HCA 1824/2018
[2019] HKCFI 834
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1824 OF 2018
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| BETWEEN | | |
| | SILVER UNIVERSE INVESTMENTS LIMITED | Plaintiff |
| | and | |
| | CHINA TIMES SECURITES LIMITED | 1st Defendant |
| | 360HK LIMITED | 2nd Defendant |
| | MARK KLEIN | 3rd Defendant |
| | NEBOJSA MICIC MICKO | 4th Defendant |
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Before: Deputy High Court Judge Keith Yeung SC in Chambers
Date of Hearing: 4 February 2019
Date of Decision: 29 March 2019
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D E C I S I O N
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1. On 21 December 2018, the plaintiff (“P”) took out a summons (the “Non-compliance Summons”) against the 2nddefendant (“D2”). P seeks thereby to enforce (1) an Order for disclosure made by G Lam J on 5 October 2018 (the “Lam J Disclosure Order”) in aid of an injunction granted by His Lordship on that same day; and a subsequent unless order granted by Master Chow on 28 November 2018 (the “Master Chow Unless Order”). It first came before me on 9 January 2019. Before me that day was also P’s application (“Injunction Application”) for, inter alia, the continuation against the 1st defendant (“D1”) of an interim-interim proprietary injunction which I had previously granted. On that day, I gave directions on the filing of evidence and adjourned the Non-compliance Summons for substantive hearing, but proceeded to deal with the Injunction Application, which I granted. I handed down my reasons for that decision on 18 January 2019 (“18January Reasons”).
2. The Non-compliance Summons now comes back before me. The main issues are what approach this Court should adopt when construing the Lam J Disclosure Order and Master Chow Unless Order, and upon application of those approaches, whether D2 has been in breach of either or both of them.
THE BACKGROUND
3. For the background facts relevant to this application, I refer to my 18 January Reasons. I will not repeat them. I will only supplement them with the following.
4. As I have said at paragraph 30 of my 18 January Reasons, P on 20 September 2018 took out a summons for inter alia an injunction against D2. The application came before G Lam J on 5 October 2018. D2 did not appear. Having heard counsel for P, G Lam J on that same day granted an injunction (“Lam J Injunction”) against D2. Paragraph 1 of that Order reads:
“ 1. Until further order of the Court, [D2] be restrained, whether as principal, agent or nominee, and whether by its officers, servants or agents, or otherwise howsoever, disposing of or otherwise dealing in [the Pledged Shares] and/or all their traceable fruits or proceeds.”
5. Paragraph 2 of that same Order compels D2 to make certain disclosure in aid of the Lam J Injunction. This is the Lam J Disclosure Order I have mentioned in paragraph 1 of this Reasons above. It is in the following terms:
“ 2. An officer of [D2] do within 21 days of this Order file and swear an affirmation to provide an account in respect of any transaction of the Pledged Shares and/or their traceable fruits from 13 February 2018 until the date of the affirmation, namely the following:
(1) Whether there were any transactions in the Pledged Shares;
(2) If yes to Subparagraph (1) above:
(a) Describe the nature of the transactions in the Pledged Shares and/or their traceable fruits or proceeds, namely whether such dealings in the Pledged Shares involve any sale and purchase, borrowing, lending, pledging, custodian and/or hedging of or in respect of the Pledged Shares and/or their traceable fruits or proceeds;
(b) Describe whether [D2] and/or any other parties involved in such transactions was acting as principal or as agent, nominee or otherwise on the instructions of others (and if so, on behalf of whom) in the transactions of the Pledged Shares and/or their traceable fruits; and
(c) Confirm whether valuable consideration (if any) was paid in respect of the dealings in all or any part of the Pledged Shares and/or their traceable fruits, and if so what was the consideration paid and by whom.
(3) If yes to Subparagraphs (1) above, provide copies of all documents evidencing such transactions set out in Subparagraphs (1) and (2), namely, (i) instructions to transact; and (ii) statements, receipts, notes, invoices, advices, slips, contracts, correspondence and legal documents pertaining to such transactions.”
6. 21 days from the date of the Lam J Disclosure Order lapsed on 26 October 2018.
7. On 26 October 2018, D2 took out a summons for an extension of time to comply with the Lam J Disclosure Order. That application was granted. The new deadline was 19 November 2018.
8. By another summons issued on 19 November 2018, D2 applied for a second extension of time to comply with the Lam J Disclosure Order (“D2’s 2nd Extension Summons”). That application was supported by an affidavit dated 21 November 2018 of Cheng Ting Lun, a solicitor under the employ of Messrs DLA Piper (“DLA Piper”, solicitors for D2). He exhibited thereto a draft Affidavit of Micic Nebojsa (“Draft Nebojsa 1st”). Micic Nebojsa (“Nebojsa”) is the sole shareholder and director of D2. It was said that as Nebojsa was not in Hong Kong, time was required for his draft affidavit to be notarized—hence the need for the extension.
9. Having received Mr Cheng’s affidavit in support, Messrs Wan Yeung Hau & Co (“WYH”, solicitors for P) on 11 November 2018 wrote to DLA Piper (the “WYH 11 Nov Letter”). WYH made various comments (details of which I will come back) on the Draft Nebojsa 1st, to the effect that the disclosure proposed to be made was insufficient for the purpose of complying with the Lam J Disclosure Order. They informed DLA Piper that for that reason, P had filed a summons for an unless order against D2.
10. P had indeed done so. P’s summons for an unless order was dated 22 November 2018. I will call it the “Cross Summons”, as that is the way it has been described by the parties in some affirmations. P sought thereby an order that:
“ unless [D2] complies with [the Lam J Disclosure Order] by 4pm, 3 December 2018, [D2] be ordered to make a payment into Court in the sum of HK$25,988,661”.
11. Both D2’s 2nd Extension Summons and the Cross Summons came before Master Chow on 28 November 2018 for hearing. Both were marked for 3 minutes. Having heard parties, the learned Master made the following Order (ie the Master Chow Unless Order mentioned in §1 above):
“ 1. Unless [D2] do comply with the [Lam J Disclosure Order] by 4:00 pm on 19 December 2018, [D2] do forthwith pay [P], all costs incurred by [P] up to 19 December 2018, to be taxed forthwith if not agreed; and
2. [D2] do pay [P] the costs of [D2’s 2ndExtension Summons], summarily assessed at $1,040 payable forthwith.
3. Leave be granted to withdraw the [Cross Summons].”
12. On 10 December 2018, the signed version of Draft (“Nebojsa 1st”) was filed. Nebojsa made therein the following disclosure:
“ 5. In respect of subparagraph (1) of the [Lam J Disclosure Order], I confirm that save and except the transaction described in paragraph 6 below, [D2] did not enter into any other transactions in respect of the Pledged Shares.
6. In respect of subparagraph [sic] 2 and (3) of the [Lam J Disclosure Order], I confirm that:-
(a) [D2] entered into the following agreements with Eden Investments Limited (‘Eden’) in respect of the Pledged Shares on 12 February 2018:-
(i) Credit Agreement (the ‘Credit Agreement’); and
(ii) Hypothecation Agreement (the ‘Hypothecation Agreement’),
[a copy each of which produced as ‘MN-1’]
(b) The nature of the transaction entered into between [D2]and Eden is clearly set out in the Credit Agreement and theHypothecation Agreement. In essence, in considerationof Eden’s agreement to advance a loan to [D2] so as toenable [D2] to fund the loan to Silver Universe pursuantto the Loan Agreement, [D2] hypothecated the Pledged Shares to Eden as security for the loan to be advanced by Eden to [D2]. Without prejudice to any other arguments [D2] may advance in these proceedings in support of [D2] defence against [P’s] claim, it is [D2] position that the transaction entered into by [D2] and Eden by virtue of the Credit Agreement and the Hypothecation Agreement falls squarely within the ambit of ‘Portfolio Protection Arrangements’, which is expressly defined in the Loan Agreement to mean ‘any arrangements or transactions effectuated to mitigate the risk of loss of principal, assets or securities values, including without limitation effecting a pledge, encumbrances, hypothecation and/or loan of or on securities’.
7. For completeness, I confirm that pursuant to a Loan Purchase Agreement dated 6 August 2018, Eden has assigned all its rights under the Credit Agreement and the Hypothecation Agreement to Everton Associates Limited (the ‘Loan Purchase Agreement’) [a copy of which produced as ‘MN-2’].”
13. On 21 December 2018, P took out the Non-compliance Summons. It seeks, inter alia, an order that:
“ 1. [D2] do pay [P] forwith [sic] all costs of an occasioned by [P] in this action against [D2] up to 19 December 2018, to beassessed on a summary basis, on account of its failure to comply with:-
(1) [the Lam J Disclosure Order];
(2) paragraph 1 of the [Master Chow Unless Order].
2. [D2] do file a further affidavit to comply with the [Lam J Disclosure Order]; and
3. Unless [D2] complies with Paragraphs 1 and 2 above and within 14 days of the Order to be made, [D2] be debarred from filing any defence in these proceedings.”
14. The Non-compliance summons was supported by the 2nd Affirmation of Hau Wing Yin (“Hau 2nd”), a solicitor in the employ of WYH. In opposition, two affidavits have been filed: Affidavit of Au Arthur Tze Ching (“Au Aff”), a solicitor in the employ of DLA Piper, and the 2nd Affidavit of Nebojsa (“Nebojsa 2nd”). In Nebojsa 2nd, Nebojsa gave some explanations as to why he believed there had been no breach of the Lam J Disclosure Order. I will come back to the contents of those affidavits.
PARTIES’ SUBMISSIONS
15. Mr Deng appears for P. The way he frames P’s application under the Non-compliance Summons may be summarized as follows:
(a) As a matter of construction, the Master Chow Unless Order requires compliance of the Lam J Disclosure Order in terms not just of the filing of an affidavit to effect the disclosure ordered, but also of the adequacy of the disclosure effected;
(b) On the facts, despite the filing of Nebojsa 1st, the disclosure effected was inadequate in complying with the Lam J Disclosure Order. The disclosure by D2 was therefore “non-compliance,in bad faith and illusory”;
(c) On the above bases, and despite the filing of Nebojsa 1st, D2 has been in breach of both the Master Chow Unless Order and the Lam J Disclosure Order;
(d) For non-compliance of the Master Chow Unless Order, P is entitled to enforce the same—hence the relief sought via §1 of the Non-compliance Summons;
(e) For non-compliance of the Lam J Disclosure Order, P is entitled to a further unless order to compel compliance (the “Further Unless Order”)—hence the relief sought via §§2 and 3 of the Non-compliance Summons.
16. Mr Chiu appears for D2. His submissions, in summary, are that:
(a) There has been no non-compliance of either the Master Chow Unless Order or the Lam J Disclosure Order;
(b) The Master Chow Unless Order is, properly construed, a time order. It has been complied with by the filing of Nebojsa 1st;
(c) Applying the correct test, D2 has also complied with the Lam J Disclosure Order by the filing of Nebojsa 1st;
(d) In any event, he disputes the appropriateness of the Further Unless Order as being a “wholly disproportionate sanction”.
MY APPROACH
17. In considering how to approach the application, I have considered and accept Mr Chiu’s submissions that the Master Chow Unless Order and the Lam J Disclosure Order are potentially two different Orders, and that the tests to be applied when deciding whether there have been any breaches can be different. I do not find it helpful to roll the two Orders into one, as paragraph 1 of the Non-compliance Summons seeks to do. I will approach the application by considering the following issues in turn:
(a) In respect of the Master Chow Unless Order, what is the “default event”. This is a question of construction of that Order;
(b) Whether there has been any breach of the Master Chow Unless Order;
(c) Whether the sanction specified in the Master Chow Unless Order should take effect;
(d) Whether there has been any breach of the Lam J Disclosure Order; and
(e) If so, the further enforcement of that Order.
APPROPRIATE APPROACH WHEN CONSTRUING AN UNLESS ORDER
18. There is no dispute as to the appropriate approach when construing a court order. As observed by Chow J in Cosimo Borelli v Allen Tak Yuen Chan HCMP 2174/2014 (12 November 2015), at §11:
“ … In Secretary of State for Business, Innovation and Skills v Feld [2014] 1 WLR 3396, at paragraph 23 per Deputy High Court Judge Edward-Murray, it is said that the starting point is the natural and ordinary meaning of the words used in light of the syntax, context and background in which those words are used. What additional principles and factors come into play as part of the court’s exercise of interpretation will depend on the nature of the writing to be interpreted and will be highly dependent on the facts of the specific case.”
19. In the case of the construction of an unless order, one specific issue frequently arises: what the default event is. Using the Master Chow Unless Order as an illustration: is the default event the non-filing of any disclosure affidavit, or the inadequacy of the disclosure?
20. In most cases, and in particular in cases where an unless order ismade to secure compliance of the Rules of the High Court by the undertaking of a particular procedural step, the default event is the failure to undertake that step rather than, if that step has in fact been undertaken within the stipulated time, the qualitative adequacy of that step. In Top Point Ltd vK&L Gates HCA 1088/2011 (13 September 2016), Lok J was concerned with the issue as to whether an unless order for discover had been complied with. Having considered a number of authorities, which included Reiss v Woolf [1952] 2 QB 557, Ka Wah Bank Ltd v Low Chung-song [1989] 1 HKLR 451, Lau Chi Wang v Ip Fook Chuen [2003] 1 HKLRD 485, Daimler AG v Leiduck [2012] 3 HKLRD 119 and Re AJK Co Ltd [2015] 6 HKC 493, His Lordship observed, at §34 that:
“ … it is clear that an unless order even requiring specific discoveryof certain kinds of documents should be construed as a time order,and the issue will therefore turn upon whether the deadline has been met and not on the adequacy of compliance, unless it can be said that the compliance is not made in good faith or illusory.”
(emphasis added)
21. Given the drastic consequence which a finding of a breach of an unless order will often lead to, the adoption by the courts of the above general position makes perfect sense. As has been explained by the Court of Appeal in Bruce James Stinson v Gu Ming Gao[2018] HKCA 10, per Kwan JA at §50:
“ Realkredit Danmark, Ka Wah Bank Ltd and Top Point Ltd are all concerned with the test for establishing whether there has been compliance with an unless order for discovery. In that kind of situation, the court is concerned that before the drastic consequence of an unless order is visited upon the offending party, it must be sure there has been a failure to comply with the order in question. And it was held in Top Point Ltd that the issue of default of an unless order will turn upon whether the deadline has been met and not on the adequacy of compliance, unless it can be said that the compliance is not made in good faith or is illusory.”
22. I however highlight the word “construed” used by Lok J in Top Point. That the identification of the default event is one of construction of the unless order concerned is in my view clear. China MetalRecycling (Holdings) Ltd (in provisional liquidation) v Chun Chi Wai & Ors HCA 1412/2013 (25 June 2014) is an example in which the unless order concerned was enforced otherwise than simply as a time order. In that case, the unless order which Depute Judge Saunders was concerned with, and which the plaintiffs were seeking enforcement of, was made earlier by another Deputy Judge “following protracted argument”[1], and after a positive finding that there had been non-compliance with the underlying disclosure order[2] made in aid of a Mareva injunction. Hence, properly understood and construed, the unless order in China Metal Recycling (June 2014) was not a time order, and that the default event contemplated was properly the inadequacy of the disclosure. In the end, Deputy Judge Saunders proceeded to consider the adequacy of the disclosure, adopted the test and standard of “virtually complete compliance”[3], and concluded that non-compliance of the unless order had been established. The sanction specified in the unless order was enforced.
23. In my view, the situation which this Court is facing is correctly summarized and analyzed at [12-176] of Civil Procedure in Hong Kong, 6th ed, that:
“ In case the party subject to the unless order has purportedly complied with it before the deadline but the other party takes theview that this is not a true compliance, then inevitably the dispute has to be resolved by the court upon application by summons. In that situation, the first and most basic question is: What is the default event specified in the order and whether there is non-compliance? For example, if the unless order requires the defendant to file further and better particulars by a certain time, the court would need to first construe whether the order is a time order requiring the defendant to file a reply to the request for further and better particulars by the deadline or whether the orderrequires the defendant to provide all the particulars requested by the plaintiff before the deadline. In the former case, there is no breach of the unless order so long as the defendant has filed within time a document made in good faith and which can fairly be treated as a reply to the request for further and better particulars. In the latter case, there is a breach unless each request for particulars has been substantially met. In general, the court would require that the unless order must be stated in sufficiently exact terms so as to make clear what the party ordered must do in order to comply with it, though the court may also look at the history of the proceedings to decide whether the party ordered would have any doubt as to what needs to be done under the unless order. In the absence of clear wording to the contrary, the general position is that the unless order should be construedas a time order, and the issue will therefore turn upon whether the deadline has been met, and not on the adequacy of compliance,unless it can be said that the compliance is not made in good faith or is illusory.” (emphasis added)
24. For the avoidance of doubt, I suggest one additional qualification to the last sentence in the passage cited above. Apart from clear wording, the history of the proceedings leading to the issue of the unless order concerned may also point to a contrary interpretation. In my view therefore, in the absence of clear wording or history of the proceedings suggesting the contrary, the general position is that an unless order should be construed as a time order, so that a qualitative analysis of the adequacy of the step undertaken is in general not necessary.
WHETHER BREACH OF THE MASTER CHOW UNLESS ORDER
25. My first task is to identify the default event envisaged by the Master Chow Unless Order. Asked in another way, is the Master Chow Unless Order a time order?
26. The Master Chow Unless Order stipulates that “Unless [D2] do comply with [the Lam J Disclosure Order] …” As a matter of language, it is equivocal as to whether the default event focuses upon the non-filing of the affirmation ordered by the Lam J Disclosure Order, or the inadequacy of the disclosure. There is no express or clear wording requiring the Lam J Disclosure Order to be complied with in the qualitative sense. This is one pointer suggesting that the Master Chow Unless Order is, or should be construed as, a time order.
27. It is relevant to note, as has been made clear on the face of the Master Chow Unless Order, that the Cross Summons had been withdrawn, and that the Master Chow Unless Order was made upon D2’s 2nd Extension Summons. That was a time summons. That in my view also supports the conclusion that the Master Chow Unless Order is, or should be construed as, a time order.
28. That the Master Chow Unless Order is a time order is also supported by the history of the proceedings leading to its issue:
(a) I refer to Au Aff filed in opposition on behalf of D2. P has not filed any evidence to challenge its contents;
(b) During the hearing before Master Chow, Mr Au appeared for D2. Mr Deng appeared for P;
(c) According to Au Aff, Mr Deng during that hearing made submissions on the alleged inadequacy of the Draft Nebojsa 1st;
(d) According to §19 of Au Aff:
“ As confirmed in paragraph 18 of [Hau 2nd], in making the [Master Chow Unless Order], Master Chow observed that if [D2] did file the [Draft Nebojsa 1st] without more, whether that was sufficient to secure compliance with the [Lam J Disclosure Order] would be a matter left for a specific summons and after it was duly filed. As a result of this observation, the learned Master suggested that [P] withdraw the Cross Summons and Mr Deng agreed to the withdrawal of the Cross Summons.”
(e) The above suggests that the learned Master had not, before making the Master Chow Unless Order, made any findings in respect of the adequacy of the Draft Nebojsa 1st (contrast with what had happened in China Metal Recycling (June 2014)). This is hardly surprising, given that both of the summonses before the learned Master were marked for 3 minutes[4]. This in turn suggests that the intended default event is the non-filing of an affirmation, rather that the inadequacy of the disclosure effected.
29. For the above reasons, I construe the Master Chow Unless Order as being a time order. The default event focused upon is the non-filing of an affirmation by D2 to make disclosure, rather than the adequacy of the disclosure.
30. Having identified the default event, I proceed to consider whether there has been any breach of the Master Chow Unless Order.
31. The onus is on P to establish that there has been a failure to comply with the Master Chow Unless Order—see Bruce James Stinson v Gu Ming Gao[2018] HKCA 10, per Kwan JA at §48.
32. Nebojsa 1st was filed on 10 December 2018, before the deadline of 4:00 pm of 19 December 2018. In terms of time, D2 has been in compliance with the Master Chow Unless Order.
33. The follow-on question is whether it can be said that compliancewas not made in good faith or is illusory. If it were, the Master Chow Unless Order could still have been breached[5].
34. I am however not persuaded that P has established that the disclosure by way of Nebojsa 1st was not in good faith or was illusory. Those (and in particular lack of good faith) are serious allegations. Nebojsa has in fact filed two affidavits. Some disclosure has been effected. I in the circumstances am not, at this stage and based on the evidence so far adduced, prepared to make inferentially those serious adverse findings against D2. I add that in reaching this decision, I have considered the matters discussed below in relation to the inadequacy of D2’s compliance. In my view, while the manner of D2’s purported compliance has been casual and dilatory, it is in my view not sufficient to support an adverse inference that D2’s purported compliance was not made in good faith or has been illusory.
ENFORCEMENT OF THE MASTER CHOW UNLESS ORDER
35. Given my conclusion that P has failed to discharge the onus of establishing that there had been breach of the Master Chow Unless Order by D2, no question of imposition of the stipulated sanction arises. I refuse paragraph 1 of the Non-compliance Summons.
WHETHER NON-COMPLIANCE OF THE LAM J DISCLOSURE ORDER
The approach
36. When considering this issue, I respectfully adopt the approach propounded by A Chow J in China Metal Recycling (Holdings) Ltd (in provisional liquidation) v Chun Chi Wai & Ors HCA 1412/2013 (17 November 2014). Before His Lordship in that case was an application by the plaintiffs for an unless order to compel compliance of an earlier orderfor disclosure granted in aid of a Mareva injunction (referred to as the “ChanOrder” in the Decision). In deciding whether an unless order should be granted, one issue before the Court was whether the defendants had failed to comply with the Chan Order. At §34, Chow J observed that:
“ In judging whether there has been a proper and sufficient compliance by the 1st and 13th defendants with the Chan Order, while it would not be appropriate for me to conduct a mini‑trial onaffidavit evidence, I believe that I am entitled to consider whether the 1st and 13th defendants’ explanation is on its face credible and consistent with contemporaneous documents and/or their previous statements.”
37. That approach was approved and adopted by the Court of Appeal in Bruce James Stinson when deciding whether a prior order for disclosure had been breached for the purpose of deciding whether an unless order compelling compliance should be made. Indeed, the Court of Appeal (per Kwan JA at §§50 and 51) specifically rejected the test of “whether the compliance is not in good faith or illusory” in favour of the approach propounded by A Chow J in China Metal Recycling (November 2014).
Two preliminary questions
38. I have decided upon the appropriate approach to adopt when deciding whether there has been proper and sufficient compliance of the Lam J Disclosure Order. But before I can embark upon that exercise, I need to consider two preliminary matters:
(a) the degree of compliance required, and
(b) the scope of the Lam J Disclosure Order.
The degree of compliance required
39. Mr Deng has cited to me Tarn Insurance Services Ltd v Kirby & Ors [2009] EWCA Civ 19, where Sir John Chadwick observed, in a case involving a freezing and proprietary injunctions, at §74 that:
“ … the orders for the provision of tracing information and the delivery of documents were intended to provide important safeguards in relation to [the applicant’s] claims; and that the consequences of [the respondent’s] failure to comply with those orders were potentially very serious in a case of this nature.”
I respectfully agreed.
40. In The Republic of Angola v Perfectbit Ltd & Ors (unreported, CL-2017-000702, 5 March 2018, QBD (Comm)), Popplewell J observed at §8 that:
“The importance of disclosure in rendering freezing orders effectivehas often been emphasized. … Unless proper disclosure is given, it is impossible to police the freezing order, and if it cannot be policed, then fraudulent defendants are able to ignore the order and to breach it with impunity. Disclosure is, in almost all cases, essential in order to render effective a worldwide freezing order. The importance of disclosure is reinforced where a claimant has a proprietary claim and is seeking to recover specific sums or their traceable proceeds. Again, an order freezing such sums will be ineffective if the claimant cannot know what has happened to them. It is essential to the protection of the claimant’s rights to pursue its proprietary claim that full disclosure is given of what has happened to the money so that the claimant may take steps to freeze the proceeds and then to establish its right to recover those traceable proceeds.”
I agree with the sentiments expressed by the learned Judge.
41. In China Metal Recycling (June 2014)[6], Deputy Judge Saunders, having considered the purpose of Mareva injunctions and consequent disclosure orders in aid, accepted the submission that a much higher threshold must be imposed upon a party required to make disclosure. He applied the standard of “virtually complete compliance”.
42. Having considered the above, I accept Mr Deng’s submissions in this regard and adopt the standard of “virtually complete compliance” as the applicable standard.
The scope of the Lam J Disclosure Order
43. I next consider the scope of the Lam J Disclosure Order.
44. At paragraph 8(c) of his written skeleton, Mr Deng, having put forward the standard of “virtually complete compliance”, goes on to submit that:
“ … virtual complete compliance in the context of proprietary injunction must mean not only disclosure as to what the respondent knows, but also to disclose what information or documents they can reasonably be expected to obtain or have knowledge of, and to take reasonable steps to investigate.”
45. The scope which Mr Deng is putting forward is a wide one. He is not able to cite to me any direct authority in support of that proposition. One case he seeks to rely on is Bird v Hadkinson [1999] BPIR 653. That was a contempt case which was in my view decided on the language of the specific order concerned. It related more to the issue of the mental status required to establish contempt. It does not support the proposition put forward by Mr Deng. If anything, it is against it—see the observations of Neuberger J (as he then was) at page 657E–F, that:
“ It seems to me that the issue [of what is required by a disclosure order] should be judged by reference to the language of the order. When one is considering the effect of an injunction one should not go beyond the ordinary meaning of the words used, especially if to do so would impose a greater burden on the respondent.”
46. On this issue, I am of the view that there is force in Mr Chiu’s skeleton argument[7] that Mr Deng’s proposition would stretch the ambit of the Lam J Disclosure Order and introduce uncertainty to the same.
47. Having considered the submissions, bearing in mind the language of the Lam J Disclosure Order, and in the absence of any direct authority in support, I am not prepared to accept Mr Deng submissions in this regard. On this issue, I am prepared to give D2 the benefit of doubt and hold that the Lam J Disclosure Order only compels it to disclose transactions and other matters (as specified in the Lam J Disclosure Order) which are within its knowledge.
48. But how about disclosure of documents. In my view, the disclosure of documents attracts considerations different from those concerning the disclosure of information. In my view, when it comes to the disclosure of documents, the standard of “possession, custody or power” applies. It is a time-honoured standard which parameters are clear. No uncertainty will be introduced. It is a standard applicable to general discovery under Order 24. The standard required by a discovery order granted in aid of a Mareva injunction (a fortiori in the case of a proprietary injunction) ought not to be any lower.
Consideration of the evidence
49. I have set out the terms of the Lam J Disclosure Order above. I have considered its scope and the standard of compliance required.
50. I have also set out above the material parts of Nebojsa 1st. In terms of documents, only three are exhibited thereto: the Credit Agreement and the Hypothecation Agreement between D2 and Eden, and the Loan Purchase Agreement between Eden and Everton.
51. I mentioned in paragraph 9 above the WYH 11 Nov Letter. In gist, WYH commented therein that Draft Nebojsa 1st was inadequate in that D2 (1) “had failed to confirm or deny or describe whether [D2] was involved in” those transactions revealed in Draft Nebojsa 1st; (2) had failed to confirm or deny “whether it has pursuant to your Clients or others instructions, transferred the Pledged Shares out of the Custodian Account; and (3) failed to disclose documents which it was ordered to disclose under paragraph 2(3) of the Lam J Disclosure Order. DLA Piper in its letter of 19 December 2018 disputed that. I have considered the contents of those letters.
52. I will deal with each of the sub-paragraphs of the Lam J Disclosure Order in turn.
Paragraphs 2(1) and 2(2)(a) of the Lam J Disclosure Order
53. At §14 of Nebojsa 2nd, Nebojsa said that:
“ It has always been my impression that paragraph 2(1) of the [Lam J Disclosure Order] only requires me (as an officer of [D2]) to confirm whether there were any transaction(s) in the Pledged Shares entered into by [D2].” (emphasis added)
54. I see no basis for that “impression”. Paragraph 2 of the Lam J Disclosure Order in general, and paragraph 2(1) of the same in particular, do not contain the qualifying words of “entered into by [D2]”. Nebojsahas not himself disclosed any basis for that “impression”. That interpretationis in my view incorrect. In my view, and as I have found above, the Lam J Disclosure Order compels D2 to disclose transactions and other matters (as specified in the Lam J Disclosure Order) which are within its knowledge.
55. Mr Deng submits that D2 has been in breach of §2(1). His main complaint is that D2 has failed to confirm, deny or provide any account of the Standard Chartered Bank transfers (“SCB Transfers”) and any subsequent transfers. I observe that those same complaints had been made on P’s behalf by WYH in the WYH 11 Nov Letter.
56. In respect of those transfers, I refer to paragraph 23 of my 18 January Reasons. I repeat, in gist, the evidence before me in this regard, that P had contemporaneously corresponded with D2 about those transfers. Printouts of some of those correspondence have been exhibited. One of the persons who P had corresponded with was D3. As I have noted in paragraph 14 of my 18 January Reasons, D3 had held himself out as the managing director of 360 Group.
57. Nebojsa has not sought to challenge any of the evidence. He asserted, at §15 of Nebojsa 2nd, that:
“ … For the avoidance of doubt, I hereby confirm that apart from the transactions described in paragraphs 6 and 7 of [Nebojsa 1st], [D2] is not (and I am not) aware of any other transactions in the Pledged Shares.”
And specifically in respect of the complaint set out in §55 above, Nebojsa asserted, at §40(a) – (d) of Nebojsa 2nd, that:
“ (a) The alleged transfer of the Pledged Shares was from [P’s] account with [D1] to Standard Chartered Bank. Given that[D2] was not involved in the alleged transfer, [D2] does not possess any information about the alleged transfer.
(b) It was alleged by [P] that [D1] had represented to [P] that the alleged transfer was made pursuant to [D2’s] instructions. Given that I am not privy to the alleged conversations between the representative from [P] and the representative from [D1], I cannot comment on whether [P’s] allegation is true or not. In any event, the truth is that [D2] had never instructed [D1] to transfer the Pledged Shares to Standard Chartered Bank.
(c) As can be seen from the contractual documents relating to the [D2]/Eden Transaction, the Pledged Shares were hypothecated to Eden and [D2] ceased to have any rights over the Pledged Shares upon such hypothecation.
(d) For the above reasons, [D2] is not in a position to provide any account of the alleged transfer of the Pledged Shares from [P’s] account with [D1] to the Standard Chartered Bank.”
58. I note however:
(a) Some of the contemporaneous correspondence summarized in §56 above were between representatives of P with D3. Nebojsa has failed to address them at all. Nebojsa could not hide behind the fact that he was not personally privy to those communications. I note that he has not even tried to explain the relationship between D2 and D3. That is so despite the evidence that D3 has held himself out as managing director of D2;
(b) It should be noted that the Lam J Disclosure Order requires an officer of D2 to file the disclosure affirmation, not Nebojsa himself. For the purpose of compliance, it is the corporate knowledge of D2 which is important, but not just Nebojsa’s personal knowledge;
(c) Clause 7 of the Hypothecation Agreement provides that:
“ The Collateral Agent [ie D1] will send copies of all statements andconfirmations for the Account simultaneously to Eden and [D2]”; (emphasis added)
(d) If the Hypothecation Agreement reflects a genuine transaction, which is held out by Nebojsa to be, I will be surprised that D2 would not have become aware of the SCB Transfers through such “statements and confirmations”;
(e) Further, as Mr Deng has pointed out[8], D2 on 15 August 2018 issued a letter to P. It was copied to D1. In that letter, D2 alleged against P that an event of default had taken place, and directed D1 to transfer the Pledged Shares to D2’s account. I agreed with Mr Deng that long after the alleged execution of the Hypothecation Agreement, D2 still took an interest in the Pledged Shares.
59. In my view, the assertion that D2 was not aware of the SCB Transfers is inconsistent with contemporaneous conduct and documents. I do not accept it. The corollary is that I do not accept Nebojsa’s assertion that “apart from the transactions described in paragraphs 6 and 7 of [Nebojsa 1st], [D2] is not (and I am not) aware of any other transactions in the Pledged Shares.”
60. In my view, D2 has failed to comply with §2(1) and §2(2)(a) of the Lam J Disclosure Order.
61. My conclusion above necessarily means that in my view, the purported compliance of the balance of the Lam J Disclosure Order is also inadequate. On top of that, there are further specific aspects of the purported compliance which are, as submitted by Mr Deng, inadequate. I deal with them below.
Paragraph 2(2)(b) of the Lam J Disclosure Order
62. At §21 of Nebojsa 2nd, Nebojsa said that:
“ … given that I have already disclosed the underlying documents …, I did not think it was necessary for me to describe that the parties entered into these transactions at their own rights as [P] should be able to gather the information from the disclosed documents.”
63. I do not accept that approach. The language of paragraph 2(2)(b) of the Lam J Disclosure Order is clear. D2 is ordered to “describe” those specific matters. D2 is not asked simply to produce the underlying documents for P or the Court to work out the answers. The provision by D2 of an answer as required by the Lam J Disclosure Order is further, apart from anything else, important when it comes to the policing of its compliance. What Nebojsa thought in that regard is not relevant. Such attitude, which verges on being arrogant, has no place when it comes to compliance of a disclosure order granted in aid of a proprietary injunction.
64. Nebojsa then continued to say at §21 of Nebojsa 2nd that:
“ For the avoidance of doubt, I hereby confirm that as far as I am and [D2] is aware, all parties to the Credit Agreement, the Hypothecation Agreement, and the Loan Purchase Agreement entered into the documents at their own rights.”
(emphasis added)
65. It is impossible to pin down what Nebojsa meant by “at their own rights”. It is not a phrase contained in §2(2)(b). Compliance with a disclosure order is not a game with words. The language used in §2(2)(b)ought to have been adhered to.
66. I agree with Mr Deng that the purported compliance with this paragraph of the Lam J Disclosure Order has also been inadequate.
Paragraph 2(2)(c) of the Lam J Disclosure Order
67. Mr Deng has drawn my attention to the 4thparagraph under “WITNESSETH” in the Hypothecation Agreement, which records that:
“WHEREAS, on or about the date hereof, Eden is loaning funds to [D2] (‘Eden Loan’) in order to fund the Borrower Loan [ie the loanby D2 to P], and in connection therewith and contemporaneously herewith Eden has delivered or is delivering a cashier’s check or wire transfer to the Collateral Agent to be deposited into the Account (or to [D2] or [P], as the case may be) to advance the Eden Loan in order to fund the Borrower Loan.”
68. No copy of the “cashier’s check or wire transfer” has been produced. No statement of the Account has been produced (which D1 under Clause 5 the Collateral Agreement between P, D1 and D2 should send to P and D2 simultaneously)—see paragraph 19 of my 18 January Reasons. Such statements should at the very least be in the power of D2.
69. Nebojsa in §34 of Nebojsa 2nd asserted that:
“ Further, since [D2] did not receive any other tangible consideration under the Hypothecation Agreement or the Loan Purchase Agreement, [D2] does not have any documents in connection with its receipt or any consideration in relation to the Hypothecation Agreement or the Loan Purchase Agreement.”
70. Nebojsa has not explained what “tangible consideration” means or why he was qualifying “consideration” with the word “tangible”. I observe again that compliance with a disclosure order is not a game with words.
71. I agree with Mr Deng that the purported compliance with this paragraph of the Lam J Disclosure Order has also been inadequate.
Paragraph 2(3) of the Lam J Disclosure Order
72. As I have observed above, only three documents have been produced. In the absence of convincing explanations, I find the absence of any document of the kind described in §2(3) of the Lam J Disclosure Order quite difficult to accept.
73. Then, in Nebojsa 2nd, Nebojsa produced two more documents. Below is what Nebojsa said at paragraph 33 of Nebojsa 2nd:
“ … In this respect, there is now produced and shown to me markedExhibit ‘MN-3’ a copy of the letter from Eden to [D1] dated 21 February 2018 instructing [D1] to withdraw the said sum of USD2,902,345 from Eden’s account to [P’s] account. Whilst [D2] did not have this letter at the time when I swore [Nebojsa 1st], I was able to obtain a copy of this letter from Eden when I asked them to provide me with documents to prove that the loan proceeds were paid by Eden to [P] directly without going through [D2].For completeness, there is now produced and shown to me marked Exhibit ‘MN-4’ a copy of the ‘Drawdown Notice’ referred to in the letter from Eden to [D1] dated 21 February 2018. Given that (a) the ‘Drawdown Notice’ is a document issued by [D2] to [D1] pursuant to the underlying loan agreementbetween [D2] and [P] which was dated 12 February 2018; (b) the [Lam J Disclosure Order] only requires [D2] to disclose any transaction of the Pledged Shares from 13 February 2018; and (c) [P] had, pursuant to the underlying loan agreement, agreed to pledge the Pledged Shares to [D2], I was under the impression that the ‘Drawdown Notice’ does not fall within the scope of the [Lam J Disclosure Order] and hence I did not disclose this document in [Nebojsa 1st].” (emphasis added)
74. Nebojsa did not start to explain what further document D2 could or did obtain from Eden when he “asked [Eden] to provide me with documents”. Further, in my view, the reasons Nebojsa tendered for not producing the Drawdown Notice in Nebojsa 1st makes very little sense.
75. I agree with Mr Deng that the purported compliance with this paragraph of the Lam J Disclosure Order has also been inadequate.
Conclusion on D2’s purported compliance with the Lam J Disclosure Order
76. For the reasons set out above, my view is that D2’s purported compliance with the Lam J Disclosure Order has been inadequate.
FURTHER ENFORCEMENT OF LAM J DISCLOSURE ORDER
77. I now consider whether the Lam J Disclosure Order ought to be further enforced. In the way Mr Deng puts, the issue is whether the enforcement of the Lam J Disclosure Order should be escalated. He submits that it should be, and that the Further Unless Order sought in paragraph 3 is a proportionate one. For the reasons set out below, I agree.
78. That the court has jurisdiction to grant the Further Unless Order sought is clear. As Chow J has observed in China Metal Recycling (November 2014), at §§51 – 52:
“ 51. It is not in dispute that the court has jurisdiction to make an ‘unless’ order to ensure compliance with disclosure orders in aid of Mareva injunctions: see JSC BTA Bank v Ablyazov [2013] 2 All ER 414 at paragraphs 146, 149, 165, 183–188, per Rix LJ.In relation to the exercise of such jurisdiction, the following was said by Rix LJ at paragraph 188:
‘ The authorities demonstrate that it is vital for the court, in the interests of justice, to have effective powers, and effective sanctions. Without these, it would be possible for a defendant (or, in a different situation, a claimant) to flout the orders of the court, which are the court’s considered means by which to keep the scales of justice for the parties even. If once it became known that the court was unable or unwilling to maintain the effectiveness of its orders, then it would lose all control over litigation of this kind, with terrible consequences for the administration of justice. Those wrongly accused of fraud would be relieved of a certain amount of inconvenience, but fraudsters would rejoice and hitch a free ride to interminable litigation on the back of ill-gotten gains.’
52. As submitted by Mr Coleman, freezing orders are critical weapons in the court’s armoury against fraud, securing the preservation of assets which might otherwise be wrongly dissipated pending judgment, and in appropriate cases, the preservation of evidence, including documentation, and the provision of information to trace the proceeds of fraud: CIBC Mellon Trust Company v Stolzenberg [2003] EWHC 13 at paragraph 103, per Etherton J. Further, compliance with orders of the court goes to the essence of the rule of law that parties subject to the court’s jurisdiction should comply with court orders. The gravity of the matter of non‑compliance will increase where the non‑compliance results from a conscious decision: see CIBC Mellon Trust Company v Stolzenberg [2004] EWCA Civ 827 at paragraph 167, per Arden LJ.”
79. I repeat the sentiments expressed by Sir John Chadwick in Tarn Insurance Services and by Popplewell J in The Republic of Angola v Perfectbit, which I have set out above.
80. As I have observed at paragraph 25 of my 18 January Reasons, P only got part of the Loan, but that the whereabouts of the Pledged Shares have become unknown. P has already incurred substantial costs and efforts in order to identify the defendants, serve the proceedings, obtain the Lam J Injunction and the Injunction which I granted, and to obtain the Lam J Disclosure Order. All of those will come to very little if P cannot trace the very Pledged Shares. P is perfectly justified in the circumstances to seek to escalate the enforcement.
81. No less important is the importance of safeguarding the dignity of the Lam J Disclosure Order and to ensure its compliance. This is vital to the rule of law.
82. D2 has had ample time to comply with the Lam J Disclosure Order. Yet, as I have found, the purported compliance has been inadequate. I agree with Mr Deng’s submissions in this regard that D2’s approach towards compliance of the Lam J Disclosure Order is at the least casual and dilatory. It only has itself to blame for any consequences it will face as a result.
83. I have also considered Mr Deng’s submissions, which I agree, that costs orders or orders for payments alone are insufficient to ensure compliance by D2 of the Lam J Disclosure Order, as D2 is an off-shore company in a remote jurisdiction and has no known assets in Hong Kong available to enforce any such orders.
84. In all the circumstances, I am of the view that the Order sought in paragraph 3 of the Non-compliance Summons would have been a necessary and proportionate one.
85. I say “would have been” because I have been informed by a letter dated 14 March 2019 from WYH to my clerk that prior to the handing down of this Decision, D2 had on 12 March 2019 filed its Defence and Counterclaim. WYH submits therein that if this Court is minded to grant paragraph 3 of the Non-compliance Summons, the appropriate sanction will be the striking out of D2’s Defence and Counterclaim that has been filed. I agree. I note that in DLA Piper’s reply of 21 March 2019, whilst other matters were addressed, DLA Piper made no comments or submissions on the above suggestion by WYH.
DISPOSITION
86. For the reasons set out above, I refuse paragraph 1 of the Non‑compliance Summons. I grant paragraph 2 thereof. In respect of paragraph 3, in the light of the intervening events, I make the following Order, that unless D2 files a further affidavit to comply with the Lam J Disclosure Order within 14 days of the handing down of this Decision, the Defence and Counterclaim of D2 filed on 12 March 2019 be stuck out.
COSTS
87. D2 is successful in obtaining the Further Unless Order (as updated), but unsuccessful in seeking the enforcement of the Master Chow Unless Order. In the circumstances, I make a costs order nisi that 75% of the costs of the Non-compliance Summons be to P, to be taxed if not agreed. Any party who wishes to vary the above (or to seek summary assessment) is directed to file its submissions within 14 days from the handing down of this Decision, submissions in response then within 14 daysof receipt, and submissions in reply within 14 days of receipt of the response.
POSTSCRIPT
88. As I have mentioned above, both WYH and DLA Piper have written in since the hearing. Apart from noting that D2 has filed its Defence and Counterclaim, I have not taken into account any other matters raised in those letters.
| | (Keith Yeung SC) |
| | Deputy High Court Judge |
Mr Earl Deng and Ms Tara Liao, instructed by Wan Yeung Hau & Co,
for the plaintiff
Mr Mark Pierrepont, of Arun Nigam Associates, for the 1st defendant
Mr Bryon Chiu, instructed by DLA Piper Hong Kong, for the 2nd defendant
[1] see §31 of the Decision
[2] see §32 of the Decision
[3] see §51 of the Decision
[4] Mr Deng informed me from the bar table that the hearing actually took about 20 minutes. Even so, it still afforded the learned Master little time to consider the issue of adequacy.
[5] Top Point, per Lok J at §34
[6] see §§49 – 51
[7] at §38.2(b)
[8] §18(4) of his Skeleton Submissions