ASOC.

42.  Ms Yuen submits that, since D3’s Strike-Out Application was extant at the time P applied to amend its SOC, D3 should have opposed the amendment application if D3 had considered the proposed amendments to be unsustainable: see Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at §25, which states that leave to amend is readily granted before the trial unless it can be demonstrated that the new claim based on the proposed amendment is bound to fail.

43.  Ms Yuen argues that proper procedure dictates that the amendment application would then be adjourned for argument together with a strike-out application. If the proposed amended pleadings should not be struck out, then the application to amend should be allowed and consequently the application to strike out should be dismissed. Therefore, Ms Yuen submits, as D3 did not oppose the amendments to the SOC, she should not now be allowed to raise these oppositions at the strike-out application stage.

44.  On the other hand, Mr Fan suggests that this is equivalent to an argument of res judicata, which does not apply to interlocutory proceedings, at least not with the same force. Whether D3’s Strike-Out Application constitutes an abuse of process depends on the particular circumstances of the case upon a broad merits-based assessment. Further, the point having been raised only in argument, the Court can take into account the lack of opportunity for D3 to explain in evidence why she did not oppose P’s application to amend the SOC in 2022, or raise such objections at the Injunction hearing: see Universal Corporation v Kazuo Okada[2020] HKCFI 1406 at §43. Mr Fan suggests there may yet be the possibility of an innocent explanation for D3 restoring D3’s Strike-Out Application by reason of D3’s indication that she did not have the funds to secure legal funding in 2021, when the application was adjourned and before the SOC was amended.

45.  Further, it is not the case that D3 unsuccessfully contested the amendment application. Rather, D3 did not oppose the amendments at all at that stage; as such, this is “one level removed from the classic case of Henderson abuse where there was a lost, contested application”. Whilst D3 could have opposed the amendments, even if D3 had done so the Court would have assessed the strike-out application on the draft amendments anyway. Hence, Mr Fan submits, there is no practical or substantive difference between re-raising the point at the amendment stage and raising it now in D3’s Strike-Out Application. Mr Fan points me to the principles laid out by Popplewell LJ in Koza Ltd v Koza Altin Isletmeleri AS [2021] 1 WLR 170 at §42 (first part):

42. The Henderson and Hunter principles apply to interlocutory hearings as much as to final hearings. Many interlocutory hearings acutely engage the court’s duty to ensure efficient case management and the public interest in the best use of court resources. Therefore the application of the principles will often mean that if a point is open to a party on an interlocutory application and is not pursued, then the applicant cannot take the point at a subsequent interlocutory hearing in relation to the same or similar relief, absent a significant and material change of circumstances or his becoming aware of facts which he did not know and could not reasonably have discovered at the time of the first hearing. This is not a departure from the principle in Johnson v Gore Wood & Co [2002] 2 AC 1 that it is not sufficient to establish that a point could have been taken on an earlier occasion, but a recognition that where it should have been taken then, a significant change of circumstances or new facts will be required if raising it on a subsequent application is not to be abusive. The dictum in Woodhouse v Consignia plc [2002] 1 WLR 2558 that the principle should be applied less strictly in interlocutory cases is best understood as a recognition that because interlocutory decisions may involve less use of court time and expense to the parties, and a lower risk of prejudice from irreconcilable judgments, than final hearings, it may sometimes be harder for a respondent in an interlocutory hearing to persuade the court that the raising of the point in a subsequent application is abusive as offending the public interest in finality in litigation and efficient use of court resources, and fairness to the respondent in protecting it from vexation and harassment. The court will also have its own interest in interlocutory orders made to ensure efficient preparations for an orderly trial irrespective of the past conduct of one of the parties, which may justify revisiting a procedural issue one party ought to have raised on an earlier occasion. …

46.  However, Ms Yuen points me to the latter half of §42, which states:

42. … There is, however, no general principle that the applicant in interlocutory hearings is entitled to greater indulgence; nor is there a different test to be applied to interlocutory hearings. In every case the principles are those identified in paras 30–40 above, the application of which will reflect that within a single set of proceedings, a party should generally bring forward in argument all points reasonably available to him at the first opportunity, and that to allow him to take them serially in subsequent applications would generally permit abuse in the form of unfair harassment of the other party and obstruction of the efficacy of the judicial process by undermining the necessary finality of unappealed interlocutory decisions.

47.  But I am inclined to agree with Mr Fan. I do not think D3 is asking for “greater indulgence” at this interlocutory hearing to rehear matters that were previously decided. Rather, P’s application to amend the SOC was unopposed by D3, and it can be said that the points now raised are raised for the very first time.

48.  Moreover, I note that the substance and target of a number of D3’s pleading objections do not actually relate to amendments made by P in the ASOC. Firstly, §146 of the ASOC was not the subject of substantive amendments, nor was it the subject of P’s application for injunction. Secondly, the crux of D3’s objections to ASOC §§194-199 relate to phrases which were present prior to the amendments, i.e. “knew or ought reasonably to have known or suspected” at ASOC §194 and “receiving the HSBC Payments and/or permitting the Chen Property Payments to be used to purchase the NZ Property and pay down the loans of the Mortgaged Property” at §195. Similarly, part of D3’s objections to §§217-220 relates to the plea that “D1 and D3 were reckless as to whether their actions would cause P loss and damage”, which again was present prior to the amendments. Hence many, if not all, of these claims carry the same substantive effect even if the amendments were not present.

49.  In any case, the parties came fully prepared to argue the merits of D3’s Strike-Out Application. I would not shut out consideration of it on the basis of this preliminary objection.

D.3.2  Inconsistent with Injunction Decision

50.  Ms Yuen also contends that D3’s attempt to strike out the “dishonest assistance” claim (§§194-199 ASOC) in its entirety on the “no reasonable cause of action” limb is inconsistent with the Injunction Decision, on the basis that a good arguable case was found by DHCJ Eva Sit SC against D3 for the dishonest assistance claim in the Injunction Decision, and D3 should not be allowed to re-litigate the merits of the entirety of P’s the dishonest assistance claim.

51.  Ms Yuen submits that D3, in resisting the injunction application, had argued that the particulars of knowledge pleaded at §§194-195 are insufficient for dishonest assistance. In granting the worldwide Mareva injunctions and proprietary injunctions against D3, DHCJ Eva Sit SC found a good arguable case had been established against D3 for the dishonest assistance claim, with respect to the HK$68.95m Payment as well as D3’s share of the NZ Property and the Mortgaged Properties.

52.  Further, D1 and D3 sought leave to appeal against the Injunction Decision. But, on 1 April 2021, Madam Recorder Eva Sit SC dismissed the application. Whilst D1 subsequently sought leave to appeal from the Court of Appeal – see Natural Dairy (NZ) Holdings Ltd v Chen Keen (Alias Jack Chen)[2022] HKCA 246 – D3 did not seek further leave to appeal the Injunction Decision.

53.  Ms Yuen submits that, in the circumstances where 5 years have passed since the Injunction Decision, deciding that the dishonest assistance claim against D3 has met the threshold of “good arguable case”, it must logically meet the lower “not bound to fail” threshold for resisting a strike-out application.

54.  Conversely, Mr Fan submits that the “good arguable case” threshold is different from that required for a finding of “no reasonable cause of action” for the purposes of strike-out: see Zimmer Sweden AB v KPH Hong Kong Ltd (unreported, HCA 2264/20130, 2 May 2014) at §§84-86. As I understand it, the distinction drawn is between the considerations involved in an injunction hearing (which invariably take into account the “totality of evidence” provided by the parties and not just the pleading), and procedural hearings such as strike-out applications (which are concerned, on the no reasonable cause of action limb, with the pleading itself). Here, D3 is challenging what is said to be a defective pleading, rather than challenging the merits of the case pleaded (which would be considered on the evidence).

55.  I accept this as a possible way to distinguish between the substantive way in which injunction applications are dealt with as opposed to strike-out applications. But, it seems to me that the procedural history of this case does not give rise to any complete bar to the hearing of the current strikeout application. Again, the matter has been fully argued, and I will deal with it. I shall address each challenged area as follows.

D.4  §§130-132 of the ASOC

56.  At the hearing, Mr Fan accepted that it is not plain and obvious that §§130-132 of the ASOC, which deal with the reflective loss claim, should be struck out, and D3 would no longer contest this issue.

57.  Therefore, in so far as it is necessary for me formally to do so, I dismiss the application as regards those paragraphs.

D.5  §146 of the ASOC

58.  D3 seeks to strike-out §146 and Schedule 8 referred to in it on three grounds under Order 18 rule 19(1)(a), (c) and (d) – namely that it discloses no reasonable cause of action, and/or it may prejudice, embarrass or delay the fair trial of the action, and/or it is otherwise an abuse of the process of the court.

59.  §146 in full – together with the heading immediately above it – is as follows:

Other payments made to the 3^rd Defendant’s HSBC Account

146. The JPL’s investigations have revealed further substantial payments into the 3^rd Defendant’s HSBC Account between 22 June 2010 and 19 October 2011 totaling HK$114,400,749.18 (approximately NZ$19,721,300). A full list of the payments is set out in Schedule 8. The JPLs are continuing to investigate the source of these payments to establish whether they are connected to the misappropriation of the Acquisition Funds. The Plaintiff reserves the right to further amend this Amended Statement of Claim accordingly.

60.  Schedule 8 of the ASOC sets out the particulars of payments made to D3’s HSBC Account, totalling 15 payments between 22 June 2010 and 19 October 2011 (“15 Payments”). D3 alleges that none of the 15 Payments were from P, and that a payment of HK$500,000 was said to be from an “Unnamed Person”.

61.  Mr Fan submits that:

(1)  P has made no attempt to plead a reasonable cause of action with respect to the 15 Payments received by D3 from third parties, nor has P pleaded any cause of action in the 6 years that have passed since D3’s strike-out summons was first taken out in 2019.

(2)  P’s assertion that there were doubts on the “substantial payments” received by D3 (expressed through P’s deponent Jong’s 3^rd affirmation) is irrelevant because affirmation evidence is irrelevant to a challenge that there is no reasonable cause of action pleaded.

(3)  P’s claims – that D3 makes no attempt to explain the basis on which she received such substantial payments, and that at the very least D3 should be required to give discovery in relation to these receipts – are a ‘fishing expedition’ by P, hoping to discover something at discovery or cross-examination.

(4)  That is a matter which may prejudice, embarrass or delay a fair trial, and amounts to an abuse of process.

62.  On the other hand, Ms Yuen submits that some of the 15 Payments under Schedule 8 relate to payments D3 claims to have received from D4 as consideration under the Transfer Agreement (as defined in the pleading), and are therefore relevant to D1 and D3’s pleaded case on the Transfer Agreement. It is further said that the HK$50 million payment into D3’s HSBC account on 2 September 2010 – see Schedule 8 item (d) – was a repayment of a bridging loan extended to D3’s acquaintance Lisa Du. Ms Yuen submits that the veracity of D3’s account in relation to the HK$50 million transfer is relevant to the true circumstances surrounding the alleged D3 Loan Agreements between 13 September 2010 and 17 November 2010, which is close-in-time to the alleged 50M Loan, and similarly interest-free and without security.

63.  First, I note that §146 of the ASOC seems to exist as a standalone paragraph, independent of any of P’s pleaded causes of action. It appears separately under the heading “Other payments made to the 3^rd Defendant’s HSBC Account”, and is the only paragraph under that heading – though I note that this heading is perhaps one of many of a similar ‘level’ below the ‘higher level’ heading of section E of the ASOC ‘USE OF ACQUISITION FUNDS’, which begins at §107 and continues to §146. This in turn is immediately before section F of the ASOC which seems to go on to set out the particular claims against the defendant on particular causes of action advanced.

64.  Ms Yuen concedes that §146 is not meant to disclose a cause of action on its own, but she submits that some of the 15 Payments set out in Schedule 8 relate to payments received by D3 under the Transfer Agreement, which is said by P to be a key aspect of D1 and D3’s defence. She points to (1) an already pleaded case in the ASOC on the Transfer Agreement, which is said to be one of a series of agreements which were not bona fide, genuine or legitimate commercial transactions, but sham transactions to conceal the misappropriation of Acquisition Funds from P and (2) other matters pleaded as regards D3’s HSBC account. As such, Ms Yuen submits this is not a ‘fishing expedition’, because the transactions are plainly relevant to D1 and D3’s pleaded case. Hence, contrary to D3’s assertions, it is not plain and obvious that the 15 Payments in Schedule 8 are completely irrelevant/immaterial, and therefore §146 should not be struck out.

65.  However, §146 is the only time these transfers are referred to in the ASOC. It is odd – and it seems to me to be incorrect – to claim that §146 relates to any pleaded cause of action, where there are no further references to the 15 Payments, either in the particulars specifically against D3 or more generally against other defendants to this action. Indeed, on its face, §146 reads like the expression of suspicion about the 15 Payments and the attempted reservation of the right actually to plead something more than mere suspicion on some future occasion, if anything turns up upon further investigation. In other words, this reads to me expressly like an intended ‘place-holding’ pleading, pending anything which might turn up in future, including from a ‘fishing expedition’.

66.  Further, although Ms Yuen points to the HK$50 million transfer as allegedly relevant to the “true circumstances surrounding the Alleged D3 Loan Agreements between 13 September 2010 and 17 November 2010” due to their proximity in time and the similarity of circumstances in which the transfers were made/received, this is not actually pleaded in the ASOC.

67.  I have already noted that it is an abuse of process to start a case without a solid foundation, hoping that something will turn up in the course of the proceeding for example at the stage of discovery or on cross-examination, or to stop time from running: see The New China Hong Kong Group Limited (In Creditors’ Voluntary Liquidation) v Ng Kwai Kai, Kenneth [2011] HKCFI 519 at §70.

68.  I am also inclined to agree with Mr Fan (on preliminary examination of Schedule 8) that P is not the payer of any of the 15 Payments there set out. Any allegations that the 15 Payments were linked to any alleged misappropriation would be material facts which should have been pleaded with respect to the specific sum said to be misappropriated from P.

69.  It is difficult for the other parties to know precisely the nature of the case that they have to meet on §146. As I say, on the face of the pleading, P merely questions the purpose of the 15 Payments without full knowledge of the circumstances in which the payments were received, and it does appear that P is attempting or hoping to ascertain the way in which these payments are related to P’s causes of action before properly pleading it in the ASOC. That is a situation where, as Mr Fan rightly points out, P is trying to “salvage” the Schedule 8 Payments by submitting that they relate to the Transfer Agreement (to which P is not a party). As such, I find that ASOC §146 discloses no reasonable cause of action and is an abuse of process.

D.6  §§194-199 of the ASOC

70.  §§194-199 of the ASOC read as follows:

194. As set out above, the 1^st Defendant committed numerous breaches of the fiduciary duties which he owed to the Plaintiff by causing and/or procuring and/or permitting the Acquisition Funds to be used to make the Chen Family Payments. At all material times the 3^rd Defendant knew or ought reasonably to have known or suspected that the 1^st Defendant was acting in breach of duty in doing so. Paragraph 170 above is repeated.

195. The 3^rd Defendant assisted the 1^st Defendant in the commission of the aforementioned breaches by (i) receiving the HSBC Payments and/or permitting the Chen Property Payments to be used to purchase the NZ Property and pay down the loans on the Mortgaged Properties and/or (ii) facilitating the concealment of the misappropriation and/or diversion of the Acquisition Funds to make Chen Family Payments from the Plaintiff, including by entering into the Transfer Agreement and the D3 Loan Agreements to conceal the aforesaid by dressing up the making of the HSBC Payments as genuine and/or legitimate commercial transactions.

196. At all material times, the 3^rd Defendant’s actions transgressed the ordinary standards of honest behaviour and she acted dishonestly in rendering assistance to the 1^st Defendant’s breaches of duties and/or trust. The dishonesty of the 3^rd Defendant is apparent or is to be inferred from the fact that she well knew or turned a blind eye to or was recklessly indifferent to the fact that the 1^st Defendant acted in breach of duties and/or trust by causing and/or procuring and/or permitting the Acquisition Funds to be used to make the Chen Family Payments. The Plaintiff also relies on the matters pleaded at paragraph 170 above.

197. By reason of the wrongful acts of the 3^rd Defendant as set out above, the Plaintiff has suffered loss and damage, including in particular the amount of the HSBC Payments and the Chen Property Payments. In the premises, the 3^rd Defendant is liable to pay damages and/or equitable compensation in respect of the loss and damage suffered by the Plaintiff as a result of the dishonest assistance of the 3^rd Defendant as pleaded above.

198. Further or alternatively, by reason of the facts and matters pleaded above, the 3^rd Defendant is liable to account to the Plaintiff as constructive trustee for any benefits she personally received as a consequence of dishonestly assisting the 1^st Defendant in relation to the Acquisition including any commissions or profits (of whatsoever nature) she has received consequent thereon. Further, or alternatively, the Plaintiff is entitled to recover those benefits by following and/or tracing the same. The Plaintiff will seek an account of all sums due to it (further or alternatively an inquiry into the same) together with an Order for the payment of all sums due on the taking of such account (and/or inquiry).

199. Further or alternatively, the Plaintiff is entitled to a declaration that all the Acquisition Funds received by the 3^rd Defendant and/or the proceeds thereof and/or any assets on which such sums or any part thereof have been expended constitute in equity the property of the Plaintiff and an order that the 3^rd Defendant do transfer to the Plaintiff, or procure the transfer to the Plaintiff of, any assets to which the Plaintiffs are beneficially entitled and which assets in whole or in part may be said to represent or constitute the product of the Acquisition Funds.

71.  Because of the references back to §170, it may be helpful to set out the content of that paragraph as well:

170. As also above pleaded, at all material times, the 3^rd Defendant was the wife of the 1^st Defendant and a housewife. The 3^rd Defendant knew, or reasonably ought to have known or suspected that:

(a) she had no equitable or legal right to receive any part of the Chen Family Payments; and

(b) the 1^st Defendant had no equitable or legal right to receive any part of the Chen Family Payments; and/or

(c) the Chen Family Payments constituted breaches of duty and/or breaches of trust on the part of the 1^st Defendant and/or were not in the best interests of the Plaintiff and/or were not made for the proper purposes of the Plaintiff’s business.

More specifically, as pleaded above (i) the 3^rd Defendant is a party to the Transfer Agreement together with the 4^th Defendant (owned and/or controlled by the 1^st Defendant), which is a sham to conceal the misappropriation of Acquisition Funds; and (ii) the 3^rd Defendant knew that she did not contribute her own funds to make the D3 Loans, and/or new, turned a blind eye to or was recklessly indifferent to the fact that the source of the D3 Loans was the Acquisition Funds.

72.  These paragraphs §§194-199 relate to P’s claims against D3 for dishonest assistance arising from the defined Chen Family Payments. D3 seeks to have them all (i.e. the entirety of the dishonest assistance claim) struck out on the bases that (1) the reference to “at all material times [D3] knew or ought reasonably to have known or suspected that [D1] was acting in breach of duty” is fatal to P’s dishonest assistance claim, and hence discloses no reasonable cause of action, and (2) P’s pleading of D3 “receiving the HSBC Payments and/or permitting the Chen property payments to be used to purchase the NZ Property and pay down the loans on the Mortgaged Property” cannot support a case of dishonest assistance.

73.  On the first point, it appears D3 takes particular issue with the wording of “knew or ought reasonably to have known or suspected”. Mr Fan submits that it conflicts with the plea that D3 was dishonest given there was no alleged “actual knowledge”, and therefore it cannot be open to the Court to find fraud. Ms Yuen contends that this is not fatal to P’s case of dishonest assistance on the basis that “imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision”: see Royal Brunei Airlines v Tan [1995] 2 AC 378 at §389H-391B.

74.  In determining whether D3 was acting dishonestly for the purposes of striking out, one can only look to the pleadings alone on an assumption that the facts pleaded in it are true. As to the approach, see the Royal Brunei Airlines case at §391:

An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise, and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct ... Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time.

75.  Mr Fan points me to Top Point Ltd v K&L Gates (A Firm) [2020] 1 HKLRD 814 at §19, where Lok J held that a “rolled up plea” – i.e. a plea which, on its face, alleges actual or alternative constructive knowledge – is not treated as making two alternative allegations. Instead, it is treated as a single allegation that a person ought to have known. Therefore, where a claim involves an allegation of dishonesty or fraud which requires a plea of actual knowledge, and yet the pleader only makes a rolled-up plea, the claim is liable to be struck out for disclosing no reasonable cause of action or defence or being embarrassing.

76.  But Ms Yuen submits that, not least in light of the Royal Brunei Airlines case, the way in which §194 is pleaded is not fatal to P’s case of dishonest assistance. What D3 ought reasonably to have known about D1’s acting in breach of duty could well be evidence that D3 acted dishonestly by objective standards. Further, actual knowledge is not a prerequisite to dishonesty, and actual knowledge that someone is acting in breach of duty or breach of trust is not necessary to ground a claim of dishonest assistance.

77.  I agree with Ms Yuen that the complaint about the wording “ought reasonably to have known” in §194 cannot justify the striking out of the entirety of the dishonest assistance case against D3. It is correct that in the Top Point Ltd case, Lok J held that the plaintiff should have made clear that they were pleading “blind-eye” knowledge and not just carelessness or negligence on the part of the defendants. However, Lok J only struck out the specific wording of “ought to have known” in the pleading, and further granted general leave to the plaintiff to amend their pleading and particularize their case.

78.  It follows, therefore, that a defective pleading as to the knowledge requirement in a dishonesty plea would not necessarily be fatal to P’s pleading as a whole. It is not plain and obvious that this is a pleading that is “unarguably bad” or so beyond the possibility of correction that it should be struck down as a whole.

79.  Further, in China Shanshui Cement Group Limited v Zhang Caikui[2025] HKCFI 1868 at §391-393, I attempted a summary of the following principles on dishonest assistance:

391. The general requirements for dishonest assistance liability are as follows: (1) there is a trust; (2) there is a breach of trust by the trustee of that trust; (3) the defendant induces or assists that breach of trust; and (4) the defendant does so dishonestly.

392. Whether someone has acted dishonestly is to be evaluated objectively, based on the person’s subjective knowledge. It may consist in knowledge that the transaction is one in which he cannot honestly participate, or it may consist in suspicion combined with a conscious decision not to make any enquiries which might result in knowledge. Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court will take into account the circumstances known to the person providing the assistance, his personal attributes such as his experience and intelligence, and the reason why he acted as dead.

393. In this context, ‘blind-eye’ knowledge is equated with actual knowledge. But the imputation of ‘blind-eye’ knowledge requires two considerations to be satisfied: (1) the existence of a suspicion that certain facts may exist, which is to be judged subjectively by reference to the beliefs of the relevant person; and (2) a conscious decision to refrain from taking any step to confirm their existence, where the decision to avoid obtaining confirmation must be deliberate.

80.  Here, on the facts alleged by the pleadings, in the circumstances known to her, D3 ought reasonably to have at the very least inquired as to the nature of the source of the funds that were received by her, and by failing to do so and/or “turning a blind eye” it could very well be argued that D3 acted dishonestly. Ms Yuen also submits that the plea of dishonesty is expressly pleaded at ASOC §196, and that it is clear and unequivocal that P’s case is that D3 “rendered assistance dishonestly, which transgressed ordinary standards of honest behaviour”. I accept that point.

81.  On the second point, Mr Fan submits that mere passive receipt of misappropriated funds or the benefit thereof does not amount to assistance. Therefore, he says, in respect of the HK$68.95m Payment and HK$24,221,420 Payment received into D3’s HSBC Account, and in respect of “permitting Chen Property Payments” in §195 Limb (i), these pleas cannot support a case of actionable assistance, particularly where §195 Limb (ii) pleads a more active form of dishonest assistance, being “facilitating the concealment of the misappropriation and/or diversion of the Acquisition Funds to make Chen Family Payments from the Plaintiff, including by entering into the Transfer Agreement and the D3 Loan Agreements to conceal the aforesaid by dressing up the making of the HSBC Payments as genuine and/or legitimate commercial transactions”.

82.  Ms Yuen submits that this is not a case where D3 is a wholly passive recipient. P’s dishonest assistance case against D3 must be taken as a whole to determine if D3 is merely a “wholly passive” recipient, and §195 Limb (i) cannot be read on its own to justify a finding that that D3 was a “wholly passive” recipient. I accept that submission.

83.  Indeed, it is not plain and obvious to me that P’s case on dishonest assistance should fail at this juncture. I certainly do not see how P’s entire claim in this regard must fail. I resist any invitation, or any temptation, to descend further into the factual arguments by reference to the evidence, which seems to me to fall foul of the requirement that there should be no trial on affidavit. It is not plain and obvious that D3 has not acted dishonestly, and this is a fact-specific matter to be determined at trial.

84.  I have considered whether I should strike out the phrase “ought reasonably to have known or suspected” in §194, but also grant general leave to P to amend §194 better to particularize its case. However, I do not think that is the appropriate course. First, the attack mounted as to the whole of the dishonest assistance claim (even if a particular phrase in the pleadings is used as part of the argument). Secondly, even that wording viewed in the context of the relevant pleading as a whole, I cannot see that the dishonest assistance claim is plain and obviously want to be struck out.

85.  Therefore, I refused this aspect of D3’s Strike-Out Application.

D.7  §§217-220 of the ASOC

86.  §§217-220 of the ASOC are as follows:

217. From approximately 12 March 2010 (at the latest) and after, the 3^rd Defendant wrongfully conspired and combined together by unlawful means with the 1^st Defendant to defraud the Plaintiff by misappropriating and/or diverting the Acquisition Funds of the Plaintiff to make the Chen Family Payments for the benefit of the 1^st and/or 3^rd Defendants and to conceal such fraud and the proceeds of such fraud from the Plaintiff (“D1&D3 Conspiracy”). Pending discovery and interrogatories, the Plaintiff will rely on the matters pleaded at Section E above insofar as the Chen Family Payments are concerned, paragraphs 152 (the breach of duties of the 1^st Defendant) and paragraphs 194 to 196 (the dishonest assistance of the 3^rd Defendant) to prove the existence and terms of the D1&D3 Conspiracy.

218. Pursuant to and in furtherance of the D1&D3 Conspiracy, the 1^st Defendant carried out the breach of duties as pleaded at paragraph 152 above by diverting the Acquisition Funds to make the Chen Family Payments and the 3^rd Defendant dishonestly assisted the breach of duties of the 1^st Defendant as pleaded at paragraphs 194 to 196 above, as a result of which the Plaintiff suffered loss and damage. At all material times, the 1^st Defendant and the 3^rd Defendant knew, or were reckless as to whether their aforesaid actions were unlawful, including whether the receipt and use of the Chen Family Payments constituted unlawful breaches of the duties which the 1^st Defendant owed to the Plaintiff.

219. Further, at all material times, the 1^st Defendant and the 3^rd Defendant knew and intended that their actions would cause the Plaintiff loss and damage. Their intention to injure the Plaintiff is to be inferred from the fact that they took concerted action in furtherance of a common design to carry out the D1&D3 Conspiracy and to conceal the same from the Plaintiff by way of, inter alia, the Transfer Agreement and the D3 Loan Agreements. Alternatively, the 1^st Defendant and the 3^rd Defendant were reckless as to whether their actions would cause the Plaintiff loss and damage.

220. By reason of the wrongful acts of the 1^st Defendant and 3^rd Defendant as set out above, the Plaintiff has suffered loss and damage, including in particular the amount of the Chen Family Payments.

87.  These are pleas which have been significantly amended from those in the SOC at the time the strike-out application was originally launched in 2019. The amendments seek to plead the alleged overt acts relied upon in support of the allegation of an unlawful means conspiracy.

88.  D3 invites this Court to strike out the above paragraphs on the basis that the “overt act” relied upon to plead the unlawful means conspiracy is the alleged dishonest assistance of D3, and the unlawful means conspiracy against D3 fails if the dishonest assistance pleas are struck out. As to this point, my above findings relating to the dishonest assistance claim precludes further argument.

89.  However, Mr Fan also submits that §§217-220 should be struck out for the reason that the plea of recklessness in §219 is inconsistent with the essential element of “intention to cause loss” in unlawful means conspiracy claims.

90.  In the Top Point Ltd case at §43, Lok J distinguished between “ought to have known” and “blind-eye knowledge”, finding that mere negligence or carelessness on the part of the defendant cannot sustain a case on conspiracy to injure the plaintiff. He pointed to the difference between a phrase which suggests carelessness or negligence and one which suggests something like recklessness, or turning a blind eye to something that is quite obvious. He was prepared to accept that ‘blind eye knowledge’ may approximate to ‘knowledge’, but he thought that to avoid confusion and embarrassment, the pleading should be amended to make clear that the plaintiff was not relying on mere constructive knowledge, or carelessness or negligence, to support the claim of conspiracy to injure.

91.  Again in China Shanshui Cement Group Limited v Zhang Caikui[2025] HKCFI 1868 at §354, I also considered the intention to injure element of unlawful means conspiracy as follows:

(1) Knowledge and intention are connected, because the element of intention to injure (and indeed acting in concert) cannot be inferred in the absence of the requisite knowledge.

(2) This is why there must be sufficient identity of object amongst the parties to a conspiracy or combination, even though the advantage to be derived from that same object may not be the same.

(3) Possession of a separate aim may be evidence that the person concerned has not participated in the conspiracy combination at all, at any rate if he acted throughout in ignorance of the true facts.

(4) The suggestion that the Court can adopt a test of “constructive intent”, derived from the fact that the defendant should have known the injury to the plaintiff would ensue, is contrary to the requirement for the unlawful means to be directed towards the plaintiff.

(5) Hence, it is not sufficient in seeking to meet the element of intention to show merely that there was knowledge to found an awareness of the likelihood of particular consequences.

(6) Rather, lesser states of mind, such as an appreciation that the course of conduct would inevitably harm the plaintiff, would not amount to an intention to injure.

(7) The unlawful acts in question must be the instrument by which the loss is inflicted.

(8) Unlawful acts will not be the instrument in this sense, if the unlawful acts are only incidental to, or collateral to, the loss.

(9) This is because the unlawful means must be the means by which the defendant intended the harm to the plaintiff, and the means by which the harm is intentionally inflicted.

92.  Reading Top Point Ltd in conjuncture with China Shanshui Cement Group Ltd, it is clear that the “lower” knowledge requirement of carelessness, i.e. “should have known”, is not enough for a finding of intention to injure. However, that does not mean that only the most stringent finding that a defendant objectively intended to injure the plaintiff would satisfy the requirement. Thus, the standard to be met is one that may lie in the middle. I find that recklessness, in the manner that a defendant knew his acts would likely injure the plaintiff and consciously disregarded such an outcome, would suffice.

93.  Indeed, I agree with Ms Yuen that it is not plain and obvious from E D & F Man Capital Markets v Come Harvest Holdings Ltd [2022] EWHC 229 that recklessness can never satisfy the requisite intention for unlawful means conspiracy. It was held at §489 that, if harm to the claimant was the necessary consequence of the defendant’s actions and the defendant knew this, then although the purpose of the defendant’s action was not to harm the claimant, he/she will be considered as having intended to harm the claimant. Insofar as harm to the plaintiff is the outcome of the defendant’s actions, the defendant need not have deliberately intended to harm the plaintiff.

94.  As such, I dismiss the application to strike out §§217-220.

E.  D1’s Security for Costs Application

E.1  Introduction

95.  D1’s application for security for costs up to the stage of witness statements is made under section 905 of the Companies Ordinance Cap 622 (“CO”). The estimated costs sought by way of security total HK$4.4 million, set out in the expected skeleton bill of costs.

E.2  Applicable Principles

96.  The applicable principles are well known. The Court adopts a two-stage test for security for costs, consisting of the jurisdiction stage and the discretion stage.

97.  If the applicant can show that the Court has jurisdiction to order security under one of the grounds set out in Order 23 rule 1(1)(a)-(d) or section 905 of the CO, the Court will proceed to consider whether it is appropriate in the circumstances of the case to exercise the discretion to make an order for security, and if so in what amount.

98.  The exercise of discretion involves having regard to all of the circumstances of the case. Those circumstances include taking into account the merits of the plaintiff’s claim. Hence, if the plaintiff’s case is genuine and strong, it may be that no order for security would be granted. On the other hand, an order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial. Reference can also be made to considering the defendant’s prospects of success, including whether it has an arguable defence. These are matters to be approached on a broad-brush basis.

99.  Consistent with this broad-brush approach, it is not necessary for the plaintiff to demonstrate a high probability of success in every single cause of action, or on both liability and quantum. Security for costs may be refused where the plaintiff demonstrates a high probability of success on one of the various causes of action, or where there is demonstrated a strong likelihood of success on liability, even though quantum is more questionable.

100.  However, it is not the function of the Court to make a preliminary assessment at deciding the ultimate success or failure of the claim. Therefore, the Court should not delve into the respective merits of the parties’ cases, unless it can clearly be demonstrated one way or the other that there is a high probability of success or failure.

101.  While it is relevant that the plaintiff’s impecuniosity is caused by the defendant, if the allegation depends on the relative merits of the parties’ cases, the Court should avoid delving into the respective merits, again unless it can be clearly demonstrated one way or the other that there is a high probability of success or failure.

102.  Whilst the delay is not in itself a bar to making an application for security for costs, delay is a relevant consideration to the exercise of the Court’s discretion to order security, and if so as to how much.

E.3  Jurisdiction Stage

103.  P is in liquidation, so that there is prima facie evidence that he would be unable to pay the costs, in the absence of evidence to the contrary. Here, there is no evidence to the contrary, and there is also no evidence or assertion that P’s claim will be stifled if ordered to pay security.

104.  I am satisfied that there is jurisdiction to make an order for security for costs, and it is appropriate to consider whether to do so in the exercise of my discretion. To be fair, Ms Yuen does not contest the jurisdiction point, but raised various reasons as to why she says the Court should not exercise its discretion to make any order for security for costs in favour of D1.

E.4  Discretion Stage

105.  In the affidavit evidence filed for P in opposition to the application, the basis of opposition was threefold: (1) P’s claim is bona fide; (2) P has a reasonably good prospect of success; and (3) P’s present want of means is brought about by the conduct of D1. However, all of these points essentially come back to the merits of the claim, and that is the focus of Ms Yuen’s submissions. Assuming the claim is bona fide, she says that P can demonstrate, primarily by reference to the Injunction Decision and D1’s criminal convictions, that P enjoys a high probability of success, at least with respect to its core claims against D1 for breach of fiduciary duties and misappropriation of Acquisition Funds.

106.  As to the benefit of the Injunction Decision, Ms Yuen referred to XY LLC v Jesse Zhu[2024] HKCA 653 at §§22-25. There it was held that:

(1)  The threshold required for the granting of a Mareva injunction was different from the standard to be applied in security for costs applications.

(2)  The former required demonstrating that the applicant has a “good arguable case”, whereas the latter required demonstrating that the applicant has a “very high probability of success”.

(3)  However, the evidence which was found to be capable of satisfying the threshold for granting a Mareva injunction might also be capable of meeting the higher threshold that the plaintiff’s case had a very high probability of success.

(4)  This is a matter of assessment of the evidence at this interlocutory stage, and it does not involve conflating the different thresholds.

(5)  Whether the state of evidence found sufficient for the grant of a Mareva injunction is also sufficient to support a plaintiff’s case with a very high probability of success is a matter of assessment of the evidence concerned.

(6)  Thus, the assessment must be dependent on the particular circumstances and facts of each case.

107.  Ms Yuen submitted – by reference to the findings made in the Injunction Decision – that:

(1)  There is sufficiently cogent evidence to show that D1 was in a position of conflict with respect to P’s entering into the SPA during the period when he was a de jure director between 7 May 2009 and 15 September 2009.

(2)  D1 had a significant indirect interest in the vehicle used to acquire the dairy assets, and was prima facie entitled to commission under the Commission Agreement for the successful sale of them.

(3)  The “Eric Yee 2009 Emails” (as they are described) show that D1 was aware that the financial information about the assets had been manipulated, and D1’s failure to disclose that to P was contrary to P’s best interests.

(4)  D1 had a pivotal role in the structuring of the Acquisition and the terms of the SPA.

(5)  A good arguable case was demonstrated for the misappropriation of the HK$776 million CDO Funds.

(6)  The agreements relied upon in the defence are inconsistent with the case advanced by D1 and D3, and also internally inconsistent.

108.  I acknowledge the findings made in the Injunction Decision, though they were obviously on the different and lower standard than is applicable to the current application. I do not think the Injunction Decision can be read as identifying evidence strong enough to satisfy the higher standard. Nor is this application the proper place for me to have any preliminary run at the merits by revisiting the same evidential materials. Suffice to say that I am not persuaded at this stage of the high probability of success.

109.  As to the criminal convictions, Ms Yuen said D1’s convictions on Counts 3 and 4 are of particular relevance, because they concern D1’s conviction for conspiracy to defraud P and its shareholders. Those counts are:

Count 3: D1 and D2, between the 7^th day of May 2009 and the 19^th day of July 2010, both dates inclusive, in Hong Kong, conspired together to defraud P and its existing shareholders by dishonestly:

(a) Falsely representing that UBNZ Trustee Limited, UBNZ Funds Management Limited and their respective ultimate beneficial owners were independent third parties to P and its connected persons;

(b) Falsely representing that there was no existing or prior relationship or understanding between the said D1 and D2 with respect to the acquisition of the entire issued share capital of UBNZ Assets Holdings Limited by P from UBNZ Trustee Limited;

(c) Concealing or failing to declare that the said D1 had an interest in the Acquisition, in that the said D1 and D2 were parties to an agreement signed between them and Latitude Asia Limited dated the 8^th day of October 2008 to share the commission arising from or received through the sale and purchase of dairy farms owned by the CraFarms Group in New Zealand;

(d) Causing P and its existing shareholders to approve the agreement for the Acquisition;

(e) Causing P to issue and release convertible notes and an optional bond for the payment of the Acquisition.

Count 4: D1, D2 and Eric Yee, between the 7^th day of May 2009 and the 19^th day of July 2010, both dates inclusive, in Hong Kong, conspired together to defraud P and its existing shareholders by dishonestly:

(a) Falsely representing that the gross profit of the properties and fixed assets relating to dairy farms owned by the CraFarms Group in New Zealand for the year ended the 31^st day of May 2009 was approximately HK$92,520,000;

(b) Causing P and its existing shareholders to approve the agreement for the acquisition of the entire issued share capital of UBNZ Assets Holdings Limited by P from UBNZ Trustee Limited;

(c) Causing P to issue and release convertible notes and an optional bond for the payment of the Acquisition.

110.  Ms Yuen contends that the fact there is a subsisting conviction is highly material and relevant to P’s resistance to the current application. She draws to attention section 62(2) of the Evidence Ordinance Cap 8, which states that in any civil proceedings in which a person is proved to have been convicted of an offence by or before any court in Hong Kong, he shall be taken to have committed that offence, unless the contrary is proved. Ms Yuen submits that the conviction proves D1 has acted fraudulently and dishonestly beyond a reasonable doubt, and that the application of the “beyond reasonable doubt” standard satisfies the relatively lower threshold of “high probability of success” required to resist the current application.

111.  But, as Mr Fan points out, RHC Order 18 rule 7A states that any party intending to adduce evidence that a person was convicted of an offence by or before a Court in Hong Kong must include in his pleading a statement of his intention with particulars of (a) the conviction and the date thereof, (b) the court which made the conviction, and (c) the issue in the proceedings to which the conviction is relevant. Yet, it is not in dispute that the convictions have not been pleaded – even though Ms Yuen seeks to explain that is because the convictions upon retrial had not occurred at the time of the amendments leading to the ASOC.

112.  In any event, Mr Fan also asserts that the prospects of the appeal and the uncertainty of future proceedings cannot be discounted. Indeed, this may be why P has not yet sought to amend the claim so as expressly to rely upon the convictions – and will not do so unless and until those convictions are upheld on appeal.

113.  The fact is that the appeal is still underway – in the sense that it has been heard, but not yet determined. Furthermore, as noted above, two of the grounds of appeal that D1 has pursued before the CA relating to Count 3 were previously raised before the CFA, and leave to appeal on these grounds was granted. The final appeal did not actually decide those grounds because it was “unnecessary and undesirable” to deal with them when the conviction was quashed on other grounds. I also note that – whilst the decision is awaited on the substantive appeal – when granting bail pending appeal to both D1 and D2, Macrae VP earlier found that there were several grounds of appeal “which are reasonably arguable, although I am not prepared to say at this stage that any one ground reaches the threshold of a strong likelihood or prospect of success”.

114.  I accept that – at least when properly pleaded – D1’s criminal conviction would certainly relevant to the matter at hand. But again, given the complexity of the case and the fact that appeals are currently pending (and there is a possibility of further appeal on points on which the CFA has already expressed the view as to arguability), this is not a factor which I am prepared to say points to a “high probability of success” in favour of P.

115.  I also do not accept Ms Yuen’s submission that the finding of good arguable case under the Injunction Decision and the criminal convictions of D1 identify strong merits at least with respect to the “fundamental planks” of its case against D1. That seems to me to be merely the same argument put in different form, and would lead to the same response and conclusion.

116.  As to the submission that P’s want of means is brought about by D1’s fraudulent and dishonest wrongdoings committed against P, I think that also involves delving into the merits in a way which is impermissible.

117.  Lastly, Ms Yuen sought to rely upon an ‘after-the-event’ policy (“ATE Policy”) which offers protection to the defendants’ costs position. She submitted that an appropriately framed policy may mean that there is no reason to believe that a claimant will be unable to pay the defendant’s costs. Further, in determining whether security should be ordered, the Court will consider whether the ATE Policy offers sufficient protection for D1, in particular whether the defendant would be entitled to some assurance that the policy is not liable to be avoided for misrepresentation or non-disclosure.

118.  In this case, under the ATE Policy, the insurer shall indemnify P in respect of the defendants’ costs in these proceedings up to the limit of indemnity of US$1.8 million (i.e. around HK$14 million). Even though the Insurer reserves the right to cancel the Policy under Clause 10 of the ‘Conditions’ of the ATE Policy on grounds of misrepresentation or non-disclosure, Clause 10.2 specifically provides that only “failure to provide accurate and complete information [to the Insurer] to the best of [P’s] knowledge” would result in potential cancellation of the policy. This, Ms Yuen submits, militates against the risks of avoidance, particularly when the relevant information was provided to the insurer by independent provisional liquidators. Further, P is prepared to offer an undertaking immediately to notify D1 if P receives any indication from the Insurer that it intends to cancel or terminate the Policy.

119.  Ms Yuen acknowledges that the ATE Policy was not considered to be adequate protection for D3 when the Master ordered security for costs in her favour. But Ms Yuen submits that D1 is in a different position where (apart from the strength of the claim against him) D1 saw fit not to apply for any security for costs where more than five years had elapsed since D3’s application for security for costs. Nor is there any apparent lack of funds explain that long delay where D1 has been represented by King’s Counsel in the lengthy criminal retrial and appealed to the CA.

120.  I accept that there is little explanation for D1’s delay in making the application. On the other hand, his ability to fund his criminal proceedings does not seem to me to be of great relevance, as he is not seeking funding for his civil proceedings; rather, he is seeking protection against his own provision of funding to be provided by the security from P available and circumstances that costs would be ordered against P in favour of D1.

121.  As to the terms of the ATE Policy, Mr Fan brings to my attention Clause 3 of the ‘Conditions’, which permits the ATE Policy to be terminated at any stage if P changes its solicitors, or the solicitors terminate the retainer, unless the Insurer provides consent to the continuance of the policy. It may well be that there has as yet been no change of solicitors since the action commenced, but I do not think the risk is fanciful. As the Master said when granting security for D3’s costs, the landscape of litigation changes with time and it is difficult to anticipate what a plaintiff may do at different stages, so that this is a possibility against which a defendant is entitled to guard.

122.  Further, though I accept that Clause 10.2 might be thought of as being in the ‘middle ground’ of the range of similar types of exclusion, the anti-avoidance protection is therefore relatively limited. It is not possible for P to be sure that it has properly disclosed everything which the Insurer might one day say should have been disclosed – not least in the complex circumstances of this case, with the voluminous documentation involved. Moreover, the Insurer does not have to seek to avoid cover under Clause 10.2 until the claim is made under the ATE Policy. Rather it seems that the adverse costs would only be paid when proceedings are finally concluded, and there is no requirement for continuous monitoring of proceedings. So it may not be possible for P – under its offered undertaking – to notify D1 of the Insurer’s intention to avoid until it is simply too late.

123.  There is also the slight conundrum which arises on Clause 2 of the ATE Policy, which gives the Insurer the right to withdraw its support of the legal proceedings if the insured (i.e. P) is bankrupt, insolvent or becomes bankrupt or insolvent during the period of insurance – and where insolvency is deemed by the appointment of an office holder such as the provisional liquidator in this case. On the face of the ATE Policy, P was described as being in provisional liquidation, and it is unclear why Clause 2 was either not deleted or is present – but that at least raises further doubts about the effectiveness of the policy.

124.  As to the delay, I do not think that is of significant weight on the balance in the circumstances of this case. The fact is that there has been very little progress in the proceedings in the five years since D3 obtained her order for security for costs. This may be for many reasons, including recognition of the impact of the ongoing criminal proceedings, but it means that there is little if any real practical detriment to P even if it had thought that it would not face an application from D1. On the other hand, I do think that the delay may be relevant to, and brought into the discretionary mix for, the assessment of the sufficient quantum of costs to be ordered as security.

125.  Overall, it seems to me that there is reason to exercise my discretion to make an order for security for costs.

E.5  Quantum

126.  The principles concerning quantum of security for costs can be summarised shortly:

(1)  A party is only entitled to sufficient (and not complete) security that would be just in all the circumstances, and not necessarily on full indemnity basis.

(2)  What constitutes sufficient security depends on the circumstances of each case.

(3)  It is for the party seeking security to place materials before the Court to enable the Court to come to a view on the quantum to be ordered as security for costs.

(4)  If the applicant fails to provide a properly itemised bill of costs with the necessary breakdown for each item, the Court may use its own experience to decide on the amount to be ordered as security for costs.

(5)  In some cases, it would be appropriate for a party’s solicitors to involve two fee-earners, but if there would be significant involvement of Counsel at a PTR and trial, the bulk of the solicitors’ professional work would likely be undertaken by the junior fee-earner with the senior fee-earner taking on a supervisory role and managing client/counsel liaison on key matters.

(6)  There is usually no need for more than one fee-earner to be involved to the same extent in correspondence with the client and Counsel.

(7)  When faced with an unhelpful (and especially overly ambitious) skeleton bill, the Court is entitled in an appropriate case to dismiss the application for security on this ground alone – though this must be a consideration of last resort.

127.  As to quantum in this case, there is no need to have regard to that last resort. Instead, I have already mentioned that the latest version of D1’s skeleton bill of costs seeks security in the rounded figure of HK$4.4 million. Of that sum, HK$1 million is attributed to past costs, and HK$3.8 million is attributed to future costs (up to the exchange of witness statements).

128.  Ms Yuen submits, adopting a broad brush approach to the revised skeleton bill, the following main points of criticism that the security sought is excessive:

(1)  the sum of HK$800,000 claimed for “perusal of documents related to HCA 2218 of 2017 (2021)” by Counsel, without any breakdown or explanation, is excessive;

(2)  there are duplicate costs in relation to drafting the Defence and settling the Amended Defence;

(3)  under section B of Part 2 (solicitors’ fees totalling HK$1.254 million), it is excessive to cater for 3 fee earners for each item, with the most senior fee earner taking up an equal if not largest number of hours for each of them.

(4)  While the estimate is alleged to cover only D1’s costs, the overall figure of HK$4.4 million up to the stage of witness statements is excessive when compared to the sum of HK$4 million orders in favour of D3 up to the conclusion of the trial.

129.  Mr Fan submits that the above elements are appropriate in the circumstances of the case. He says the “perusal of documents” costs are necessary due to the number of criminal judgments the defendants were involved in, and the sheer volume and complexity of documents involved. Mr Fan further submits that the setting out of multiple solicitors in the same items is not “duplication”, but rather a division of labour in complex cases resulting in the combined efforts of more than one fee earner. Furthermore, he says that the sum of HK$1 million was already discounted by 50% from the actual total amount of HK$2.1 million to reflect the duplicated work completed for D3 as well. On the other hand, Mr Fan concedes that D1 will not be insisting on the full costs for settling the Amended Defence, so that it can be reduced by half.

130.  I think aspects of the skeleton bill are lacking breakdown or proper explanation, not least in relation to the “perusal” item, and the use of three fee-earners with significant time spent by the most senior of them. On the other hand, I note that the crux of P’s claims lie against D1, and the allegations made are of a serious and grave nature. The sum at issue on the claim is also significant.

131.  Adopting the broad brush approach applicable, and in the exercise of my discretion, it seems to me that the sufficient sum of security that would be just in all the circumstances – up to the stage of witness statements is HK$3 million.

F.  Result

132.  On D3’s Strike-Out Application, I order §146 of the ASOC to be struck out, but otherwise dismiss the application.

133.  On the basis that P has been substantially successful in opposing D3’s Strike-Out Application (where only the standalone §146 has been struck out), I think that costs should follow that broad event. Therefore, I order D3 to pay P’s costs of the application, to be taxed if not agreed.

134.  On D1’s Security for Costs Application, I order P to provide security for D1’s costs from the commencement of this action up to the exchange of witness statements in the sum of HK$3 million, by way of payment into Court on before 6 March 2026. Save in respect of the Case Management Conference already fixed to be heard on 12 February 2026, all further proceedings against D1 in this action be stayed until the ordered security is provided. I also grant liberty to apply.

135.  On the basis that D1 has succeeded on D1’s Security for Costs Application, it seems to me that costs should follow that event. Therefore I order P to pay D1’s costs of the application, to be taxed if not agreed.

136.  Both of the above costs orders are made by me in the first instance on a nisi basis, and will become absolute if no application for variation is made on or before 20 February 2026. Any such variation application as is made will be dealt with on paper.

Ms Sharon Yuen, instructed by Tanner De Witt, for the plaintiff

Mr Brian Fan, instructed by Boase, Cohen & Collins, for the 1^st and 3^rd defendants

HCA 2218/2017

[2023] HKCFI 306

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

________________________

________________________

_____________________________

D E C I S I O N   O N   C O S T S

_____________________________

1.  By the decision dated 5 October 2022 (“the Decision”), this court allowed the application by the 1^st defendant (“Chen”) and the 3^rd defendant (“Ye”) for exceptions to the injunctions against them in part. Direction was given for written submissions in respect of costs of and occasioned by the application. Hence this ruling on costs on paper. The same abbreviations and definitions in the Decision are adopted here.

2.  The plaintiff asks for costs of the application up to the first hearing on 25 May 2022 and at least half of its costs since then. Chen and Ye ask for costs to follow the event on the basis of their success.

3.  The circumstances and outcome of the application were explained in the Decision, which will not be repeated here. Some circumstances relevant to the issue of costs were already rehearsed under the section on costs in the Decision.

4.  The application concerned the Legal Costs Exception and the Mortgage Repayment Exception. The plaintiff opposed both. Whilst the plaintiff was, in view of the nature of the application, entitled to leave it to its opponents to satisfy the court, the fact remained that it has maintained its opposition without real concession up to the ruling of the court. Therefore, the event of the application is still a matter of success or failure of the applying parties. Costs should be considered accordingly.

5.  Regarding the Legal Costs Exception, Chen and Ye achieved no more than half success in terms of items and quantum. Apart from some allowance under this exception, the application in respect of the release of the awarded costs of Chen’s aborted criminal trial then under appeal became academic, and that to vary the proprietary part of the injunction for the purpose of this exception was rejected.

6.  Regarding the Mortgage Repayment Exception, this court considered the circumstances pragmatically in the interest of both sides and, in line with such approach, acceded to the application with qualification that the onerous mortgage liabilities should well be removed by way of sale of the property at the appropriate time. The plaintiff did not labour much in its argument in respect of this exception.

7.  However, there was the adjournment of the hearing. Not only did this court refuse to find that the adjournment was attributable to the fault of the plaintiff, but Chen and Ye also took advantage of the adjournment to enable them to present their case fully, which eventually ended up with the extent of success mentioned in the Decision and above.

8.  Following such event, this court finds that Chen and Ye shall have 50% of their costs of their application up to and including the hearing on 25 May 2022 while the plaintiff shall have their costs of and occasioned by the adjournment on 25 May 2022 including 50% of the costs of the hearing on 5 July 2022. Costs shall be taxed, if not agreed, with certificate for two counsel.

9.  In view of the above, there will be no order as to costs of the submissions on costs. This part of the costs order is nisi, and shall in the absence of application to vary within 14 days become absolute without further order.

Written Submissions by Ms Rachel Lam SC leading Ms Sharon Yuen, instructed by Tanner De Witt, for the plaintiff

Written Submissions by Mr Alan C Y Yung, instructed by Boase, Cohen & Collins, for the 1^st and 3^rd defendants

HCA 2218/2017

[2022] HKCFI 3037

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

________________________

________________________

____________________

DECISION

____________________

1.  The defendants were allegedly involved in a complex conspiracy, for which there are ongoing criminal and civil legal proceedings both in Hong Kong and New Zealand, including the present action. The first three defendants in this action have since 2011 been subject to a property restraint order as well as prosecution in Hong Kong. In the present action, the plaintiff, under liquidation, has also obtained worldwide proprietary and Mareva injunction for some HK$776 million against the first four defendants. Of them, the first three defendants have attempted but failed to obtain exception to the injunction on account of, amongst other things, their legal expenses. They now apply to vary the injunction with a view to obtaining a similar exception.

BACKGROUND

2.  Briefly, the plaintiff, under the control of its joint provisional liquidators (“JPL”), claims against the 1^st defendant (“Chen”) for breach of fiduciary duties with respect to a complex deal which the plaintiff entered into with entities controlled by the 2^nd defendant (“Hao”) in 2009.  The purported deal was to acquire certain dairy assets in New Zealand (“the Acquisition”), which resulted in substantial funds belonging to plaintiff being paid out to various parties including Chen and his wife, the 3^rd defendant (“Ye”).  The last four defendants in this action are also sued for accessory liability in assisting Chen with his breach of fiduciary duties while all the defendants are sued for conspiracy.

3.  On 9 July 2019, the plaintiff applied for worldwide proprietary and Mareva injunction against the defendants.  The application was heard in early May 2020.  By her decision dated 7 October 2020 (“the 7/10/2020 Decision”), DHCJ Eva Sit SC (as the learned Recorder then was) granted the injunction against the first four defendants.

4.  The terms of the injunction will be summarised further below.  Suffice at this juncture to say that the learned Deputy Judge gave direction for the filing of evidence and written submissions for resolving the outstanding issue of exception from the injunction. Chen and Ye did so, seeking exception from the injunction amounts for their legal expenses.

5.  On 9 November 2020, the learned Deputy Judge in writing refused to allow the exception requested (“the 9/11/2020 Decision”).

6.  The background and the procedural history of the present application up to early October 2020 were set out in the 7/10/2020 Decision and the 9/11/2020 Decision.  Pertinently, the learned Deputy Judge was aware that following the arrest and charge of Chen and Ye, the Department of Justice (“DoJ”) has obtained against them a restraint order in respect of their properties pursuant to the Organized and Serious Crimes Ordinance, Cap 455 (“OSCO”) since October 2011 (“the Restraint Order”).  The Restraint Order has since been varied for several times, the last of which was in March 2020.  Against this background, Chen and Ye have since been the subjects of various legal proceedings referred to below.

7.  In 2012, Ye faced criminal trial for money laundering relating to the Acquisition (DCCC 1022/2012).  The trial lasted for 44 days (over a span of 8 months). After her conviction, Ye appealed in 2014 (CACC 299/2014).  The conviction was quashed on appeal, but a re-trial was directed. The re-trial lasted for 27 days.  Ye was eventually acquitted.

8.  In 2014, Chen (and Hao) faced criminal trial for conspiracy to defraud relating to the Acquisition (HCCC 83/2014).  The trial lasted for 105 days. After their conviction, Chen sought to appeal (CACC 172/2016).  After a 10-day hearing, the appeal failed.  Chen took it to the Court of Final Appeal, and eventually managed to have his conviction quashed in August 2019 (FAMC 29/2018 & FACC 26/2018).  However, Chen also had to face re-trial.

9.  The learned Deputy Judge was also aware that in January 2020, the Court of Final Appeal awarded costs to, amongst others, Chen consequential upon the success of his final criminal appeal.  The amount of such costs were subsequently agreed with the DoJ at HK$60 million.  Such costs then paid to Chen were excepted from the Restraint Order, and were said to have been applied towards what had previously been paid for the costs of Chen and Ye in their criminal proceedings, leaving a balance of HK$19,293,048.92 in the client’s account of those acting for Chen.  That formed the sum then sought by Chen and Ye to be excepted from the injunction.

10.  By the time of the 9/11/2020 Decision, Chen and Ye have also filed their application for leave to appeal against the 7/10/2020 Decision, challenging the injunction.

11.  In the 9/11/2020 Decision, the learned Deputy Judge explained her decision to refuse to allow the exception sought:

“The Restraint Order has been in place since October 2011 and it is supposed to cover all of D1/D3's assets. However D1/D3's case appears to be that they have already settled all their legal fees in the 1^st Criminal Proceedings up to the Court of Final Appeal. I also accept P's submissions that the averments in D1's 3^rd Affirmation suggest there have been changes (in some cases accretion) in the assets of D1/D3 for which they have failed to provide any or any sufficient evidence to show their current whereabouts or value, which would clearly be relevant to whether other source(s) of funding are available. Accordingly D1/D3's application for an exception for payment of legal fees in the sum of the Dl/D3 Balance is dismissed.”

12.  There was no appeal against the 9/11/2020 Decision.

13.  Since the 9/11/2020 Decision up to the present application, Chen and Ye were subjects of the following further legal proceedings.

14.  In late February 2021, the criminal re-trial of Chen (HCCC 309/2019) commenced.

15.  In April 2021, following the dismissal by the learned Deputy Judge of the application for leave to appeal against the 7/10/2020 Decision, Chen applied to the Court of Appeal for leave (CAMP 119/2021).  This was dismissed on 23 February 2022.

16.  In mid-June 2021, when the re-trial of Chen in HCCC 309/2019 reached its 65^th day, the trial judge directed the jury to be discharged.  In August 2021, the trial judge made an order awarding costs of the aborted re-trial to Chen. That prompted the DoJ to appeal against such costs decision on the one hand and Chen to apply for stay of further criminal proceedings against him on the other.

17.  By summons filed on 13 December 2021 (“the Summons”), Chen and Ye took out the present application to vary the injunction by excepting from it:

(1)  Spending of HK$60,433,687.22 on legal fees in connection with, inter alia, the proceedings herein and the criminal proceedings under HCCC 309/2019 and any appeals arising therefrom (“the Legal Costs Exception”); and

(2)  Settlement of any outstanding mortgage repayments and future monthly mortgage repayments in respect of the property situated at No. 16 Bridgewater Road, Parnell, Auckland, New Zealand (“the 16 Bridgewater Road Property”) with the Bank of New Zealand together with bank charges and related legal fees (if any) from the trust account held by the Official Assignee in New Zealand under Estate No. 862740 (“the Trust Account”) until further order (“the Mortgage Repayments Exception”).

18.  By the time when the present application was first heard in May 2022, the Court of Appeal has already refused leave to Chen to appeal against the 7/10/2022 Decision to the Court of Appeal.

19.  Further pending legal proceedings were also known by then.

20.  First, the appeal against the order as to the costs of the aborted criminal re-trial of Chen mentioned above was scheduled to be heard by the end of June 2022.  Decision was in fact handed down on 4 August 2022 (ie after the hearing of the present application on 5 July 2022) whereby the costs order was set aside.  In other words, the costs originally awarded to Chen for the aborted criminal re-trial would not come as expected.

21.  Second, following the Court of Final Appeal’s dismissal of Chen’s application to appeal against the dismissal of his application for stay of proceedings mentioned above (FAMC 35/2021 & FAMC 1/2022) in March 2022, the second criminal re-trial of Chen in HCCC 309/2019 is now scheduled to commence in May 2023, and is estimated to last for 90 days.

THE PRINCIPLES

22.  It is common ground that the applicant has the burden to show by sufficient evidence that:-

(1)  he does not have other assets to meet the payment, and the court should not limit its consideration to funds to which the applicant concerned has a legal right, if there are reasonable grounds for believing that he can obtain money otherwise; and

(2)  the purpose of the application is not an attempt to dissipate the assets to frustrate the enforcement of judgment by the plaintiff.

See Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Limited & Ors [2015] EWHC 2748 (at §§34-46); XY, LLC v Jesse Zhu[2018] HKCFI 1485 (at §§20-22).

23.  The plaintiff reiterates that the JPL have no intention of unfairly depriving Chen or Ye of legal representation or unnecessarily preventing them from meeting the mortgage repayments.  It argues that Chen and Ye nevertheless fail to discharge their burden so that the present application ought to be dismissed.

PRELIMINARY

24.  A couple of preliminary points.

25.  First, when the present application came to be heard on 25 May 2022, counsel for Chen and Ye complained about surprise arising out of issues taken by the plaintiff in its written submission, which were said to be withheld from the affirmation in opposition filed on its behalf.  Without ruling on the complaint, but after ascertaining the plaintiff’s stance, this court gave leave to Chen and Ye to file and serve further affirmation evidence in respect of those issues and adjourned the substantive argument of the application.  Hence the second hearing on 5 July 2022.  The further affirmation evidence has now been filed, and further submissions of the parties have been lodged with reference to the further evidence.

26.  Second, in respect of the Legal Costs Exception, the plaintiff argues that the present application is an abuse of process. Reference is made to what the court said in Lau Sin v Wong Mary [2018] 3 HKLRD 202 (at §33), which did not differ in substance from the following explanation in Steven Gee Q.C., Commercial Injunctions (7^th Edition) (at §21-059).  They are summarized by counsel as follows:-

(1)  If a point was open to the applicant on an earlier interlocutory application and was not pursued, it is not open to the applicant to take the point in a later application when there has been no material change of circumstances and no new facts.

(2)  It is an abuse of process of the court to rely upon a set of facts for obtaining a variation and then to apply again shortly thereafter for different relief based on the same facts or when there has been no material change of circumstances.

(3)  When an application is made to the court for a variation, the applicant should put before the court the full picture.  The court will not rehear an application which it has already heard and determined inter partes. A party aggrieved by such a determination will have to appeal.

27.  In the present case, DHCJ Sit SC has considered and spoken on the application by Chen and Ye for the exception from the injunction for the legal costs and expenses on the basis of the circumstances up to the 9/11/2020 Decision.  The learned Deputy Judge noted that Chen and Ye chose not to file any evidence then notwithstanding leave to do so.  Regard was then had to their submission, before the learned Deputy Judge concluded that they failed to discharge the burden in accordance with the principle.  Such conclusion on the basis of the circumstances by then has not been challenged by way of appeal (with application for leave to adduce new evidence).

28.  If Chen and Ye now seek to better their explanation of their case before the learned Deputy Judge and to rely on evidence which could have been but was not adduced then, that may be viewed as disguised attempt to have a “second bite of the cherry”.  That said, this court understands that the present application is based on alleged material change of circumstances, namely that Chen and Ye have since the 9/11/2020 Decision and by now exhausted their financial resource to fund the further criminal proceedings (against Chen) and the proceedings herein (against Chen and Ye) ahead.  This court also notes that for the purpose of considering the present application on this basis, whether and, if yes, what Chen and Ye said in respect of how their legal proceedings so far have been funded remain relevant.  This is apparent from the submission on behalf of the plaintiff as well.  Approached this way, the consideration should leave the parties with no real concern about any room for re-litigation of previously decided issues.

THE LEGAL COSTS EXCEPTION

29.  Concerning Chen and Ye, the proprietary part of the injunction restrains them from, amongst others, disposing of their interest in the landed properties in Hong Kong and New Zealand set out in Schedule 5 to the order.  Ye is further subject to a proprietary injunction in respect of the sum of HK$68,950,000 said to have gone into her bank account with HSBC.

30.  By the Mareva injunction, Chen is restrained from, amongst others, removing his assets up to the value of HK$776,070,000 while Ye is restrained from, amongst others, removing her assets up to the value of NZ$6,497,500 (or its equivalent Hong Kong dollar value) and HK$68,950,000 mentioned above.

31.  In seeking the legal costs exception before DHCJ Sit SC in November 2020 (then for the amount of HK$19,293,048.92), Chen and Ye projected the need but inability to fund (i) the estimated costs in the sum of HK$2,997,840 to be incurred for the criminal re-trial of Chen; (ii) costs incurred in the present action in the sum of HK$450,000; and (iii) estimated costs in the sum of HK$22.2 million to be incurred in the present action.

32.  Now for the present application, Chen and Ye provided the following figures:

Costs incurred and paid

Criminal proceedings concerning Chen
ESCC 1834/2012		HK$19,065,591.78
HCCC 83/2014		HK$62,143,524.85
CACC 172/2016		HK$10,451,424.25
FAMC 29/2018 & FACC 26/2018		HK$7,936,366.67
HCCC 309/2019
1st retrial		HK$38,746,653.75
Application for stay of proceedings		No charge
Appeal to the CFA		HK$1,552,000.00
Criminal proceedings concerning Ye
DCCC 1022/2012 & CACC 299/2014		HK$17,736,804.84
Costs awarded		- HK$11,057,000.00
DCCC 1022/2012 (re-trial)		HK$14,323,057.72
Costs awarded		- HK$9,800,000.00
Proceedings concerning Chen and Ye
HCA 2218/2017 (the present action)		HK$6,112,194.13
New Zealand proceedings		Unknown[1]

Costs incurred but unpaid

Proceedings concerning Chen
HCCC 309/2019
DoJ’s appeal against costs order	HK$2,000,000.00
Proceedings concerning Chen and Ye
HCA 2218/2019 (the present action)	HK$450,000.00

Estimated further costs to be incurred

Proceedings concerning Chen
HCCC 309/2019
2nd re-trial (quoted)	HK$38,000,000.00
Proceedings concerning Chen and Ye
HCA 2218/2017 (the present action)	HK$17,913,000.00

33.  It can be seen that the amount sought for the Legal Costs Exception is substantially more than that sought for the similar exception before DHCJ Sit SC back in late 2020.  More importantly, the plaintiff rightly points out that when the present application was heard before this court on 25 May 2022, Chen and Ye were yet to actually state what assets restrained by the injunction that they are seeking to be released to make up the now requested exception of HK$60,433,687.22.  The sources for the exception was made clear only in the latest affirmation of Chen filed after that hearing, which consist of:

(1)  The balance of HK$18,301,298.92 in Chen’s client account with his solicitors;

(2)  Costs of the criminal re-trial awarded to him estimated at HK$40,000,000; and

(3)  The balance of HK$13,206,236.98 in Ye’s account with HSBC.

34.  Subject to the Restraint Order since 2011, Chen and Ye should expect to be questioned about how they have managed to fund the legal costs incurred and paid, including those arising out of the legal proceedings subsequent to the 9/11/2020 Decision.  The explanation must be supported by evidence as well as full and frank.

The balance in Chen’s client account with his solicitors

35.  The scepticism of the court about the defendants, Chen and Ye included, that led to the grant of the injunction was set out in the 7/10/2020 Decision, which the Court of Appeal refused to disturb.  Insofar as their previous attempt on the basis of the circumstances by November 2020 is concerned, the scepticism the court had about the case of Chen and Ye that led to the refusal of allowing a similar legal costs exception from the injunction was set out in the 9/11/2020 Decision.  This court is in principle entitled to be no less sceptical in the consideration of the present application on the basis of their circumstances since then: see Steven Gee Q.C., Commercial Injunctions (7^th Edition) at §§21-048 to 053.  That the plaintiff subjects the disclosure and explanation of Chen and Ye to forensic scrutiny is only to be expected, as the financial situation of Chen and Ye is for them to tell: see: Tidewater Marine International Inc (above) (at §40).  Explanation by reference to lapse of time, inability to recall or lack of contemporaneous record never works in their favour.

36.  It is emphasised on behalf of Chen and Ye that the plaintiff never alleges breach of the ancillary disclosure order on their part, insofar as assets owned and controlled by them are concerned.  That may probably be relevant to the consideration of some queries raised by the plaintiff which will be discussed below.  However, the duty of full and frank disclosure for the purpose of discharging the burden to obtain the Legal Costs Exception here extends to that of the financial resources of Chen and Ye which could be entirely beyond their ownership or control such as loans.

37.  Indeed, Chen and Ye essentially explain that they have funded their legal costs so far since the Restraint Order and the injunction by obtaining substantial loans from relatives, business partners and friends.  The loans would have to be repaid.  Further, they have now exhausted such source as these third parties are prepared to lend them no more.

38.  The plaintiff argues that the account of Chen and Ye is both inadequate and incredible, notwithstanding effectively second chance to adduce evidence and to explain even the circumstances prior to the 9/11/2020 Decision.  Specifically, the plaintiff takes the following issues:

(1)  There is no evidence as to how Chen and Ye paid certain of their legal costs incurred even on the basis of their own case.

(2)  That the alleged family and friends of Chen and Ye would have advanced all those alleged loans in substantial sums enough to fund the HK$100 million legal costs incurred is inherently and on balance incredible.

(3)  The actual sources of the funds that enabled these alleged family and friends to advance the alleged loans to Chen and Ye are unclear and doubtful.

(4)  Certain substantial changes in Ye’s assets have not been explained.

(5)  There are a number of other suspicious features in the case and evidence of Chen and Ye.

39.  The factual context of the above issues was set out in some detail in the submission on behalf of the plaintiff.  Almost point-to-point responses were set out in the submission on behalf of Chen and Ye, particularly in that lodged with reference to the latest affirmation evidence filed pursuant to this court’s leave given at the first hearing of the present application.  Details aside, the central theme of the plaintiff’s criticism is either of two scenarios regarding the financial sources of Chen and Ye.  The first scenario is that Chen and Ye have not exhausted their third party funding sources as alleged.  The second scenario is that such funding, or part of it, so far did not come from entirely third party sources.

40.  An instance of the first scenario mentioned above was that Chen and Ye likewise claimed before DHCJ Sit SC in their first attempt for the exception from the injunction that they had no other means to pay their legal costs, and that they were no longer able to secure further loans from their family and friends.  The assertion did not persuade the learned Deputy Judge.  It is said that as a result, Chen had no choice but to act in person in the application for leave to appeal against the 7/10/2020 Decision.  Chen did appear to have acted in person.  However, somehow it was Ye, still represented in those proceedings, who through her solicitors adopted the submission of Chen who appeared in person: see decision of DHCJ Sit SC dated 1 April 2021 (at §8).

41.  Relevantly, after that, Chen allegedly came to be able to obtain another loan from his friend (Chan Tze Shing) to fund his appeal against the refusal of stay of his criminal proceedings.  That was heard in March 2022 when he was represented by QC and junior counsel.  Chen and Ye also allegedly secured another loan from the same friend to fund their present application to be conducted by SC and junior counsel. There might be circumstances surrounding or terms for such arrangements.  Yet the fact was that they did manage to obtain such funding after their claim of impossibility.

42.  The implication of the second scenario mentioned above would go further.  The doubt that the plaintiff cast on first, the inherent and relative improbability of all such funding by way of alleged loans from family and friends, and second, the intricate connections amongst these alleged third party sources and the couple, gears towards one suggestion, namely that Chen and/or Ye by themselves or their associates may have control over some of those funds deployed which they claim are third party sources. Only that the plaintiff is careful in refraining from actually saying that.

43.  Counsel for Chen and Ye must have discerned from the plaintiff’s criticism the implication of the second scenario.  They made the point that had the plaintiff indeed suggested that Chen or Ye has withheld disclosure of any assets owned or controlled by them, it would have been expected to have taken action for their breach of the ancillary disclosure order under the injunction.  Regarding that, it should be noted that first, the plaintiff is at the receiving end of disclosure by Chen and Ye; second, the facts and evidence as well as their scrutiny were really brought about by the application for exception by Chen and Ye but not before; and third, the plaintiff in the present application is still entitled to submit to the court whether or not Chen and Ye have discharged their burden of demonstrating by evidence their assertion that they have no other means of funding their legal expenses.

44.  Reference is made to the fact that the DoJ raised no objection to the release of the HK$60 million costs awarded to Chen upon his ultimate success in quashing his conviction after the first trial.  However, as the plaintiff points out, the fact was that the sum was not brought within the ambit of the Restraint Order.  That did not connote that the DoJ has considered and was satisfied that Chen and Ye have no other means to pay their legal expenses.  Further, the purpose of the Restraint Order and the Mareva injunction are not the same – the former being to preserve assets and prevent dissipation to enable confiscation in the event of a conviction where a person has benefitted from his crime, whereas the latter being to prevent dissipation of a defendants’ assets to frustrate the plaintiff’s enforcement of a civil judgment which may be obtained: see ss. 14 and 15 of OSCO; §15.03 of Annotated Ordinance of OSCO.  That also explains the concurrent existence of the two in the first place.

45.  This court bears in mind what the court in Tidewater Marine International Inc (above) said (at §44), and will make the best assessment on the material available.  All things considered and balanced, this court is not compelled by the materials, at this stage I emphasize, to come to the view for the present purpose that the alleged funding of Chen and Ye by way of third party loans was not genuine. However, this court also concludes that it is not virtually impossible for Chen and Ye to secure further funding by way of loans for footing their bills for their legal expenses to be incurred.  That said, I am prepared to share the reservation about the extent of that, in view of the extent already extracted so far including that since the 9/11/2020 Decision.  By now, it is also known that Chen’s costs incurred for the last aborted criminal re-trial indeed went down the drain, as the award of costs of that has just been set aside.

46.  At this stage, this court is only prepared to accommodate the more imminent need of the second criminal re-trial of Chen. Chen improves his case by providing information about actual counsel quotation (about HK$38 million), instead of mere estimation, by way of his further affirmation filed since the last hearing.  As mentioned, the amount spent on the first criminal re-trial was unexpectedly wasted, and could not be recouped.  Approaching with balance of interest of the parties in mind, provision to ease the unexpected situation faced with by Chen, in my view, suffices for the time being.

47.  As to the legal expenses of Chen and Ye to be incurred in the present action, this court observes that this action is still at its early stage, and it would be premature to consider the exception for the purpose of the proceedings herein, let alone up to trial estimated to last for 40 days as suggested.  This court would also be surprised that the parties have not considered whether and, if yes, to what extent the further proceedings in the present action should await the outcome of the criminal re-trial of Chen.

The estimated HK$40 million legal costs award

48.  As to the requested release of the then estimated HK$40 million legal costs awarded after the abortion of the criminal re-trial, the most recent development, as mentioned above, was that the order was set aside by the Court of Appeal after the hearing in July.  The exception of such sum is therefore academic.  As to its impact, the above discussion refers.

Conclusion

49.  All matters considered, including those discussed above, this court is prepared to grant the Legal Costs Exception but only to the extent of HK$40 million.  That will be inclusive of the balance of the previous award of costs now in the client’s account of Chen with his solicitors.

The variation of the proprietary injunction against Ye

50.  It becomes clear, but only at the hearing on 5 July 2022, that Ye seeks to vary the proprietary part of the injunction in respect of the money in her HSBC account for the purpose of the Legal Costs Exception.

51.  The principles applicable to except from proprietary injunction amount for funding legal costs are also trite.  It is an exercise of discretion which involves a two-stage process:

(1)  The defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim.  If the defendant fails in this first hurdle, the court need not consider the second stage and the application should be dismissed.

(2)  Once the first hurdle is cleared, the court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff of releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence.  This process is a 'careful and anxious judgment', and the court is entitled to look at all the relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff's proprietary claim in the funds and the defendant's defence to that claim.  In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case, for his having recourse to the funds in question, failing which, he has no right to use the money.

See Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783 (at §13).

52.  As to stage one of the test, the above discussion refers.  As to stage two of the test, it is apparent from the affirmation evidence and submissions on their behalf that Chen and Ye did not actually set out to demonstrate the merits of Ye’s defence to the proprietary claim against her for the purpose of the applicable test. They seek to do so by way of counsel’s oral submission at the hearing on 5 July 2022.

53.  Ye’s defence to the plaintiff’s claim over the sum of HK$68,950,000 said to have gone into her HSBC account has been considered by DHCJ Sit SC in the 7/10/2020 Decision (at §73(8)).  Her defence is that she received the funds pursuant to a transfer agreement, of which the learned Deputy Judge considered that Chen and Ye have failed to credibly explained (see §98).  At the hearing on 5 July 2022, it was submitted on their behalf that it was no more than arguable that the balance in the account might have come from other sources.  However, this does not suffice in driving this court to deprive the plaintiff of the benefit of the proprietary injunction by allowing recourse by Chen and Ye to such balance standing in Ye’s HSBC account.

54.  The release of balance in the sum of HK$13,206,236.98 in Ye’s HSBC account for the Legal Costs Exception is therefore refused.

MORTGAGE REPAYMENT EXCEPTION

55.  Chen and Ye claim similar lack of financial resources to settle the outstanding mortgage repayments in respect of the 16 Bridgewater Road Property.  They seek variation of the Mareva injunction.  They seek payment out of the Trust Account, which contained a balance in the sum of NZ$2,857,022.10 as of 10 December 2021.

56.  In July 2022, the parties have consented to the variation of the Restraint Order and the Mareva Injunction to enable the payment out of the Trust Account a sum of NZ$178,012.99 for the repayment of the arrears of mortgage repayments.  However, those acting for Chen and Ye wrote to this court soon after the hearing on 5 July 2022 that the agreed amount no longer suffices as the arrears are ever increasing.

57.  Likewise, the plaintiff argues that Chen and Ye fail to demonstrate by sufficient evidence that they do not have other means to meet the mortgage repayments, and thus the Mortgage Repayments Exception should also be refused.

58.  Essentially, the plaintiff sees the improbability of the case of Chen and Ye, as deposed to, that the mortgage repayments since the Restraint Order in 2011 have been settled by the rental income from the 16 Bridgewater Road Property at the rate of NZ$2,200 per week.  Hence its requisition.  That led to further explanation by Chen and Ye that part of the mortgage repayments was funded by loans from Ye’s father.

59.  The Restraint Order was varied in March 2020.  The case of Chen and Ye is that the mortgage repayments since then were settled by funds from Chen’s bank account with Nanyang Commercial Bank Limited, a development which the plaintiff was not actually aware of at the time when its application for the injunction was heard in May 2020.

60.  The plaintiff takes issue as to the lack of or inadequate documentary evidence in proof of the amounts and funds arrangements in this respect despite its requests and invitation to file further evidence, and thus that of transparency in the case of Chen and Ye for the purpose of the requested exception from the injunction.

61.  The DoJ does not object to the release of funds from the Trust Account for the mortgage repayments.  The plaintiff is in principle correct that that does not therefore dispense with the burden of Chen and Ye to satisfy the test for variation of the injunction. That said, unlike the Legal Costs Exception, the success or failure of which very much concerns Chen and Ye only, the sustaining of the property concerns both sides of the action.  Therefore, this court is prepared to be pragmatic about the Mortgage Repayments Exception.

62.  The undeniable fact is that what is and will continue to be preserved by the injunction is not merely the property to the extent of its capital value but also its incidental liability in terms of the mortgage repayment.  The major part of the repayment is supposed to contribute towards the capital value, instead of interest expenses, and thus proprietary interest being preserved instead of dissipated. 

63.  This court is prepared to give weight to the concern about undesirable forced sale of the property in the event of default regardless of whether this will be beneficial for either side.  As at one point proposed, the option of sale of 16 Bridgewater Road Property remains open, which is a matter of appropriate timing depending on, amongst the circumstances, the market.  This court is sure that the liberty to apply to the court at the appropriate time will be exercised in this respect.

64.  The DoJ has consented to vary the Restraint Orders to allow the funds in the Trust Account to be utilised to settle the mortgage repayments.  The New Zealand Court has also confirmed no objection to that.

65.  All matters considered, this court is prepared to allow the Mortgage Repayment Exception from the injunction in terms as sought but without prejudice to the plaintiff’s liberty to apply to further vary the injunction on the basis of, amongst others, proposed sale of the 16 Bridgewater Road Property, if so advised or agreed between the parties.

ORDER

66.  The Legal Costs Exception is allowed in terms of §1(a) of the Summons but only to the extent of a sum of HK$40 million, which is inclusive of the sum of HK$18,301,298.92 standing in the client’s account of Chen with his solicitors.

67.  The Mortgage Repayment Exception is allowed in terms of §1(b) of the Summons.

68.  There be liberty to apply.

COSTS

69.  There is some success in the application.  However, the adjournment of the substantive hearing was occasioned by Chen and Ye, which, in my view, was not attributable to fault of the plaintiff.

70.  This court agreed to adjourn the substantive argument so as to enable them to have full opportunity to address the factual issues which they were adamant about having been able to do, had they been expressly forewarned by the plaintiffs.  However, I am not convinced that the further affirmation evidence and submissions of them manage to convince me that the plaintiff was entirely unjustified in making the observations, comments and inferences in the submission on its behalf at the first hearing, particularly when the burden is always on Chen and Ye to come up with nothing short of full disclosure and explanation.

71.  Relevant matters such as that as important as identifying what makes up the amount of variation sought, which should have been made clear, was not addressed until after the same was pointed out at the first hearing.  That Ye seeks to release what is subject to the proprietary injunction was also revealed that way.  These are but instances of the deficiency of their case, which they had the chance of bettering for the purpose of the second hearing.  Further, it is not that with their further evidence, the light cast on their case was clearly turned around in their favour.

72.  On the above note, unless resolved by agreement, the issue of the costs of and occasioned by the present application will be disposed of on paper without an oral hearing.  For that purpose, the plaintiff shall lodge and serve written submission in 14 days and Chen and Ye shall do so in 14 days thereafter.  Submissions should be succinct and not exceed 3 pages, inclusive footnotes and appendix, if any (and in A4 sized paper in not less than 14 font size and 1.5 line spacing).

HCA 2218/2017

[2022] HKCFI 2185

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2218 OF 2017

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DECISION

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THE APPLICATION

1.  By a Decision dated 7 October 2020 (“the Decision”), Deputy High Court Judge Sit, SC made a Mareva injunction order against the 2^nd defendant, prohibiting her from removing, disposing or dealing with her assets up to the value of $776,070,000 (“the Mareva Injunction”).

2.  By summons filed on 10 May 2022 (“the Summons”), the 2^nd defendant applied:

(1)  to vary the Mareva Injunction such that a sum of $26,835,450 (“the CFA Costs”) be excepted either:

(i)  for the purpose of paying partially her legal costs incurred in the 1^st retrial in HCCC 309/2019 (“the 1^st Retrial”);

(ii)  alternatively, for the purpose of paying partially her future legal costs to be incurred in the 2^nd retrial in HCCC 309/2019 (“the 2^nd Retrial”);

(2)  for leave to withdraw another summons filed on 24 November 2020 with no further order as to costs.

THE PROCEDURAL HISTORY

3.  To understand the 2^nd defendant’s application herein properly, it is necessary to set out the procedural history not only of this civil action but also of the related criminal case.

4.  The 2^nd defendant was arrested back in December 2010 on charges of conspiracy to defraud the Stock Exchange Hong Kong (“SEHK”) for false representations or non-disclosure. Upon the Department of Justice’s application, a Restraint Order was granted on 26 October 2011 with respect to all of the properties of the 2^nd defendant in and outside Hong Kong (“the Restraint Order”).

5.  The 2^nd defendant was subsequently charged, together with others, with conspiracy to defraud the SEHK, the plaintiff and the plaintiff’s existing shareholders by dishonestly making false representations and concealing or failing to disclose certain matters.

6.  The 2^nd defendant was convicted after trial (HCCC 83/2014), and such conviction was upheld by the Court of Appeal. On further appeal, the Court of Final Appeal allowed the 2^nd defendant’s appeal on 30 August 2019, quashed her conviction and ordered a retrial.

7.  On 8 January 2020, the CFA awarded the 2^nd defendant with her costs in the original trial in HCCC 83/2014 and of the appeals. Such costs were subsequently agreed between the Department of Justice and the 2^nd defendant’s then solicitors at $26,835,450, i.e. the CFA Costs as defined above, which is the subject matter of the present application.

8.  In the meantime, the plaintiff took out an application for the Mareva Injunction, which, as aforesaid, was granted by Deputy High Court Judge Sit, SC against the 2^nd defendant on 7 October 2020.

9.  As the draft injunction order lodged by the plaintiff contained an exception for legal fees without stating any amount thereof, her Ladyship directed the parties to lodge and serve written submissions (together with any evidence which they might wish to rely on) as to the amount of legal fees to be excepted, which the parties duly did so. Having considered such submissions, the learned Deputy Judge ordered on 9 November 2020 that there be no exception to the Mareva Injunction for the payment of the 2^nd defendant’s legal fees.

10.  The 2^nd defendant then filed a summons on 23 November 2020 for leave to appeal against the learned Deputy Judge’s order dated 9 November 2020. However, the 2^nd defendant had not proceeded with this summons so far.

11.  On 24 November 2020, the 2^nd defendant took out a summons to apply for variation of the Mareva Injunction such that the CFA Costs may be excepted from the Mareva Injunction (“the Nov 2020 Variation Summons”).

12.  While the Nov 2020 Variation Summons was initially fixed to be heard on 25 January 2021, the 2^nd defendant eventually decided not to proceed with the application. Pursuant to the order of Au-Yeung J, the application was adjourned sine die with liberty to restore, and the 2^nd defendant was ordered to bear the plaintiff’s costs of and occasioned by the adjournment.

13.  The 1^st Retrial commenced on 8 February 2021. Unfortunately, because the trial Judge, Deputy High Court Judge Andrew Bruce, SC, took the view that the jury had received information which his Lordship considered prejudicial to the 2^nd defendant, the learned Deputy Judge decided on 15 June 2021 to discharge the jury.

14.  The 2^nd defendant’s legal representative then made submissions on 25 June 2021 that the prosecution should not be permitted to pursue a further trial before a fresh jury. However, by a ruling dated 30 November 2021, the learned Deputy Judge refused to order a stay of the criminal proceedings.

15.  The 2^nd Retrial was since then fixed to commence on 2 May 2023 (with an estimated length of 90 days), with a Case Management Hearing to be held on 19 October 2022.

THE GROUNDS OF OBJECTION

16.  The plaintiff asked this Court to dismiss the Summons on the following two grounds:

(1)  The applications made by virtue of the Nov 2020 Variation Summons and the Summons are an abuse of process because the 2^nd defendant’s first application for “legal fees exception” had already been dismissed on 9 November 2020 and she had filed an application for leave to appeal in respect thereof. There is no material change of circumstances since then;

(2)  The 2^nd defendant has not demonstrated by sufficient evidence that:

(i)  she does not have other assets to meet the payment of legal costs;

(ii)  the purpose of the application is not an attempt to dissipate her assets.

DISCUSSION

Abuse of process

17.  The plaintiff suggested that this is the third time that the 2^nd defendant had applied for “legal fees exception”, and it is an abuse of the process of the court for the 2^nd defendant to do so.

18.  In Lau Sin v Wong Mary & Others [2018] HKLRD 202, Deputy High Court Judge Paul Lam, SC, having considered various authorities, summarised the following general principles applicable to the situation where the same interlocutory application was made again[1]:

“(a) The doctrine of res judicata, properly-so-called, does not apply to interlocutory orders.

(b) If a party seeks to re-litigate a matter which has been determined in a previous interlocutory decision by taking out a second application, the second application is liable to be dismissed by the court, either of its own motion or on application, pursuant (sic) its inherent jurisdiction or Order 18, rule 19, on the ground that it constitutes an abuse of process.

(c) It will not be an abuse of process if there are express statutory provisions permitting the re-litigation of the matter. There are many express provisions allowing the respondent to an application to apply to set aside an order made in its absence or as a result of its failure to comply with certain procedural steps (eg Order 13, rule 9; Order 14, rule 11; Order 19, rule 9; Order 24, rule 17; Order 26, rule 8). Another useful example is that directions on evidence (including expert evidence) may also be revoked and varied by a subsequent direction (Order 38, rule 44).

(d) In the absence of any such express statutory provision, whether the second application constitutes an abuse of process must depend on the particular circumstances of each case. Generally speaking, the court should consider what is just and reasonable.

(e) It is inappropriate and impossible to set out exhaustively what the relevant considerations will be. Naturally, the court will need to consider the nature of the interlocutory application; whether the applicant had, or could and should have, challenged the first interlocutory decision by other means; and why a second application on the same matter has been made. Examples of situation where the court may conclude that there is no abuse of process include: the ruling on the first application was not based on merits but on a technical objection, the applicant failed to prove essential facts from mistake or inadvertence at the first application, there is new evidence that seriously justifies reconsideration of the issue; or there is a material change of circumstances.

(f) Nevertheless, the court should adopt a holistic, rather than a dogmatic or mechanistic, approach. At the end of the day, the court shall whether it is in the interests of justice to allow the second application to proceed having regard to all relevant circumstances of the particular case. And in considering how its discretion should be exercised, Order 1A, rule 2 requires the court to give effect to the underlying objectives of the RHC as set out in Order 1A, rule 1.”

19.  In the circumstances of the present case, I do not consider that the 2^nd defendant has abused the process of the Court by taking out the Summons. My reasons are as follows.

20.  Firstly, I do not think it was fair for the 2^nd defendant to be described by the plaintiff as having made her “1^st Costs Exception Application” back in October 2020 when she lodged her written submissions pursuant to the learned Deputy Judge’s directions contained in the Decision. In paragraph 129(4) of the Decision, it was stated that:

“The draft order to the Summons contains an exception for legal fees but no amount has been suggested by either side. Both Mr Wong and Mr Cao drew my attention to the imminent re-trial in the 1^st Criminal Proceedings for which legal costs will have to be incurred, and the prospect of receiving taxed costs from the Department of Justice pursuant to the costs order made by the Court of Final Appeal. In these circumstances I will direct that:-

(a) D1 to D4 to file and serve written submissions of no more than 5 pages (together with any evidence they may wish to rely on) as to the amount of legal fees to be excepted under the Mareva injunction within 14 days hereof;

(b) […]

(c) […]”

21.  It can be seen that when the application for Mareva Injunction was made, it was the plaintiff which proposed (by inserting a “legal cost exception” in the draft order) that there be a costs exception. The only issue at that time seems to be the quantum to be allowed. I therefore accept the 2^nd defendant’s explanation that her focus at that time was on the amount of costs to be incurred for the 1^st Retrial and that as a result she did not file any additional evidence pursuant to the learned Deputy Judge’s directions.

22.  Secondly, in any event, it is evident that since then there have been material changes of the circumstances:

(1)  The 1^st Retrial had been aborted and the 2^nd defendant is now facing the 2^nd Retrial in 2023;

(2)  The 2^nd defendant is now indebted to her solicitors and counsel legal fees incurred for the 1^st Retrial in the total sum of $37,271,583.65;

(3)  It is evident (in the form of Mr Andrew Powner’s 2^nd Affirmation which this Court has no hesitation to accept) that the 2^nd defendant had indeed not paid any legal fees in respect of the 1^st Retrial (apart from $150,000 which only covered leading counsel’s travelling expenses from England);

(4)  The Case Management hearing for the 2^nd Retrial is going to be heard on 19 October 2022, and the whole legal team of the 2^nd defendant would only agree to continue acting for her provided the CFA Costs could be released to pay off part of either the outstanding legal costs or the costs for the 2^nd Retrial.

23.  Thirdly, in relation to the 2^nd defendant’s application for leave to appeal against Deputy High Court Judge Sit SC’s order dated 9 November 2020, it is the evidence of the 2^nd defendant that she had no funds to engage solicitors or counsel for the purpose of conducting the appeal. She also affirmed that she thought at the material time that it would be quicker if she took out a summons and made an application for variation of the Mareva Injunction. As a matter of fact, the 2^nd defendant did take out a summons (the Nov 2020 Variation Summons). Furthermore, given the change of circumstances since November 2020 and the availability of more evidence (as explained in the preceding paragraph), I do not think the 2^nd defendant should be prohibited from making a fresh application for variation by relying on the most up-to-date circumstances in 2022.

24.  Fourthly, in relation to the Nov 2020 Variation Summons, it is the evidence of the 2^nd defendant that, shortly before the scheduled hearing date, she thought she had successfully found a benefactor. She therefore decided not to proceed further with the application in order to save costs. This part of her evidence is corroborated by Mr Powner in his 2^nd Affirmation.

25.  The plaintiff’s solicitors had reminded this Court that when the Nov 2020 Variation Summons was filed, there was also a threat made by the 2^nd defendant’s trial counsel that they might return their briefs, yet they did not do so at the end of the day despite the fact that they were not paid. In this regard, Mr Powner explained in his 2^nd Affirmation that counsel and solicitors decided to act for the 2^nd defendant in the 1^st Retrial because they had significant concern that the 2^nd defendant would be left without any legal representation shortly before the complex criminal trial and the grave injustice that would be brought about. I have no reason not to accept Mr Powner’s evidence. However, it must not be assumed that counsel and solicitors would be prepared to be so generous for the 2^nd time.

26.  In these circumstances, taking into account the fact that the merits of the Nov 2020 Variation Summons had not been ruled upon, and the change of circumstances since then, I do not think the 2^nd defendant had abused the process of the Court by taking out the Summons.

27.  Hence, in my view, it is in the interest of justice to allow the 2^nd defendant to make the present application.

The legal principles applicable to this application

28.  Before I proceed to consider whether this Court should accede to the 2^nd defendant’s application to vary the Mareva Injunction, it may be useful to refer to the relevant legal principles.

29.  In XY, LLC v Jesse Zhu (a.k.a. Jia-Bei Zhu and Jesse Jia-Bei Zhu) [2018] HKCFI 1485, Wilson Chan J had summarised the principles as follows:

“18. As laid down in Derby & Co Ltd v Weldon (Nos 3 and 4) [1990] Ch 65 (at 76-77) and quoted in Atlas Maritime SA v Avalon Ltd (No 3) [1991] 1 WLR 917 (CA) (at 920H to 921A):

(1) The ‘fundamental principle underlying this [Mareva] jurisdiction is that, within the limits of its powers, no court should permit a defendant to take action designed to ensure that subsequent orders of the court are rendered less effective than would otherwise be the case’, as would occur here if the application under GNT’s Summons were to succeed because the funds available to satisfy judgment in the Hong Kong Enforcement Action would be yet further diminished.

(2) That principle is, however, subject to the proviso that ‘it is not its [the Mareva jurisdiction’s] purpose to prevent a defendant carrying on business in the ordinary way … nor to impede him in defending himself against the claim.’ (the ‘Proviso’).

19. […]

20. The second limb of the Proviso is further explained by Lord Donaldson MR in Atlas Maritime SA v Avalon Ltd (No 3), ibid, thus:

(1) (at 926C-D):

‘… the fact that the variation of the injunction to enable legal costs to be paid would be likely to render any award in favour of [the plaintiff] less effective is not of itself a fatal objection because of the proviso built into what I have described as the fundamental principle. But this proviso only applies in cases in which the operation of the injunction would impede the person enjoined from defending himself against the claim.’

(2) (at 927B):

‘In exercising the equitable Mareva jurisdiction, the court should …not limit its consideration to funds to which the party concerned has a legal right, if there are reasonable grounds for believing that it can obtain money otherwise.’ [emphasis supplied]

21. In Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783, Au J at paragraph 14 stated this:

‘14. In the case of an ‘ordinary’ Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the court’s discretion faced with an application to release the funds, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets to meet the payment; and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff.’ [emphasis supplied]

22. Drawing the threads together, two points thus emerge. First, in an application of this nature, the burden is on the defendant to show ‘by sufficient evidence’. Secondly, that the defendant ‘does not have other assets to meet the payment’ should be read together with the analysis postulated by Lord Donaldson MR, so that the court should not ‘limit its consideration to funds to which the party concerned has a legal right, if there are reasonable grounds for believing that it can obtain money otherwise’.”

30.  In my view, when considering whether the 2^nd defendant has shown by sufficient evidence that she does not have other assets to meet the payment, this Court should also follow the approach explained in Bank St Peterburg & Another v Vitaly Arkhangelsky & Another [2014] EWHC 574 (Ch) as follows:

“21. In this case, however, (a) the Defendants’ assets worldwide (with some presently immaterial exceptions) have been frozen and (b) substantial evidence as to the Defendants’ means has been filed. In such circumstances, in my view, the burden shifts to the Claimants to show that the evidence of the Defendants is incredible, and that there are sufficiently strong grounds for supposing that in breach of the worldwide order the Defendants have not disclosed other assets from which they could meet their living and legal expenses to outweigh the natural concern of the court not by its own orders to cause real and irremediable prejudice.

22. Otherwise, if the burden were on the Defendants (as the Claimants submitted), the Defendants would be faced with the difficulty of proving a negative, a difficulty all the greater at an interlocutory stage, and exposed to a total freeze if they cannot do so; that would be unjust, and give no sufficient weight to the fact that at this interlocutory stage the facts cannot be found, and the Court must do its best to avoid irremediable unfairness or injustice.

23. Is the evidence filed by the Defendants incredible? Are there real grounds for supposing that they have available to them undisclosed assets which they have kept away from the purview of the Freezing Order? Are those grounds sufficient to outweigh the risk of the irremediable and serious injustice which would necessarily be occasioned if in truth the Defendants have no other substantial assets out of which to pay the living expenses of themselves and their young family and their legal costs?” (emphasis added)

Other source of funds

31.  The first question which this Court has to consider is whether the 2^nd defendant has shown by sufficient evidence that she has no other source of funds to pay for her legal costs.

32.  To answer this question, I would give much weight to the evidence of Mr Andrew Powner, solicitors acting for the 2^nd defendant, who has made two affirmations in the present case. In view of the importance of his evidence, I will quote these affirmations extensively below.

33.  In his 1^st Affirmation filed on 24 November 2020, he stated, among other things, that:

“50. […] the 2^nd Defendant wishes to ensure equality of arms at the [1^st Retrial] by engaging the services of her former Queens (sic) Counsel who represented her both in the Court of Appeal and in the Court of Final Appeal.

51. It was therefore agreed between local Counsel and Haldanes that we would each reduce our previously agreed brief fees and preparation costs to allocate an agreed, fixed sum of HK$1 million of the CFA Costs towards the brief fee of Ian Winter QC, to enable him to conduct the pre-trial applications.

52. The 2^nd Defendant informed me that she had no funds available from any other source (ie, other than the CFA Costs) in order to brief Ian Winter QC to conduct those pre-trial applications which (until receipt of the Directions) were previously anticipated to be heard in late November or early December 2020. […]

53. In addition to briefing Ian Winter QC to conduct her pre-trial applications, because of the high regard in which the 2^nd Defendant holds him, I was informed that she embarked upon an exercise in early 2020 to try to brief Ian Winter QC for her 1^st Retrial]. As explained in the 3^rd affirmation of the 2^nd Defendant, I am informed that her attempts to raise third-party funds to fund Mr Winter QC’s brief fee to conduct her [1^st Retrial] have not met with any success. […]

[…]

60. Since the CFA Costs are now included within the ambit of the Mareva injunction, all Counsel have informed me that they will return their briefs on 12 December 2020 since there is no prospect of payment of their brief fees before the deadline on 12 December 2020, being the 30 day before trial period specified in the briefs […]

[…]

64. Thus, as from 12 December 2020, the 2^nd Defendant will be unrepresented at a complex 105-day retrial, which is currently scheduled to commence on 11 January 2021. Haldanes are also entitled to cease to act on the same day, 12 December 2020 due to lack of funds, although we wish to assist the Court as much as possible in the likely task of vacating the [1^st Retrial] before coming off the Record in all criminal and civil actions.”

34.  He further explained what happened in 2021 in his 2^nd Affirmation filed on 10 May 2022 as follows:

“6. In late December 2020, after discussions with the 2^nd Defendant and Counsel, despite the 2^nd Defendant having no funds to pay the legal costs, Haldanes and Counsel agreed to continue to act for the 2^nd Defendant in order to prevent the sudden adjournment of a lengthy commercial crime trial. This was done in circumstances where our client had been awaiting trial since her arrest in 2010 and had spent over 2½ years in prison before [the 1^st Retrial] was ordered. Furthermore, the resources of the Court would have been wasted if we withdrew, since the trial had been listed for many months. If the trial judge ordered the trial to continue without the 2^nd Defendant having legal representation, then we were also very concerned about the fairness of the retrial. In addition, one of the two overseas senior counsel admitted for the retrial had already arrived in Hong Kong to conduct the 105-day trial.

7. Furthermore, we had confidence that the 2^nd Defendant would either succeed in appealing the order of DHCJ Sit, or in obtaining a variation of the Mareva Injunction in January 2021 in circumstances where the CFA Costs had been awarded specifically for the purpose of funding her retrial; or further alternatively, that the 2^nd Defendant would be able to locate a new benefactor who would be prepared to fund her first retrial.

8. In January 2021, the 2^nd Defendant did in fact find a friend who agreed to contribute HK$150,000 towards leading counsel’s disbursements; i.e., his travelling expenses from England (two business class return flights from November 2020 to January 2021), and thereafter to remain for the trial in hotel accommodation for over 120 days in total, which disbursements were paid by Mr Ian Winter QC personally.

9. Shortly before the [1^st Retrial] was to begin in February 2021, the 2^nd Defendant was confident that she had secured a new benefactor for her legal fees, and for this reason her [Nov 2020 Variation Summons] to be heard on 25 January 2021 was adjourned sine die (see paragraph 28 of the 2^nd Defendant’s 6^th Affirmation). Unfortunately, very shortly thereafter, she informed us that she had failed.

10. Under normal circumstances, Haldanes would have ceased to act in the criminal trial. However, it was a significant concern for us that our client would be left without legal representation so shortly before a complex trial and the grave injustice that would take place. After further discussions, Haldanes and Counsel took the exceptional decision to continue to act for her.

11. The 2^nd Defendant assured us that she would continue to look for a new benefactor whilst [the 1^st Retrial] continued. She did not have any funds to brief civil Counsel to argue for a variation of the Mareva injunction (the 2^nd Defendant was acting in person in this civil matter) or to pursue her appeal. She was also rather concerned about having to argue in person against an experienced counsel for the Plaintiff in circumstances where she was fully occupied in preparing for her criminal retrial, which was shortly about to begin after some pre-trial arguments.

12. After the [1^st Retrial] concluded without a verdict, the 2^nd Defendant continued in her efforts to obtain a new benefactor. However, in October 2021, she informed us that she had exhausted all possibilities. Haldanes came off the record in December 2021 due to the outstanding legal fees and are no longer representing the 2^nd Defendant for her second retrial in 2023.

[…]

15. With reference to my affirmation dated 24 November 2020, I confirm that Haldanes and Counsel are still unpaid for our past legal services […]”

35.  Mr Powner’s evidence is important because it shows that:

(1)  The 2^nd defendant knew that she would be left unrepresented in the 1^st Retrial if she was unable to pay her counsel’s brief fees by 12 December 2020;

(2)  There is no evidence to show that she knew beforehand that her counsel and solicitors would stay on as her legal representatives even if she could not raise any funds for counsel’s brief fees and the solicitors’ costs on account;

(3)  Despite the threat of the grave consequence of being left unrepresented in the 1^st Retrial, the 2^nd defendant as a matter of fact did not pay towards her counsel’s brief fees at all;

(4)  The 2^nd defendant could not even raise any funds to proceed with her appeal against DHCJ Sit SC’s order nor to make an application for variation of the Mareva Injunction.

36.  In my view, the above amounts to strong evidence in support of the 2^nd defendant’s assertion that she really could not find any other source of fund to pay her legal fees. If she somehow had hid some monies somewhere, or if she knew that there were any benefactors who were ready to give her further financial assistance, I would have thought she would have approached them and come up with the necessary funds. Yet, what happened was that she had never come up with such funds. That speaks volume of the actual situation.

37.  The plaintiff has made a number of points in opposition.

38.  Firstly, it was alleged that the disclosure provided by the 2^nd defendant remained grossly inadequate. It was pointed out that:

(1)  despite the previous benefactors’ allegations that they had no direct or indirect relationship with this case and/or the criminal case, the evidence which the joint and several liquidators found show that many of them in fact were related to the plaintiff company or other parties herein;

(2)  the 2^nd defendant has never disclosed any loan agreement between her and any of the alleged benefactors;

(3)  it is incredible that Mr William Chan would agree to contribute over $1 million when, on his own evidence, he did not know the 2^nd defendant well at the time;

(4)  it is difficult to fathom how Tong Ho Yin, a company secretary, would be in a position to provide $4.3 million financial assistance to the 2^nd defendant, and it is also strange that he would agree to do so when he and the 2^nd defendant had only known each other for 3 years;

(5)  the alleged benefactors had failed to disclose their source of funds.

39.  While the plaintiff’s solicitors did not make it clear in their written submission, it appears that it was hinted that those alleged benefactors were in fact not benefactors as such, but were in fact using the 2^nd defendant’s own money and pretending that they had given financial assistance to the 2^nd defendant. Putting aside the fact that this is pure speculation, even if it were true, as I analysed above, the 2^nd defendant’s conduct shows that she was unable to provide any more fund to pay her legal fees for the 1^st Retrial and/or the 2^nd Retrial.

40.  Secondly, the plaintiff’s solicitors argued that 5 of the purported benefactors had failed to give affirmation evidence to confirm that no further funding would be provided to the 2^nd defendant, despite the fact that the 2^nd defendant had previously confirmed that the same would be filed. With greatest respect, this is neither here nor there. The fact that they did not make any affirmation to confirm this point does not mean that they were willing to give further assistance to the 2^nd defendant. I would have thought, if any of them were really able to do so, the 2^nd defendant would have approached them when she urgently needed money to pay her counsel’s brief fees for her 1^st Retrial, or at least to secure legal representation for her application to vary the Mareva Injunction.

41.  Thirdly, the plaintiff’s solicitors argued that there was not enough disclosure on the part of the 2^nd defendant because she did not name the alleged potential benefactor who indicated that he would unconditionally fund 75% of the costs of the 1^st Retrial. With greatest respect, this is totally irrelevant, because it cannot be denied that, at the end of the day, the potential benefactor did not actually assist the 2^nd defendant at all.

42.  It was further complained by the plaintiff’s solicitors that the 2^nd defendant did not disclose her relationship with a Mr Liu who allegedly provided $150,000 towards Mr Ian Winter QC’s travel expenses to Hong Kong. It was further said that no particulars had been provided as to the circumstances of the financial assistance. With greatest respect, these matters are totally beside the point.

43.  Fourthly, the plaintiff’s solicitors stated that the 2^nd defendant had failed to disclose a number of variations to the Restraint Order.

44.  All those variations (the last one was made on 28 April 2016) were in fact made at least 4 years before the Mareva Injunction. I do not understand, and the plaintiff’s solicitors did not explain at all, why they were relevant to the present application.

45.  To conclude, the plaintiff has not put forward sufficiently strong grounds for supposing that in breach of the Injunction Order the 2^nd defendant has not disclosed other assets from which she could meet her legal expenses. On the other hand, I am satisfied that the 2^nd defendant has adduced sufficient evidence that that she has no other source of funds to pay for her legal costs.

Dissipation of assets

46.  The next question is whether the 2^nd defendant has provided sufficient evidence that the purpose of the present application is not an attempt to dissipate her assets to frustrate the enforcement of judgment by the plaintiff.

47.  In this regard, I only need to refer to Haldanes’ retainer letter dated 25 April 2022 in which the costs agreements in relation to the 2^nd Retrial were set out. It is provided, among other things, that:

“1. We refer to our costs agreement dated 30 September 2020 in respect of your first re-trial in February 2021, which concluded in June 2021. Haldanes are no longer representing you or appear on the Court’s record in respect of your first or second re-trials. This new costs agreement relates to your second re-trial which has been listed in 2023.

2. We note your intention to plead not guilty to all charges. After careful consideration and discussions with your former Senior Counsel Ian Winter, Haldanes and Mr Winter QC would agree to represent you in your second retrial in May 2023, provided that a sum of HK$26,835,450 is provided as costs on account by 1 August 2022; ie, in sufficient time to allow for detailed pre-trial preparation and for Senior Counsel to mark his diary for a High Court trial in 2023.

3. In this regard, Haldanes and Counsel do not waive entitlement to any of your outstanding legal costs including those for your Appeal, Final Appeal and first re-trial, as set out in our previous bills. You shall remain liable for those outstanding legal costs which amount to a total of HK$41,000,000 in total, which still remain unpaid […]

4. However, in the interest of a fair trial in a complex commercial crime case before the High Court in which we recognise that proper legal representation is essential, and taking into account your difficult circumstances, Haldanes and Counsel would agree to represent you at your second re-trial provided that costs on account in the sum of HK$26,835,450 are paid in advance by 1 August 2022.

5. In order for Counsel and Haldanes to represent you at your second re-trial in 2023, the said sum of HK$26,835,450 can be paid either: (a) in part-satisfaction of your outstanding unpaid bills of HK$41,000,000 (as per paragraph 3 above); or (b) as costs on account for your second re-trial in 2023, in accordance with the terms of this costs agreement.

[…]”

48.  The retainer letter then went on to provide that the agreed costs for the 2^nd Retrial would be in the total amount of $41 million (assuming that it will not overrun).

49.  Given the provisions in the retainer letter, I am of the view that the 2^nd defendant has adduced sufficient evidence that the purpose of this application is not an attempt to dissipate the 2^nd defendant’s assets to frustrate the enforcement of judgment by the plaintiff.

50.  As a matter of fact, it must also be borne in mind that the CFA Costs were actually costs awarded to the 2^nd defendant. In my view, it would only be fair if the 2^nd defendant would be allowed to make use of this fund to secure legal representation in the 2^nd Retrial.

The plaintiff’s other miscellaneous arguments

51.  The plaintiff’s solicitors had made a number of other miscellaneous points which I will deal with below.

52.  It was said that the legal cost of $41,000,000 for the 2^nd Retrial is “not a reasonable nor a credible figure” and that it is incredible that solicitors and counsel would agree to accept instructions and undertake the work in the circumstances where the 2^nd defendant would still owe an outstanding amount of more than $14 million. The plaintiff’s solicitors went as far as to submit that:

“Accordingly, it appears that, in reality, the variation that D2 seeks in her [current application] simply has the effect of allowing Haldanes and the Counsel to be partially repaid their debt owed to D2, thus preferred as unsecured creditors over D2’s many other creditors, which includes P.”

53.  I am surprised to see that the plaintiff’s legal representative would make such a point. It is clear from the retainer letter that solicitors and counsel were willing to act for the 2^nd defendant in the 2^nd Retrial provided the CFA Costs would be paid to Haldanes by 1 August 2022, even though no one could tell when the balance of the legal costs could be paid. To say that it is “incredible” that solicitors and counsel will agree to accept instructions and undertake the work in relation to the 2^nd Retrial on this basis is tantamount to alleging that the retainer letter did not mean what it said. This is a very serious allegation made against their fellow legal practitioners which should not have been made without basis.

54.  As to the reasonableness of the figure of $41 million being the quoted total fees for the 2^nd Retrial, with greatest respect, since we are not taxing such fees herein, it is simply irrelevant to consider “reasonableness” of such fees. While I agree that $41 million is a high level of costs, after all, it is a matter between the 2^nd defendant’s legal team and the 2^nd defendant. So long as there is no evidence showing that the 2^nd defendant and the lawyers are conspiring together to misrepresent what they have agreed on costs (I must emphasize that I have absolutely no reason to suspect so in the present case), the level of costs to be charged by the 2^nd defendant’s lawyers, to put it bluntly, is really none of the plaintiff’s business. In any event, what the 2^nd defendant is asking for is the release of the CFA Costs which is in the sum of $26,835,450 only.

55.  The plaintiff’s solicitors then pointed out that, even if the 2^nd defendant were to succeed in the present application, she would still owe her lawyers more than $14 million in relation to the 2^nd Retrial. I do not understand the solicitors’ purpose of mentioning this. Again, this is a matter which should not be a matter of concern on the part of the plaintiff, at least not before an application is made by the 2^nd defendant for further freezed assets to be released for payment towards such balance.

56.  On the allegation that the costs of $41 million is incredible, I am of the view that there is no basis for the plaintiff’s solicitors to make such a serious allegation.

Conclusion

57.  To conclude, having taken all the relevant circumstances into account, I am of the view that it is just and convenient for the Court to accede to the application of the 2^nd defendant, so that she will be able to have legal representation in the 2^nd Retrial, in which she will face very serious criminal charges. It is not in the interest of justice if the 2^nd defendant’s ability to defend herself properly in the 2^nd Retrial is impeded.

ORDER

58.  By reasons of the aforesaid, I make the following order:

(1)  The Mareva Injunction granted against the 2^nd defendant by the Decision made by Deputy High Court Judge Eva Sit, SC dated 7 October 2020 be varied and excepted in the sum of $26,835,450 for the purpose of paying partial future legal costs to be incurred in the 2^nd retrial in HCCC 309/2019.

(2)  Leave be granted to the 2^nd defendant to withdraw the Summons filed herein on 24 November 2020.

(3)  By consent, the 2^nd defendant shall bear the plaintiff’s costs of the Summons filed on 24 November 2020 (except the costs of and occasioned by the preparation of affidavit evidence in relation to the said Summons), with certificate for counsel for the hearing before Wilson Chan J on 27 November 2020, to be taxed if not agreed.

COSTS

59.  I make a costs order nisi that the plaintiff shall bear the costs of the 2^nd defendant (including the costs of and occasioned by the preparation of affidavit evidence in relation to the Summons filed herein on 24 November 2020 and all costs reserved (if any)), to be taxed if not agreed.

60.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper) within 14 days hereof.

Tanner De Witt for the plaintiff

The 2^nd defendant, unrepresented

HCA 2218/2017

[2021] HKCFI 804

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

____________

____________

__________________

DECISION

__________________

1.  This is the application by the 1^st Defendant (“D1”) and the 3^rd Defendant (“D3”) for leave to appeal against my Decision made on 7 October 2020 (“Decision”) granting Mareva and proprietary injunctions against them (inter alios). For convenience I will adopt the nomenclature in the Decision herein.

2.  In essence, P (now under the control of JPLs) claims against D1, its former director, for breach of fiduciary duty with respect to the Acquisition, in which he was in a position of conflict which he had not disclosed and was highly impoverished to P, and that consequent upon the Acquisition very substantial funds belonging to P had been paid out, of which a significant amount ended up with D1 and D3 (who is D1’s wife).

3.  By the Decision, I found (inter alia) that:-

(1)  A good arguable case for breach of fiduciary duty has been made out against D1, in that (a) during the period when he was a de jure director of P he was (i) in a position of conflict or possible conflict with respect to P’s entering into the SPA which he had not disclosed; and (ii) aware that the financials of the Crafar Farms (the underlying asset to be acquired under the SPA) had been manipulated and their asset value and financial performance were much less favourable than as presented, without disclosing the same to P, and (b) he should account for approximately HK$776.07 million (viz. the [E] payment, the [B], [J], [F3] and [F4] payments; and the [D] and [F3] payments) out of the HK$1,357,680,000 (ie the Acquisition Funds) claimed by P. As I was also satisfied that there was a real risk of dissipation in the circumstances of this case, a Mareva injunction up to HK$776.07 million was granted against D1.

(2)  I was also satisfied that some of the Acquisition Funds that had been misappropriated by D1 (specifically those paid to the counterparty to the SPA with respect to which D1 was in a position of actual or possible conflict) could be traced into the NZ Property and the Mortgaged Properties, and granted a proprietary injunction with respect to D1’s share in these properties.

(3)  As to D3, against whom P claims dishonest assistance in D1’s breaches of fiduciary duty, I was satisfied that a good arguable case was established with respect to the D3 1^st Payment, the NZ Property and the Mortgaged Properties.  I granted Mareva and proprietary injunctions with respect to the D3 1^st Payment and D3’s share of the NZ Property and the Mortgaged Properties respectively.  

4.  On 21 October 2020 D1 and D3 issued a summons seeking leave to appeal against the Decision, on the basis of the 3 grounds set out in their draft notice of appeal (“Draft NOA”).

5.  However, the matter then progressed slowly:-

(1)  At the outset, directions were given for the leave application to be disposed of on the papers.

(2)  However, after I have refused, on 9 November 2020, D1 and D3’s (inter alios) application with respect to legal fees exception to the Mareva injunctions (see paragraph 129(4) of the Decision) on the basis that they have not discharged their burden of showing they have no other source of funding other than the enjoined funds (and there is no application for leave to appeal against such ruling), D1 proceeded to act in person.

(3)  Notwithstanding extension of time and further directions given for D1 and D3 to file written submissions, at the time when D1 was due to file his last round of written submissions on 29 December 2020, he requested, in an English letter written to Court, an oral hearing instead.

(4)  That request was acceded to in light of the fact that D1 was acting in person, and an early hearing was directed. D1’s attempt to fix the hearing after May 2021 (on the basis that he had to attend the re-trial of the 1^st Criminal Proceedings) was rejected, and the hearing was fixed for 22 March 2021 at a time which would accommodate his attendance at the re-trial.

6.  When I acceded to the request for oral hearing, I further directed that D1 should have a final opportunity to file written submissions by 10am on 9 March 2021, as he has not filed any reply submissions as directed in late December 2020. This D1 did, out of time, on 18 March 2021.

7.  After that, on 19 March 2021 and at the hearing on 22 March 2021, D1 attempted to submit further documents, including documents which were not in evidence at the substantive hearing.  Given the lateness, the lack of justification and the obvious unfairness to P, I refused leave for D1 to rely on these new documents.

8.  As to D3, those representing her informed the Court that she would not advance any submissions and would be content to adopt D1’s submissions for the leave application, and their attendance was excused on that basis.

9.  The principles applicable to leave to appeal an interlocutory decision are uncontroversial.

(1)  No leave shall be granted unless the court is satisfied that either the appeal has a reasonable prospect of success (meaning the prospect of succeeding must be reasonable, which is more than fanciful without having to be probable), or there is some other reason in the interests of justice that the appeal should be heard: SMSE v KL [2009] 4 HKLRD 125.

(2)  Further, in an appeal against the grant or refusal of an interlocutory injunction the function of the appellate court is limited; the appellate court will only interfere where it can be shown that the judge’s exercise of discretion was based on a misunderstanding of the law, or of the evidence before the judge, or upon an inference that particular facts existed or did not exist demonstrated to be wrong by further evidence that becomes available subsequently, or there has been a change in circumstances: Hadmor Productions Ltd v Hamilton [1983] 1 AC 191, 220B-F.

10.  In my view, none of the 3 grounds advanced by D1 in the Draft NOA satisfy the above threshold.

11.  The first ground is directed against the finding of good arguable case against D1 and D3, to the effect that there was no concrete evidence showing (i) D1 had an interest in the UBNZ Group when he was a de jure director of P; (ii) D1 still had an interest in the Acquisition by reason of the Commission Agreement; (iii) the Eric Yee 2009 Emails provided a sufficiently cogent basis to show D1’s knowledge of manipulation of the Crafar Farm financial information, and in any event such information was irrelevant since the Acquisition concerned the acquisition of assets and not the business of Crafar Farms; and (iv) the Acquisition Funds could be traced into the Anfatex Properties, the Anfatex Payments, the NZ Poperties, the Mortgaged Properties or the D3 1^st Payment.

12.  Essentially D1 merely disagrees with the analyses and conclusions in the Decision, which with respect to the above matters have been set out in detail in paragraphs 88, 91, 94, 98 and 106 of the Decision. There is no error of law alleged, and no attempt has been made to show any demonstrable error in the understanding or analysis of the relevant facts.

13.  Further, D1 also asserts that I had reversed the burden of proof with respect to the conclusions on D3 1^st Payment, the NZ Property and the Mortgaged Properties as I had allegedly relied on the absence of credible explanation from D3. This is plainly incorrect, as can be seen from paragraphs 98, 104 and 106 of the Decision, where the positive explanations given by D3 were considered and rejected with reasons stated.

14.  The second ground is directed at causation of loss flowing from D1’s breaches of fiduciary duty, essentially that since I have only found (for the purpose of a good arguable case) breach at the time when D1 was a de jure director, the losses said to be suffered by P at a time after D1 ceased to be de jure director (15 September 2009) should not be attributed to him.  However, this wholly ignores the applicable law, which has been set out in paragraph 96(1) of the Decision (for which there is no suggestion of any misunderstanding thereof), and the analysis of the evidence in the remainder of paragraph 96.

15.  As to the third ground, it goes to quantum of the cap for D1’s Mareva injunction, and complains that (i) of the [E] payment, I have taken into account HK$314 million when the evidence only shows HK$280 million had been paid out; and (ii) I erred in not giving credit for the HK$314 million repaid by UBNZ Trustee in 2011 on the basis that D1 had failed to show it was not saddled with any liability.

(1)  (i) is dealt with in paragraph 48(1)-(2) of the Decision (in particular footnote 5), where I have referred to the fact that the contemporaneous documents in this case either referred to HK$ or NZ$ without any attempt to provide the then prevailing conversion rate, which rendered the tracing of payments from such documents more difficult. However, it has never been D1’s case and he has adduced no evidence to that effect, whether at the substantive hearing or now, that the [E] payment consisted only of HK$280 million. My adoption of the HK$314 million figure was based on the public announcement made by P at the time, which in the absence of evidence suggesting otherwise I had no basis to not accept as accurate.

(2)  (ii) is addressed in paragraphs 96(1)(d)-(e) and 97 of the Decision. The principles of law set out in paragraph 96(1)(d)-(e) are not suggested to be erroneous, and they clearly placed the burden on the director (ie D1) to show that credit should be given and the money returned was not saddled with any liability. D1 has not adduced any evidence, at the substantive hearing or now, to show that the refund either did not originate from the AB Funds, or that the refund was otherwise not saddled with any liability.  

16.  In the premises, I am not satisfied that the grounds in the Draft NOA have a reasonable prospect of success.

17.  The leave to appeal application by D1 and D3 is accordingly dismissed with costs.

HCA 2218/2017

[2020] HKCFI 2491

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

____________

____________

__________________

DECISION

__________________

A.Introduction

1.  This is an application by the Plaintiff (“P”), a listed company in provisional liquidation, for interlocutory injunctions (Mareva, proprietary and Chabra) against the Defendants.

2.  In broad outline, P (under the control of Joint Provisional Liquidators, “JPLs”) claims against the 1^st Defendant (“D1”), a former director, for breach of fiduciary duties with respect to a “very substantial acquisition” P entered into in May 2009 with entities under the control of the 2^nd Defendant (“D2”) to acquire various dairy assets in New Zealand (“Acquisition”).  P says that the Acquisition was a transaction in which D1 was in a position of conflict which he had not disclosed, and was highly impoverished to P, and that consequent upon it, very substantial funds belonging to P had been paid out, of which a significant amount ended up with D1 or his wife, the 3^rd Defendant (“D3”).

3.  P also claims against the 2^nd to 5^th Defendants for accessory liability in assisting D1 in his breach of fiduciary duties (knowing receipt and dishonest assistance), and in conspiracy against all Defendants.

4.  This application is by way of inter partes summons issued on 9 July 2019 (“Summons”). As will be discussed below, the timing of this application has to do with a restraint order made in HCMP No. 2111 of 2011 on 26 October 2011 (“Restraint Order”), which remains subsisting to date and has the effect of freezing all the known assets of the Defendants worldwide.

5.  This application first came before Deputy High Court Judge Dawes SC on 12 July 2019, and was adjourned for substantive argument on the basis that the Defendants would give prior written notice to the Plaintiff of any intended application by the Defendants or the Secretary for Justice to vary or discharge the Restraint Order. 

6.  This is the substantive hearing of the injunction application.

7.  The 4^th Defendant (“D4”) has not filed any defence in these proceedings and did not appear in this application. The 5^th Defendant (“D5”), a company incorporated in the British Virgin Islands (“BVI”), has since 1 November 2013 been struck off the BVI Register of Companies.  I was informed by counsel for D2 (D2 and D5 having filed a joint Defence on 19 August 2019 with D2 purporting to sign the statement of truth on behalf of D5 qua director) that steps are being taken to reinstate D5, although they are preliminary in nature and no application has yet been filed in the BVI.  In these circumstances counsel for P confirmed that she would not seek any order against D5.  Accordingly, the application is to be considered against D1 to D4 only.

B.     The Parties

8.  As to P:-

(1) It is a Cayman company which has been listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”) since 21 March 2003.  In 2008 and 2009 its name was “China Jin Hui Mining Corporation Limited”.  Following the events described below, it changed its name to the present one (Natural Dairy (NZ) Holdings Limited) in October 2009.

(2) Trading in P’s shares has been suspended since 7 September 2010.

(3) Pursuant to the application by Xiamen Hengxing Group Co Ltd, a contributory of P who has presented a petition to wind up P on just and equitable ground, the Cayman court appointed JPLs over P on 22 December 2016.

(4) At the material time in 2009, Chan Wai Kay Katherine (“Katherine Chan”) and D1 were directors and joint chairpersons of P.

9.  D1 (Jack Chen) was, between 7 May 2009 and 15 September 2009, a de jure director of P as well as its joint chairman together with Katherine Chan.  It is suggested that he has substantial business interests in the Mainland, and has lived in New Zealand for some years and active in the political scene there, being the founder of the New Citizen Party in New Zealand.  Further:-

(1) D1 does not dispute that he knew D2 and had business dealings with her, prior to his appointment as director of P and the Acquisition.

(2) D1 accepts, in his pleadings, that he beneficially owned and controlled D4.

10.  In the case of D2 (May Wang):-

(1) She is a New Zealand citizen.   

(2) It is not seriously disputed that D1 and D2 had, prior to May 2009, business dealings in the form of (i) having 60% and 40% interests (through companies they held) in the shares of UBNZ Funds Management Limited (“UBNZ Funds”) (see corporate chart below); (ii) being parties to a Commission Agreement dated 8 October 2008 (“Commission Agreement”); (iii) being directors in Global Food Holdings Limited (“Global Food”); and (iv) D1 having purchased a property in New Zealand from D2 on 10 February 2009.  (i), (ii) and (iii) are relevant to the subject matter of this claim and will be discussed further below.

(3) Further, D2 was the sole shareholder and director of UBNZ Trustee Company Limited (“UBNZ Trustee”), the holding company of a group of companies structured as follows:-

(4) D2 and the UBNZ companies were the counterparties to P in the Acquisition (see below).

11.  D3 (Ye Fang) is the wife of D1.  She is said to be the beneficial owner of Global Food, which owned various trademarks and production lines of food and beverage products in the Mainland.  D3 claims that she is a housewife as well as a successful merchant in her own right.  Her involvement in this case is primarily through her receipt of various substantial sums, which were said to be the traceable proceeds of P’s funds paid out as a result of D1’s alleged breach of fiduciary duties.

12.  As to D4, as indicated above it is a company beneficially owned and controlled by D1.  It was in receipt of various substantial sums said to be the traceable proceeds of P’s funds, and had also transferred part of those funds to D3. 

13.  D5 is said to be a company beneficially owned by D2, whose sole director is D2. 

C.     Relevant Facts

14.  The circumstances relating to the Acquisition are complex. This section sets out those facts that are most pertinent for present purposes.

C.1      The Crafar Farms

15.  The underlying assets the subject matter of the Acquisition were 20 dairy farms in New Zealand (“Crafar Farms”) (as well as the cattle stock, machinery and other chattels therein) owned by various companies associated with or controlled by the Crafar family.

16.  It is common ground that the Crafar Farms fell within the definition of “sensitive New Zealand Assets” under the New Zealand Overseas Investment Act 2005 (“2005 NZ Act”), such that consent from the relevant New Zealand authorities would be required for “overseas investment” (by an individual who is not a New Zealand citizen or resident or a company incorporated outside New Zealand or is the 25% or more subsidiary for such company) which would result in the acquisition of at least 25% interest in a New Zealand company that either (i) controls the freehold of 5 hectares or more of non-urban land or (ii) which consideration for such acquisition exceeds NZ$100 million.  The authority responsible for considering and recommending to the relevant authority on the giving or withholding of consent is the New Zealand Overseas Investment Office (“OIO”).

17.  It appears that the Crafar companies were not in a sound financial state – it is not clear from the evidence available when their financial troubles began, but by 5 October 2009 receivers had been appointed over all of the relevant Crafar companies (“Crafar Receivers”).

C.2         D1/D2’s involvement in marketing Crafar Farms

18.  In October 2008, D1 and D2 became involved in marketing the Crafar Farms for sale:-

(1) A confidentiality agreement dated 3 October 2008 was signed between UBNZ Funds (then owned by Global Financial (controlled by D1) as to 60% and UBNZ Trustee (controlled by D2) as to 40%) and Barry Fraser (“Barry Fraser”) with respect to provision of information relating to the Crafar Farms to UBNZ Funds.

(2) The Commission Agreement was entered into on or about 8 October 2008 between (i) Latitude Asia Limited (a BVI company wholly owned by Barry Fraser’s children) (ii) D1 and (iii) D2 which provided (inter alia) that “… all commission received through dairy farm purchases with CraFarm Group … will be shared equally between the said three parties”.

(3) A consultancy agreement dated 17 November 2008 (“Consultancy Agreement”) was entered into between Barry Fraser and the Crafar companies to provide for (inter alia) provision of consultancy services by Barry Fraser in relation to the sale of the Crafar Farms in return for a “success fee” of 2% upon sale.  

19.  At that time, P was engaging in the business of provision of engineering systems contracting and supporting services and sale of related spare parts and consumables, and trading of beverage and food related products, which did not appear to be profitable.  The board of directors of P (“Board”) was looking for investment opportunities to broaden P’s income stream.

20.  In April 2009:-

(1) Katherine Chan was appointed chairperson of P.  At that time Katherine Chan and D1 had been business acquaintances for several years.

(2) Although there is some dispute over who initiated the discussion, it is common ground that D1 introduced Katherine Chan to the opportunity of acquiring the Crafar Farms and D2 as the counterparty for such acquisition.

C.3     D1’s appointment as director

21.  On 7 May 2009, D1 was appointed an executive director, joint chairman and chief executive officer of P with responsibility for assisting the Board to explore the Crafar Farms opportunity, and to negotiate and execute the terms of the Acquisition.

22.  On the day following his appointment to the various offices in P (ie 8 May 2009), D1 procured Global Financial to transfer its 60% interest in UBNZ Funds to UBNZ Trustee.  There is no averment or evidence as to whether (and if so what) consideration had been given for such transfer.

C.4     The Acquisition

23.  On 18 May 2009, UBNZ Funds (a New Zealand incorporated company) entered into 6 agreements with 6 Crafar companies to acquire the businesses and assets of the Crafar Farms (“Farm Agreements”). The total consideration for the Farm Agreements was NZ$259 million.  It is P’s case that it was not aware of the consideration payable under the Farm Agreements, but D1 (who by then was a director of P) was.

24.  Four days later, on 22 May 2009, P entered into an agreement with the UBNZ companies for the purpose of the Acquisition.

25.  The Acquisition was structured as follows:-

(1) Instead of acquiring the Crafar Farms directly from the Crafar companies (which given P was a non-New Zealand incorporated company would have required approval under the 2005 NZ Act), the arrangement was for UBNZ Funds to inject the Crafar Farms and related assets it was to acquire under the Farm Agreements into a target company (UBNZ Assets, also incorporated in New Zealand), and for P to acquire the shares and debts in UBNZ Assets.

(2) P’s acquisition of UBNZ Assets would take the following form: first, P would acquire 20% shares and debts in UBNZ Assets for NZ$100 million (subsequently varied to NZ$100 million less NZ$1); at the same time P would be granted an option to acquire the remaining 80% shares and debts for NZ$400 million, which option must be exercised within 3 months after the applicable conditions precedent – the most relevant of which for present purposes was the grant of approval by the OIO – had been satisfied.   

26.  The terms of the Acquisition were set out in the Agreement dated 22 May 2009 entered into between UBNZ Trustee as vendor, P as purchaser and UBNZ Funds as warrantor (“SPA”).

27.  The SPA provided (inter alia):-

(1) UBNZ Assets did not carry on any business as at the date of the SPA, but would acquire all the assets (of which there were 5 defined items, including those set out in the Farm Agreements which were listed in Schedule 2A of the SPA) for use in the conduct of the business of cattle and dairy cattle breeding in New Zealand and production, and sale and distribution of livestock and milk fat solids (“Business”), and would carry on the Business prior to completion of the acquisition of Sale Shares (see below).

(2) P was to acquire 20% of the shares in UBNZ Assets (“Sale Shares”) from UBNZ Trustee for NZ$100 million (subsequently varied to NZ$100 million less NZ$1), which consideration was to be satisfied by (i) cash to be raised by P and (ii) zero-coupon convertible notes in the aggregate amount of not more than NZ$285 million (HKD equivalent) (“Note B”) to be issued by P.

(3) The conditions precedent to the Sale Shares completion included (inter alia) vesting of all the property, assets and rights for use in the Business (including the assets set out in the Farm Agreements) in UBNZ Assets, which must be satisfied or waived by the “Long Stop Date”, being 90 days from the date of the SPA (subsequently extended).

(4) At the time of the Sale Shares completion, an option would be granted to P, to be exercised within 3 months of satisfaction or waiver of the applicable conditions precedent, to acquire the remaining 80% shares in UBNZ Assets (“Option Shares”) for NZ$400 million, which consideration was to be satisfied by (i) zero-coupon convertible notes with value of NZ$50 million (out of the aggregate amount of not more than NZ$215 million, HKD equivalent) (“Note A”) to be issued by P; (ii) cash to be raised by P; (iii) set off against any financial assistance to be provided by P to UBNZ Assets under the SPA; (iv) further issuance of Note A in the remaining total aggregate amount; and (v) further issuance of Note B in the remaining total aggregate amount.

(5) The conditions precedent to the Option Shares completion must be satisfied or waived within 9 months from the date of the SPA.  One such condition was the obtaining of all necessary consents and approvals from the OIO, which could not be waived, and which if not satisfied within the 9-month period, P would have the right to terminate the SPA.

(6) The consideration payable by P was subject to the following additional terms:-

(a) UNBZ Trustee undertook that the audited net profits after tax of the Business for one year from 1 June 2009 would be no less than NZ$35 million, and in the event that such amount was not met, it would pay to P 20% or 80% (depending on the stage at which the transaction had reached) of the shortfall multiplied 14 times.

(b) UBNZ Trustee further undertook that the aggregate market value of the properties listed in Schedule 2A (ie the Crafar Farms) would be no less than NZ$300 million, and in the event that their value was less than that, the consideration for the Sale Shares and the Option Shares would be adjusted downwards on a dollar-for-dollar basis of such shortfall multiplied by 20% or 80% (as the case may be).

(7) Upon signing the SPA, P would have the right to conduct due diligence.

(8) Various warranties were provided by UBNZ Trustee and UBNZ Funds, including (i) an undertaking to transfer all the property, assets and rights for use in the Business to UBNZ Assets, and (ii) a warranty that the unaudited balance sheets and profit and loss accounts of UBNZ Assets for the year ended 31 December 2008 and as at 31 March 2009 gave a true and fair view of the state of affairs of the company (on the assumption that UBNZ Assets already owned the Business of the Crafar Farms).  

28.  There were a number of supplemental agreements to the SPA, but save for those referred to in this Decision, their terms do not appear to be relevant for present purposes.

29.  After signing the SPA, P made an announcement on 4 June 2009 (“2009 Announcement”). It was explained therein that the consideration under the SPA (NZ$500 million less NZ$1) was determined with reference to (i) the market value of the Crafar Farms valued at NZ$320 million; (ii) the financial position of UBNZ Assets; (iii) the current share price of certain “Fonterra Shares”[1] allotted to the Crafar Farms; and (iv) future prospects of UBNZ Assets.  One of the matters P relies upon in its claims is a statement in the 2009 Announcement to the effect that each of UBNZ Trustee, UBNZ Funds and UBNZ Assets were third parties independent to P and its connected persons.

C.5     Financial due diligence and P’s approval of the Acquisition

30.  Between June and September 2009, P engaged Shinewing (CPA) Limited (“Shinewing”) to carry out financial due diligence for the purpose of the Acquisition.  In this context:-

(1) Eric Yee (“Eric Yee”), an accountant engaged by UBNZ Assets, was responsible for liaising with Shinewing and providing Shinewing with financial information for the purpose of the due diligence.  D2 gave express instructions to Eric Yee (inter alia) that he must obtain her written confirmation before releasing any financial information to Shinewing; and he must not discuss the background of the deal or the original purchase price for the Crafar Farms to Shinewing without her written permission.

(2) By an email dated 16 June 2009 from Eric Yee addressed to D2 and copied to D1, Eric Yee stated that whilst the accounts of the Business up to 31 March 2009 revealed some weakness, the actual financial performance of the Business up to 31 May 2009 would “implode an Armageddon on the account balance sheet”, with a loss of at least NZ$30 million.

(3) By further emails dated 16, 26 and 27 June 2009 (all addressed to D2 and copied D1), Eric Yee presented his proposed adjustments to the accounts of the Business up to 31 March 2009, which would have the effect of showing a net profit (as opposed to net loss) position for 2009, and substantially larger net profits for 2008. (2) and (3) above are collectively referred to as the “Eric Yee 2009 Emails”.

31.  Following completion of the Shinewing financial due diligence, on 8 September 2009 P issued a circular (“2009 Circular”) for the purpose seeking shareholders’ approval for the Acquisition pursuant to the SPA.  The Circular stated (inter alia) that:-

(1) Upon completion of the due diligence, P decided not to acquire all 5 items of assets defined in the SPA, but only the “Properties” (the Crafar Farms) and “Fixed Assets” (the cattle, machinery and chattels used in the Business as well as the Fonterra Shares).

(2) On the latest valuation as at 19 June 2009, the Crafar Farms were worth only NZ$206 million (compared to NZ$320 million stated in the 2009 Announcement). The Board recognized that the SPA consideration represented a premium of more than 50% over such valuation, but considered that no adjustment was necessary given (i) the increasing trend in gross profits of the Business (by reference to financial information set out in Appendix II to the Circular, which set out the profit and loss statements of the Business for years ended 31 May 2007, 2008 and 2009 and showed increase of gross profits from some HK$17 million in 2007 to some HK$92 million in 2009); (ii) the tentative signs of the global economic crisis bottoming out and recovery in the global dairy market which provided an indicative sign that the current conservative valuation of the Crafar Farms would likely to revise upward favourably thereafter; (iii) the scarcity of availability of Fonterra-approved dairy farm land in New Zealand; (iv) the profit guarantee in the SPA; and (v) the property valuation adjustments in the SPA.

(3) P had requested UBNZ Trustee to disclose the prior transacted price for the assets acquired under the Farm Agreements, but due to commercial sensitivity UBNZ Trustee had declined such request.

(4) The 2009 Circular contained statements similar to that in the 2009 Announcement that the UBNZ companies were third parties independent to P and its connected persons including D1 (who was expressly referenced).

32.  It is clear from the 2009 Announcement and the 2009 Circular that the financial performance of the Business between 2007 and 2009 was relevant to (i) the fixing of the consideration under the SPA as well as (ii) the Board’s decision in September 2009 not to revise the consideration despite the reduced valuation of the Crafar Farms.

33.  On the basis of the information disclosed in the 2009 Circular, P’s members approved the Acquisition and the SPA in an extraordinary general meeting held on 2 October 2009, whereupon P also changed its name into its current name.

C.6     D1’s resignation as director

34.  Meanwhile, on 15 September 2009, D1 resigned from all offices he held with P.  He however remained a director of Nation Resources Limited (“Nation Resources”), a wholly owned subsidiary of P, until 15 September 2010, and was appointed a director of NZND Media Limited (“NDNZ Media”), another wholly owned subsidiary of P, between 29 January 2010 and 27 May 2010.  As will be seen below, there are some documents suggesting that despite his resignation from the offices, D1 continued to be involved in the Acquisition in 2011.

C.7     Events leading to Sale Shares completion

35.  One of the conditions precedent for Sale Shares completion under the SPA was the vesting of all the property, assets and rights for use in the Business in UBNZ Assets, which was supposed to take place on or before the “Long Stop Date”.  As it transpired, this deadline was extended several times by various deeds of undertaking executed by P, and was eventually postponed to 31 December 2010, because completion of the acquisition under the Farm Agreements and the SPA encountered the following obstacles.  P’s consent to extend the deadline (as opposed to terminating the SPA) in these circumstances forms one of the grounds of complaint P now raises against D1.

36.  On 5 October 2009, the Crafar Receivers were appointed over the Crafar companies.  However this did not appear to present any insuperable obstacle to progression of the Farm Agreements, and UBNZ Trustee thereafter dealt with the Crafar Receivers directly.

37.  On 20 January 2010, New Zealand lawyers engaged by P approached OIO to seek “non-binding guidance” on the proposed purchase of 4 Crafar Farms, as part of a larger transaction whereby 20 Crafar Farms would be acquired.  OIO raised concerns with the proposed transactions, which were relayed to P’s side.  The position taken by P at the time, as set out in a letter from its New Zealand lawyers to the OIO dated 5 February 2010, was that OIO consent was not required for the 4 Crafar Farms.

38.  Meanwhile, the Sale Shares completion took place on 10 February 2010, and P became a 20% shareholder in UBNZ Assets. The 4 Crafar Farms were transferred to UBNZ Assets on 12 February 2010.

C.8     Applications to the OIO

39.  Following that:-

(1) In March 2010, despite the initial view taken that no OIO approval was required (paragraph 37 above), P , UBNZ Assets and UBNZ Funds applied for retrospective consent from the OIO for the acquisition of the 4 Crafar Farms.

(2) At the same time, the UBNZ companies attempted to complete acquisition of the remaining 16 Crafar Farms. To that end, P agreed to release the Note A and Note B issued but held in escrow to UBNZ Trustee to facilitate payment under the Farm Agreements.

(3) P had, by a fifth supplemental agreement to the SPA dated 16 June 2010 and a supplemental deed of undertaking dated 26 June 2010, agreed to extend the deadlines for satisfaction of the conditions precedent with respect to obtaining OIO approval and vesting of property and assets in UBNZ Assets to 22 January 2011 and 31 December 2010 respectively.

40.  However, probably unbeknownst to the parties at the time, OIO had commenced an investigation into the transfer of the Crafar Farms since March 2010.  In the course of its investigation, the OIO received a request for assistance from the Independent Commission Against Corruption in Hong Kong with respect to alleged corruption by senior officers of P.  The matter was then referred to the New Zealand Police and the New Zealand Serious Fraud Office.

41.  Whilst these investigations were ongoing, on 10 August 2010 a further application for consent was submitted to the OIO with respect to acquisition of the remaining 16 Crafar Farms.

42.  In December 2010:-

(1) D2 was adjudged bankrupt in New Zealand (on debts which did not appear to have anything to do with the Acquisition).

(2) D1 and D2 were arrested in Hong Kong on charges of conspiracy to defraud the SEHK for false representations or non-disclosure made with respect to the Acquisition.

(3) The OIO recommended to the relevant authority under the 2005 NZ Act to decline consent on the basis that the “good character” criterion under the statute had not been met, based on the OIO’s concerns relating to both P and D2.

(4) The OIO’s recommendation was accepted and consent under the 2005 NZ Act was refused by the relevant authority on 23 December 2010.

C.9     Financing of Acquisition and application of funds

43.  At this juncture one should briefly consider how the Acquisition was financed and how such funds had been applied.

44.  As can be seen from paragraph 27(2) and (4) above, the total consideration under the SPA of NZ$500 million less NZ$1 was to be satisfied by cash, Note A and Note B.

45.  There appears to be no dispute that:-

(1) In December 2009, P had raised gross amounts of:-

(a) HK$842 million through the placing of 3% coupon convertible notes C issued by P (“Note C”) with third parties;

(b) HK$64 million through the placing of zero-coupon convertible notes D issued by P (“Note D”) with CCB International Asset Management Ltd (“CCBIAM”); and

(c) HK$49 million through CCBIAM’s subscription of optional bond issued by P which carried 3% interest (“Optional Bond”).

Note C, Note D and the Optional Bond collectively raised HK$955 million for P (“CDO Funds”).

(2) Further, on 21 December 2009, P issued:-

(a) HK$276,078,000 (equivalent to NZ$50.25 million) worth of Note A in favour of UBNZ Trustee (as “Deposit” and part of Option Shares consideration under the SPA); and

(b) HK$552,155,999 (equivalent to NZ$100.49 million) worth of Note B in favour of UBNZ Trustee (as part of Sale Shares consideration and part of Option Shares consideration under the SPA)),

which were initially placed in escrow with UBNZ Trustee’s solicitors, Fred Kan & Co (“FKC”), and subsequently released to enable UBNZ Trustee to raise funds to pay for the remaining 16 Crafar Farms (paragraph 39(2) above).

(3) Upon release, UBNZ Trustee had exercised its right to convert part of Note A and Note B into shares, and had sold the remainder to raise HK$25 million and HK$372 million respectively.  The funds UBNZ Trustee deprived from sale of Note A and Note B totalling HK$397 million are referred to as “AB Funds”.

46.  As will be seen below, whilst P advances its claims against the Defendants with respect to the CDO Funds, the AB Funds as well as a sum of NZ$1 million paid by Nation Resources on 7 October 2009 (which totalled HK$1,357,680,000 and is defined as the “Acquisition Funds” in the Statement of Claim)[2], for the purpose of this application P is only relying on the CDO Funds.

47.  As to the application of the Note C funds (HK$842 million), according to an announcement of P dated 2 February 2011[3]:-

(1) approximately HK$89 million had been paid to 3 direct and indirect subsidiaries of P (Nation Resources, Nation Yield Limited (“Nation Yield”) and Guoyuan Natural Dairy (Jiangxi) Co Ltd (“Jiangxi Natural Dairy”)) as working capital ([A] payment);

(2) approximately HK$52 million had been paid as part of the deposit payable by Jiangxi Natural Dairy pursuant to a manufacturing agreement dated 9 June 2010 it entered into with UBNZ Funds (“Manufacturing Agreement”) ([B] payment);

(3) approximately HK$8.73 million had been paid as placing fees and bank remittance charges ([C] payment);

(4) as to the bulk in the sum of HK$692.3 million, it was remitted to Knight Coldicutt (“KC”), New Zealand lawyers engaged by P for the Acquisition, and was applied as follows:-

	Amount (HK$)	Purpose
(a)	29.2 million	Paid to NZND Media (P’s subsidiary) as working capital ([D] payment)
(b)	314.17 million	Paid to UBNZ Trustee as “financial assistance” under the SPA ([E] payment)
(c)	346 million	Paid to the Crafar Receivers as escrow funds for purchase of 16 Crafar Farms ([F] payment)
(d)	1.3 million	Paid to KC and others for professional services rendered for the Acquisition
(e)	1.6 million	Retained by KC in escrow for payment of fees and costs relating to the Acquisition ((d) and (e) collectively [G] payment)

(5) With respect to the [F] payment, after termination of the acquisition of the remaining 16 Crafar Farms in circumstances described in paragraph 52 below, the sum (NZ$65.3 million)[4] was returned to KC which was then applied as follows:-

	Amount (NZ$)	Purpose
(a)	15 million	Paid to Nation Yield for the purpose of Jiangxi Natural Dairy’s registered capital ([F1] payment)
(b)	2.3 million	Paid to NZ Natural Dairy Limited (P’s subsidiary) as working capital ([F2] payment)
(c)	23 million	Paid to UBNZ Funds for (i) remaining deposit under the Manufacturing Agreement (2.77 million) and (ii) part payment of 3 months’ milk orders under the Manufacturing Agreement (20.23 million) ([F3] payment)
(d)	25 million	Paid to Nation Resources for (i) working capital (73.5%) and (ii) part payment of 3 months’ milk order in favour of UBNZ Funds (26.5%) under the Manufacturing Agreement ([F4] payment)

48.  As to the [E] payment:-

(1) I note that on the documents available, while the announcement of 2 February 2011 refers to a sum of HK$314.17 million being paid to UBNZ Trustee on 14 February 2010 as “financial assistance” under the SPA, the only payment from KC to UBNZ Trustee that one can see from KC’s ledgers during that period was a sum of NZ$51.6 million (converted into over HK$280 million at the time) made on 10 February 2010 described as “part payment of shares” (most likely a reference to the Sale Shares).

(2) Assuming[5] this NZ$51.6 million constituted part of the [E] payment, it was further transferred as follows[6]:-

Date	Movement of [E] payment
10/2/10	NZ$51.6 million paid to UBNZTrustee for Sale Shares completion	NZ$51.6 million transferred to UBNZAssets	NZ$21.2 million transferred to UBNZ Funds	NZ$10.5 million paid to CrafarReceivers
				NZ$10.7 million paid to UBNZTrustee as loan
12/2/10			NZ$30.1 million transferred to UBNZ Funds	NZ$15.25 million paid to CrafarReceivers
15/2/10				NZ$14.55 million paid to UBNZTrustee as loan
			NZ$270,000 transferred to UBNZ Funds to hold as security for Crafar company’s obligation to replace stock	NZ$270,000 paid to UBNZTrustee as loan

(3) In other words, of the NZ$51.6 million paid by KC to UBNZ Trustee, some NZ$26 million had been paid to the Crafar Receivers (for purchase of the 4 Crafar Farms, which had been transferred to UBNZ Assets), with a balance of some NZ$25.6 million remained in UBNZ Trustee and UBNZ Funds.

(4) In addition, P claims that further sums totalling NZ$558,041.21 had been paid by KC to UBNZ Trustee on 8 March 2010 and 4 May 2010.

(5) As shall be seen below, P has stated, in its announcements dated 2 February 2011 and 3 May 2011, that the HK$314 million “financial assistance” had been repaid to P in full by the end of March 2011. It appears that the funds used to make such repayment originated primarily from the AB Funds that UBNZ Trustee and UBNZ Funds recovered from the Crafar Receivers following termination of the Farm Agreements.

49.  As to the Note D funds (HK$64 million):-

(1) HK$40 million had been applied towards payment of legal and OIO consultants’ fees ([H] payment); and

(2) HK$24 million had been remitted to Nation Resources as working capital on 23 April 2010 ([I] payment).

50.  As to the Optional Bond funds (HK$49 million), it was paid to UBNZ Funds on 16 June 2010 as part payment of the deposit under the Manufacturing Agreement ([J] payment).

51.  As to the AB Funds (HK$397 million), out of the HK$372 million portion HK$314.17 million had been applied as follows:-

Date	Movement of AB Funds
25/5/10	NZ$65.59 million paid to UBNZTrustee by Sun Hung Kai Investment Services	NZ$60 million transferred to UBNZFunds	NZ$31 million paid to CrafarReceivers as refundable and non-refundable deposits for remaining 16 Crafar Farms
24/6/10			NZ$24 million paid to CrafarReceivers as tax payable for acquisition of 16 Crafar Farms
Jan 11				NZ$24 million deposit refunded by Crafar Receivers
Mar 11				NZ$23.97 million tax provision refunded by Crafar Receivers

C.10      Restructuring of the Acquisition post-OIO refusal

52.  Following the refusal of approval under the NZ 2005 Act:-

(1) An undated sixth supplemental agreement to the SPA was entered into to further extend the deadline for satisfaction of the condition precedent with respect to obtaining OIO approval (and P’s right to terminate the SPA) to 30 September 2011.

(2) UBNZ Funds served notice on the Crafar Receivers cancelling the purchase of the remaining 16 Crafar Farms on 12 January 2011.

(3) Following refund made by the Crafar Receivers:-

(a) The [F] payment (being part of the CDO Funds) was applied in the manner set out in paragraph 47(5) above.

(b) Although there are some discrepancies in the figures[7], it appears that with respect to the AB Funds, (i) HK$160 million had been transferred to Nation Yield on 19 January 2011; (ii) HK$145 million had been transferred to P on 23 March 2011; and (iii) the Board agreed to set off approximately HK$9 million from P’s payment otherwise due to UBNZ Funds for milk under the Manufacturing Agreement.  

53.  In its announcement dated 2 February 2011, P stated that notwithstanding the cancellation of the Farm Agreements, P considered it did not have to terminate the SPA, and was considering its options and negotiating the revision of the same.

54.  It appears that in December 2011, P entered into a number of agreements to restructure the Acquisition (“Flying Max Agreements”).  In gist:-

(1) The consideration for the Sale Shares and the Option Shares was reduced to just under NZ$100 million.

(2) Assets in the form of cattle and dairy cattle, plant, machinery, tools and equipment valued at no less than NZ$99 million would be transferred to UBNZ Assets.

(3) P would pay, on behalf of UBNZ Assets, NZ$400 million to Flying Max Limited (“Flying Max”) and Earn Cheer Limited (“Earn Cheer”), in the form of the unissued portions of Note A and Note B as well as shares in P held by UBNZ Trustee through conversion of the issued Note A and Note B, for managing and operating the Business under a management agreement, whereunder Flying Max would provide a profit guarantee of net profits after tax of no less than NZ$35 million for each of the first 2 financial years, with shortfall to be multiplied by 14 and paid by Flying Max through cancellation of Note A and Note B and thereafter in cash. To that end Flying Max further entered into an agency agreement with Earn Cheer as exclusive agent for marketing and sale of dairy and related products in certain regions in the Mainland.

55.  It is P’s case that Flying Max and Earn Cheer were beneficially owned and/or controlled by D1 and D2, based on (inter alia) the connections between the sole director of Flying Max and Earn Cheer with D2 and D1 respectively, common directorship in Flying Max’s subsidiary and company controlled by D2, as well as UBNZ Trustee acting as guarantor of Flying Max’s liabilities for substantial loans advanced by a lender. Both D1 and D2 deny this allegation.

56.  It also appears that the Flying Max Agreements were only disclosed by P in an announcement made on 9 September 2013.  

57.  Following the Flying Max Agreements:-

(1) The remaining portions of Note A and Note B were issued and transferred to Flying Max and Earn Cheer, whereupon they converted the bulk of them into P’s shares. 

(2) The Option Shares were transferred to P, such that P became the 100% shareholder of UBNZ Assets.

58.  Meanwhile, pursuant to the direction of OIO, UBNZ Assets sold the 4 Crafar Farms to third parties, which sale proceeds were said to have been wholly applied towards discharging various mortgage loans.

D.     Criminal Proceedings against D1, D2 and D3

59.  Following D1 and D2’s arrest in Hong Kong (paragraph 42(2) above), upon the Department of Justice’s application, the Restraint Order was granted on 26 October 2011 with respect to all of the property of the Defendants in and outside Hong Kong.

60.  Two sets of criminal proceedings have since been commenced against D1, D2 and D3 in Hong Kong.

61.  In HCCC No. 82 of 2014 (“1^st Criminal Proceedings”):-

(1) D1, D2 and Eric Yee were charged with conspiracy to defraud the SEHK, P and P’s existing shareholders by dishonestly making false representations and concealing or failing to disclose matters thereby causing (i) the SEHK to allow the publication of the 2009 Announcement and the 2009 Circular; (2) P and its existing shareholders to approve the Acquisition; and (3) P to issue and release convertible notes and the Optional Bond for payment of the Acquisition.

(2) They were convicted after trial before a judge and jury, which conviction was upheld by the Court of Appeal in CACC No. 172 of 2016.  On appeal to the Court of Final Appeal in FACC Nos. 26 to 28 of 2018, the Court of Final Appeal allowed the appeal of D1, D2 and Eric Yee on the ground of duplicity, quashed their convictions and ordered a re-trial.

(3) I am informed that the re-trial (HCCC No. 309 of 2019) has been fixed to commence on 11 January 2021, with 105 days reserved.  

62.  In DCCC No. 1022 of 2012 (“2^nd Criminal Proceedings”):-

(1) D3 and a partner of FKC were charged with various counts of dealing with property known or reasonably believed to represent proceeds of an indictable offence, with respect to funds said to represent the traceable proceeds of the CDO Funds.

(2) They were convicted after trial by a district judge, which conviction was quashed by the Court of Appeal in CACC No. 299 of 2014 and a re-trial was ordered.

(3) At the re-trial before another district judge, both defendants (including D3) were acquitted.

63.  It is common ground that (i) since all convictions against D1, D2 and D3 have been quashed, I must proceed on the basis that there is no conviction against any of them; (ii) I cannot rely on the findings made in the judgments, decisions or rulings in the 1^st and 2^nd Criminal Proceedings (Secretary for Justice v FTCW [2014] 1 HKLRD 849, §§93-94 (per Lam VP)); and (iii) I am entitled to consider the underlying documentary evidence and witness testimony referred to in the aforesaid judgments, decisions or rulings as hearsay evidence, subject to the question of weight (China Everbright-IHD Pacific Ltd v Ch-ng Poh [1999] 2 HKLRD 555).

E.     The Parties’ Pleaded Case

E.1     P’s pleaded case

64.  P’s case is set out in a 61-page Statement of Claim with 8 schedules.

65.  P claims that D1 was:-

(1) a de jure director of P between 7 May 2009 and 15 September 2009; and

(2) a de facto director, alternatively a shadow director, of P from 15 September 2009 to 22 December 2016 (the date of appointment of JPLs), by reason of:-

(a) D1’s continued involvement in and responsibility for all significant aspects of the Acquisition (including inter alia the Sale Shares completion, the Flying Max Agreements and the use of the Acquisition Funds), and his causing P to incorporate a number of subsidiaries purportedly to carry on the Business;

(b) at least one or more members of the Board – including Graham Chin who was said to be a family friend of D1 and D3 who held shares in various companies which substantially owned indirectly Global Food, a company acknowledged by D3 to be mainly beneficially owned by her) – were accustomed to act in accordance with the directions or instructions of D1; and

(c) KC continued to act on D1’s instructions in relation to the application of the Acquisition Funds;

(3) alternatively, the agent of P, by reason of his having acted on behalf of P in relation to all significant aspects of the Acquisition including the use of the Acquisition Funds.

66.  As such, P claims that D1 owed various fiduciary duties to P, including (inter alia) the duty not to place himself in a position where his personal interests or duties to others conflict with P’s interests, the duty to act in the best interest of P, and the duty to exercise his powers for proper purposes.

67.  P further claims that D1 had acted in breach of the fiduciary duties.  In Statement of Claim §152, P sets out 12 counts of conduct in breach of fiduciary duties, broadly summarized as follows:-

(1) procuring P to enter into the SPA in circumstances where D1 had a conflict of interest (namely, his beneficial interest in UBNZ Funds; his intended or actual sharing in part of the Acquisition Funds with D2; and his being privy to the Commission Agreement), which conflict he had not only failed to declare but had concealed from the directors and shareholders of P and the SEHK;

(2) procuring P to enter into the SPA which terms were wholly uncommercial, in particular when the consideration under the SPA was nearly doubled that under the Farm Agreements, and P could have acquired those assets directly from the Crafar companies;

(3) procuring P to extend the various deadlines under the SPA and to postpone its right to terminate the same in circumstances where there was no approval from the OIO;

(4) procuring P to enter into the Flying Max Agreements in circumstances where (i) he had a conflict of interest; and (ii) they were plainly not in the commercial interest of P;

(5) receiving or agreeing to receive secret profits in relation to the Acquisition; and

(6) applying the Acquisition Funds for his own benefit or for the benefit of his associates.

68.  With respect to the allegation of receipt of Acquisition Funds by D1 or his associates, P’s case is as follows.

(1) As can be seen from paragraphs 48 and 51 above:-

(a) Of the approximately NZ$52.1 million (Note C funds) paid to UBNZ Trustee since early February 2010, only some NZ$26 million had been paid to the Crafar Receivers for acquiring the 4 Crafar Farms, and some NZ$26 million remained with UBNZ Trustee and UBNZ Funds.

(b) Of the NZ$65 million (AB Funds) paid to UBNZ Trustee in May 2010, NZ$60 million was transferred to UBNZ Funds, out of which NZ$55 million had been paid to the Crafar Receivers for part payment of the 16 Crafar Farms, leaving (i) some NZ$5 million with UBNZ Trustee and (ii) NZ$5 million with UBNZ Funds.

(2) P’s case is that the Acquisition Funds had been applied for the benefit of the Defendants as follows:-

Date	Use of Acquisition Funds pleaded by P
10-15/2/10	NZ$51.6 million transferred to UBNZ Trustee; after payments to Crafar Receivers approximately NZ$25.6 million remained with UBNZ Trustee
19/2/10	D1 purchased 3 New Zealand properties in the name of Anfatex Global Financial Investment Holdings Limited (“Anfatex”), a company wholly owned by D1, for NZ$8 million
	D1 (through Anfatex) purchased another New Zealand property for NZ$1.82 million
	(collectively “Anfatex Properties”)
2/3/10	HK$73.736 million (~NZ$13.7 million) remitted by UBNZ Trustee to D4’s account (1) at ICBC Hong Kong
	HK$73.7 million transferred by D4 to D4’s account (2) at ICBC Hong Kong
11/3/10	HK$69 million transferred by D4 back to D4’s account (1) at ICBC Hong Kong
		D4 drew cheque of HK$68.95 million (signed by D1) in favour of FKC client account
12/3/10			FKC drew cheque of HK$68.95 million in favour of D3 (“D3 1st Payment”)
25/5/10 – 24/6/10	NZ$65.59 million transferred to UBNZ Trustee, of which NZ$60 million transferred to UBNZ Funds, and which NZ$55 million paid to Crafar Receivers, leaving balance of NZ$5.59 million with UBNZ Trustee and NZ$5 million with UBNZ Funds
10/6/10 – 16/8/10	Anfatex received NZ$500,000 in cash from KC (“Anfatex Payments”)[8]
10/6/10 – 13/7/10	UBNZ Trustee (through KC) paid NZ$2.16 million to D4
14/7/10	D1 and D3 acquired a New Zealand property in their joint names for NZ$2.3 million (“NZ Property”)
7/7/10 – 17/8/10	NZ$103,105.45 transferred by UBNZ Trustee (through KC) to D2 (“D2 Payment”)
23/2/11	D1 and D3 discharged mortgage over 2 New Zealand properties securing NZ$1.38 million and NZ$900,000
13/4/11	D1 and D3 discharged mortgage over Hong Kong property securing HK$23.8 million (~NZ$4.63 million)
	(collectively “Mortgaged Properties”)

(3) In other words, P’s case is that part of the Acquisition Funds had been applied for the benefit of the Defendants by:-

(a) acquiring the Anfatex Properties and the NZ Property;

(b) making the Anfatex Payments;

(c) discharging the liabilities on the Mortgaged Properties;

(d) D3 1^st Payment (HK$68.95 million);

(e) D2 Payment (NZ$103,105.45); and

(f) paying some NZ$2.16 million and HK$4,736,482.56[9] (collectively “D4 Payment”).

(4) Further, P seeks to challenge the following payments derived from the CDO Funds:-

(a) HK$29.2 million paid to NZND Media (P’s subsidiary) ([D] payment in paragraph 47(4)(a) above), on the basis that at the time of payment D1 and Eric Yee were the only directors of NZND Media and the sum could not be identified in the accounts of NZND Media;

(b) NZ$25 million paid to Nation Resources ([F4] payment in paragraph 47(5)(d) above), from which a sum of HK$24,221,420 was paid out to D3 within 5 days of receipt (“D3 2^nd Payment”);

(c) payments made (through various subsidiaries of P) to UBNZ Funds for the purpose of the Manufacturing Agreement (paragraph 47(2) above), namely (i) [B] payment; (ii) [F3] payment; (iii) [F4] payment; (iv) [J] payment (paragraphs 47 and 50 above); and (v) 2 further sums of NZ$1.77 million and NZ$52.5 million, on the basis that P’s justification for the Manufacturing Agreement and payments thereunder at different times were internally inconsistent, and UBNZ Funds had substantially under-performed the Manufacturing Agreement yet very significant sums had been paid by P; and

(d) specifically with respect to the [F3] payment (NZ$23 million), NZ$9.3 million of which had within 8 days of receipt been transferred to D5 (“D5 Payment”), contrary to the stated use of those funds in the announcement dated 2 February 2011.  

(5) For completeness, P has also identified 4 groups of payment in its Statement of Claim which were said either to have derived from the CDO Funds or received by D3, with respect to which no claim has yet been advanced as the JPLs are still investigating the same.  These are (i) [F1] payment; (ii) [F2] payment; (iii) [H] and [I] payments (paragraphs 47(5) and 49 above); and (iv) sums totalling HK$114,400,749.18 received by D3 which were not sourced from P or its subsidiaries.

69.  P claims that but for D1’s breaches of fiduciary duty, it would not have entered into the SPA, or would have terminated the same at an early stage; it would not have raised finance through the use of the various convertible notes and Optional Bond or use the Acquisition Funds in the manner it did; and it would not have entered into the Flying Max Agreements.

70.  Accordingly, P claims that it has suffered loss and damage, at least in the sum of HK$3,103,227,573 (being the total of (i) the Acquisition Funds and (ii) the face value of Note A and Note B issued to and converted by Flying Max and Earn Cheer), as well as the legal and fund-raising costs incurred by P in relation to the Acquisition and not discharged from the Acquisition Funds.  P further acknowledges that it will give credit for any part of the Acquisition Funds that had been used for P’s proper business purposes.

71.  As against D2 to D5, P makes the following claims:-

(1) receipt-based claims against D2 to D5 in respect of (i) D2 Payment (D2); (ii) D3 1^st Payment, D3 2^nd Payment, NZ Property and Mortgaged Properties (D3); (iii) D4 Payment (D4) and (iv) D5 Payment (D5); and

(2) dishonest assistance against D2 to D5.

(3) P also claims unlawful act conspiracy against all Defendants.

E.2         D1 and D3’s pleaded case

72.  D1 and D3 filed a joint Defence.  Save for the matters set out in paragraph 73(8) below, their Defence essentially consists of bare assertions and denials.

73.  In gist, D1 and D3 claim that:-

(1) They are independently wealthy and successful merchants in their own right.

(2) D1 ceased to be a director of P after his resignation on 15 September 2009, and denies he was a de facto or shadow director of P or exercised any influence or control over P or the Acquisition thereafter.  In any event there were other independent directors on the Board and he denies the directors named in the Statement of Claim acted on his instructions (although the relationships with him and D3 are admitted).

(3) D1 was not in a position of conflict at the time of the SPA as:-

(a) he had no legal and beneficial interest in UBNZ Trustee or the UBNZ group at the time of the SPA, having procured Global Financial to transfer all its interests in UBNZ Funds by 8 May 2009 “in order to avoid any possible conflict of interest” and because Global Financial had already been struck off the register in the BVI on 1 May 2009 (which was also said to have triggered the transfer); and

(b) by then the Commission Agreement had already lapsed and ceased to have any legal effect, and in any event the Commission Agreement was not related to the SPA.

(4) They deny the SPA was uncommercial since the subject matter of the SPA and the Farm Agreements were different  - under the SPA, P was acquiring the Business with a profit guarantee; as such the consideration under the Farm Agreements was said to be irrelevant.

(5) The decision to enter into the SPA was made by Katherine Chan “with the support of [D1] in the negotiations”, and the Board also relied on external advisers to that end.   

(6) D1 disputes the authenticity of the Eric Yee 2009 Emails, and claims that he did not receive them nor did he have knowledge of them, and that he rarely used emails and did not understand English.

(7) D1 further denies that he caused or procured the Flying Max Agreements, or that he beneficially owned or controlled Flying Max or Earn Cheer.

(8) Specific defences have been pleaded with respect to the following payments:-

(a) For the D3 1^st Payment, it is said that:-

1. D3 had procured Global Food to enter into a Trade Marks Licensing and Production Lines Purchase Agreement with P on 16 November 2009 (“VSA-2”), whereunder P was to purchase various production lines used for packaging beverage from Global Food for HK$26 million and to obtain an exclusive licence to use certain trademarks owned by Global Food for marketing beverage products in the Mainland for 3 years for licence fees of no less than HK$30 million.  The consideration under VSA-2 was to be wholly satisfied by the allotment of 70 million shares in P.  It is said that the closing price of P’s shares on 16 November 2009 was HK$0.73, such that the value of the 70 million shares would have been HK$51.1 million.

2. By early January 2010, the share price of P had increased to HK$1.96, and D1 was interested in acquiring shares in P.  He therefore procured D4 to enter into a Transfer Agreement with D3 on 8 January 2010 to acquire all of P’s shares D3 was to obtain under VSA-2 for HK$110 million (“Transfer Agreement”).

3. It is said that the D3 1^st Payment was part payment by D1 under the Transfer Agreement.

(b) For the Anfatex Properties, NZ Property, Anfatex Payments and redemption of the Mortgaged Properties, D1 and D3 claim that those funds originated from D5 (instead of the Acquisition Funds) pursuant to an agreement dated 12 February 2010 between D4 as vendor and D5 as purchaser (“Super Worth Agreement”), whereby D5 agreed to purchase (i) all the rights under VSA-2 that D4 had or was going to acquire; (ii) production lines owned by Global Food and its subsidiaries; and (iii) the sales teams and network in the Mainland owned by Global Food and D4, for RMB195 million.

(c) For the D3 2^nd Payment, it was repayment of various interest-free loans totalling HK$24,221,420 D3 advanced to P (and paid to Nation Resources) pursuant to 6 loan agreements entered into between 13 September 2010 and 17 November 2010 (“D3 Loan Agreements”), whereunder the loans had to be repaid within 6 months.  The D3 Loan Agreements were signed by Miranda Ng, an executive director of P, on its behalf.

(9) As for the rest of the payments allegedly made from the Acquisition Funds in paragraph 68 above, D1 and D3 either non-admit or give bare denials.

(10) Further, D1 and D3 rely on the repayment by UBNZ group of HK$314 million (paragraph 48(5) above) to P and allege that P is not entitled to claim any further loss and damage.

E.3     D2 and D5’s pleaded case

74.  D2 has purported to file a joint Defence with D5.  Their Defence only consists of bare denials.

F.     The Summons

75.  The Summons was issued on 9 July 2019, shortly after conclusion of D1, D2 and Eric Yee’s appeal to the Court of Final Appeal in the 1^st Criminal Proceedings and before judgment was handed down.  The JPLs explain that this was with a view to protecting P’s position irrespective of the outcome of the appeal (whether resulting in the discharge of the Restraint Order or the application for a confiscation order).  I will consider the significance or otherwise of the Restraint Order in the context of risk of dissipation below.

76.  In the draft order attached to the Summons, P seeks (i) proprietary injunction against D1, D2 and D3 with respect to assets in Hong Kong and overseas set out in Schedule 3 and Schedule 4 thereto (which appear to contain all of their known assets); and (ii) worldwide Mareva injunction against all Defendants up to a cap of HK$3 billion.

77.  At the hearing, Ms Lam SC, counsel for P, clarified P’s position as follows:-

(1) In addition to proprietary and Mareva injunctions, P also seeks an injunction on the Chabra basis against D3.

(2) For the proprietary injunction, P would focus on (i) the NZ Property; (ii) the Mortgaged Properties; (iii) D3 1^st Payment; (iv) D3 2^nd Payment and (v) D5 Payment[10].

(3) For the Mareva and Chabra injunctions:-

(a) P would not rely on the Flying Max Agreements;

(b) for D2 to D5, P would only rely on dishonest assistance;

(c) P would revise downwards the cap to HK$955 million (the amount of the CDO Funds).

G.     Mareva Injunction

78.  For Mareva injunction, it is common ground that a plaintiff applying for the same has to satisfy the court that:-

(1) it has a good arguable case;

(2) there are no or insufficient assets within the jurisdiction to satisfy its claim;

(3) there are assets outside the jurisdiction; and

(4) there is a real risk of dissipation or secretion of those assets so as to render nugatory any judgment which a plaintiff may eventually obtain:

China Medical Technologies, Inc (in liq) v Wu Xiaodong[2019] HKCFI 1266, HCA 3391/2016 (unrep., 22 May 2019), §15 (per P Ng J).

79.  In this case, the battle lines are drawn on the first and fourth requirements.

G.1     Good arguable case – D1

80.  The threshold of “a good arguable case” is much higher than “a serious issue to be tried” under the American Cyanamid principles.  While the plaintiff need not go so far as to persuade the court that it is likely to win, it needs to show a case which is more than barely capable of serious argument, albeit not necessarily one that the judge believes to have a better than 50% chance of success.  The existence of a good arguable defence does not necessarily negate a good arguable case: China Medical Technologies §16.

81.  In assessing whether the threshold has been met:-

(1) the court must not conduct a trial on affidavit of disputed questions of fact, and should take a broad preliminary view of the plaintiff’s merits, doing the best the court can, notwithstanding the obvious difficulties that interlocutory applications present;

(2) that said, there must be proper evidential basis or concrete evidence to support the plaintiff’s claim: Gu Zhuoheng v Huang Wei Cheng[2019] HKCFI 381, HCA 2509/2017 (unrep., 13 February 2019), §§67-68 (per Lisa Wong J); and

(3) where serious allegations are made which depend upon the drawing of inferences as opposed to direct evidence, the court should consider whether the evidence demonstrates there are facts and matters capable of justifying such inference, having regard to the substance and implications of the matters relied upon by the plaintiff and testing them against the defendant’s evidence: Kwok Hiu Kwan v Convoy Global Holdings Limited[2018] HKCFI 1729, HCMP 900/2018 (unrep., 26 June 2018), §§15-17 (per Harris J).

82.  P’s arguments are based on the entering into of the SPA and the use of the Acquisition Funds, and may be summarized as follows:-

(1) D1 was a de jure director of P until 15 September 2009, and thereafter a de facto or shadow director, owing fiduciary duties to P.

(2) D1 procured P to enter into the SPA, without disclosing his conflict of interest, in the UBNZ companies or in receiving commission from the Acquisition or both.

(3) He had knowledge of but failed to disclose to P the Eric Yee 2009 Emails, which showed that the financials of the Crafar Farms had been manipulated and the value of their assets as well as profitability had been inflated.

(4) The SPA was seriously impoverished to P, given P had to pay almost double the value for the Crafar Farms (compared to the consideration under the Farm Agreements).

(5) D1 and his associates had misappropriated the Acquisition Funds in the manner set out in paragraph 68(2)-(4) above.

83.  Mr Wong SC, counsel for D1 and D3 (whose submissions were adopted by Mr Cao, counsel for D2), submitted that P has failed to demonstrate a good arguable case.  In this regard Mr Wong took issue with (i) the existence of any fiduciary duties after 15 September 2009; (ii) whether breaches of duty can be established on the evidence; and (iii) the quantum of loss claimed, having regard to:-

(1) The evidence adduced by P, consisting of a few emails in 2010 and 2011, showed no more than “sporadic consultations” of D1 and was not sufficient evidence to show D1 had control of P’s affairs subsequent to his resignation as de jure director; nor could the “loose connection” between D1 and a minority of P’s directors satisfy the test for shadow director.

(2) D1’s denial of conflict of interest, which is consistent with (i) D1 and D2 having only had historical business dealings prior to the SPA; and (ii) the Commission Agreement was no longer operative at the time of the SPA and D1’s evidence that he never received any commission thereunder.

(3) D1’s evidence that he did not speak English and had not read or replied to any of the Eric Yee 2009 Emails.

(4) The fact that the subject matter of the SPA (acquisition of the Business, the assets identified together with a profit guarantee) was different from that under the Farm Agreements, and the absence of evidence as to the detailed terms of the Farm Agreements for a proper comparison to be made.

(5) Further, the SPA was the collective decision of the Board, including Katherine Chan and other directors against whom no allegations of impropriety have been made, with assistance from legal and professional advisors.

(6) In any event, the SPA was not only publicized but specifically drawn to the attention of the relevant authorities (the OIO) by P; such publicity was inconsistent with P’s allegation that D1 and D2 were seeking to perpetuate a fraudulent scheme.

(7) The Acquisition Funds had been paid to KC for the purpose of the Acquisition and P’s subsidiaries and hence had been applied towards the proper purposes of P. Further, P had received (i) 100% shares in UBNZ Assets (together with NZ$99 million worth of assets under the Flying Max Agreements) and (ii) repayment of HK$314 million from UBNZ Trustee.

(8) Moreover, the receipt of funds by D1 and D3 was in respect of genuine and bona fide commercial transactions entered into after D1 had resigned from the Board.

84.  In my view, a good arguable case has been shown on the materials available for the following reasons.

85.  First, it is common ground that D1 was a de jure director of P between 7 May 2009 and 15 September 2009, during which (i) the SPA was entered into and (ii) the Eric Yee 2009 Emails were sent and copied to D1.

86.  Second, there is sufficiently cogent evidence to show that D1 was in a position of conflict or possible conflict with respect to P’s entering into the SPA during the period when he was a de jure director.

87.  With respect to conflict of interest:-

(1) A director must not place himself in a position of possible conflict between his interest and his duty to the company, and cannot retain an advantage acquired as a result of such a conflict: Grand Field Group Holdings Ltd v Chu King Fai [2016] 1 HKLRD 1316, §§4.2 and 4.4 (per Cheung JA).

(2) Liability does not depend on any finding of mala fide or dishonesty. The fact of a benefit acquired in breach of this rule is necessary and sufficient to found liability: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144G-145A; Kao Lee & Yip v Donald Koo [2003] 3 HKLRD 296, §135 (per Ma J, as he then was).

(3) The approach to be adopted is framed by Lord Upjohn in Phipps v Boardman [1967] 2 AC 46, 124 (adopted in Kao Lee & Yip §50):-

“It is perhaps stated most highly against trustees or directors in the celebrated speech of Lord Cranworth L.C. in Aberdeen Railway v Blaikie, where he said:

‘And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.’

The phrase “possibly may conflict” requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.” (emphasis added)

88.  In coming to the conclusion that there is a good arguable case on D1’s conflict or possible conflict, I rely on 2 matters.

(1) The first is D1’s interest in UBNZ Funds. It is not disputed that when D1 was appointed a director of P, he had a significant indirect interest in UBNZ Funds, the corporate vehicle used to acquire the assets from the Crafar companies for injection into UBNZ Assets for the purpose of the Acquisition.

(2) Although D1 claims to have procured Global Financial to divest its interests in UBNZ Funds in favour of UBNZ Trustee on 8 May 2009 (before the SPA was entered into), it has never been his case or evidence that the disposal was for consideration (paragraph 73(3)(a) above), or that Global Financial had intended to gift the shares to UBNZ Trustee.  As such, there is a serious argument that even if legal title to the shares might have passed to UBNZ Trustee, the beneficial interest remained in Global Financial (of which D1 was a 50% shareholder).  I do not consider that I need to go as far as Mr Wong submitted to find that the divestment of UBNZ Funds shares was false before I can find a good arguable case on conflict on this basis.

(3) Further, D1 has given inconsistent explanations for the transfer of UBNZ Funds shares – on one hand he claims the transfer was to avoid conflict of interest; yet he also claims that it was because Global Financial had been struck off from the register (paragraph 73(3)(a) above).  In any event neither explanation suggests that consideration had been paid.

(4) The second matter is the Commission Agreement (paragraph 18 above). Mr Wong argued that the Commission Agreement only had a tenor of one month and had already expired by the time of the SPA, by reference to the Consultancy Agreement (not in evidence before me) which was said to last for one month only.  However, that is not borne out by (i) the terms of the Commission Agreement, which contained no tenor or term of expiration, and made no reference to the Consultancy Agreement; and (ii) the fact that the Consultancy Agreement was entered into more than one month after the Commission Agreement and D1 was not a party thereto, such that there is no factual basis to suggest at the time of the Commission Agreement, D1 must have been aware of the terms of the Consultancy Agreement or must have intended that such terms would be incorporated into the Commission Agreement.

(5) Further, I note that Barry Fraser had by an email dated 16 September 2009 demanded and had also procured Latitude Asia Limited to issue a statutory demand (against UBNZ Funds, D1 and D2) in 2010 for payment of commission under the Commission Agreement.  Although I do not consider such conduct to be in any way conclusive, it was consistent with the express wording of the Commission Agreement and the absence of any term of expiration therein.

89.  In other words, there is sufficient evidence to show that D1 was in a position of conflict or possible conflict with respect to (i) the consideration payable to UBNZ Trustee under the SPA, whereunder P was to acquire shares in UBNZ Assets which assets and Business would be that of the Crafar Farms vested in UBNZ Funds; and (ii) any commission payable to D1 under the Commission Agreement for the successful sale of the Crafar Farms.

90.  I note there is at present no evidence that D1 had received any commission under the Commission Agreement and D1 has denied the same. However there is plainly a prima facie entitlement to commission and the other party to the Commission Agreement (Barry Fraser) has made a claim for the same. In the circumstances I consider there is sufficient basis to show a conflict or possible conflict with respect to the commission payable.  In any event, given the first matter identified above D1 would be called upon to account with respect to his share of the SPA consideration received by UBNZ Trustee.

91.  Third, the Eric Yee 2009 Emails (paragraph 30 above) provide a sufficiently cogent basis to show that D1 was aware that the financials of the Crafar Farms had been manipulated and their asset value and financial performance were much less favourable than as presented, and his failure to disclose the same to P would clearly be contrary to the best interest of P. 

(1) The Eric Yee 2009 Emails were clearly copied to D1.  As to D1’s claim that he did not read English, did not use emails and did not read the same, that assertion does not sit well with (i) D1’s own claim that he has been active in the political scene in New Zealand and is the founder of a political party there; (ii) D1 having sent an email dated 16 September 2009 to Barry Fraser in English (paragraph 88(5) above, which was before the courts in the 1^st Criminal Proceedings though not in evidence before me); and (iii) various emails in 2009 and 2011 recording discussions between Kerry Knight of KC with D1 over the Acquisition, which would have been conducted in English and there is no suggestion otherwise in the evidence.

(2) Further, as can be seen from paragraphs 29, 31 and 32 above, the financial performance of the Business (which included the periods of up to 31 March and 31 May 2009) that the Eric Yee 2009 Emails indicated manipulation thereof was clearly relevant to the consideration payable by P under the SPA (which was agreed upon based on inter alia the financial performance and future prospects of UBNZ Assets, which in turn depended wholly on the performance of the Crafar Farm business since UBNZ Assets had no business of its own), and it was on the basis of such information that the SPA was approved by P’s shareholders in general meeting.

(3) The fact that the extraordinary general meeting of P only approved the SPA on 2 October 2009 matters not, since there is no dispute that the general meeting relied on the 2009 Circular (which was compiled and issued at the time when D1 was a de jure director and in breach of his fiduciary duty) in arriving at its decision.

(4) I am also of the view that there is force in Ms Lam’s submission that D1’s suppression of the fact that the financials had been manipulated bolsters P’s case of conflict, namely D1 had an interest in the UBNZ companies and would stand to gain from the SPA.

92.  I should also mention that D1 and D3 have relied upon a censure issued by the SEHK on 13 January 2017 (“SEHK Censure”) as evidence to show D1 did not commit any breach of fiduciary duty, on the basis that various other directors of P were criticized by the SEHK but not D1.  The SEHK Censure was concerned with (inter alia) failure by P’s former and then current directors to ensure the contents of the 9 September 2013 announcement (paragraph 56 above) were accurate, complete and not misleading and that requisite shareholders’ approval be obtained with respect to (i) the revised use of the CDO Funds, and (ii) the restructuring of the SPA by the Flying Max Agreements. The scope of the SEHK Censure was narrower than the present inquiry and it is not known what materials were presented to the SEHK which resulted in the SEHK Censure.  Accordingly I do not consider the SEHK Censure to have the effect of or is sufficient to undermine the good arguable case otherwise shown for D1’s breaches of fiduciary duty. 

93.  Fourth, as to D1 and D3’s allegation that he did not procure P to enter into the SPA, that there were other members of the Board (including Katherine Chan) and it was a collective decision of the Board, having regard to (i) the statement in the 2009 Circular that since his appointment D1 had “been responsible for assisting the Board explore the business opportunity, negotiate and execute the terms of the Acquisition”; and (ii) D1’s acknowledgement that he was the one who handled the negotiations (paragraph 73(5) above), it is clear that D1 had a pivotal role in the structuring of the Acquisition and the terms of the SPA, in circumstances where he had not disclosed to the Board his conflict or potential conflict of interest.

94.  Fifth, given the breaches of fiduciary duty identified above, whether the SPA was of itself uncommercial or impoverished to P may not be a matter of great significance for present purposes.  The commerciality or otherwise of a transaction is normally a matter for the board or the general meeting. In this case the 2009 Announcement and the 2009 Circular did set out factors which the Board had taken into account in arriving at the consideration payable under the SPA, of which the valuation of the Crafar Farms was just one factor.  That said, the subject matter of the SPA was the Crafar Farms assets (together with the Fonterra Shares attached thereto), and the profit guarantee also depended upon the profitability of the business of the Crafar Farms, such that there would appear to be a large measure of overlap between the SPA and the Farm Agreements through which UBNZ Funds and UBNZ Assets acquired those underlying assets and the ability to generate profit. Nevertheless, given the SPA consideration arrived at by the Board and endorsed by the general meeting was based on false information which D1 had failed to disclose in breach of fiduciary duty, it would appear to me that a case of breach has been shown up to the requisite standard, without the need to go into the uncommerciality or otherwise of the SPA at this stage.

95.  Sixth, the above analysis also means that whether D1 was a de facto or shadow director of P after he resigned on 15 September 2009 may not be a matter of great significance for present purposes, since the entering into of the SPA and the endorsement of the same by the general meeting were based on or affected by D1’s breaches of fiduciary duty at a time when he plainly owed those duties, and P is not relying on the Flying Max Agreements for present purposes.  I should only point out that (i) it is not in dispute that de facto director is different from shadow director and the matters required to be established for each differ, and (ii) the undisputed evidence shows that the Board at any given time had a number of directors against whom no allegation is made, and whilst P has adduced a number of emails in September 2011 showing that KC undertook discussions concerning the restructuring of the Acquisition with D1 whom KC regarded as someone in P’s camp, the burden is on P to adduce sufficient evidence at trial to prove de facto directorship or shadow directorship (as the case may be).

96.  Seventh, on the use of the Acquisition Funds (specifically, the CDO Funds):-

(1) The applicable principles are as follows:-

(a) Where a breach of fiduciary duty leads directly to misapplication of the company’s funds, the director who is liable is required to restore to the company what he has caused it to lose as a result of his breach of fiduciary duty: Target Holdings Ltd v Redferns [1996] AC 421, 434; Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, §78.

(b) A fiduciary will be personally accountable for losses arising where there is a real sensible possibility of conflict between his beneficiary’s interest and his self-interest: Underhill and Hayton, Law Relating to Trusts and Trustees, 19^th edn, §55.1(1).

(c) In such a case, the breach of fiduciary duty was complete when the money was paid out of the company wrongfully, and the loss was incurred at that point: The Liquidator of Wing Fai Construction Company Limited (in liquidation) v Yip Kwong Robert, HCCW 735/2002 (unrep., 24 November 2017), §§280, 283 (per G Lam J).

(d) It is possible for it to be shown that the deficit was made good, and the company did not suffer a loss at all, because eg the money was later brought back by way of repayment.  It is for the director to show that credit should be given for payments in the other direction: Wing Fai §§284-285.

(e) The critical question is whether the depletion of funds had been made good by the parties responsible for the misappropriated funds with money not saddled with any liability.  If it had been, it does not matter whether or not it had been made good with the very money originally removed as a result of the breach of fiduciary duty: Wing Fai §§306-308.

(2) In this case, the CDO Funds had been applied in the manner set out in paragraphs 47 to 50 above, of which:-

(a) [A], [D] and [I] payments had been paid to P’s subsidiaries;

(b) [E] payment had been paid to UBNZ Trustee;

(c) [F] payment had been paid to the Crafar Receivers but was subsequently refunded, whereupon it was applied towards (i) payments to P’s subsidiaries ([F1], [F2] and [F4] payments) as well as (ii) the Manufacturing Agreement ([F3] and [F4] payments);

(d) [B] and [J] payments had been made for the purpose of the Manufacturing Agreement; and

(e) [C], [G] and [H] payments had been paid for professional fees relating to the Acquisition and related fund-raising.

(3) Although the legal position is that loss was suffered as soon as the money was paid out of the company in breach of fiduciary duty, and P has asserted in its pleadings that D1 is liable with respect to the whole of the Acquisition Funds, as can be seen from paragraph 68 above P has pleaded claims only with respect to the following payments out of the CDO Funds:-

(a) [E] payment;

(b) [B], [J], [F3] and [F4] payments; and

(c) [D] and [F3] payments.

These sums come up to approximately HK$776.07 million (=HK$314.17 million + HK$52 million + HK$49 million + $101 million[11] + HK$131 million¹¹ + HK$29.2 million + HK$99.7 million¹¹).

(4) As explained in paragraphs 73(8)-(9) and 74 above, save for the [E] payment which was justified on the basis of the SPA, the Defendants only pleaded bare denials to the aforesaid payments without any attempt to justify the same. That said, I do not consider the absence of specific response would necessarily mean that P has discharged its burden; instead, the court should examine the bases advanced by P to assess whether a good arguable case has been shown, in particular where the payment was said to have been made for the discharge of obligations under commercial agreements or to a subsidiary, which on their face and without more would be consistent with the normal business purpose of P and its group.

(5) In this case:-

(a) For [E] payment, it was for the purpose of the SPA. Given my conclusion on conflict of interest above, I consider that P has discharged the necessary burden with respect to this payment.

(b) For [B], [J], [F3] and [F4] payments (relating to the Manufacturing Agreement) and [D] payment, having regard to P’s pleaded case on the same (summarized in paragraph 68(4)(c) above) and in the absence of any explanation, I consider that P has just about discharged its burden with respect to the same.

(c) As to [F3] payment, P’s pleaded basis for challenging the same is that whilst it was said to be made for the purpose of the Manufacturing Agreement, in fact NZ$9.3 million had been paid to D5 (ie the D5 Payment).  In the absence of any explanation, I also consider that the burden has been discharged with respect to this payment.  

(6) In the JPL’s 1^st affidavit filed on 9 July 2019 and P’s skeleton submissions, reliance was also placed on [F1], [F2] and [C] payments. However as mentioned above, P has not advanced any pleaded claim against these payments that they were not in the interest of P, and in the JPL’s affidavit there were only assertions that it was unclear why those payments were made.  In the circumstances I do not consider that on the present materials P has discharged its burden of showing that these payments were made in breach of fiduciary duty.

(7) Finally, D1 and D3 argue that the CDO Funds were not funds of P but belonged to its investors. I do not consider that to be a valid argument. In the case of misappropriation of funds in breach of fiduciary duty, as long as the funds paid out were P’s to dispose of, it matters not even if those funds were borrowed: Wing Fai §281.

97.  Eighth, as to D1 and D3’s argument that credit should be given for (i) the repayment by UBNZ Trustee of HK$314 million in early 2011 (paragraph 47(5) above); and (ii) P having acquired (through UBNZ Assets) assets worth no less than NZ$99 million under the Flying Max Agreement (paragraph 54(2) above):-

(1) It is for D1 to show that the depletion of funds had been made good by the parties responsible for the misappropriated funds with money not saddled with any liability.

(2) For the repayment by UBNZ Trustee of HK$314 million, the evidence shows that those funds originated from the AB Funds. Although P is not relying on the AB Funds for the purpose of its good arguable case, I am entitled to take into account any allegations it may have against the AB Funds for the purpose of deciding whether they were saddled with any liability. In its Statement of Claim, P has relied on the same allegations of breach of fiduciary duty with respect to the SPA to claim the AB Funds. I have already found that those allegations give rise to a good arguable case that the SPA was entered into in breach of fiduciary duty; the issuance of Note A and Note B pursuant to the SPA could thus amount to misappropriation of P’s assets. Accordingly, D1 and D3 have failed to show that the HK$314 million derived from the AB Funds were not saddled with any liability.

(3) As for the injection of assets into UBNZ Assets, that was done not pursuant to the SPA but the Flying Max Agreements, which P contends amounted to further and separate breaches of fiduciary duty by D1. I also bear in mind the observation of G Lam J in Wing Fai §285 as to the inappropriateness of simply looking at the final difference or shortfall between all the payments in and out, for each payment out constitutes a breach of fiduciary duty and it is for the director to justify credit which has the effect of negating loss. In the circumstances, while I do not lose sight of the fact that UBNZ Assets (now a wholly owned subsidiary of P) is said to have assets of no less than NZ$99 million and this may be a matter which has to be considered at trial when the full extent of P’s claims fall to be determined, given the considerations above, at this stage I do not consider D1 has discharged his burden of showing that credit should be given for the misappropriation of the CDO Funds.

98.  Ninth, as to P’s claim that some of the Acquisition Funds had been misappropriated by D1 (namely the Anfatex Properties, the Anfatex Payment, the NZ Property and redemption of the Mortgaged Properties):-

(1) As can be seen from paragraph 68(2) above, the timing of the acquisition (or redemption) of the aforesaid assets corresponded with the receipt by UBNZ Trustee of the CDO Funds and the AB Funds, and the amounts in question also indicate they could be made out of those funds.

(2) D1’s case is that the funds used to acquire (or redeem) these assets originated from D5 (which, like UBNZ Trustee, was wholly owned by D2), pursuant to the Super Worth Agreement.

(3) This requires one to look back at VSA-2 and the Transfer Agreement, which preceded the Super Worth Agreement.  When one examines these 3 agreements, they are inconsistent with the case advanced by D1 and D3 and are also internally inconsistent.

(a) With respect to the Transfer Agreement, it is D1 and D3’s pleaded case as well as the evidence of D1 filed on their behalves that the consideration of HK$110 million was arrived at by reference to the prevailing market price of P’s shares (said to be trading at HK$1.96) and the revenue from the trademarks owned by Global Food. However that is inconsistent with the express terms of the Transfer Agreement (Schedule 5), which set out the price attributable to P’s shares which Global Food was to obtain under VSA-2 was HK$0.8 only (ie the trading price as at the time of VSA-2).

(b) Further, the preamble to the Transfer Agreement stated that D3 was to transfer to D4 (i) the rights under VSA-2; (ii) all the trademarks registered in the name of Global Food; and (iii) all the assets in the name of Global Food which, as can be seen from Schedule 4 thereto, was a reference to the production lines already sold to P under VSA-2.

(c) As to the Super Worth Agreement, it provided (inter alia) that D4 was to sell to D5 the production lines owned by Global Food. This agreement thus suffers from the same problem as the Transfer Agreement in that it purported to sell the very production lines that Global Food had already sold to P under VSA-2.

(4) Accordingly, I do not accept that D1 and D3 have advanced a credible explanation for the Transfer Agreement and the Super Worth Agreement and their receipt of funds thereunder. In light of (i) sub-paragraph (1) above and (ii) the absence of any evidence from D2 (who opposed the Summons but chose to adduce no evidence) to suggest that the funds paid to D1 and D3 were derived from funds other than that which UBNZ Trustee received from the Acquisition Funds, I consider that P has established a good arguable case that part of the Acquisition Funds had been misappropriated by D1 and could be traced into the Anfatex Properties, the Anfatex Payment, the NZ Property and the Mortgaged Properties.

G.2         Good arguable case – D2 to D4

99.  There is no dispute on the law. The plaintiff bears the burden to establish the 4 requirements for the imposition of liability for dishonest assistance:-

(1) a breach of trust or fiduciary duty by someone other than the defendant;

(2) in which the defendant assisted;

(3) dishonestly; and

(4) resulting in loss:

Hui Cheung Fai v Daiwa Development Ltd, HCA 1734/2009 (unrep., 8 April 2014), §§130-137 (per DHCJ Eugene Fung SC).

100.  The claim against D2 is straight-forward – D2 was the sole shareholder of UBNZ Trustee which was the counterparty to the SPA, as well as a party to the Commission Agreement. Given my findings against D1, a good arguable case as to assistance and dishonesty is clearly established.

101.  As to D4, as indicated above it has not filed a defence in these proceedings. Further, given D1’s acknowledgement in his pleadings that he beneficially owns and controls D4, the necessary requirements would readily be established with respect to the D4 Payment.

102.  That leaves D3, who has pleaded a positive case on assistance, and on that basis also takes issue with dishonesty.

103.  To recap, D3’s assistance is said to consist of the use of the Acquisition Funds to (i) acquire the NZ Property; (ii) redeem the Mortgaged Properties; (iii) make the D3 1^st Payment; and (iv) make the D3 2^nd Payment.

104.  D3’s defence is set out in paragraph 73(8) above. In gist, her case is that:-

(1) D3 1^st Payment was attributable to the Transfer Agreement.

(2) The NZ Property and redemption of Mortgaged Properties did utilize funds from D5, but those funds were paid pursuant to the Super Worth Agreement.

(3) D3 2^nd Payment was in discharge of the debts under the D3 Loan Agreements.

105.  For the reasons below, I am of the view that a good arguable case is established with respect to the D3 1^st Payment, the NZ Property and the Mortgaged Properties, but not the D3 2^nd Payment.

106.  As to the D3 1^st Payment and the NZ Property and the Mortgaged Properties:-

(1) For the D3 1^st Payment, as can be seen from paragraph 68(2) above, the amounts paid by UBNZ Trustee to D4 and by D4 to FKC and then D3 on 2 and 11 March 2010 were very similar.  There is no evidence as to the financial position of D4 at the time (whether from D4 or D1). In the premises, I consider that P has shown a good arguable case that the D3 1^st Payment originated from UBNZ Trustee, and the proximity in timing also indicates it originated from the CDO Funds.

(2) For the NZ Property and the Mortgaged Properties, see paragraph 98 above.

107.  Next I consider the D3 2^nd Payment.

(1) There appears to be no dispute that [F4] payment (NZ$25 million, converted into approximately HK$135.7 million) was paid to Nation Resources on or about 13 January 2011, of which some HK$99.7 million was said to be for its working capital.

(2) The D3 Loan Agreements were executed by a director of P against whom no allegation has been made.  The amounts stated in the D3 Loan Agreements corresponded exactly to the entries in the general ledgers of Nation Resources. There is no suggestion from the JPLs (who exhibited the general ledgers) that the general ledgers had been doctored or were otherwise unreliable.

(3) The D3 2^nd Payment also corresponded exactly to the total amount outstanding under the D3 Loan Agreements.

(4) The timing of the D3 2^nd Payment was consistent with the tenor of the D3 Loan Agreements, which required repayment no later than March 2011.  

(5) Even if the D3 2^nd Payment had originated from the CDO Funds ([F4] payment), I do not consider that using funds designated for working capital of Nation Resources to discharge its accrued and due debts could without more amount to breach of fiduciary duty, or that D3’s receipt thereof could without more amount to assistance in such breach.

108.  To summarize, I find that a good arguable case has been established:-

(1) against D1 for breach of fiduciary duty, to the extent of HK$776.07 million of the CDO Funds;

(2) against D2 for dishonest assistance, to the same extent as D1 given her assistance was with respect to the entering into of the SPA and the receipt of consideration payable thereunder;

(3) against D3 for dishonest assistance, with respect to the D3 1^st Payment and her share of the NZ Property and the Mortgaged Properties, being the extent of assistance given by her; and

(4) against D4 for dishonest assistance with respect to the D4 Payment.

G.3      Risk of dissipation

109.  On this requirement the parties’ arguments centre on the following issues:-

(1) whether there is “solid evidence” to show there is a real risk of dissipation; and

(2) whether the existence of the Restraint Order effectively negates any risk of dissipation.

110.  First, the law is non-contentious and is summarized in Tugushev v Orlov [2019] EWHC 2031 (Comm) §49 (per Carr J):-

(1) The court must conclude on the whole of the evidence before it that the refusal of a freezing order would involve a real risk that judgment would remain unsatisfied, in the sense that, unless restrained by injunction, either the defendant will dissipate or dispose of his assets other than in the ordinary course of business or assets are likely to be dealt with in such a way as to make enforcement of any award or judgment more difficult, unless those dealings can be justified for normal and proper business purposes. The plaintiff must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets.

(2) The risk is not to be inferred lightly. Bare or generalized assertion of risk by a plaintiff is not enough. There must be solid evidence of the risk of dissipation.

(3) Mere reliance on alleged dishonesty of the defendant is not, of itself, sufficient to found a risk of dissipation. The court must scrutinize with care whether what is alleged to have been the dishonesty justifies the inference of a real risk of dissipation. Where the dishonesty alleged is at the heart of the claim against the defendant the court may be able to draw the inference that the making out to the necessary standard of that case against the defendant also establishes sufficiently the risk of dissipation of assets.

(4) A defendant’s former use of offshore structures may be relevant but does not itself equate to a risk of dissipation. Businesses and individuals often use offshore structures as part of the normal and legitimate way in which they deal with their assets.

(5) Each case is fact specific and relevant factors must be looked at cumulatively.

111.  Second, having regard to the following matters, I am satisfied that a real of dissipation has been made out in this case.

(1) The breaches of fiduciary duty at the heart of this claim involve D1 knowingly suppressed his conflict of interest and material information which he knew to be false, in order to induce P to enter into the SPA through which he would obtain a substantial benefit.

(2) These, coupled with my finding of a good arguable case that part of the Acquisition Funds upon being paid to UBNZ Trustee had been trransferred to D1 offshore as well as to D3 and D4 (D1’s vehicle), justify an inference to be drawn of a real risk of dissipation.

(3) Further, the evidence shows that D1, D2 and D3 have repeatedly used corporate vehicles which shareholding were opaque and overlaid with nominee or trust arrangements (eg Global Food, which according to the documents annexed to the Transfer Agreement was substantially indirectly held by Graham Chin on trust for D3), and would readily and with relative ease be able to transfer assets held in one known vehicle to a newly incorporated one upon triggering events (eg UBNZ Trustee transferred the Option Shares to NZ Dairy Trustee Limited, a newly incorporated vehicle, shortly after D2 was arrested in December 2010).

112.  Third, I do not accept that the existence of the Restraint Order means that P is not entitled to a Mareva injunction.

(1) As explained by Mann J in Faya Limited (in liquidation) v Butt [2010] EWHC 3461 (Ch) at §§23-25 (citing Cancer Research UK Limited v Morris [2008] EWHC 2678 (QB)), a criminal restraint order is subject to vulnerabilities:-

“24. At para.23 of [judgment in Cancer Research], King J. says this:

‘… There is a fundamental difference between the two sets of contemplated proceedings [criminal restraint proceedings instigated by the Crown Prosecution Service (“CPS”) and civil proceedings]. Restraint proceedings instigated by the CPS will, subject to the overall control of the court, be under the control of the CPS, a public body whose primary duty is to act in the public interest and not in any private interest. In contrast, the claimant in these civil proceedings is seeking to protect its own private interests by the making of a proprietary claim in respect of funds said to have been wrongfully obtained from them. I see no reason why in these circumstances the claimant should be denied relief in private law proceedings in proper protection of those interests which would otherwise be appropriate.’

25. All that applies in this case where there is an extant criminal restraint order. The extant criminal order in this case is not even for the alleged wrongs associated with the alleged wrongs in this case; it is apparently for wrongs on a much lower scale and of a completely different nature. It is possible that that criminal restraint order will be abandoned. If it were to go and there were to be nothing else in place, then the claimant would not have any protection in this case. Similarly it may be varied in due course to limit it to something like the amount of sums which are the subject of the present investigation in the criminal proceedings. In other words, the criminal restraint order is in no way geared or intended to protect the interests of the claimant liquidator in the present proceedings. He has his own rights and his own interest in getting his own order which he controls. In the circumstances, while as a matter of fact at this very moment in time there is not a risk of dissipation because of the criminal restraint order, that position may change. The liquidator is, in my view entitled, subject to his otherwise being entitled to the order, to his own order which he controls and to bring about a situation which is not vulnerable to a change of mind by a party to other proceedings or indeed by the court, if the court were to come to the conclusion that the criminal restraint order ought to go. Accordingly for those reasons I do not think that the existence of the criminal restraint order means that there is no risk of dissipation in this case.” (emphasis added)

(2) Thus, the interest the Mareva injunction seeks to protect is different, as is the control regime. Provided the plaintiff can otherwise justify a Mareva injunction, a criminal restraint order is not a reason not to grant it even though at this point in time, there may not be a risk of dissipation.

(3) In this case, the vulnerabilities of the Restraint Order are patent in that (i) D3 has already been acquitted in the 2^nd Criminal Proceedings, such that Restraint Order against her could be discharged at any time; and (ii) the Department of Justice’s stated position, in its letter of 12 March 2020, is that the costs awarded in favour of D1 and D2 in the 1^st Criminal Proceedings (still subject to taxation) would not be brought within the ambit of the Restraint Order when paid.

(4) Further, on Mr Wong’s calculation, the Restraint Order covers assets of around HK$200 million. That is insufficient to cover the HK$776.07 million with respect to which I have found a good arguable case that D1 is liable for in breach of fiduciary duty and D2 for dishonest assistance. This also provides the answer to Mr Wong’s objection to a worldwide Mareva on the basis that the Hong Kong assets (already included in the Restraint Order) may be sufficient to meet the quantum of P’s claim.

(5) In any event, I do not consider that order of Deputy High Court Judge Dawes SC (paragraph 5 above) is sufficient protection or that this application for Mareva injunction is premature. The parties have presented their case on the Summons substantively and I have heard full argument. There is no good reason to defer determining the Summons until conclusion of the re-trial in the 1^st Criminal Proceedings, which is just a few months away.

(6) Finally, I also do not accept Mr Wong’s submission that there has been delay in making the application. When the JPLs were appointed in December 2016, the Restraint Order was not only in place but had been in place since 26 October 2011, making dissipation of assets in the meantime highly unlikely. Within 9 months of their appointment the JPLs had procured P to issue the writ of summons herein. Although D3 was acquitted in her re-trial around this time, no attempt was made by the Department of Justice to discharge the Restraint Order vis-à-vis D3 as to warrant P seeking a Mareva injunction at that point. When the judgment of the Court of Final Appeal in the 1^st Criminal Proceedings was imminent – following which there would either be a confiscation order or a discharge of the Restraint Order – P issued the Summons. In these circumstances I do not consider there was unjustified delay on P’s part.

113.  Accordingly, I find that a real risk of dissipation has been made out, and the Restraint Order is not a reason to deny P a Mareva injunction.

H.     ChabraInjunction against D3

114.  The Mareva jurisdiction may be exercised against non-parties.  The court will exercise that jurisdiction where there is “good reason to suppose” that the assets of the third party are, in truth, the assets of the injuncted defendant. “Good reason to suppose” means a good arguable case that there are assets, apparently vested in the third party, which may be beneficially the property of the defendant and therefore available to satisfy the plaintiff’s claims against him if established at trial: TSB Bank International v Chabra [1992] 1 WLR 231, 238F-G, 239F, 240B-D; Akai Holdings Ltd (in liq) v Ho Wing On Christopher, HCMP 1718/2009 (unrep., 24 September 2009), §§44-48 (per Tang VP).

115.  Thus, the invocation of the Chabra jurisdiction would depend upon facts showing that assets vested in the third party are either beneficially the property of the defendant or over which the defendant has substantive control.

116.  In this case, the Summons and the affidavit evidence filed by P made no reference to the Chabra jurisdiction.  P first intimated that it is seeking to invoke the Chabra jurisdiction in its skeleton filed one week before the hearing.  Ms Lam submitted that P is merely relying on the same evidence it has already adduced in support of this application.

117.  I do not consider that this provides a sufficient answer. The Chabra jurisdiction engages a different factual question – not that D3 has physically received the assets said to be traceable proceeds of D1’s breach of fiduciary duty, but that she holds assets either as nominee for D1 or in circumstances where D1 exercises substantive control over them.  Fairness demands that D3 be given advance warning of such application as well as the facts which P relies upon to ground the application, such that D3 would have the chance (if she so wishes) to adduce evidence or to make focused and informed rebuttal to the same.

118.  As such, I agree with Mr Wong that it is wholly inappropriate to consider the Chabra application in these circumstances.  Insofar as is necessary I will dismiss P’s application on this basis.

I.     Proprietary Injunction against D1, D2, D3

119.  As clarified by Ms Lam, P only seeks proprietary injunction against D1 and D3 with respect to (i) the NZ Property; (ii) the Mortgaged Properties; (iii) D3 1^st Payment and (iv) D3 2^nd Payment.

120.  Given my findings above, I can be relatively brief on this application.

(1) Having regard to my findings on a good arguable case for D1’s breach of fiduciary duty and D3’s dishonest assistance, the threshold of serious issue to be tried is clearly made out.

(2) I have also found that a good arguable case has been made out that the NZ Property, the Mortgaged Properties and the D3 1^st Payment are traceable proceeds of the Acquisition Funds. A “clear link” between P’s funds and the assets claimed is thus established.

(3) As to the D3 2^nd Payment, applying the lower threshold of serious issue to be tried, I also do not consider that it can be shown on the evidence presently available that D3 has given assistance to D1’s breached of fiduciary duty.

(4) I also find that having regard to the circumstances of this case as described above, the balance of convenience lies in favour of granting an injunction over the NZ Property, the Mortgaged Properties and the D3 1^st Payment.

J.     Prematurity / Necessity of Order

121.  D1 and D3 further submitted that the Mareva and proprietary injunctions sought are both premature and unnecessary, given the Restraint Order and the order of Deputy High Court Judge Dawes SC. For the reasons set out in paragraph 112 above, I do not accept this submission to be well founded.

K.     Cross-Undertaking as to Damages

122.  In her written submissions, Ms Lam invited this Court to not require P to provide a cross-undertaking as to damages, alternatively to accept a cross-undertaking limited to the net value of the realizable assets of P.

123.  The imposition of a cross-undertaking in damages is virtually a sine qua non of obtaining an interlocutory injunction.  However, the court does have power to dispense with a cross-undertaking altogether, or to accept a limited undertaking, although it would only be prepared to do so in the most extraordinary circumstances: RBG (Resources) Plc v Rastogi [2002] BPIR 1028, §§21-23 (per Laddie J).

124.  RBG (Resources) is a case where the provisional liquidators made an application under section 236 of the Insolvency Act 1986 (which must be made in the name of the office holder) to vary the unlimited cross-undertaking given to one limited to the net realizable value of the assets of the company in provisional liquidation, on the basis that the provisional liquidators were not willing to put their own assets at risk and the bank creditor who previously agreed to provide the unlimited undertaking had withdrawn its consent.

125.  Laddie J referred to the decision of Millett J (as he then was) in DPR Futures Limited [1989] 1 WLR 778 and observed that:-

(1) Office holders cannot be criticized if they are not prepared to expose themselves to financial ruin by putting up their personal assets in support of a cross-undertaking. Were the court to require that, no liquidator or office holder would dare to seek interlocutory relief, no matter how vital it might be to the execution of his duties as office holder.

(2) It is right to require the office holder to give an undertaking of an amount commensurate with the size of the company’s assets and to take the risk that he may not be authorized by the court to have recourse to them to meet his liability. If the value of such an undertaking is considered insufficient he should be required to fortify it by obtaining a bond or an indemnity from a substantial creditor.

(3) If fortification cannot be obtained this will affect the balance of convenience between the granting or refusing of the injunction.

126.  However, as can be seen from the above, the observations of Millett J and Laddie J were directed at the situation where the office holder takes proceedings in his own name.  Where the company in liquidation is the plaintiff, the cross-undertaking would be given by the company, and no question of the office holder’s personal assets being put at risk arises.  In such a case, there is no reason to depart from the general position that an unlimited cross-undertaking should be given; indeed in RBG (Resources) §12 Laddie J recorded that in similar proceedings issued by the company in that case the usual undertaking was given by the company.  If the company’s assets are considered to be inadequate, it is up to the defendant to seek fortification.  In this case, Mr Wong confirmed that D1 and D3 will not be seeking fortification at this juncture, although their right to do so is reserved.

127.  Accordingly, I do not consider that the authorities cited by P justify dispensing with the usual cross-undertaking.

128.  Ms Lam confirmed that P would offer the usual cross-undertaking. I would grant the orders in Section L below on such basis.

L.     Disposition

129.  For all the reasons stated above, I will grant the following orders:-

(1) A proprietary injunction against:-

(a) D1 with respect to his share in the NZ Property and the Mortgaged Properties; and

(b) D3 with respect to her share in the NZ Property and the Mortgaged Properties, and the D3 1^st Payment.

(2) A worldwide Mareva injunction against:-

(a) D1 up to HK$776.07 million;

(b) D2 up to HK$776.07 million;

(c) D3 up to the value of the D3 1^st Payment and her share of the NZ Property and the Mortgaged Properties[12]; and

(d) D4 up to the value of the D4 Payment.

(3) P seeks a disclosure order ancillary to the Mareva injunction, which I see no reason not to grant. The draft order attached to the Summons does not contain the monetary floor or the time within which the disclosure affidavit is to be served.  I will direct that D1 to D4 should disclose in writing all of their assets of an individual value of HK$50,000 or above, and should make such disclosure within 21 days hereof and serve the affidavit within 14 days thereafter, with liberty to D1 to D4 to apply in writing within 14 days hereof to vary the aforesaid monetary floor and/or time.

(4) The draft order to the Summons contains an exception for legal fees but no amount has been suggested by either side. Both Mr Wong and Mr Cao drew my attention to the imminent re-trial in the 1^st Criminal Proceedings for which legal costs will have to be incurred, and the prospect of receiving taxed costs from the Department of Justice pursuant to the costs order made by the Court of Final Appeal.  In these circumstances I will direct that:-

(a) D1 to D4 to file and serve written submissions of no more than 5 pages (together with any evidence they may wish to rely on) as to the amount of legal fees to be excepted under the Mareva injunction within 14 days hereof;

(b) P to file and serve written submissions of no more than 5 pages (together with any evidence they may wish to rely on) in reply within 14 days thereafter;

(c) unless otherwise directed by the Court, the issue of the legal fees exception will be disposed of on the papers.

130.  I also make a costs order nisi that 70% of P’s costs be in the cause.  The costs order nisi will be made absolute unless the parties take out an application to vary the samewithin 14 days hereof. For the avoidance of doubt, this costs order nisi does not cover the matter in paragraph 129(4) above, which costs will be separately provided for in the paper disposal.

HCA 2218/2017

[2020] HKCFI 2491

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

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D E C I S I O N

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A.  Introduction

1.  This application raises a novel point as to whether the existence of an After The Event (“ATE”) Insurance Policy can be an answer to an application for security for costs under section 905 of the Companies Ordinance (Cap 622). 

2.  This is the substantive hearing for the 3^rd defendant’s application for security for costs against the plaintiff, a foreign company incorporated in the Cayman Islands in liquidation.  The plaintiff was a listed company in Hong Kong, but its shares had been suspended for trading on the Hong Kong Stock Exchange since 7 September 2010. 

3.  Under section 905, security for costs may be ordered against a company if there is credible testimony that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.  The fact that a company is in liquidation is prima facie evidence that it is unable to pay the costs, unless evidence to the contrary is given: see Hong Kong Civil Procedure 2020 Vol 1 at §23/3/14. 

4.  Although in liquidation, the plaintiff has not raised any financial difficulties that it may face if it is ordered to pay any security for costs.  In other words, it is not the plaintiff’s case that this action may be stifled by the financial burden to pay security for costs. 

5.  Instead, the plaintiff submits that security for costs should not be ordered because of the following grounds:

(1)  The plaintiff’s claims against the 3^rd defendant have a high degree of probability of success; and

(2)  The 3^rd defendant’s position is already sufficiently protected by the ATE policy taken out by the plaintiff. 

6.  I will deal with each of these grounds in turn.

B.  High degree of probability of success

B.1.  Factual background

B1.1.  The plaintiff's case

7.  The 1^st defendant was the joint chairman, executive director and CEO of the plaintiff.  The 2^nd defendant was a business associate of the 1^st defendant.  The 3^rd defendant is the 1^st defendant’s wife. 

8.  It is alleged that a sophisticated, elaborate scheme of fraud was perpetrated by the defendants on the plaintiff.  Under the arrangement of the 1^st defendant and 2^nd defendant, the plaintiff was defrauded to enter into an acquisition agreement dated 22 May 2019 (“Acquisition Agreement”) with UBNZ Trustee Company Limited (“UBNZ Trustee”), a company wholly owned and controlled by the 2^nd defendant, for the sale and purchase of UBNZ Trustee’s 100% shareholding in UBNZ Assets Holdings Limited (“UBNZ Assets”) for NZ$500 million (“Acquisition”), where UBNZ Assets shall hold the business of cattle and dairy cattle breeding and the production, sale and distribution of livestock and milk fat solids in respect of 20 dairy farms in New Zealand (“Crafar Farms”). 

9.  In essence, it is alleged that 1^st defendant and the 2^nd defendant worked together to reap substantial benefits from the deal (i) to pocket the substantial price difference between what was paid by 2^nd defendant to acquire the Crafar Farms (NZ$259 million) and the inflated price the plaintiff were to pay (NZ$500 million); and (ii) to benefit from secret commissions from brokering a sale of the Crafar Farms. 

10.  The plaintiff claims inter alia against (i) the 1^st and 2^nd defendants for wrongfully conspiring to defraud the plaintiff and to conceal such fraud and the proceeds of such fraud from the plaintiff; (ii) the 1^st defendant for breach of fiduciary duties and/or trust; and (iii) the 2^nd to 5^th defendants for knowing receipt and dishonest assistance. 

11.  More specifically, the plaintiff’s case against the 3^rd defendant is as follows:-

(1)  On 2 March 2010, a sum of HK$73,736,482.56 was remitted by UBNZ Trustee to an account of the 4^th defendant (“1^st D4 Account”), a company controlled by the 1^st defendant.  On the same day, almost the whole amount was remitted to a different account of the 4^th defendant (“2^nd D4 Account”).  

(2)  On 11 March 2010, HK$69,000,000 was remitted from the 2^nd D4 Account back to the 1^st D4 Account.  On the same day, the 1^st defendant signed a cheque in the amount of HK$68,950,000 in favour of the client account of Fred Kan & Co (“FKC”) (the 1^st defendant’s personal solicitors who also acted as UBNZ Group’s solicitors in relation to the Acquisition).  

(3)  On 12 March 2010, FKC signed a cheque in the amount of HK$68,950,000 in favour of the 3^rd defendant, describing such payment as “C&D refund to the client”.

(4)  The 3^rd defendant’s receipt of the aforesaid sum appears to be readily traceable to UBNZ Trustee’s receipt of around NZ$51.6 million on 10 February 2010. 

(5)  The 3^rd defendant received the payment unconscionably, as she knew or turned a blind eye to the fact that it formed part of the funds for the Acquisition diverted from the plaintiff in breach of the 1^st defendant’s fiduciary duties, given (i) there is no legitimate reason for the 3^rd defendant, who is the 1^st defendant’s wife and who at all material times described herself as a “housewife”, to receive any part of the funds; (ii) the funds went through a suspiciously tortuous route before ending up at the 3^rd defendant’s HSBC account, presumably to conceal its tainted origins. 

(6)  Further or alternatively, the 3^rd defendant dishonestly assisted the 1^st defendant by facilitating the concealment of the systematic diversion of funds from the plaintiff. 

B1.2.  The 3^rd defendant’s case

12.  On the other hand, the 3^rd defendant claims that she has genuine commercial reasons to receive the relevant monies.

13.  On 16 November 2009, the plaintiff entered into the contract with Global Food Holdings Limited, a company beneficially owned by the 3^rd defendant, whereby the plaintiff agreed to purchase the production lines and the right to use certain trademark for a consideration which should be settled by way of the plaintiff's issue of 70 million shares at HK$0.8 per share (“VSA-2 Agreement”).  The prevailing market price of the plaintiff's share was HK$0.73 per share at that time.  

14.  In other words, the 3^rd defendant was about to receive substantial shares issued by the plaintiff. 

15.  On 8 January 2010, the plaintiff’s market share price increased to HK$1.96 per share.  The 1^st defendant was positive about the plaintiff’s shares and negotiated with the 3^rd defendant to acquire her entitlement under the VSA-2 Agreement (“VSA-2 Shares Consideration”).  As shown in the “Transfer Agreement” dated the same day, the 1^st defendant agreed to buy VSA-2 Shares Consideration from the 3^rd defendant at the price of HK$110 million.  The result was that the 3^rd defendant could realize her entitlement in cash, whereas the 1^st defendant could reap profits from the increasing trend of the shares. 

16.  Subsequently on or about 12 February 2010, the 4^th defendant (controlled by the 1^st defendant) in turn sold the VSA-2 Shares Consideration to the 5^th defendant (controlled by the 2^nd defendant) at the sale price of HK$195 million.  By that time, the 2^nd defendant would acquire substantial shares in the plaintiff through the Acquisition Agreement and should have certain commercial interests in enlarging her shareholding.  At the same time, the 4^th defendant agreed to provide a profit guarantee of RMB$15 million per year in the following 2 years, generating from the production lines under the VSA-2 Agreement (“Super Worth Agreement”).  This profit guarantee explains the sharp increase of value of VSA-2 Shares Consideration when the 4^th defendant sold the same to the 5^th defendant. 

17.  Pursuant to the Super Worth Agreement, the 5^th defendant paid the consideration to the 4^th defendant.  As a result, the 1^st defendant through the 4^th defendant was able to utilize part of the monies to purchase some New Zealand real properties, to discharge the mortgages, and also pay part of the purchase price of the Transfer Agreement to the 3^rd defendant (HK$68.95 million) into the 3^rd defendant's HSBC account. 

18.  Therefore, the relevant monies originate from the Transfer Agreement and the Super Worth Agreement, not the funds for the Acquisition.

B1.3.  Criminal proceedings

19.  In the light of the above transactions, the 1^st, 2^nd and 3^rd defendants were prosecuted for various offences. 

20.  The 1^st and 2^nd defendants were charged with two counts of conspiracy to defraud, one defrauding the plaintiff’s shareholders and the other defrauding the Stock Exchange, so as to acquire their approval in entering into the Acquisition Agreement.  The 1^st defendant was also charged with the offence of “money laundering”. They were once convicted after trial, but their convictions were all quashed by the Court of Final Appeal on 30 August 2019.  A re-trial was ordered and the date is yet to be fixed. 

21.  On the other hand, the 3^rd defendant was separately charged with the offence of “money laundering”, mainly concerned with some of the monies deposited into her HSBC account at the material time. She was once convicted but her conviction was quashed by the Court of Appeal on 26 May 2016, and likewise a re-trial was ordered.  At the conclusion of the re-trial, the 3^rd defendant was acquitted on 1 September 2017. 

22.  Mr William Wong SC (with Mr Paul Wong), counsel for the 3^rd defendant, has reminded me to observe the following principles when I consider the relevant judgments. 

23.  The fact that a finding was made in another case does not enable the court to take judicial notice of those findings to fill “evidential gaps”: Jankowski v District Court Wroclaw (Poland) [2016] EWHC 3792 (Admin) at §23 per Simon LJ. 

24.  By the same token, findings in a previous judgment are not admissible as evidence to prove a fact unless it is a subsisting criminal conviction that satisfies section 62 of Evidence Ordinance (Cap 8): see Secretary for Justice v FTCW [2014] 2 HKC 132 at §§93–94 per Lam VP. 

25.  On the other hand, in interlocutory applications like the present, the court can refer to the evidence (instead of the findings) in the judgments where appropriate in determining the strength of the parties’ cases.  

B.2.  Legal principles

26.  It is trite that if the plaintiff’s case is genuine and strong, no order for security would be granted.  On the other hand, an order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.  The court will also have to consider the defendant’s prospects of success (ie whether it has an arguable defence).  This is to be approached in a broad-brush manner, and the court is not to embark on an assessment exercise as though it were considering an application for summary judgment under Order 14.  This is not to say that every application for security for costs should be made in the occasion for a detailed examination of the merits of the case.  It is not the function of the court, when faced with an application for security for costs, to make a “preliminary run” at deciding the ultimate success or failure of the claim.  The strength of the plaintiff’s case is only a material consideration in simple cases.  The court will not embark on determining whether a case is “genuine and strong” if that case is not straightforward and not amenable to ready assessment of the prospects of a party’s case being made out at trial: see Hong Kong Civil Procedure 2020 Vol 1 at §23/3/3. 

B.3.  Analysis

27.  Both Ms Rachel Lam SC (with Ms Sharon Yuen), counsel for the plaintiff, and Mr Wong have made detailed submissions about the respective merits of their clients’ case. However, in reality I think these arguments merely show both parties have arguable contentions, which can only be resolved at trial.  I do not consider that it is possible to reach a clear view on the merits, one way or another, that there is a high degree of probability of success or failure.  I will therefore proceed on the basis that the plaintiff’s claim is bona fide and has some degree of probability of success.  However, I do not think the degree is so high that it becomes a factor against the exercise of my discretion to order security for costs.

C.  ATE policy

C.1.  Factual background

28.  The plaintiff submits that an order for security for costs in favour of the 3^rd defendant is not necessary as the plaintiff has taken out a “Litigation Insurance Policy” which covers any adverse costs in favour of the defendants.  Under the policy (with an inception date of 24 April 2019) (“Policy”), the insurer, Burford Worldwide Insurance Limited (“Insurer”), shall indemnify the plaintiff in respect of the costs of the defendants in these proceedings up to the limit of indemnity of US$1,800,000 (ie around HK$14,040,000 at an exchange rate of US$1:HK$7.8).  Viewed against the 3^rd defendant’s present application for security of HK$6,000,000, the plaintiff argues that the coverage under the Policy provides more than sufficient protection for the 3^rd defendant’s costs position. 

C.2.  Legal principles

29.  ATE insurance is an insurance policy that provides coverage for the legal costs and disbursements during the litigation process.  The insurance is called “After The Event” because it is purchased after a legal dispute arises.  This is to be contrasted with a “Before The Event” (BTE) insurance, which provides coverage for a future matter.

30.  This appears to be the first time in Hong Kong that an ATE policy is raised as an answer to an application for security for costs. Even in the UK, the use of ATE policies to fund litigation is also relatively new and only developed more extensively following the effective abolition of civil legal aid at the end of the 1990s. 

31.  ATE polices have frequently been used in the UK by insolvent claimants (which are self-evidently unable to pay costs) in resisting security for costs.  The theory is that once an ATE policy is in place, the insolvency of the claimant will no longer be relevant because any adverse costs order will then be shouldered by the insurer. 

32.  Nasser v United Bank of Kuwait [2002] 1 WLR 1868 was a security for costs case involving a claimant resident outside England. Mance LJ made these obiter remarks (at §60):-

“I would interpose at this point that, even where a claimant or appellant is resident abroad, there may of course be special factors indicating that any order for costs will be satisfied in some other fashion. The interesting possibility was raised before us that a claimant or appellant who has insured against liability for the defendants' costs in the event of the action or appeal failing might be able to rely on the existence of such insurance as sufficient security in itself. I comment on this possibility only to the extent of saying that I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere.”

33.  On the other hand, defendants would usually argue that ATE policies could not provide sufficient protection because the policies contained various exclusions and condition precedents which allowed insures to cancel the policy during the course of the litigation.

34.  Before the Court of Appeal decision in Premier Motorauctions Ltd v PricewaterhouseCoopers LLP [2018] 1 WLR 2955, such arguments have met with mixed results.  For example, in Michael Phillips Architects Ltd v Riklin [2010] BLR 569^[1], Akenhead J first summarized the principles as follows (at §18):

“(a) There is no reason in principle why an ATE insurance policy which covers the claimant’s liability to pay the defendant’s costs, subject to its terms, could not provide some or some element of security for the defendant’s costs. It can provide sufficient protection.

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs.

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.”

35.  After going through the terms, however, his Lordship held that the ATE policy provided “no real security for the Defendant’s costs” and therefore security was granted.  That was because the policy was ambiguous as to what would be covered; the indemnity cover for the “opponent’s legal costs and disbursements” might be eroded; if the insurers believed that there was no reasonable prospect of success, the cover would end; the insurers could refuse to pay if any of the conditions were broken; the policy would become void if a fraudulent claim was made; and there were extensive rights to cancel.

36.  On the other hand, in Geophysical Service Centre v Dowell Schlumberger (ME) Inc 147 Con LR 240, Stuart-Smith J adopted the principles in Michael Phillips Architects Ltd but came to a different conclusion regarding a policy that contained terms similar to those in Michael Phillips Architects Ltd. 

37.  In respect of the contract conditions, breach of which would allow insurers to avoid or cancel the policy, his Lordship accepted that there was a theoretical possibility that a breach might occur.  But there was no reason to suppose that the possibility was anything more than “theoretical”.

38.  He explained that (at §30):-

“[30] The following features lead me to this conclusion. First, the conditions themselves are not onerous. Second, the Claimant has no commercial interest in breaching the conditions. The policy has been taken out for the Claimant's protection, and no sensible reason has been offered as to why the Claimant would deliberately, or even inadvertently, breach the conditions. Indeed, Mr Fraser accepted that it was not in the Claimant's commercial interest to do so. Third, the Claimant is represented by very experienced and competent legal representatives who are there to make plain to the Claimant its obligations under the policy if any doubt exists. For these reasons, it seems to me that there is no reason to believe that there is more than a theoretical risk of breach.”

39.  Coupled with other factors such as the good relationship between the claimant’s solicitors and the insurers, Stuart-Smith J found the policy to have provided adequate protection to the claimant.

40.  In Premier Motorauctions Ltd v PricewaterhouseCoopers LLP (ibid), Longmore LJ framed the question as follows (at §5):-

“does ATE insurance which has no anti-avoidance provisions (and other exceptions or conditions precedent to liability) constitute adequate security for costs in a case requiring such security to be given?”

41.  At first instance Snowden J considered that the prospect of avoidance was theoretical.  That analysis was rejected by the Court of Appeal.  Longmore LJ observed (at §§26–29) that:

“26 If Mr Elliott is not believed, the Companies will lose and be liable for the costs of PWC and the Bank. The judge said that “it was something of a leap” to conclude that disbelief of Mr Elliott on the part of a judge would provide grounds for insurers to avoid the policies.

27 Again I cannot with respect agree. Of course it does not follow that insurers would avoid but the difficulty is that neither the defendants nor the court has any information with which to judge the likelihood of such avoidance. One knows that ATE insurers do seek to avoid their policies if they consider it right to do so: see Persimmon Homes Ltd v Great Lakes Reinsurance (UK) plc [2011] Lloyd's Rep IR 101 in which a successful defendant was unable to recover its costs from ATE insurers. The landscape after trial may be very different from the landscape as it appears to be at present and it is unsatisfactory to have to speculate.

28 The judge felt he could rely on the fact that the proposals to insurers were made by joint liquidators who are independent professional insolvency office holders, and who investigated the claims with the assistance of experienced solicitors and counsel providing a high level of objective professional scrutiny. All this is, of course, true but the best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know.

29 Neither the defendants nor the court have been provided with the placing information put before the insurers but, even if that had been provided, it is unlikely that the court could be satisfied that the prospect of avoidance is illusory. Even at the jurisdictional stage of considering security for costs, the defendants must, as Mance LJ said in the Nasser case [2002] 1 WLR 1868, para 60, “be entitled to some assurance that [the insurance] was not liable to be avoided for misrepresentation or non-disclosure”. I cannot see that on the facts of this case these defendants have that assurance. It follows therefore that there is reason to believe that the Companies will be unable to pay the defendants’ costs if ordered to do so and that the jurisdictional requirement of CPR r 25.13 is satisfied.”  

42.  Longmore LJ then observed that authorities at first instance went both ways but the judgment of Snowdon J revealed that there might be a tendency for judges at first instance to accept that an ATE policy could stand as security for costs.  His Lordship then noted that Snowdon J was particularly impressed by the remarks of Stuart-Smith J in Geophysical Service Centre (ibid) where it was said that (at §§15, 20): -

“[15] I make two observations. First of all, Mance LJ was there commenting in the abstract, since there was not in fact an ATE policy in existence. Second, Nasser’s case dates from 2001 when the ATE market was considerably less mature than it is now. It must be recognised both that the market is now more mature and that Brit, who provided the insurance which is going to be considered in this case, is to be regarded as a reputable insurer within the market. It is also to be recognised in my judgment that the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of parties to gain access to justice. In the absence of evidence to the contrary, the court's starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding.”

“[20] Ultimately, on an application such as this, the question is not whether the assurance provided by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the Claimant will be unable to pay the Defendant's costs despite the existence of the ATE policy. It must now be recognised, in my judgment, that depending upon the terms of the policy in question, an ATE policy may suffice so that the court is not satisfied that there is reason to believe that the Claimant will be unable to pay the Defendant's costs. In this case, the Defendant's costs estimate of just over £900,000 has been approved by the court, and the claim for security for costs in the sum of £500,000 should be seen in that context.”

43.  Longmore LJ commented that (at §31): -

“31 I have no fundamental quarrel with these observations but would emphasise the words “properly drafted” and “depending on the terms of the policy in question” in these paragraphs because there was in the Geophysical case an anti-avoidance provision of the kind which Mance LJ envisaged in Nasser's case. It is set out in para 23 in the following terms: “8. The insurer shall not be entitled to avoid this policy for non-disclosure or misrepresentation at the time of placement except where such non-disclosure was fraudulent on your part.” Insurers could therefore avoid for fraud but not otherwise. It may not be a particularly difficult exercise for a judge to assess the likelihood of avoidance if the right to avoid is confined to fraud but, where there is no anti-avoidance clause of any kind, the exercise is very much more difficult and the defendants’ need for the assurance to which Mance LJ referred is all the greater.”

44.  For the reasons given, his Lordship therefore held that, on the facts of the case, there was jurisdiction to make an order for security for costs.

C.3.  Analysis

45.  Ms Lam submits that in the present case, security for costs should not be ordered against the plaintiff since the Policy offers sufficient protection for the 3^rd defendant.  On the other hand, Mr Wong submits that the Policy is fraught with questions, and should be disregarded for the present purpose. 

46.  First, Mr Wong notes that there is no evidence that the premium has been paid.  The Policy provides that: -

“PREMIUM

The Premium shall comprise the Initial Premium and the Conditional Premium...

The Initial Premium shall be payable within seven days of the Inception Date specified in the Schedule. If the Initial Premium is not paid within seven days of the Inception Date then We [ie insurer] may elect to cancel the Policy...”

47.  As the plaintiff has not provided evidence for the payment of the Initial Premium within the stipulated seven days, the 3^rd defendant suggests the Policy may have been cancelled already. 

48.  In opposition to the present application, Mr Jong Yat Kit, one of the joint provisional liquidators of the plaintiff has made an affirmation on behalf of the plaintiff dated 10 November 2019.  At paragraph 40, Mr Jong deposed that: -

“40. In any event the Application and an order for security for costs in favour of the 3^rd Defendant is not necessary as the Plaintiff has taken out a Litigation Insurance Policy with Burford Worldwide Insurance Limited. This Litigation Insurance Policy covers any adverse costs that may be awarded by the Court in favour of the 3^rd Defendant up to the amount being sought in the Application. A copy of the Litigation Insurance Policy is at pages 085 to 097.”

49.  The inception date of the Policy was 24 April 2019, which was more than six months before the date of Mr Jong’s affirmation. The seven-day grace period would therefore have lapsed long before Mr Jong’s said deposition that the Policy could obviate the need for an order for security for costs.  Unless it is contended that Mr Jong had perjured himself in the depositions, there is no reason to doubt that the relevant premium has already been paid and therefore the Policy is a valid one.  The 3^rd defendant makes no such contention and in fact Mr Wong very fairly concedes that he will not take further issue on this matter after Mr Jong’s said depositions were canvassed at the hearing. 

50.  Secondly, Mr Wong notes that the Policy only covers proceedings relating to “fraudulent acquisition” of the plaintiff’s funds.  He argues that it is highly doubtful if the plaintiff could succeed in its claim against the 3^rd defendant based upon “fraud” or “dishonesty” at the trial.  Assuming for some reason the 3^rd defendant is only liable for knowing receipt, which does not involve “fraudulent acquisition”, this Policy may not cover the adverse costs. 

51.  Ms Lam submits the above contention is based on an incorrect reading of the Policy.  On a proper reading of the Policy, the Policy has insured the plaintiff specifically against the costs of the 3^rd defendant (and other defendants) in the present proceedings, because:-

(1)  Under the Policy, the Insurer will indemnify the plaintiff in respect of “Adverse Costs”, defined as the costs of the “Opponents” in the “Legal Proceedings”. 

(2)  “Legal Proceedings” are in turn defined as “the legal action brought by the Insured to pursue money or damages in compensation or any other relief and which is the subject of the Retainer [between the plaintiff and its solicitors]”.  This is clearly a reference to the present proceedings.  

(3)  Therefore, the Policy must be insuring the plaintiff against the 3^rd defendant’s (and other defendants’) costs in these proceedings.  The description of “legal proceedings” at the Schedule (ie “claims to be brought in Hong Kong courts against the Opponents for the fraudulent acquisition of funds from [the plaintiff] prior to its entering into provisional liquidation”) is merely a convenient summary of the nature of the proceedings, and cannot alter the scope of the Policy’s coverage as clearly set out above. 

52.  I agree with Ms Lam.  I think the 3^rd defendant’s costs in the present proceedings is covered by the Policy. 

53.  Thirdly, Mr Wong submits that the Policy may be terminated at any stage if the plaintiff change its solicitors, or the plaintiff’s solicitors terminate the retainer.  There is no guarantee that these two events would not happen in the course of these proceedings.  This is so because the Policy provides that: -

“3. The Policy will terminate if the Insured or Solicitor terminates the Retainer, unless We provide Our Consent to the Policy continuing.”

54.  In response, Ms Lam submits that it is fanciful to suggest that the plaintiff or the solicitors would somehow terminate the retainer between them. 

55.  With respect, I do not think the risk can be regarded as entirely fanciful, as the landscape of the litigation changes with time and it is difficult to anticipate what the plaintiff may do at different stages.  This is certainly a possibility that the 3^rd defendant has to guard against, particularly because the Policy specifically provides that: -

“If the Policy is terminated or cancelled, the Insurer shall have no obligation to make any payment.”

56.  Fourthly, Mr Wong submits that the value of the Policy is equally questionable because of the various “General Exclusions” to deny payment of “Adverse Costs” and the right of the Insurer to cancel the Policy on grounds of misrepresentation and non-disclosure.  The Policy provides that: -

“10. Misrepresentation and non-disclosure

10.2 You are required to take care to supply accurate and complete answers to any questions You were asked at the time of taking out this insurance. You must check Your records for the information You have provided and notify Us immediately of any changes or inaccuracies in these details. Failure to provide accurate and complete information to the best of Your knowledge may result in increased premium, refusal or revision of a claim, or this insurance being cancelled.

10.3 You are also required to update Us with any changes to the information You provided at the time You asked us to insure You. When You tell Us about these changes We may adjust the premium. If You do not tell us about these changes or inaccuracies, this may result in refusal or revision of a claim or this insurance being cancelled.

…

10.5 Where We deem the misrepresentation or non-disclosure to be deliberate or reckless:

a) We will have the option to treat the insurance as void (the Insurer can cancel Your policy from inception and treat the insurance as though it had never existed). …”

57.  Ms Lam submits that the 3^rd defendant does have some assurance that the Policy is not liable to be avoided for misrepresentation or non-disclosure, because: -

(1)  Even though the Insurer reserved the right to cancel the Policy under clause 10 of the “Conditions” of the Policy on grounds of misrepresentation or non-disclosure, clause 10.2 specifically provides that only “failure to provide accurate and complete information [to the Insurer] to the best of [the plaintiff’s] knowledge” will result in potential cancellation of the Policy.  

(2)  Since the plaintiff is in provisional liquidation, the relevant information was provided to the Insurer by the provisional liquidators.  In this regard, it is notable that the date of taking out the policy post-dates the plaintiff’s entry into provisional liquidation by some time. The entirety of the information provided to the insurers would thus be by the professional insolvency office-holders, and not anyone else.  It is fanciful to suggest that the independent professional insolvency office-holders had not provided accurate and complete information to the Insurer to the best of their knowledge.  

(3)  In addition, the plaintiff is prepared to offer an undertaking to immediately notify the 3^rd defendant if the plaintiff receives any indication from the Insurer that it intends to cancel or terminate the Policy.  

58.  With respect, I do not think the above can entirely alleviate the 3^rd defendant’s concern.

59.  In Monarch Energy Ltd v Powergen Retail Ltd 2006 SLT 743, Lord Drummond Young ruled that the ATE policy could not provide sufficient security and therefore allowed the defendant's application for security for costs.  His Lordship said that (at §28):-

“[28] ... In my opinion non-disclosure is a particularly significant risk, because it is very difficult for even the most conscientious of solicitors to be certain that they have unearthed all material facts about the action before applying for ATE insurance. Critical facts may be known only to an individual who has not been precognosced, or those who have been precognosced may not have disclosed fully everything that they know about the case. This risk inevitably places a substantial limitation on the extent to which an ATE policy can be used to provide security for expenses.”

60.  Further, I think there is force in Mr Wong’s argument that there is also a concern about the accuracy of the information provided by the provisional liquidators.  The same liquidators were recently criticized by DHCJ To for conducting litigation not based on evidence but by way of “mere imagination and speculation” (“這安排純屬臨時清盤人的個人構想及憶測”) (see: §50 in Yung Wai Tak Abraham William v Natural Daily (NZ) Holdings Limited (In Pro Liquidation)[2020] HKCFI 2067).  

61.  More importantly, there is no anti-avoidance clause in the Policy and also the proposal for the Policy is not before the court.  In Hotel Portfolio II UK Ltd (In Liquidation) v Ruhan [2020] Costs LR 205, Butcher J held that (at §14):-

“14. Where there are no anti-avoidance provisions there are difficulties in relying on the fact that the proposal to insurers was made by liquidators “who are independent professional insolvency officeholders, and who investigated the claims with the assistance of experienced solicitors and counsel” since, as Longmore LJ said in para 28:

“The best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know.” Further, at para 29 of his judgment Longmore LJ said this:

“Neither the defendants nor the court have been provided with the placing information put before the insurers but, even if that had been provided, it is unlikely that the court could be satisfied that the prospect of avoidance is illusory. Even at the jurisdictional stage of considering security for costs, the defendant must, as Mance LJ said in Nasser [2002] 1 WLR 1868 at para 60 ‘be entitled to some assurance that [the insurance] was not liable to be avoided for misrepresentation or nondisclosure’. I cannot see that on the facts of this case these defendants have that assurance. It follows therefore that there is reason to believe that the Companies will be unable to pay the defendants’ costs if ordered to do so and that the jurisdictional requirement of CPR 25.13 is satisfied.”

62.  His Lordship did not consider that the ATE policy could provide adequate protection such that there was no reason to believe that the company would be unable to pay the defendants’ costs if ordered to do so.  One of the reasons was that (at §15):-

“Firstly, there may be bases on which the insurers could avoid. There is no anti-avoidance provision. The way in which the matter was presented to insurers is not known as the proposal has not been provided. Only strictly limited comfort can be taken from the fact that Ms Aird-Brown says she put matters properly before the insurers. She could not disclose what she did not know and, as the claimants accepted, the documentation in this case is voluminous. She cannot be expected to know everything that is in it. In those circumstances, it is not a fanciful risk that there might be avoidance.”

63.  When asked whether it is the plaintiff’s case that clause 10.2 is as effective as an anti-avoidance clause, Ms Lam very fairly concedes that it is not so.  The plaintiff’s case is merely that the risk of misrepresentation and/or non-disclosure is “lower” as a result of clause 10.2.

64.  Further, the proposed undertaking to “immediately notify the 3^rd defendant if the plaintiff receives any indication from the Insurer that it intends to cancel or terminate the Policy” is hardly any protection at all.    

65.  Finally, Mr Wong relies on Gaelic Seafoods (Ireland) Ltd v Ewos Ltd 2009 SC.LR 417.  In that case, Lord Drummond Young refused to accept a funding agreement and a litigation costs insurance as sufficient security.  His Lordship referred to the defendant's counsel arguments for the security for costs (at §§14, 21):-

“[14] Fourthly, clause 5.5 of the policy provided as follows: “in the event of the Insured becoming insolvent,... [or] upon the appointment of a receiver or administrator... the Insurer reserves the right to terminate this Policy and no payment will be due by the Insurer under the terms of this Policy”. The pursuers were already insolvent, and it was not at all apparent how that clause might apply in the circumstances. It was, however, clear that the policy was not intended to apply on insolvency..... Those exclusions, counsel submitted, gave rise to a significant risk that the policy would be rendered invalid in the course of proceedings, thus destroying such security as it afforded the defenders.”

“[21]... I am of opinion that there are significant problems with the funding agreement and the policy... In relation to the litigation costs policy, my concern relates to clause 5.5, whose terms are set out at paragraph [14] above. That clause appears to assume that the pursuers were solvent at the time when the policy was taken out, and avoids liability in the event of insolvency. In the schedule to the policy, the insured appears to be identified as a company in receivership and liquidation, and the application of clause 5.5 in those circumstances is not wholly clear. At the very least, I think that it can be expected that, where it is known that the insured is already insolvent, any provisions such as clause 5.5 should be deleted; that seems to me to be an elementary aspect of competent draughtsmanship. The very fact that the clause was not deleted seems to me to raise some doubts about the effectiveness of the policy...”

66.  In the present case, the Policy states that:-

“2. If the Insured [the plaintiff] is bankrupt, insolvent or become bankrupt or insolvent during the Period of Insurance the Insurer shall have the right to withdraw its support of the Legal Proceedings. The Insured shall be deemed insolvent upon the appointment in relation to that Insured of an office-holder within the meaning given by Section 233(1) or 372(1) of the Insolvency Act 1986.”

67.  The said clause is odd because it seems to assume that the plaintiff was solvent at the time when the Policy was taken out, but in the Schedule, the Insured was described as “Natural Dairy (NZ) Holdings Limited (In Provisional Liquidation)”. 

68.  I think the above observation made by Lord Drummond Young squarely applies to the present case.  The very fact that the clause was not deleted seems to me to raise some doubts about the effectiveness of the Policy.

69.  In conclusion, the terms of the Policy provide ample grounds for the Insurer to avoid the Policy, thus leaving the 3^rd defendant at an unacceptable risk that her costs would not be paid if she wins.  I am therefore not satisfied that the Policy can provide sufficient protection to the 3^rd defendant.  In the circumstances, I conclude that, on the facts of this case, there is jurisdiction to make an order for security for costs.  As there is no evidence that the plaintiff’s claim will be stifled, I see no reason not to exercise my discretion to order security.

D.  Quantum of security

70.  The 3^rd defendant’s estimated costs amount to some HK$15 million but she is now seeking only HK$6 million. 

71.  Ms Lam submits that the amount of security should be reduced substantially because heavy discount should be applied in the light of the availability of the policy. 

72.  She relies on Bailey v GlaxoSmithKline UK Ltd [2020] Costs LR 795 where the defendant applied for security for costs for £6.8 million, and the claimants had the benefit of an ATE policy in relation to generic costs up to £750,000.  As there was no anti-avoidance clause in the insurance contract, the English High Court recognized that there was a risk of the ATE policy being avoided at some stage.  To reflect that risk, it deducted two-thirds of the sum of £750,000 (namely, £500,000) from the amount of security otherwise to be provided. 

73.  Forskett J said that (at §70):-

“70. However, for the reasons foreshadowed in the preceding paragraph, I do not think it is possible to discount as illusory the prospect of the avoidance of the ATE insurance cover at some stage. Since it is not an issue that arises at the jurisdiction stage (as it did in Premier Motorauctions ), the issue is to what extent can or should it be reflected in the discretionary, balancing exercise. The defendant argues that I should "disregard (alternatively … give limited weight to), the existence of the … ATE policy when exercising [my] discretion as to the appropriate quantum of security to be ordered." MLS (supported by the claimants contends that I "should conclude that the ATE policy gives [the defendant] sufficient protection in relation to £750,000 of its costs" or, alternatively, that I "should ascribe some value to the policy as part of the exercise of discretion [and if] … there is some risk [of avoidance], then [I should] reduce the amount of security which [I] might otherwise order by an amount below £750,000 to reflect those contingencies.”

74.  In Bailey, his Lordship was able to conclude that “it is more likely that the policy will remain intact and remain available for the payment of part of the defendant’s costs if the defendant is successful, but that there is a more than minimal risk that it will not remain intact” (§79).  In this case, however, I am of the view that the terms of the Policy would appear to provide the Insurer with extensive rights to cancel the policy.  Thus, it is foreseeable that the Insurer could in the context of live litigation readily be in a position, if it so wished, to avoid paying.  I therefore do not think the Policy provides any real security for the 3^rd defendants' costs.  As such, there is no basis for me to discount any sum from the security to be ordered as a consequence of the existence of the Policy. 

75.  Ms Lam further submits that the amount of security claimed in the skeleton bill submitted by the solicitors of 3^rd defendant is grossly exaggerated and should be cut down substantially.  Ms Lam has not, however, taken me through the individual items in any great detail, nor has Mr Wong.  

76.  The HK$ 6 million figure is made on the 3^rd defendant’s own assessment that the length of the trial is around 40 days.  On the other hand, Ms Lam submits the estimated length of the trial has not been agreed, and a 40-day trial is too long.  She suggests 20 days instead.  Further, Ms Lam reminds me that the 1^st defendant and the 3^rd defendant are represented by the same team of solicitors and counsel, and thus it is reasonable to assume that there is a substantial overlap in terms of legal costs.

77.  Doing the best I can, I consider that ordering security in the sum of HK$4 million would be appropriate in this case.

E.  Order

78.  I shall make the following order:

(1)  The plaintiff do within 35 days from the date hereof pay into court the amount of HK$4 million as security for the 3^rd defendant’s costs in the present action up to the conclusion of trial with liberty to apply;

(2)  Until such security is given all further proceedings against the 3^rd defendant be stayed; and

(3)  In default of payment, the plaintiff’s claim against the 3^rd defendant be dismissed with costs to the 3^rd defendant.

79.  There is no reason why costs should not follow event.  I therefore grant a costs order nisi that the plaintiff shall forthwith pay the 3^rd defendant costs of and occasioned by this application to be summarily assessed, with certificate for two counsel.  I therefore direct that if no application is made to vary the costs order nisi within 14 days from the date hereof: -

(1)  The 3^rd defendant do lodge and serve statement of costs within 28 days from the date hereof; and

(2)  The plaintiff do within 14 days thereafter lodge and serve summary of objections.

80.  Finally, I wish to thank counsel for their considerable assistance in this case.

Ms Rachel Lam, SC and Ms Sharon Yuen instructed by Tanner De Witt for the Plaintiff

Mr William Wong, SC and Mr Paul Wong instructed by Boase, Cohen & Collins for the 3^rd Defendant