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

CACV 149/2017

[2018] HKCA 139

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 149 OF 2017

(ON APPEAL FROM HCMP NO 1987 OF 2016)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the court):

1.This is the appeal of the 2^nd to 4^th defendants against the decision of Lok J on 15 May 2017, in which the judge dismissed their summons to set aside the ex parte leave (“the Setting Aside Summons”) granted by Mimmie Chan J to the plaintiff to issue proceedings to commit the 1^st to 4^th defendants for contempt (“the Leave Order”) and to strike out the originating summons issued pursuant to the Leave Order.

2.As stated in the Setting Aside Summons, the application was made on these grounds:

(1)   the plaintiff’s statement pursuant to Order 52 rule 2(2) (“the Statement”) is materially defective by reason of “false statements that the 2^nd to 4^th defendants breached the Hong Kong Mareva [i.e. the Mareva Order granted by Anthony Chan J on 29 August 2014], inherently representing that the 2^nd to 4^th defendants were by such order enjoined to do, or refrain from doing, certain acts. Paragraphs 13, 43.1, 44, 51, 53, 54 and 56 of the Plaintiff’s Statement are false, as the Hong Kong Mareva did not enjoin the 2^nd to 4^th defendants to do, or refrain from doing, any act”; and/or

(2)   the plaintiff was guilty of material non-disclosure in “wrongly informing the Court that the 2^nd to 4^th Defendants were enjoined by the Hong Kong Mareva”.

3.The gravamen of the complaint of the 2^nd to 4^th defendants before the judge, as repeated in the Notice of Appeal and the skeleton argument of Mr Julian Lam on appeal, is that the Statement is materially defective in that the plaintiff had failed to state the “correct legal basis” for the alleged contempt of these defendants.  As these defendants were not directly enjoined, they could only be made liable for contempt as non-parties, for either knowingly aiding and abetting a breach by the 1^st defendant of the Mareva Order, and/or interfering with the administration of justice by obstructing or frustrating the Mareva Order.  There was before the judge a summons issued by the plaintiff seeking leave to amend the originating summons to aver that the 2^nd to 4^th defendants had knowingly aided and abetted breaches of the Mareva Order.

4.The judge refused to set aside the Leave Order, taking the view that the mis-characterisation of the 2^nd to 4^th defendants as having breached the Mareva Order is but a “technical error”, as the basis for seeking to make these defendants liable for contempt has been correctly and adequately set out in the Statement.  Instead of requiring the plaintiff to bring a fresh application to seek leave to commit these defendants for contempt, he exercised his discretion to entertain the plaintiff’s application to amend the originating summons and reserved the application to himself pending the plaintiff’s submission of revised draft amendments concerning the allegation there was interference with the administration of justice by obstructing or frustrating the Mareva Order.  He ordered that save there be no order as to the costs of the hearing before him, the costs of the Setting Aside Summons and the costs of the amendment summons incurred up to date be paid by the plaintiff to the defendants.

5.The 2^nd to 4^th defendants sought leave to appeal against the judge’s decision.  The judge granted leave on the basis that in view of some authorities emphasising the penal nature of contempt proceedings requiring strict procedural compliance with procedural rules, the appeal court should be invited to consider whether his decision is right and give further guidance on the procedural requirements for contempt proceedings.

Background

6.For present purpose, the relevant background matters may be stated as follows.

7.The 1^st defendant is the former chief executive officer of Sino Forest Corporation (“SFC”), a company listed on the Toronto Stock Exchange.  The plaintiff, as the trustee of the SFC Litigation Trust, brought proceedings against him in Ontario for breaches of fiduciary, equitable and statutory duties.  The 2^nd defendant is the companion of the 1^st defendant, the 3^rd and 4^th defendant are his daughters.

8.On 28 August 2014, the Canadian court granted a worldwide Mareva injunction against the 1^st defendant without any monetary limit and, as mentioned earlier, on 29 August 2014 Anthony Chan J granted a parallel Mareva injunction against the 1^st defendant being the Mareva Order subject to the monetary cap of HK$2.25 billion.  The Mareva Order specifically listed three properties as being frozen by the order and these properties were owned by two companies of which the 3^rd and 4^th defendants are the sole shareholders and directors.  The Mareva Order contained a notice to third parties in the standard form stating that it is a contempt of court for any person notified of the order knowingly to assist in or permit a breach of the order.

9.As part of his disclosure pursuant to the Ontario Mareva order, the 1^st defendant disclosed that a company under his control, Win Fair Holdings Group Limited (“Win Fair”) had on 9 June 2011 transferred three sums of money totalling US$6.5 million (“the Sums”) to the 2^nd defendant (US$1.3 million), the 3^rd defendant (US$2.6 million) and the 4^th defendant (US$2.6 million).

10.On 9 January 2015, Chow J made an order extending the freezing order under the Mareva Order (“the Extended Mareva Order”) to the respective bank accounts of the 2^nd, 3^rd and 4^th defendants at the Standard Chartered Bank (“SCB”), into which the Sums were transferred.

11.Following various disclosure orders made against the 2^nd to 4^th defendants by Chow J, on 17 June 2016, Mimmie Chan J made a further order for disclosure (“the Further Order”) against these defendants requiring them to provide a full and accurate account of the historical trail of the fund flow of the Sums from their SCB accounts and the current whereabouts of the money.

12.With a view to complying with the Further Order, on 7 July 2016, the 2^nd, 3^rd and 4^th defendants filed evidence disclosing that they had all transferred substantial sums on 22 September 2014 from their SCB accounts to various entities, in the respective amounts of HK$10.525 million (the 2^nd defendant), HK$11 million (the 3^rd defendant) and HK$13 million (the 4^th defendant) (collectively “the Substantial Transfers”).

13.On 26 July 2016, the plaintiff filed the Statement to apply for leave ex parte to bring contempt proceedings against the four defendants.  Mimmie Chan J made the Leave Order on 27 July 2016.  The originating summons to commit for contempt was issued on 4 August 2016 and the Setting Aside Summons of the 2^nd to 4^th defendants was issued on 19 August 2016.

The reasoning of Lok J

14.Lok J took the view that not every defect in a statement filed pursuant to Order 52 rule 2(2) must be treated as fatal notwithstanding the penal nature of proceedings for contempt so that leave granted to commence proceedings must be set aside and the applicant required to seek leave afresh.  In determining whether a statement is defective, the question to ask is whether the statement has given the alleged contemnor sufficient information to enable him to meet the charge and in answering that question, the court should look at the document as a whole to determine whether sufficient information has been given and whether the alleged contemnor is left in any doubt as to the charge he has to face[1].

15.Reading the Statement as a whole, the judge concluded it is clear 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.”[2]

16.He set out the allegations in §51 of the Statement relating to the making of the Substantial Transfers.  He referred also to §§53, 54 and 56 which alleged further instances of contempt by the 3^rd and 4^th defendants in making other payments at other times.  He came to the view that “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.”[3]  Although it is “not technically correct” for the plaintiff to allege that the 2^nd to 4^th defendants breached the Mareva Order, the contents of the Statement, in particular §51, provide a detailed account of the charge against them and specify clearly what they have done which constitutes a contempt of court.  The 2^nd to 4^th defendants should have no doubt about the nature of the charge they have to meet.  He did not accept that such a “technical error” is sufficient to render the Statement defective.[4]

17.Further, Lok J did not think Mimmie Chan J had made the Leave Order on the wrong basis.  Reading the Statement as a whole, Mimmie Chan J 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.”  Leave would have been granted on the basis of these allegations and Mimmie Chan J would not have been misled in believing that the 2^nd to 4^th defendants had been enjoined at the time of making the Substantial Transfers.[5]

Whether the Statement is defective

18.In his written submission on appeal, Mr Lam renewed his attack on the Statement on the basis that it has failed to specify the correct legal basis for the alleged attempt.  He submitted that the obligation to specify the precise legal basis is inherent in the requirement in Order 52 rule 2(2) to set out “the grounds on which [the] committal is sought”. He contended it is not sufficient to state the material facts.  In support he cited Chanel Ltd v FGM Cosmetics [1981] FSR 471 at 478 to 479; Harmsworth v Harmsworth [1987] 1 WLR 1676 at 1683A to C; and Nicolas Pappadis v Chan Shing-sheung Barry [1989] 2 HKLR 511 at 520C to H.

19.Mr Tim Kentish for the plaintiff submitted that the authorities cited by Mr Lam do not stand for the proposition that it is necessarily a fundamental defect in a statement under Order 52 rule 2(2) if the legal basis of the contempt is mis-characterised.  He cited authorities to support his proposition that the factual allegations are paramount (Chiltern District Council v Keane [1985] 1 WLR 619 at 622A; Kao, Lee & Yip v Koo Hoi Yan (2009) 12 HKCFAR 830 at §72; and YBL v LWC [2017] 1 HKLRD 823 at §§43 to 44).

20.The requirement of Order 52 rule 2(2) is to set out in the statement “the grounds on which [the] committal is sought”.  It has been said in many cases what is required is that the alleged contemnor “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”, and every statement “must be looked at against its own background” to ascertain whether enough information has been given to the alleged contemnor to meet the charge (Chiltern District Council v Keane at 622A to C).  The extent of particularity required depends on the nature of the order alleged to be breached and the background of the case.

21.There is no rigid or inherent requirement that apart from the factual elements alleged to constitute contempt, the legal basis for alleging contempt must also be given in the statement.  Whether the legal basis is also required to be stated would depend on the particular circumstances.  Two examples may be given why it may be necessary to state the legal basis in some situations.

22.In Nicolas Pappadis v Chan Shing-sheung Barry, officers of a company were found liable of contempt under Order 45 rule 5(1) as well as for aiding and abetting.  The statement required by Order 52 stated that they “failed to cause” the company to disclose assets of the company as ordered by the court.  The Court of Appeal held that the words quoted in the statement were directed to an Order 45 rule 5 situation.  However, the finding of contempt under Order 45 rule 5 could not stand as a copy of the order was not served on the respondent pursuant to Order 45 rule 7(3) and service was not dispensed with under rule 7(7).  The objection to the finding of aiding and abetting was also upheld as the respondent was not charged in the form of aiding and abetting, there was no suggestion of knowing defiance of the court order, and no suggestion of aiding and abetting.  This is an example in which the plaintiff was held strictly to the charge alleged.

23.In Numeric City Ltd v Lau Chi Wing [2016] 4 HKLRD 812, the plaintiff sought to commit the defendant for contempt for making a false witness statement verified by a statement of truth.  It is provided in Order 41 rule 9(2)(b) of the Rules of the District Court that this kind of contempt proceedings may be brought only with the leave of the court.  Neither the statement nor the supporting affirmation referred to the statutory basis of making the application, being Order 41 rule 9(2).  Instead, leave to commence committal proceedings was sought and granted under Order 52 of the Rules of the District Court.  The Court of Appeal held that the need to refer to Order 41 rule 9(2) is of paramount importance, for there is a wider public interest involved in this kind of contempt proceedings and an obvious need to guard against the risk of abuse.  It is incumbent on an applicant who wishes to cite a person for contempt for making a false statement to state explicitly he is seeking leave under Order 41 rule 9(2), so that the vigilance of the court is aroused.  As the plaintiff had not obtained leave under this provision in the ex parte application nor applied for leave to cure the irregularity, the application for contempt must be dismissed without going into the merits.

24.The present situation is very different from the examples mentioned.  The Statement is to be read “fairly and sensibly as [it] would be read by a reasonable person in the position of the alleged contemnor” and the crucial question is whether such a person, “having regard to the background against which the committal application is launched, [would] be in any doubt as to the substance of the breaches alleged.” (Harmsworth v Harmsworth, at 1683E to F)  Notwithstanding the error in alleging that the 2^nd to 4^th defendants breached the Mareva Order in those paragraphs of the Statement as identified by Mr Lam when these defendants were not enjoined by the order, in light of the detailed account of the factual elements, we agree with the judge that they should be in no doubt as to the details of the charge against them and that the ex parte judge should have no problem in understanding the correct legal basis of the complaint.

25.The factual allegations in §51 of the Statement quoted by the judge clearly spelt out the basis of the complaint as regards the Substantial Transfers:

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

51.1 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 therefore subject to the [Mareva Order] and the Freezing Order made thereunder;

51.2 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 of the terms of the [Mareva Order] and the Freezing Order made thereunder;

51.3 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

51.4  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 Freezing Order.”

26.The judge is correct in regarding the mis-characterisation about the legal basis of the complaint in the paragraphs identified by counsel for these defendants as technical errors and that the Leave Order had not been made by Mimmie Chan J on the wrong basis. Such technical errors could not have caused prejudice to the 2^nd to 4^th defendants.  As stated by Sir Gerard Brennan NPJ in Kao, Lee & Yip v Koo Hoi Yan at §73:

“Although the procedures governing committal for contempt are strictly enforced when needed to safeguard the liberty of an alleged contemnor, the discretionary power to dispense with a procedural requirement is available in appropriate case. As Lord Woolf MR said in Nicholls v Nicholls [1997] 1 WLR 314, 326:

‘… Like any other discretion, the discretion provided by the statutory provisions must be exercised in a way which in all the circumstances best reflects the requirements of justice. In determining this the court must not only take into account the interests of the contemnor but also the interests of the other parties and the interests of upholding the reputation of civil justice in general. Today it is no longer appropriate to regard an order for committal as being no more than a form of execution available to another party against an alleged contemnor. The court itself has a very substantial interest in seeing that its orders are upheld. If committal orders are to be set aside on purely technical grounds which have nothing to do with the justice of the case, then this has the effect of undermining the system of justice and the credibility of the court orders. While the procedural requirements in relation to applications to commit and committal orders are there to be obeyed and to protect the contemnor, if there is non-compliance with the requirements which does not prejudice the contemnor, to set aside the order purely on the grounds of technicality is contrary to the interests of justice …’ ”

27.We think reliance on the misstatement about the “correct legal basis” of the complaint is misplaced. Nor do we think the contentions on material non-disclosure (that the ex parte judge was wrongly informed the 2^nd to 4^th defendants were enjoined by the injunction) would add anything to their arguments.  There is however a more substantial objection to the Statement, as we have raised with the parties at the hearing.

28.Given that the juristic basis of the contempt alleged is non-party liability (whether knowingly aiding and abetting a breach by the party enjoined and/or interfering with the administration of justice by obstructing or frustrating the Mareva Order), to establish this there must be requisite knowledge on the part of the 2^nd to 4^th defendants.  These defendants must have knowledge of the terms of the injunction and what they did was a breach of the terms of that injunction (Z Ltd v A-Z and AA-LL [1982] 1 QB 558 at 580B).  In the present context, this would entail knowledge on their part that the source of the funds they dealt with, being the Sums, came from the 1^st defendant and remained beneficially his, so that when they dealt with the money, they knew they were aiding and abetting a breach by the 1^st defendant and/or they were knowingly acting contrary to the terms of the injunction.

29.The Statement has given particulars of the service of the Mareva Order on the companies owned by the 3^rd and 4^th defendants and on the solicitors acting for the 2^nd to 4^th defendants in August and September 2014, and of factual matters from which notice of the 2^nd defendant might be inferred[6].  Mr Lam accepted that the Statement does contain the allegation that the terms of the injunction were brought to the notice of these defendants.

30.We have mentioned earlier §§19 and 27 of the decision of Lok J in which he stated that the basis of the complaint was that these defendants “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.”  But there is no allegation in the Statement that these defendants knew, at the times of the Substantial Transfers[7] and the other transfers[8], that the funds had come from the 1^st defendant. Both Mr Lam and Mr Kentish accepted that is the case.  It is not sufficient for the Statement to merely allege that the Substantial Transfers comprised part of the Sums, that the Sums were paid by Win Fair to these defendants, and that none of the defendants have sought to challenge the finding of Chow J on 9 January 2015 that there are good reasons to believe that the Sums, though transferred to the 2^nd to 4^th defendants, are beneficially owned by the 1^st defendant[9].

31.It has been emphasised repeatedly by the courts that a statement filed pursuant to Order 52 rule 2(2) is to be treated in a similar manner as an indictment in criminal proceedings, having regard to the penal nature of the sanctions for contempt.  Hence, the statement should state all the factual elements (but not the evidence to be relied on) which, if proved, are sufficient to establish the contempt (Grand Union Insurance Co Ltd v Clyde & Co [1988] HKC 464 at 469D to E; Aqua-Leisure Industries, Inc & Anr v Aqua Splash Ltd, HCA 18928/1998, 18 April 2001, p 3; Secretary for Justice v Choy Bing Wing, CACV 11/2004, 3 December 2004, §§64 to 67; Fonfair Co Ltd v UDL Management Ltd, HCA 2002/2001, 24 November 2006, §§23 to 24; Kao, Lee & Yip v Koo Hoi Yan, §72; Pan Chung Pat Wo Tong (Hong Kong) Ltd v Law Yan Wai, HCA 1719/2010, 5 May 2017, §6(a)).

32.We find the Statement defective in that it has failed to mention a factual element which is necessary to establish the contempt complained of.

33.A statement filed pursuant to Order 52 rule 2(2) is of vital importance.  It has the two‑fold function of informing the alleged contemnor of the charge he has to meet, and discharging the applicant’s duty of making full and frank disclosure in the ex parte leave application.  Practitioners tasked with preparing the statement should approach this with great care, treating this document as equivalent to an indictment in criminal proceedings, and making sure they have stated all the factual elements required to be proved to establish the alleged contempt.

How the discretion should be exercised

34.As the judge’s intention was not directed to a defect of substance in the Statement, it falls on this court to exercise the discretion afresh whether we ought to set aside the Leave Order.

35.The circumstances here are exceptional.  The Leave Order was made by Mimmie Chan J, who was thoroughly familiar with the case, having considered the earlier decisions of Chow J on 9 January 2015 and 12 November 2015 and reviewed the relevant evidence when she gave a detailed decision in making the Further Order on 17 June 2016.  Further, the Leave Order was made just over a month of Mimmie Chan J handing down her decision in respect of the Further Order, when the materials she had considered would have been reasonably fresh in her mind.

36.Importantly, it can be seen from the decisions of Chow J and Mimmie Chan J that: (1) the Sums were transferred from the SCB account of Win Fair to the SCB accounts of the 2^nd to 4^th defendants[10]; (2) the 2^nd to 4^th defendants knew that the Sums were provided by the 1^st defendant, as it was asserted by them they received the Sums as substantial gifts of money from the 1^st defendant[11]; (3) there were good reasons to suppose that the 1^st defendant had substantial control over the Sums transferred to the 2^nd to 4^th defendants and there was a possible inference that the money was held by the 2^nd to 4^th defendants as nominees for the 1^st defendant[12]; (4) in making the Extended Mareva Order, Chow J was satisfied that the 1^st defendant had substantive control over the SCB accounts of the 2^nd to 4^th defendants[13]; (5) although no causative link can be seen between the Sums paid into the SCB accounts of these defendants and some payments and expenditure claimed to have been made by the 3^rd and 4^th defendants, these payments were asserted by the 3^rd and 4^th defendants to have been made from the Sums[14]; (6) the amounts paid out of the SCB accounts of the 2^nd to 4^th defendants are, on the face of the documents disclosed, attributable to the Sums and these are the Substantial Transfers and the additional transfers made by the 3^rd defendant (on 17 March 2014, 1 September 2014, 5 September 2014 and 23 September 2014) and the 4^th defendant (on 1 September 2014, 6 September 2014 and 19 January 2015)[15].

37.Mr Kentish indicated to this court he would seek leave to amend the Statement and the originating summons (the plaintiff has a pending application for amendment reserved to Lok J) to allege requisite knowledge on the part of the 2^nd to 4^th defendants of the source of the Sums paid into their SCB accounts and that they knew the money was beneficially owned by the 1^st defendant when they dealt with it.

38.We do not accept Mr Lam’s submission that as a matter of principle the court should simply set aside leave and strike out the originating summons once the Statement is found to be defective.  We do not think the authorities cited by him would support this proposition.  We are inclined to think that the court has a real discretion to exercise whether to set aside leave.  As pointed out by Mr Kentish, the court has broad powers to permit amendment under Order 20 rule 8 and the express power of the court to permit amendment of the Order 52 statement at the leave stage is expressed to be without prejudice to the general powers conferred by Order 20 rule 8.  And there is clearly discretionary power to dispense with a procedural requirement in an appropriate case, even though the procedures are strictly enforced when needed to safeguard the liberty of the alleged contemnor (Kao, Lee & Yip v Koo Hoi Yan, §73).

39.We do not think the 2^nd to 4^th defendants would have suffered any prejudice notwithstanding the omission to mention the requisite knowledge on their part, bearing in mind it is not controversial they knew that the Sums paid into their SCB accounts came from the 1^st defendant, as it was their contention they had received substantial gifts of money from him.  Even though such knowledge on their part was not mentioned in the Statement, Mimmie Chan J must have been aware of this as matters pertaining to their knowledge were dealt with in some detail in her decision.  The omission to mention the requisite knowledge of these defendants would have made no difference to her exercise of discretion in granting leave.

40.As stated by Lord Woolf MR in Nicholls v Nicholls [1997] 1 WLR 314 at 326, the discretion must be exercised in a way which in all the circumstances best reflects the requirements of justice.  In the very special circumstances of this case, we consider the proper exercise of our discretion is to refuse to set aside the Leave Order.

Conclusion and costs

41.We dismiss the appeal of the 2^nd to 4^th defendants.  We understand the plaintiff would further revise their draft amendments to the Statement and the originating summons and their amendment application would be restored before Lok J.

42.We will not disturb the costs order of Lok J. As for the costs of this appeal, we will make an order nisi even though the parties have indicated they have no quarrel with the proposition that costs should follow the event.  Although the plaintiff is ultimately successful in resisting the appeal, we think it appropriate to deprive him of part of his costs.  This is to reflect that we have found the Statement defective, albeit the defect was not raised by the 2^nd to 4^th defendants.  We would award the plaintiff half of the costs of this appeal.

Mr Julian Lam, instructed by K B Chau & Co, for the 2^nd to 4^th Defendants (Appellants)

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