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

HCA 1412/2013

ACTION NO 1412 OF 2013

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J U D G M E N T
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1.This is litigation on a grand scale. The plaintiffs are two companies in compulsory liquidation, and their action against the defendants is being continued by their liquidators. They alleged that the first defendant, Chun Chi Wai, and a company wholly owned by him, Wellrun Ltd (“Wellrun”), the thirteenth defendant, fraudulently conspired with other defendants to inflate the value of the plaintiffs’ business by the creation of a series of fictitious transactions and a fictitious flow of funds. As a result of this fraud, the plaintiffs claim to have suffered loss and damage in excess of HK$5 billion. The defence of Mr Chun and Wellrun was struck out for their failure to comply with their obligations under a Mareva injunction to disclose what had become of sums in excess of HK$780 million which Wellrun had received in 2010 and 2011.

2.The current application before the court, which was only issued at the end of last week, is for the appointment of interim receivers over the assets of a particular company, together with three of its subsidiaries and its parent company, on the basis that the company has been used to dissipate the assets of Mr Chun and Wellrun.  The application is urgent if the liquidators’ concern about the further dissipation of those assets is justified, and if this judgment is less comprehensive than it might otherwise have been, I trust that the parties will understand why. 

3.The case has a long history, but previous orders of the court mean that for present purposes I can be relatively brief.  In June 2014, the Mareva injunction which had previously been granted was extended to cover a number of companies incorporated in Hong Kong, the PRC, Singapore and Belize through which Mr Chun was alleged to have held substantial assets.  Those companies included the five respondents to the current application, being five companies (two incorporated in Hong Kong, two incorporated in the PRC and one incorporated in Singapore) over whose assets the appointment of interim receivers is sought, as well as another company incorporated in the PRC, Zhongjin Goldman (Jiangsu) Investment Co Ltd (“the Jiangsu company”). 

4.One of the grounds on which the Mareva injunction was extended to cover those companies was that it was claimed that Wellrun had “lent” US$82 million to Chung Shing Finance (Holdings) Ltd, the first respondent (“R1”), a company incorporated in Hong Kong, which was a wholly‑owned subsidiary of Chung Shing Insurance PTE Ltd, the second respondent (“R2”), a company incorporated in Singapore, which was itself a wholly‑owned subsidiary of Chung Shing Finance Holding Ltd, a company incorporated in Belize (“the Belize company”).  It was claimed that R1 had then transferred the US$82 million to two of its subsidiaries, Zhongjin Goldman (Tianjin) Financing Lease Co Ltd, the third respondent (“R3”), a company incorporated in the PRC, and the Jiangsu company.  US$30 million was alleged to have been received by R3, and US$52 million was alleged to have been received by the Jiangsu company.

5.It has also been claimed that the shareholding in the Belize company (which, as I have said was the ultimate owner of R1) was transferred by way of gift to Mr Chun’s three daughters.  In that way, Mr Chun’s daughters became the beneficial owners of R1 and its four subsidiaries, those four subsidiaries being

(1) R3;

(2) Zhongjin Goldman (Tianjin) Equity Investment Management Co Ltd, the fourth respondent (“R4”), a company incorporated in the PRC;

(3) Chung Shing Finance Corporation Ltd, the fifth respondent (“R5”), a company incorporated in Hong Kong; and

(4) the Jiangsu company.

By that route, Mr Chun’s three daughters are said to have controlled what remains of the US$82 million transferred to R3 and the Jiangsu company.  There is nothing to suggest that they had done anything to warrant such munificence, and accordingly they appear to have acquired very substantial assets for nothing. 

6.In the light of that, the plaintiffs applied for the Mareva injunction to be extended to cover Mr Chun’s daughters, and that resulted in his daughters undertaking that they would not dispose of, deal with or diminish in any way the value of their shareholding in the Belize company or the assets, whether held directly or indirectly, of a number of companies including the five respondents, the Belize company, and the Jiangsu company.  Mr Chun’s daughters were also ordered to disclose the assets of those companies, but it is claimed that they have failed to do so.  Leave to commence proceedings against them for their committal for contempt of court in respect of that alleged breach of the order for disclosure has been granted.  

7.Against that background, I come to the events which have given rise to the present application.  The application for the committal of Mr Chun’s daughters was due to be heard yesterday.  The evidence now before the court is that in the course of preparing for that hearing, the plaintiffs’ liquidators discovered that R1 had passed a resolution signed by Li Jinquan in March 2015 cancelling the registration of the Jiangsu company and forming a committee to place it into liquidation, that in breach of the Mareva injunction by August 2015 its assets and funds in excess of RMB216 million had been distributed to R1, and that in November 2015 the de‑registration of the Jiangsu company had been lodged with the relevant authorities in the PRC. 

8.The liquidators claim that it is inconceivable that Mr Chun would not have known about the liquidation of the Jiangsu company. Indeed, they claim that he instigated it.  In my opinion, the liquidators have reasonable grounds for believing that to be the case, having regard to the reasons given in para 21 of the 20^th Affidavit of Cosimo Borelli, one of the liquidators, not least of which is that Mr Li is a close associate of Mr Chun, and that two of the three members of the liquidation committee of the Jiangsu company were connected to companies in which Mr Chun had a controlling interest. 

9.I should say something about the Jiangsu company’s assets.  According to the liquidation report of the Jiangsu company, they consisted for the most parts of accounts receivable in excess of RMB23 million and prepayments in excess of RMB192 million which the liquidation report stated had been distributed to R1.  That does not sit easily with what Mr Li informed R1’s solicitors only last Friday, namely that the liquidation committee of the Jiangsu company was continuing “to recover the debt receivables on behalf of the [Jiangsu] company to minimise the losses of” R1.  Either all the assets of the Jiangsu company had been distributed to R1 or they had not.  The fact is that it is not known whether R1 still has the Jiangsu company’s assets, or whether it has disposed of them elsewhere, perhaps to its parent company, R2, or to its subsidiaries, R3, R4 or R5. 

10.When these events came to light, the plaintiffs’ liquidators’ solicitors wrote to Mr Chun, his three daughters, Wellrun, R1 and Mr Li.  They asked the recipients of those letters to disclose to them what had become of the assets of the Jiangsu company. Neither R1 nor Mr Li replied.  Mr Chun and Wellrun claimed to have no knowledge of the liquidation of the Jiangsu company and claimed not to have received any of its assets.  Mr Chun’s daughters also claimed to know nothing about the liquidation of the Jiangsu company, but confirmed that they would hold any money or assets they might subsequently receive from the Jiangsu company in accordance with their previous undertaking to the court. 

11.That brings me to the current application.  The parties to whom the summons seeking the appointment of interim receivers was addressed are Mr Chun, Wellrun, Mr Chun’s daughters and the five respondents.  Service of the summons and the supporting evidence has been effected on Mr Chun and Wellrun, but they have decided to take no position on the plaintiffs’ application for interim receivers to be appointed as their case, though strongly disputed by the plaintiffs’ liquidators, is that they no longer have anything to do with the five respondents.  Mr Chun’s daughters have also been served with the summons and the supporting evidence, service having been effected on their solicitors in Hong Kong.  They have not appeared and are not represented.

12.As I have said, R1 and R5 were incorporated in Hong Kong and the summons seeking the appointment of interim receivers together with the supporting evidence has been served on them in the usual way.  On the other hand, R2 was incorporated in Singapore, and R3 and R4 were incorporated in the PRC.  Leave to serve them out of the jurisdiction was granted by Master Wong last Monday.  Service has been effected on R2, but not on R3 or R4.  That is because there was no one at the addresses of their registered offices when couriers engaged by the plaintiffs’ liquidators’ solicitors went there to serve the summons and the supporting evidence.  Of course, if Mr Chun is still behind R3 and R4 as the plaintiffs’ liquidators’ contend, it can properly be said that those in control of R3 and R4 know about the hearing today and that the plaintiffs’ liquidators are seeking the appointment of interim receivers over the assets of R3 and R4 as well as over the assets of R1, R2 and R5.  But that is not a sufficient basis for getting round the fact that R3 and R4 have not been served with the summons and the supporting evidence.  It follows that the application for the appointment of interim receivers over the assets of R3 and R4 will have to be adjourned until such time as they have been properly served, or a further order for substituted service is made on the basis that they have been deliberately evading service.  Ms Eva Sit for the plaintiffs’ liquidators did not seriously seek to argue against that. 

13.I go back to R1, R2 and R5.  In an affirmation affirmed yesterday by a certified accountant, Fung Kwok Leung, which was filed yesterday on behalf of R1, R2, R5 and Mr Chun’s daughters, Mr Fung said that Mr Chun’s daughters had appointed him to assist them in their disclosure obligations under their undertaking to the court, and that in order to do so, he is in the process of assuming responsibility himself for the affairs of R1, R2, R3, R4 and R5.  He has been able to do that for R1, R2 and R5 which is how they have come to appear today, but he has not been able to do that for R3 and R4.  He claims that before he can do so, various administrative steps have to be taken.  He estimates that it will take at least 20 working days for that to be done. 

14.That is the background against which Mr Alan Leong SC for R1, R2 and R5 applies for today’s hearing to be adjourned so that all five respondents can be heard on it.  It is said there is no real need for the plaintiffs’ application to be determined today. The application was triggered by events which were disclosed recently but which happened some time ago.  If R1 was going to dispose of the assets of the Jiangsu company, it has had plenty of time to do so before today.  If it has not done so yet, then the plaintiffs, so it is said, are sufficiently protected from it doing so by the Mareva injunction in place freezing its assets and by Mr Fung now being in effective control of R1, R2 and R5.

15.Leaving aside the question whether Mr Fung’s role provides the plaintiffs with sufficient protection, which is a topic to which I shall return when I consider the plaintiffs’ liquidators’ application on its merits, I cannot go along with Mr Leong’s argument at all.  The Mareva injunction in place freezing the assets of R1 may well not be sufficient protection for the plaintiffs against the disposal by R1 of such assets as it got from the Jiangsu company if it still has them.  I say that because the Mareva injunction in place against the Jiangsu company did not prevent it from transferring its assets to R1, and if, as the plaintiffs allege, Mr Chun is still the moving force behind R1 — just as they say he was the moving force behind the Jiangsu company — he cannot be trusted not to dispose of R1’s assets despite the Mareva injunction freezing its assets. 

16.I turn, then, to the merits of the plaintiffs’ liquidators’ application for the appointment of interim receivers over the assets of R1, R2 and R5.  Lack of time prevents me from embarking upon a detailed analysis of the circumstances in which the appointment of interim receivers in aid of a Mavera injunction is appropriate.  A statement of the relevant principles is all that it is required.  The power may be exercised when it is just or convenient to do so (see section 21L(1) of the High Court Ordinance (Cap 4)), and the court would usually regard it as just or convenient to do so if there is good evidence of a failure to comply with a Mareva injunction.  The principle was succinctly expressed in Gee’s Commercial Injunctions, 5^th ed, para 16.008 as follows:

“If (1) assets are liable to be dissipated or are otherwise in jeopardy and (2) cannot satisfactorily be preserved by injunction, then it may be appropriate to appoint a receiver.”

Examples where that might arise were said to be when

“… the defendant controls a network of overseas trusts or companies and it appears that he has arranged his affairs in such a complicated way that if the step were not to be taken he might be judgment proof … [or] where the defendants are likely to act in disregard of an injunction or have already done so.”

17.The evidential test which the court applies, rightly in my opinion, is the conventional American Cyanamid test.  That was confirmed by Kwan J (as she then was) in Tan Man Kou v Chime Corporation Ltd and others (HCMP 4146/2001), unreported, 25 June 2003, and followed by Stone J in Akai Holdings Limited (in compulsory liquidation) and others v Ho Wing On Christopher and others (HCCL 37/2005), unreported, 1 September 2009.  Accordingly, the court will determine whether there is a serious issue to be tried and a risk of dissipation of assets, it will take into account the efficacy of the current regime for protecting the interests of the party seeking the appointment of a receiver, it will assess the risk of damage to any party if a receiver is appointed and whether that damage can be adequately compensated for by a cross‑undertaking as to damages, and whether a less drastic remedy is suitable in the particular circumstances of the case.  On that last issue, Stone J in Akai held that where a defendant has deliberately withheld disclosure such as to deny the plaintiff information about its assets which the plaintiff is otherwise entitled to under the Mareva injunction as a means to police it, the court will be unlikely to entertain any suggestion that a lesser remedy or partial receivership will suffice, since (i) the court and the plaintiff are simply not in a position to assess, given the lack of disclosure, whether the lesser remedy is sufficient to protect the plaintiff’s interests, and (ii) it is entirely within the power of the defendant to put an end to the receivership by giving full disclosure or putting up security. 

18.Applying those principles to the present case, there is clearly a triable issue over whether the liquidation of the Jiangsu company and the current whereabouts of its assets were deliberately concealed from the plaintiffs’ liquidators, and whether the Mareva injunction was not complied with.  There is also a triable issue over whether there is a risk that there will be a further breach of the Mareva injunction unless drastic action of some kind is taken.  The Mareva injunction and the associated requirement of disclosure have not been sufficient to protect the interests of the plaintiffs so far because they have left the plaintiffs’ liquidators in a state of ignorance about the current whereabouts of the Jiangsu company’s assets. 

19.Moreover, subject to the position of Mr Fung, I think that the appointment of interim receivers over the assets of R1, R2 and R5 would be a proportionate response to the need to protect the assets of the Jiangsu company from further dissipation.  Neither Mr Chun nor Wellrun nor his daughters can be heard to complain of being prejudiced by the appointment of interim receivers over the assets of R1, R2 or R5 because none of them claim any connection with R1, R2 or R5.  R1, R2 or R5 could be significantly affected by such an appointment if they were trading, but Mr Leong acknowledged in his written submissions that they are not.  R1’s only asset is its shareholding in R3, R4 and R5.  R2 is only an intermediate holding company, and R5 is a dormant company.  So I come back to the question whether Mr Fung’s role within R1, R2 and R5 gives the plaintiffs’ liquidators the protection they need.  The evidence is that last Monday Mr Li was removed from the management of those companies, and Mr Fung was appointed a director in his place, and he asserts that he alone has full executive control of them.

20.Ms Sit tenaciously argued that Mr Fung is no substitute for independent receivers.  He is too closely aligned to Mr Chun’s daughters to be regarded as independent.  And if he really was helping them to comply with their disclosure obligations, he has not done a very good job of it.  If one of the things they had to disclose was what happened to the US$52 million paid by R1 to the Jiangsu company, the first thing he might be expected to have done was to find out more about the Jiangsu company.  And yet he claims not to have known anything about its liquidation or de‑registration until that had been discovered by the plaintiffs’ liquidators.  There are other respects in which Ms Sit criticizes Mr Fung’s competence and his ability to get on with things promptly. 

21.There is a good deal of force in all of that, but I cannot ignore the fact that Mr Fung is a Hong Kong permanent resident with a professional qualification in Hong Kong and subject to the disciplinary jurisdiction of his profession.  He is aware of the existence of the Mareva injunction, and he knows how serious his position would be, from a disciplinary point of view, if he helped anyone to act in breach of it.  The fact is that if Mr Fung is now in executive control of R1, and if he would not act in a way which enables R1 to dispose of such of the Jiangsu company’s assets as it still has, the plaintiffs should be adequately protected for the time being.  And if R1 has already disposed of those assets to R2 or R5, the fact that Mr Fung is in executive control of them as well should be sufficient protection for the plaintiffs — on the assumption, of course, that he will not act in a way which enables R2 or R5 to dispose of those assets if they have them.  That can be reinforced by making Mr Fung directly responsible to the court, and that can be achieved if Mr Fung is prepared to give his personal undertaking to the court that in his capacity as the officer in executive control of R1, R2 and R5, he will not act in a way which enables any of them to dispose of any of their assets in breach of the Mareva injunction freezing those assets.  Mr Leong has said that Mr Fung would be prepared to give such an undertaking. 

22.Having said all that, since I have adjourned the plaintiffs’ liquidators’ application for the appointment of interim receivers over the assets of R3 and R4, I do not think that I should today dismiss their application for the appointment of interim receivers over the assets of R1, R2 and R5.  The better course is to adjourn that application so that it can be renewed at the same time as the application in respect of the assets of R3 and R4, on Mr Fung giving the personal undertaking to the court in the terms I have mentioned.  

Ms Eva Sit, instructed by Hogan Lovells, for the first and second plaintiffs

Mr Alex Tang, instructed by Anthony Siu & Co, for the first and the thirteenth defendants

Mr Alan Leong SC and Mr Martin Wong, instructed by Chong & Partners, for the first, second and fifth respondents

The third and forth respondents did not attend and were not represented