Cosimo Borrelli As Trustee of the Sfc Litigation Trust v. Allen Tak Yuen Chan and Others

HCMP 1987/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1987 OF 2016

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DECISION

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1.There are 3 applications before me:

(i) the Plaintiff’s application by Originating Summons dated 4 August 2016 (“the Originating Summons”) to commit the 2^nd to 4^th Defendants for contempt, issued pursuant to the leave granted ex parte under the order of M Chan J dated 27 July 2016 (“the Leave Order”);

(ii) the summons by the 2^nd to 4^th Defendants dated 19 August 2016 to set aside the Leave Order and to strike out the Originating Summons (“the Setting Aside Summons”); and

(iii) the summons by the Plaintiff dated 24 August 2016 to amend the Originating Summons (“the Amendment Summons”).

Background

2.The 1^st Defendant is being sued by the Plaintiff in Canada for breaches of fiduciary, equitable and statutory duties in respect of his role as the former Chief Executive Officer of Sino Forest Corporation (“SFC”).  The compensation sought exceeds CAD$3 billion.  On 28 August 2014, the Ontario Superior Court of Justice (Commercial List) granted an order to freeze the assets of the 1^st Defendant.

3.On 29 August 2014, Anthony Chan J made a Mareva injunction order (“the Mareva Order”) pursuant to s 21M of the High Court Ordinance (Cap 4) prohibiting the 1^st Defendant from disposing his assets located in Hong Kong up to the value of HK$2.5 billion.

4.The Mareva Order specifically listed 3 properties as being frozen by the order.  These properties were owned by 2 companies, Shiny Tech (Hong Kong) Limited and Open Heart Dojo Inc, of which the 3^rd and 4^th Defendants are the sole directors and shareholders.

5.It is the Plaintiff’s case that: (i) the 2^nd Defendant was the female companion of the 1^st Defendant; and (ii) the 2^nd to 4^th Defendants were at all material times well aware of the Mareva Order.

6.The Mareva Order was subsequently extended on 9 January 2015 to cover the bank accounts of the 2^nd to 4^th Defendants (“the Extended Mareva Order”).  This was the result of the disclosure by the 1^st Defendant of substantial cash transfers to the 2^nd to 4^th Defendants shortly following the publication of a short-seller report in relation to SFC that precipitated SFC’s collapse.  Ancillary disclosure orders were made against the 2^nd to 4^th Defendants, which led to a series of applications to the court by the Plaintiff with an attempt to obtain proper disclosure from the 2^nd to 4^th Defendants.  Unless order for disclosure was made by the court against the 2^nd to 4^th Defendants on 12 November 2015.  As the court was still not satisfied with the disclosure, M Chan J made a further order for disclosure against them on 17 June 2016 (“the Further Order”).

7.On 7 July 2016, the 2^nd to 4^th Defendants made further affidavits with a view to comply with the Further Order.  These affidavits revealed substantial transfers (“the Substantial Transfers”) made by the 2^nd to 4^th Defendants on 22 September 2014 to other parties, of which CAD$10.525 million by the 2^nd Defendant, HK$11 million by the 3^rd Defendant and HK$13 million by the 4^th Defendant.

8.It is the Plaintiff’s case that the Substantial Transfers were traceable to funds received by the 2^nd to 4^th Defendants from the 1^st Defendant and therefore represented the disposition of the 1^st Defendant’s assets.  By making the Substantial Transfers, the Plaintiff claims that the 2^nd to 4^th Defendants either breached the Mareva Order by knowingly dissipating the 1^st Defendant’s assets at a time when they knew that those assets were frozen or aided and abetted the 1^st Defendant to breach the Mareva Order.

9.The Plaintiff then took out contempt proceedings against the Defendants.  In order to obtain leave to institute contempt proceedings, the Plaintiff filed a Statement on 26 July 2016 under O 52 r 2(2) of RHC (“the Statement”), in which the Plaintiff claims that, inter alia:

(i) the 2^nd to 4^th Defendants breached the Mareva Order by making the Substantial Transfers; and

(ii) the 2^nd to 4^th Defendants breached the Further Order by not making all the required disclosure.

10.The Leave Order was granted by M Chan J on 27 July 2016.

11.The 2^nd to 4^th Defendants now seek to set aside the Leave Order (“the Setting Aside Application”) on the ground that the Plaintiff has no legal ground to apply to commit them for breach of the Mareva Order.  As the 2^nd to 4^th Defendants had not been enjoined when they made the Substantial Transfers, they cannot be liable for breach of the Mareva Order.  The legal basis for liability of non-parties is different, but that was not made known to the court at the ex parte leave application.  They also contend that the Amendment Application should be dismissed because the Plaintiff is in effect trying to add a new claim for which no leave has been granted.

Legal principles relating to liability for contempt against non-parties

12.Some of the relevant legal principles relating to liability for contempt against non-parties for breach of injunction can be listed out as follows:

(i) Non-parties are not themselves enjoined by an injunction against another person.[1]

(ii) The legal basis for liability of parties directly enjoined and non-parties is fundamentally different.[2]

(iii) Non-parties may only be liable for contempt if they either:

(a) knowingly aid and abet a breach of an injunction by the enjoined defendant (“the First Limb of Liability”); or

(b) interfere with the administration of justice by, with knowledge of the order, doing something which disables the court from conducting the case in the intended manner (“the Second Limb of Liability”).[3]

(iv) The elements for non-party are different from the elements necessary to prove the liability of the defendant directly enjoined.  For example, for a defendant directly enjoined, it is not necessary to prove that the defendant appreciated that he was acting in breach of the order, as long as he had notice of the order and the conduct in breach was not accidental.[4]

The basis of the Setting Aside Application

13.Given such distinction of liability between parties directly enjoined and non-parties, the 2^nd to 4^th Defendants argue that the Statement is defective.  In various places in the Statement, including §§13, 43.1, 44, 51, 53, 54 and 56 therein, it is alleged that the 2^nd to 4^th Defendants knowingly breached the Mareva Order.  However, they had not been enjoined when the Substantial Transfers were made, and so there is no basis for the Plaintiff to allege that they were in breach of the Mareva Order itself.  The 2^nd to 4^th Defendants can only be liable for contempt if they knowingly assisted in or permitted a breach, but that is not the basis of the Plaintiff’s allegation contained in the Statement and the Originating Summons.  These documents are therefore fundamentally defective and disclose no grounds for committing them for breach of the Mareva Order.

14.In support of such contention, Ms Ismail, SC, counsel for the 2^nd to 4^th Defendants, relies on the following propositions of law:

(i) A statement in contempt proceedings is equivalent to an indictment in criminal proceedings.[5]

(ii) The charges made against a defendant in a committal application must be properly made out in the statement.[6]

(iii) It is necessary that a person alleged to be in contempt shall know with sufficient particularity to enable him to defend himself, what exactly he is said to have done or omitted to do which constitutes a contempt of court.[7]

15.Ms Ismail also contends that:

(i) O 52 requires that the court is presented with a precise and accurate statement as to the allegations of the breach of the court’s order in an application for leave before a decision as to whether leave should be granted is made.  Strict compliance is required.  Defects in the originating summons and the O 52 statement prior to leave being granted mean that leave should be set aside.  A proposed amendment after leave is granted will not help because the leave to apply for committal must be set aside and there is nothing for the court to continue with.  This is without prejudice to the plaintiff commencing a fresh proceeding on a properly formulated statement.^[8]

(ii) Since the application for leave is made ex parte, it is liable to be set aside for material non-disclosure^[9], and the duty of full and frank disclosure extends to matters of law^[10].

Merits of the Setting Aside Application

16.Despite the able submissions of Ms Ismail, I do not accept these arguments.

17.In my judgment, not every defect in an O 52 statement is fatal.  In determining whether a statement is defective, the question to be asked should be whether the statement has given the person alleged to be in contempt enough and sufficient information to enable him to meet the charge.  In answering such question, the court should look at the document as a whole to determine whether sufficient information has been given and whether the person alleged to be in contempt is left in any doubt as to the charge he has to face in the contempt proceedings.

18.In the Statement, the Plaintiff has listed out the history of the litigation between the parties.  It provides a detailed account of the events leading to the granting of the Mareva Order, the Extended Mareva Order and the Further Order.

19.Insofar as the allegation for contempt in respect of the Mareva Order is concerned, it is clear from the Statement that the basis of the Plaintiff’s complaint is that the 2^nd to 4^th Defendants were making the Substantial Transfers knowing full well the injunction contained in the Mareva Order and that the funds for the Substantial Transfers were beneficially owned by the 1^st Defendant.

20.In §51 of the Statement and §49 of the Originating Summons, the Plaintiff pleads the following conclusion in relation to the making of the Substantial Transfers:

“In making the Substantial Transfers, the 2^nd, 3^rd and 4^th Defendants knowingly breached the [Mareva Order], in that:

[1] the cash held by the 2^nd, 3^rd and 4^th Defendants the subject of the Substantial Transfers was sourced from the Sum and was an asset of the 1^st Defendant located in Hong Kong and therefor subject to the [Mareva Order];

[2] the Substantial Transfers were made after the date of the [Mareva Order] and at a time when the 2^nd, 3^rd and 4^th Defendants were aware if the terms of the [Mareva Order];

[3] the purported purpose of the Substantial Transfers was to discharge a debt owed by the 1^st Defendant to Renlu, a company controlled by an associate of the 1^st Defendant; and

[4] by the Substantial Transfers, the 2^nd, 3^rd and 4^th Defendants had assisted the 1^st Defendant to dispose of, deal with or diminish the value of his assets in breach of the [Mareva Order].”

21.The Statement and the Originating Summons also allege further instances of contempt by the 3^rd and 4^th Defendants by making payments to other parties in September 2014.[11]

22.The Statement and the Originating Summons further allege breaches of the Further Order which are not the subjects of complaint of the Setting Aside Application.

23.With such details given, the 2^nd to 4^th Defendants should not have any doubt as to the details of the charge against them.

24.I agree that O 52 statement is an important piece of document.  Taking into account the penal nature of the sanctions for contempt, the defendant should know the nature of the charge against him so that he can answer the charge properly.  In my judgment, although it is not technically right for the Plaintiff to say that the 2^nd to 4^th Defendants had breached the Mareva Order itself, the contents in the Statement, in particular §51 therein, provide a detailed account of the charge against them.  It specifies clearly what they have done which constitutes a contempt of court.  I therefore do not accept that such technical error is sufficient to render the Statement a defective one.

25.As I see it, the present case is quite different from Aqua-Leisure Industries, Inc v Aqua Splash Ltd[12].  In Aqua-Leisure, Yeung J (as he then was) found that only general allegations were contained in the O 52 statement, whereas the particulars of those allegations could only be found in the affirmation in support of the application.  In other words, the defendant did not know exactly what he had allegedly done which constituted a contempt.  The issue in that case was, therefore, whether the defects in the O 52 motion[13] and statement can be cured by the contents of the supporting affirmation.  In the present case, sufficient particulars of the charge have been provided in the Originating Summons and the Statement.  While it might not be perfectly accurate to describe the making of the Substantial Transfers as breach of the Mareva Order itself, the 2^nd to 4^th Defendants should have no doubt about the nature of the charge they have to meet.

26.In the authorities, the courts have repeatedly emphasised that the main consideration, if not the sole test, is whether the O 52 statement (and not the supporting affirmation) has provided enough information to the defendant in the contempt proceedings to meet the charge.[14]  In my judgment, the Plaintiff has provided enough information in the Originating Summons and the Statement.  Despite the “mischaracterisation” of the conduct as breaching the Mareva Order itself, it should not render the whole proceedings a nullity to the effect that the Plaintiff would have to start all over again.   In particular, the Plaintiff is also alleging that the 2^nd to 4^th Defendants were in breach of the Further Order which is not the subject for complaint in the Setting Aside Application.

27.I also do not accept that the leave for the contempt proceedings has been granted on the wrong basis.  The judge dealing with the ex parte application must have read the Statement as a whole. The judge should have no problem in understanding that the 2^nd to 4^th Defendants had not been enjoined at the time when they made the Substantial Transfers, and that the basis of the complaint was that they made the Substantial Transfers and the other transfers knowing full well the injunction contained in the Mareva Order and that the funds originated from the 1^st Defendant himself.  The leave should have been granted on the basis of these allegations, and the judge should not have been misled in believing that the 2^nd to 4^th Defendants had been enjoined at the time of the making of the Substantial Transfers.

28.It follows that the court should also allow the Plaintiff to amend the Originating Summons.  The proposed amendments include the proper characterisation of the 2^nd to 4^th Defendants’ conducts as assisting the breach of the Mareva Order, which should have been made clear in the existing §51 of the Statement and §49 of the Originating Summons. The particulars of allegations and the substance of the charge have remained unchanged.

29.Nevertheless, the proposed amendments require further clarification.  Apart from the First Limb of Liability for non-parties as referred to in §12(iii) above, it seems from the Plaintiff’s submissions that he is also relying on the Second Limb of Liability, i.e. interference with the administration of justice, and the Plaintiff just equates the Second Limb of Liability with a breach of the Mareva Order itself.  That may not be entirely correct as non-parties are not themselves enjoined by an injunction against another person.  Allegations to the effect that the 2^nd to 4 Defendants had breached the Mareva Order should therefore be avoided.  If the Plaintiff is seeking to rely on the Second Limb of Liability, rather than just referring to it as breaching the Mareva Order itself, he should expressly specify that the 2^nd to 4^th Defendants are liable because they interfered with the administration of justice.  The Plaintiff is therefore directed to submit a revised draft for consideration by the court and the Defendants.  In case of any disagreement between the parties, they are at liberty to restore the Amendment Summons for further argument.

30.By reason the penal nature of the sanctions for contempt, the court has all along adopted a stricter approach so far as the procedural fairness of contempt proceedings is concerned.  That is also one of the reasons why O 52 statement is to be treated in a similar manner as an indictment in criminal proceedings.  However even in criminal proceedings, there are statutory provisions such as s 23(1) of the Criminal Procedure Ordinance (Cap 221) which empower the court to amend an indictment in appropriate circumstances, and so one should not over-emphasise the strictness of procedural requirements in contempt proceedings.  Every procedural requirement should serve a legitimate purpose.  As the 2^nd to 4^th Defendants should have had a clear understanding of the nature of the charges against them from the particulars pleaded in the existing Statement, I see no point in setting aside the leave for the contempt proceedings.

31.For the above reasons, I dismiss the Setting Aside Summons.  I would reserve my decision on the Amendment Summons pending the submission of a further revised draft made in accordance with my decision above.

32.I also make a costs order nisi that, save that there be no order as to costs of the hearing on 8 November 2016, the costs of the Setting Aside Summons and the costs of the Amendment Summons incurred up to the date hereof be paid by the Plaintiff to the Defendants.  The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.

33.There is also liberty to the parties to restore the Originating Summons for a further direction hearing.

Mr Timothy Kentish (solicitor advocate), of Lipman Karas, for the Plaintiff

Mr Michael Lok, instructed by C Y Tsang & Co, for the 1^st Defendant

Ms Roxanne Ismail, SC and Mr Julian Lam, instructed by K B Chau & Co, for the 2^nd to 4^th Defendants