Primus Pacific Partners (Gp1) Lp and Another v. Li, Wenlei and Another

HCA 3373/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 3373 OF 2016

____________

____________

______________

D E C I S I O N

______________

Introduction

1.This is the plaintiffs’ application to continue the Mareva injunction order granted at an ex parte hearing on 21 December 2016 (“the Dec 2016 injunction”).  The 1^st defendant (“Mr Li”) is incarcerated in the Mainland and did not attend the inter partes hearing, while the 2^nd defendant (“Mr Chen”) opposes this application and seeks the discharge of the Dec 2016 injunction.  The plaintiffs also apply for the Dec 2016 injunction to be extended to cover Mr Chen’s assets worldwide.

2.The plaintiffs are related; their relationship will be set out in more detail below (para 5 below).  Suffice it to say for now they are part of an investment fund group (“the plaintiffs’ group”). The defendants formerly worked for the plaintiffs’ group (the defendants’ working capacity (that is, whether they were former employees or former consultants) is in dispute).

3.It is the plaintiffs’ main complaint that the defendants breached their duties (probably tortious and/or equitable) owed to the plaintiffs during their periods of service.  For the purpose of the Dec 2016 injunction, they also complain that there is a substantial risk the defendants may dissipate their assets to defeat the enforcement of any judgment against them.

Background

4.This action was commenced in December 2016, but the events giving rise to it took place in about 2007 (to 2008), some 9 years earlier.

5.The organization chart of the plaintiffs’ group shows a relatively complicated corporate structure.  But for present purpose, the plaintiffs’ respective role therein can be viewed as:

(a)  the 1^st plaintiff (“the partners”), together with other limited partnerships, is the partnership in control of a private investment fund particularly interested in investing in the financial sector in Asia;

(b)  the 2^nd plaintiff (“the SPV”) was a so-called “special purpose vehicle” set up by the partners for the purpose of investing in a business known as “China Sports II”, a sports media business in the Mainland (such as producing and airing sports television channels).

6.There was no direct contractual relationship between the plaintiffs and the defendants.  The defendants have entered into contracts with a Hong Kong company which in effect acted as an investment advisor (“the ‘internal’ advisor”) of the partners and the SPV.

7.The defendants’ work which constitutes the subject-matter on which the plaintiffs’ claim in this action is based was their work to evaluate and advise the investment committee regarding investing into “China Sports II”.  It is undisputed:

(1)  Mr Huan and Mr Ng were the two principals of the partners, and two of the three members of the investment committee of the plaintiffs’ group (“the investment committee”);

(2)  Mr Huan, Mr Li and Mr Chen were former colleagues of another investment banker before the plaintiffs’ group was set up, and before the defendants joined the “internal” advisor;

(3)  Mr Chen’s direct superior was Mr Li;

(4)  in relation to “China Sports II”, the defendants were tasked to prepare an investment memorandum (“the investment memo”) for the consideration of the investment committee;

(5)  a due diligence report dated 29 August 2007 was separately prepared by Messrs Deloitte & Touche (“the Deloitte report”);

(6)  the Deloitte report was attached, and sent, by Mr Li to Mr Huan and Mr Ng under cover of an email dated 16 September 2007 (“the Sep 2007 email”);

(7)  the investment memo was provided to the investment committee on 28 September 2007;

(8)  the investment committee considered and approved the “China Sports II” investment (based on the materials placed before it).

8.Although it has not been specifically mentioned in either the parties’ affirmations or their submissions, the above has to be set against the backdrop of what has widely been publicized as the “financial crisis of 2007-2008” (sometimes called the “subprime mortgage crisis”) (of which judicial notice can be taken).

9.In brief, the crisis began in the latter half of 2007 with a crisis in the subprime mortgage market in the US, and developed into a full-blown international banking crisis.  Some economists described it as the worst financial crisis since the “Great Depression” of the 1930.  Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed by governments worldwide in 2008 to prevent a possible collapse of the world's financial system.  The crisis was nonetheless followed by a global economic downturn, and a period of general economic recession.

Summary of the plaintiffs’ case

10.In gist, the plaintiffs’ case put forth at the ex parte hearing was:

(a) the plaintiffs’ group has invested more than US$36 million into “China Sports II” with a view to having it listed at the Nasdaq stock exchange (para 18, plaintiffs’ ex parte skeleton submissions (“ex parte submissions”));

(b) the investment was by way of the acquisition of about 35% of the shareholding in “China Sports II”;

(c) the investment decision was based on the investment memo (para 4 and 18, ex parte submissions);

(d) the defendants failed to properly disclose material investment risks in the investment memo (para 4, ex parte submissions);

(e) further, the defendants were in conflict of interest in using their mothers’ names to register as shareholders of “China Sports II”;

(f) up to now, “China Sports II” has not achieved listing status, and the remaining value of the investment was assessed at nil (“China Sports II” ceased operation in 2012) (para 20, ex parte submissions);

(g) the plaintiffs have made attempts in effect to mitigate their loss but to no avail;

(h) the plaintiffs have also sought to commence criminal investigation in the Mainland against the defendants (and others) for possible bribery and other wrongs;

(i) Mr Li has been imprisoned in the Mainland for crimes committed in relation to an unrelated investment project;

(j) on the question of delay, (1) this was caused by the plaintiffs’ earlier attempts to recoup their loss from elsewhere (“China Sports II” and its major shareholder), (2) the plaintiffs were alerted to the need to investigate the defendants by the 2012 Mainland investigation into Mr Li (para 85, ex parte submissions), (3) the urgency was brought about by Mr Li’s imprisonment in 2016 which the plaintiffs became aware of in December 2016;

(k) on the duty to make full and frank disclosure, the defendants may argue (1) the claim was time-barred by virtue of the Limitation Ordinance (Cap 347) (the plaintiffs claimed there was deliberate concealment), (2) the Deloitte report was known to the plaintiffs (the plaintiffs claimed Mr Huan did not peruse the Deloitte report in detail, but relied on the investment memo), (3) the plaintiffs could have enquired in 2009 about the poor financial results of “China Sports II” (the plaintiffs claimed they did not do so because of the then severe financial crisis).

11.The plaintiffs’ stance remained largely the same at the inter partes hearing (para 1, plaintiffs’ inter partes skeleton submissions (“inter partes submissions”)).  The plaintiffs also argue that it can be inferred Mr Chen has assets outside the jurisdiction:

(1)  Mr Chen’s main asset in Hong Kong is bank credit balance totaling about $3.2 million;

(2)  Mr Chen’s monthly expenses amount to about $254,800;

(3)  further, so far Mr Chen has to incur about $700,000 for legal expenses.

Such level of expenditure cannot be maintained without substantial assets available to Mr Chen elsewhere.

12.The plaintiffs also argue that, although there is no direct evidence of an intention to dispose of assets, the effect of the defendants’ wrongful conduct justifies the court to find that there is a substantial risk of dissipation of assets.

Summary of Mr Chen’s case

13.The relatively lengthy delay (from about 2009 to 2016, according to Mr Chen) shows the following:

(a) the plaintiffs’ claim has been time-barred by virtue of Cap 347;

(b) the plaintiffs’ lack of full and frank disclosure is relevant not only to the court’s discretion in these applications, it is also relevant to the plaintiffs’ bona fides;

(c) there is an absence of the objective circumstances showing an intention to dissipate assets;

(d) related to sub-para (c) above, there was the lack of a sufficient degree of urgency or secrecy to justify an ex parte application.

14.Mr Chen also put forth the arguments that:

(1)  he was only a junior staff and was not responsible for the investment advice given to the plaintiffs.  Hence, it would be an over-statement to say he caused loss to the plaintiffs;

(2)  there is an “innocent” explanation for registering his mother as a shareholder of “China Sports II”.

15.The Sep 2007 email is said to be relevant to:

(a) the merits of the plaintiffs’ claim;

(b) whether the plaintiffs can establish there was “deliberate concealment” of the relevant facts (especially when considered together with the Deloitte report), so as to prevent the time to sue from running against them (s 26(1)(b), Cap 347).

16.Before proceeding to consider the applications, more details about the Sep 2007 email (sent by Mr Li to Mr Huan and Mr Ng, with copy to Mr Chen) should be given.  It referred to due diligence reports from Messrs Tong Shang and Messrs Deloitte (and attached the Deloitte report).  Further, effectively it pointed out:

(1) there were potential historical liabilities because the legal documents of one of the subsidiaries of “China Sports II” were missing;

(2) there were potential historical tax liabilities because of the same reason;

(3) “China Sports II” suffered a loss for the preceding year and the earlier half of the (then) current year because of some of its business operations;

(4) “China Sports II” had no strong internal and systemic management, and had made wrong business expansion or investment decision(s).

17.In relation to para 16(1) and (2) above, the Sep 2007 email proposed setting up a “clean entity”, transferring the operating assets of “China Sports II” into the “clean entity”, and using it as the vehicle for obtaining listing by initial public offering (“IPO”).  Other solutions were proposed in relation to para 16(3) and (4) above.

The applications

18.It is undisputed the first hurdle for the plaintiffs in the application to continue the injunction is to establish a “good arguable case” (para 27, inter partes submissions; Holyoake v Candy [2016] 3 WLR 357, especially para 13-15).

19.In short, I agree with Mr Chen it is doubtful if the plaintiffs can overcome that hurdle.

20.The essence of the plaintiffs’ complaint is that the investment memo failed to mention the following problem areas of “China Sports II”:

(a)  its deteriorating financial positions;

(b)  its excessive inter-company exposures;

(c)  inadequate internal controls;

(d)  improper accounting regarding its salaries and expenses;

(e)  the over-stated income;

(f)  the undisclosed potential tax liabilities.

The above problem areas have allegedly been highlighted in the Deloitte report.  But merely sending the Deloitte report to Mr Huan is insufficient because the investment committee relied on the investment memo.

21.The plaintiffs point to Mr Huan’s involvement in nearly 30 investment projects during that time as a reason for his not having perused in detail (let alone relied on) the Deloitte report.

22.It is true that the investment memo did not refer to the problem areas, and can indeed be read as holding an optimistic view regarding the “China Sports II” investment.  However, it is also relevant the investment memo was provided to the investment committee only about 12 to 13 days after the Sep 2007 email was sent to Mr Huan and Mr Ng (para 7(6) and (7) above).

23.As has been summarized in para 16 above, the Sep 2007 email pointed out various problems (historical financial and tax liabilities, business losses and the lack of internal management and erroneous business and investment decision(s)).

24.In order to negate Mr Chen’s case that their claim has been time-barred, the plaintiffs would have to rely on s 26, Cap 347 (which they do).  The relevant parts of s 26, Cap 347 read:

“... [Where] in the case of any action for which a period of limitation is prescribed by this Ordinance, ... any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant ... the period of limitation shall not begin to run until the plaintiff has discovered the ... concealment ... or could with reasonable diligence have discovered it.” (emphasis supplied) (s 26(1)(b), Cap 347)

25.But even on the plaintiffs’ case, what has in truth been concealed from them was at most the information summarized in para 20 above.  However, although the business “short-comings” of “China Sports II” summarized in the Sep 2007 email were not precisely those highlighted in the Deloitte report, nonetheless various kinds of historical liabilities, as well as recent business losses, have been pointed out by the Sep 2007 email.

26.Moreover, although this is not a matter emphasized upon by Mr Chen, upon seeing the Sep 2007 email’s proposed “solution” (of setting up a “clean entity”), the alarm should go off for anyone with experience and knowledge in finance (which Mr Huan and Mr Ng should be).

27.An IPO is essentially an exercise enabling a business, which seeks capital for its own purpose (usually proper business purpose (or purpose(s) which any IPO regulatory authorities would approve)), to obtain capital by offering its stocks for public investment (so that the stocks can be subscribed by the investing public (be it institutional, or individual, investors)).

28.It does not take much imagination to see that a “clean entity” which is put forth for an IPO will not be viewed by the investing public with favour: there will be no business track record to show its potential future investment value (be it positive value or negative value). In these applications, there is no evidence that the “clean entity” proposal has been taken up by the plaintiffs, or “China Sports II” (and understandably so).

29.What is more important for these applications is that the plaintiffs’ relative lack of evidence as to how the Sep 2007 email was looked at by Mr Huan or Mr Ng, who sat on the investment committee (such as whether it gave off an “alarm”). 

30.The “China Sports II” project was implemented in late 2007, with a binding agreement having been executed, and payment having been made, by November 2007.  The plaintiffs’ goal was to proceed with the “China Sports II” IPO in early 2008.  The above-mentioned problems of “China Sports II” should become apparent by early 2008 at the latest.  Such being the background, the plaintiffs’ right for the purpose of Cap 347 would appear to accrue by early 2008 (and hence time would begin to run since then, subject to the application of s 26, Cap 347).  The severe financial crisis cannot be a valid reason for not looking into the defendants’ role in the allegedly failed “China Sports II” project.

31.With the above in mind, I agree with Mr Chen (and using as mild a language as can be) that the plaintiffs have encountered difficulties in demonstrating that:

(1)  a “good arguable case” that their investment decision was caused by the defendants’ fault (in not alerting them to the potential problems of “China Sports II”); further, such a claim has not been time-barred;

(2)  they have made full and frank disclosure of material facts;

(3)  the defendants’ conduct was in the realm of “unacceptably low commercial morality”.

32.I also note that the way in which the plaintiffs’ brought up the Sep 2007 email (again putting it mildly) was intriguing. The affirmation evidence said:

“[under the heading ‘Potential defences of the Defendants’] [Mr Li and Mr Chen] may state that ... a copy of the Deloitte Report was copied to me by e-mail. ... Whilst I do not deny that I may have been copied on an e-mail attaching the Deloitte Report ...” (para 137, Mr Huan’s affirmation).

33.That Mr Huan can depose to the Deloitte report having been attached to the Sep 2007 email should mean either he has an independent memory of this (despite the long time lapse, and the numerous documents he must have read about the 30 or so investment projects at the time (para 21 above)), or he has perused the Sep 2007 email (at least) shortly before the affirmation.

34.Whatever was the real reason for his recollection, it falls short of the duty of an applicant for an ex parte injunction order to make full and frank disclosure, for Mr Huan not to (at least) give a summary of the contents of the Sep 2007 email (para 16 above), or to exhibit the actual email (the plaintiffs assert that it could not be located earlier).

35.The plaintiffs’ case concerning the defendants’ alleged “conflict of interest” (by registering their mothers’ names as shareholders (para 10(e) above)) is not easy to understand in the light of their main complaint that “China Sports II” was an investment which was worth nothing (and the loss suffered being the loss of their injected capital) (para 10(a), (b) and (f) above).  It is therefore unclear why the defendants did so (there was no direct monetary gain in becoming shareholders of a worthless “China Sports II”). Perhaps the plaintiffs’ case is that the defendants would be given a share of the plaintiffs’ investment (obtained with the help of the defendants’ misrepresentations).  But it does not appear necessary for such money to be channeled through shareholding.  In any event, this is not a matter which is weighty enough to “tip the balance” in these applications. 

36.Mr Li’s criminal conviction in the Mainland (para 10(i) above) was related to an investment project unconnected with “China Sports II”.  No weight should be placed upon this. 

Conclusion

37.By reason of the matters aforesaid, I am not satisfied that the plaintiffs have established a case for the court to exercise its discretion to grant an injunction order.  They have also failed to discharge the duty to make full and frank disclosure.

38.Accordingly, the Dec 2016 injunction is discharged.  The application for its continuation (and with it the application to vary the Dec 2016 injunction) is refused.

Other matters

39.The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order nisi

40.There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of these applications are to be paid by the plaintiffs to Mr Chen, to be taxed if not agreed.

Mr John Hui, instructed by Peter Yuen & Associates (in association with Fangda Partners), for the plaintiffs

The 1^st defendant was not represented and did not appear

Mr Patrick Chong and Mr Ross Li, instructed by Howse Williams Bowers, for the 2^nd defendant