LAU LAI SHAN LISA v. ZHANG QI AND OTHERS

HCA 1395/2018 &
HCA 1992/2019
(Consolidated)

[2023] HKCFI 1465

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 1395 OF 2018 AND 1992 OF 2019

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BETWEEN

(Consolidated pursuant to the Order of the Honourable
Madam Justice Cheng dated 28 February 2022)

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D E C I S I O N

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A. INTRODUCTION

1.  By a summons of 10th August 2022 (“the Summons”), the 1st Defendant seeks fortification of the undertaking as to damages provided by the Plaintiff in Schedule 2 of the injunction granted on 25th June 2018 against the 1st Defendant (“the Injunction”).

B. THE BACKGROUND

2.  It is the Plaintiff’s case that Kidbrooke Group Limited (“Kidbrooke”) was used by her uncle (“Lau Senior”) to hold various assets on trust for Lau Senior’s sons. The trust was established pursuant to a deed of settlement of 15th December 1997 (“the Trust”), with Lau Senior as the settlor. The Plaintiff was the sole shareholder and sole director of Kidbrooke and was tasked with managing the Trust and its assets. The Trust acquired four properties and earned rental income from such properties.

3.  The Plaintiff studied medicine and is a doctor. She says that that the work of administering the Trust was time-consuming, and her brother (“Alan”) helped out with such work, in accordance with Lau Senior’s wishes. In 2002, Alan met the 1st Defendant, and in 2007, they got married. The 1st Defendant then assisted in the administration of the Trust, and gradually earned the trust of the Plaintiff.

4.  The Plaintiff says that the 1st Defendant fraudulently induced her to sign various documents, including documents to transfer the sole share in Kidbrooke to the 1st Defendant, and resigning her position as director, by making various misrepresentations as to the contents and purposes of such documents. Thereafter, the 1st Defendant emptied Kidbrooke’s bank account, sold two of its properties, and assigned another property to a company owned by her; she then sold the share of Kidbrooke in May 2018 for $140m.

5.  It is the 1st Defendant’s case that Kidbrooke was instead used by Alan’s parents to hold and manage their assets for the benefit of Alan, and that the Plaintiff owned and managed Kidbrooke for Alan.

The actions

6.  The Plaintiff commenced HCA 1395/2018 on 15th June 2018, against:

6.1 the 1st Defendant;

6.2 the 2nd Defendant which was a limited company carrying on an accountant’s business; and

6.3 the 3rd Defendant who was the sole director and 90% shareholder of the 2nd Defendant. The Plaintiff says that the 3rd Defendant took various documents to her to sign, at the 1st Defendant’s instructions, and that the 2nd and 3rd Defendant received from the 1st Defendant $13.28m of the sale proceeds of Kidbrooke’s share.

7.  The Plaintiff commenced HCA 1992/2019 on 31st October 2019, against (what is now):

7.1 the 4th Defendant, another company owned by the 3rd Defendant, which is said to have received from the 3rd Defendant $5.9m of the aforesaid $13.28m;

7.2 the 5th Defendant, a director of the 4th Defendant and a barrister said to have been advising the 1st Defendant in relation to the sale of Kidbrooke. It is said that the 5th Defendant directed the 2nd and/or the 3rd Defendant to make a payment, on the 5th Defendant’s behalf, of $4m of the aforesaid $5.9m;

7.3 the 6th Defendant, the wife of the 5th Defendant. It is said that the aforesaid $4m was used to purchase properties in the name of the 6th Defendant.

8.  The actions were consolidated on 28th February 2022.

The injunction

9.  On 25th June 2018, the Plaintiff obtained an injunction against the 1st Defendant (“the Injunction”), restraining the 1st Defendant from (1) dealing with $80m of the proceeds of sale of the Kidbrooke share which were held by her solicitors and (2) dealing with her assets up to a further $60m. The Injunction was given against the Plaintiff’s cross-undertaking as to damages.

The current application

10.  The 1st Defendant applies for fortification of the cross-undertaking as to damages on the basis that there has been a change of circumstances since the time when the Injunction was granted, namely:

10.1 commencement of HCA 1992/2019 in 2019 and its consolidation with HCA 1395/2018;

10.2 downturn in the property market starting in 2022.

C. THE APPLICABLE PRINCIPLES

11.  There is no dispute as to the relevant principles. Where an application for fortification is made after the grant of the original injunction and giving of the cross-undertaking:

11.1 the applicant needs to show a reason why the late application should be entertained, by way of some significant change of circumstances, or compelling circumstances;

11.2 if the court is persuaded that the application should be entertained, the test to be applied is the ordinary test as to the grant or refusal of an order of fortification.

See Hui Chi Ming v Koon Wing Yee [2011] 1 HKLRD 260 at [36] to [39].

12.  As to the “ordinary test” as to whether to grant or refuse an application for fortification:

12.1 the court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order;

12.2 usually, the merits of the parties’ cases are not a relevant consideration. However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant;

12.3 the burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification;

12.4 the defendant must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes that the plaintiff will be unable to make good that loss;

12.5 the court will approach these issues by taking a broad view of the evidence, usually without the need for a detailed enquiry;

12.6 whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of disclosure might entitle the court to draw an adverse inference as to the plaintiff’s ability to meet his cross-undertaking in damages;

12.7 whilst fortification is not the necessary starting point, it is valid to consider whether a plaintiff’s financial position is such that, viewed fairly, may be said to raise realistic doubts as to the plaintiff’s ability to honour the cross-undertaking.

See Yan Yu Ying v Leung Wing Hei [2022] 3 HKLRD 270 at [81] to [83].

D. WHETHER CHANGE OF CIRCUMSTANCES

D1. Commencement of HCA 1992/2019 and consolidation with HCA 1395/2018

13.  Mr Anson Wong SC (appearing with Mr Peter Chung) for the 1st Defendant submitted that the significance of the commencement of HCA 1992/2019 and its consolidation with HCA 1395/2018 is two-fold. First, it is said that the mere fact of commencement of the 2019 action is that the Plaintiff needs to incur more legal costs, which will also mean that the resources which the Plaintiff will have to meet her cross-undertaking will be significantly reduced. Second, it is said that the fact of the consolidation will mean that the trial will take longer, will be fixed for later, and that the 1st Defendant will be subject to an injunction for a longer time and suffer greater loss than originally anticipated.

14.  I do not agree.

14.1 Prior to consolidation, the statements of claim in HCA 1395/2018 and HCA 1992/2019 were largely identical. The statement of claim in HCA 1992/2019 was essentially a duplication of the statement of claim in HCA 1395/2018, with the addition towards the end of some paragraphs relating to the onward payment of some of the proceeds of sale of the share in Kidbrooke to the 4th to 6th Defendants (or the application of such proceeds for their benefit). From the consolidated Re-Re-Amended Statement of Claim, it can be seen that apart from identifying the 4th to 6th Defendants in paragraphs 4B to 4E, pleading the payments to or for the benefit of the 4th to 6th Defendants in paragraphs 69B to 69I, and a few other minor amendments, the rest of the claim is against the 1st to 3rd Defendants. Furthermore, the newly added 4th to 6th Defendants cannot be said to be a wholly unrelated set of defendants: the 4th Defendant is a company owned by the 3rd and 5th Defendants; the 5th Defendant also advised the 1st Defendant in relation to the sale of Kidbrooke; the 6th Defendant is the 5th Defendant’s wife. Thus the amount of additional costs, if any, due to the commencement of HCA 1992/2019 would not appear to be substantially significant. I say “if any” in the light of the reduced time estimate referred to in the subsequent paragraph.

14.2 It would follow that (in theory) the amount of time for the trial of the consolidated actions would not be significantly longer than for HCA 1395/2018 alone. As a matter of actual fact, the amount of time which will be needed for the trial of the consolidated actions is much shorter than what was envisaged for HCA 1395/2018 alone: at the hearing, when I asked for an estimate of the length of the trial of the consolidated actions, Mr Wong and Mr Chung^[1] estimated that 18 days would be needed. Previously, in early February 2022, the parties had been asked for updated time estimates, and at the hearing of 28th February 2022, the parties to HCA 1395/2018 had estimated that 24.5 days would be required for the hearing of HCA 1395/2018 alone.^[2]

14.3 Whilst the parties in HCA 1395/2018 had stated in their listing questionnaires of August 2021 that the case was ready to be set down for trial, by the time that the matter came before me on 28th February 2022, the Plaintiff and the 1st Defendant had each indicated that they would call an additional witness, the 1st Defendant proposed amendments to her pleadings, and the parties anticipated that there would be yet further supplemental witness statements filed.^[3] As matters have transpired, there have been further interlocutory skirmishes between the parties, most recently in November 2022 when the Plaintiff sought to adduce further factual and expert evidence.

14.4 Meanwhile, the parties in what was originally HCA 1992/2019 have caught up. Counsel for the Plaintiff, Mr Toby Brown, indicated at the hearing that the final rounds of witness statements were due to be filed shortly.

15.  I therefore do not consider that there is any increase in costs or delay which could be said to be due to the commencement of HCA 1992/2019, or its consolidation with HCA 1395/2018, such as to constitute a significant change of circumstances justifying revisiting the issue of fortification of the Plaintiff’s cross-undertaking as to damages.

D2. Movement in property market

16.  The second matter relied on by the 1st Defendant to say that there has been a significant change of circumstances, or that there are compelling circumstances (as to why the fortification application should be considered), is the downturn in the property market starting in 2022. The Plaintiff and her husband jointly own a property at City Point in Tsuen Wan (“the City Point Property”). It is said that the fall in value of the City Point Property since 2018 (when the Injunction was granted), due to the Covid-19 pandemic, the tension between the PRC and western countries, and the recent interest rate increase, means that there has been a reduction in the pool of assets backing the cross-undertaking in damages.

17.  The 1st Defendant produced:

17.1 copies of an index taken from an estate agent’s website for the period from 2012 to July 2022 to make the point that the property market was on an upward trend from 2012 to June 2018, peaked in August 2021, and has since been gradually declining;

17.2 articles from Bloomberg and the South China Morning Post from 29th March 2022 to 31st July 2022, all predicting a general increase in mortgage loan interest rates and a slump in property prices. Singled out for mention was Goldman Sachs Group Inc’s prediction that property prices would drop by 5% every year from 2022 to 2025 before stabilising.

18.  Mr Wong relied on Hui Chi Ming at [48], [49] for the submission that a mere change in the form of a plaintiff’s assets (in that case, from shares to cash) could constitute a sufficiently significant change in circumstances so as to justify the court entertaining an application for fortification of the plaintiff’s cross-undertaking after the original grant of the injunction. Furthermore, there was no finding in Hui Chi Ming that the plaintiff intended to dissipate his cash, so that its full value would remain available to support the plaintiff’s cross-undertaking. It was said that a fortiori, in the present case, where the Plaintiff’s assets have not merely changed in form, but actually reduced in value, a sufficient change in circumstances must have been shown.

19.  However, the circumstances in Hui Chi Ming were that the plaintiff had identified his shareholding as the specific asset underpinning his cross-undertaking at the time of applying for the injunction, yet he disposed of it, and he did not satisfactorily explain why he sold it or account for what had become of the proceeds: see [50]. The disposal of the asset was instigated by the plaintiff. By contrast, in the present case, there is no suggestion that the Plaintiff has done anything nefarious. I do not agree that the present case is “stronger” than Hui Chi Ming.

20.  I do not consider that the evidence relied on by the 1st Defendant demonstrates any significant change of circumstances or compelling circumstances as to why the court should entertain the application for fortification.

20.1 Fluctuations in property values in response to external events are normal and to be expected. The evidence adduced does not suggest that the fluctuations are out of the ordinary.

20.2 The graph of the property index relied on shows an upward gradient between about 2016 and 2018, a bit of a drop between 2018 and 2019, and then a relatively overall flat gradient between 2019 and 2022. Roughly speaking, the level of the index in June 2018 is similar to the level of the index in 2022. Even assuming that the index accurately reflects the fluctuations in value of the City Point Property (there is no evidence in this regard), this would mean that the absolute value of the City Point Property has not in fact fallen since the time of the Injunction.

20.3 From the graph, it does not seem that the property market was on an upward trend as at June 2018; rather, the index had started falling some time prior to that. Insofar as the 1st Defendant suggests that at the time of the Injunction, she was not particularly concerned that the Plaintiff might not be good for her cross-undertaking by reason of her ownership of the City Point Property,^[4] this would have been against the background of (and despite) the property market moving downwards. The contrast she now seeks to draw between property market trends then and property market trends now should be seen in this light.

20.4 It is said that the property market is predicted to continue to fall until 2025, based on the articles adduced in evidence. However, the articles were generally written in the context of the restrictions imposed during the Covid-19 pandemic and the associated economic conditions. Several of the articles report the predictions made by Goldman Sachs Group Inc, who said that social distancing rules would combine with rising unemployment and higher borrowing rates to dampen demand, and that this would be reflected in lower home prices. A South China Morning Post article of 17th June 2022 reported that property developers had mostly written off the first quarter of 2022 when strict social distancing rules forced them to scrap their home sales from January to April 2022. Another South China Morning Post article of 27th July 2022 reported the Financial Secretary as saying that the movement in home prices in the second half of 2022 would depend on the pandemic. In other words, the articles and predictions relied on were just snapshots at particular points in time (mostly around March to July 2022), and market conditions will continue to change.

21.  I therefore do not agree that the downturn in the property market starting in 2022 constitutes a significant change of circumstances, or special circumstances, justifying the revisiting the issue of fortification of the Plaintiff’s cross-undertaking as to damages.

E. CONSIDERATIONS UNDER THE “ORDINARY TEST”

22.  In the light of my conclusion that there has not been any significant change of circumstances, or special circumstances, as to why the late application for fortification should be entertained, it is strictly speaking not necessary for me to proceed to consider whether, under the “ordinary test”, fortification should be granted. In case I am wrong in my earlier conclusion, and in deference to counsel’s submissions, I will set out my brief observations in this regard.

23.  It was common ground that if the 1st Defendant were able to show a change of circumstances or special circumstances, she would then have to go on to show (1) the likelihood of a significant loss arising as a result of the Injunction, and (2) why she believes that the Plaintiff would be unable to make good the loss.

E1. Likelihood of significant loss

24.  In her evidence,^[5] the 1st Defendant says that she would suffer loss of about $14m resulting from the Injunction, assuming that the trial would take place in 2024, calculated as follows:

24.1 $10,440,000, being loss of rental income at 2.5% per annum from purchase of “low-risk property” and “other investments” generating a stable return. Such purchases would have been funded from (i) cash of $68m which has been frozen pursuant to the Injunction and paid into court and (ii) cash of some $1.6m which has been frozen in bank accounts, of which $1.3m had been earmarked for a down payment of the purchase price of a property referred to as the Po Shing Mansion Shop;

24.2 $1,440,000, being loss of interest at 2% per annum from a loan of $12m which was to have been advanced to a friend in Taiwan (“Liu”) pursuant to an agreement said to have been entered into in May 2018. The $12m would have come from funds which have been frozen pursuant to the Injunction and paid into court;

24.3 $2,160,000, being loss of interest at 2% per annum from a loan of $18m earlier advanced to Liu pursuant to the same agreement. It is said that Liu has refused to continue to pay interest on this part of the loan as the 1st Defendant has failed to advance the aforesaid $12m.

25.  The aforesaid sums of $68m and $12m were frozen pursuant to the Injunction and paid into an interest-bearing account of the court pursuant to a court order of 17th December 2019. However, as at 27th July 2022, only $112,060.81 has been earned by way of interest. This is unlikely to be of much significance in offsetting losses caused by the inability to use the funds during the period of the Injunction.

26.  Mr Brown pointed out that no evidence has been adduced to support the claim that the 1st Defendant could expect an annual return of 2.5% from 2018 to 2024 on the investments which were intended to have been made with the $68m and $1.6m. In his skeleton argument, Mr Wong cited authorities to say that best lending rates have been used in cases where a substantial amount of money was frozen and no specific investments were planned. However, as Mr Brown submitted, in the present case, the 1st Defendant was specific as to the use planned for the $68m and $1.6m, so it is incumbent on her to adduce the evidence to show what return would have been made from such a use and accordingly lost as a result of the Injunction; having failed to do so, she cannot simply fall back on an argument that returns of some sort would have been made, for example by placing the cash in fixed deposits. I agree. Whilst the 1st Defendant exhibited a table published by the Rating and Valuation Department indicating average yields of rent for various classes private property in 2018, there is no evidence as to what yields would have been in subsequent years. I therefore do not consider that the 1st Defendant has sufficiently shown what loss is likely to have been suffered as a result of the freezing of these amounts.

27.  Mr Brown further submitted that on the 1st Defendant’s own evidence, property prices are falling and will not rise till 2025, so that the capital value of any investments which would have been made with the $68m and $1.6m would be expected to fall during this period. However, I agree with Mr Wong that the focus should not be on the capital value of the investments but on the loss said to arise from the lost opportunity to earn rental income, this being caused by the operation of the Injunction.

28.  As for the loss arising from the freezing of the $1.3m, Mr Brown challenged the genuineness of the purchase of the Po Shing Mansion Shop. However, this challenge was raised only in Mr Brown’s skeleton, so that the 1st Defendant has not had a proper opportunity of putting forward evidence in relation thereto. Mr Brown submitted that it was open to him to make the challenge based on the documents produced by the 1st Defendant and by reference to observations made in the decision of DHCJ William Wong SC in [2019] HKCFI 2170, being a decision in HCA 1395/2018 relating to the 1st Defendant’s application to vary the Injunction. However, the challenge involves allegations of dishonesty against the 1st Defendant. For example, it is said that the 1st Defendant had falsely claimed that the $1.3m was intended as a down payment for the purchase of the Po Shing Mansion Shop, and had instead used the funds to pay off the 3rd Defendant’s overdraft. I agree with Mr Wong that as a matter of fairness, it is not appropriate for me to take a view about the matter when the 1st Defendant has not had a proper opportunity of filing evidence to respond to such allegations; nor can the observations made by the court in determining another interlocutory application between the parties be taken as findings of fact binding on the court in this application, or indeed even as evidence of such facts.

29.  As for the loss arising from Liu’s refusal to pay interest on the $18m previously advanced by the Plaintiff, and the loss of interest from the inability to advance a further $12m to Liu, again, Mr Brown sought to challenge the genuineness of the loan agreement in his skeleton argument, without having raised it on the evidence. Again I agree with Mr Wong that as a matter of fairness, it is not appropriate for me to come to any conclusion about this when the 1st Defendant has not had a proper opportunity of filing evidence to respond to allegations of this nature.

30.  On the other hand, it is not known whether the 1st Defendant would really ultimately suffer the loss of interest, at least in relation to the $18m said to have already been lent to Liu, given that the 1st Defendant’s case is that he is obliged to pay interest, although he is currently refusing to do so (and claims to be entitled to so refuse). The 1st Defendant says that she and Liu have agreed to hold off commencing legal action against each other until the conclusion of the current proceedings.

31.  Thus whilst on a broad view of the evidence, I would accept that the 1st Defendant demonstrates that she would suffer some loss arising as a result of the Injunction, I consider that she has not shown what loss is likely to have been suffered as a result of the freezing of the amounts of $68m and $1.6m, and in relation to the interest payable on the $18m lent to Liu. In saying this, I am not suggesting that the 1st Defendant needs to show to a balance of probabilities the amount of loss which she would suffer. Such proof is not required: Yan Yu Ying at [95], citing Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2015] 1 WLR 2309. However, given that the 1st Defendant has specifically said that she would have invested in “low-risk property for rental returns and other investments to generate stable return”, but has not adduced evidence to support her claim as to what those returns would be, and given the uncertainty as to whether the 1st Defendant would really be unable to recover interest from Liu in relation to the amount lent to him, it is not possible to make an “intelligent estimate … of the likely amount of any loss which may be suffered” (see Yan Yu Ying at [95]) – at least not so as to enable a view to be taken that the Plaintiff will be unable to make good such loss, given that the Plaintiff does have some assets from which damages can be paid, as discussed below.

E2. Why the 1st Defendant believes the Plaintiff will be unable to make good the loss

32.  According to the Plaintiff, the net equity in the City Point Property is currently in the region of $10.9m to $11.36m, so that her half-share is in the region of $5.45m to $5.68m. She says that all along the mortgage repayments have been made punctually, so that the net equity will continue to increase over time.

33.  The Plaintiff earns an annual income of about $2m, and she would also be entitled to a retirement benefit of about $2m if she were to choose to retire now, the amount increasing if she continues to work in her current position.

34.  Mr Wong submitted that:

34.1 the property market is continuing to decline, so that the City Point Property will be less valuable in a few years’ time;

34.2 the Plaintiff’s husband does not have a regular job so that there is no other source of income for the family, which includes two children;

34.3 the Plaintiff has to bear the costs of the litigation, which are likely to be heavy.

35.  However, I note that:

35.1 the 1st Defendant’s evidence is that the property market will stabilise by 2025;

35.2 the 1st Defendant’s own case is that Lau Senior, who claims to have been the beneficial owner of the assets transferred to the Trust, has been supporting the litigation and may have been financing some of it.

36.  In the light of the uncertainty referred to in the previous section as to the degree of loss which the 1st Defendant is likely to suffer as a result of the Injunction, I am unable to come to the view that the level of assets which the Plaintiff has disclosed would be insufficient to enable the Plaintiff to make good such loss.

E3. Relevance of merits

37.  Mr Brown submitted that the Plaintiff has a strong case that the assets of the Trust came from Lau Senior. However, Mr Brown seeks to rely on the earlier decision in [2019] HKCFI 2170 for this purpose. As already noted above, the observations made by DHCJ William Wong SC cannot be treated as findings of fact or as evidence for present purposes. Furthermore, as Mr Wong points out, since the time of that decision, the parties have filed further witness statements, addressing some of the points in the decision.

38.  Mr Brown also made reference to the statements which the 1st Defendant made to the police regarding the events which occurred. It is apparent that there are a number of inconsistencies which call for explanation, but that will be a matter for cross examination at trial, and it is not possible at this stage to come to any view as to the veracity of the 1st Defendant’s case without first giving her the opportunity of responding to the points raised.

39.  I therefore do not consider it appropriate to go into the details of the merits of the parties’ cases for the purpose of this application.

F. DISPOSITION

40.  I dismiss the Summons. I further make a costs order nisi that the 1st Defendant pay to the Plaintiff the costs of and occasioned by the Summons, to be taxed if not agreed.

Mr Toby Brown, instructed by Chui & Lau, for the Plaintiff

Mr Anson Wong SC leading Mr Peter KM Chung, instructed by Fongs, for the 1^st Defendant

HCA 1395/2018

[2019] HKCFI 2170

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1395 OF 2018

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________________________

DECISION

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Applications

1.  By summons dated 4 March 2019 (“the Summons”), the 1^st Defendant seeks to vary the terms of a proprietary and Mareva injunction granted by Madam Justice Mimmie Chan on 25 June 2018 (“the Injunction Orders”) in two respects.

2.  First, the 1^st Defendant seeks to clarify the terms of the Injunction Orders such that she is only:

  (a)  prohibited from removing from Hong Kong, disposing of, dealing with or diminishing the HK$80 million proceeds from the sale of Kidbrooke Group Limited (“Kidbrooke”) presently held by the 1^st Defendant’s solicitors qua stakeholder; and

  (b)  restrained from removing from Hong Kong, disposing of, dealing with or diminishing her assets whether in her name or not and whether solely or jointly owned up to HK$60 million.

3.  The proposed variation is to make clear that since the HK$80 million currently held by the 1^st Defendant’s solicitors is subject to a freezing injunction, the maximum amount of the 1^st Defendant’s personal assets to be frozen should be limited to HK$60 million and not a total of HK$140 million.  As the Plaintiff’s maximum claim is HK$140 million in the present action, I see no valid objections to the variation or clarification sought by the 1^st Defendant.  Indeed, it is very important that the amount to be frozen or restrained by an interlocutory injunction should be correctly stated and fully justified.  Mr Brown for the Plaintiff has a valid argument that this variation sought by the 1^st Defendant is not clearly stated in the Summons and was only made clear in Mr Chan’s Skeleton Submissions.  However, that is an issue in relation to costs which I shall deal with at the end of this Decision.

4.  Accordingly, I make an order in terms of the proposed amendments as submitted by Mr Chan for the 1^st Defendant with a minor amendment proposed by Mr Brown.

5.  The second aspect of the Summons is controversial and contested.  The 1^st Defendant applied for a variation of the Injunction Orders so that she is permitted to withdraw money in her bank account with the Standard Chartered Bank (Hong Kong) Limited (“Standard Chartered Bank”) as follows:

  (1)  a monthly withdrawal of HK$49,000 to settle legitimate household expenses;

  (2)  a one-off withdrawal of HK$384,830.85 to settle the outstanding sum on her American Express credit card and the late payment charges thereto; and

  (3)  a one-off withdrawal of HK$650,000 being estimated legal fees (including counsel’s fees) up to the discovery stage of the present action.

Applicable legal principles

6.  In Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783, Au J (as he then was) set out the applicable legal principles as follows:

“ 13. The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a two-stage process:

(a) First, 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.

(b) Secondly, 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. As Millett LJ (as he then was) said in Ostrich Farming Corp Ltd v Ketchell [1997] EWCA Civ 2953 ‘[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings’.

See: Ostrich Farming Corp Ltd v Ketchell, per Roch LJ at p.10; Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33, 37B–H paras.10, 11, per Le Pichon JA; Lit Ma v Chen Kang Huang (unrep., HCSD 9/2007, HCA 218/2005, [2007] HKEC 1605, 27 August 2007, Sakhrani J), paras. 23–28.

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 available 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.”

Material facts

7.  It is the Plaintiff’s case that Kidbrooke was incorporated in 1997 to be both the trustee of “The Lau’s Trust” (“the Trust”) and the legal owner of the Trust’s assets.

8.  Lau Chun Cheong (“Lau Senior”) was the Trust’s settlor.  He is the Plaintiff’s paternal uncle.  The Trust’s beneficiaries were Lau Senior’s sons, i.e., the Plaintiff’s cousins.

9.  The Plaintiff, as a much trusted niece, was charged with managing the Trust and its assets.  She was the sole shareholder and sole director of Kidbrooke.

10.  Through gifts of cash by Lau Senior, the Trust accumulated four commercial properties in Sheung Shui and thereafter enjoyed considerable rental income for the benefit of the Trust.  It is the Plaintiff’s case that the “marquee” property in the property portfolio was 41A, 41B Fu Hing Street (“Fu Hing Property”).

11.  The Plaintiff managed the Trust in accordance with the wishes of Lau Senior.  However, the demands of administrating the Trust were taxing on the Plaintiff’s time as she studied and worked as a medical doctor.  The Plaintiff’s brother, Alan Lau provided assistance with routine tasks for the Trust but under the Plaintiff’s supervision and in accordance with Lau Senior’s wishes.

12.  In around 2002, Alan Lau met the 1^st Defendant and they got married in 2007.  The 1^st Defendant then assisted Alan Lau with the administration of the Trust and in the course of the following 10 years, became increasingly involved in the Trust’s management and gained considerable trust from the Plaintiff.

13.  It is the Plaintiff’s case that the 1^st Defendant fraudulently caused her to sign various documents, including corporate documents to effect transfer of the sole share in Kidbrooke from her to the 1^st Defendant, by misrepresenting to her the documents’ contents and purposes.  Through such process, the 1^st Defendant became the sole director and sole shareholder of Kidbrooke and took control of its bank account.

14.  The 1^st Defendant emptied Kidbrooke’s bank account, sold two properties and assigned another property (the “Cockloft”) to a company owned by her.  The 1^st Defendant has never accounted to the Trust for these disposals nor has she ever disclosed what had become of the funds from Kidbrooke’s bank account or the sale proceeds of the two properties sold. 

15.  Mr Brown for the Plaintiff submitted that the final act in the fraud was the sale of the single share of Kidbrooke for HK$140 million (“Sale Proceeds”) on 29 May 2018.  The sale of the single share of Kidbrooke was used as a mean to sell the Fu Hing Property, the last remaining Trust asset at the time.

16.  As the Plaintiff was the rightful owner of the single share of Kidbrooke, she brought these proceedings to recover the Sale Proceeds. The 1^st Defendant is currently released on bail.

17.  The 1^st Defendant’s case is that:

  (1)  The assets of the Trust were in fact owned by her parents-in‑law and not the Trust or Lau Senior.  There was no trust and the assets have nothing to do with the Trust or Lau Senior;

  (2)  As the assets would in due course be gifted by her parents-in‑law to her husband, she was entitled to take control of the assets now and treat them as her own;

  (3)  As the Plaintiff was aware that the assets would ultimately belong to her husband, the Plaintiff willingly and with full knowledge executed all necessary documents to transfer the Trust’s assets to her;

  (4)  Alternatively, if the Plaintiff failed to read the documents that resulted in the loss of control of Kidbrooke, the Plaintiff is bound by her own error in signing the same; and

  (5)  The Plaintiff’s current proceedings is an attempt to deprive the 1^st Defendant of assets rightfully belonging to her, her parents-in-law and husband, for the Plaintiff’s improper personal gain.

18.  I accept Mr Brown’s submission that the following contemporaneous documentary evidence support the Plaintiff’s case:

  (1)  the acknowledgements of receipt by Kidbrooke of the various transfer of funds from Lau Senior;

  (2)  Lau Senior’s own evidence as to the setting up of the Trust, including the Letter of Wishes signed by Lau Senior in respect of the Trust’s operation; and

  (3)  evidence from the accountant who set up the Trust together with all the relevant documents showing Lau Senior’s role in the Trust.

19.  On the other hand, there is no documentary evidence produced by the 1^st Defendant to substantiate her case that the assets belonged to her parents-in-law.  Neither her parents-in-law, nor her husband has filed any affirmation or evidence to support the 1^st Defendant’s case.  I agree with Mr Brown’s submission that it is strange that they have not provided any evidential support to the 1^st Defendant if there is any truth in her case.

20.  Mr Chan for the 1^st Defendant submitted that it is beyond belief that a highly educated and intelligent psychiatrist such as the Plaintiff would have signed the documents (such as board resolution and bought and sold notes) without realizing their purposes or was misled by the 1^st Defendant into believing that they were for tax or insurance purposes.

21.  It is not for this Court at this stage to express a view on whether it is beyond belief for a highly educated professional to have signed documents without realizing their purposes.  This is a matter for trial.  The key issue in this case is that the assets are, on the existing evidence before this Court, trust assets.  The 1^st Defendant has not adduced any evidence to refute the documentary evidence produced by the Plaintiff which overwhelmingly points to the existence of a trust.

22.  There is no way in which the 1^st Defendant could have turned trust assets into her personal assets.

23.  Mr Brown for the Plaintiff further submitted that it makes no sense to suggest that the Plaintiff brought the present proceedings to deprive the 1^st Defendant of her assets for the Plaintiff’s financial gain because:

  (1)  the Plaintiff’s position is that the Trust was for the benefit of Lau Senior’s sons, the beneficiaries of the Trust and not for her. She has no ultimate personal financial interest in bringing these proceedings; and

  (2)  it makes no sense for the Plaintiff to knowingly transfer the sole share in Kidbrooke to the 1^st Defendant and then immediately report the fraud to the Police and sue the 1^st Defendant for misappropriation of trust assets.

24.  On the existing evidence, I accept Mr Brown’s submission. 

25.  Further, the 3^rd Defendant is the principal and 100% shareholder of the 2^nd Defendant, a company providing accountancy services.  Yet, from the Sale Proceeds, just over HK$13.28 million can be directly traced to the 2^nd Defendant’s accounts.

26.  The 3^rd Defendant admits in her defence that she brought documents to the Plaintiff to sign and that included (mixed with other documents) the Plaintiff’s resignation as a director and secretary of Kidbrooke.  It is the Plaintiff’s case that the 3^rd Defendant deliberately misrepresented to her the nature of the documents she was signing and hence played a role in the fraud, which in turn may explain the amount paid to her through the 2^nd Defendant.

27.  The Joint Financial Intelligence Unit (“JFIU”) has frozen the sum of HK$2,593,689 in the 2^nd Defendant’s HSBC account which appears to be what remains of the Sale Proceeds received by the 2^nd Defendant.

28.  On 20 June 2019, Deputy High Court Judge Stock SC granted a proprietary and Mareva injunction against the 2^nd and 3^rd Defendants in respect of the proceeds paid by the 1^st Defendant to the 2^nd Defendant out of the Sale Proceeds.

Analysis

29.  Mr Chan for the 1^st Defendant submitted that the funds in the 1^st Defendant’s Standard Chartered Bank accounts belong to her and the Plaintiff has no proprietary claim over the same.  I am of the view that whether the funds in her Standard Chartered Bank accounts belong to her or not is irrelevant.  The Plaintiff has an outstanding claim of HK$140 million and a Mareva injunction to restrain her from disposing of or dealing with or diminishing the value of her assets in Hong Kong up to the value of HK$60 million.  Her assets in her Standard Chartered Bank accounts are obviously covered by the Mareva injunction.

30.  Mr Brown for the Plaintiff submitted that not only has the 1^st Defendant failed to discharge her duty of full and frank disclosure, in fact, she has positively misled the Court as to her financial position.  In relation to the sum of HK$1.3 million which was said to have been paid to the2^nd Defendant for costs on account for the 5% down payment of the purchase price of a property known as Shop 7 on G/F, Po Shing Mansion, Nos 24/30 and 70 Hau Tei Square and Nos 77/89 Tai Ho Road, Tsuen Wan, New Territories (“the Po Sing Mansion Property”), the 3^rd Defendant had in fact disclosed that the said sum was not used for the purchase of the Po Shing Mansion Property, but rather was used to pay off the 3^rd Defendant’s own overdraft in the sum of HK$1,299,943.06.

31.  Mr Brown submitted that at the time of affirming her 4^th affirmation, the 1^st Defendant must have known that her evidence about the purpose of the payment to the 2^nd Defendant of the sum of HK$1,300,000 was false, as she must have enquired with the 3^rd Defendant as to the progress of the purchase of the Po Shing Mansion Property.  In any event, the 1^st Defendant should have and could have claimed back the sum of HK$1,300,000 from the 2^nd Defendant and/or the 3^rd Defendant.

32.  In the 5^th affirmation of the 1^st Defendant, I note that in §§6 and 10, she deposed that:

“ 6. Of the remaining HK$60 million:

6.1 HK$26,963,332 (being HK$26 million principal, HK$953,332 interest and HK$10,000 costs and disbursements) was paid directly from L&W Lawyers to Future Stars in full and final settlement of the 2^nd Loan.

6.2 The remaining sums were paid to me and of that sum, HK$18 million was advanced by me to a Taiwanese friend by the name of Liu Shih Wei.

6.3 HK$13.28 million was paid by me to IC Accounting Limited (“IC Accounting”).

6.4 HK$1.79 million was lent to a friend.

…

10. Furthermore, to the best of my knowledge, the sum was paid to IC Accounting for legitimate and lawful purposes. I crave leave to refer to my 4^th Affirmation and the marked exhibit therein‘ZQ-17’ true copies of the cheques drawn by me to IC Accounting Limited on diver [sic] dates. To the best of my knowledge, the following sums were paid for the following purposes.

10.1 HK$1.4 million was paid to IC Accounting for services rendered by it on 31 May 2018.

10.2 HK$1 million was paid to IC Accounting so that it could settle the legal fees incurred by L&W Lawyers for the work done on the sale of the share of Kidbrooke.

10.3 HK$1.68 million was paid for costs on account for IC Accounting to settle Kidbrooke’s taxes and stamp duty.

10.4 HK$1.3 million was paid to IC Accounting for costs on account for the 5% down payment of the purchase price of a property known as Shop 7 on G/F, Po Shing Mansion,Nos. 24/30 & 70 Hau Tei Square & Nos. 77/89 Tai Ho Road, Tsuen Wan New Territories, which IC Accounting was handling on my behalf.

10.5 HK$900,000 and HK$5 million were paid to IC Accounting for service fee charged by Success Time Properties Limited,which IC Accounting paid on my behalf.

10.6  HK$2 million was paid to IC Accounting as stakehold money for tax payment and government rent & rate.”

  ( emphasis added)

33.  I find the amount of service fees paid to the 2^nd Defendant cries out for investigation and more detailed explanation.

34.  In the 4^th affirmation of the 1^st Defendant, at §§5 and 6, the 1^st Defendant deposed that:

“ 5. I am a Chinese medicine practitioner practising from my clinic, which I share with my husband Lau Ngar Lun Alan (‘Alan’) who is also a Chinese medicine practitioner, at No.9 Fu Hing Street, Sheung Shui, N.T. I have been in practice for 14 years. I gave birth to my son recently and am taking some time off from my practice. Prior to that, I earned around HK$60,000 per month.

6. At the moment, I earn nothing from my practice as I am staying at home to take care of my son. My husband Alan, who earns around HK$50,000 per month from his practice and rental income of around HK$56,000, supports me by paying around HK$20,000 per month to cover our son’s and my expenses. However, as I shall explain below, Alan’s support is not sufficient to cover all the expenses and therefore I have no choice but to apply to vary the Injunction.” (emphasis added)

35.  First, there has been no disclosure by the 1^st Defendant of her shareholding or entitlement to her clinic.  Mr Brown further pointed out that indeed the 1^st Defendant was caught out in that she still treats patients at her clinic.  The 1^st Defendant’s response that she only practices on a part time and limited basis and only when a particular patient requests to consult her does not sit well with her sworn statement that she is presently not working.  In her 6^th affirmation, at §15, she said that the payments she received from patients for her cases (both in terms of consultation and medicine) would go to the clinic and not to her.  However, there has been no disclosure as to how the profits of the clinic are being shared.

36.  Secondly, the 1^st Defendant applied for a sum of HK$12,000 per month as contribution to mortgage payments for the property in which she currently resides with her husband.  As she has the obligation to make mortgage payments, it follows that she might have some beneficial interest in the property.  This is not addressed at all in her affirmations.  Mr Chan for the 1^st Defendant informed this Court that the property was previously jointly owned by the 1^st Defendant and her husband, but in order to purchase one more property under the current policies, she transferred her share to her husband so that she could buy another property.  However, the plan to purchase another property did not materialise but she still continues to make mortgage payments for the property.  Though Mr Chan informed this Court that the 1^st Defendant has gifted her half share of the property to her husband, it is not at all clear whether the 1^st Defendant still retains and/or claims any beneficial interest to the property given that she contributes to the mortgage payments of the property continuously.

37.  Thirdly, there are various sums of money which the 1^st Defendant lent to her friends which have not been properly accounted for:

  (1)  The 1^st Defendant lent a sum of HK$1.79 million to a friend but there is no evidence as to when the same could be repaid and/or whether the 1^st Defendant had made any attempt to recover the same.

  (2)  The 1^st Defendant has also lent a sum of HK$18 million to a Taiwanese friend.  In a letter dated 11 June 2019 from the 1^st Defendant’s solicitors to the Plaintiff’s solicitors, it is stated that:

“ We are instructed that our client has not received any repayment from Liu Shih Wei (‘Mr Liu’). It is our client’s instruction that, as explained in paragraphs 49.1, 49.2 and 49.3 of her 4^th Affirmation, our client has not advanced the total sum of HK$30 million as agreed in the said loan agreement to Mr Liu. As she has failed to honour the terms in the said agreement, Mr Liu has not performed his contractual duties in return to make any repayment to our client.” (emphasis added)

38.  Mr Brown submitted that the reason given for not making repayment to the 1^st Defendant is difficult to fathom.  I agree.  Further, the 1^st Defendant does not appear to have taken any action to recover the sum of HK$18 million or any interest from her Taiwanese friend thereafter.

39.  Fourthly, the 1^st Defendant has failed to disclose the whereabouts of the sales proceeds of the two other properties which also belonged to the Trust in 2015.  Although Mr Chan for the 1^st Defendant submitted that the 1^st Defendant would be facing another injunction if she sought to use the sale proceeds and/or the Cockloft for her expenses as the same would have been subjected to the same claims from the Plaintiff and/or Kidbrooke (as the proper plaintiff), that does not mean that the 1^st Defendant can avoid her duty to make full and frank disclosure of the whereabouts of such assets.

40.  Fifthly, this Court is distinctly unimpressed by the fact that the 1^st Defendant has contributed to both the clinic which she has a share and the mortgage payments for her matrimonial property with her husband and yet, she submitted that one of the reasons for the present application is that her husband would only pay her HK$20,000 as monthly expenses, including expenses relating to their son.  On the evidence, her husband has a monthly income of HK$50,000 from his medical practice and HK$56,000 rental income from a property.

41.  Sixthly, the 1^st Defendant has not disclosed to this Court on how she defrayed her expenses from 25 June 2018 (date of the Injunction Orders) to the present hearing.  It was only at the hearing that this Court was told that legal expenses in the sum of HK$650,000 had been paid from loans she raised from her friends in the region of HK$1 million.  But that still leaves the question of how she defrayed her monthly expenses of HK$49,000 unanswered.

42.  On the evidence, I am not satisfied that the 1^st Defendant has demonstrated with full and frank evidence that there are no alternative funds or assets available to her which can be used to pay for her expenses, other than the assets which are subjected to both a proprietary and a Mareva injunction. In the circumstances, strictly speaking, it is not necessary for this Court to engage in a balancing exercise of weighing the potential injustice to the Plaintiff by releasing the funds against the possible injustice to the 1^st Defendant.

43.  However, I am of the view that the relative merits of the parties’ case is also a relevant consideration.  The Court is keen to preserve the integrity of trust assets.  The 1^st Defendant has not adduced any evidence to demonstrate that the assets belonged to her parents- in-law.  Instead, the contemporaneous documentary evidence before the Court at this stage demonstrates that the assets belonged to the Trust.  Apart from the HK$80 million which is still in the accounts of the 1^st Defendant’s solicitors, there is still an outstanding sum of HK$60 million which the 1^st Defendant has to account for to the Plaintiff.

44.  Finally, Mr Brown submitted that in relation to the American Express credit card debts, the 1^st Defendant’s position is that she would defend the same.  As for the legal expenses of HK$650,000, the same has been settled from the loans that the 1^st Defendant raised from her friends.

45.  To conclude, I am of the view that the 1^st Defendant has not demonstrate with sufficient evidence that she does not have other assets available to meet her expenses.

Disposition

46.  For all the reasons stated above, I make the following orders:

  (1)  The Injunction Orders are varied in terms of the draft Orders as agreed by the parties;

  (2)  The rest of the Summons dated 4 March 2019 is dismissed.

47.  As far as costs is concerned, as the 1^st Defendant only made clear the terms of her proposed revisions in her Skeleton Submissions and such proposed revisions were not seriously contested at the hearing, I am of the view that there is no valid reason to depart from the usual rule that costs of the Summons should follow the event.

48.  Accordingly, I make a costs order nisi that the 1^st Defendant is to pay the costs of and incidental to the Summons dated 4 March 2019 forthwith, to be taxed on a party to party basis if the parties cannot agree.  The costs order nisi will become absolute unless the parties take out applications to vary the same within 14 days from the date hereof.

49.  Finally, it remains for me to thank Mr Brown for the Plaintiff and Mr Chan for the 1^st Defendant for their assistance to this Court.

HCA 1395/2018

[2019] HKCFI 1750

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1395 OF 2018

________________

________________

________________________________

REASONS FOR DECISION

________________________________

1.  On 20 June 2019, two summonses taken out by the Plaintiff (“P”) came before me for hearing, namely:

(1)  P’s summons (the “Injunction Summons”) dated 29 November 2018 seeking:

(a)  a proprietary injunction against the 2^nd Defendant (“D2”) and the 3^rd Defendant (“D3”) to restrain them, pending trial or further order, from dealing with certain specified sums which were paid by D1 to D2, or the proceeds of thereof; and

(b)  disclosure orders against D2 and D3 in respect of the whereabouts of those sums or their proceeds;

(2)  P’s summons (the “Section 21 Summons”) dated 4 December 2018 under section 21 of the Evidence Ordinance (Cap 8) (the “EO”) for inspection of records and documents kept by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) regarding D2’s account with HSBC.

2.  P was represented by Mr Toby Brown.  D2 and D3 were represented by Mr Kevin Li and Mr Gilbert Chong.

3.  At the conclusion of the hearing I made orders in terms of P’s summonses (subject to certain adjustments).  I indicated that I would provide reasons for my decision in due course, which I now do. 

Background

4.  P claims that she is the victim of a fraud perpetrated by D1, who is her sister-in-law, and in which D2 and D3 also participated.  D2 is a Hong Kong company, of which D3 is the sole director and shareholder [1].

5.  The key facts alleged by P include the following:

(1)  P formerly owned the sole share in a West Samoan company called Kidbrooke Group Limited (“Kidbrooke”).  Kidbrooke held certain real property and funds on trust pursuant to a trust (the “Trust”) which had been established by P’s uncle (“Lau Senior”).  Since the establishment of the Trust in 1997, P as sole director and shareholder managed the day-to-day operations of Kidbrooke and the Trust.

(2)  From around 2002/2003, when D1 began a relationship with P’s brother (“Alan”), D1 started assisting P with management of the Trust.  Over time, D1’s involvement increased and P reposed increasing trust and confidence in D1, to the point where P would sign documents presented to her by D1 without reading them.

(3)  Starting from 2015, D1 caused P to sign various documents disposing of certain assets of the Trust and allowing D1 to have access to and operational control over Kidbrooke and its assets. 

(4)  In May 2017, D1 caused P to sign a written resolution to transfer P’s shareholding in Kidbrooke to D1, which transfer took effect.  P was induced by a fraudulent misrepresentation by D1 that the documents she was signing related to insurance for trust assets.

(5)  On 23 – 24 May 2018, D1 represented to P that D3 would bring to P a series of documents for signature in respect of Kidbrooke’s tax affairs.  Unbeknownst to P, these contained a letter of P’s resignation as Kidbrooke’s director.  P was induced to so sign by fraudulent misrepresentations by D1 and D3 as to the nature of the documents she was signing.

(6)  On 29 May 2018, a similar incident occurred, wherein P signed a letter of resignation as Kidbrooke’s secretary, induced by fraudulent misrepresentations by D1 and D3 as to the nature of the documents she was signing.

(7)  Starting in 2017, D1 had begun the process of selling the share in Kidbrooke, which company still owned a valuable property (the “Fu Hing Property”).  On 29 May 2018, completion took place of a transaction by which D1 purportedly sold the share in Kidbrooke to Allied Way International Investment Limited (“Allied Way”) for a purchase price of HK$140,000,000.

(8)  P’s pleaded causes of action include deceit, conversion, negligence, breach of fiduciary duty, knowing receipt of trust property, dishonest assistance in a breach of trust, unjust enrichment, proprietary/tracing claims, and conspiracy to injure by unlawful means.

6.  D1’s pleaded defence is relevant mainly by way of background. Her position, in essence, is that Kidbrooke was in fact a vehicle used to manage the assets of Alan’s parents (rather than Lau Senior), which would in due course become the property of Alan as their only son.  There was never any trust—or D1 knew of no such trust—created by Lau Senior for the benefit of his sons.  As Alan’s wife, D1 over time became more involving with the management of Kidbrooke, with the consent of Alan, his parents and P.  The various transactions which P now disputes were effected with the knowledge and consent of Alan’s parents, Alan and P; and P knew the nature of the documents she signed.  It is apparently D1’s position that the proceedings are aimed at depriving Alan’s parents (and in due course Alan and D1) of assets which rightly belong to them.

7.  The substantive position of D2 and D3 is set out in their pleaded defence and D3’s affirmation filed in opposition to P’s summonses.  D2 and D3 complain that they are innocent parties who have become unfairly embroiled in a family dispute.  Broadly, it is said that:

(1)  D3 has been in the business of providing company secretarial, accounting and consultancy services since 2005.  In July 2016 she incorporated D2 in for the purpose of such businesses.  D2 is currently serving over 283 companies.

(2)  Around May 2017, D3 was introduced to Kidbrooke, and D2 began to provide administrative services to Kidbrooke.  In August 2017, D1 passed to D2/D3 Kidbrooke’s company kit which included a Certificate of Incumbency describing D1 as Kidbrooke’s sole shareholder. 

(3)  Around October 2017, D1 engaged D2 to handle accounting, tax and secretarial work for Kidbrooke.  D2/D3 were made aware of the intention to sell the share in Kidbrooke, and provided various professional services in respect of that sale.

(4)  D2/D3 admit that on 24 May and 30 May 2018, D3 met with P and provided various documents for her to sign, including to effect P’s resignation as director and secretary of Kidbrooke.  However, D3 says that she explained to P the nature of the documents provided, and that P had an opportunity to review them before signing.

(5)  D2/D3 deny all alleged wrongdoing and claims asserted by P. 

Relevant procedural history

8.  The writ was issued in June 2018 against only D1.

9.  On 25 June 2018, Mimmie Chan J granted to P on an ex parte basis: (i) a proprietary injunction restraining D1 from dealing the sale proceeds (the “Sale Proceeds”) of the share in Kidbrooke [2] ; (ii) a Mareva injunction against D1 up to the sum of HK$110,000,000; and (iii) a disclosure order against D1 in respect of the whereabouts of the Sale Proceeds and their proceeds. 

10.  On 29 June 2018, Deputy High Court Judge Saunders made orders on an inter partes basis: (i) continuing the injunctions against D1, with an additional disclosure order against D1; and (ii) under section 21 of the EO, for the inspection by P of various documents kept by Standard Chartered Bank (Hong Kong) Limited (“SCB”) regarding D1’s account(s) with SCB.

11.  As a result of documents received from SCB pursuant to the said order, P applied to join D2 and D3 as defendants to these proceedings and to amend to claim against them; which joinder and amendment took effect by consent on 20 November 2018.

12.  Shortly thereafter, P issued the Injunction Summons and the Section 21 Summons against D2 and D3.

The Injunction Summons

13.  The Injunction Summons relates to the Sale Proceeds (of the share in Kidbrooke), in respect of which D1 has already been injuncted.

14.  Pursuant to the Court’s orders against D1, P obtained documents in relation to D1’s accounts with SCB (“D1’s Savings Account” and “D1’s Current Account”).

15.  P’s evidence herein canvasses the flow of funds after receipt into D1’s SCB accounts of a portion of the Sale Proceeds, by reference to D1’s SCB account statements. It is P’s case that: (i) on 30 May 2018 sums totaling almost HK$31,000,000 were deposited into D1’s Savings Account, which represented a portion of the Sale Proceeds (HK$140,000,000), immediately prior to which D1’s Savings Account was virtually empty; (ii) from 31 May to 5 June 2018, sums totaling HK$14,300,000 were transferred from D1’s Savings Account to D1’s Current Account, which previously had a zero balance; (iii) seven cheques (the “7 Cheques”) with dates ranging 21 May to 5 June 2018 were drawn on D1’s Current Account in favour of D2, with a total value of HK$13,280,000; (iv) the statements for D1’s Current Account show withdrawals from that account from 31 May to 5 June 2018 pursuant to the 7 Cheques.

16.  Accordingly, P says that D1 paid to D2 a total of HK$13,280,000 (the “7 Cheque Sum”) pursuant to the 7 Cheques, which sum represents a traceable portion of the Sale Proceeds.  P’s Amended Statement of Claim includes a tracing/proprietary claim (as well as other claims) in respect of the 7 Cheque Sum received by D2.

17.  The Injunction Summons seeks to restrain D2 and D3‌— pending trial or further order‌—‌from dealing with the 7 Cheque Sum or the proceeds thereof.

18.  D2/D3 admit that D2 received the 7 Cheque Sum from D1 pursuant to the 7 Cheques.  Mr Li for D2/D3 did not‌—‌for present purposes at least‌—‌take issue with P’s case as to the flow of funds up to that point; nor actively deny that the 7 Cheque Sum represented a traceable portion of the Sale Proceeds.  Rather, the position of D2/D3 is that D2’s receipt of the 7 Cheque Sum was for various legitimate purposes and uses, and that most of those funds have now been paid away by D2 for such purposes: see further below.

Applicable principles

19.  The principles applicable to the grant of interim proprietary injunctive relief are well-known.  They were helpfully summarised by Deputy High Court Judge Douglas Lam SC in Pacific Rainbow InternationalInc v Shenzhen Wolverine Tech Ltd & Ors HCA 3023/2016, unreported, 2 May 2017 at §§36 – 42, including the following:

(1)  For an interim injunction to protect a claim for trust property, the principles in American Cyanamid apply; although irremediable damage need not necessarily be shown and the Court will readily find that the balance of convenience favours preservation of the fund pending trial.

(2)  The merits threshold is that of a serious issue to be tried, as opposed to a “good arguable case” in the case of Mareva relief.  

(3)  It is not necessary to demonstrate a real risk of unjustified dissipation of assets, as in the case of Mareva relief.

20.  Mr Li, for D2/D3, did not seriously dispute these principles.  At the hearing, he distilled his submissions on the Injunction Summons into two main arguments, namely that: (i) P’s position is weak on the merits; and (ii) damages would be an adequate remedy. 

Serious issue to be tried/merits

21.  As noted above, the relevant merits threshold is “serious issue to be tried”.  Mr Li accepted this, but also argued that the (alleged) weakness of P’s merits should be taken into account as part of the balance of convenience and Court’s discretion.

22.  First, Mr Li relied on the merits of P’s case generally.  He argued that P’s case that she signed various documents without reading/ understanding was inherently incredible, given that she is well-educated (a medical doctor), and that her resignation letters were clear and simple documents.  D3 would not have taken the risk of seeking to mislead P as alleged.  P’s case, said Mr Li, relied on her oral evidence, and was accordingly weak; and P had made no complaint or insufficient complaint at the time of allegedly discovering the true nature of the documents signed.  There was no document to show that D2/D3 knew that the share in Kidbrooke was subject to a trust. 

23.  I do not think that this line of argument assists D2/D3.  Certain of these points have been addressed in P’s affidavit evidence, the detail of which I will not canvass.  The central factual issues fall to be ventilated at trial following cross-examination of witnesses.  I cannot conclude, at this stage, that there is not even a serious issue to be tried or that the general merits are obviously against P.  Further, as Mr Brown submitted, even if it were correct that D3 herself did not actively mislead P, that would not necessarily bar P’s potential tracing claim into the 7 Cheque Sum received by D2.

24.  Second, Mr Li focused on D3’s affirmation evidence as to the purpose of the funds received pursuant to the 7 Cheques, and the uses made by D2/D3 of those funds.  Mr Li argued that in respect of P’s tracing claim into those funds, the said explanations gave rise to defences of bona fide purchaser/recipient for value and/or change of position [3].

25.  The parties adduced evidence and made argument in respect of each of the 7 Cheques.  I note the following points: 

(1)  Cheque No 785637 for HK$1,400,000.  D3’s evidence is that this was for various professional services provided by D2 in respect of the sale of the share in Kidbrooke.  D3 produced a debit note issued by D2 to D1 detailing such services.  Mr Li argued that in respect of this sum, D2 was a bona fide purchaser/recipient for value.  However, Mr Brown argued that: (i) there is insufficient breakdown and other supporting documentation to justify such a large fee, particularly given that other large fees were purportedly charged for the same transaction (see below); and (ii) no evidence (other than D3’s say so) has been produced that D2/D3 are even qualified or in the business of providing accountancy, tax, secretarial, and other related professional services at all. 

(2)  Cheque No 447607 for HK$1,000,000.  D3’s evidence is that this sum was for legal fees charged by solicitors for the share sale transaction, paid by D1 to D2 as costs on account.  D3 produced evidence that HK$920,000 of this was subsequently paid away to solicitors.  For present purposes, P no longer took issue with HK$920,000 of this sum, and proposed to deduct that amount from the quantum covered by the injunction sought.

(3)  Cheque No 447612 for HK$1,680,000.  D3’s evidence is that this represented costs received on account for Kidbrooke’s liabilities to tax and other legal fees.  For present purposes, P accepted that a portion of this (HK$684,300 plus HK$201,100) was paid away by D2 for tax and legal fees, and again gave credit for these amounts in the quantum sought to be injuncted. 

(4)  Cheque No 785638 for HK$1,300,000.  D3’s evidence is that this related to a transaction whereby D1 was to purchase a property (the “Po Shing Mansion Property”) via her corporate vehicle, Sharp Control Limited, for HK$26,000,000.  The sum represented costs on account for a 5% down-payment for this transaction.  The only supporting document produced by D3 is a provisional agreement for sale and purchase between a vendor and Sharp Control.  In reply evidence, P produced a land search record showing that the Po Shing Mansion Property has not changed hands since 2012; so it appears that at the least, any such transaction did not complete [4].  No further documents were produced by D3 to show that this sum was actually paid away by D2, as alleged.

(5)  Cheques Nos 447604 and 447606 for HK$5,000,000 and HK$900,000.  D3’s evidence is that these sums were received for the payment to Success Time Properties Limited (“Success Time”) of a service fee plus bonus for the sale of the Fu Shing Property.  However, the supporting evidence, explanation and documentation are extremely sparse.  The only supporting document produced is an unsigned one-page receipt purportedly issued by Success Time.  As Mr Brown submitted, D3 gave virtually no explanation of the nature of the services provided or justification for such a large fee.  In addition, D3’s evidence failed to mention the connections between D2/D3 and Success Time, which were revealed in P’s reply evidence.  The company filings of Success Time reveal that D2 is its corporate secretary, and D3 is its director and former shareholder. D3 provided no documentary evidence that this sum was in fact paid away by D2.  In oral submissions, Mr Li was essentially unable to provide any further answer to these criticisms of his clients’ evidence.

(6)  Cheque No 447603 for HK$2,000,000.  D3’s evidence is simply that this sum is stakeheld by D2 for D1.  There is no suggestion that it has been paid away.

(7)  It is D3’s evidence that accordingly, of the HK$13,280,000 which D2 received from D1 pursuant to the 7 Cheques, HK$10,405,400 has been paid away or utilised by D2 for the various purposes referred to above.  Of the balance (HK$2,874,600), there were other payables from D2 to Kidbrooke for various professional services (no detail is given), and a sum of HK$2,593,689 (the “Frozen Sum”) has been frozen in D2’s hands by the Joint Financial Intelligence Unit (“JFIU”). D2/D3 offered to undertake not to deal with or dispose of the Frozen Sum. 

26.  On the basis of the evidence presented to me, I do not think it can sensibly be suggested that there is not even a serious issue to be tried as to P’s right to trace into whatever portion of the 7 Cheque Sum remains with D2/D3; nor that the merits on this point are somehow substantially in favour of D2/D3.  Quite the contrary.  The evidence presented by D2/D3 to assert that the sums received have been largely paid away for bona fide purposes, is riddled with holes and inadequacies.  Despite his best efforts, Mr Li was unable to convince me otherwise.  

27.  In so concluding, I rely especially—though by no means solely — on the sum of HK$5.9 million referred to at §25(5) above.  This very large sums is said to have been paid to Success Time—an entity which turns out to be closely connected to D2/D3—in addition to D2’s already hefty fees of HK$1.4 million in respect of, apparently, the same transaction (and in addition to legal fees for that transaction).  The nature of and justification for a payment of this magnitude cry out for explanation and supporting evidence, but D2/D3 have provided almost nothing. Further, I accept that on the evidence currently before me, the connection between D2/D3 and Success Time and the silence of D3’s affirmation on this point, are suspicious.

28.  I also accept Mr Brown’s submissions as to the inadequacies of D3’s explanation and evidence in respect of certain of the other cheques: see §25 above.  

29.  If D2/D3’s version of events is accurate, they could have produced D2’s bank statements confirming that the sums D2 received from D1 were paid away as alleged; but they did not.  On various of the points made, the Court is simply asked to accept D3’s bare assertion, with little or no supporting documentation.

30.  For the above reasons, I conclude that there is—at the very least—a serious issue to be tried; and that D2/D3’s efforts to convince me of the inherent weakness of P’s case fail.

Adequacy of damages

31.  Mr Li’s second argument was that damages would be an adequate remedy because: (i) though P’s relevant claim is proprietary, it is a proprietary claim to money, which is fungible; (ii) there is no basis to suggest that D2/D3 could not compensate P in damages for any wrongdoing which might be established; (iii) accordingly, damages would be an adequate remedy.  

32.  I do not think there is anything in this point.  The sums at stake are substantial.  P is in no position to adduce evidence as to the financial means of D2 and D3; a point to which Mr Li had no real answer.  Contrast D2/D3, who are in a position to adduce such evidence, but did not.  In these circumstances, I do not see that it is open to D2/D3 to sensibly assert that damages would be an adequate remedy.

33.  In support of this argument, Mr Li cited DBS Bank (Hong Kong) Ltd v Tian Wen Quan HCA 3228/2016, unreported, 12 October 2017, per Anthony Chan J at §§14–18. I do not think that that decision assists.  In that case the learned Judge considered that on the evidence, there was doubt over the defendant’s ability to meet a damages claim (§18).  He therefore went on to examine the strength of the parties’ cases, concluding that there was no serious issue to be tried on any of the bank’s proprietary claims against the defendant (§41). The present case is not comparable.

34.  Further, as Mr Brown submitted, in Heitkamp & Thumann KG v Living Profit Trading Develop Ltd[2018] HKCFI 2475 at §30, Deputy High Court Judge Marlene Ng (as she then was) considered and rejected similar arguments in the context of a proprietary claim against a defendant said to have received the proceeds of fraud [5].

Balance of convenience

35.  In my view, the balance of convenience favours granting the injunctive relief sought.

36.  If P’s claim ultimately succeeds, there is an obvious risk of prejudice to P in the absence of injunctive relief.  Conversely, D2/D3 have not suggested that the injunction order sought would cause them prejudice.

37.  Indeed, the proposed injunction bites only on the 7 Cheque Sum and its proceeds; but it is D2/D3’s own evidence that the portion of those funds still remaining with D2 has been largely or entirely frozen by the JFIU, and D2/D3 offered an undertaking not to deal with the Frozen Funds: see §25(7) above.

38.  Since D3 is the controlling mind of D2, the injunctive relief should cover D3 also.  

39.  In addition, I consider that in the above circumstances the disclosure orders sought against D2/D3 are justified.  Mr Li made no separate submission to oppose those orders.

The Section 21 Summons

40.  By the Section 21 Summons, P seeks an order to inspect various records and documents regarding D2’s specified account with HSBC mainly from 30 May 2018 onwards, including: account opening and application forms; bank statements; records of the identities of persons authorised to operate the account; cheques drawn on the account; credit and debit vouchers; SWIFT messages and telexes.

41.  I was informed that HSBC indicated that it did not object or wish to appear. 

42.  The principles applicable to such an application in the context of a tracing claim were summarised by the Court of Appeal per Poon J (as he then was) in Pacific King Shipping Holdings Pte Ltd v Huang Ziqiang [2015] 1 HKLRD 830 at §29 [6].

43.  I am persuaded that the criteria for making an order are satisfied: (i) there is a real prospect that the order made may lead to the location of assets the subject of a tracing claim; (ii) I consider the categories of documents sought to be sufficiently well-defined; and (iii) the balance of potential advantage to P compared with potential detriment to D2/D3 favours the orders sought.

44.  Mr Li argued that D3’s evidence provided comprehensive and sufficient details of the purpose of the sums received from D1.  For the reasons canvassed above, I reject this. 

45.  Next, Mr Li argued that the scope of documents sought was over-broad, and would lead to unnecessary disclosure of confidential information belonging to D2’s clients, which could in turn occasion serious loss to D2/D3.

46.  However, I consider that sufficient protection is provided by the usual undertakings as to the permissible uses of documents obtained under the order. Further, given the background allegations and facts canvassed above, the scope of documents sought is necessary and justified in order to facilitate and protect P’s potential tracing claim.

Disposition

47.  For the above reasons, I granted orders in terms of P’s Injunction Summons and Section 21 Summons, subject to certain adjustments which are reflected in the sealed orders [7].

48.  Further, I ordered that the inter partes costs of both summonses be P’s costs in the cause.

Mr Toby Brown, instructed by Chui & Lau, for the plaintiff

Mr Kevin Li and Mr Gilbert Chong, instructed by Howse Williams, for the 2^nd and 3^rd defendants