Universal Exports Group Ltd v. Zechin Technology Co., Ltd

HCA 2613/2016

[2018] HKCFI 283

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2613 OF 2016

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DECISION

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1.This was a summons taken out by Universal Exports and Group Limited (“the plaintiff”) on 18 October 2016 for continuation of the 2^nd Mareva injunction it obtained on 17 October 2016 restraining Zechin Technology Co Limited, a company incorporated in Hong Kong (“the defendant”) from removing from Hong Kong or in any way disposing of or dealing with any of its assets within Hong Kong including monies held in an account with the Hong Kong and Shanghai Banking Corporation Limited (“HSBC”) up to the value of US$2,241,126 (“the funds”). At the conclusion of the hearing, the Decision was reserved which I now give.

The issue arising

2.The only issue for determination is whether there is a real risk of dissipation, it being common ground that the plaintiff has a good arguable claim against the defendant for the repayment of the funds.  The relevant background that gave rise to the claim is outlined below. 

Background facts

3.The plaintiff is the assignee under a Deed of Assignment dated 5 October 2016 made with The Prepaid Company (Pty) Ltd (“TPC”) of TPC’s rights acquired by TPC by virtue of an agreement (“the August agreement”) contained in two letters dated 12 and 16 August 2016 (collectively “the August letters” and respectively “the 12 August letter” and “the 16 August letter” (more particularly described in §§5 – 6 below) and made between AG Cellular Dealership Close Corporation (“AGC”), the defendant and others expressed to be for the benefit of TPC.

4.This action seeks to enforce TPC’s rights under the August agreement, written notice of assignment to the defendant having been given on 6 October 2017.  TPC’s rights arose in the following way:

(i)   AGC is a South African importer of mobile phones and telecommunications equipment which began trading with the defendant in 2013, purchasing the latter’s mobile phones and tablets on a regular basis.

(ii)   AGC regularly issued written purchase orders (reflecting orders previously placed orally and agreed between AGC and the defendant).  AGC would invariably pay a deposit of 8 – 15% with the balance payable on an “open account” basis for 60 days.

(iii)   AGC was aware that the defendant maintained export credit insurance provided by Sinosure and at some point understood from the defendant that Sinosure imposed a credit limit of US$6 million[1] for goods delivered to AGC but AGC had not seen (and had never been provided with) the Sinosure insurance contract.

(iv)   However, AGC was aware that despite the alleged credit limit, in practice, the defendant continued to deliver goods even when overdue payments exceeded the credit limit.

(v)   In July 2016, when AGC was seriously in arrears to the tune of approximately US$5.4 million, the defendant chased AGC for payment stating that no more goods would be delivered if the outstanding invoices were not settled.

(vi)   AGC then approached TPC (a wholesaler of mobile phones and tablets) the end buyer of the goods ordered by AGC) concerning the matter and TPC agreed to deal directly with the defendant as a third party purchaser.

(vii)   That led to the August letters and a meeting on 27 September 2016 (“the September meeting”) considered below. 

(a)   The August letters

5.The 12 August letter from AGC to the defendant specifically provided that the balance of the purchase price in respect of the order (after taking into account the deposit already paid by AGC) (“the balance”) was to be allocated towards paying for the goods under the 1^st pro forma invoice dated 14 August 2017[2] and not to any historic liability.  The 16 August letter set out the specifics for the delivery of the goods in three tranches: (a) “immediate release” of the 1^st tranche, (b) “week day following receipt of [the 1^st tranche], (c) “day following receipt of [the 2^nd tranche]”.  As earlier noted, the August letters were expressed to be for TPC’s benefit.  They were countersigned by the defendant’s sales and overseas director Jason Zhang (“Mr Zhang”) for the defendant and constituted the August agreement.

6.Under the August agreement, payment was due from TPC upon TPC’s freight forwarder being in possession of the goods.  However, prior to delivery of the 1^st tranche, TPC was asked to make payment upfront.  On 19 August 2016, TPC acceded to the request and paid US$1,107,532 for the 1^st tranche after which the 1^st tranche goods were delivered in two shipments made on 30 August and 1 September.

7.The defendant then required TPC to make payment upfront for the 2^nd and 3^rd tranches before making delivery.  Again, TPC complied by making payments on 7 and 16 September totalling US$2,241,126 (being the funds).  However, the defendant refused to deliver any further goods although they had been readied for shipment on 19 September 2016.

8.On 22 September 2016 the defendant informed AGC and TPC that the three payments received from TPC would be applied towards settling AGC’s historical indebtedness on the ground that Sinosure had revoked insurance coverage.

(b)   The September meeting

9.This was held at the defendant’s offices on 27 September 2016 at which TPC was represented by Andrew Leigh Sack, Chen Cheng and Ellian Perch and the defendant by Mr Zhang.

10.Mr Sack’s evidence is to the effect that he informed Mr Zhang that the plaintiff, on behalf of TPC, demanded the return of the funds from the defendant.  Mr Zhang indicated that the funds had been used to settle the historic debts of AGC with the defendant and that even if TPC or the plaintiff were to pursue recovery of the funds, the defendant was “a paper company”.  Mr Sack understood that as meaning that the company could be closed any time.  Mr Zhang also said that if TPC or the plaintiff were to pursue the matter, the defendant would install a software to lock all the devices that had already been delivered and were in the market. In short, Mr Zhang indicated that the return of the funds or shipment of the goods was not possible.

11.The affidavits of Ms Chen and Mr Perch concerning the September meeting support Mr Sack’s account.

12.Mr Zhang accepts that he did make the statements attributed to him during the September meeting. He explained that it was impossible to make further shipments because Sinosure had refused to provide any further insurance coverage in relation to the goods. He also relied on a set-off agreement which he understood had been reached earlier between Li Nanbiao (“Mr Li”) and AGC’s Anthony Goodman (“Mr Goodman”).

13.According to Mr Li (see §§20 – 23 of his 2^nd affirmation dated 19 May 2017), after receipt by him of the email dated 12 August 2016 from Sinosure warning the defendant not to send goods to AGC if default continued, it was agreed between him and Mr Goodman that all payments made by AGC to the defendant would first be applied to settle the earliest outstanding invoices ie “1^st money paid in, 1^st invoice settled” (“the set-off agreement”).  Mr Goodman denies the existence of such an agreement.  That conflict of evidence is a matter for resolution at trial.

Procedural history

14.Apart from the risk of dissipation issue, there are certain outstanding costs issues to be decided by this court and it would be convenient to mention them at this point.  They arose as follows:

(i)   On 7 October 2016, the plaintiff after accepting the defendant’s repudiation of the August agreement, issued a writ seeking repayment of the funds for non-delivery of goods.  On the same day, the plaintiff issued an ex parte summons and obtained the 1^st Mareva injunction but which was discharged at the inter partes hearing for material nondisclosure of the plaintiff’s financial condition.

(ii)   At the hearing of the plaintiff’s 2^nd ex parte summons on 17 October 2016, Wong J made the order sought but required the plaintiff to fortify its undertaking by making payment of HK$9 million into court by three instalments.

(iii)   On 22 October Madam Justice Au‑Yeung ordered the 2^nd Mareva injunction continue until noon on 24 October, pending the outcome of the inter partes hearing by DHCJ Kwok SC for hearing on 24 October at 9 am.

(iv)   After the inter partes hearing on 24 October 2016, DHCJ Kwok SC continued the 2^nd Mareva injunction, conditional on payment of the balance of the plaintiff’s fortification which was duly made by 31 October.

(v)   The defendant’s application for leave to appeal the 24 October order was dismissed by DHCJ Kwok SC who made no order as to costs.

(vi)   The Court of Appeal granted the defendant leave to appeal and later allowed the defendant’s appeal on 3 April 2017, making an order in terms of the consent summons of 24 March 2017.  Accordingly, it ordered inter alia that:

(1)the 2^nd Mareva injunction be continued until final determination of the inter partes summons;

(2)costs of the 2^nd inter partes summons (including the hearings on 22 and 24 October) be reserved; and

(3)costs of and incidental to:

(a)   the defendant’s summons of 4 November 2016 for leave to appeal (including the hearing on 2 December 2016),

(b)   the renewed application for leave before the Court of Appeal in HCMP 3478/2016, and

(c)   the appeal to the Court of Appeal

be in the cause of the plaintiff’s summons.

Applicable legal principles

15.It is well-established that apart from showing a good arguable case, the plaintiff needs to show that a refusal of an injunction would involve a real risk that a judgment or award in his favour would remain unsatisfied: see Ninemia Corp v Trave Schiffahrts GmbH [1983] 1 WLR 1412 at 1422H.

16.Gee on Commercial Injunctions, 6^th Edn at 12-033 sets out some of the factors that may be relevant, for example, the nature of the assets that are to be subject to the proposed injunction and the ease or difficulty with which they could be disposed of or dissipated, the nature and financial standing of the defendant’s business, the length of time it has been in business, the domicile or residence of the defendant, any intention expressed by the defendant about future dealings with its assets within the jurisdiction and the defendant’s behaviour in respect of the claims.

17.As the Court of Appeal made clear in ULFCAR International AS v Miles and Others [1991] Lexis Citation 1533, 29 August 1991 (at p 3),

“ … the appropriate test … is whether, on the assumption that the plaintiffs have shown at least ‘a good arguable case’, the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiffs would remain unsatisfied.” (emphasis added)

Risk of dissipation

18.The plaintiff relies primarily on what was said at the September meeting, specifically, in relation to the defendant being a “paper company”, and the threat to lock the devices already supplied and in the market.  Ms Cheung, counsel for the plaintiff, submitted that in the context, the statement of the defendant being a “paper company” was a clear expression of intent that if the plaintiff pressures for repayment, the defendant could and would render the judgment an empty judgment.  Further the threat to lock devices already delivered and in the market demonstrated low commercial morality on the defendant’s part.

(1)   The “paper company” statement

19.Mr Zhang’s explanation for making that statement was that Mr Sack was putting a lot of pressure on him to ship AGC’s ordered productsby referring to TPC’s payments on behalf of AGC.  As he believed that the defendant had no trading relationship with TPC whatsoever, he became “very agitated and felt very unreasonable and at the spur of the moment and purely out of anger” told Mr Sack that the defendant was a paper company.  It was said that as shown in the defendant’s audited accounts, the defendant is clearly not a paper company (in that it has real operations and has generated substantial income and profits in the last few years) which Mr Sack should have known.

20.The following matters arise from Mr Zhang’s explanation: (a) his knowledge (if any) of TPC’s interest under the August agreement, and (b) the nature of the defendant’s “operations” in Hong Kong.

21.Whether or not the defendant maintained a trading relationship with TPC would not appear to be the relevant consideration since implicit in Mr Zhang’s explanation was that TPC was an unknown third party and effectively a complete stranger to the August agreement.  That, however, could not be the case because TPC featured prominently in the August letters (signed by Mr Zhang only five to six weeks earlier) inasmuch as it (or its nominees) was the designated recipient of the goods to be delivered and, importantly, it was the entity responsible for making payment of the balance under the August agreement.  It was also expressly stated that the benefits of the August agreement would enure for TPC’s benefit.

22.Further, viewed objectively, what could have been the rationale underpinning the August agreement?  If it was not for facilitating the delivery of the goods ordered to the end buyer (TPC) who would pay the defendants directly for the same, what was its purpose?  Why would TPC agree to make payment if the goods it had ordered as end buyer would not be released?

23.The defendant’s case as to why Mr Zhang signed the August letters on behalf of the defendant was that AGC’s manager Tracy Hu represented to Mr Zhang that AGC’s (historic) debts would be paid.  But that is no answer to any of the matters raised in §22.  

24.It is also noteworthy that the (mis)representation allegation is not made by Mr Zhang (despite his having filed an affirmation in opposition to the continuation of the 2^nd Mareva injunction) but by Mr Li in his 2^nd affirmation who did not provide particulars or contemporaneous documentary evidence in support.

25.It is not suggested that Mr Zhang is not conversant with the English language.  He signed the August letters and absent any explanation from him as to what purpose he thought they were to serve or what he thought he was signing, prima facie, he must be taken to have understood what he was signing.

26.Turning to the defendant’s operations in Hong Kong, its financial statements for 2015 and 2016 are in evidence.  For 2016, they show a turnover of approximately US$215 million and a net profit of US$0.35 million or a return of 0.16%.

27.The statement of financial position as at 31 March 2016 is noteworthy in the following respects: (i) the amount due to trade creditors exceeds accounts receivable; (ii) while net assets of US$0.85 million odd are shown, that is only after taking into account its 100% interest in a PRC subsidiary, namely, Longconn Electronics (Shenzhen) Co Limited valued at US$0.95 million. However, that does not necessarily translate into recourse against the assets of the subsidiary: first there is a subsisting guarantee given by the subsidiary in respect of the defendant’s banking facilities and second, it is unclear to what extent the subsidiary’s assets are reachable by a creditor (if at all).

28.Mr Li and Chen Jia were and are the members and directors of the defendant.  Mr Li’s 1^st affirmation dated 16 November 2016 describes the defendant as a private limited company incorporated in Hong Kong with its principal place of business located in Shenzhen.  It is in the business of sourcing and trading of telecommunications products and is used as a representative office by its parent, Zechin Communication Co Limited (“Zechin China”).

29.The defendant’s Hong Kong registered address is at the office of its company secretary but as Mr Li explained (at §7):

“ [a]s most of its business operations are conducted in Shenzhen, the [d]efendant did not (and still does not) operate any office in Hong Kong … It is however necessary for the [d]efendant to cater for its customers in Hong Kong. As a result, the [d]efendantmainly serves as a contact point with them in facilitating businesstransactions and communication as well as for trading convenience ‌…”

30.Mr Lo, counsel for the defendant, sought to demonstrate that the defendant has clients internationally and was a company of substance by referring to contracts it entered into with entities worldwide, trading in products manufactured by well-known manufacturers and also selling handsets manufactured by its parent Zechin China through Longconn. 

31.It was submitted that the defendant’s business has a “close connection with Hong Kong” in that foreign clients with a Hong Kong subsidiary would direct the defendant to deliver goods to designated warehouses or local forwarders in Hong Kong.  Upon clients’ request, the ordered goods would also be shipped via Hong Kong to various destinations worldwide.  Commercial invoices for orders issued by the defendant showing its Hong Kong address.

32.While there is no doubt that that is how the defendant operates its business, the fact remains that the defendant is but a “contact point” with a Hong Kong address but does not maintain an office as such in Hong Kong where it has no staff.  In other words, its operations are carried out fromShenzhen albeit using its Hong Kong address.  Other than the HSBC account, it is not evident what assets the defendant has in Hong Kong.  That assets in the form of monies in a bank account can easily be dissipated requires no elaboration.

33.While the mode the defendant chooses to adopt to conduct its business operations is a matter for the defendant and not the court, nevertheless, the court may take notice of the nature of those operations and whether they could easily be transferred to or assumed by a new entity.  Where there is effectively but a post box[3] situated within Hong Kong and no known assets other than the HSBC account, the risk of dissipation is obvious. That is but common sense.

(2)   The “locking” of devices statement

34.Turning to the statement relating to the “locking” of devices, Mr Zhang explained that it was “to give some pressure back” to Mr Sack that he (Mr Zhang) said that if AGC did not repay the accrued debts, the defendant would “lock” the products by way of firmware upgrades.  He stated that as a matter of fact the defendant has never done such “locking” and did not know if it was technologically possible and that it was “also said out of the spur of the moment”.

35.The plaintiff submitted that the utterance of those words amounted to a threat and constituted good evidence of low commercial morality because if it were true, it could have a devastating impact on the plaintiff/TPC’s trade reputation and future business prospects.  If it were untrue, that the defendant saw fit to resort to a blatant lie for the purpose of putting pressure on the plaintiff is conduct that is indicative of low commercial morality.  Having regard to the nature of TPC’s business, I would agree.  

36.On the basis of the good arguable case put forward by the plaintiff, the point of the August agreement was to enable the end buyer (TPC) to pay for and take delivery of the goods and indeed the 1^st tranche was delivered. As regards the 2^nd and 3^rd tranches, payments were effected on 7 and 16 September 2016.  The goods should have been shipped on 19 September 2016 but were not.

37.While Sinosure’s revocation of coverage was the reason given as to why the defendant could not deliver any more goods, the terms of Sinosure’s insurance coverage are not in evidence.  There is no evidence (much less solid evidence) as to when exactly Sinosure became so entitled and, indeed, when exactly it revoked coverage.

38.The revocation notice exhibited and dated 22 September 2016 appears to be prospective, relating to losses caused by the buyer or incurred by banking transactions after midnight of 23 September 2016.  The evidence in the hearing bundles regarding revocation is at best tenuous.

39.Had the defendant complied with its contractual obligations under the August agreement, it would not have been in a position (seemingly, wrongfully), to appropriate the TPC payments towards the discharge of AGC’s historic debts.  The appropriation has the hallmarks of an afterthought since it would appear that it did not take place until several days after 19 September 2016.  In other words, the defendant chose to breach the August agreement for its own purposes.  Such conduct would also be indicative of low commercial morality.

Conclusion

40.Having regard to all the matters considered above and to the factors mentioned in §16 above, I am of the view that the risk of dissipation in the present case is real.  Assessed objectively, the paper company utterance, made in the circumstances set out above, is undeniably a threat that any pursuit for repayment of the funds would be futile.  The fact that the only known assets consists of monies in a bank account, the risk of dissipation looms large.   

41.When that is coupled with the manner in which the defendant has seen fit to conduct itself following the August agreement, including the threat to lock the devices supplied, it is appropriate to order that the 2^nd Mareva injunction be continued until after trial of the action or further order.

Costs

42.There is to be an order nisi that the costs of the 2^nd inter partes summons (including the costs of the hearing on 22 August and 24 August 2016 hearing) and the costs referred to in §14(vi)(3) above be to the plaintiff with certificate for counsel.

Ms Janine Cheung, instructed by Boase, Cohen & Collins, for the plaintiff

Mr Benny Lo and Mr Chan Yip Hei, instructed by Gallant, for the defendant