ZHANG YAN AND OTHERS v. ASA BULLION LTD
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HCA 1555/2018
[2019] HKCFI 179
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1555 OF 2018
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| BETWEEN | ||
| ZHANG YAN ( 张燕 ) | 1st Plaintiff | |
| CAO SHIHU (曹世虎) | 2nd Plaintiff | |
| CHEN JINGYUN (陈井云) | 3rd Plaintiff | |
| CHEN YIDE (陈义德) | 4th Plaintiff | |
| CHI HUANZHEN (迟焕珍) | 5th Plaintiff | |
| CUI XUEYI (崔学义) | 6th Plaintiff | |
| DAI YUFEN (代玉芬) | 7th Plaintiff | |
| DING SHUZHEN (丁淑珍) | 8th Plaintiff | |
| FAN YUQING (樊玉清) | 9th Plaintiff | |
| GAO SHUMEI (高树梅) | 10th Plaintiff | |
| GAO YING ( 高英 ) | 11th Plaintiff | |
| GAO YUEPING (高曰平) | 12th Plaintiff | |
| GU XINXIN (谷心心) | 13th Plaintiff | |
| GUAN FENGLAN (管风兰) | 14th Plaintiff | |
| GUAN JIAHONG (管佳红) | 15th Plaintiff | |
| GUAN SHIYU (管诗羽) | 16th Plaintiff | |
| GUAN WEIXIA (管卫霞) | 17th Plaintiff | |
| HOU JUNXIA (侯俊霞) | 18th Plaintiff | |
| HOU XIUYING (侯秀英) | 19th Plaintiff | |
| JI BAILING (计百灵) | 20th Plaintiff | |
| JI YANG ( 计洋 ) | 21st Plaintiff | |
| JIANG HAIJIANG (蒋海疆) | 22nd Plaintiff | |
| JIAO TIYUAN (焦体源) | 23rd Plaintiff | |
| JIN GUIZHEN (金桂珍) | 24th Plaintiff | |
| LENG TENGFEI (冷腾飞) | 25th Plaintiff | |
| LI FUMEI (李福梅) | 26th Plaintiff | |
| LI MEIYING (李梅英) | 27th Plaintiff | |
| LIU FENGSUI (刘风遂) | 28th Plaintiff | |
| LIU GUIYUN (刘桂云) | 29th Plaintiff | |
| LIU KAI ( 刘凯 ) | 30th Plaintiff | |
| LIU YING ( 刘颖 ) | 31st Plaintiff | |
| LV GUOJIANG (吕国江) | 32nd Plaintiff | |
| LV HUA ( 吕华 ) | 33rd Plaintiff | |
| MA YIWEI (马一为) | 34th Plaintiff | |
| MENG XIANGLIANG (孟祥亮) | 35th Plaintiff | |
| MIAO ZENGHUA (苗增花) | 36th Plaintiff | |
| PENG LIMEI (彭丽梅) | 37th Plaintiff | |
| QUAN HUIFANG (全慧芳) | 38th Plaintiff | |
| SONG BINGBING (宋兵兵) | 39th Plaintiff | |
| SONG JINFENG (宋金风) | 40th Plaintiff | |
| SONG ZHIPENG (宋志鹏) | 41st Plaintiff | |
| SUN YONGPING (孙永平) | 42nd Plaintiff | |
| TAN WENXING (谭文兴) | 43rd Plaintiff | |
| WANG GUOFENG (王国峰) | 44th Plaintiff | |
| WANG JIQI (王继琪) | 45th Plaintiff | |
| WANG JING ( 王靜 ) | 46th Plaintiff | |
| WANG JUAN ( 王娟 ) | 47th Plaintiff | |
| WANG PEICHUN (王培春) | 48th Plaintiff | |
| WANG YUEHUA (王月华) | 49th Plaintiff | |
| WANG ZHENYU (王震宇) | 50th Plaintiff | |
| WANG ZHENGBO (王政波) | 51st Plaintiff | |
| WANG ZHILIANG (王志亮) | 52nd Plaintiff | |
| WANG ZHIWEI (王志伟) | 53rd Plaintiff | |
| XIAO YAN ( 肖岩 ) | 54th Plaintiff | |
| XING GUICHUN (邢桂春) | 55th Plaintiff | |
| XUE YUQING (薛玉青) | 56th Plaintiff | |
| XUE SHUANG ( 薛双 ) | 57th Plaintiff | |
| YAO QIANGHUA (姚强华) | 58th Plaintiff | |
| YIN FENGXIA (尹凤侠) | 59th Plaintiff | |
| ZHANG HUI ( 张慧 ) | 60th Plaintiff | |
| ZHANG JIANZHOU (张建周) | 61st Plaintiff | |
| ZHANG YUEMEI (张越美) | 62nd Plaintiff | |
| ZHAO JIAN ( 赵健 ) | 63rd Plaintiff | |
| ZHAO MENG ( 赵萌 ) | 64th Plaintiff | |
| ZHAO YUNFENG (赵云凤) | 65th Plaintiff | |
| ZHAO YUNLI (赵云立) | 66th Plaintiff | |
| ZHAO ZIGUANG (赵子光) | 67th Plaintiff | |
| and | ||
| ASA BULLION LIMITED (日昇金銀業有限公司) | Defendant |
______________
| Before: | Mr Recorder Eugene Fung SC in Chambers |
| Date of Hearing: | 7 January 2019 |
| Date of Decision: | 23 January 2019 |
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D E C I S I O N
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A. INTRODUCTION
1. On 9 July 2018, DHCJ S Leung granted an ex parte injunction(“theInjunction”) in favour of the plaintiffs (“Ps”) to restrain the defendant (“D”) from dealing with its assets in Hong Kong up to US$10,578,027.07. By an inter partes summons dated 10 July 2018 (“the Continuation Summons”), Ps applied to continue the Injunction until trial or further order. On 13 July 2018, the Injunction was continued by DHCJ M Ng (as she then was) until the determination of the Continuation Summons or further order of the Court.
2. On 31 July 2018, D issued a summons (“the Variation Summons”) to vary the Injunction. By the Order of DHCJ K Yeung SC dated 23 November 2018, this was adjourned to be heard together with the Continuation Summons.
3. This is the substantive hearing of both the Continuation Summons and the Variation Summons.
B. BRIEF FACTUAL BACKGROUND
4. Ps claim to be individual investors resident in the Mainland.
5. D is licensed in the Chinese Gold and Silver Exchange Society and carries on bullion trading business in Hong Kong. It operates an internet trading platform for gold bullion trading and investors/customers can set up accounts with it for the buying and selling of bullions in the market.
6. Ps’ case is that they are a group of victims of a scheme of fraud perpetrated by D, and D’s agent in the Mainland, Qingdao Mutong Assets Management Limited (“Mutong”). They claim that they deposited funds into their investment accounts with D (totalling US$13,147,992.99) and that Mutong used Ps’ funds to purchase gold and immediately sold it at a loss. Such buying and selling were carried out repeatedly (“the Alleged Wrongful Transactions”) and resulted in a complete loss of Ps’ funds.
7. On 6 July 2018, Ps took out a generally indorsed Writ against D. In their Statement of Claim filed on 12 September 2018, Ps claim the following reliefs against D: (1) damages for the torts of deceit, negligence, unlawful means conspiracy or lawful means conspiracy; (2) alternatively equitable compensation for dishonest assistance; (3) an inquiry as to damages or equitable compensation; (4) an account of profits; (5) alternatively an order to disgorge any enrichment acquired at Ps’ expense; (6) alternatively a declaration that D is a constructive trustee for all funds injected into Ps’ accounts with D; (7) an account; (8) interest and (9) costs.
8. On 30 October 2018, D filed its Defence denying all liabilities.
C. CONTINUATION SUMMONS
9. Ms Cherry Xu, on Ps’ behalf, submitted that the Injunction granted by DHCJ S Leung was both a proprietary injunction and a Marevainjunction, and should be continued on both bases.
10. Mr Kenneth C L Chan (together with Mr Billy N P Ma), on behalf of D, submitted that there cannot be a proprietary injunction, that the requirements for granting a Mareva injunction are not satisfied, and that the Injunction should not in any event be continued because of serious material non-disclosures.
C1. Proprietary injunction
11. The relevant legal principles regarding a proprietary injunction are as follows:
(1) Where a plaintiff asserts title to property or seeks to trace property which belongs to him, the Court has jurisdiction to grant a proprietary injunction restraining the disposal of that property: see A v C [1981] 1 QB 956 at 958D – 959D (Robert Goff J).
(2) For the grant of a proprietary injunction, there are three elements which the plaintiff has to demonstrate, following the American Cyanamid approach: (a) that there is a serious issueto be tried on the merits; (b) that the balance of convenience is in favour of granting an injunction and (c) that it is just and convenient to grant the injunction. It is not necessary to show any risk of dissipation of assets. See eg Madoff Securities International Ltd v Raven [2012] 2 All ER (Comm) 634 at §§127 – 128 (Flaux J).
(3) A proprietary injunction must relate to a specific asset held byor under the control of the defendant, or its traceable proceeds,in respect of which a proprietary claim is raised by the plaintiff:see任俊國v Chin Choi Ming (unreported, HCA 2017/2017, 6 November 2017) §20 (Chow J).
(4) In order to justify the grant of a proprietary injunction, the plaintiff should ordinarily adduce some reasonable evidence of the existence of the specific asset (or its traceable proceeds)and that the same is being held by or under the control of the defendant. Where the asset forming the subject matter of the proprietary claim has been dissipated and can no longer be traced, a proprietary injunction cannot ordinarily be granted. See 任俊國v Chin Choi Ming (above) §§21 – 22 (Chow J).
12. On behalf of Ps, Ms Xu submitted that it is highly arguable that Ps have a proprietary claim on the basis of a constructive trust over misappropriated funds where such funds could be traced.
13. In order for Ps to continue the Injunction on the basis of a proprietary claim, they need to adduce some reasonable evidence that the sum of US$10,578,027.07 is being held by or under the control of D.
14. However, no such evidence has been adduced by Ps. Further,it is common ground that D had a total balance of HK$26,166,675.09 in its bank accounts in Hong Kong as at 9 July 2018 (ie, the date when the Injunction was granted). Ps have not adduced any evidence to show that any part of HK$26,166,675.09 in D’s accounts belonged to them.
15. Ms Xu submitted that the evidence shows that D was the onlyrecipient of all the proceeds of the Alleged Wrongful Transactions, and such proceeds have been mixed up with the funds in D’s accounts. She fairly acknowledged that it is impossible to trace the whereabouts of the funds after they were transferred into D’s accounts, and that Ps can only suggest there is a chance that some of funds in D’s accounts represent Ps’ assets.
16. It is clear to me that Ps cannot establish a serious issue to be tried that the sum of US$10,578,027.07 is being held by or under the control of D. In these circumstances, the Injunction cannot be continued on the basis of a purported proprietary claim.
C2. Mareva injunction
17. For the grant of a domestic Mareva injunction, the plaintiff must show that:
(1) he has a good arguable case on a substantive claim over which the court has jurisdiction;
(2) there are assets within the jurisdiction;
(3) the balance of convenience in favour of grant;
(4) there is a real risk of dissipation of assets, or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effect;
(5) he must comply with a strict duty of full and frank disclosure.
See Hong Kong Civil Procedure 2019 Vol 1, §29/1/65.
C2a. A good arguable case
18. In order to show a “good arguable case” for the purpose of a Mareva injunction, the plaintiff must show that his case is one that is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success; he need not go so far as to persuade the judge that he is likely to win:Grupo Pacifica Incorporada v Worldwide Marine Product Ltd (unreported, CACV 217/2015, 28 January 2016) §5.1 (Cheung JA).
19. Ms Xu submitted that Ps have a good arguable case in respect of each of pleaded causes of action against D: (1) deceit, (2) dishonest assistance, (3) conspiracy, (4) negligence, and (5) unjust enrichment and constructive trust. Mr Chan, on behalf of D, submitted that Ps have no good arguable case for all of the causes of action.
20. Deceit:
(1) An action for fraudulent misrepresentation is the same as an action for deceit and consists of the following elements:
(a) A false representation was made to the plaintiff by or on behalf of the defendant.
(b) The representation was made fraudulently. The plaintiff was fraudulent if he knew the representation was false,or suspected it might not be true, or was reckless as to its truth.
(c) The defendant intended him to act on it.
(d) The representation was an inducement of his own action as a result of which he suffered the loss which he claims.
See J Cartwright, Misrepresentation, Mistake and Non-Disclosure (4th ed, 2016), §§5-01, 5-05 and 5-14.
(2) Ms Xu summarised Ps’ pleaded case of deceit as follows:
(a) D had concealed and/or failed to disclose the fact that (i) D was the counterparty to all the transactions on its platform and (ii) D was at liberty to set the prices and spreads for such transactions.
(b) D was fully aware of Mutong’s conflict of interest by acting as agent for both Ps and D when carrying out the Alleged Wrongful Transactions and failed to disclose such a fact to Ps.
(3) It can be seen that Ps’ pleaded case of deceit is based on D’s failure to disclose, as opposed to active misrepresentation(s) allegedly made by D. At the hearing, this Court enquired with Ms Xu regarding the precise legal basis for a claim of deceit based on P’s omission to disclose facts. I then gave leave to both parties to file additional written submissions on the point.
(4) In D’s additional written submissions, Mr Chan cited various authorities to suggest that it is not sufficient for the tort of deceit that a defendant knowingly stood by and allowed the plaintiff to persevere in his misunderstanding, and that the tort is committed only if the defendant has made an active representation: see Misrepresentation, Mistake and Non-Disclosure (above) §17-43; Peek v Gurney (1873) LR 6 HL 377 at 403 (Lord Cairns); HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] 2 Lloyd’s Rep 61 at §75 (Lord Hoffmann).
(5) Ps did not advance any submissions to deal with the general propositions of law set out in these authorities. Instead, Ms Xu submitted that the relationship between Ps and D was analogous to that between a client and a stockbroker, and that a duty would arise from such a relationship for D to disclose to Ps the alleged material facts and Mutong’s conflict of interests, relying on the case of Armstrong v Jackson [1917] 2 KB 822. For the following reasons, I disagree with these submissions:
(a) In Armstrong v Jackson, the defendant was the plaintiff’s stockbroker and McCardie J found that the defendant had a duty to make a full and accurate disclosure to the plaintiff.
(b) However, in the present case, Ps have repeatedly emphasised that the Ps and D were counterparties in the relevant transactions. It has never been Ps’ case that D was acting for or on behalf of Ps in the purchase of gold or silver, or that D had any duty of disclosure to Ps by virtue of their relationship.
(6) In her additional written submissions filed after the conclusion of the hearing, Ms Xu put forward two further alternative cases of deceit (see §§12 – 16 of Ps’ 2nd Supplemental Skeleton Submissions). Neither of them has been pleaded by Ps nor canvassed during the hearing. It is unsatisfactory that new submissions were advanced after the hearing to bolster Ps’ case of deceit. In any event, I am not persuaded how either of them can constitute a good arguable case on deceit.
(7) For completeness, I should mention that the learned author of Misrepresentation, Mistake and Non-Disclosure in §17-43 refers to some recent authorities to suggest that deceit may cover non-disclosure where there is a duty to disclose material facts by the defendant. However, as mentioned earlier, Ps have not asserted such a duty to disclose on the part of D in their pleaded case of deceit and I do not consider the recent authorities (which in any event have not been relied upon by Ms Xu) assist Ps either.
(8) Accordingly, I am not satisfied that Ps have a good arguable case in deceit against D.
21. Dishonest assistance:
(1) There are four requirements for the imposition of liability for dishonest assistance: (1) a breach of trust or fiduciary duty bysomeone other than the defendant, (2) the defendant’s assistance, (3) dishonesty, and (4) resulting loss. See Grupo Torras SA v Al-Sabah [1999] CLC 1469 at 1664A–B (Mance J).
(2) Ms Xu summarised Ps’ case on dishonest assistance as follows:
(a) As Ps entrusted the funds in their accounts to Mutong for the purpose of making a profit in the form of monthly returns payable to Ps, Mutong held the funds on Quistclose trust for Ps unless and until such purpose has been achieved.
(b) Mutong caused the depletion of Ps’ accounts in breach of trust and contrary to the said purpose.
(c) D facilitated and/or participated in the Alleged WrongfulTransactions by being a counterparty thereto and fixing the commission and spreads for the corresponding sale and purchase of gold and silver, which constituted dishonest assistance to Mutong’s breach of trust.
(d) As a result of dishonest assistance, D caused loss and damage to Ps, and acquired gains.
(3) In my view, the basis upon which D is allegedly to be dishonest is highly unclear. From the above summary, I do not believe it is sufficient to allege dishonesty simply on the basis that D was a counterparty to the Alleged Wrongful Transactions and/or that it was able to fix the commission andspreads. The evidence adduced by D is that it is the common and standard practice in bullion trading that (a) a customer would enter into a trading contract with D when spot trading is carried out and (b) every licensed bullion trading company in Hong Kong is at liberty to set the buying and selling prices of the bullion contract(s) and fix the spread with its customers. I note that no rebuttal evidence has been filed on behalf of Ps. In these circumstances, I am not satisfied that there is a good arguable case that D was dishonest for the purpose of dishonest assistance.
(4) It follows that I am not satisfied that Ps have a good arguable case in dishonest assistance against D.
22. Conspiracy:
(1) The tort of conspiracy takes two forms, namely (1) conspiracyto use unlawful means and (2) conspiracy to injure. The latter does, but the former does not, require a predominant purpose to injure: see Meretz Investments NV v ACP Ltd [2008] Ch 244 at §117 (Arden LJ); De Krassel v Chu [2010] 2 HKLRD 937 at §39 (Sakhrani J).
(2) On the claim for conspiracy to injure by unlawful means, it is incumbent on the plaintiff to prove:
(a) the nature of the agreement;
(b) the unlawful means alleged;
(c) each unlawful act relied upon as causing loss;
(d) the fact that each such act was carried out pursuant to the conspiracy; and
(e) the relevant state of mind of the putative conspirator.
See De Krassel v Chu (above) at §40.
(3) Ms Xu summarised Ps’ case of lawful/unlawful means conspiracy as follows:
(a) There was a combination or understanding between D and Mutong that they should cause loss and/or injury to Ps by, inter alia, embezzling the funds from their accounts by way of the Alleged Wrongful Transactionsand concealing the fraud and losses to the accounts from Ps.
(b) Acting in concert and upon the said combination and/orunderstanding, and with sole or predominant purpose or intention to cause loss/or injury to Ps, D and Mutong carried out the said conspiracy.
(c) As a result of the conspiracy of D and Mutong, Ps suffered loss and damage in that they lost all the funds in their accounts.
(d) The means by which D and Mutong caused loss and/or injury to Ps were fraudulent and/or wrongful and constitute unlawful means.
(4) I have not, however, been referred to the specific affidavit evidence of what Ps allege to be the combination or understanding between D and Mutong that they should cause loss and/or injury to Ps. The particulars of the alleged combination or understanding between D and Mutang are also absent from Ps’ Statement of Claim.
(5) In the circumstances, I am not satisfied that Ps have a good arguable case in conspiracy against D.
23. Negligence:
(1) Ps allege that:
(a) D, as a provider of services and the online platform for Ps to trade in gold and silver, owed various duties of care, including the duty to exercise reasonable skill and care;
(b) D has acted negligently and failed to (i) take reasonable steps to prevent the losses to Ps’ accounts, (ii) take reasonable steps to stop Mutong from continuing its trading strategy and (iii) inform Ps of the losses to their accounts.
(2) Ps have adduced affidavit evidence to provide the factual foundation for these allegations. I find Ps’ claim in negligence to be more than barely capable of serious argument. I am therefore satisfied that Ps have a good arguable case in negligence against D.
24. Unjust enrichment and constructive trust:
(1) In dealing with the issue of whether Ps have a good arguable case, Ms Xu treated unjust enrichment and constructive trust together in her written submissions. Moreover, in her written submissions, she repeated her submissions on proprietary claim to contend that Ps have a good arguable case in unjust enrichment and constructive trust. Accordingly, I have treated Ps’ claim in unjust enrichment and constructive trust as a purported proprietary restitutionary claim for a proprietary remedy: see the recognition of the distinction between proprietary claims and proprietary remedies in Trustee of the Property of F C Jones & Sons (a firm) v Jones [1997] Ch 159 at 168 (Millett LJ).
(2) It is well-established that a proprietary claim is confined to the property remaining in the defendant’s hands. Further, a proprietary restitutionary remedy can only be granted if the plaintiff continues to have a proprietary interest in the property which is held by the defendant when the restitutionary claim is made: see G Virgo, The Principles of the Law of Restitution (3rd ed, 2015) p 558.
(3) For the reasons given in Section C1 above on proprietary injunction, I am not satisfied that Ps have a good arguable proprietary claim against D.
25. For the above reasons, I am only satisfied that Ps have a good arguable case in negligence against D.
C2b. Assets within jurisdiction
26. As mentioned earlier, it is common ground that D only had a total balance of HK$26,166,675.09 in its bank accounts in Hong Kong as at 9 July 2018 (ie, the date when the Injunction was granted).
27. Mr Chan submitted that given D had HK$26 million odd in Hong Kong as at 9 July 2018, it follows that D did not have US$10,578,027.07 (the enjoined amount in the Injunction) within the jurisdiction, and that the Injunction should not therefore be continued. However, no authorities have been produced to suggest that the plaintiff must show that the defendant has sufficient assets within the jurisdiction to satisfy the entirety of the plaintiff’s claim before a Mareva injunction can be granted.
28. I am unable to accept Mr Chan’s submissions. The requirement that a plaintiff must show that there are assets within the jurisdiction for a grant of a domestic Mareva injunction is to ensure that the domestic injunction can “bite” so that it is not granted in vain: see Revenue and Customs Commissioners v Cozens [2012] STC 420 at §§40 – 41 (Floyd J). In my view, the evidence shows that D clearly has assets within the jurisdiction and that the Injunction would “bite”.
C2c. Balance of convenience
29. Ms Xu relied on two matters to contend that it is just and convenient for the Injunction to be continued.
(1) Ps have a proprietary claim against D against the proceeds of fraud and it is imperative that the status quo should be maintained.
(2) Additional victims in the alleged fraud are coming forward to make a claim against D and it is in the interests of all the victims to prevent D from further dissipation of assets.
30. On the other hand, Mr Chan made the following submissions to contend that the balance of convenience is against the continuation of the Injunction:
(1) D has been in business since 2006 and has over 2,500 customers other than Ps and the additional purported victims of fraud.
(2) Since the making of the Injunction in July 2018, D has not been able to acquire any new customers.
(3) Ps are all resident in the Mainland and have not produced plausible evidence of their personal financial means. If Ps’ claims are dismissed, it would be extremely difficult to enforce the undertakings as to damages against Ps in the Mainland.
31. Having considered the parties’ submissions, I consider that it is not just or convenient to continue the Injunction:
(1) First, for the reasons given above, I do not consider that Ps have a good arguable proprietary claim against D. It thereforecannot be said that D is currently holding the proceeds of any fraud.
(2) Further, I bear in mind that the adverse effect a Mareva injunction has on a defendant which has a legitimate ongoing business is an important consideration for the court, and that a Mareva injunction should not interfere with the ordinary course of business of the defendant: see Peter Ho Pui Tsun v Chain Liaison Investment Ltd (unreported, HCA 7111/1995, 2 November 1995) §12 (Leonard J); Polly Peck Internationalplc v Nadir (No 2) [1992] 4 All ER 769 at 782g (Scott LJ). On the basis of the evidence before the court, I am unable to accept Ps’ assertion that D operates a fraudulent business.
(3) Finally, given that Ps are all resident outside Hong Kong, there seems to me to be a reasonable chance that D may have difficulties enforcing the undertakings as to damages against Ps.
C2d. Risk of dissipation of assets
32. Ms Xu submitted that by allowing Mutong to carry out the Alleged Wrongful Transactions, D acted with an unacceptably low standard of commercial morality, or questionable integrity. She argued that there is therefore a risk of dissipation of assets by D.
33. For the reasons given above, I do not consider Ps to have demonstrated a good arguable case in deceit (or fraud) against D. Accordingly, I am unable to conclude that there is an unacceptably low standard of commercial morality giving rise to a feeling of uneasiness about D which would drive the court to the conclusion that there is a real risk of dissipation of assets.
34. On the basis of the evidence before the court, I am not persuaded that there is a real risk of dissipation of assets on the part of D.
C3. Any material non-disclosures?
C3a. The relevant principles
35. In considering whether there has been relevant non-disclosure,the following principles are applicable:
(1) The duty of the applicant is to make a full and fair disclosure of all the material facts.
(2) The material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers.
(3) The applicant must make proper inquiries before making the application. The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such inquiries.
(4) The extent of the inquiries which will be held to be proper, and therefore necessary, must depend on all the circumstances of the case including (a) the nature of the case which the applicant is making when he makes the application; and (b) theorder for which application is made and the probable effect of the order on the defendant; and (c) the degree of legitimate urgency and the time available for the making of inquiries.
See Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1356F – 1357B (Ralph Gibson LJ).
36. In exercising the court’s discretion as to whether an interlocutory injunction should be re-granted, the following principles are applicable:
(1) If the court finds that there have been breaches of the duty of full and fair disclosure on the ex parte application, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial.
(2) Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order.
(3) That jurisdiction should be exercised sparingly, and should takeaccount of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.
(4) The court should assess the degree and extent of the culpability with regard to non-disclosure. It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order. Equally, there is no general rule that a deliberate breach will attract that sanction.
(5) The court should assess the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court. In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.
(6) The court can weigh the merits of the plaintiff’s claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff’s case is allowed to undermine the policy objective of the principle.
(7) The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.
(8) The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence.
(9) There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances.
See Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642 at §56 (Kwan JA).[1]
C3b. Any material non-dislosures?
37. Mr Chan on behalf of D submitted that Ps were guilty of the following serious and intentional material non-disclosures when the Injunction was obtained ex parte:
(1) Ps did not draw the court’s attention to the contents of the 賬戶服務協議書 between Ps and Mutong (“the Account Services Agreements”), but instead adduced evidence to suggest that such Agreements did not affect Ps’ claim against D (“the 1st Non-Disclosure”).
(2) Ps did not make proper inquiries to find out that it is common practice that a licensed bullion trading company in Hong Kong is the counterparty under the relevant contract with the customer, and is at liberty to set the buying and selling prices of the bullion contract(s) (“the 2nd Non-Disclosure”).
(3) Ps did not follow the standard form to allow D’s ordinary andproper business expenses and deliberately omitted to draw this to the court’s attention (“the 3rd Non-Disclosure”).
(4) Ps misled the court regarding the 1st plaintiff’s ability to satisfy any undertaking as to damages (“the 4th Non-Disclosure”).
38. The 1st Non-Disclosure:
(1) It is common ground that there were agreements between eachof Ps and Mutong by way of the Account Services Agreements. The Account Services Agreement provide, amongst other things,the following:
(a) Mutong was appointed by each of Ps to operate the relevant account to carry out internet trading “乙方 [Ps] 委託甲方 [Mutong] 按照甲方的操作方法為乙方開設的…帳戶內的資金進行網絡交易服務” (clause 1(1));
(b) Ps conferred full authority on Mutong to carry out internet trading on P’s behalf within the relevant account to the exclusion of Ps “乙方自主開設網絡交易帳戶， 並授權甲方全權代理其…帳戶的網絡交易。在本協議有效期間，乙方不得從事該授權賬戶的交易。” (clause 1(4));
(c) Ps authorised Mutong as their sole internet trading agent in respect of the trading account “乙方須簽署相關授權文件，授權甲方為其交易賬戶唯一網絡交易代理方” (clause 1(2)).
(2) It is apparent from the above provisions in the Account Services Agreements that Mutong was expressly appointed by Ps to be their sole agent in relation to the relevant internet accounts (including the trading within such accounts).
(3) The fact that Mutong had been appointed by each of Ps to be their agent was never disclosed at the ex parte stage. From Ps’ Skeleton Submissions at the ex parte stage (“the Ex ParteSkeleton”), Mutong was consistently described only as D’s agent.[2] Indeed, this has remained to be Ps’ position even at the current inter partes stage.
(4) I consider the agency relationship between Ps and Mutong to be a highly material fact in the present case. It is material because it suggests that Mutong was not simply acting for D (as Ps suggest) and puts a different complexion on the relationship between Ps, Mutong and D. The picture painted by Ps was (and still is) that Ps are the victims of fraud perpetrated by D and Mutong (which was and still is described as D’s agent) acting together. I believe a different picture would emerge if Mutong is described as Ps’ sole and exclusively trading and account-operating agent, as well as D’s agent in the Mainland. This would have the effect of lessening D’s involvement in the Alleged Wrongful Transactions.
(5) Specifically, I note that Ps sought to persuade the court at the ex parte stage that D should be liable for Mutong’s fraud on the basis that Mutong was D’s agent.[3]
(6) Ms Xu sought to explain this non-disclosure by saying that Ps had mentioned in their affidavit evidence that Mutong managed and traded through the relevant accounts alone. Be that as it may, it remains a fact that the precise agency relationship between Ps and Mutong was not brought to the attention of the ex parte judge.
(7) Such a non-disclosure is in my view particularly serious because Ps adduced evidence to suggest that the Account Services Agreements did not affect Ps’ claim against D. Further, given this evidence, the non-disclosure must have been deliberate.
39. The 2nd Non-Disclosure:
(1) At the ex parte stage, Ps placed much emphasis on the fact that D was the counterparty to all the Alleged Wrongful Transactions and was at liberty to fix the difference between the selling price and the buying price (ie the spread) for the transactions.
(2) D has adduced evidence to suggest that the above matters are in fact common and standard practice for licensed bullion trading companies in Hong Kong. As mentioned earlier, Ps have not filed any rebuttal evidence to challenge D’s evidence.
(3) Mr Chan submitted that Ps would have known about the common and standard practice if they made proper inquiries before applying for the Injunction. Ms Xu’s response was that D’s evidence on common and standard practice was a bare assertion.
(4) I bear in mind that the extent of proper and necessary inquiries must depend on all the circumstances of the case. The evidence from D is that it is common and standard practice for licensed bullion trading companies in Hong Kong to be thecounterparty in the relevant trading contract, and to be able tofollow the prevailing market price(s) to provide the buying and selling price(s). D’s evidence further states that it would be up to the individual customer to decide whether or not to buy or sell against the price(s) set by the licensed bullion trading company. Up to now, Ps have not adduced any evidence to suggest otherwise. In the circumstances, it seems to me that there is some force in Mr Chan’s submission that Ps should have made inquiries about the aforesaid common practice in Hong Kong and should have made disclosure of the same at the ex parte stage.I find the 2nd Non-Disclosure to be material.
40. The 3rd Non-Disclosure:
(1) In the Injunction, no ordinary and proper business expenses ofD were provided for. Mr Chan submitted that Ps deliberately omitted to make provision for such expenses and departed from the standard form of order in Practice Direction 11.2.
(2) Ms Xu submitted that Ps sought a proprietary injunction against D and there is no need to provide for any legal or otherexpenses as a matter of law. Be that as it may, it appears thatPs did not draw the court’s attention to the same at the ex parte stage and simply omitted the standard order on ordinary and proper expenses in the Injunction without informing the court.
(3) §3 of Practice Direction 11.2 provides that “[where] the order sought deviates in a material respect from the standard form this should be drawn to the attention of the judge hearing the application”. One of the exceptions to the order in the standard form relates to the dealing with or disposing of the defendant’s assets “in the ordinary and proper course of business”. Even though this exception is surrounded by square brackets in the standard form, a plaintiff should still in my view inform the court at the ex parte stage if he wishes to delete such an exception from the order. I regard this to be part of the plaintiff’s duty to make full and fair disclosure.
(4) In my view, P’s failure to draw the court’s attention to the absence of provision for ordinary and proper business expenses in the Injunction at the ex parte stage is a material non-disclosure.
41. The 4th Non-Disclosure：
(1) In her affidavit evidence filed on behalf of Ps, the 1st plaintiff referred to a landed property in the Mainland registered in herhusband’s name but stated that the property is mutually ownedby her husband and herself. She relied on this to say that shehas sufficient ability to satisfy any undertaking as to damages.
(2) Mr Chan submitted that the 1stPlaintiff’s evidence is wrong because there is no trusts law in the Mainland to regard the relevant property as jointly owned by the 1stplaintiff and her husband.
(3) Even if the 1st plaintiff’s belief of her entitlement to the Mainland property were wrong, I would not describe her mistaken belief to be a non-disclosure of a material fact.
C3c. Exercise of discretion
42. For the reasons given above, I consider that the 1st, 2nd and 3rd Non-Disclosures are material non-disclosures. Accordingly, and particularly given the seriousness and deliberateness of the 1stNon-Disclosure, I would refuse to continue or re-grant the Injunction on the ground of material non-disclosure alone.
C4. Disposition on the Continuation Summons
43. In summary, Ps have not satisfied all of the requirements for a domestic Mareva injunction against D, and have made material non-disclosures at the ex parte stage. I therefore discharge the Injunction and dismiss the Continuation Summons.
D. VARIATION SUMMONS
44. In view of the fact that the Injunction is discharged and not continued or re-granted, it is unnecessary to deal with the Variation Summons. I therefore make no order on the Variation Summons except for costs, which I will deal with below.
45. For completeness, I will set out my views on the two issues on which D seeks my determination under the Variation Summons, namely:
(1) Whether the Injunction should be varied to allow D to spend (a) HK$2 million on legal advice and representation, and (b) HK$140,000 per week on ordinary and proper business expenses; and
(2) Whether Ps should fortify their undertaking as to damages in the sum of RMB 7.5 million.
D1. Variation
46. Where the defendant seeks the release of funds subject to a Mareva injunction to meet certain expenses, the court should consider whether the defendant has shown by sufficient evidence that (1) he does not have other assets available to meet those expenses; and (2) the purpose of the application is not an attempt to dissipate the assets to frustrate the plaintiff’s enforcement of a judgment: Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783 at §14 (Au J).
47. D seeks an order that it be allowed spend HK$2 million on legal advice and representation and HK$140,000 per week on ordinary andproper business expenses. D has adduced evidence to show how much cash it has in its bank accounts in Hong Kong. However, it has not produced any evidence to show that it does not have other assets available to meet such expenses.
48. Moreover, Ps have produced evidence to show that D paid to two of its customers in the Mainland a total sum of over RMB 146,000 in July and August 2018, and argued that D clearly has assets in the Mainland. D did not file any rebuttal evidence to suggest otherwise.
49. In these circumstances, I would not have been satisfied that D has adduced sufficient evidence to demonstrate that it does not have other assets to meet its expenses, and would not have ordered variation of the Injunction.
D2. Fortification
50. The relevant principles on fortification of a cross-undertaking are as follows:
(1) The court will order fortification where it appears just and proper to protect the defendant by making such an order: ChowChor Leung v Rafaella Sportswear Inc [1990] 1 HKLR 449 at 453H (Bokhary J).
(2) The applicant for fortification must show a good arguable case that he will suffer loss in consequence of the making of the injunction. An intelligent estimate can be made of the likely amount of any loss which may be suffered by the applicant for fortification by reason of the making of the injunction. See Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2015] 1 WLR 2309 at §§52 – 53 (Tomlinson LJ).
(3) The court must be satisfied that the making of the injunction was a cause without which the relevant loss would not have been suffered: Energy Venture Partners Ltd (above) at §54.
(4) In determining the amount of the fortification, the court will take a broad view without resolving all arguments that have been raised regarding the amount to be ordered: Chow Chor Leung (above) at 453I.
51. In the Variation Summons, D seeks fortification in the sum of RMB 7.5 million. However, this amount is the total value of the two properties in the Mainland which are allegedly owned by the 1st plaintiff, and is plainly not the measure of D’s purported loss.In fact, D is not ableto produce evidence that it will suffer loss, or provide an intelligent estimate of the likely amount of any loss which it may suffer, in consequence of the making of the Injunction. I am not satisfied that D has shown a good arguable case that it is entitled to a fortification order.
52. For these reasons, I would not have made any order for fortification.
E. DISPOSITION
53. I see no reason why the costs of the Continuation Summons should not follow the event particularly when the Injunction is discharged on the ground of material non-disclosure: Velatel Global Communications Inc v Chinacomm Ltd & ors (unreported, HCA 1978/2011, 8 March 2013) §5 (Au-Yeung J).
54. Even though it is unnecessary for me to make any substantive order on the Variation Summons, I consider that the variation application was reasonably taken out by D. However, in view of the matters set out in Section D above, I do not consider that D should be entitled to all of its costs occasioned by the Variation Summons. Taking into account all the circumstances and adopting global view, it seems to me that D should only be entitled to 25% of the costs of the Variation Summons.
55. The orders that I make are as follows:
(1) That the Injunction be discharged.
(2) That the Continuation Summons be dismissed.
(3) Liberty to D to apply for inquiry whether D has sustained any and if so what damages by reason of the Injunction which Ps ought to pay according to their undertakings contained in the Injunction.
(4) An order nisi that the costs of and occasioned by the Injunction and the Continuation Summons (including all reserved costs) be paid by Ps to D to be taxed if not agreed.
(5) An order nisi that 25% of the costs of and occasioned by the Variation Summons (including all reserved costs) be paid by Ps to D to be taxed if not agreed.
| (Eugene Fung SC) | |
| Recorder of the High Court |
Ms Cherry Xu, instructed by KCL & Partners, for the 1st to 67th plaintiffs
Mr Kenneth C L Chan and Mr Billy N P Ma, instructed by Patrick Mak & Tse, for the defendant