Lau Lai Shan Lisa v. Zhang Qi and Others

HCA 1395/2018

[2019] HKCFI 1750

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1395 OF 2018

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BETWEEN

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REASONS FOR DECISION

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1.On 20 June 2019, two summonses taken out by the Plaintiff (“P”) came before me for hearing, namely:

(1)  P’s summons (the “Injunction Summons”) dated 29 November 2018 seeking:

(a)  a proprietary injunction against the 2^nd Defendant (“D2”) and the 3^rd Defendant (“D3”) to restrain them, pending trial or further order, from dealing with certain specified sums which were paid by D1 to D2, or the proceeds of thereof; and

(b)  disclosure orders against D2 and D3 in respect of the whereabouts of those sums or their proceeds;

(2)  P’s summons (the “Section 21 Summons”) dated 4 December 2018 under section 21 of the Evidence Ordinance (Cap 8) (the “EO”) for inspection of records and documents kept by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) regarding D2’s account with HSBC.

2.P was represented by Mr Toby Brown.  D2 and D3 were represented by Mr Kevin Li and Mr Gilbert Chong.

3.At the conclusion of the hearing I made orders in terms of P’s summonses (subject to certain adjustments).  I indicated that I would provide reasons for my decision in due course, which I now do. 

Background

4.P claims that she is the victim of a fraud perpetrated by D1, who is her sister-in-law, and in which D2 and D3 also participated.  D2 is a Hong Kong company, of which D3 is the sole director and shareholder [1].

5.The key facts alleged by P include the following:

(1)  P formerly owned the sole share in a West Samoan company called Kidbrooke Group Limited (“Kidbrooke”).  Kidbrooke held certain real property and funds on trust pursuant to a trust (the “Trust”) which had been established by P’s uncle (“Lau Senior”).  Since the establishment of the Trust in 1997, P as sole director and shareholder managed the day-to-day operations of Kidbrooke and the Trust.

(2)  From around 2002/2003, when D1 began a relationship with P’s brother (“Alan”), D1 started assisting P with management of the Trust.  Over time, D1’s involvement increased and P reposed increasing trust and confidence in D1, to the point where P would sign documents presented to her by D1 without reading them.

(3)  Starting from 2015, D1 caused P to sign various documents disposing of certain assets of the Trust and allowing D1 to have access to and operational control over Kidbrooke and its assets. 

(4)  In May 2017, D1 caused P to sign a written resolution to transfer P’s shareholding in Kidbrooke to D1, which transfer took effect.  P was induced by a fraudulent misrepresentation by D1 that the documents she was signing related to insurance for trust assets.

(5)  On 23 – 24 May 2018, D1 represented to P that D3 would bring to P a series of documents for signature in respect of Kidbrooke’s tax affairs.  Unbeknownst to P, these contained a letter of P’s resignation as Kidbrooke’s director.  P was induced to so sign by fraudulent misrepresentations by D1 and D3 as to the nature of the documents she was signing.

(6)  On 29 May 2018, a similar incident occurred, wherein P signed a letter of resignation as Kidbrooke’s secretary, induced by fraudulent misrepresentations by D1 and D3 as to the nature of the documents she was signing.

(7)  Starting in 2017, D1 had begun the process of selling the share in Kidbrooke, which company still owned a valuable property (the “Fu Hing Property”).  On 29 May 2018, completion took place of a transaction by which D1 purportedly sold the share in Kidbrooke to Allied Way International Investment Limited (“Allied Way”) for a purchase price of HK$140,000,000.

(8)  P’s pleaded causes of action include deceit, conversion, negligence, breach of fiduciary duty, knowing receipt of trust property, dishonest assistance in a breach of trust, unjust enrichment, proprietary/tracing claims, and conspiracy to injure by unlawful means.

6.D1’s pleaded defence is relevant mainly by way of background. Her position, in essence, is that Kidbrooke was in fact a vehicle used to manage the assets of Alan’s parents (rather than Lau Senior), which would in due course become the property of Alan as their only son.  There was never any trust—or D1 knew of no such trust—created by Lau Senior for the benefit of his sons.  As Alan’s wife, D1 over time became more involving with the management of Kidbrooke, with the consent of Alan, his parents and P.  The various transactions which P now disputes were effected with the knowledge and consent of Alan’s parents, Alan and P; and P knew the nature of the documents she signed.  It is apparently D1’s position that the proceedings are aimed at depriving Alan’s parents (and in due course Alan and D1) of assets which rightly belong to them.

7.The substantive position of D2 and D3 is set out in their pleaded defence and D3’s affirmation filed in opposition to P’s summonses.  D2 and D3 complain that they are innocent parties who have become unfairly embroiled in a family dispute.  Broadly, it is said that:

(1)  D3 has been in the business of providing company secretarial, accounting and consultancy services since 2005.  In July 2016 she incorporated D2 in for the purpose of such businesses.  D2 is currently serving over 283 companies.

(2)  Around May 2017, D3 was introduced to Kidbrooke, and D2 began to provide administrative services to Kidbrooke.  In August 2017, D1 passed to D2/D3 Kidbrooke’s company kit which included a Certificate of Incumbency describing D1 as Kidbrooke’s sole shareholder. 

(3)  Around October 2017, D1 engaged D2 to handle accounting, tax and secretarial work for Kidbrooke.  D2/D3 were made aware of the intention to sell the share in Kidbrooke, and provided various professional services in respect of that sale.

(4)  D2/D3 admit that on 24 May and 30 May 2018, D3 met with P and provided various documents for her to sign, including to effect P’s resignation as director and secretary of Kidbrooke.  However, D3 says that she explained to P the nature of the documents provided, and that P had an opportunity to review them before signing.

(5)  D2/D3 deny all alleged wrongdoing and claims asserted by P. 

Relevant procedural history

8.The writ was issued in June 2018 against only D1.

9.On 25 June 2018, Mimmie Chan J granted to P on an ex parte basis: (i) a proprietary injunction restraining D1 from dealing the sale proceeds (the “Sale Proceeds”) of the share in Kidbrooke [2] ; (ii) a Mareva injunction against D1 up to the sum of HK$110,000,000; and (iii) a disclosure order against D1 in respect of the whereabouts of the Sale Proceeds and their proceeds. 

10.On 29 June 2018, Deputy High Court Judge Saunders made orders on an inter partes basis: (i) continuing the injunctions against D1, with an additional disclosure order against D1; and (ii) under section 21 of the EO, for the inspection by P of various documents kept by Standard Chartered Bank (Hong Kong) Limited (“SCB”) regarding D1’s account(s) with SCB.

11.As a result of documents received from SCB pursuant to the said order, P applied to join D2 and D3 as defendants to these proceedings and to amend to claim against them; which joinder and amendment took effect by consent on 20 November 2018.

12.Shortly thereafter, P issued the Injunction Summons and the Section 21 Summons against D2 and D3.

The Injunction Summons

13.The Injunction Summons relates to the Sale Proceeds (of the share in Kidbrooke), in respect of which D1 has already been injuncted.

14.Pursuant to the Court’s orders against D1, P obtained documents in relation to D1’s accounts with SCB (“D1’s Savings Account” and “D1’s Current Account”).

15.P’s evidence herein canvasses the flow of funds after receipt into D1’s SCB accounts of a portion of the Sale Proceeds, by reference to D1’s SCB account statements. It is P’s case that: (i) on 30 May 2018 sums totaling almost HK$31,000,000 were deposited into D1’s Savings Account, which represented a portion of the Sale Proceeds (HK$140,000,000), immediately prior to which D1’s Savings Account was virtually empty; (ii) from 31 May to 5 June 2018, sums totaling HK$14,300,000 were transferred from D1’s Savings Account to D1’s Current Account, which previously had a zero balance; (iii) seven cheques (the “7 Cheques”) with dates ranging 21 May to 5 June 2018 were drawn on D1’s Current Account in favour of D2, with a total value of HK$13,280,000; (iv) the statements for D1’s Current Account show withdrawals from that account from 31 May to 5 June 2018 pursuant to the 7 Cheques.

16.Accordingly, P says that D1 paid to D2 a total of HK$13,280,000 (the “7 Cheque Sum”) pursuant to the 7 Cheques, which sum represents a traceable portion of the Sale Proceeds.  P’s Amended Statement of Claim includes a tracing/proprietary claim (as well as other claims) in respect of the 7 Cheque Sum received by D2.

17.The Injunction Summons seeks to restrain D2 and D3‌— pending trial or further order‌—‌from dealing with the 7 Cheque Sum or the proceeds thereof.

18.D2/D3 admit that D2 received the 7 Cheque Sum from D1 pursuant to the 7 Cheques.  Mr Li for D2/D3 did not‌—‌for present purposes at least‌—‌take issue with P’s case as to the flow of funds up to that point; nor actively deny that the 7 Cheque Sum represented a traceable portion of the Sale Proceeds.  Rather, the position of D2/D3 is that D2’s receipt of the 7 Cheque Sum was for various legitimate purposes and uses, and that most of those funds have now been paid away by D2 for such purposes: see further below.

Applicable principles

19.The principles applicable to the grant of interim proprietary injunctive relief are well-known.  They were helpfully summarised by Deputy High Court Judge Douglas Lam SC in Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & Ors HCA 3023/2016, unreported, 2 May 2017 at §§36 – 42, including the following:

(1)  For an interim injunction to protect a claim for trust property, the principles in American Cyanamid apply; although irremediable damage need not necessarily be shown and the Court will readily find that the balance of convenience favours preservation of the fund pending trial.

(2)  The merits threshold is that of a serious issue to be tried, as opposed to a “good arguable case” in the case of Mareva relief.  

(3)  It is not necessary to demonstrate a real risk of unjustified dissipation of assets, as in the case of Mareva relief.

20.Mr Li, for D2/D3, did not seriously dispute these principles.  At the hearing, he distilled his submissions on the Injunction Summons into two main arguments, namely that: (i) P’s position is weak on the merits; and (ii) damages would be an adequate remedy. 

Serious issue to be tried/merits

21.As noted above, the relevant merits threshold is “serious issue to be tried”.  Mr Li accepted this, but also argued that the (alleged) weakness of P’s merits should be taken into account as part of the balance of convenience and Court’s discretion.

22.First, Mr Li relied on the merits of P’s case generally.  He argued that P’s case that she signed various documents without reading/ understanding was inherently incredible, given that she is well-educated (a medical doctor), and that her resignation letters were clear and simple documents.  D3 would not have taken the risk of seeking to mislead P as alleged.  P’s case, said Mr Li, relied on her oral evidence, and was accordingly weak; and P had made no complaint or insufficient complaint at the time of allegedly discovering the true nature of the documents signed.  There was no document to show that D2/D3 knew that the share in Kidbrooke was subject to a trust. 

23.I do not think that this line of argument assists D2/D3.  Certain of these points have been addressed in P’s affidavit evidence, the detail of which I will not canvass.  The central factual issues fall to be ventilated at trial following cross-examination of witnesses.  I cannot conclude, at this stage, that there is not even a serious issue to be tried or that the general merits are obviously against P.  Further, as Mr Brown submitted, even if it were correct that D3 herself did not actively mislead P, that would not necessarily bar P’s potential tracing claim into the 7 Cheque Sum received by D2.

24.Second, Mr Li focused on D3’s affirmation evidence as to the purpose of the funds received pursuant to the 7 Cheques, and the uses made by D2/D3 of those funds.  Mr Li argued that in respect of P’s tracing claim into those funds, the said explanations gave rise to defences of bona fide purchaser/recipient for value and/or change of position [3].

25.The parties adduced evidence and made argument in respect of each of the 7 Cheques.  I note the following points: 

(1)  Cheque No 785637 for HK$1,400,000.  D3’s evidence is that this was for various professional services provided by D2 in respect of the sale of the share in Kidbrooke.  D3 produced a debit note issued by D2 to D1 detailing such services.  Mr Li argued that in respect of this sum, D2 was a bona fide purchaser/recipient for value.  However, Mr Brown argued that: (i) there is insufficient breakdown and other supporting documentation to justify such a large fee, particularly given that other large fees were purportedly charged for the same transaction (see below); and (ii) no evidence (other than D3’s say so) has been produced that D2/D3 are even qualified or in the business of providing accountancy, tax, secretarial, and other related professional services at all. 

(2)  Cheque No 447607 for HK$1,000,000.  D3’s evidence is that this sum was for legal fees charged by solicitors for the share sale transaction, paid by D1 to D2 as costs on account.  D3 produced evidence that HK$920,000 of this was subsequently paid away to solicitors.  For present purposes, P no longer took issue with HK$920,000 of this sum, and proposed to deduct that amount from the quantum covered by the injunction sought.

(3)  Cheque No 447612 for HK$1,680,000.  D3’s evidence is that this represented costs received on account for Kidbrooke’s liabilities to tax and other legal fees.  For present purposes, P accepted that a portion of this (HK$684,300 plus HK$201,100) was paid away by D2 for tax and legal fees, and again gave credit for these amounts in the quantum sought to be injuncted. 

(4)  Cheque No 785638 for HK$1,300,000.  D3’s evidence is that this related to a transaction whereby D1 was to purchase a property (the “Po Shing Mansion Property”) via her corporate vehicle, Sharp Control Limited, for HK$26,000,000.  The sum represented costs on account for a 5% down-payment for this transaction.  The only supporting document produced by D3 is a provisional agreement for sale and purchase between a vendor and Sharp Control.  In reply evidence, P produced a land search record showing that the Po Shing Mansion Property has not changed hands since 2012; so it appears that at the least, any such transaction did not complete [4].  No further documents were produced by D3 to show that this sum was actually paid away by D2, as alleged.

(5)  Cheques Nos 447604 and 447606 for HK$5,000,000 and HK$900,000.  D3’s evidence is that these sums were received for the payment to Success Time Properties Limited (“Success Time”) of a service fee plus bonus for the sale of the Fu Shing Property.  However, the supporting evidence, explanation and documentation are extremely sparse.  The only supporting document produced is an unsigned one-page receipt purportedly issued by Success Time.  As Mr Brown submitted, D3 gave virtually no explanation of the nature of the services provided or justification for such a large fee.  In addition, D3’s evidence failed to mention the connections between D2/D3 and Success Time, which were revealed in P’s reply evidence.  The company filings of Success Time reveal that D2 is its corporate secretary, and D3 is its director and former shareholder. D3 provided no documentary evidence that this sum was in fact paid away by D2.  In oral submissions, Mr Li was essentially unable to provide any further answer to these criticisms of his clients’ evidence.

(6)  Cheque No 447603 for HK$2,000,000.  D3’s evidence is simply that this sum is stakeheld by D2 for D1.  There is no suggestion that it has been paid away.

(7)  It is D3’s evidence that accordingly, of the HK$13,280,000 which D2 received from D1 pursuant to the 7 Cheques, HK$10,405,400 has been paid away or utilised by D2 for the various purposes referred to above.  Of the balance (HK$2,874,600), there were other payables from D2 to Kidbrooke for various professional services (no detail is given), and a sum of HK$2,593,689 (the “Frozen Sum”) has been frozen in D2’s hands by the Joint Financial Intelligence Unit (“JFIU”). D2/D3 offered to undertake not to deal with or dispose of the Frozen Sum. 

26.On the basis of the evidence presented to me, I do not think it can sensibly be suggested that there is not even a serious issue to be tried as to P’s right to trace into whatever portion of the 7 Cheque Sum remains with D2/D3; nor that the merits on this point are somehow substantially in favour of D2/D3.  Quite the contrary.  The evidence presented by D2/D3 to assert that the sums received have been largely paid away for bona fide purposes, is riddled with holes and inadequacies.  Despite his best efforts, Mr Li was unable to convince me otherwise.  

27.In so concluding, I rely especially—though by no means solely — on the sum of HK$5.9 million referred to at §25(5) above.  This very large sums is said to have been paid to Success Time—an entity which turns out to be closely connected to D2/D3—in addition to D2’s already hefty fees of HK$1.4 million in respect of, apparently, the same transaction (and in addition to legal fees for that transaction).  The nature of and justification for a payment of this magnitude cry out for explanation and supporting evidence, but D2/D3 have provided almost nothing. Further, I accept that on the evidence currently before me, the connection between D2/D3 and Success Time and the silence of D3’s affirmation on this point, are suspicious.

28.I also accept Mr Brown’s submissions as to the inadequacies of D3’s explanation and evidence in respect of certain of the other cheques: see §25 above.  

29.If D2/D3’s version of events is accurate, they could have produced D2’s bank statements confirming that the sums D2 received from D1 were paid away as alleged; but they did not.  On various of the points made, the Court is simply asked to accept D3’s bare assertion, with little or no supporting documentation.

30.For the above reasons, I conclude that there is—at the very least—a serious issue to be tried; and that D2/D3’s efforts to convince me of the inherent weakness of P’s case fail.

Adequacy of damages

31.Mr Li’s second argument was that damages would be an adequate remedy because: (i) though P’s relevant claim is proprietary, it is a proprietary claim to money, which is fungible; (ii) there is no basis to suggest that D2/D3 could not compensate P in damages for any wrongdoing which might be established; (iii) accordingly, damages would be an adequate remedy.  

32.I do not think there is anything in this point.  The sums at stake are substantial.  P is in no position to adduce evidence as to the financial means of D2 and D3; a point to which Mr Li had no real answer.  Contrast D2/D3, who are in a position to adduce such evidence, but did not.  In these circumstances, I do not see that it is open to D2/D3 to sensibly assert that damages would be an adequate remedy.

33.In support of this argument, Mr Li cited DBS Bank (Hong Kong) Ltd v Tian Wen Quan HCA 3228/2016, unreported, 12 October 2017, per Anthony Chan J at §§14–18. I do not think that that decision assists.  In that case the learned Judge considered that on the evidence, there was doubt over the defendant’s ability to meet a damages claim (§18).  He therefore went on to examine the strength of the parties’ cases, concluding that there was no serious issue to be tried on any of the bank’s proprietary claims against the defendant (§41). The present case is not comparable.

34.Further, as Mr Brown submitted, in Heitkamp & Thumann KG v Living Profit Trading Develop Ltd [2018] HKCFI 2475 at §30, Deputy High Court Judge Marlene Ng (as she then was) considered and rejected similar arguments in the context of a proprietary claim against a defendant said to have received the proceeds of fraud [5].

Balance of convenience

35.In my view, the balance of convenience favours granting the injunctive relief sought.

36.If P’s claim ultimately succeeds, there is an obvious risk of prejudice to P in the absence of injunctive relief.  Conversely, D2/D3 have not suggested that the injunction order sought would cause them prejudice.

37.Indeed, the proposed injunction bites only on the 7 Cheque Sum and its proceeds; but it is D2/D3’s own evidence that the portion of those funds still remaining with D2 has been largely or entirely frozen by the JFIU, and D2/D3 offered an undertaking not to deal with the Frozen Funds: see §25(7) above.

38.Since D3 is the controlling mind of D2, the injunctive relief should cover D3 also.  

39.In addition, I consider that in the above circumstances the disclosure orders sought against D2/D3 are justified.  Mr Li made no separate submission to oppose those orders.

The Section 21 Summons

40.By the Section 21 Summons, P seeks an order to inspect various records and documents regarding D2’s specified account with HSBC mainly from 30 May 2018 onwards, including: account opening and application forms; bank statements; records of the identities of persons authorised to operate the account; cheques drawn on the account; credit and debit vouchers; SWIFT messages and telexes.

41.I was informed that HSBC indicated that it did not object or wish to appear. 

42.The principles applicable to such an application in the context of a tracing claim were summarised by the Court of Appeal per Poon J (as he then was) in Pacific King Shipping Holdings Pte Ltd v Huang Ziqiang [2015] 1 HKLRD 830 at §29 [6].

43.I am persuaded that the criteria for making an order are satisfied: (i) there is a real prospect that the order made may lead to the location of assets the subject of a tracing claim; (ii) I consider the categories of documents sought to be sufficiently well-defined; and (iii) the balance of potential advantage to P compared with potential detriment to D2/D3 favours the orders sought.

44.Mr Li argued that D3’s evidence provided comprehensive and sufficient details of the purpose of the sums received from D1.  For the reasons canvassed above, I reject this. 

45.Next, Mr Li argued that the scope of documents sought was over-broad, and would lead to unnecessary disclosure of confidential information belonging to D2’s clients, which could in turn occasion serious loss to D2/D3.

46.However, I consider that sufficient protection is provided by the usual undertakings as to the permissible uses of documents obtained under the order. Further, given the background allegations and facts canvassed above, the scope of documents sought is necessary and justified in order to facilitate and protect P’s potential tracing claim.

Disposition

47.For the above reasons, I granted orders in terms of P’s Injunction Summons and Section 21 Summons, subject to certain adjustments which are reflected in the sealed orders [7].

48.Further, I ordered that the inter partes costs of both summonses be P’s costs in the cause.

Mr Toby Brown, instructed by Chui & Lau, for the plaintiff

Mr Kevin Li and Mr Gilbert Chong, instructed by Howse Williams, for the 2^nd and 3^rd defendants