JIN JIANG INVESTMENT LTD AND ANOTHER v. 深圳市威廉金融控股有限公司 AND OTHERS
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HCA 196/2021
[2023] HKCFI 3129
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 196 OF 2021
________________________
BETWEEN | ||
| JIN JIANG INVESTMENT LIMITED | 1st Plaintiff | |
| SHUM TIN CHING trading as CHUANGSHENG | 2nd Plaintiff | |
| INTERNATIONAL INVESTMENT AND | ||
| MANAGEMENT CO. (formerly known as | ||
| JIN JIANG INVESTMENT AND | ||
| MANAGEMENT CO.) | ||
| and | ||
| 深圳市威廉金融控股有限公司 | 1st Defendant | |
| ZHANG WEI (张伟) | 2nd Defendant | |
| WANG TAO (王涛) | 3rd Defendant | |
| CHINA CREATE CAPITAL LIMITED | 4th Defendant | |
| (中科創資本有限公司) | ||
| WANG XU (王旭) | 5th Defendant | |
| STATE FRONTIER LIMITED | 6th Defendant | |
| (邦領有限公司) | ||
| DENG YUMING (邓宇鸣) | 7th Defendant | |
| BAIJIN LIMITED (百錦有限公司) | 8th Defendant | |
| LIU JIANGYUAN (刘江湲) | 9th Defendant | |
| BAIDA HOLDINGS LIMITED | 10th Defendant | |
| XIAO SHU (肖述) | 11th Defendant | |
| ENVISION GLOBAL INVESTMENTS | 12th Defendant | |
| LIMITED | ||
| LINKFUL SHARES LIMITED | 13th Defendant | |
| KING PAK FU (景百孚) | 14th Defendant | |
| SINO ESTEEM INVESTMENTS LIMITED | 15th Defendant | |
| KE XUN (可恂) | 16th Defendant | |
| EAGLE SEEKER COMPANY LIMITED | 17th Defendant | |
| FENG CHANGGE (冯长革) | 18th Defendant | |
| ACHIEVE BIG LIMITED | 19th Defendant | |
| HAN SHUAI (韩帅) | 20th Defendant | |
| ZHANG AIHUA (张爱华) | 21st Defendant | |
| SWIFT FORTUNE INVESTMENTS | 22nd Defendant | |
| LIMITED | ||
| (捷發投資有限公司) | ||
| CARNIVAL GROUP INTERNATIONAL | 23rd Defendant | |
| HOLDINGS LIMITED | ||
| (嘉年華國際控股有限公司) | ||
| CARNIVAL GROUP (HONG KONG) | 24th Defendant | |
| HOLDINGS LIMITED | ||
| (嘉年華(香港)控股有限公司) | ||
| SOUTH POINT GLOBAL LIMITED | 25th Defendant | |
| LI MAO CHEN (李茂珍) | 26th Defendant | |
| GIANT PROFIT ENTERPRISES LIMITED | 27th Defendant | |
| (大盈企業有限公司) | ||
| LEE TAI HAY DOMINIC (李大熙) | 28th Defendant | |
| GLORY IMAGE INTERNATIONAL | 29th Defendant | |
| INVESTMENT LIMITED | ||
| LI YANG | 30th Defendant | |
| WEN SHAOMIN (温少敏) | 31st Defendant | |
| CHINA ECONOMIC HOLDINGS CO., | 32nd Defendant | |
| LIMITED | ||
| (中經控股有限公司) | ||
| DAI YUMIN (戴昱敏) | 33rd Defendant | |
| and | ||
| CHEUK HIU LAM | 1st Third Party | |
| SHUM TIN CHING | 2nd Third Party | |
| JIA YUAN INTERNATIONAL GROUP | 3rd Third Party | |
| LIMITED | ||
| (佳源國際控股有限公司) | ||
| (STOCK CODE: 2768) | ||
| and | ||
| HAITONG INTERNATIONAL SECURITIES | 1st Intervener | |
| COMPANY LIMITED | ||
| HAITONG INTERNATIONAL PRODUCTS | 2nd Intervener | |
| & SOLUTIONS LIMITED | ||
| and | ||
| CHANGJIANG SECURITIES | Intended | |
| BROKERAGE (HK) LIMITED | 3rd Intervener | |
| CHANGJIANG ASSET | Intended | |
| MANAGEMENT (HK) LIMITED | 4th Intervener | |
| CHANGJIANG FINANCE (HK) LIMITED | Intended | |
| 5th Intervener | ||
________________
| Before: | Deputy High Court Judge Phoebe Man in Chambers |
| Date of Hearing: | 8 November 2023 |
| Date of Decision: | 4 December 2023 |
________________
D E C I S I O N
________________
BACKGROUND
1. The background to these proceedings has been comprehensively set out in the Judgment of Coleman J dated 17 February 2022. For present purposes, it is sufficient to note that the plaintiffs’ case is that the defendants were part of a scheme that defrauded the plaintiffs under fictitious investment agreements which led to the plaintiffs having paid out HK$1,029,000,000 (the “Sum”).
2. Pursuant to the Injunction Order continued by the Hon Coleman J on 17 February 2022 (the “Injunction”), amongst other things, a Mareva injunction was ordered against the 5th defendant (“Wang Xu”) and the 6th defendant (“State Frontier”) (together with other defendants) up to the amount of the Sum; and a proprietary injunction on Wang Xu and State Frontier regarding three cheques numbered 000163, 000164 and 000128 from the 8th defendant Baijin Ltd amounting in total to HK$281,900,000.
APPLICATION
3. This is the application by summons filed on 22 August 2022 (the “Summons”) by the intended 3rd intervener (“CJ Securities”), the intended 4th intervener (“CJ Asset”) and the intended 5th intervener (“CJ Finance”) (together, the “CJ Parties”) to intervene in these proceedings and to vary the Injunction. The purpose of the variation is to enable assets of Wang Xu and State Frontier in their accounts with CJ Asset and CJ Securities to be used to discharge Wang Xu’s payment obligations owed to CJ Finance.
4. The relevant accounts are set out as follows:
Account Numbers Account Holder Balance as of June 2022 100028026
(with CJ Securities)Wang Xu (D5) HK$744,373.32 313
(with CJ Asset)Wang Xu (D5) HK$750,244.90 102632500
(with CJ Securities)
(the “State Frontier Account”)State Frontier (D6) HK$5,990,957.44
5. The plaintiffs are neutral to the variation in relation to Wang Xu’s accounts with CJ Securities and CJ Asset. They only object to the variation of the Injunction affecting the State Frontier Account.
6. As such, leave will be granted to CJ Securities, CJ Asset and CJ Finance to participate in the present proceedings such that CJ Securities will become the 3rd Intervener, CJ Asset will become the 4th Intervener and CJ Finance will become the 5th Intervener for the purposes of their application to vary the Injunction.
7. The Injunction will be varied such that CJ Securities, CJ Asset and CJ Finance will be allowed to utilize the funds in Wang Xu’s accounts with CJ Securities and CJ Asset to discharge his obligations owed to CJ Finance.
8. It is thus only necessary to deal with the variation of the Injunction in relation to the State Frontier Account at the hearing.
APPLICABLE PRINCIPLES
9. The applicable principles are trite: a creditor of the injuncted party may apply to vary an injunction that affected his rights to enforce against the injuncted party. However, the Court must be satisfied that the payment is for bona fide business debts of the injuncted party[1].
10. The applicant for variation bears the burden of persuading the Court that “the proposed payment from the proposed source would not be in conflict with the principle underlying the Mareva jurisdiction”[2].
11. Clarke J in Compagnie Noga D’Importation et D’exportation SA v Australian and New Zealand Banking Group and ors[3] set out in paragraph 9 of the Judgment the relevant principles:
“(iii) In determining whether or not to allow the variation proposed the court is concerned to examine whether to do so would be consistent with the policy that underpins the jurisdiction, namely that a defendant should be restrained from evading justice by disposing of assets otherwise than in the ordinary course of business with the result that any judgment goes unsatisfied[4].
(iv) The correct test is “to consider objectively the overall justice of allowing the payment to be made including the likely consequence of permitting it on the prospects of a future judgment being left unsatisfied, and bearing in mind that the assets belong to the defendant and that the injunction is not intended to provide the claimant with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment.[5]”
PAYMENT OBLIGATIONS
12. The payment obligations of HK$18,792,522.61 (as at 31 July 2022) owed by Wang Xu to CJ Finance were said to have arisen from a promissory note dated 4 May 2018 (the “Promissory Note”). Wang Xu had failed to repay the Promissory Note after the maturity date (after multiple extensions) on 5 December 2018.
13. The CJ Parties’ case is that, by reason of two letters signed by Wang Xu purportedly on behalf of State Frontier instructing CJ Securities to make payment from State Frontier’s Account on 29 November 2019 (the “2 Letters”), Wang Xu as director and sole beneficiary of State Frontier authorized CJ Securities to utilize State Frontier’s securities in an account with CJ Securities to repay the Promissory Note. 1.5 million shares of Car Inc were transferred to the State Frontier Account on 19 December 2019. Such shares were bought back pursuant to a privatization and the proceeds were credited into the State Frontier Account. These proceeds are now subject to the Injunction.
GROUNDS RELIED UPON BY THE CJ PARTIES
14. Mr Tso, counsel for the CJ Parties relied on the following in support of the variation sought:
1) The CJ Parties had had an existing right to payment against the amounts standing to the credit of and contained in the State Frontier Account before the Injunction.
2) The variation will be no more than the court sanctioning a payment that would have been made out had there been no injunction. State Frontier had in fact been repaying the Promissory Note for Wang Xu before the deposit of securities.
3) As borne out from the evidence, State Frontier had already been parted with the 1.5 million shares of Car Inc in partial discharge of the Promissory Note as on 19 December 2019. Therefore, those shares would no longer be available to satisfy any judgment debt in favour of the plaintiffs should the plaintiffs succeed eventually.
PLAINTIFFS’ OBJECTIONS
15. Mr Chong, counsel for the plaintiffs raised the following objections in relation to the variation in relation to State Frontier’s payment obligations owed to CJ Finance:
1) The authenticity of the 2 Letters are challenged. Mr Chong submitted that in any event, even assuming the 2 Letters are authentic, they only showed Wang Xu’s intention to confer authority on CJ Securities to make payments from the State Frontier Account in favour of CJ Finance (emphasis added).
2) Mr Chong submitted that at the time when the 2 Letters were signed, the privatization of Car Inc had not yet taken place, and yet the 2 Letters only contemplated and authorized a withdrawal of money, and not a transfer of shares from the State Frontier Account. As such, it was submitted that there was no intention to utilize the shares in State Frontier’s Account (as opposed to cash) to offset Wang Xu’s indebtedness. Moreover, the space as set out in the 2 Letters for the amount of money having been authorized to be transferred to CJ Securities was not yet filled out.
HCA196B/2021 JIN JIANG INVESTMENT LTD AND ANOTHER v. 深圳市威廉金融控股有限公司 AND OTHERS
HCA 196/2021
[2023] HKCFI 3129
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 196 OF 2021
________________________
BETWEEN
JIN JIANG INVESTMENT LIMITED 1st Plaintiff SHUM TIN CHING trading as CHUANGSHENG 2nd Plaintiff INTERNATIONAL INVESTMENT AND MANAGEMENT CO. (formerly known as JIN JIANG INVESTMENT AND MANAGEMENT CO.) and 深圳市威廉金融控股有限公司 1st Defendant ZHANG WEI (张伟) 2nd Defendant WANG TAO (王涛) 3rd Defendant CHINA CREATE CAPITAL LIMITED 4th Defendant (中科創資本有限公司) WANG XU (王旭) 5th Defendant STATE FRONTIER LIMITED 6th Defendant (邦領有限公司) DENG YUMING (邓宇鸣) 7th Defendant BAIJIN LIMITED (百錦有限公司) 8th Defendant LIU JIANGYUAN (刘江湲) 9th Defendant BAIDA HOLDINGS LIMITED 10th Defendant XIAO SHU (肖述) 11th Defendant ENVISION GLOBAL INVESTMENTS 12th Defendant LIMITED LINKFUL SHARES LIMITED 13th Defendant KING PAK FU (景百孚) 14th Defendant SINO ESTEEM INVESTMENTS LIMITED 15th Defendant KE XUN (可恂) 16th Defendant EAGLE SEEKER COMPANY LIMITED 17th Defendant FENG CHANGGE (冯长革) 18th Defendant ACHIEVE BIG LIMITED 19th Defendant HAN SHUAI (韩帅) 20th Defendant ZHANG AIHUA (张爱华) 21st Defendant SWIFT FORTUNE INVESTMENTS 22nd Defendant LIMITED (捷發投資有限公司) CARNIVAL GROUP INTERNATIONAL 23rd Defendant HOLDINGS LIMITED (嘉年華國際控股有限公司) CARNIVAL GROUP (HONG KONG) 24th Defendant HOLDINGS LIMITED (嘉年華(香港)控股有限公司) SOUTH POINT GLOBAL LIMITED 25th Defendant LI MAO CHEN (李茂珍) 26th Defendant GIANT PROFIT ENTERPRISES LIMITED 27th Defendant (大盈企業有限公司) LEE TAI HAY DOMINIC (李大熙) 28th Defendant GLORY IMAGE INTERNATIONAL 29th Defendant INVESTMENT LIMITED LI YANG 30th Defendant WEN SHAOMIN (温少敏) 31st Defendant CHINA ECONOMIC HOLDINGS CO., 32nd Defendant LIMITED (中經控股有限公司) DAI YUMIN (戴昱敏) 33rd Defendant and CHEUK HIU LAM 1st Third Party SHUM TIN CHING 2nd Third Party JIA YUAN INTERNATIONAL GROUP 3rd Third Party LIMITED (佳源國際控股有限公司) (STOCK CODE: 2768) and HAITONG INTERNATIONAL SECURITIES 1st Intervener COMPANY LIMITED HAITONG INTERNATIONAL PRODUCTS 2nd Intervener & SOLUTIONS LIMITED and CHANGJIANG SECURITIES Intended BROKERAGE (HK) LIMITED 3rd Intervener CHANGJIANG ASSET Intended MANAGEMENT (HK) LIMITED 4th Intervener CHANGJIANG FINANCE (HK) LIMITED Intended 5th Intervener ________________
Before: Deputy High Court Judge Phoebe Man in Chambers
Date of Hearing: 8 November 2023 Date of Decision: 4 December 2023 ________________
D E C I S I O N
________________
BACKGROUND
1. The background to these proceedings has been comprehensively set out in the Judgment of Coleman J dated 17 February 2022. For present purposes, it is sufficient to note that the plaintiffs’ case is that the defendants were part of a scheme that defrauded the plaintiffs under fictitious investment agreements which led to the plaintiffs having paid out HK$1,029,000,000 (the “Sum”).
2. Pursuant to the Injunction Order continued by the Hon Coleman J on 17 February 2022 (the “Injunction”), amongst other things, a Mareva injunction was ordered against the 5th defendant (“Wang Xu”) and the 6th defendant (“State Frontier”) (together with other defendants) up to the amount of the Sum; and a proprietary injunction on Wang Xu and State Frontier regarding three cheques numbered 000163, 000164 and 000128 from the 8th defendant Baijin Ltd amounting in total to HK$281,900,000.
APPLICATION
3. This is the application by summons filed on 22 August 2022 (the “Summons”) by the intended 3rd intervener (“CJ Securities”), the intended 4th intervener (“CJ Asset”) and the intended 5th intervener (“CJ Finance”) (together, the “CJ Parties”) to intervene in these proceedings and to vary the Injunction. The purpose of the variation is to enable assets of Wang Xu and State Frontier in their accounts with CJ Asset and CJ Securities to be used to discharge Wang Xu’s payment obligations owed to CJ Finance.
4. The relevant accounts are set out as follows:
Account Numbers Account Holder Balance as of June 2022 100028026
(with CJ Securities)Wang Xu (D5) HK$744,373.32 313
(with CJ Asset)Wang Xu (D5) HK$750,244.90 102632500
(with CJ Securities)
(the “State Frontier Account”)State Frontier (D6) HK$5,990,957.44
5. The plaintiffs are neutral to the variation in relation to Wang Xu’s accounts with CJ Securities and CJ Asset. They only object to the variation of the Injunction affecting the State Frontier Account.
6. As such, leave will be granted to CJ Securities, CJ Asset and CJ Finance to participate in the present proceedings such that CJ Securities will become the 3rd Intervener, CJ Asset will become the 4th Intervener and CJ Finance will become the 5th Intervener for the purposes of their application to vary the Injunction.
7. The Injunction will be varied such that CJ Securities, CJ Asset and CJ Finance will be allowed to utilize the funds in Wang Xu’s accounts with CJ Securities and CJ Asset to discharge his obligations owed to CJ Finance.
8. It is thus only necessary to deal with the variation of the Injunction in relation to the State Frontier Account at the hearing.
APPLICABLE PRINCIPLES
9. The applicable principles are trite: a creditor of the injuncted party may apply to vary an injunction that affected his rights to enforce against the injuncted party. However, the Court must be satisfied that the payment is for bona fide business debts of the injuncted party[1].
10. The applicant for variation bears the burden of persuading the Court that “the proposed payment from the proposed source would not be in conflict with the principle underlying the Mareva jurisdiction”[2].
11. Clarke J in Compagnie Noga D’Importation et D’exportation SA v Australian and New Zealand Banking Group and ors[3] set out in paragraph 9 of the Judgment the relevant principles:
“(iii) In determining whether or not to allow the variation proposed the court is concerned to examine whether to do so would be consistent with the policy that underpins the jurisdiction, namely that a defendant should be restrained from evading justice by disposing of assets otherwise than in the ordinary course of business with the result that any judgment goes unsatisfied[4].
(iv) The correct test is “to consider objectively the overall justice of allowing the payment to be made including the likely consequence of permitting it on the prospects of a future judgment being left unsatisfied, and bearing in mind that the assets belong to the defendant and that the injunction is not intended to provide the claimant with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment.[5]”
PAYMENT OBLIGATIONS
12. The payment obligations of HK$18,792,522.61 (as at 31 July 2022) owed by Wang Xu to CJ Finance were said to have arisen from a promissory note dated 4 May 2018 (the “Promissory Note”). Wang Xu had failed to repay the Promissory Note after the maturity date (after multiple extensions) on 5 December 2018.
13. The CJ Parties’ case is that, by reason of two letters signed by Wang Xu purportedly on behalf of State Frontier instructing CJ Securities to make payment from State Frontier’s Account on 29 November 2019 (the “2 Letters”), Wang Xu as director and sole beneficiary of State Frontier authorized CJ Securities to utilize State Frontier’s securities in an account with CJ Securities to repay the Promissory Note. 1.5 million shares of Car Inc were transferred to the State Frontier Account on 19 December 2019. Such shares were bought back pursuant to a privatization and the proceeds were credited into the State Frontier Account. These proceeds are now subject to the Injunction.
GROUNDS RELIED UPON BY THE CJ PARTIES
14. Mr Tso, counsel for the CJ Parties relied on the following in support of the variation sought:
1) The CJ Parties had had an existing right to payment against the amounts standing to the credit of and contained in the State Frontier Account before the Injunction.
2) The variation will be no more than the court sanctioning a payment that would have been made out had there been no injunction. State Frontier had in fact been repaying the Promissory Note for Wang Xu before the deposit of securities.
3) As borne out from the evidence, State Frontier had already been parted with the 1.5 million shares of Car Inc in partial discharge of the Promissory Note as on 19 December 2019. Therefore, those shares would no longer be available to satisfy any judgment debt in favour of the plaintiffs should the plaintiffs succeed eventually.
PLAINTIFFS’ OBJECTIONS
15. Mr Chong, counsel for the plaintiffs raised the following objections in relation to the variation in relation to State Frontier’s payment obligations owed to CJ Finance:
1) The authenticity of the 2 Letters are challenged. Mr Chong submitted that in any event, even assuming the 2 Letters are authentic, they only showed Wang Xu’s intention to confer authority on CJ Securities to make payments from the State Frontier Account in favour of CJ Finance (emphasis added).
2) Mr Chong submitted that at the time when the 2 Letters were signed, the privatization of Car Inc had not yet taken place, and yet the 2 Letters only contemplated and authorized a withdrawal of money, and not a transfer of shares from the State Frontier Account. As such, it was submitted that there was no intention to utilize the shares in State Frontier’s Account (as opposed to cash) to offset Wang Xu’s indebtedness. Moreover, the space as set out in the 2 Letters for the amount of money having been authorized to be transferred to CJ Securities was not yet filled out. It was therefore submitted that there was no concluded agreement.
DETERMINATION
16. The arrangement in place relied upon by the CJ Parties is one where Wang Xu is using the assets of State Frontier to repay his own debts. Ultimately the court needs to decide whether this arrangement falls into the category of ordinary course of business of State Frontier and whether the proposed payment from State Frontier in conflict with the principle underlying the Mareva jurisdiction.
17. I am of the view that the application to vary the Injunction in relation to the State Frontier Account ought to be dismissed for the following reasons:
1) I agree with Mr Chong’s submissions that the 2 Letters are not evidence of any concluded agreement between Wang Xu and the CJ Securities for the use of State Frontier’s assets to offset Wang Xu’s indebtedness. This conclusion is further supported by the fact that:
i) It was the CJ Parties’ evidence that despite the 2 Letters, the funds in the State Frontier Account had not yet been utilized to offset Wang Xu’s indebtedness because in anticipation of the price of the shares to go up, Wang Xu had requested that the Car Inc shares should not be liquidated at that time. This confirms that as at 29 November 2019 (when the 2 Letters were signed), there was not yet any concluded agreement between Wang Xu (for and on behalf of State Frontier) and CJ Securities conferring a right to utilize State Frontier’s assets to offset Wang Xu’s indebtedness. It was clearly accepted by the CJ Parties that the instructions of Wang Xu in the 2 Letters were subject to further instructions and directions from Wang Xu.
ii) The confirmation issued by CJ Asset and signed by Wang Xu dated 29 April 2020 (the “Confirmation”) only referred to the utilization of the charged shares to off-set the indebtedness of Wang Xu under the Promissory Note. There was no mention of the arrangement as provided for in the 2 Letters. The 2 Letters were dated 29 November 2019, before the Confirmation was signed. If there was truly an agreement in place for the CJ Parties to utilize the assets in the State Frontier Account to offset Wang Xu’s indebtedness by reason of the 2 Letters, the Confirmation would have also mentioned the utilization of the assets/proceeds in the State Frontier Account to offset Wang Xu’s indebtedness.
iii) In HCA 496/2021, an action commenced by CJ Finance on 31 March 2021 in relation to Wang Xu’s indebtedness under the Promissory Note (after the Injunction was obtained), only Wang Xu was named as a defendant, and not State Frontier. Mr Chong thus submitted, and I accept, that as at 31 March 2021 it was not yet CJ Finance’s case that they were entitled to use the proceeds in the State Frontier Account to offset Wang Xu’s indebtedness.
iv) Although the Car Inc Shares had been transferred to State Frontier’s account with CJ Securities, it is accepted by Mr Tso that they are still under State Frontier’s Account and are thus beneficially owned by State Frontier. There is thus no basis to allege that State Frontier had already parted with the 1.5 million shares of Car Inc on 19 December 2019.
2) In any event, even if I was wrong on the above conclusion, there are the following factual disputes as to the arrangement between Wang Xu, State Frontier and CJ Securities as set out in the 2 Letters such that it would not be possible for the court to accept at this juncture that a debt is owed by State Frontier to CJ Finance without a trial:
i) The authenticity of the 2 Letters;
ii) Whether the 2 Letters were created with a view to defraud State Frontier’s creditors, including the plaintiffs and are void under section 60 of the Conveyancing and Property Ordinance (Cap 219). CJ Finance denies knowledge of such breach and claims to be a bona fide purchaser for value.
iii) As the debts were not incurred by State Frontier, whether State Frontier has any obligation to repay CJ Finance, and whether there was any justification for Wang Xu to appropriate moneys belonging to State Frontier to discharge Wang Xu’s payment obligations.
iv) There is also dispute as to whether State Frontier belongs to Wang Xu beneficially. Upon the present application being taken out, Wang Xu has only indicated his neutral stance and has not expressly acknowledged that his debt is to be paid from State Frontier’s Account. Further, Wang Xu’s defence indicated that he had never disposed of securities held in State Frontier without instructions or agreement of Wang Tao (Wang Xu’s sister), as some of the investments were joint investments of himself and Wang Tao. This indicates that at least some of the assets in State Frontier do not belong beneficially to Wang Xu. The PRC Judgment dated 2 June 2020 also referred to State Frontier being controlled by Wang Tao. Whether the proceeds of the Car Inc shares in State Frontier’s Account beneficially belong to Wang Xu will need to be examined at trial.
3) Mr Tso submitted that the funds in the State Frontier Account had in fact already been utilized to set off Wang Xu’s indebtedness in the past. However, if Wang Xu was not entitled to use the funds in State Frontier to pay off his own debts, the fact that he had done so in the past would not lend legitimacy to similar subsequent arrangements.
4) Further, State Frontier is clearly one of the entities alleged to be involved in the scheme of fraud. Even if the CJ Parties are not part of the fraud and there is no suggestion that this was an attempt on their part of abuse through unwarranted dissipation of assets, the circumstances are such that allowing the application may inadvertently assist Wang Xu in decreasing his own personal indebtedness and evading justice by a disposition of State Frontier’s assets.
5) I am thus of the view that the arrangement for Wang Xu’s indebtedness to be repaid with State Frontier’s assets cannot be said to be in the ordinary course of State Frontier.
COSTS
18. Costs follow the event.
19. The CJ Parties have succeeded in their application to vary the Injunction to the effect that the 3rd - 5th Interveners are allowed to withdraw from the 5th Defendant’s account numbered: 1) 313 with the 4th Intervener; and 2) 1000028206 with the 3rd Intervener (the “D5 Account Variation Application”). The 1st and 2nd plaintiffs should logically therefore bear costs of such application up to and including the date when the 1st and 2nd plaintiffs first indicated that they would not object to such application.
20. However, I accept Mr Chong’s submission that the CJ Parties had failed to provide sufficient information to the plaintiffs prior to the Summons having been issued, so that the first opportunity of when the plaintiffs could consider the merits of the D5 Account Variation Application was when the CJ Parties filed the Summons and their affirmation in support. After that the plaintiffs had promptly indicated their neutral stance when the 8th affidavit of Mr Vrijmoed was filed on 7 December 2022. I therefore order that there be no order as to costs in relation to the D5 Account Variation Application.
21. As the CJ Parties have failed in their application to vary the Injunction to the effect that the 3rd - 5th Interveners be allowed to withdraw from the State Frontier’s Account (the “D6 Account Variation Application”), they should pay for the costs of and occasioned by such application to the 1st and 2nd plaintiffs, with certificate for counsel, to be summarily assessed, if not agreed.
22. For the avoidance of doubt, no part of the hearing time was devoted to the D5 Account Variation Application and the entirety of the hearing was devoted to the D6 Account Variation Application.
23. The above costs orders are orders nisi, which will become absolute if no application to vary is made within 14 days hereof.
ORDERS
24. I therefore grant the following orders:
1) For the purposes of their application to vary the Injunction, leave be granted to the 3rd - 5th Intended Interveners to participate in the present proceedings, such that:
i) the 3rd Intended Intervener will be the 3rd Intervener;
ii) the 4th Intended Intervener will be the 4th Intervener; and
iii) the 5th Intended Intervener will be the 5th Intervener.
2) Paragraph 1 of the Order dated 1 February 2021 granted by the Hon Coleman J, as extended by the Order of His Lordship on 19 February 2021 and varied by the Hon Anthony Chan J on 7 September 2021 and further continued by the Hon Coleman J on 17 February 2022 (the “Injunction”) be varied such that the 3rd - 5th Interveners be allowed to withdraw:
i) amounts standing to the credit to
ii) proceeds of securities and
iii) proceeds of bonds
held in the 5th Defendant’s account numbered:
a) 313 with the 4th Intervener
b) 1000028026 with the 3rd Intervener
to discharge the 5th Defendant’s obligation under the agreements as set out in the Schedule to the summons filed on 18 August 2022.
3) The application to vary the Injunction to the effect that the 3rd - 5th Interveners be allowed to withdraw:
i) amounts standing to the credit to
ii) proceeds of securities and
iii) proceeds of bonds
held in the 6th Defendant’s account numbered 102632500 with the 3rd Intervener to discharge the 5th Defendant’s obligation under the agreements as set out in the Schedule to the summons filed on 18 August 2022 be dismissed.
4) There be no order as to costs for the application to vary the Injunction to the effect that the 3rd - 5th Interveners be allowed to withdraw from the 5th Defendant’s account numbered: 1) 313 with the 4th Intervener; and 2) 1000028026 with the 3rd Intervener.
5) Costs of and occasioned by the application to vary the Injunction to the effect that the 3rd - 5th Interveners be allowed to withdraw from the 6th Defendant’s Account numbered 102632500 with the 3rd Intervener be paid by the 3rd - 5th Interveners to the plaintiffs, with certificate for counsel, to be summarily assessed, if not agreed.
6) The costs orders are orders nisi, which will become absolute if there is no application to vary them within 14 days hereof.
(Phoebe Man)
Deputy High Court JudgeMr Patrick Chong and Mr Brian Fan, instructed by Au & Vrijmoed, for the 1st and 2nd Plaintiffs
Attendance of Fangda Partners, for the 5th and 6th Defendants, was excused
Mr Anson Tso, instructed by Francis Kong & Co, for the 3rd, 4th and 5th Intended Interveners
[1] Commercial Injunctions (7th ed.) §21-003, 21-039
[2] A v C (No.2) [1981] QB 961 [P#3] at 963F per Goff J (as he then was)
[3] [2006] EWHC 602 (Comm)
[4] Gangway Ltd v Caledonian Park Investments (Jersey) Ltd [2001] 2 Lloyd’s Rep 715
[5] Gee, § 20.054
JIN JIANG INVESTMENT LTD v. 深圳市威廉金融控股有限公司 AND OTHERS
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HCA 196/2021
[2022] HKCFI 1068
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 196 OF 2021
________________________
BETWEEN JIN JIANG INVESTMENT LIMITED 1st Plaintiff SHUM TIN CHING trading as CHUANGSHENG
INTERNATIONAL INVESTMENT AND
MANAGEMENT CO. (formerly known as
JIN JIANG INVESTMENT AND MANAGEMENT CO.)2nd Plaintiff and
深圳市威廉金融控股有限公司 1st Defendant ZHANG WEI (张伟) 2nd Defendant WANG TAO (王涛) 3rd Defendant CHINA CREATE CAPITAL LIMITED 4th Defendant (中科創資本有限公司) WANG XU (王旭) 5th Defendant STATE FRONTIER LIMITED
(邦領有限公司)6th Defendant DENG YUMING (邓宇鸣) 7th Defendant BAIJIN LIMITED (百錦有限公司) 8th Defendant LIU JIANGYUAN (刘江湲) 9th Defendant BAIDA HOLDINGS LIMITED 10th Defendant XIAO SHU (肖述) 11th Defendant ENVISION GLOBAL INVESTMENTS LIMITED 12th Defendant LINKFUL SHARES LIMITED 13th Defendant KING PAK FU (景百孚) 14th Defendant SINO ESTEEM INVESTMENTS LIMITED 15th Defendant KE XUN (可恂) 16th Defendant EAGLE SEEKER COMPANY LIMITED 17th Defendant FENG CHANGGE (冯长革) 18th Defendant ACHIEVE BIG LIMITED 19th Defendant HAN SHUAI (韩帅) 20th Defendant ZHANG AIHUA (张爱华) 21st Defendant SWIFT FORTUNE INVESTMENTS LIMITED
(捷發投資有限公司)22nd Defendant CARNIVAL GROUP INTERNATIONAL HOLDINGS LIMITED
(嘉年華國際控股有限公司)23rd Defendant CARNIVAL GROUP (HONG KONG) HOLDINGS LIMITED
(嘉年華(香港)控股有限公司)24th Defendant SOUTH POINT GLOBAL LIMITED 25th Defendant LI MAO CHEN (李茂珍) 26th Defendant GIANT PROFIT ENTERPRISES LIMITED
(大盈企業有限公司)27th Defendant LEE TAI HAY DOMINIC (李大熙) 28th Defendant GLORY IMAGE INTERNATIONAL INVESTMENT LIMITED 29th Defendant LI YANG 30th Defendant WEN SHAOMIN (温少敏) 31st Defendant CHINA ECONOMIC HOLDING CO. LIMITED
(中經控股有限公司)32nd Defendant DAI YUMIN (戴昱敏) 33rd Defendant and
HAITONG INTERNATIONAL SECURITIES COMPANY LIMITED 1st Intervener HAITONG INTERNATIONAL PRODUCTS & SOLUTIONS LIMITED 2nd Intervener ________________________
AND
HCA 391/2021
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 391 OF 2021
________________________
BETWEEN HAITONG INTERNATIONAL PRODUCTS & SOLUTIONS LIMITED Plaintiff and
STATE FRONTIER LIMITED Defendant ________________________
(Heard together)
Before: Hon Coleman J in Chambers (Open to Public)
Date of Written Submissions: 9, 16, 21 and 25 March and 1 April 2022
Date of Decision: 22 April 2022
______________
D E C I S I O N
______________
A. Introduction
1. The current applications relate to the two sets of otherwise separate proceedings shown in the heading, on this aspect being heard together.
2. On 1 February 2021, in HCA 196/2021 (“196”), I granted an order (“Order”) which comprises (a) a Mareva injunction to prohibit the 2nd, 3rd, 4th, 5th and 6th Defendants from dealing with their assets to the ceiling figure of about HK$1 billion (“Mareva Injunction”), and (b) a proprietary injunction against the 4th, 5th and 6th Defendants in various amounts (“Proprietary Injunction”). The Order was last continued by me on 17 February 2022: see my Judgment [2022] HKCFI 378.
3. It is the 6th Defendant (“State Frontier”) which is relevant for present purposes because it is also the Defendant and judgment debtor in another action, HCA 391/2021 (“391”).
4. On 16 June 2021, in 391, the Plaintiff (“Haitong Products”), obtained judgment (“Judgment”) against State Frontier in the sum of US$64.7 million odd carrying with it a 20% annual interest, and costs (“Judgment Debt”). As it now stands, the Judgment Debt has run up to more than US$80 million.
5. From 28 July 2021 to 15 October 2021, Haitong Products obtained (a) two charging orders nisi (“COs Nisi”) and (b) two garnishee orders nisi (“GOs Nisi”) on the strength of the Judgment Debt. There were some hiccoughs with the COs Nisi (irrelevant for present purposes) and they were later amended.
6. The COs Nisi are attached to various listed shares held by different securities firms as custodians on behalf of State Frontier. One of those custodian firms is a group company of Haitong Products, which I shall refer to as Haitong Securities. The GOs Nisi garnish the debts owed to State Frontier by different financial institutions, i.e. the garnishees. Haitong Securities is also one of the garnishees.
7. Obviously the assets of State Frontier sought to be attached by the COs Nisi and the GOs Nisi are also exposed to the Injunction Order. But it bears emphasis that, on the face of it, only the Mareva Injunction component of the Order is relevant because none of the assets sought to be attached by the COs Nisi and GOs Nisi are caught by the Proprietary Injunction as it now stands.
8. By a consent summons dated 8 March 2021, Haitong Products and Haitong Securities (“Interveners”) applied to intervene in 196. That summons was granted 9 March 2021. The Interveners then issued a summons (“Variation Summons”) on 30 December 2021 for the purpose of varying the Order to enable the release of assets covered by the COs Nisi and GOs Nisi (i.e. for the Interveners to sell etc assets).
9. Because of the connection between the Variation Summons and the hearings for the COs Nisi and the GOs Nisi to be made absolute, the Variation Summons, COs Nisi and the GOs Nisi were directed by Master Phoebe Man to be heard together before me, and the date was originally fixed for 14 March 2022. Due to the intervention of the GAP, I subsequently vacated the hearing and directed paper disposal.
B. The Exchange of Written Submissions
10. The exchange of written submissions was more protracted than expected. I ended up having the benefit of 5 sets of written submissions, filed by either the Interveners or the Plaintiffs in 196. No other parties participated in the written exchange. The Interveners’ filed 3 sets of written submissions, all by Mr Justin Ho of Counsel. The Plaintiffs have provided 2 sets, with the latter by Mr Patrick Chong of Counsel, and the earlier one (contained in the form of a letter) by the solicitors’ firm representing the Plaintiffs but said to be upon the advice of Counsel.
11. On 9 March 2022, the Interveners filed the first set of submissions. As said, the assets covered by the COs Nisi and the GOs Nisi do not fall within the scope of the Proprietary Injunction. Mr Ho emphasised the starting point that Haitong Products, as the judgment creditor, is entitled to enforce the Judgment by way of the COs Nisi and the GOs Nisi and the well-established Angel Bell principle that a Mareva injunction does not confer proprietary rights on the enjoined assets nor improve the position of the claimant. The assets enjoined remain the asset of the defendant to the Mareva Injunction.
12. On 16 March 2022, at 4.30 pm (which was after the already extended deadline), the Court received a faxed letter from the Plaintiffs’ solicitors, stating that (my emphasis):
As advised by counsel, inter alia, the 1st and the 2nd Plaintiffs have a proprietary claim in respect of the sum of HK$117,000,000.00 transferred to the 6th Defendants’ account maintained with the Industrial Bank Co. Ltd (see paragraph 2(1)(c) of the Injunction Order dated 1 February 2021 – Bundle A page 4). It is the 1st and the 2nd Plaintiff’s position that all or part of the amount of HK$117,000,000 may have been used by the 6th Defendant to purchase the shares which are now subject to the Charging Orders Nisi obtained by the 1st and the 2nd Interveners.
In order to properly ascertain the matter the 1st and the 2nd Plaintiffs will seek discovery against the 6th Defendant and a Summons will be issued within the next 7 days and we will invite his Lordship to deal with such discovery application.
In the circumstances, we respectfully submit that the hearing be adjourned sine die with liberty to restore pending the outcome of the 1st and the 2nd Plaintiffs discovery application as mentioned above.
13. The bank account mentioned in the letter – the account held with Industrial Bank and credited to State Frontier (“Industrial Bank Account”) – is covered by the 1st GO Nisi granted on 28 July 2021.
14. In the 16 March 2022 letter, the Plaintiffs seemed to suggest that it may have a competing claim to (a) the money in the Industrial Bank Account because it was covered by the Proprietary Injunction component of the Order; and (b) the listed shares covered by the 2 COs Nisi because they might be the traceable substitutes from the Industrial Bank Account.
15. A few observations could be made about this letter. First, the letter suggests that the Industrial Bank Account is covered by the Proprietary Injunction as shown in §2(1)(c) of the Order. But there is no mention of the Industrial Bank Account in §2(1)(c), which reads:
The HK$117,900,000.00 transferred from Baijin Limited to the 6th Defendant [State Frontier] pursuant to the cheque dated 6 June 2017 (no. 000128) [“Cheque Money”]
16. Though perhaps not the biggest point, the figures are also slightly different: HK$117.9 million in the Order against HK$117 million in the letter.
17. Second, the Plaintiffs’ ‘position’ – that the money deposited into the Industrial Bank Account may have been used to purchase the shares now subject to the COs Nisi – is stated in the form of a speculative possibility rather than a positive case. The relevant shares which could be said to be traceable are not even identified, let alone was any attempt made to explain and substantiate the necessary tracing.
18. Third, the Plaintiffs were all along represented by the same solicitors’ firm and they knew at the latest by July 2021, from other court documents previously filed in 196, that (a) the Industrial Bank Account had been closed and (b) the Cheque Money could be traced no further than to some HK$200 million worth of shares in a listed company known as Jiayuan International Group Limited (“Jiayuan Shares”). They also knew at the latest by 7 December 2021 that the Jiayuan Shares were no longer held by State Frontier. Such knowledge was confirmed by the Plaintiffs in their affirmation (“DV 3rd”) filed on 25 March 2022 for the purpose of the Variation Summons. They did not impart such information to the Interveners until 25 March 2022.
19. Third, the Plaintiffs said it would apply for discovery within 7 days from the date of the letter. Yet, it seems that no discovery has been applied for even as of now.
20. On 21 March 2021, the Interveners filed the second set of written submissions. Mr Ho emphasised that despite the fact that the Plaintiffs were made aware of the Interveners’ intended variation application by the Interveners’ letter dated 10 September 2021 and the various subsequent correspondence:
(1) the 16 March 2022 letter was the first time for the Plaintiffs to indicate their intention to make a discovery application or to seek to adjourn the matters sine die;
(2) it was also the first time the Plaintiffs sought to raise a proprietary claim to the shares subject to the COs Nisi;
(3) even for the Industrial Bank Account, the Plaintiff has not provided any evidence to show how the Cheque Money could be traced to it – as said, the Interveners were not served with the prior court documents filed in 196 and by 21 March 2022, the Plaintiffs had not yet filed DV 3rd;
(4) no steps including any discovery application have been taken by the Plaintiffs to establish the necessary proprietary link between the Cheque Money and the shares subject to the COs Nisi;
(5) there was a lack of particulars and, still less, evidence to show the Plaintiff’s proprietary claim in shares subject to the COs Nisi.
21. Based on the substantial delay on the Plaintiffs’ part and the lack of evidence on the Plaintiff’s proprietary claim, Mr Ho invited the Court to refuse the Plaintiffs’ request to adjourn the matters sine die.
22. By letter dated 22 March 2022 issued to the parties, I indicated that, based on the chronology of the proceedings and the materials available thus far, I was not prepared to grant an open-ended adjournment pending a discovery application yet to be issued. Nor was it necessarily clear that the intended application would be materially significant, let alone determinative, in dealing with the current substantive matters before the Court. I, in effect, directed a further round of written submissions from the parties (first to be filed by the Plaintiffs). I also indicated that if it is said that the current substantive matters could not be properly determined without further information available to Court, if such information is to be obtained and however it is to be obtained, that can form part of the submissions.
23. On 25 March 2022, Mr Chong filed a set of written submissions on behalf of the Plaintiffs. For the first time, the Plaintiffs submitted that the proper way forward is to order a trial proper before a Master to resolve the supposed competing claims in not only the shares covered by the COs Nisi (as put forward in the 16 March 2022 letter) but also the moneys subject to the GOs Nisi. Also for the first time, the Plaintiffs explained how the missing proprietary link might look: the sale proceeds of the Jiayuan Shares might have been used to purchase the shares now subject of the COs Nisi (or which found their way into the GOs Nisi). Mr Chong submitted that it is not “clearly unarguable”:
If the Plaintiffs are given an opportunity to carry out the tracing exercise, it is possible that the evidence might reveal that the sale proceeds of the shares had been spent elsewhere. On the other hand, it is also possible that they have found their way in the subject accounts and identified by the Interveners. The shares and the moneys in the subject accounts could have been bought by State Frontier using the sale proceeds of the shares. Is that clearly unarguable? The Plaintiffs submit the question should be answered in the negative.
24. It was also admitted in the written submissions that the Plaintiffs have not yet provided any substantive evidence for their claim, though that is said to be excusable because they do not have access to State Frontier’s documents.
25. Late on 25 March 2022, the Plaintiffs also filed DV 3rd and the Interveners were informed for the first time that prior court documents in 196 had shown that the Cheque Money subject to the Proprietary Injunction was once deposited into the Industrial Bank Account before it was later withdrawn to purchase the Jiayuan Shares. The Interveners requested a very short extension of time on the ground of this evidence (understandably new to them) which was granted.
26. On 1 April 2022, Mr Ho filed his third written submissions. The thrust of his argument is that a trial should only be ordered if the Plaintiffs have shown sufficient evidential basis for their claim, and they have not done so.
C. The COs Nisi, GOs Nisi and Parties’ Current Stands
27. There are two GOs Nisi. The respective garnishee of each GO Nisi is required to pay the judgment creditor of 391 (i.e. Haitong Products) the debt owed by the garnishee to the judgment debtor (i.e. State Frontier) to meet the Judgment Debt and the costs of the garnishee proceedings.
28. The 1st GO Nisi was obtained on 28 July 2021. The garnishee is Industrial Bank. As said, the Industrial Bank Account had been closed already and it is the Plaintiffs’ position, as stated in Mr Chong’s written submissions, that they would now adopt a neutral stance towards the 1st GO Nisi.
29. The 2nd GO Nisi was obtained on 1 September 2021. The garnishee is Haitong Securities. State Frontier maintains 3 accounts with Haitong Securities, referred to by the Interveners as the “30 Cash Account”, the “31 Cash Account” and the “Margin Account”. State Frontier held cash and/or shares in these accounts and it is the cash in the accounts which are garnisheed by the 2nd GO Nisi.
30. The COs Nisi, when made absolute, will have the effect of charging State Frontier’s beneficial interest in the assets with the payment of the Judgment Debt and the costs of the charging order proceedings.
31. The 1st CO Nisi was obtained on 28 July 2021 and amended on 30 November 2021. It covers various shares listed in Hong Kong held in the custody of Haitong Securities.
32. The 2nd CO Nisi was obtained on 15 October 2021, and amended on 30 November 2021. It covers various shares listed in Hong Kong held in the custody of two other financial institutions, namely CCB International Securities Limited (“CCBI”) and China Merchants Securities (HK) Co Ltd (“CMS”).
33. Except for the 1st GO Nisi (which covers the now closed Industrial Bank Account), the Plaintiffs assert a potential proprietary claim to all the debts and/or shares covered by the 2nd GO Nisi and the two COs Nisi.
34. The other potentially interested parties’ positions are as follows:
(1) As stated in its lawyers’ letter dated 3 March 2022, State Frontier has adopted a neutral stance to the Variation Summons. It can also be noted that it did not file an intention to defend in 391 and the Interveners obtained default judgment against it.
(2) Industrial Bank, the garnishee in the 1st GO Nisi, has made no appearance so far.
(3) Haitong Securities, the garnishee in the 2nd GO Nisi, is also one of the interveners issuing the Variation Summons.
D. Haitong Securities and its General Lien
35. The Interveners claim two legal bases for the Variation Summons: (1) the COs Nisi and GOs Nisi obtained in favour of Haitong Products; (2) a “general lien” which is said to have arisen in favour of Haitong Securities by the agreements entered into between itself and State Frontier when the latter opened the 3 accounts with it.
36. The COs Nisi and GOs Nisi already cover all the moneys and shares which the Interveners sought to free from the Order, as identified in §2 of the Variation Summons.
37. The general lien only covers the moneys and shares which are kept in State Frontier’s accounts with Haitong Securities. The lien serves as an additional legal basis for these items because they are already covered by the 2nd GO Nisi (for money) or the 1st CO Nisi (for shares).
38. That may be said to be the other reason why Haitong Securities is also made an intervener, despite the GOs Nisi and COs Nisi are not to be enforced for its benefit, besides indicating its support for the application as one of the garnishees and the entity having possession of the assets sought to be charged.
39. The effect of the general lien is a subject of contention between the parties. Mr Ho submitted in his 1st written submissions that Haitong Securities’ general lien over assets under its control gave rise to a proprietary interest in favour of Haitong Securities and would enable it, under the relevant contractual terms, to sell such assets to settle the Judgment Debt owed to Haitong Products. By his 3rd written submissions, Mr Ho accepted that the interest arising from the general lien (and also the interest underscored by the COs Nisi and GOs Nisi) will not take priority over the Plaintiff’s asserted proprietary claim (if proved). Whilst not put in such terms, that is an acceptance that the lien cannot further strengthen the Interveners’ case beyond what the COs Nisi and the GOs Nisi could do.
40. I shall try to deal with the lien argument as economically as possible.
41. The Terms and Conditions of the 3 accounts maintained by State Frontier with Haitong Securities contain the following:
In addition and without prejudice to any general liens, rights of set-off or other similar rights to which the Company [i.e. Haitong Securities] may be entitled under the law or this Agreement, all securities, receivables monies (in any currency) and other property of the Client [State Frontier] (held by the Client either individually or jointly with others) held by or in the possession of the Company at any time shall be subject to a general lien in favour of the Company as continuing security to offset and discharge all of the Client’s obligations, arising from the business of dealing in securities or otherwise, to the Company and any of the Company’s group Companies [which includes Haitong Products]
42. Mr Ho submitted that the lien confers on Haitong Securities a proprietary interest in the assets held in those accounts and allows it to sell them in settlement of the Judgment Debt owed to its group company, Haitong Products.
43. Mr Chong pointed out that (1) the lien is a contractual lien which only gives rise to a security interest but not a proprietary interest in common law, (2) lien is a form of possessory security and Haitong Products does not have a lien over assets which are in the possession of Haitong Securities, and (3) if the assets in the accounts of Haitong Securities were stolen assets, it is difficult to see how the Interveners may have any interests over them.
44. I shall deal the three points in reverse order. The last point could be readily disposed of. It was a mere speculation that those assets might have been stolen assets. There is neither particulars nor evidence for such assertion.
45. Mr Ho, as he re-emphasised in his latest written submissions, does not claim that Haitong Products has the lien over assets in the possession of Haitong Securities. The lien is conferred on the latter, but he said Haitong Securities is allowed to sell the assets covered by the lien to settled Haitong Products’ Judgment Debt.
46. As to whether the lien has given rise to any sort of proprietary interest (as opposed to ‘security interest’ in Mr Chong’s words), this question has subsided since Mr Ho has already conceded that if the Plaintiffs are able to prove a proprietary right over the assets, such interest will take prior to the Interveners’ lien. In this case, there is no need for the Court to entertain the issue on the true nature of the interest arising from the lien.
E. The Competing Claims between Haitong Products and Plaintiffs
47. The basis of Haitong Products’ claim to the assets held under State Frontier’s name is straightforward. The claim arises from the Judgment obtained in Haitong Products’ favour and which has now given rise to the COs Nisi and the GOs Nisi.
48. In his first written submissions, Mr Ho submitted that the granting of COs Nisi and GOs Nisi, even before they are made absolute, would have already created some sort of proprietary rights:
(1) For the COs Nisi, he relied on the principle that a charge imposed by a charging order will have effect and will be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing under his hand: see Hong Kong Civil Procedure 2022 (“HKCP 2022”), Note §50/9A/17.
(a) For the GOs Nisi, he submitted that the service of a garnishee order nisi would create an equitable charge over the debt in question due to the judgment debtor, citing HKCP 2022, Note §49/3/3.
49. These submissions were made before Mr Ho was informed that now the Plaintiffs assert a possible proprietary claim over the assets subject to the GOs Nisi and the COs Nisi. As Mr Ho has fairly accepted in his 3rd written submissions, if the Plaintiffs are able to prove that they have a proprietary interest (which as a matter of chronology must have arisen before the COs Nisi and the GOs Nisi were granted), their interests will take priority over the Interveners’ interests. As a corollary, the GOs Nisi and the COs Nisi should be discharged rather than made absolute.
50. If the Plaintiffs fail to demonstrate a proprietary interest in the assets now covered by the GOs Nisi and the COs Nisi, Mr Chong has accepted the settled law that a Mareva injunction does not grant the plaintiff any proprietary interest and will not improve the plaintiff’s position as against other creditors. A Mareva injunction could thus be varied to allow payment out of the enjoined assets for the purpose of satisfying the defendant’s judgment debts owed to third parties: see Iraqi Ministry of Defence v Arcepey Shipping Co SA(The ‘Angel Bell’) [1981] 1 QB 65 at 72, and Great Silver Investment Ltd v Sky Trend Global Ltd[2020] HKCFI 2987, at §§7 and 16.
51. Thus, the basis of Haitong Products’ claim rests on the Judgment Debt, rather than the COs Nisi and the GOs Nisi. The latter could not give Haitong Products any proprietary interests which could be capable of ranking higher than the Plaintiffs’, if they could show a proprietary interest in the relevant assets.
52. As it now stands, the assets covered by the COs Nisi and the GOs Nisi are not caught by the Proprietary Injunction. The Plaintiffs’ “case” is that the Cheque Money covered by the proprietary injunction might somehow have found its way into the assets enjoined by the Mareva Injunction.
53. It is of note that:
(1) The particular assets which are said to be capable of tracing to the Jiayuan Shares are not identified.
(2) The routes and details by which such assets are to be traced to the Jiayuan Shares are not identified.
(3) The Court is informed of no more than that “the shares and moneys in the subject accounts could have been bought by State Frontier using the sale proceeds of the [Jiayuan Shares]”.
(4) There is admittedly no evidence to substantiate the Plaintiffs’ “case”. As noted, the Plaintiffs’ “case” is not even a positive case in that they can only state such a case as a mere possibility without committing to such a position.
F. The Proper Procedural Way Forward
F1. The two stages for garnishee and charging order applications
54. Garnishee orders and charging orders are enforcement methods available only to enforce judgment debts. The procedural rules governing garnishee applications and charging order applications are found in RHC Order 49 and Order 50 respectively.
55. Both types of applications follow a two-stage approach. In the first stage, a nisi order is to be sought by the judgment creditor on an ex parte basis: see Order 49 rule 2 and Order 50 rule 1.
56. The nisi order obtained from the first stage is formally known as a “Notice to Show Cause”. It will be stated in the standard form for the respective nisi order that, unless sufficient cause is shown on why the nisi order should not be made absolute in the hearing fixed for the nisi order, the nisi order will be made absolute. The nisi order must be served on the judgment debtor and the garnishee in the case of a garnishee order. The Court may also direct service of the charging order nisi on other creditors of the judgment debtor or other interested persons: see Order 49 rules 1 and 3 and Order 50 rules 1 and 2.
57. In the second stage, the Court has to exercise its discretion in determining whether the order nisi should be made absolute. For garnishee orders, if the garnishee makes no appearance or does not dispute the debt claimed to be due from it, the Court may make absolute the order nisi: see Order 49 rule 4. For charging orders, the Court has the power to made absolute the nisi order or to discharge it upon further consideration: see Order 50 rule 3.
F2. Resolving claims from third parties
58. Both types of proceedings anticipate that there may be other parties having an interest in the assets sought to be attached by the charging order or the garnishee order.
59. In the case of a garnishee order, there is express provision governing third party claims. Order 49 rule 6 provides:
(1) If in garnishee proceedings it is brought to the notice of the Court that some other person than the judgment debtor is or claims to be entitled to the debt sought to be attached or has or claims to have a charge or lien upon it, the Court may order that person to attend before the Court and state the nature of his claim with particulars thereof.
(2) After hearing any person who attends before the Court in compliance with an order under paragraph (1), the Court may summarily determine the questions at issue between the claimants or make such other order as it thinks just, including an order that any question or issue necessary for determining the validity of the claim of such other person as is mentioned in paragraph (1) be tried in such manner as is mentioned in rule 5 [which provides for a trial before a master].
60. Mr Chong submitted that the Court has not yet even called upon the Plaintiffs to attend the Court and state the nature of their claim as required by Order 49 rule 6(1). But I agree with Mr Ho that it is disingenuous for the Plaintiffs to claim that they have not yet been called upon to state the nature of their claim, when they have already filed two rounds of submissions to the Court and already proposed two different ways as to how the COs Nisi, GOs Nisi and the Variation Summons could be dealt with. I also agree with Mr Ho that Order 49 rule 6(1) only gives the Court power to order the third party to attend Court, but it does not impose a duty on the Court to do so: see Goodpoint Holdings Ltd v Seabrook [1997] 2 HKC 541, at 545 to 546.
61. The fact is the Plaintiffs were given ample opportunity to make submissions, and they did make submissions for the purpose of the hearing originally fixed on 14 March 2022 for the GOs Nisi (and the COs Nisi and the Variation Summons). It is now for the Court to determine if it should summarily determine the dispute, direct a trial under Order 49 rule 6(2), or perhaps give some other directions.
62. For a charging order, Order 50 rule 3(1) provides that after the granting of the order nisi, the Court shall either make the order absolute, with or without modification, or discharge it. Whilst the text of Order 50 rule 3(1) does not expressly provide other options other than the two stated, the Court has held that if there is dispute on whether the judgment debtor has held any beneficial interest in the property sought to be charged, the Court can also direct the issue to be tried: see Po Kwong (China) Stone Ltd v Cheung Wai Wah (unreported, CACV 157/2004), also cited in HKCP 2022 Note §50/3/1.
63. Mr Chong relied on the commentary from HKCP 2022 Note §50/3/1 and submitted that unless the Plaintiffs’ argument is “clearly unarguable”, the Court shall order a trial to resolve the dispute. The commentary was taken from the Po Kwong (supra) case. There, Cheung JA stated at §§11-12:
11. Although Rule 3 seems to suggest that the only choice that is available to the court on the further consideration of the case is to impose the charging order absolute or to discharge the charging order nisi, the English courts have interpreted the provisions in such a way as to allow the court to direct an issue to be tried on whether the judgment debtor in fact holds any beneficial interest in the property sought to be charged. In Rosseel N. V. v. Oriental Commercial and Shipping (UK) Ltd. and others (Hearing date 8 October 1991 Lexis Nexis Transcript) Parker LJ of the English Court of Appeal stated that
‘Where there is a real dispute, it is, as it seems to me, necessary in order to do justice that an issue should be tried and the court can in the exercise of his power to regulate its own procedure direct such issue.’
In that case a dispute arose on the beneficial ownership of the charged property.
12. We will respectfully adopt the same approach as well. In an usual case, unless the matter is clearly unarguable, the question as to whether a registered owner of a piece of land is holding the beneficial interest on trust for someone who provided the purchase price can only be resolved by a trial. We do not see why there should be any difference in approach when the judgment creditor is applying for a charging order. In our view the defendant has provided sufficient evidence for the issue to be tried. She has produced sufficient evidence to show the mother paid for the deposits and for a substantial period, the mother paid for the mortgage repayment. This is not a case that can be determined on affidavit evidence alone. What the defendant and her mother said on affidavit must be tested in cross examination.
64. Clearly, the third party has to show sufficient evidence to assert his proprietary claim in the assets sought to be charged before the Court directs the dispute to be tried.
65. A similar sentiment could also be seen in the case of garnishee proceedings. In Fubon Bank (Hong Kong) Ltd v First Prime Group Ltd [2009] 4 HKLRD 283 at §49, Saunders J ruled that a garnishee order nisi should not have been made absolute but a trial should be directed to resolve the claim from a third party who had shown a “sufficient claim”.
F3. Have the Plaintiffs shown a sufficient claim?
66. As already noted, the Plaintiffs do not have a positive case they can assert. Still less is there any evidence to substantiate a case. The Plaintiffs ask for a trial, but not for the purpose of proving that they have a proprietary interest in any identified assets. They are not ready or able to commit to a firm position. Rather, they seek to assert a claim based upon an assertion that they might have a proprietary claim.
67. In our adversarial system, there can be no trial when the supposed claimant itself cannot put forward a positive case of what the truth is. To put it in a different way, any pleading along the lines of the Plaintiff’s current position – that they may have an unidentified proprietary interest in some unspecified assets arising from or by some unknown tracing route or exercise – would not lead to a trial, but likely to that pleading being struck out.
68. The Plaintiffs have so far failed to show a sufficient claim to order a trial under Order 50 or Order 49. This is despite the fact that the Plaintiffs have had the opportunity and time to investigate and to gather sufficient evidence for a positive case to be asserted. The fact that they have not yet done so seems to be due to their own insufficient action, or inaction, as will be further explained below.
G. Delay and the Plaintiffs’ overall conduct
69. The Plaintiffs were made aware of the Interveners’ intention to apply for the Variation Summons as early as 10 September 2021.
70. They were aware that their claim in the Cheque Money (of which they have proven only a triable issue) could only be traced at best to the Jiayuan Shares. By 7 September 2021, they had already known that the Jiayuan Shares were no longer in State Frontier’s possession. Indeed, by 30 July 2021, they were already aware of State Frontier’s position that most of the Jiayuan Shares were “liquidated” in January 2019 to meet the margin call.
71. Clearly, the Plaintiffs knew all along that they would have to obtain evidence to establish the proprietary link from the Jiayuan Shares to any assets over which they were minded to make a proprietary claim. Yet, nothing has been done. No discovery application has been taken out even as of the date of this judgment.
72. The Plaintiffs’ conduct in these proceedings are also far from satisfactory:
(1) In September 2021, they only informed the Interveners that they had a proprietary claim in the money in the Industrial Bank Account, without providing evidence to the Interveners to show how the Cheque Money identified in the Order could be traced to the Industrial Bank Account. Despite the Interveners’ chasing for particulars and evidence, no evidence at all was provided to the Interveners until 25 March 2022 in DV 3rd.
(2) The Plaintiffs only claimed to have a proprietary interest (on an unknown basis) in the shares now subject to the COs Nisi for the first time in the 16 March 2022 letter.
(3) The Plaintiffs’ claim only extended to cover the moneys now subject to the GOs Nisi for the first time in Mr Chong’s submissions filed on 25 March 2022.
(4) The lack of clarity and belated disclosure of the Plaintiffs’ position have caused some wasted efforts on the Interveners’ side and were not conducive to the settlement of disputes in an economical and expeditious manner.
73. The Plaintiffs have sought to excuse their delay. But I do not accept there is any great weight in the excuses advanced on their behalf:
(1) The Plaintiffs complained that they had sought the underlying documents in 391 as early as October 2021 but the documents were only provided to them on 7 March 2022. Whilst it might have been preferable for the Interveners to have provided the 391 documents to the Plaintiffs earlier, the 391 documents are plainly not really relevant to whether the Plaintiffs could establish their own proprietary claim.
(2) The Plaintiffs said their case had always been a proprietary claim since September 2021. However, a claim to the money held in the Industrial Bank Account and a claim in other assets subject to the COs Nisi and GOs Nisi are different claims.
(3) The Plaintiffs said they were busy preparing for the injunction hearing heard before me on 16 December 2021. This is not a powerful excuse.
(4) The Plaintiffs only knew that the Order would be continued when the judgment for the injunction hearing was released on 17 February 2022. That may strictly be so. But this seems to mean that the Plaintiffs could only determine if the COs Nisi and the GOs Nisi are worth contesting from a commercial perspective after they have learned whether the Injunction Order would be continued. I am sure that the Plaintiffs would have their own reasons for choosing not to act until now. But this does not mean the Interveners, who obviously had decided that the Judgment Debt was worth pursuing and had pursued it with reasonable efforts, should be jeopardized.
(5) The Plaintiffs point out that the Interveners’ underlying claim in 391 arose as early as April 2020 and yet they had only instituted proceedings in March 2021. The Plaintiffs said the Interveners delayed for one year. But for the Order, the Plaintiffs would probably have the GOs Nisi and COs Nisi made absolute and the Judgment enforced within two years after Haitong Products’ claim arose. But I do not think that could be criticized as unduly slow.
(6) The Plaintiffs point out that apparently no application for service out was made by Haitong Products, despite State Frontier being an overseas company. They said they have decided not to take issue on the merits and will leave it to the Interveners to address the Court. It is not clear to me how this is relevant to the Plaintiff’s own proprietary claim. In any event, I take note that (1) the Court in 391 must have been satisfied of due service of the writ before it entered default judgment in favour of Haitong Products, and (2) State Frontier has been represented by Fangda Partners who wrote to the Court by letter dated 9 March 2022 to indicate a neutral stance in the Variation Summons.
H. Further Considerations
74. In light of the facts that (1) the judgment debtor, State Frontier, has adopted a neutral stance, (2) the garnishee has either made no appearance or is one of the interveners, (3) the Plaintiffs have no positive case as it now stands, and (4) as to the Plaintiffs’ delay and overall conduct in the matter, I certainly could exercise my discretion to order that the COs Nisi and the GOs Nisi be made absolute and the Variation Summons be granted.
75. But to do so, would in the overall circumstances of these two sets of proceedings, leave me with some sense of disquiet. Though Mr Chong has focused on the phrase “not clearly unarguable” to describe the Plaintiffs’ position, it might better be described by saying that it is certainly not inconceivable that some of the assets held by State Frontier (whether in the form of listed shares or cash) is the traceable product of the Cheque Money, the original target of the Proprietary Injunction.
76. To put it another way, it has been possible to trace the Cheque Money into the Jiyuan Shares, and it seems that those shares have been disposed of – presumably for some monetary or other economic return. At the same time, the particular sources of the assets now held by State Frontier – and subject to the Mareva Injunction – are unclear (where State Frontier itself may have little incentive to provide any particular clarity). Further, where it has been properly accepted that any proprietary claim which the Plaintiffs might have would take priority over Haitong Products’ Judgment and the COs Nisi and GOs Nisi, there is a possibility of injustice if it were later to be identified that the plaintiffs’ suggested proprietary claim is good.
77. One suggestion put forward by the Plaintiffs was that they would not oppose the current applications, in return for an undertaking that, should they succeed in establishing a proprietary claim over assets received by Haitong Products as a result of the applications, those assets would be returned. I have considered whether I could make an order to similar effect, but I do not think that that would be appropriate.
78. I have also already pointed out, when giving directions, that some sort of general adjournment is not an attractive case management option. To be blunt, unless the Plaintiffs can put forward a realistic prospect of a properly identified and non-demurrable proprietary claim which can be adjudicated, and can do so within a rather short period, I see no reason to keep Haitong Products out of the fruits of the Judgment.
79. But, overall, I think it only fair and appropriate for the Plaintiffs to be given a last opportunity to take – if they wish to – the relevant steps as might enable them to formulate a proper proprietary claim for adjudication.
I. Result
80. Therefore, I make the following orders:
(1) Unless by 5pm on 29 April 2022 the Plaintiffs in HCA 196/2021 issue and serve, and notify to the Plaintiff in HCA 391/2021 and to this Court, an application seeking relevant discovery for the purposes of tracing the proceeds of the sale of the Jiyuan Shares:
(1) the COs Nisi and the GOs Nisi shall be made absolute; and
(2) an order shall be made in terms of the Variation Summons.
(2) For the avoidance of doubt, if the Plaintiffs in HCA 196/2021 failed to comply with the ‘unless’ step set out in paragraph 1 above, the consequential orders will be made without the need for further order of the Court.
(3) If the Plaintiffs in HCA 196/2021 comply with the ‘unless’ step set out in paragraph 1 above, the applications for the COs Nisi and the GOs Nisi to be made absolute and the Variation Summons shall be adjourned to a mention hearing at 9.30am on 14 July 2022 (with 30 minutes reserved).
(4) The only parties expected to attend the mention hearing will be the Plaintiffs in both actions HCA 196/2021 and HCA 391/2021 and the Interveners, and all other parties’ attendance will be excused.
81. I further specifically reserve the right to make whatever orders seem to me to be appropriate in the circumstances prevailing at the time of the mention hearing.
82. In circumstances where, but for a final grant to the Plaintiffs of the indulgence of time, I would have made the orders sought by the Interveners – and where the operation of the unless order made may yet lead to the consequential orders – it seems to me that the proper costs order to make in the exercise of my discretion is that the costs of these applications (to date) be to the Interveners, payable by the Plaintiffs in HCA 196/2021, to be taxed if not agreed. However, I shall in the first instance make that costs order on a nisi basis, to be made absolute if no variation application is made within 14 days. Any variation application will be dealt with on paper.
(Russell Coleman) Judge of the Court of First Instance High Court Mr Patrick Chong, instructed by Au & Vrijmoed, for the plaintiffs in HCA 196/2021
Mr Justin Ho, instructed by DLA Piper, for the interveners in HCA 196/2021 and the plaintiff in HCA 391/2021
JIN JIANG INVESTMENT LTD AND ANOTHER v. 深圳市威廉金融控股有限公司 AND OTHERS
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HCA 196/2021
[2022] HKCFI 378
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 196 OF 2021
________________________
BETWEEN
JIN JIANG INVESTMENT LIMITED 1st Plaintiff SHUM TIN CHING trading as CHUANGSHENG
INTERNATIONAL INVESTMENT AND
MANAGEMENT CO. (formerly known as
JIN JIANG INVESTMENT AND
MANAGEMENT CO.)2nd Plaintiff and 深圳市威廉金融控股有限公司 1st Defendant ZHANG WEI (张伟) 2nd Defendant WANG TAO (王涛) 3rd Defendant CHINA CREATE CAPITAL LIMITED
(中科創資本有限公司)4th Defendant WANG XU (王旭) 5th Defendant STATE FRONTIER LIMITED
(邦領有限公司)6th Defendant DENG YUMING (邓宇鸣) 7th Defendant BAIJIN LIMITED (百錦有限公司) 8th Defendant LIU JIANGYUAN (刘江湲) 9th Defendant BAIDA HOLDINGS LIMITED 10th Defendant XIAO SHU (肖述) 11thDefendant ENVISION GLOBAL INVESTMENTS LIMITED 12th Defendant LINKFUL SHARES LIMITED 13th Defendant KING PAK FU (景百孚) 14th Defendant SINO ESTEEM INVESTMENTS LIMITED 15th Defendant KE XUN (可恂) 16th Defendant EAGLE SEEKER COMPANY LIMITED 17th Defendant FENG CHANGGE (冯长革) 18th Defendant ACHIEVE BIG LIMITED 19th Defendant HAN SHUAI (韩帅) 20th Defendant ZHANG AIHUA (张爱华) 21st Defendant SWIFT FORTUNE INVESTMENTS LIMITED
(捷發投資有限公司)22nd Defendant CARNIVAL GROUP INTERNATIONAL
HOLDINGS LIMITED
(嘉年華國際控股有限公司)23rd Defendant CARNIVAL GROUP (HONG KONG)
HOLDINGS LIMITED
(嘉年華(香港)控股有限公司)24th Defendant SOUTH POINT GLOBAL LIMITED 25th Defendant LI MAO CHEN (李茂珍) 26th Defendant GIANT PROFIT ENTERPRISES LIMITED
(大盈企業有限公司)27th Defendant LEE TAI HAY DOMINIC (李大熙) 28th Defendant GLORY IMAGE INTERNATIONAL
INVESTMENT LIMITED29th Defendant LI YANG 30th Defendant WEN SHAOMIN (溫少敏) 31st Defendant CHINA ECONOMIC HOLDING CO. LIMITED
(中經控股有限公司)32nd Defendant DAI YUMIN (戴昱敏) 33rd Defendant ________________________
Before: Hon Coleman J in Chambers (Open to Public)
Date of Hearing: 16 December 2021
Date of Judgment: 17 February 2022
________________________
J U D G M E N T
________________________
A. Introduction
1. The core facts of this case are straightforward. The Plaintiffs together transferred to various Defendants the total sum of HK$1,029,000,000 (“the HK$1 billion”), which was never returned, either as funds or as value in any other form. The parties’ dispute lies in the original reason for the transfer and whether there was any obligation for return.
2. In this Judgment, references to numbered plaintiffs and defendants will either be by a given definition or to, for example, “P1”, “P2”, “D23”, “D24” etc.
3. On 1 February 2021, on the ex parte applications of P1 and P2 (together “Ps”), I granted the following orders (“Order”): (1) a Mareva injunction prohibiting the D2-D6 (“Zhang”, “Wang Tao”, “China Create”, “Wang Xu”, and “State Frontier” respectively) from dealing with their assets to the ‘ceiling figure’ of the HK$1 billion; and (b) a proprietary injunction against China Create, Wang Xu and State Frontier in various amounts.
4. By summons dated 2 February 2021, Ps applied for continuation of the Order against Zhang, Wang Tao, China Create, Wang Xu and State Frontier (“Continuation Summons”). Save as regards Zhang, who has not been taking an active part in these proceedings, the Continuation Summons is opposed. The opposition is predicated on every typical argument, namely: (1) the Order was wrongfully obtained ex parte, without justification for proceeding on that basis; (2) there was serious material non-disclosure; (3) Ps have shown no serious issue to be tried (let alone a good arguable case); (4) there is no demonstrable risk of dissipation; and (5) on the balance of convenience, the Order should be set aside or discharged.
5. By summons dated 30 July 2021, China Create applied – as an alternative to the opposition to the Continuation Summons – to vary the terms of the Order (“Variation Summons”). The variation sought is solely to enable China Create to fulfil the condition imposed by the Court of Appeal in another action involving it, where China Create was given leave to defend that action on condition (“Condition”) of payment into Court of the sum of HK$295,014,400 (“Condition Sum”).
6. The substantive hearings of the Continuation Summons and the Variation Summons were agreed to be dealt with together on 16 December 2021. In practical terms, of course, the Variation Summons needs to be considered only if the Continuation Summons succeeds.
7. In the hearing, P1 and P2 were represented by Mr Patrick Chung, Mr Michael Ng and Mr Brian Fan. Wang Tao and China Create were represented Ms Elizabeth Cheung and Ms Candice Lau. Wang Xu and State Frontier were represented by Mr John Hui. The hearing bundle was not compact, and all sides put in reasonably full written submissions and made detailed oral submissions. I mean no disrespect that I shall not refer to all of the detail in those materials, though I have it in mind.
8. At the conclusion of the hearing, I reserved my decision. This is my Judgment.
B. The Parties
9. P1 is a Hong Kong company, and P2 is a registered business in Hong Kong. At all material times, both were beneficially owned and controlled by a Mr Shum Tin Ching (“Shum”). But the person representing P1 and P2 in the negotiations of the relevant transactions was a Ms Cheuk Hiu Nam (“Cheuk”).
10. Cheuk and Shum are also connected through a Hong Kong listed company known as Jiayuan International Group Limited (stock code: 2768) (“JIGL”). Cheuk is the CEO and an executive director of JIGL. Shum is the chairman and a non-executive director of JIGL. Shum is also the sole shareholder and director of Mingyuan Group Investment Limited (“Mingyuan”), which is the controlling shareholder of JIGL.
11. There are 33 Defendants in this case. Zhang and Wang Tao are said to have been a ‘power couple’, who were active in the capital markets in both Hong Kong and on the Mainland.
12. D1 (“William Financial”), China Create and State Frontier were companies under the control of Zhang and/or Wang Tao and/or Wang Xu at the material times.
13. William Financial was a company incorporated in the PRC and was effectively owned and controlled by Zhang via an intermediary company, for which I shall use the shorthand of “CC Financial”. William Financial was once registered as a private equity fund manager with the Mainland authority, but was investigated by the China Securities Regulatory Commission and prosecutorial procedures were said to have commenced in January 2021. William Financial is apparently no longer in operation, and has been deregistered as a private equity fund manager by the relevant authorities.
14. China Create is a BVI company which was wholly owned and controlled by either Wang Tao or Zhang from February 2011 to March 2018. Though ownership of its shares has since been transferred away, China Create is still under the control of Wang Tao.
15. State Frontier is a BVI company the sole shareholder and director of which is Wang Xu. Wang Xu is the brother of Wang Tao.
16. On 1 June 2021, Zhang was sentenced to life imprisonment for illegal defrauding public investors and leading triad-related criminal syndicate, etc. No court documents were adduced to give particulars of Zhang’s conviction, but media reports say that he had, through the fraudulent financing platform “88 Wealth Network” and a group of companies including William Financial, China Create and others, made up fake investment projects, accepted deposits from the public unlawfully, etc.
17. Also, Wang Tao has been on the wanted list of the PRC’s authorities and has been residing in the United States since 2019.
18. Wang Tao was (from the Defendants’ side) the person negotiating with Cheuk (for the Ps) for the transactions. Cheuk and Wang’s relationship went back to 2016 during JIGL’s initial public offering (“IPO”). State Frontier subscribed to some of the JIGL IPO shares. Wang Tao helped JIGL to line up loans from time to time using her networks. In March 2016, Wang Tao helped to arrange a loan in the sum of RMB130 million to JIGL.
C. Overview of Respective Cases
C.1 Ps’ case
19. In a nutshell, Ps’ case is that they entered into five investment agreements (“WF Agreements”) with William Financial, in which the latter promised to invest Ps’ money (i.e. the HK$1 billion) with a guaranteed return of 12% per annum for 2 years.
20. The WF Agreements were all titled “William Financial Merger Investment Fund Agreements” and numbered in sequence. The 5 WF Agreements are numbered 42, 44, 45, 76 and 77. Each WF Agreement supposedly gave rise to a separate investment fund (“WF Fund”). All the agreements are either undated or partly dated.
21. WF Agreements 42, 44 and 45 were entered into in early June 2017 (“June Agreements/Funds”) and WF Agreements 76 and 77 were entered into in December 2017 (“December Agreements/Funds”). P1 was identified as the investor in the June Funds and P2 as the investor in the December Funds. William Financial was the other contracting party (identified as the fund manager) for all the WF Funds.
22. The agreements are short written documents, the body of which are less than 2 pages each. The terms were simple and look rather ‘home-made’. Ps would invest a certain amount of initial capital for the guaranteed return of 12% per annum. The WF Funds were to last for 2 years upon inception. The WF Funds were to invest in a wide range of securities. For WF Funds 42, 76 and 77, P1/P2 had to transfer the initial capital into a bank account as instructed by William Financial. For Agreements 44 and 45, P1 had to transfer the capital to the account of D12 (“Linkful”).
23. Ps duly transferred HK$1 billion in different batches into six bank accounts, including that of Linkful and five others as instructed by Wang Tao or her associates. Other than Linkful, other receivers of note were D8 (“Baijin”), D10 (“Baida”), D12 (“Envision”) and D15 (“Sino Esteem”). JIGL had dealt with Baijin’s account as early as 2016, when Wang Tao lined up a RMB130 million loan for it.
24. The June Funds matured in June 2019, and the December Funds in December 2019. However, when the 2-year terms expired, no money was returned nor was the promised 12% delivered – nor were any investments handed over.
25. Ps obtained a PRC legal opinion which advised that the 5 WF Funds or the 5 WF Agreements were not registered with the relevant PRC authorities and no diligence was conducted on the investors (i.e. Ps) as required under the PRC law. The PRC legal opinion thus concluded that the WF Funds were likely to be “fictitious”. Ps say the agreements were instruments of fraud and no such “funds” ever existed. They say there was a ‘mega-fraud’ and they were not the only ones to fall victim.
26. But Ps’ case on why the HK$1 billion should be returned does not turn on breach of contract. They said the WF Agreements were part of a large fraud masterminded by Wang Tao and Zhang, together with other Defendants.
27. Ps’ recovery actions started in around July 2020, when they sought Norwich Pharmacal orders against banks to trace the whereabouts of the HK$1 billion. The fund tracing exercise was completed by December 2020. It was discovered that, after the funds were transferred to the ‘1st layer’ recipients as instructed by Wang Tao and/or her associates, the funds were further transferred to the ‘2nd layer’ and then the ‘3rd layer’ recipients. More than 30% of the HK$1 billion was eventually transferred to accounts held by Wang Tao, China Create, Wang Xu and State Frontier. In most cases, the sum received or part of it was immediately transferred away upon receipt, sometimes in the exact amount. Most recipients were companies with a PRC individual as the sole shareholder and director. Some of the recipient accounts had had insubstantial balance prior to the receipts of the respective part of the HK$1 billion and are now closed or have very little balance.
28. An example given was Baida. After receiving part of the HK$1 billion, almost the entire amount was immediately transferred away. Before receipt, Baida’s account had a balance of HK$9,203.18. After the transfer away, the balance fell back to HK$9,008.39.
29. Ps said these banking account activities bore the hallmarks of money laundering and were circumstantial evidence of a fraud.
30. From the alleged fraud, Ps have raised myriad causes of actions against the Defendants or some of them: unlawful conspiracy, tort of deceit, fraud/fraudulent misrepresentation, breach of constructive trust, dishonest assistance of breach of trust, knowing receipt and unjust enrichment.
C.2 Wang Tao’s & China Create’s case
31. Wang Tao’s and China Create’s case is that the 5 WF Agreements were, in essence, a sham. They were not intended by the contracting parties to give rise to binding legal rights and obligations, contrary to what the black-and-white documents suggested.
32. Around the same time when the WF Agreements were executed and the funds transferred, JIGL had two rounds of placement of shares, one in June 2017 and one in December 2017 (respectively “June Placing” and “December Placing”, collectively “Placings”). The Placings were very successful and raised a total sum of about HK$2.6 billion for JIGL.
33. Wang Tao says that the HK$1 billion was never intended for investment purposes. Instead, Cheuk’s side wanted to use the money to subscribe for shares in the Placings. They wanted to leverage on Wang Tao’s margin financing capabilities, and so they transferred the HK$1 billion to Wang Tao who would then use that sum to participate in the Placings in the name of various entities (“Placing Arrangements”). The WF Agreements were only entered into to “document the passage of funds for accounting purpose”. Wang Tao’s side would earn a 2% fee in return for the use of her margin capability.
34. The natural question is why the real purpose of margin financing could not be documented as what it was, but had to be covered up or legitimized by sham agreements. That has never been directly answered by Wang Tao and China Create in evidence. But, albeit only in the Skeleton Submissions filed for them shortly before the hearing, it was suggested that Ps needed the sham to circumvent the regulatory requirements because they and the persons behind them were all connected persons of JIGL.
35. Simply put, it is argued that it was Shum/Cheuk’s side who purchased the JIGL placement shares; the Defendants were mere conduits for Ps to participate in the Placings, and did not beneficially own the HK$1 billion or the JIGL shares.
36. Of course, even under this theory, one would expect that the Defendants would still have to return the HK$1 billion or the shares to their beneficial owners at some point. Wang Tao and China Create do say that the JIGL shares had to be returned eventually, but to JIGL – not to Ps or Shum or Cheuk.
37. But on 17 January 2019, there was a sudden plunge of 80% of JIGL’s share price, from about HK$13 to less than HK$3. Wang Tao and China Create say the sudden plunge led to margin calls and to shares held in the placees’ accounts being liquidated, resulting in substantial loss for the Defendants, and the Defendant placees are thus the real victims. This is said to explain why the Defendants did not have to return the HK$1 billion or the JIGL shares to the beneficial owners.
C.3 Wang Xu’s & State Frontier’s case
38. The fund tracing exercise conducted by Ps shows that the total sum received by State Frontier from HK$1 billion was HK$281,900,000 (“HK$282 million”).
39. Wang Xu’s and State Frontier’s case is that Wang Xu was instructed by Wang Tao to participate in the June and December Placings on her behalf. Wang Tao wanted to participate in the Placings, but was short of funds and wanted to make use of State Frontier’s margin quota. Due to the close and trusting relationship built up with Wang Tao over the years, Wang Xu did not second-guess what Wang Tao told him.
40. Mr Hui submitted that all (or most) causes of action raised against his clients are predicated on Wang Xu and State Frontier having knowledge of the fraud, which the Ps were unable to prove.
41. Mr Hui also submitted that if the injunction was to be continued, the amount should be adjusted to only cover the HK$282 million which was received by Wang Xu and State Frontier.
D. The PRC Judgment
42. In the hearing, Mr Chong heavily relied on a PRC judgment dated 2 June 2020, issued by the People’s Court of Longgang District, Shenzhen City, Guangdong Province (“PRC Judgment”). There, Huang Xuli (“Huang”), the personal assistant of Wang Tao, was sentenced to 5 years’ imprisonment for conducting unlawful cross-border currency exchange transactions in breach of the PRC’s capital control regulations.
43. Mr Chong sought to rely on the PRC Judgment to prove the modus operandi of Wang Tao – how she had been laundering money and conducting illegal transactions through a network of shell companies and natural persons some of which are also Defendants in the present case. The fraud to which Ps had fallen victim were, he said, operated under the same modus operandi.
44. The intended reliance raises the question as to the admissibility of the PRC Judgment, by reference to what is sometimes called the rule or principle in Hollington: see Hollington v F Newthorn & Co [1943] KB 587. The starting point is that it is trite that a judgment and factual finding of another court or tribunal in earlier proceedings, whether civil or criminal, is inadmissible in subsequent proceedings, unless the party against whom the finding is sought to be deployed is bound by it by reason of an estoppel per rem judicatam. The rationale for the principle can be explained as follows:
(1) a central part of a judge’s task in a civil case is to evaluate the evidence adduced by the parties, and to decide what conclusions may properly be drawn from that evidence;
(2) in performing that task, consistently with the parties’ right to a fair trial before an impartial and independent tribunal, the judge must make his or her own evaluation of the evidence, and not defer to the opinion of anyone else;
(3) therefore, it is not proper for a judge to be influenced by the opinion of a previous court;
(4) if the evidence before the judge is the same as that before the earlier court, the judge is in as good a position to draw inferences and conclusions from the evidence;
(5) if the evidence before the judge is different from that before the earlier court, the opinion of the earlier court does not assist the judge’s task;
(6) indeed, and in any event – except as regards that of the relevant decision maker or an expert in a relevant discipline – the opinion of someone who is not the trial judge is, as a matter of law, irrelevant and should not be taken into account.
45. Mr Chong said his reliance on the PRC Judgment does not fall foul of the Hollington principle, because he did not seek to rely on the findings of the PRC Court. He sought only to rely on the statement or reported statements in the PRC Judgment of the factual evidence before that court. I agree that such materials are not excluded by the operation of the Hollington principle. Mr Chong also submitted that the evidence given by the witnesses in Huang’s case should be admissible in the present case as hearsay evidence. Despite the objection raised by Ms Cheung, I accept that the evidence given by the witnesses in the PRC Judgment is admissible as hearsay in the present case. Of course, what weight, if any, is to be given to hearsay evidence in civil proceedings is a different matter, which can be assessed including by reference to those questions posed in section 49 of the Evidence Ordinance.
46. Ms Cheung reminded me that Wang Tao was not the defendant in the case leading to the PRC Judgment, and she did not have the opportunity to rebut what Huang or other witnesses said. But it seems to me that that point also should go to the weight of the evidence.
47. The PRC Judgment identifies that Huang pleaded guilty and gave substantial evidence to explain Wang Tao’s operation. Huang was employed by CC Financial in February 2016. CC Financial conducted its financial activities through the “88 Wealth Platform” and offline channels. China Create had more than RMB 1 billion when she first joined.
48. Huang’s role was to act as Wang Tao’s personal assistant. Wang Tao operated illegal foreign currency exchange (between HK Dollar and RMB) for profit through a network of overseas and domestic companies. These illegal currency exchange transactions were often disguised in a number of loan contracts.
49. Huang helped Wang Tao to open bank accounts and securities accounts, handle documents, draft loan contracts, make bank transfers, keep accounts, etc. She handled many transactions in the magnitude of millions of dollars. Since February 2018, she also helped to purchase BVI and Cayman Island companies for the purpose of purchasing Hong Kong shares and debentures.
50. Some Defendants’ bank accounts through which the HK$1 billion in the present case was channelled also featured in Huang’s evidence as entities controlled by/connected to Wang Tao. She said:
(1) State Frontier was purchased in Wang Xu’s name but was actually controlled by Wang Tao.
(2) Carnival Group International Holdings Limited (D23) had entered into illegal currency exchange transaction with Wang Tao. Baijin was involved in the illegal transactions with D23.
(3) Liu Jiangyuan (D9), the owner of Baijin, was a friend of Wang Tao.
(4) Xiao Shu (D11) also gave evidence that he had made use of the illegal foreign exchange services and Wang Tao charged a “channel fee” (“通道費”).
51. Other witnesses in Huang’s case also gave evidence that Wang Tao had offered investment services similar to the WF Funds in the present case:
(1) Xiao Shu (D11) said Wang Tao requested him to introduce clients with spare money which could be placed with her for wealth management for a fixed term and with a promised annual rate of return. Xiao introduced a Yang Zhuoya.
(2) Ms Yang gave evidence that she placed RMB 400 million with Wang Tao for investment by entering into a loan contract with a term of 2 years. But after Wang Tao’s husband, Zhang, was arrested, Yang’s investment money was not paid back.
52. When CC Financial was investigated and seized in December 2018, Wang Tao told Huang to hide in Hong Kong. She hid in Hong Kong for more than a month as instructed. When she returned to Shenzhen in February 2019, she resigned. Her role was later assumed by Wang Hao, who is Wang Tao’s cousin. It is of note that in March 2020, Wang Tao transferred all shares in China Create to Wang Hao (though Wang Tao now accepts that she remains the beneficial owner, and so it remains under her control).
53. It can be noted that the illegal transactions referenced in the PRC Judgment were cross-border currency exchanges, which is perhaps different from Ps’ allegation of making up fictitious investment “funds”. Yang did say her investment money was not returned, but that is not necessarily the same as saying the investment was a fraud. Ps’ case about the WF Funds seems closer to the matters on which Zhang was said to have been convicted.
54. Ps also relied on the experience of a listed company known as Life Healthcare which it said has also fallen victim to Wang Tao’s fraud. Life Healthcare entered into one of the WF Agreements (numbered 35) in May 2017 in return for a fixed annual return of 4.75%. However, in its 2019 annual report, the Board of Life Healthcare decided to record that investment sum as an impairment.
E. The WeChat messages
E.1 WeChat Messages as Main Plank of Defence
55. As Ms Cheung said, no stone would be left unturned in opposition to the Continuation Summons. But, clearly, Ms Cheung understood her best case to be on material non-disclosure. Nevertheless, that basis of challenge is inextricably tied up in this case with the argument that Ps have not shown a good arguable case. It is, therefore, convenient to traverse the materials relating to the merits of the claim and defence and relating to allegations of material non-disclosure together.
56. Wang Tao’s (and China Create’s) case is mainly built upon a series of instantaneous WeChat messages among Wang Tao, Cheuk, Huang (Wang Tao’s assistant), Cathy Wang (“Cathy”) (Cheuk’s assistant), and Andy Siu (the General Manager of the Financing and Capital Centre in the JIGL) around the same time when the WF Agreements were executed. Wang Tao’s case is that these messages prove that the WF Agreements were only employed – in effect – to cover up the real arrangement, i.e. the Placing Arrangements.
57. Ps have admitted that at around the same time when the 5 WF Agreements were executed, Cheuk had also asked Wang Tao to line up investors to participate in the June Placing and the December Placing. But Ps have insisted that the Placings and the WF Agreements were separate transactions. On Ps case, the alleged Placing Arrangements – by which Ps are said to have passed the HK$1 billion through Wang Tao and her networks to leverage on her margin capability – simply did not exist. Ps/Cheuk believed that Wang Tao would (separately) line up independent placees. They said if Wang Tao did channel the money to participate in the Placings, that is a further evidence of fraud against them.
58. Ps position is that the WeChat messages could not prove the Placing Arrangements:
(1) Cheuk could not confirm the veracity of those messages. Cheuk had switched her mobile phones a few times, and she no longer had a complete record of her own WeChat messages. Both Andy Siu and Cathy have already left their original employment. She cast doubt on Wang Tao’s ability to obtain some WeChat records of Huang to which Wang Tao was not privy, since Huang’s phones were confiscated by the PRC authorities when she was arrested.
(2) In any event, those WeChat messages could not prove a connection between the WF Agreements and the Placings. As expected, Ps offered a different interpretation to many of the messages relied upon by Wang Tao and China Create.
E.2 WeChat messages around June Placing / June Funds
59. Ms Cheung took me through the WeChat messages in some detail. Though I do not propose to rehearse the detail of the messages one by one, I think that when reading the messages as a whole, the broad picture can be described as follows:
(1) The June Placing started on 6 June and was completed on 19 June 2017. Leading up to the commencement and shortly after the completion of the placing, there was a good deal of discussion between Cheuk and Wang Tao. There was a thread of conversation between Cheuk and Wang which shows that Cheuk was making use of capital from Wang Tao’s side to participate in the placing and was trying to agree with her some sort of fee/commission structure for such assistance.
(2) The June WF Funds were executed during the lead-up to the commencement of the June Placing. It appears that the deal was struck between Cheuk and Wang Tao. Once the deal was struck, the paperwork and the transfer of funds would be passed to Huang and Andy Siu for handling.
(3) The discussion between Cheuk and Wang Tao concerning the financing of the June Placing resembles true business negotiation. Cheuk went into some detail to confirm the actual fees her side had to pay Wang Tao.
(4) On the other hand, the conversation regarding the WF Funds strike less as a true negotiation. There was barely any discussion on the keys terms of the WF Agreements, such as investment size, duration of fund, name of investors, etc. They were left to be filled in by Cheuk’s side. Maybe the negotiation happened somewhere else, but no such evidence has yet been adduced by Ps’ side.
60. The involvement of Andy Siu was relied upon by Ms Cheung to say that the June Placing was connected with the June WF Agreements. Andy Siu was introduced as the General Manager of the Financing and Capital Centre of the JIGL and as a colleague of Cheuk to Wang Tao and Huang. Ms Cheung said that if the WF Funds and the June Placing were unconnected, it could not be explained why the investor side of the WF Funds (i.e. Ps’ or Cheuk’s side) would have a staff member from JIGL to handle the paper work of the WF Funds. No good reasons were provided by Ps’ side. Cheuk’s affidavit evidence is that Andy Siu had already left JIGL, and she was not able to confirm the veracity of the WeChat records adduced. I agree this is not strong evidence for Ps.
61. The conversation regarding the June Placing and the conversation regarding the June WF Funds mostly occurred on different threads or in different chat groups, despite their proximity in time. However, there was a particular conversation between Cheuk and Wang Tao where the June Placing and the “investment funds” were mentioned in the same thread of conversation. (In passing, I note the contest between the parties as to whether the accurate translation in some of the messages should be to “funds” or “investment funds”. But that contest is unlikely to be resolvable without a more thorough investigation of the overall context, possible only at a trial.)
62. That conversation which seems to deal with both the June Placing and investment of funds occurred in the morning of 22 May 2017. Each side said the conversation is significant, and the parties fought on the correct English translation. Wrapped up in their discussions regarding the June Placing, Cheuk said to Wang Tao in a voice message (with the different offered translations below):
“哎欸王總，早呀。唉我想再確認一下就是你那邊6千是沒問題的是吧。因為我想今週的時候呢，就是欸有一些手續呀，就是那些的話，就是也欸盡快把它更正掉，那所以呢你就是你那邊基金的一些情況，譬如說是哪個2個基金，或者是到時候就是我欸的那些走哪個去的那些路徑。那然後我們都確定好，那所以呢就是這一邊就是看欸我們今週裡面能不能夠都把這。。。這些欸情況都定掉，那欸如果欸你那邊就是有一些什麼的update 的話, 那你隨便告訴我，那反正我們在欸中環呀在金鐘呀，我們可以再碰碰。”
“Wang Zong, morning! Um I would just like to confirm again that there is no issue with 60 million from your side. Since I want to, in this week, that there will be um certain procedures, i.e. if there is, should also be corrected as soon as possible. So for certain situations concerning funds on your side, such as which to funds they will be, or when the time comes, the route for where mine would go. Then after we have confirmed, so it depends on um whether we can, within this week .. confirm these situations. So um if um there is any update on your end, please tell me any time. Since we are in um Central and Admiralty anyway, we can meet again.”
“I would like to confirm that your 6000 does not have any problem. Because I think this week, there are some procedures, that is, amended as soon as possible, so you can give some information about your investment fund, such as which to investment funds, or which one I will invest in at that time. Then we will all be sure. Okay, so let us see if we can within this week … these circumstances are all set. Then if there is some update on your side, then you can tell me any time. Anyway, we are in Central and Admiralty, we can meet up again.”
63. Reading what Cheuk said in the context, it could sound like Cheuk and Wang Tao were pulling together their capital to participate in the June Placing. Cheuk was confirming the route by which her side’s capital should go (assuming “mine” refers to her capital). The route was supposed to be two of Wang Tao’s investment funds, and she wanted to ascertain which two.
64. Ps said that that conversation only refers to the WF Funds but was unrelated to the June Placing. In that thread, all preceding and subsequent discussion to that conversation concerns the June Placing. I note that that thread of conversation between Cheuk and Wang Tao continued as follows:
(1) On 24 May 2017, Cheuk said the placing was approaching the final stage and she wanted to confirm the “quota” which Wang Tao’s side could provide. The Chinese phrase used by Cheuk is “額度”, which in the finance context commonly refers to margin quota or credit limit.
(2) In the morning of 25 May 2017, Cheuk went to some length to confirm with Wang Tao the costs she had to bear for occupying Wang’s capital quota (資金額度). Similarly, “額度”, is likely to be referring to margin quota. Various charges/fees were mentioned, including a “passage fee” (“通道費”) of 2%, which was supposed to be charged by Wang Tao.
(3) On 26 May 2017, Cheuk sought to confirm with Wang Tao the names of the three companies and their securities accounts which would be used to receive the JIGL shares.
65. There is some support for the idea that the route by which the UD$60 million mentioned by Cheuk was eventually passed was through WF Fund 42 and WF Fund 44.
(1) US$60 million was about HK$467.89 million. The sums invested in WF Fund 42 (HK$312 million) and WF Fund 44 (HK$156 million) totalled HK$468 million. The two agreements were executed on 1 and 6 June 2017.
(2) In the afternoon of 22 and on 23 May 2017, there was a chat conversion between Wang Tao, Cheuk, Huang and Andy Siu regarding WF Fund 42. The conversation suggested that Cheuk and Wang Tao decided to enter the transaction and asked Huang and Andy Siu to finalize the details/execute the documents. Cheuk was referred to as “Cheuk Zong of the JIGL” (佳源的卓總) and Andy Siu was added to the group by Cheuk as her colleague to handle the execution of documents.
(3) From the chat conversation, it seems that the people in the group understood Cheuk, Andy Siu and JIGL were on the same side and it was people from that side who were purchasing the WF Funds.
(4) On 1 June 2017, Huang sent the draft WF Agreements 42 and 44 to Andy Siu. The size of fund to be invested in WF Fund 44 was left blank, to be filled in by Andy Siu.
(5) From 1 June 2017 to 6 June 2017 (the date when the June Placing started), Andy Siu transferred part of the Subject Sum to three ‘1st layer’ recipients of WF Fund 42 (Baijin, Baida, and D12), and to Linkful, the designated recipient of WF Fund 44.
66. Ms Cheung said when Cheuk asked for the names of the three companies and their accounts, she was referring to the recipients designated by Wang Tao to receive the money under WF Fund 42. On the face of it, it does tally with the terms of the WF Funds. No receiving bank account was named in WF Fund 42 and the terms provided that the receiving bank accounts were to be designated by Wang Tao’s side. But the terms of WF Fund 44 already designated Linkful to be the recipient.
67. Ms Cheung also relied on a calculation table which was sent by Andy Siu to Huang on 13 July 2017. The calculation table listed the details of four placees (China Create, State Frontier, D22 (“Swift Fortune”), and Sino Wealthy Limited – a company Wang Tao says she lined up through her friend D14) in the June Placement, including the number of shares purchased, their fund invested (“投入”) and the amount of margin financing obtained by them. Andy Siu urged Huang to sign the “agreements” as soon as possible and that the excess amount would be refunded and the outstanding sum would be paid (“合同請盡快簽回，餘下金額多退少補“).
68. Ms Cheung said this table shows the reconciliation process conducted between Wang Tao’s side and Cheuk’s side, to ensure that the WF Funds and agreements executed matched up with the June Placing Arrangement. On the other hand, Cheuk explained that JIGL compiled the table because it had to keep an eye on placees which used margin to purchase shares because that would have an impact on JIGL’s share price. Ms Cheung questioned why JIGL would have to ask Wang Tao’s side to check that information if the purpose of the table was as Ps asserted. On Ps’ case, they did ask Wang Tao to line up independent places, and those placees were lined up by Wang Tao. Thus, there could be legitimate reasons why JIGL would check with Wang Tao about the placees’ information.
69. Cheuk also explained that the detailed talk about fees/commission to be paid to Wang Tao was concerning an intended loan to be extended from Wang Tao, but which did not materialize in the end. She also said that she used to understand that Wang Tao ran a legitimate cross border currency exchange service under the PRC’s policy to gradually relax its foreign exchange control. That was a cash pooling service which would entail a “passage fee” of 2%. If Wang Tao lined up placees from the mainland with insufficient cash in HK dollars and who were unwilling to pay the 2% to convert funds into HK dollars, Cheuk/JIGL would have to bear that costs. Cheuk said she now knew that such service offered by Wang Tao was illegal, as stated in the PRC Judgment. As the loan did not eventuate, Ps did not need to pay the 2%, which Cheuk said is consistent with Wang Tao never asking for the 2% because the alleged Placing Arrangements did not exist.
E.3 WeChat messages around December Placing / December Funds
70. The messages in December 2017 are perhaps less strong for the defence than those in June 2017. The messages do not directly link the December Placing to WF Funds 76 and 77, although the two matters occurred around the same time.
71. On 13 December 2017, Cheuk urged Huang to send a signed version of WF Agreement 76, because there would be a need for some “justification” to be presented to the bank before they could transfer the money. Huang asked if the receiving bank could be a personal account, but Cheuk said an investment fund account would be better because the money was for investment purpose.
72. Ms Cheung submitted that this shows that the WF Agreements were only produced to provide justification for banks, and were not intended to create genuine legal obligations. Mr Chong said Cheuk’s request for an investment funds account shows that she meant the WF Funds to be genuine, and there was nothing improper to want to have documents to show the banks.
73. On 15 December 2017, Huang asked Wang Tao and Cheuk whether, if the bank asked for reasons of the transfer, she could say that it was a loan because investment fund accounts were more sensitive. Again, Ms Cheung said that shows that parties would document the passage of funds in different ways.
E.4 WeChat messages chasing annual statement of WF Funds
74. In February 2019, Cheuk chased after Wang Tao for the annual statements of the WF Funds. Mr Chong said that showed that Cheuk did intend the WF Funds to be real instead of a sham.
75. However, if one reads the WeChat messages on 18 February 2019, Cheuk’s purpose might be read as to obtain a proper annual statement to satisfy JIGL’s auditor for JIGL’s 2018 annual report. She referred to how the WF Funds’ annual statements should look like “if they had not lost”.
F. Other evidence for the Placing Arrangement?
76. If the case of the alleged Placing Arrangements is to be made good, it might be expected the fund flow would show (1) that all of the HK$1 billion was used to purchase JIGL shares in the June Placing and the December Placing, and (2) that margin finance was raised on all of the sum.
77. However, that was apparently not the case. The fund tracing exercise conducted by Ps showed that a substantial part of the HK$1 billion was transferred to various recipients for purposes not connected to the June/December Placings. No explanation for this has been given by Wang Tao.
78. Even on Wang Tao’s case, not all of the placees lined up by her used margin financing. Swift Fortune and Sino Wealthy did not use any margin. Again, no explanation was offered.
79. State Frontier produced some of the monthly statements of its securities accounts which revealed that the account used in the June Placing was apparently a cash account and no margin was obtained. Mr Chong questioned why Ps would use companies with no margin accounts if the purpose of channelling the HK$1 billion through Wang Tao was for margin financing. Mr Hui, responding to this point raised for the first time in the hearing, said that maybe margin was obtained in other accounts since State Frontier had the practice of switching the shares from one security firm to another. But this assertion was, perhaps understandably, unsupported by any documents. Anyway, the use of, and extent of use of, margin financing is something clearly amenable to further investigation.
80. Besides the use of margin, monthly statements for the Defendants’ securities accounts could have served another crucial purpose, namely for them to explain the loss they allegedly suffered in the stock plunge on 17 January 2019. Without that, they could not explain why they should not have to return any part of their received portion of the HK$1 billion or the shares purchased, despite the fact that they were not the beneficial owners. Monthly statements for the month of January 2019 – which are presumably in their custody – would be the convenient and perhaps persuasive evidence to show the margin call and the loss. Yet, the January statements were not produced.
81. Ps also questioned the logicality of Wang Tao’s assertion that the original arrangement was eventually to return the JIGL shares “to JIGL”. Taken literally, it would mean giving the shares to JIGL, which would not directly benefit Shum/Cheuk/Ps. But it may be that Wang Tao regarded Cheuk and Ps (and subsequently Shum) as on the same side as JIGL, so that returning the shares to JIGL could be loosely understood as returning to the JIGL side.
82. Included in the evidence is also correspondence from Wang Tao to Shum, where she was trying to engage him or his nominee in settlement discussions or negotiations. In one email dated 10 December 2020, Wang Tao suggests that the “plunge in stock and bond prices last year has brought huge losses to both of our companies”. She refers to trying to discuss the matter with Cheuk, and the hope that Shum would arrange for Cheuk to communicate (as she was the most familiar with the situation), and the aim to come up with the best solution to try to minimise both parties’ losses, and protect interests to the greatest extent. Shum responded by saying he was not familiar with the situation mentioned. Later, in an email dated 24 December 2020, Wang Tao suggested to Shum that they were both victims in the matter, that the loan agreements did not reflect their real intentions, and it would lead to all sorts of risks to Shum’s company if too much were to be disclosed. I have not seen any response to that email.
G. Commerciality of the Placing Arrangement
83. Ps also rely heavily on what was said to be the lack of commerciality in the alleged Placing Arrangements. Even on Wang Tao’s case, based on the HK$1 billion and value of shares subscribed by placees lined up by her, the loan-to-margin ratio is quite low, I think only about 19%. But some evidence suggests that traditional banking institutions would offer a margin ratio of about 30% to 60%, so that Ps/Shum did not gain more margin through Wang Tao.
84. Shum also said the Placing Arrangement was the worst deal he could ever have imagined: he would provide HK$1 billion to purchase the JIGL shares, yet the shares would be “returned to JIGL”. He or Ps would get nothing in return. Further, whilst the shares were supposed to be “returned to JIGL”, there was no mechanism by which Shum or Ps could control the placees, and the shares were indeed eventually not returned.
85. Shum also said if he wanted to inject capital into JIGL, such sum could be directly injected, by way of direct subscription for more of JIGL’s shares or for its bonds/notes, etc. Through the Placing Arrangement, Shum/Mingyuan’s control over JIGL actually decreased from 72.29% to 55.06%.
86. In the overall circumstances, there is a decent argument that leveraging on Wang Tao’s margin financing capability could not be the valid commercial reason why Shum’s side would want to pass the funds through the various recipients or placees for the June Placing and December Placing.
87. However, the commerciality for Shum/Ps of the Placing Arrangements would be more obvious if the real purpose was to hide the identity of the true placees or the true source of funds for the June Placing and December Placing. Shum, being a connected person, would be subject to various regulatory requirements if he was to participate in the Placings. It might also be thought commercially sound that the majority shareholder of a listed company would want to put up a pretence that the company’s shares are in high demand by independent third party investors in the market. That might show market confidence in the listed company’s stock, and in fact over the 6-month period between the two Placings, JIGL’s share price went up from HK$3 to HK$6, and then further to about HK$14 before the plunge in January 2019.
88. It might also be thought that a decrease of shareholding from 72.29% to 55.06% makes little material practical difference in terms of control. Thus, hiding the identity of the true placees could provide good commercial justification as to why Shum/Cheuk/Ps would want to participate in the Placing Arrangement.
89. Of course, this is a serious allegation against JIGL (and Shum, Cheuk and the Placees) which had declared to the Stock Exchange and public investors, in various written forms, that the placees were independent third parties unconnected to the JIGL and so was their source of fund. Indeed, Ps seek to capitalize on those declarations as contemporaneous documents contradicting the existence of the Placing Arrangements.
H. Continuation of the Order?
H.1 Sufficient merits against Wang Tao and China Create
90. I shall deal first with whether Ps have shown a serious issue to be tried and/or a good arguable case against Wang Tao and China Create, since this point can be disposed of quickly. In my view, Ps clearly have demonstrated merits in the claim to meet both standards.
91. Ps’ case is a simple one. There is no dispute that they had transferred the HK$1 billion to bank accounts as instructed by Wang Tao and her associates, and that sum has never been returned. Nor has any other asset of value been returned. Although Ps did not plead a case of breach of contract, there was a set of written agreements (the WF Agreements) showing that they did intend the HK$1 billion to be used for investment purposes. Their case of a ‘mega fraud’ and Wang Tao’s modus operandi of conducting unlawful business operations through a network of companies and natural persons (including some Defendants in the present case) are to some extent supported by the evidence given by witnesses in the PRC Judgment.
92. The WeChat messages do lend some support to show that the WF Agreements may be connected with the June Placing and December Placing. But it seems less likely that the real arrangement/purpose which was concealed by the allegedly sham agreements was to make use of Wang Tao’s margin financing capability, as initially suggested by her and China Create. The fact that on Wang Tao’s case the loan-to-margin ratio obtained by placees lined up by her was only 19% significantly weakens that argument.
93. Hiding the true identity of the placees would make commercial sense from the perspective of Shum/Cheuk’s side. But that is not how the case had been substantially developed in the affidavit evidence, and that would still not explain the mismatch in the fund flow and monthly statements.
94. The WeChat messages do suggest that there may be much more to these matters than meets the eyes. The June Placing and the December Placing may well be connected with the WF Agreements. But it is trite that even a good arguable defence does not necessarily negate a good arguable case. The account proffered by Wang Tao and China Create in the instant case is far from sufficient to make Ps’ case fail the merits test for the grant of Mareva or proprietary interlocutory injunctive relief.
H.2 Sufficient merits against Wang Xu and State Frontier
95. Wang Xu’s and State Frontier’s strongest case was put forward as being on the suggested lack of knowledge of the alleged fraud on Wang Xu’s part. But his own evidence is that he would follow Wang Tao’s orders unquestionably. That is consistent with Huang’s evidence recorded in the PRC Judgement that State Frontier was only a corporate shell incorporated under Wang Xu’s name for Wang Tao’s use. As Mr Chong submitted, if State Frontier was under Wang Tao’s control, so must Wang Xu have been. I do not accept Mr Hui’s submission that the brother-sister relationship was “at best neutral”.
96. Wang Xu said he ‘lent’ State Frontier’s securities’ account to his sister because she wanted to make use of State Frontier’s margin quota. But that may not hold water if State Frontier did not use any margin in the June Placing and the securities account it used was indeed a cash account instead of a margin account. In any event, I also agree with Mr Chong that the overall circumstances should at least have put Wang Xu and State Frontier on enquiry – if they were not mere cyphers of Wang Tao.
97. Further, the Court is entitled to draw an adverse inference from the omission to produce to the January 2019 monthly statements which were supposed to show the margin call on the relevant accounts and to explain why the JIGL shares or the part of the HK$1 billion – which were admittedly not beneficially owned by them – did not have to be returned.
H.3 Material Non-Disclosure
98. Both Ms Cheung and Mr Hui submitted that Ps had failed to discharge their duty of full and frank disclosure.
99. Ms Cheung submitted that the material non-disclosure on Ps’ part was not on a small scale. It was not a case of putting wrong emphasis on a point, or tucking a relevant matter away in the exhibits. Instead, Ms Cheung submitted that there had been deliberate concealment of relevant matters on a massive scale. The relevant matters not disclosed were the existence of the Placing Arrangements, and those WeChat records which, she said, showed the connection between the WF Funds and the Placings. Ms Cheung submitted that the contemporaneous messaging records demonstrated what happened prior to, during and after making the 5 WF Agreements; failing to make proper disclosure of those matters put ‘blinkers’ on the Court.
100. Mr Chong submitted that Ps could not be blamed for failing to anticipate a defence as far-fetched as that presented by Wang Tao and China Create. On Ps’ case, the WF Agreements and the Placings were two separate sets of transactions, and Ps could not have thought or anticipated that the WeChat messages would be “reverse engineered” to say that the WF Agreements were a sham.
101. Had Ps’ case been a straightforward one based on a breach of the 5 WF Agreements, I would have less hesitation in holding that it would have been too demanding to ask Ps to anticipate a defence that the agreements were a sham. But, as Ms Cheung pointed out, Ps have chosen to plead a case of ‘mega fraud’, rather than pursue a claim in contract directly on the agreements (presumably to avoid the exclusive jurisdiction clause in the WF Agreements, and perhaps to make the PRC Judgment and Zhang’s conviction more relevant). Though Ps pleaded a ‘mega fraud’, yet they omitted to mention the wider conversation which was happening at the same time. Ms Cheung submitted that disclosure could have been given, and the messages could have been explained by Ps, but they were not.
102. Reasonably strong evidence of material non-disclosure comes from Ps’ own fund tracing exercise and bank disclosure applications. The fund tracing exercise, which was completed in December 2020, had shown that significant portions of the HK$1 billion had been used to purchase the JIGL shares in the Placings. Parts of the HK$1 billion transferred to Wang Xu and State Frontier were eventually used in the June Placing and the December Placing. Part of the HK$1 billion transferred to Sino Wealthy was used in the December Placing. Miss Cheung said all these should have alerted Cheuk, who had personally discussed with Wang Tao on both the June/December Placings and the WF Agreements, to the need to make disclosure.
103. It was also Cheuk who brought in Andy Siu, the General Manager of JIGL, to handle the execution of the WF Agreements with Huang in the WeChat group for the June Placing.
104. Ms Cheung also submitted that Ps’ choice of deponent for the affidavit evidence of the ex parte application was a deliberate attempt to conceal the web of relationships among Ps, Shum, Cheuk and JIGL, and that Shum’s and Cheuk’s roles were downplayed in the papers for the ex parte application. The affidavit evidence of the injunction application was deposed by Zheng Lei, who had no direct knowledge of the 5 WF Agreements, and was not even the shareholder of P1 at the relevant time.
105. Cheuk, the CEO and executive director of JIGL, was the one directly involved in the 5 WF Agreements and yet her role/importance was watered down, if not concealed. She would appear to have been the one with the most personal and direct knowledge to give evidence about the so-called ‘mega fraud’, but Cheuk was introduced in Zheng Lei’s affidavit by stating that Ps:
got in touch with one Miss Cheuk Hiu Nam (“Miss Cheuk”), who was well connected in the financial sector both in Hong Kong and the People’s Republic of China (the “PRC”).
106. That is hardly a full description, bearing in mind Cheuk’s riles in JIGL, and it was at least potentially misleading given that Cheuk and Ps were indeed connected via Shum, and where the relationships – including that with Wang Tao – went long back before 2017. (I also note that Cheuk was also involved as negotiator with Wang Tao on the transaction relating to the Sky Motion Action: see below.) Even Shum, who was the beneficial owner and controller of both P1 and P2 at the material time, would appear to have been a much more suitable deponent than Zheng Lei.
107. Ms Cheung submitted that because both Cheuk and Shum are obviously connected to the JIGL, their roles in the WF Agreements were downplayed in order to conceal the WF Agreements’ connection with the June Placing and December Placing.
108. I can see the real force of all these submissions. The fact that Cheuk held office in JIGL and knew that a substantial part of the HK$1 billion was ultimately channelled to purchase JIGL shares in the June Placing and the December Placing, but the evidence did not draw the Court’s attention to the Placings which she was negotiating with Wang Tao at the same time, is particularly alarming. The lengthy and extensive contact between Cheuk and Wang Tao, and at least some of the context of it, was another matter which probably should have been properly drawn to the attention of the Court. Further, an explanation could have been given as to the involvement of Andy Siu, had it been revealed that he was contemporaneously involved, including in the transfer of funds.
109. However, the relevance of the Placings to the WF Agreements is inextricably linked with the defence that the WF Agreements were but a sham to cover up the Placing Arrangements. Wang Tao’s and China Create’s case is, in turn, substantially dependent on the WeChat messages, the interpretation (not just the translation) of which is hotly debated among the parties and where I think that debate could only be resolved at trial.
110. Since the materiality of the matters relied upon in the context of the allegations of material non-disclosure is closely interwoven with the argument as to the sham nature of the WF Agreements, it appears that the material non-disclosure ground could not be resolved without the Court having to engage in a mini-trial at the interlocutory stage. However, it is well settled that the Court should not embark on such an exercise: see, for example, Zhao Zhi Qiang v Zhao Zhiguan and Asian Trinity Limited[2020] HKCFI 2990, at §§55-56.
111. Not without some reluctance in light of my views and serious doubt as to the adequacy of disclosure, in the exercise of my discretion and in view of the overall circumstances, I have come to the view that the Order should not be discharged on the ground of material non-disclosure. Nor without determination of the interwoven matters would it really have been possible to decide if any non-disclosure was such as would lead not just to the discharge of the Order obtained ex parte, but also to the refusal of any re-grant (in circumstances where I have already held that there are at least sufficient merits on the claim to justify the making of the Order).
H.4 Risk of Dissipation
112. There is no dispute that the HK$1 billion was transferred to the Defendants. Wang Tao/China Create and Wang Xu/State Frontier have suggested that they no longer have the money or its traceable proceeds, i.e. the JIGL shares. Yet no evidence has been produced so far to substantiate precisely how and why they no longer have them, except by the bare assertion of an alleged margin call.
113. There is also substantial evidence pointing towards the low commercial morality on the part of the relevant Defendants, which weigh in favour of inferring a risk of assets dissipation, in the Court’s holistic assessment.
114. The evidence given by the witnesses in the PRC judgment shows that Wang Tao was committing foreign exchange crimes through her network of corporate vehicles and natural persons, including Wang Xu, and China Create and State Frontier. Whilst the exact crime relevant to the PRC Judgment differed from the fraud asserted in the present case, there is clearly circumstantial evidence showing a propensity to commit commercial crimes by the same group of persons and entities. Ms Yang’s testimony in the PRC Judgment and Life Healthcare’s experience are also evidence that Wang Tao and her associates have been duping victims into investment products which did not deliver return as promised, and indeed no return at all. Of course, I bear in mind that that is hearsay evidence, but it seems to me that it is evidence on which I can properly place some weight for present purposes.
115. In any event, Wang Tao’s defence in the present case is based upon her own assertion that the WF Agreements were a sham. It is her own case that the WF Agreements were executed to provide a false picture or pretence to third parties, being (in the original narration) banks and/or (as developed in argument) the regulatory authorities of listed companies and the investing public. In other words, the defence is based upon the assertion that the Defendants were perfectly content to – and intended to – dupe third parties into believing the WF Agreements were genuine, when they were knowingly not genuine. Of itself, this demonstrates a low standard of commercial morality.
116. I also agree with Mr Chong that there is evidence of actual dissipation. Two days after the injunction Order was made, Wang Tao transferred all her shares in China Create to Wang Hao, her cousin and assistant. Whilst Wang Tao’s stance now is that China Create remains still under her beneficial ownership and control, no proper explanation has been given to explain the transfer and its timing.
117. Wang Tao also has been residing out of the Hong Kong jurisdiction since 2019. She was also on the wanted person list of the PRC police in September 2019. Although she offered Covid-19 related reasons to justify her not returning to the Mainland or Hong Kong, those reasons were vague and without particulars. There is force in Mr Chong’s submissions that Wang Tao had apparently fled to the United States to avoid criminal investigations against her in the PRC.
118. I have taken into account that Wang Tao was at times actively seeking engagement with Cheuk and Shum in mid to late 2020, which Ms Cheung said countered the suggestion that there should be an inference of risk of dissipation. But I do not think contact about negotiating a potential acceptable solution is of much weight against the overall circumstances, where no such solution was negotiated and litigation became highly likely, and has been pursued.
119. In light of the above, I have no hesitation in finding that risk of assets dissipation is established against Wang Tao and China Create.
120. Further, in view of the facts that Ps have established an arguable case of fraud, Wang Xu and State Frontier have failed to produce the January 2019 monthly statements to explain why they no long have the part of the HK$1 billion transferred to them or its traceable proceeds, and Huang’s evidence as recorded in the PRC Judgment, I am satisfied that Ps have established a risk of dissipation against Wang Xu and State Frontier to the required threshold.
H.5 Whether Ps entitled to apply ex parte without notice
121. Both Ms Cheung and Mr Hui submitted that there was no need for secrecy nor any urgency to justify making the application for the injunction orders on an ex parte without no notice basis. Ms Cheung further submitted that if there was only urgency but no need for secrecy, the application should have been made on an ex parte on notice basis.
122. There is no dispute that parties had been in communication throughout 2019 by way of WeChat messages or having face to face meet-up to reach some sort of settlement regarding the disputes. But Ps and Ds had different accounts of what the disputes were. Ps’ understanding of the picture would also have evolved as more evidence was unearthed.
123. I am also satisfied that there is no inordinate delay on Ps’ part. The June WF Funds were to mature in June 2019; and the December Funds, in December 2019. Ps’ first legal actions to seek recovery of the funds was the gagging order application and the Norwich Pharmacal application which were granted in July 2020 and the fund tracing was completed in December 2020. Then the ex parte injunction application was taken out about a month later.
124. I also think the present facts pointing to a low commercial morality on the part of Wang Tao, China Create, Wang Xu and State Frontier also explain why Ps was entitled to apply ex parte without notice. It should also not be forgotten that the application made included seeking injunctive relief against Zhang, whose position also made the ex parte application appropriate.
125. I would not set aside the ex parte Order, nor refuse to continue the Order on the basis that the application ought not to have been made ex parte.
H.6 Amount of Injuncted Sum as against Wang Xu and State Frontier
126. Mr Hui submitted that the causes of actions pleaded against Wang Xu and State Frontier could be divided into fault-based claims and receipt-based claims. The fault-based claims include fraud, tort of deceit, breach of constructive trust, dishonest assistance, etc. The receipt-based claims include unjust enrichment and knowing receipt. Mr Hui submitted that proving all the fault-based claims would require proving the knowledge of the fraud on the part of Wang Xu and State Frontier, where it is common ground that their alleged knowledge of the fraud was all based on inference.
127. I have found that receiving the parts of the HK$1 billion into Wang Xu/State Frontier’s accounts should have put them on enquiry, since, among other reasons given above, the alleged reasons giving by Wang Tao, i.e. to make use of their margin ‘quota’, could not hold much water. As such, Mr Hui’s argument that the amount covered by the injunction Order should be reduced to the sum flowing from the receipt-based claims falls away.
128. In essence, the claim against Wang Xu and State Frontier is that they were knowing participants in the much wider fraud relating to the HK$1 billion, and it seems to me to be appropriate in the circumstances that the terms of the Order affecting them should extend to that full amount.
H.7 Balance of Convenience and Conclusion on Continuation
129. It seems to me obvious that the balance of convenience points in favour of the continuation of the Order, in the sense that the risk of injustice flowing from non-continuation should Ps later succeed on their claim is greater than that flowing from continuation should Ps later fail on their claim.
130. Overall in the exercise of my discretion, I am satisfied that the Order made should be continued against Zhang, Wong Tao, China Create, Wang Xu and State Frontier until trial or further order.
I. China Create’s Variation Summons
131. As Ps’ application on the Continuation Summons has succeeded, China Create’s Variation Summons comes into play.
132. Previously, China Create was also made a defendant in a separate set of proceedings, being HCA 1151/2019, Sky Motion Holdings Limited v China Create Captial Limited (“Sky Motion Action”). It is of note that Ps’ solicitors in this action are also Sky Motion’s solicitors in the Sky Motion Action.
133. In passing, it can also be noted that (1) Sky Motion’s claim was based on a Chinese agreement entitled “Loan Agreement”, but where it was common ground that the agreement was actually for the transfer by China Create to Sky Motion of financial instruments (secured notes and shares) of JIGL in consideration of payment by Sky Motion to China Create of almost HK$344 million, (2) the relevant agreement was negotiated between Cheuk on behalf of Sky Motion and Wang Tao on behalf of China Create; and (3) there was also WeChat messaging between Cathy and Huang (who Wang Tao said in that action “handled administrative affairs according to my instructions”).
134. On 24 June 2019, and as amended, Sky Motion successfully obtained a Mareva injunction against China Create up to the value of HK$500 million (“Sky Motion Injunction”).
135. Sky Motion also applied for summary judgment on its claim. DHCJ MK Liu granted China Create unconditional leave to defend on 7 January 2021. But, on Sky Motion’s appeal, the Court of Appeal (“CA”) gave China Create conditional leave to defend. The condition imposed was that China Create has to pay into Court the Condition Sum within 28 days (though that time has since been extended pending the determination of the Variation Summons). Default of payment of the Condition Sum into Court would lead to the entering of judgment against China Create.
136. Though the CA’s order does not specify in terms that the payment in is to stand as security for Sky Motion’s claim, that is the effect of the order, under RHC Order 14 rule 4(3): see also Hong Kong Civil Procedure 2022 Note §14/4/18.
137. Subsequently, an order was made by consent in the Sky Motion Action to permit China Create to deal with the sale proceeds of the sale of 39,198,000 MOBVISTA shares (“the Sale Proceeds”) for the sole purpose of paying into Court the Condition Sum, and for the Sky Motion Injunction to be varied accordingly, and to provide for the reduced ‘ceiling figure’ (after that payment into Court) from HK$500 million to HK$204,985,600.
138. However, when Ps were invited (by letter to their solicitors, being the same solicitors acting for Sky Motion who had consented to the variation of the Sky Motion Injunction) to consent to a variation of the Order in this case, consent to variation was refused. The stated basis for refusing consent was that, unless China Create could credibly demonstrate that the value of its assets even after the intended payment would be at least up to the value of the HK$1 billion the subject of the Order, Ps would not be in a position to agree to the proposed variation.
139. Therefore, by the Variation Summons, China Create seeks to vary the Order so that the Sale Proceeds could be released from the injunction Order to meet the condition imposed by the CA.
140. In the injunction Order granted by me in the present case, only HK$30 million was subject to a proprietary injunction, with the rest of the HK$999 million was subject only to a Mareva injunction. It is well established that assets subject to a Mareva injunction remain the assets of the defendant and do not stand as security for the plaintiff. Subject to the defendant’s demonstrating that he has no other assets with which to fund the litigation, the ordinary rule is that he should have resort to the frozen funds to finance his defence: see, for example, Halifax Plc v Chandler [2001] EWCA Civ 1750, at §§16-17, cited in Hong Kong in CK v TCH[2019] HKFC 179, (unreported, FCMC 5240/2011, 9 July 2019) at §§20-23.
141. It is also trite that Mareva injunctions are not intended to punish or penalize the party subject to it. A Mareva injunction should not operate oppressively to prevent the defendant from dealing with his assets in the ordinary course of business or any more than is absolutely necessary to protect the plaintiff from the risk of dissipation, see Halifax Plc, at §§19-20.
142. In general, when a defendant seeks the release of funds subject to a Mareva injunction to meet certain expenses, the Court should consider whether the defendant has provided sufficient evidence to show that (a) the defendant does not have other assets available to meet those expenses; and (b) the purpose of the application was not an attempt to dissipate the assets to frustrate the plaintiff’s enforcement of a judgment: see Hong Kong Civil Procedure 2022 Note §29/1/79.
143. In this case, the purpose for releasing the Sale Proceeds is legitimate, namely to pay them into Court to meet the Condition imposed by CA (though I do not think meeting the Condition falls within the usual understanding of the term ‘ordinary course of business’). In one sense, paying the condition Sum into Court would only involve the moving of assets/money from one place to another, both within the Court’s supervision. Further, as noted, the consequence of failure to meet the Condition could be significant, as summary judgment will be entered into against China Create. Indeed, in its solicitors’ correspondence, China Create suggested that it must be in the interests of Ps in this case to avoid judgment being entered in favour of Sky Motion in the Sky Motion Action.
144. The real dispute between China Create and Ps lies in whether China Create has shown that it has no alternative source of funds to meet the Condition. In that regard, Ms Cheung has provided an extensive analysis of China Create’s assets to demonstrate that it does not have enough assets to meet the Condition unless the Sale Proceeds are released from the frozen assets. On its face, that appears to be correct.
145. But Mr Chong submitted that the Court should bring a healthy scepticism to an assessment of the financial information provided by China Create. In particular, Ps have shown an arguable case of fraud against the Defendants, and China Create has been less than candid in revealing how its legal fees in Sky Motion and the current case have been met so far.
146. Further, Mr Chong also emphasized that when determining whether a defendant has an alternative source of funds, the Court will not limit its consideration to funds to which the defendant has a legal right, if there are reasonable grounds for believing that it can obtain money from elsewhere or in some other manner: see XY LLC v Jesse Zhu[2018] HKCFI 1485 at §22. Mr Chong invited the Court to consider the ultimate controller of China Create, Wang Tao, as a person who would “prop up” the corporate entity. Indeed, Mr Chong seemed to suggest that Zhang, Wang Tao, and China Create could or should be regarded as one single economic entity when the Court determines whether China Create has alternative funds.
147. Ms Cheung emphasised that China Create and Wang Tao are of course separate legal entities, and it cannot simply be said that the company is under the control of Wang Tao and so is able to obtain funds from her. But, in my view, that submission is inconsistent with settled authority. In case of a corporate defendant, the Court can and does look to the shareholders to see if there are reasonable grounds to believe that the shareholders are the source of funds for the corporate defendant: see the XY LLC case at §§23-37.
148. On the other hand, whilst the Court is entitled to look beyond the assets legally owned by a corporate defendant in determining whether it has alternative sources of funds, simply because the corporate has a wealthy shareholder on its own is insufficient to show “reasonable grounds” to believe that a corporate defendant could look to the shareholder or has other sources of fund.
149. But I am persuaded in the present case that there is substantial evidence to show that China Create has all along been funded by Wang Tao or her associates. As submitted by Mr Chong, China Create, a company which runs no substantial business, is currently holding more than HK$1 billion worth of shares. The purchase money must have come from an external source. The fact that, as of now and despite being subject to two Mareva injunctions, China Create is still able to meet its legal expenses in the current case and the Sky Motion Action suggests that it continues to obtain funds from a readily-available external source.
150. The burden falls on the party seeking an order to release assets from an injunction to show that it has no other sources of funds it could look to. Wang Tao was aware of the importance of fully disclosing China Create’s financial position and that of those who might be thought to be China Create’s source of funds, such as herself and Zhang. That is why she sought to explain in her affirmation why she and her husband could not be China Create’s source of funds. Yet, the financial picture provided is far from complete. In the absence of any proper explanation as to the source of funds of the assets obtained by China Create and of payment for China Create’s legal expenses incurred so far, I have come to the view that China Create has failed to show by sufficient evidence that it has no other alternative source of funds from which to meet the Condition.
151. There is one more feature of the consideration, which arises from the particular facts of this case. If the sum is released to satisfy the Condition imposed by the CA’s order for China Create to be able to defend the claim in the Sky Motion Action, that sum will stand as security for Sky Motion’s claim. If, eventually, China Create loses in both actions and its assets are insufficient to meet judgment debts in both cases, it seems that Sky Motion would then have higher priority to claim that security sum in Court than Ps in the present case. In other words, allowing the application would – or at least firmly could – prejudice Ps’ position, and I reject Ms Cheung’s submission to the contrary.
152. I have, of course, taken into account that, in granting conditional leave to defend in the Sky Motion Action, the CA would have thought that the condition would be able to be met by China Create (for it would have been the wrongful exercise of discretion to impose a condition knowing that it could not be met). But I note that the CA specifically stated that, in so far as China Create might wish to fulfil the Condition from the portfolio which is subject to the Mareva injunction, that was a matter for an application to the judge at first instance (and not a matter for the CA). In so saying, the CA must have had in mind the principles applicable on the exercise of the judge’s discretion, along the lines that I have set out and followed above, and the possibility that on the evidence deployed in any such application permission to use the frozen portfolio might not be granted.
J. Conclusion
153. In conclusion, I allow the Continuation Summons and I dismiss the Variation Summons.
154. I see no reason why cost should not follow the event on each summons. Therefore, I order Ps’ costs of the Continuation Summons to be paid by Wang Tao, China Create, Wang Xu and State Frontier to be taxed if not agreed, on a party and party basis, and to be payable forthwith. I further order Ps’ costs of the Variation Summons to be paid by China Create, to be taxed if not agreed, on a party and party basis, and to be payable forthwith. Despite the number of Counsel involved, I do not grant a certificate for two Counsel.
155. However, in the first instance, I make those orders on a nisi basis. The orders will become absolute after 14 days, if no variation application is made within that time. Any variation application will be dealt with on paper.
(Russell Coleman) Judge of the Court of First Instance
High CourtMr Patrick Chong, Mr Michael Ng and Mr Brian Fan, instructed by Au & Vrijmoed, for the plaintiffs
Ms Elizabeth Cheung and Ms Candice Lau, instructed by Clyde & Co., for the 3rd and 4th defendants
Mr John Hui, instructed by Fangda Partners, for the 5th and 6th defendants