China Metal Recycling (Holdings) Ltd(in Provisional Liquidation)and Another v. Chun Chi Wai and Another

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2013

__________________

__________________

DECISION
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THE APPLICATION

1.This is the plaintiffs’ application for an order, inter alia that, the 1^st and 13^th defendants having failed to comply with the order of Chow J dated 17 November 2014, the Defence of the 1^st and 13^th defendants be struck out and judgment be entered against them respectively: for the 1^st defendant with damages to be assessed; and as regards the 13^th defendant, for a declaration that it holds the sum of HK$357.4 million as constructive trustee for the benefit of the 1^st plaintiff, alternatively, as their fall‑back position, for an order that the 13^th defendant shall pay the plaintiffs the sum of HK$357.4 million with interest: see the plaintiff’s summons dated 21 April 2015.

2.Ms Linda Chan SC (together with Ms Eva Sit) said at the hearing that para 1 of the summons, ie, the striking‑out of the Defence, is unnecessary as under the new rules post‑Civil Judicial Reform, default of compliance with an unless order automatically triggers the sanction: see Order 2, rule 4 of the Rules of the High Court, Marcan Shipping (London) Ltd v Kefalas [2007] 1 WLR 1864; Daimler AG v Leiduck [2012] 3 HKLRD 119.  All that is left is for the plaintiffs to apply to enter judgment against the defendants.

3.Mr Johnny Mok SC (together with Mr Alexander Tang and Mr Val Chow) resist the application, alleging that both defendants have complied with the unless order.  They submit that if there had been breach, the nature was technical and minor and urged the court to exercise its discretion to grant relief, relying on Daimler v Leiduck. 

BACKGROUND

4.The relevant background prior and leading to Chow J’s order of 17 November 2014 has been succinctly summarized in his Decision dated 17 November 2014 and will not be repeated here: see paras 2 to 17, 20 to 24, 27, and 29 to 32. 

5.In short, the plaintiffs claimed against the defendants, inter alia, for conspiring with the other named defendants to inflate the business volume through round‑robin circulation of funds and fictitious transactions. 

6.Investigation by the SFC led to the suspension of trading of the 1^st plaintiff’s shares (the listed company) being suspended on 28 January 2013.  Provisional liquidators for the plaintiffs were appointed upon the application of the SFC[1].

7.The plaintiffs obtained Mareva injunctions[2] and an ancillary order for disclosure of the defendants’ assets.  As a result the defendants filed five Statements of Assets.

8.The plaintiffs were dissatisfied with the disclosure under the five statements.  It is the plaintiffs’ case that the defendants had received (approximately) HK$822 million since about 2010, which sum was made up of dividends and sale of 60 million shares. 

9.On 9 April 2014, upon the plaintiffs’ application, L Chan J ordered the defendants to disclose, inter alia, what had become of the HK$822 million.  Although finding the disclosure inadequate, he did not make an unless order. 

10.After that, the 1^st defendant filed a number of affirmations seeking to give further disclosure. 

11.Dissatisfied, on 4 July 2014, the plaintiffs took out an application for an unless order against the 1^st and 13^th defendants compelling them to comply with their disclosure obligations under the Mareva injunctions.

12.The matter came before Chow J and the following order was made on 17 November 2014 (“the Unless Order”):

(1) The 1^st and 13^th defendants shall, by 4 pm on the 14^th day following the date of this order[3], each serve an affidavit or affirmation on the plaintiffs’ solicitors:

(a) Providing full and proper disclosure of all their respective assets of an individual value of HK$50,000 or more, whether in or outside Hong Kong, whether in their own names or not, and whether solely or jointly owned, giving the value, location and details of all such assets.

(b) In the event that any assets of an individual value of HK$50,000 or more have been disposed of, encumbered or otherwise dealt with between 30 July 2013[4] and the date on which the said affidavit or affirmation is sworn, providing a full explanation as to what has become of the proceeds and the value thereof.

(c) Providing a full explanation as to what has become of the monies received by the 13^th defendant amounting to approximately HK$636,000,000 received by the 13^th defendant in respect of its disposal of 60,000,000 shares in China Metal on 27 April 2011 and approximately HK$170,461,770.68 received by the 13^th defendant in respect of various cash dividends declared and paid by the 1^st plaintiff (as described at para 58 of the 3^rd Affidavit of Cosimo Borrelli dated 26 October 2013 and the exhibit referred to therein) and, in the event that any part of those monies have been used, spent or disposed of, providing full particulars of the circumstances (including a full explanation as to what has become of the monies and their current whereabouts and value).

(d) Exhibiting all documents which evidence the matters set out in paras 1(a) to (c) above.

(2) Unless the 1^st and 13^th defendants do fully and properly comply with para 1 above within the time specified, the Defence of the 1^stand 13^th defendants be struck out and the plaintiffs shall be at liberty to enter judgment against the 1^st and 13^th defendants with costs.

13.The 1^st defendant filed his 17^th Affirmation on 1 December 2014 pursuant to the Unless Order annexing a report prepared by a forensic accountant, Mr Frank Yuen of KLC (“Yuen’s 1^st report”).

14.The plaintiffs were of the view that the defendants had failed to comply with the terms of the Unless Order.  Accordingly, they filed their present summons on 21 April 2015. 

15.The matter first came before A Chan J on 10 June 2015.  A Chan J adjourned the plaintiff’s summons for argument and gave leave to the plaintiffs to file an additional ground of complaint.  Leave was also granted to the defendants to file further expert reports to answer the matters set out in para 30 of the plaintiffs’ submissions dated 5 June 2015[5] and the plaintiffs’ additional ground of complaint. 

16.Consequently, the defendants filed the supplemental and 2^nd supplemental reports of Mr Frank Yuen. The contents of Mr Yuen’s supplemental reports were confirmed to be true and accurate by the 1^st defendant’s 18^th and 19^th Affirmations.

THE PRESENT SUMMONS

17.In the plaintiffs’ Skeleton Submissions, Ms Chan raised six grounds of complaint in support of their strike‑out/judgment summons. They will be discussed below.

The 1^st ground: failure to provide own explanation

18.It is submitted by the plaintiffs that the defendants had failed to provide their own explanation of the assets as required under the Unless Order.  Although the 1^st defendant had filed his 17^th Affirmation, this was inadequate as he had only said that “the information provided to KLC for the purpose of compilation of the Report is true and correct[6]”. The defendants had not themselves confirmed the contents of the report as true complete and correct.

19.She said it is very important because the Unless Order mandated the defendants themselves to make an affidavit and in view of the previous breaches of disclosure obligations by the defendants, it became all the more important that they should swear to their own statement. She said the plaintiffs would be unable to move them for contempt for breach of the Unless Order if they had not verified the accountants’ work and analyses.

20.Furthermore, Ms Chan said the relevant date and time of compliance was 4 pm, 1 December 2014 and thus, the court should only consider the evidence filed before the deadline, ie, only the 1^st defendant’s 17^th Affirmation and Yuen’s 1^st report.  In other words, she said I should ignore the 18^th and 19^th Affirmations of the 1^st defendant.

21.Mr Mok submits it is obvious that the defendants have in effect adopted the conclusions of Yuen’s 1^st report at para 12 of the 1^st defendant’s 17^th Affirmation in which he said that the total payment of HK$806,461,770.68[7] has been accounted for. 

22.At any rate, Mr Mok said that in his 18^th Affirmation filed on 24 June 2015, the 1^st defendant has confirmed for himself and on behalf of the 13^th defendant that the facts and matters stated in Yuen’s 1^st report, as well as the supplemental report were “true and correct to the best of my knowledge information and belief”: see para 3 of the 1^st defendant’s 18^th Affirmation.

23.In his 19^th Affirmation, likewise, the 1^st defendant confirmed for himself and the 13^th defendant that the 2^nd supplemental report of Yuen to be true and correct: para 4 the 1^st defendant’s 19^th Affirmation.

Non‑confirmation?

24.This ground can be dealt with swiftly. I am satisfied that the defendants have adopted the contents of Yuen’s 1^st report in his 17^th Affirmation in the manner aforesaid.  I take the view that the deadline for filing the evidence has been met by the filing of the 17^th Affirmation which attached to it Yuen’s 1^st report on 1 December 2104.  There was no breach of the time element of the Unless Order.  I also take the view that there is no reason why the court should ignore the 18^th and 19^th Affirmations which merely confirmed the contents of the 17^th Affirmation and the supplemental reports filed pursuant to the order of A Chan J.  For all intents and purposes, the materials contained in these two affirmations (which essentially were the additional reports of Mr Yuen) were simply facts and matters which supplemented the matters contained in the 17^th Affirmation which was filed within time.

25.I understand Ms Chan’s submission that A Chan J granted limited leave to the defendants only, and they were supposed to just deal with matters arising out of para 30 of their submissions before A Chan J and the additional ground of complaint. Thus, the defendants should not be allowed to raise other matters in their supplemental reports. 

26.But the reality is that throughout the two‑day hearing, both the plaintiffs and defendants have made submissions on the contents of the supplemental reports.  When the plaintiffs suggested the defendants had not been full and proper with their disclosure, they have not confined themselves to Yuen’s 1^st report but have referred to the supplemental reports, typically footnote 6 (see discussion below) which in fact formed one of their main grounds of attack.  I do not see how the defendants could resist or respond to the plaintiffs’ submissions without reference to the supplemental reports, nor could the court consider the parties’ positions if it were to disregard those reports.

27.At any rate, if I am wrong, I am prepared to grant leave to the defendants to file and serve the materials contained in the supplemental reports which were otherwise not covered by the order of A Chan J.  I do not see the absence of application for leave by the defendants would prohibit granting leave.  The court certainly has inherent jurisdiction to regulate these procedural matters.

28.Accordingly, I find the 1^st ground not substantiated.

The 2^nd ground: use of HK$384,340,667, in breach of 1(c) and (d)

29.At Table 22 of Yuen’s 1^st report[8] was a summary of the usage of the funds, the subject matter of disclosure under para 1(c) of the Unless Order, less the charges[9], ie, approximately HK$806 million – HK$22 million odd = HK$784 million odd.

30.The plaintiffs’ complaint under this ground relates to five sums, totalling about HK$384 million, which were said to be used to repay the loans owing to Sarasin, BOCI and Citibank.  These five sums were (a) US$11 million or HK$85,250,000; (b) US$27,710,552 or US$214,756,778; (c) HK$31,190,000; (d) HK$51,000,000 and (e) HK$2,143,869.  They were highlighted yellow in table 22.

31.They complained that the defendants have not fully explained the use of the loans or identify the assets acquired through the use of the loans and they provided inconsistent explanations of their use.

32.They instanced the US$11 million and the US$27.7 million as examples to illustrate the non‑compliance with paras 1(c) and (d) of the Unless Order.

33.They said in Yuen’s 1^st report, it was stated that US$11 million was paid into Wellrun (the 13^th defendant’s) Sarasin USD account to repay the money market loan no 113400 but in Yuen’s 2^nd supplemental report, it was changed to suggest that the US$11 million became part of the funds which the 13^th defendant transferred to Chung Shing Hong Kong as capital injection of the Chung Shing PRC companies.  These were two different versions.  The plaintiffs also said that not all of the Sarasin bank statements were provided, which constituted a breach of para 1(d) of the Unless Order.

34.As regards the US$27.7 million, it was first said in Yuen’s 1^st report that HK$300 million (being part of the sale proceeds of the 60 million shares) equivalent to approximately US$38,594,144 was used to repay the money market loan no 44803 of US$27.7 million, leaving a balance of US$10,855,672.  The balance of this amount, together with a sum of US$4,318,147 being the 2010 final dividend received from the 1^st plaintiff, formed part of the US$42 million which was transferred to Chung Shing PRC as capital injection: see para 69 Yuen’s 1^st report. 

35.The plaintiffs said this explanation changed when Mr Yuen said at footnote 6 of his 2^nd supplemental report that the entire amount of HK$300 million including the US$27.7 million was injected into Chung Shing PRC. 

(a) Explanation for US$11 million

36.The relevant statements of the Sarasin USD account for that period were annexed to Yuen’s supplemental reports[10] at pp 78 to 84.  It can be seen that on 21 February 2012, there was a reference of “Open a new Money Market Loan … 21.02.12 – 28.01.12 (113400)” and US$15 million was credited.

37.Tracing through the statements reveals that this US$15 million was rolled over at 7‑day intervals until 18 May 2012 when US$10,999,989.69 (US$11 million less charges) was paid into this account to partly repay this US$15 million loan (which had by then become US$15,086,650.96 together plus interest, ref no 132077), leaving a negative balance of US$3,170,601.15.

38.The genesis of this US$11 million could be found at table 7, Yuen’s 1^st report, where he set out the movements of the HK$300 million.  It is not in dispute that this HK$300 million was part of the sale proceeds of 60 million shares. 

39.At Item (u) of table 7 was the connotation of a transfer on 18 May 2012 of US$11,000,019 to the 13^th defendant’s Sarasin USD current account which could be cross-referenced to the Sarasin Citic Ka Wah USD passbook account where the corresponding withdrawal of US$11,000,019.32 on 18 May 2012 was found.  The payment voucher of the 13^th defendant, which was also produced, recorded a transfer of US$11 million (less bank charges) on 18 May 2012[11].

40.Thus, Mr Mok says it seems quite clear that the US$11 million was fully consumed for the payment of the US$15 million money market loan.

41.In reply, Ms Chan contended that the court should only look at the existing evidence.  Mr Yuen said the US$11 million was used to repay the loan no 132077: see para 46 of Yuen’s 1^st report; and there was no evidence to show that loan no 132077 was the same loan with reference no 113400.  Thus, she said the US$11 million which was used to repay the US$15 million loan with no 113400 could be a different US$15 million loan with no 132077.

42.There is actually evidence.  When one looks at the previous statements relevant to the US$15 million loan, it is readily discernable that when the loan was first created on 21 February 2012, it bore the no 113400.  In fact, it was assigned a new number each time it rolled over.  The reference number was 132077 for this US$15 million loan when it was rolled over to 16 May 2012 and this was the loan which Mr Yuen said was repaid by the US$11 million: para 46, Yuen’s 1^st report, which quite clearly was numbered 113400 when it was first opened on 21 February 2012.

43.This complaint was unjustified but it was not the plaintiffs’ only complaint.

44.It is noted that Mr Yuen said in his 2^nd supplemental report at para 32(c) (internal p 18) as follows:

“ On 18 May 2012, US$10,999,990, being part of the Sales Proceeds (Section E2.5.2.2 in the 2014 Report), was deposited into the Sarasin USD Current Account [D4C/84] and used to settle part of a money market loan with transaction reference number 113400 of US$15,000,000 that was first drawn down on 21 February 2012 and it outstanding balance was rolled-over by way of drawdowns and repayments of money market loans until the outstanding liability was repaid in full. The loan proceeds were transferred to Wellrun’s CKW USD Savings Account on 21 February 2012 [D4C/78] and eventually to Chung Shing on 29 March 2012 (described in Section E2.5.2.1 of the 2014 Report) (Column N, row (22) of Table 6).”

45.This appears to be Ms Chan’s complaint about two different versions being given.  However, in my view, it is quite obvious from the documents that this was not a different version or inconsistency but rather a different description of the same US$11 million.

46.It is necessary to refer to table 7 of Yuen’s 1^st report for elaboration.  This table sets out the movements of US$38,709,674 (about HK$300 million) which represented part of the sale proceeds of the 60 million shares:

Table 7—Movements in Wellrun CKW USD Savings Account for the period from 7 June 2011 to 18 May 2012

Date	Description	Deposit US$	Item	Withdrawal US$	Item	Balance US$
7 June 2011	Balance brought forward					323,346
30 June 2011	Transfer from CMR Macao	38,709,674	(a)			39,033,021
30 June 2011	Bank Interest	27	(b)			39,033,048
4 July 2011	Interest from CMR Macao	154,664	(c)			39,187,711
5 July 2011	Transfer to CMR Macao			20,000,000	(d)	19,187,711
14 July 2011	Transfer to Chung Shing Finance (Holdings) Ltd			19,005,000	(e)	182,711
17 October 2011	Professional fee			9,977	(f)	172,734
29 December 2011	Interest from CMR Macao	261,198	(g)			433,932
29 December 2011	Transfer from CMR Macao	20,000,000	(h)			20,433,932
31 December 2011	Bank Interest	117	(i)			20,434,049
3 January 2012	Transfer to Huan Bao Steel Ltd.			15,000,000	(j)	5,434,049
4 January 2012	Transfer to CMR Macao			1,000,000	(k)	4,434,049
4 January 2012	Transfer to Wellrun CKW HKD Savings Account			4,000,000	(l)	434,049
7 February 2012	Professional fee			150		433,899
21 February 2012	Transfer from Wellrun Sarasin USD Current Account	14,999,997	(m)			15,433,896
22 February 2012	Transfer to CMR Macao			15,000,000	(n)	433,896
29 February 2012	Bank Interest	233	(o)			434,129
28 March 2012	Transfer from CMR Macao	15,999,997	(p)			16,434,126
29 March 2012	Transfer from Huan Bao Steel Ltd.	4,000,000	(q)			20,434,126
29 March 2012	Transfer to Chung Shing Finance (Holdings) Ltd			20,000,000	(r)	434,126
17 May 2012	Transfer from Huan Bao Steel Ltd.	8,700,000	(s)			9,134,126
17 May 2012	Transfer from Huan Bao Steel Ltd.	2,299,997	(t)			11,434,123
18 May 2012	Transfer to Wellrun Sarasin USD Current Account			11,000,019	(u)	434,104

47.It is the defendants’ explanation that part of the US$38,709,674 (Item (a)), was applied towards capital injections for Chung Shing PRC. 

48.Item (e) US$19,005,000, which originated from Item (a) was the most straight forward.  It was transferred to Chung Shing on 14 July 2011: see para 30, Yuen’s 1^st report.

49.Item (l) was paid into the 13^th defendant’s Citic Ka Wah HK passbook account and its use was explained in section E.2.5.4 of Yuen’s 1^st report. 

50.According to Yuen’s 1^st report, Item (j) US$15 million was the source of funds for Items (q), (s) and (t).  Item (k) US$1 million formed part of Item (p) US$15,999,997, which together with Item (q) represented the US$20,000,000, ie Item (r), which was injected into Chung Shing as capital.  US$15 million of Item (p) was obtained by the creation of the money market loan no 113400: para 38, Yuen’s 1^st report.  This part relating to the 113400 loan is actually very complicated.

51.First, a money market loan of US$15 million (no 113400) was created on 21 February 2012: see February 2012 Sarasin USD account statement, p 78, the two rows bearing reference nos 383469284 and 383520884.  This loan was transferred into the 13^th defendant’s Citic Ka Wah USD passbook account on 21 February 2012, ie Item (m) US$14,999,997 (US$15 million less charges) on table 7.  Item (m) was transferred to become Item (n) US$15 million.  Item (n) US$15 million plus Item (k) US$1 million became Item (p) US$15,999,997.

52.Item (p) US$15,999,997 plus Item (q) US$4,000,000 which according to Mr Yuen, also came from Item (j), together formed US$20 million (Item (r)) which went into Chung Shing as capital on 29 March 2012.

53.Items (s) and (t) US$8,700,000 and US$2,299,997 were likewise sourced from Item (j) US$15 million: table 11. Items (s) and (t) were the funds for Item (u) which went to pay down the money market loan no 113400 on 18 May 2012: see the May 2012 Sarasin USD account statement.

54.Although extremely complicated, that explains why (but not that it is accepted), in the 2^nd supplemental report para 32(c), Item (u) US$11 million was described as the loan proceeds which funded the payment of Item (r) on 29 March 2012.  This is because Item (m), which became Item (n) US$15 million plus Item (k) US$1 million to form Item (p) US$15,999,997, was in fact sourced from the 113400 loan paid down by Item (u) US$11 million on 18 May 2012.

55.Thus, from the accountant’s point of view, they were simply different descriptions by the accountant of the same amount of US$11 million.

56.In fact, the accountant’s basis that this US$11 million formed part of the monies set out in table 22 was because, as can be seen from table 7, it originated from items (s) and (t), which in turn came from Item (j) that was sourced from the sale proceeds of US$38,709.674.

57.Having said all this, I hasten to emphasise that the above was the reading of Yuen’s 1^st report’s explanation of the application of this US$11 million.  This is not the end of the matter. I have the following observations to make.

58.First, Ms Chan emphatically submitted at the hearing that there was blatant non‑compliance of the Unless Order in that a full explanation of the whereabouts of the proceeds was not given.  She instanced the example that the money market loan no 132077 might not be the same as no 113400.  I have dealt with this above.

59.But I think, by extension, Ms Chan’s complaint is equally applicable to some of the sums listed in table 7. For example, how can one be sure that the US$1 million at (Item k) was the same US$1 million which formed part of (Item p)?  Likewise, how can one be sure that the US$15 million at Item (j) was the source for items (q), (s) and (t)?  After all, even though the amounts were similar, the proceeds did stay in Huan Bao’s account for a few months before they went back into the 13^th defendant’s account. 

60.Ms Chan once said by way of a general comment that to fully comply with the Unless Order, the defendants should have produced fund flow charts for each relevant sum of the proceeds.  I take it to mean that for example, in respect of the US$1 million at Item (k), that there should be a fund flow reconstruction diagram which shows exhaustively its usage and application.  Similarly, for the US$15 million, Item (j), there should be another fund flow reconstruction account of the same nature which tells what had happened to this US$15 million in the relevant Huan Bao account.

61.In my view, the failure to explain the whereabouts of the US$15 million (Item j) alone constitutes a breach of the Unless Order.  The Unless Order requires the defendants to give a complete and proper disclosure of “what has become of the monies received by the 13^th defendant ...”: para 1(c).

62.Plainly, this US$15 million (Item j) was, according to the defendants’ own accountant report, part of the US$38,709,674 (Item a) which represented monies received by the 13^th defendant. Mr Yuen said this amount was the source of the funds in Items (q), (s) and (t).  But this is the accountant’s own words of the flow.  What is crucial and required under the Unless Order is that there should be first, a full explanation; and second, supported by all documents.  Fundamentally, I cannot see how, in the absence of documents relating to Item (j), such as the accounts, ledgers and bank statements of Huan Bao, that Mr Yuen could conclude that Item (j) was the source of funds for Items (q), (s) and (t). 

63.I note from Appendix 1 of Yuen’s 1^streport, that the defendants had only produced the bank statements of Huan Bao Steel’s DBS HKD account: see Item 16 of Appendix 1 of Yuen’s 1^st report.  At para 35 of Yuen’s 1^st report, he said:

“35. According to the Confirmation for Outward Chats dated 3 January 2012 issued by CBI to Huan Bao Steel (‘Huan Bao’) (Appendix – 36), Wellrun remitted US$15,000,000 (Table 7 Item (j)) to Huan Baos’ account numbered 53293149418 in Bank of Communications Company Limited (‘Huan Bao BOCOM Account’). Nevertheless, it is noted that US$4,000,000 (Table 7 Item (q)), US$8,700,000 (Table 7 Item (s)) and US$2,299,997, net of bank charges of US$3 (Table 7 Item (t)) were remitted from Huan Bao to Wellrun CKW USD Savings Account on 29 March 2012, 17 May 2012 and 17 May 2012 respectively which together make a total of US$14,999,997.”

64.The Huan Bao BOCOM account statements for the relevant which would show the deposit of US$15 million and its subsequent movements have never been produced.  This is a clear breach of para 1(d) of the Unless Order.  Without the production of the BOCOM statements, or the Huan Bao ledgers of the relevant period, it is unknown whether this enormous sum of US$15 million has been applied for some other use or has acquired some other assets which the defendants were under a duty to disclose.  There is no evidence that the defendants were not in possession of the documents evidencing the movements of this US$15 million. 

65.The same applies to US$1 million, Item (k). It was transferred into CRM Macao on 4 January 2012.  It was then said by the accountant that this amount, together with the money market loan no 113400, formed Item (p) US$15,999,997 on 28 March 2012: see para 48, Yuen’s 1^st report.  There was a lapse of three months between the two transfers.  This US$1 million originated from the sale proceeds but there is no evidence at all showing what happened to this US$1 million after it was paid into the CMR Macao.  Indeed, Mr Yuen said at para 40 that “The additional US$1,000,000 is believed to be sourced from US$1,000,000 (Table 7 Item (k)) previously transferred to CMR Macao from Wellrun USD Savings Account. …” 

66.I am aware that the defendants might not have in their possession documents belonging to the 2^nd plaintiff. However, there is nothing to prevent them from asking or making an application for the provision of the relevant documents, or going back to Chow J for directions or make an application for relief from sanction.  None of that has been done.  

67.It is further noted that no documents at all in relation to Items (q), (s) and (t) US$4,000,000, US$8,700,000 and US$2,299,997 were produced.  At para 36 of Yuen’s 1^st report, he said: 

“36. Out of the sum of US$14,999,997, US$4,000,000 was transferred to Chung Shing on 29 March 2012 while US$8,700,000 and US$2,299,997 were transferred to Wellrun’s Sarasin USD current account numbered 8.00188.8.4000 (‘Wellrun Sarasin USD Current Account’) on 18 May 2012 as set out in Table 10 below.”

68.No documents were produced.  In the absence of the relevant documents, how can Mr Yuen conclude that these three big sums were sourced from Item (j)?  The obligation to give a full explanation of US$4,000,000, US$8,700,000 and US$2,299,997 is absolute.  It is the defendants’ own case these sums came from Item (j) US$15 million which in turn was sourced from Item (a).  Similarly, there is no evidence to suggest that the defendants did not have the relevant documents to show the flow of items (q), (s) and (t). 

69.The failure to give a full explanation of Items (q), (s) and (t) and non‑production of documents in relation thereto constitute breaches of paras 1(c) and (d) of the Unless Order. 

70.I am aware it was accepted by the plaintiffs themselves that no tracing was required: para 33, Decision of Chow J. However, the defendants were alive to the fact that the money flow was circular and extremely complicated.  Given the complexity, tracing was inevitable in order to comply with the court order.  Indeed, most parts of the accountant report were about tracing.

71.The fact that the defendants fully understood what was required of the Unless Order could be seen by the detailed tracing of the US$4,000,000 (Item (l)) in section E.2.5.4 of Yuen’s 1^st report.

72.The situation is compounded by the lack of full explanation.  For example, why was it necessary to transfer part of the proceeds to Huan Bao, then back to the 13^th defendant before injecting into Chung Shing?  Why was it necessary to create a money market loan to fund the capital injection before part of the sale proceeds were used to repay part of the money market loan?  These remain unanswered and the defendants are in breach of the Unless Order. 

73.I am also aware that the parties have not made direct submissions to these observations of the court.  It might be suggested by the defendants that they ought to be given an opportunity to specifically deal with these observations.

74.I disagree.  The defendants were at all times most ably represented by leading counsel and solicitors.  They knew full well it was their obligation to comply fully and properly with each term of the Unless Order.  They had been given a number of opportunities[12] to make good their own disclosure. 

75.More importantly, this is not a matter of submissions.  This is a factual matter.  If they had not provided a complete disclosure of what had happened to Items (j) and (k) with documentary evidence; and had not provided documents evidencing that Items (q), (s) and (t) sourced from Item (j), they had not fully explained the application of the US$11 million and are in breach of the Unless Order. 

76.There is no unfairness to the defendants. They could apply for relief from sanction if they faced any difficulty about disclosure.  They had practically done this once before A Chan J when they applied for leave to file more reports to tackle the plaintiffs’ complaints in relation to the HK$53 million odd.  After all, this is an Unless Order, the final chance the court gave to the defendants, subject only to relief from sanction if an application has been made.  I am of the view that it is wrong and unfair to the plaintiffs if the defendants were given another chance to explain. 

77.Moreover, the aforesaid analysis was certainly covered by the wider and general submission of Ms Chan that the court should not assume that one sum which has gone at a particular point of time into a particular account of the defendants was the same sum which was paid out later, even though they looked similar or was of the exact amount.  Ms Chan has helpfully drawn my attention to the fact that the defendants had many accounts which were in turn divided into various sub‑accounts.  There were many sums which were of the same or very similar amounts going in and out and travelling between the defendants’ various accounts.  The burden of showing a complete picture of the fund flow falls squarely on the defendants. 

78.Admittedly, the defendants had neither produced the general ledgers: Items 19 and 20, Appendix 1 of Yuen’s 1^st report, which were in their possession and which had been given to Mr Yuen.  The general ledgers of the 13^th defendant definitely formed part of the documents in support of the movements of funds in table 7.  Its non‑production constitutes a breach of para 1(d).

79.I find that the complaint that the defendants had not given a full explanation of the US$11 million established.

80.Ms Chan reminded me that she only needs to show one breach.  This must be correct.  But in deference to counsel’s very helpful submissions, I shall go on to discuss the other complaints raised by the plaintiffs.

(b) Explanation for US$27.7 million

81.The defendants’ explanation can be found at paragraphs 60 to 69 of Yuen’s 1^st report.

82.In short, the statement of the 13^th defendant’s USD current account for the month of May 2011 shows that the balance was zero as at 30 April 2011.  On 4 May 2011, a new money market loan of US$27,700,264.37 (ref 44803) was created. 

83.HK$300 million (equivalent to US$38,594,144), which represented about half of the sale proceeds of the 60 million shares, was credited into this Sarasin USD current account on 6 May 2011, thereby depressing the US$27.7 million money market loan to a positive balance of US$10,883,592.04. 

84.Tracking the May 2011 statement of this account, on 31 May 2011, the sum of HK$33,590,000 or US$4,318,146.76 was paid into this USD current account.  It does not seem to be disputed that this US$4.3 million odd represented the 2010 final dividend of the 1^st plaintiff. After the payment in of this amount, the balance was increased to a positive figure of US$15,175,888.  Later on 7 June 2011, US$42 million was withdrawn from this account, paid into the 13^th defendant’s ICBC Guangdong account, before it was finally paid to Goldman Properties Limited (former name of Chung Shing Hong Kong) on 27 June 2011 for capital injection into Chung Shing PRC.

85.There does not appear to be much contention about the movements of this US$27.7 million.  The major dispute seems to be the different descriptions by Mr Yuen of the use of this amount. 

86.In Yuen’s 1^st report, he concluded at para 69 as follows:

“69. In summary, the Sales Proceeds of HK$300,000,000, equivalent to approximately US$38,594,144 was used for the repayment of money market loan with transaction reference number 44803 of US$27,710,552 including interest and payment of loan interests totaling US$27,920 for the three money market loans with transaction reference numbers 46694, 48072 and 49862, leaving a balance of US$10,855,672 on 30 May 2011. The aggregate balance of the US$10,848,787 (US$10,855,672 plus interest income of US$2,069 and minus interest for money market loan with transaction reference number 51446 of US$8,954) and the 2010 Final Dividend received from CMR of US$4,318,147 formed part of the US$42,000,000 transferred to Chung Shing on 7 June 2011[13].”

87.The plaintiffs argued that the accountant changed his view, quoting footnote 6 in his 2^nd supplemental report as follows:

“ I stated in paragraph 69 of the 2014 Report that the amount of US$38,594,144 was used for repayment of money market loan no 44803 of US$27,710,552, leaving a balance of US$10,856,572. However, if one considers the Sarasin Portfolio Account for the months May and June 2011, as the outstanding money market loan before and after receiving US$38,594,144 and US$4,318,147 from the Sarasin HKD Current Account remains at the same level of approximately US$27 million, I now take the view that US$42,000,065 transferred from the Sarasin USD Current Account to Chung Shing through the Wellrun’s ICBC USD Account was sourced from the aforesaid transfers of US$38,594,144 and US$4,318,147 from Sarasin HKD Current Account [D4C/69-70].”

88.Mr Mok submits that this is a different interpretation and not a change of course.

89.I agree.  Looking through the bank statements[14], it is clear that the HK$300 million was applied towards repayment of the US$27.7 million, leaving the positive balance of US$10.855 million odd which was then mingled with US$4.318 million and formed part of the US$42 million that went into Chung Shing Hong Kong.

90.Plainly, when Mr Yuen made a remark at footnote 6, he was just supplying an alternative interpretation of the same set of figures on the same set of bank statements. 

91.The fact that the accountant had a different interpretation or analysis towards the application of the fund does not mean there was lack of disclosure.  As submitted by Mr Mok, the different interpretation by the same accountant does not detract from the fact that an explanation had been given in relation to the usage, application, and what had become of the US$27.7 million.

92.Unlike the US$11million which was sourced from a sum originated from the proceeds but which had gone into another account for a few months, the flow of this US$27.7 million was relatively straight forward and the entire history of its flow could be seen from the produced bank statements. 

93.I find that the defendants have given an explanation of this US$27.7 million.

(c) The other sums

94.Neither the plaintiffs nor the defendants made any submission on the relatively small sum of US$2,143,869.  I shall take it that there is no issue on this amount.

95.Next was the amount HK$31,190,000.  There is no dispute that this amount represented the 2009 final dividend paid by the 1^st plaintiff. According to Yuen’s 1^st report, this sum was paid on 8 June 2010 into the 13^th defendant’s Sarasin HKD account to partially settle a loan of HK$70,763,584.  Mr Mok said although he did not have to[15], he produced a schedule which shows the purchases of securities by the use of the HK$70 million odd loan, which was subsequently partially repaid by the HK$31,190,000 cash dividend.

96.Ms Chan made no submission on the sum of HK$31,190,000.  I shall take it that there was no more complaint about the disclosure of this amount.

97.Finally, as regards the HK$53,143,869 which was the 2010 final dividend, the flow of its use has been explained in Yuen’s 1^st report: see paras 89 to 97 Yuen’s 1^st report.  In short, the sum eventually broke up into three sums of HK$30 million, HK$10 million and HK$11 million and they were transferred from the 13^th defendant’s Citibank HKD account to its securities account with BOCI Securities Ltd.  Leave was granted by A Chan J on 10 June 2015 for the defendants to answer the plaintiffs’ criticisms and the further explanation can be found at paras 8 to 60 of Yuen’s 1^st supplemental report.

98.In her reply, Ms Chan made no further submission on this sum save reiterating the fact that the obligation to comply with disclosure was personal to the defendants and they should not delegate the job to the accountant which in itself constituted a breach of the express terms of the Unless Order. 

99.With respect, I disagree.  I think it was appropriate for the defendants to instruct an account to detail the fund flows in order to give an explanation of the whereabouts and what has become of the proceeds, as mandated by Chow J.  As can be seen, the exercise was very complicated involving tracing of the relevant sums from its origin to its ultimate destination.

The 3^rd ground: failure to provide all documents

100.It is the plaintiffs’ case that the defendants kept detailed records of how the proceeds were used, transferred and spent. Examples of payment vouchers cited by Ms Chan suggest that expenses involving small sums of HK$70,000 odd and HK$29,000 odd were vouchered. Purchases were receipted.

101.The plaintiffs complained that the defendants had not produced all the payment vouchers, receipts, general ledgers and supporting documents in respect of the use of the monies under para 1(c) of the Unless Order, thereby violating para 1(d).

102.The defendants in response said all documents mean all documents evidencing the disclosures required under the Order, but not all documents of the defendants.  This is correct. 

103.They also criticize the plaintiffs of being vague and unspecific of what documents were missing.

104.But what is not in dispute is that the defendants had supplied to Mr Yuen the general ledgers of the 13^th defendant and those of Asia Huan Bao: see Items 19 and 20 of Appendix 1, Yuen’s 1^st report.  As said above, in relation to the US$11 million, I noticed that only the vouchers, bank statements and bank passbooks were produced.  The general ledgers were not. 

105.At the hearing, the defendants submitted that they were prepared to disclose the documents listed under Appendix 1 of Yuen’s 1^st report which would include the general ledgers in Items 19 and 20.  They said it would be totally disproportionate to strike out their Defence and judgment entered for a relatively insignificant non-compliant aspect of the Unless Order.

106.As said during the hearing, para 1(d) of the Unless Order demands disclosure of all documents, not all relevant documents. It is obvious that the defendants have not fully complied with para 1(d) by the non-disclosure of the general ledgers. 

107.Having identified a breach, what follows next is whether the court nevertheless retains a discretion to grant relief in the circumstances or as Ms Chan suggests, that no discretion arises and the sanction automatically takes effect upon non-compliance.

108.This will be discussed below.

The 4^th ground: failure to disclose interests in Asia Steel Building

109.The plaintiffs said that in breach of para 1(a) of the Unless Order, the defendants have failed to disclose the 1^st defendant’s interest in Asia Steel Properties, GAS Property and the Asia Steel Building.  Asia Steel Properties is a Hong Kong company which wholly owns GAS which in turn owns the Asia Steel Building[16].

110.It is the plaintiffs’ case that by a sale and purchase agreement dated 13 October 2010, the 1^st defendant purportedly sold his shares in Asia Steel Properties to his mother‑in‑law, Madam Qin, at a consideration of RMB60 million which he received by two instalments on 28 February 2011 and 2 March 2011.  Through the sale of the shares in Asia Steel Properties, the ownership of GAS and hence the entire Asia Steel Building became vested in his mother‑in‑law.

111.The plaintiffs contend that the sale was false.  In support, they said that in the 1^st plaintiff’s annual reports for years ended 31 December 2011 and 31 December 2012, ie after the alleged sale, it was still stated that the GAS was a company indirectly owned and controlled by Mr Chun.  Secondly, they said that the sale and purchase agreement is not evidence of the sale of shares in contravention of section 66 of the Companies Ordinance which ordains a proper instrument of transfer to be delivered to the company.  A proper instrument of transfer is one that would attract stamp duty[17] and may include the sale and purchase agreement[18].  In the present case, the sale and purchase agreement which was produced was not stamped, nor did the defendants produce any other properly stamped instruments of transfer such as bought and sold notes.  The plaintiffs said all this supports their contention that the sale was false.

112.Mr Mok submits that the 1^st defendant had already explained at para 57 of his 14^th affirmation that in relation to the annual reports for the fiscal year 2011, the “erroneous description is probably an oversight.”  He further submits that a sale and purchase agreement is itself clear evidence of the passing of beneficial ownership[19], not to mention that the defendants had produced other evidence such as the receipts of RMB60 million from Madam Qin and the annual returns filed with the Company Registry.

113.As regards the lack of a stamped instrument of transfer, he submits and it is in fact the plaintiffs’ own case that a proper instrument of transfer under section 66 is an instrument is one that would attract stamp duty, and not a properly stamped instrument.  An unstamped instrument is inadmissible in court[20] but that does not mean the transaction is void.

114.I do not think I need to decide on these contentions although I think Mr Mok must be right that the failure to stamp an instrument renders it inadmissible in court but does not void the transfer of the shares. 

115.It is not necessary to resolve these disputes now because what is in issue is whether or not the defendants had failed to comply with para 1(a) of the Unless Order to disclose assets “whether in their own name or not”.  Plainly, what the plaintiffs now seek to do is to ask the Court to decide, at this stage and based on affidavit evidence only, that the shares in Asia Steel Properties, which the defendants said have been sold to a third party, Ms Qin, still remain the defendants’ assets.  This is clearly an ownership issue.

116.Ms Chan argues she is not asking the court to determine ownership, she is merely asking the court to consider the evidence and form its own view that the defendants’ remain the owners, which the court is entitled to do.  With respect, I do not see the distinction.  The exercise is to decide whether the 1^st defendant is the owner — albeit not in his own name — of the shares.  Of course the court is entitled to consider the evidence and form its own view.  The court will not accept bare assertions of non‑ownership.  But at the same time, unless the court forms the view that the evidence of the defendants is impossible of proof or totally incredible, the proper approach is not to determine the issue on affidavit evidence and proceed to trial.  Mr Mok has cited authorities in support of his proposition[21] to which I agree.  In the present case, although there is evidence which goes to contradict the defendants’ credibility, I frankly do not find their case to be so incredible that I can dismiss it as fanciful and form the view, at this stage, that they are the true owners of the assets, which in turn leads to the conclusion that they have breached the Unless Order. 

117.I also agree with Mr Mok that resolving the issue of ownership is unnecessary at this stage.  The order for disclosure is one in aid of the Mareva injunctions.  Its purpose is to identify and preserve the assets so as to avoid the assets being put beyond the reach of the plaintiffs pending judgment.  Regardless of the 1^st defendant’s case, the plaintiffs have already extended the Mareva injunctions to cover the assets including those presently in dispute, namely, the Asia Steel companies: see the order of DHCJ Geiser of 7 August 2013.

118.I find no substance in this ground of complaint.

The 5^th ground: failure to disclose interests in Chung Shing group

119.In similar veins to the fourth ground, the plaintiffs suggest that despite the Deed of Gift dated 29 August 2012, the defendants remained the true owners of Chung Shing Hong Kong and hence the Chung Shing PRC companies.

120.The background is that there was only one share in Chung Shing Hong Kong.  Chung Shing Hong Kong holds the Chung Shing PRC companies.  The one share in Chung Shing Hong Kong was gifted by the 13^th defendant to Chung Shing Singapore, which is wholly owned by Chung Shing Belize, and in turn beneficially owned by his three daughters[22]. By making a gift of the one share in Chung Shing Hong Kong, the daughters became owners of the Chung Shing PRC companies with capital injections of about US$82 million[23].

121.The plaintiffs complained that the defendants had failed to make disclosure of their interests of the Chung Shing PRC companies. Again, they said the defendants remained the true beneficial owners.  The plaintiffs attempted to make good their submission with reference to suspicious circumstances.

122.For instance, they pointed to the fact that even after the gift was made, in October 2012 and March 2013, the defendants were still seeking professional advice on the set up of a trust for the benefit of the three daughters which involved the injection into the trust of the Chung Shing Hong Kong share.  Moreover, evidence suggests that the 1^st defendant continued to be heavily involved in the business of the Chung Shing PRC companies after the gift was made, at least until he resigned in July 2013. Even after his resignation, he appeared to be controlling the companies through close relatives who appeared to be his nominees.  The plaintiffs submit all these are indicators that the defendants remained beneficial owners of the Chung Shing group.  Hence, it constitutes a breach of their disclosure obligations under the Unless Order.

123.Without disrespect to counsel for the plaintiffs and without going through each and every fact advanced to support the assertion that the defendants were the ultimate beneficial owners, it is unnecessary and inappropriate to resolve this issue at this stage.

124.It is unnecessary because apart from the fact that the plaintiffs have extended their Mareva injunctions to cover the Chung Shing group of companies[24], I was told that they have actually started a separate action against the daughters and had obtained, inter alia, an order for disclosures relating to the companies[25]. There seems no reason why the plaintiffs cannot seek further disclosure from the daughters who are purported owners of the PRC companies.

125.It is inappropriate because as previously said when dealing with the sale to Ms Qin, the issue is whether the defendants had breached the Unless Order by failing to disclose assets “whether in their own name or not”.  No matter how Ms Chan puts it and how forceful some of the pointers of ownership there may be, this is in essence an ownership issue which cannot and should not be disposed of on affidavit evidence at this stage.

126.Accordingly, I do not find this ground of complaint established.

The 6^th ground: failure to explain US$82 million injected into Chung Shing PRC

127.This is a similar and ancillary complaint to the fifth ground.  In short, the plaintiffs submit that the defendants had failed to provide a full explanation of the whereabouts of the US$82 million injected into the Chung Shing PRC companies.  The plaintiffs submit that the 1^st defendant should be able to provide a full explanation on what happened to the capital injections at least up to the time of disposition of the share in Chung Shing Hong Kong, ie 29 August 2012.  In fact, the plaintiffs said he did not resign as director until July 2013 and even after the resignation the companies remained under the control of his close relatives and so he should be able to obtain the information and documents from his close relatives.

128.All this was denied by the defendants who said that after the disposition and resignation, he no longer had ownership nor control over the companies, and he does not have the information and documents in his possession or custody. 

129.Again, I think now is not the time to resolve these hotly contested factual disputes which boil down to whether or not the 1^st defendant retains control over the companies even though he was no longer owner, director and legal representative.  I have read the 1^st defendant’s affidavit evidence[26] in this regard and the evidence does not appear to be entirely fanciful and utterly incredible to me. 

130.Accordingly, I find that the complaint under this ground has not been made out either.

CONCLUSION ON BREACH OF THE UNLESS ORDER

131.I find that the defendants have not given a full explanation of the US$11 million and supplied documents in relation thereto and are in breach of paras 1(c) and (d) of the Unless Order.

132.They admitted they have not supplied Items 19 and 20 of Appendix 1 of Yuen’s 1^st report and are in breach of para 1(d) of the Unless Order.

133.Before turning to the consequences, I shall discuss the applicable legal principles first.

The legal principles

134.Post‑CJR, the situation governing a default of compliance with an Unless Order is clearly stated in Marcan Shipping (London) Ltd v Kefalas [2007] 1 WLR 1864:

“28. The starting point in the present case must be the terms of the Rules themselves. Rule 3.1(3)(b) expressly gives the court the power when making an order to specify the consequences of failure to comply with its terms and rule 3.8(1)[27] expressly provides that where a party has failed to comply with an order any sanction imposed by the order has effect unless the party in default applies for and obtains relief from the sanction. This makes it clear, in my view, that no further order is required to render the sanction effective; on the contrary, the onus is on the defaulting party to take steps to obtain relief. …

29. … If it is thought that the party seeking to take advantage of the default must apply to the court in order to render the sanction effective, in my view that is wrong. The sanction takes effect without further order and the statement of case is struck out; … If, however, the party seeking to take advantage of the failure to comply wishes to obtain judgment in his favour, he must, except in those cases covered by rule 3.5(2), make an application to the court to enable it to determine whether he is entitled to judgment as a result and, if so, in what form. In such cases the operation of the sanction does not lie in the discretion of the court; only if there is an application under rule 3.8 is the court required to consider whether, in all the circumstances, it is just to make an order granting relief from the consequences that would otherwise follow.

30. The scheme of the rules relating to conditional orders is in my view both clear and salutary I its effect, namely, that such orders mean what they say, that the consequences of non-compliance take effect in accordance with the terms of the order, but that the court has ample power to do justice under rule 3.8 on the application of the party in default, or, in an exceptional case, acting on its own initiative.

…

34. In my view it should now be clearly recognized that the sanction embodied in an ‘unless’ order in traditional form takes effect without the need for any further order if the party to whom it is addressed fails to comply with it in any material respect.  This has a number of consequences, to three of which I think it is worth drawing particular attention.  The first is that it is unnecessary, and indeed inappropriate, for a party who seeks to rely on non-compliance with an order of that kind to make an application to the court for the sanction to be imposed or, as the judge put it, ‘activated’.  The sanction prescribed by the order takes effect automatically as a result of the failure to comply with its terms. … Unless the party in default has applied for relief, or the court itself decides for some exceptional reason that it should act of its own initiative, the question whether the sanction ought to apply does not arise.  It must be assumed that at the time of making the order the court considered all the relevant factors and reached the decision that the sanction should take effect in the event of default.  If it is thought that the court should not have made an order in those terms in the first place, the right course is to challenge it on appeal, but it may often be better to make all reasonable efforts to comply and to seek relief in the event of default.”

135.The Court of Appeal in Hong Kong, Daimler AG v Leiduck [2012] 3 HKLRD 119 followed Marcan Shipping: see paras 47 and 48: 

“47. Mr Wong submitted, in reliance on Marcan Shipping (London) Ltd v Kefalas [2007] 1 WLR 1864, paras 28 – 36, that, under the new procedural regime, it is not for the party seeking to take advantage of a default to apply to the Court in order to render a sanction for that default effective. Instead, the sanction takes effect immediately and it is for the party in default to apply for relief from the sanction. Only if there is an application for relief from the sanction is the Court required to consider whether, in all the circumstances, it is just to make an order granting relief from the consequences that would otherwise follow.

48. We would accept those submissions as an accurate summary of the effect of O. 2 r. 4 and O. 2 r. 5.”

136.It is, however, worth noting what was also said in the following paragraphs:

“65. It is true that the effect of the failure to comply with the Unless Order on the defendants is that there has been delay since 4 January 2011 and the defendants have had to argue, successfully, that four of the answers to the interrogatories are insufficient (O.2 r. 5(1)(i)). On the other hand, the delay can be compensated in costs and the insufficiency of the four answers in question can be addressed by this Court requiring the plaintiff to provide further answers to those interrogatories without the invocation of LPP. Mr Wong acknowledged that the Court had jurisdiction to adopt this course, although he urged the Court not to exercise its discretion in this manner: indeed he submitted, in reliance on Marcan Shipping (London) Ltd v Kefalas at paras 30 and 34, that the Court should only act on its own initiative to grant relief in an exceptional case.

66. However, the use of this alternative is, in our opinion, in keeping with the spirit of CJR under which the Court will generally use striking-out as a remedy of last resort and is encouraged to consider other measures that may be more appropriate to be taken: see Wing Fai Construction Co Ltd (in liq) v Yip Kwong Robert [2012] 1 HKLRD 589 at paras 33 and 75(1). Mr Wong rightly noted that Wing Fai Construction is a case involving the Court considering whether to impose a strike-out sanction, whereas in the present case the striking-out has already taken effect. We recognize the distinction between these two situations but we consider that the observations of the Chief Justice are of application in circumstances such as the present. If the plaintiff is ordered to provide further answers subject to the sanction of striking-out under the Unless Order, we consider that this will provide some mitigation of the effect on the defendants of the plaintiff’s failure to comply in the first place.

67. For the above reasons, it follows that we would exercise the discretion afresh and grant the plaintiff relief from the sanction of the Unless Order subject to terms.”

137.Thus, the position appears to be this.  Post‑CJR, no application is needed to activate the sanction.  The sanction under an unless order takes effect automatically upon default unless the party in breach has made an application for relief, in which case, the considerations under Order 2, rule 5 shall apply[28]. It is only necessary for the party seeking to take advantage of the default to make an application for judgment.  However, the court could, in exceptional circumstances act on its own initiative to grant relief from sanction even though there had been a breach of the Unless Order and the sanction has already taken effect[29].

138.In my view, if the defendants had only breached their obligation to supply Items 19 and 20 of Appendix 1 of Yuen’s 1^st report, ie the general ledgers, I would have granted an extension for them to comply with the Unless Order, in similar fashion as the Court of Appeal did in Daimler v Leiduck.  The omission would not constitute failure to comply with the Unless Order in any material respect: Marcan Shipping, para 34.  I would agree with Mr Mok that to strike out the Defence would be entirely disproportionate, and is not “in keeping with the spirit of CJR under which the Court will generally use striking‑out as a remedy of last resort and is encouraged to consider other measures that may be more appropriate to be taken”: para 66, Daimler.

139.However, this was not the only breach.  The failure to give a full explanation of the US$11 million was obvious, serious and significant.  The circumstances of the breach were not exceptional as to justify relief. 

140.As a matter of fact, it is common ground that there is no application for relief from sanction.  The factors under Order 2, rule 5 do not arise for consideration.

141.It follows that the sanction of strike‑out of the Defence automatically takes effect.

JUDGMENT ENTERED?

142.Without disrespect to counsel’s helpful submissions made here, this can be dealt with shortly. 

143.I agree with Mr Mok that the plaintiffs would still need to prove their case against the 2^nd defendant and they will have to prove the fraud against the 2^nd defendant to establish liability. 

144.Ms Chan said the plaintiff’s claim against the 2^nd defendant for breach of fiduciary duty is separate and distinct from the 1^st defendant.  That may be so.  But the facts and matters relied upon to establish liability must be the same.  No matter how Ms Chan puts it, it cannot be discounted that injustice might be meted out to the defendants if judgment having entered against them now, the plaintiffs later failed to prove their case against the 2^nd defendant.

145.Moreover, judgment for fraud should not be entered lightly without a trial. 

146.Accordingly, I decline to enter judgment against the defendants.

COSTS

147.There is no reason why the defendants should not pay the plaintiffs’ costs with certificate for counsel, on a party and party basis to be taxed if not agreed, with certificate for two counsel.

ENDNOTE AND ACKNOWLEDGMENT

148.It is surprising that given the resources available, that the plaintiffs have not seen fit to instruct an accountant to deal with the reports filed by the defendants.  The contents of the accountant’s reports are very difficult and the analyses not easy to understand, especially when it concerns the tracking of the funds and the circular flow of the monies.  The court’s task would have been a lot easier if assisted by accountants on both sides.  I also make a remark that many of the plaintiffs’ affirmations are repetitive, unnecessarily lengthy and contain submissions which ought not form part of the affirmations. 

149.That having said, I am indebted to leading counsel, counsel and solicitors of both teams for their high quality submissions without which this judgment would not have been possible.

Ms Linda Chan SC and Ms Eva Sit, instructed by Hogan Lovells,for the 1^st and 2^nd plaintiffs

Mr Johnny Mok SC, Mr Alexander Tang and Mr Val Chow, instructed by Anthony Siu & Co, for the 1^st and 13^th defendants