Securities and Futures Commission v. Li Han Chun and Another

HCMP 176/2011

[2019] HKCFI 1966

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 176 OF 2011

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Before: Deputy High Court Judge Maurellet SC in Chambers

Date of Hearing: 30 July 2019

Date of Judgment: 30 July 2019

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JUDGMENT

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1.There are two summonses before me:

(1)   the summons by China Forestry Holdings Company Limited (in official liquidation) (the “Company”), to be joined to these proceedings; and

(2)   the summons by the 1^st and 2^nd defendants (“the Defendants”) to amend the re-re-re-amended injunction order dated 24 September 2018 (the “Injunction Order”) by increasing the Defendants’ spending limit on legal advice and representation under paragraph 6 of the Injunction Order by HK$37,493,570 toa reasonable sum not exceeding HK$47,593,570, and providing for such sum to be withdrawn from the 2^nd defendant’s account. 

2.For reasons I explain below, there is some urgency in the matter, and the parties need to be able to proceed with a level of certainty.  After hearing the parties, I indicated I would give my decision and brief reasons today, and I do so now.

3.On 2 February 2011, the Securities and Futures Commission (the “SFC”) obtained an injunction restraining the disposal of assets of the Defendants up to HK$398 million. 

4.The wording of that order obtained before Wright J reflects those commonly used in Mareva injunction orders. This is different in some respect with those used in proprietary claim cases. As is well known, the applicable test is different, whether one seeks a Mareva injunction order or a proprietary injunction order.  This also has an impact on, for example, the ability of the defendants to be able to use the frozen funds for the purpose of either personal spending or legal expenses.

5.The underlying proceedings in the present action rely on section 213 of the Securities and Futures Ordinance, Cap 571.  It was envisaged from the beginning, as is apparent from the order made by Wright J that the Defendants would be, in principle, allowed to use some of the frozen funds for the purpose of legal advice and representation.  The original paragraphs 6 and 7 of that order read as follows:

“ 6. This order does not prohibit the defendants from spending a reasonable sum (not exceeding $100,000) on legal advice and representation.

7. The defendants may agree with the plaintiff that the above spending limit should be increased, or that the order should be varied in any other respect, but any such agreement must be in writing.”

6.The order was later varied, first, by an order made by consent by Chung J on 17 October 2017, whereby it was agreed that the Defendants would be able to use a reasonable sum not exceeding HK$1,100,000 and it was further revised, also by consent on 16 January 2018, by another order of Chung J such that the amount was revised to HK$4,100,000.

Winding-up proceedings and High Court Action 1089/2016

7.On 18 June 2015, the Company was wound up in the Cayman Islands and liquidators were appointed. 

8.On 25 April 2016, the Company issued a writ of summons in HCA 1089/2016 (the “High Court Action”) against the Defendants.

9.On 30 April 2018, a Statement of Claim was filed in the same High Court Action against the Defendants.  It is of significance that it appears from the way the Statement of Claim is pleaded that the Company claims it has a proprietary claim against the Defendants.

10.It is unnecessary for present purposes to delve into the substance of the said claims, in particular when there may be extant applications which I refer to below.

11.In the words of the liquidators, the Company alleges that:

“ (1) Li Han-chun orchestrated a pervasive and substantial false accounting scheme, such as the false accounting scheme in breach of his fiduciary and other duties owed to China Forestry for his own personal gain and to the detriment of China Forestry; and

(2)  The defendants hold the illicit gains (‘the illicit gains’) obtained from the artificial inflation of the price of China Forestry shares on a constructive trust for China Forestry.  Other than the illicit gains, China Forestry also seeks equitable compensation for various losses suffered by ChinaForestry as a result of the false accounting scheme, including misappropriation by Li Han Chun, dividends paid out on the basis of the misleading accounts and various costs which would not have been incurred had Li Han Chun not breached his fiduciary and other duties.”

12.On 3 May 2018, the SFC instituted Market Misconduct Tribunal proceedings (the “MMT Proceedings”) against the parties, including the Defendants.  These will be heard starting on 25 November this year, with a time estimate of 20 days.

13.On 9 July 2018, the Defendants applied to strike out the Statement of Claim in the High Court Action and to stay those proceedings pending the determination of the MMT Proceedings.

14.On 13 July 2018, the Defendants and the Company agreed to adjourn sine die the striking-out summons pending the hearing of the stay summons.  The application for stay was heard before a judge in January 2019 and judgment is pending.

15.The significance of this is that the viability of the claims, and in particular the proprietary nature of claims in the High Corut Action is still in question.  In the course of oral submissions and in an exchange between bar and bench, I made it clear that I was anxious to ensure that in determining the present applications before me, I would not be in any way predetermining or seeking to influence the outcome of such extant application. 

16.This was so for a number of reasons, not least because it is quite clear from the way the parties had prepared the evidence for the purpose of the joinder application that, the ultimate question of merits of the High Court Action, and in particular the viability of a proprietary claim, would not be something which would be at the heart of the present hearing.  The Court is at present dealing with a rather urgent and discrete application and it is therefore not desirable that the question of the merits of the High Court Action, and in particular, the viability of the proprietary claim be dealt with here.

17.In August 2018, the Defendants wrote to the SFC again seeking to revise upwards the amount of spending for the purpose of legal advice and representation.

18.In September of 2018, the SFC notified the Company.  On 24 September 2018, and by consent, the amount was revised upwards. This is of some relevance as this is, at least on record, the first time after the institution of the High Court Action, that the Company was officially notified of a variation of its allowance for the purpose of legal representation and advice. 

19.One question which the Defendants seek to raise is why, in the circumstances, the Company did not seek to intervene at an earlier stage, or perhaps even take out an application for an injunction.  This is explained in the affirmation of Mr Borrelli, where he explains, understandably and reasonably, that:

“ Given the relatively modest sum sought, China Forestry did not seek to intervene.It also took comfort from the fact that the SFC indicated that it would keep the liquidator’s solicitors updated of any further amendments to the injunction order.”

20.At the hearing, Mr Norman Nip and Mr Jeff Chan represented the Defendants, whereas the SFC was represented by Mr Julian Lam and the Company by Mr Justin Ho.

21.In his supplemental skeleton, Mr Nip indicated that in the light of the need to resolve the present applications expeditiously, given the imminent MMT Proceedings, that the Defendants were prepared to consent to the Company being joined in these proceedings on the basis that the joinder was entirely without prejudice to the Defendants’ position in the striking-out application in the High Court Action. I consider that approach sensible since, at the moment, the Company has a claim which it asserts is proprietary and it therefore has a commercial and practical interest in the outcome of the present application.

22.I found the evidence filed by the Company, as well as the helpful submissions from their counsel, to be of assistance in resolving the present applications. 

23.This approach avoids any predetermination of the striking out in the High Court Action which I am not prepared to deal with here as a side issue, for the reasons explained above.

24.The existence, however, of the High Court Action raises another issue, being: which test should be adopted for the purpose of the application before the Court today?  The more stringent test which is applicable in cases of proprietary injunctions, or the relatively less exalting one in the case of ordinary Mareva injunctions?

25.The principles applicable for the release of funds to pay legal costs under an injunction involving proprietary claims versus non- proprietary claims are well settled and it is explained, in particular, in the decision of Thomas Au J (as Au JA then was) in the case of Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783 at paragraphs 13 – 14:

“ 13. The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a two-stage process:

(a) First, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim. If the defendant fails in this first hurdle, the court needs not consider the second stage and the application should be dismissed.

(b) Secondly, once the first hurdle is cleared, the court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff of releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence. This process is a ‘careful and anxious judgment’, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim in thefunds and the defendant’s defence to that claim. In relationto this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has not right to use the money. As Millett LJ (as he then was) said in Ostrich Farming Corp Ltd v Ketchell [1997] EWCA Civ 2953 ‘[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings’.

See: Ostrich Farming CorpLtd v Ketchell, per Roch LJ at p.10; Liu Xian Feng v Liu Bo [2006] 4 HKLRD 33, 37B–H paras.‌10, 11, per Le Pichon JA; Lit Mav Chen Kang Huang (unrep., HCSD 9/2007, HCA 218/2005, [2007] HKEC 1605), paras.23–28.

14. In the case of an ‘ordinary’ Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the court’s discretion faced with an application torelease the funds, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet the payment; and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff. The rationale behind this is explained by Lloyd J in PCW Ltd v Dixon [1983] 2 All ER 158, 162, 164:

What should be the correct approach for the court to take in these circumstances? The first reported case in which a similarquestion was considered is Iraqi Ministry of Defence v ArcepeyShipping Co SA, The Angel Bell [1980] 1 All ER 480, [1981] QB 65. In that case Robert Goff J held that it was consistent with the policy underlying the Mareva jurisdiction that the defendant should be allowed to pay his debts as they fall due. The purpose of the jurisdiction is not to secure priority for theplaintiff; still less, I would add, to punish the defendant for his alleged misdeeds. The sole purpose or justification for the Mareva order is to prevent the plaintiffs being cheated out of the proceeds of their action, should it be successful, by the defendant either transferring his assets abroad or dissipating his assets within the jurisdiction: see Z Ltd v A [1982] 1 All ER 556 at 561, 571, [1982] QB 558 at 571, 584 per Lord Denning MR and Kerr LJ. I am not going to attempt to define in this case what is meant by dissipating assets within the jurisdiction or where the line is to be drawn; but wherever the line is to be drawn this defendant is well within it. It could not possibly be said that he is dissipating his assets by living as he has always lived and paying bills such as he has always incurred. I say nothing about the costs of defending himself inthese proceedings. The Mareva jurisdiction was never intendedto prevent expenditure such as this or to produce consequencessuch as would inevitably follow if this ex parte order is upheld.

The distinction between the ordinary Mareva plaintiff (to use Ackner LJ’s phrase) and the case where the plaintiff is laying claim to a trust fund on the so-called wider ground, is thus clear. In the latter case the whole object is to secure the trust fund itself so that it should be available if the plaintiff should prove his claim. In the former case by contrast the plaintiff is not entitled to any security. The purpose of the jurisdiction, as is now clearly established, is not to provide theplaintiffs with any form of pre-trial attachment. It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim.

These observations were adopted and followed in NMB Postbank Group NV v Naviede (No 2)[1993] BCLC 715, 717–718 per Chadwick J.”

26.For the purpose of this hearing only, and to the extent it would make a difference, I would adopt the less exalting position of a non-proprietary injunction.  The Company, as of today, has yet to obtain a proprietary injunction, and for perfectly understandable reasons as explained above, it has allowed or acquiesed the Defendants to previously revise the amount in September 2018.

27.Until the summons for joinder, or shortly before it, it would be in my view reasonable for the Defendants to proceed and plan the litigation on the assumption that the applicable test would be the one in the case of a non-proprietary injunction.  Given the above, and that the MMT Proceedingsare only four months away, it would in all the circumstances, in my view, be somewhat unfair to at this stage be altering that presumption.  I emphasise that, going forward, and should this issue be revisited in the future, the court may well take a different view.

Variation and assessment of the evidence

28.The evidence filed by the Defendants, in particular the 1^stdefendant, is rather thin and unsatisfactory, both in terms of the disclosure of his assets and his present circumstances.  The inadequacies have been helpfully set out in Ms Chi’s affirmation in section B3.  I do not propose to deal with these in detail here.

29.I agree with the submissions of Mr Lam and Mr Ho, that this is not satisfactory.  However, notwithstanding those inadequacies, I am not prepared to entirely deny any variation of the allowance for legal fees and representation.

30.As Mr Nip fairly accepted, this is something I could take into account in the exercise of my overall discretion, including on quantum.

31.In terms of quantum, I have reminded myself that the burden, as is accepted by the Defendants, is squarely on them to justify the need for the variation.  I have considered the amount frozen would now be HK$400 million plus interest of some sort since 2011.  I have also taken on board the fact that one is dealing here with Market Misconduct Tribunal Proceedings which arguably are more serious than simple commercial proceedings. I have considered various factors which were highlighted by Mr Nip in terms of the complexity of the case, the heavy documentation, as well as the representation by the SFC.

32.I accept, as a matter of principle, and as set out in the latest edition of Gee on Commercial Injunctions (6^thed) at paragraph 21-056, that:

“ Where variation is to be allowed in a Mareva case, the court wouldnot ordinarily concern itself with the quantum of individual items of cost. A court may, in appropriate circumstances, fix a limit to the overall amount to be allowed for this purpose pending further application to the court, but in general, the court will not impose a cap on the defendant’s legal cost. The court is not concerned with whether the defendant might have gone to cheaper lawyers or whether the lawyers could have spent less time on the case or whether the case could have been conducted differently, and will not act as a form of provisional taxing body for the purpose of scrutinising the defendant’s legal fees or give the claimant the right to require a solicitor and end client assessment of the defendant’s cost.”

33.In cases such as the present, there is inevitably a tension between not allowing the process to result in an unfair advantage being obtained by the opposing parties seeking to overly scrutinise and micro-manage the way in which litigation is conducted by the party subjected to the freezing order, and on the other hand, it should not be used as an excuse to allow a defendant subjected to a freezing order to unreasonably deplete the funds freezed by the order. 

34.This tension is analysed in the English case of Her Majesty’s Revenue and Customs v Begum [2010] EWHC 2186 (Ch), a decision of David Richards J (as Richards LJ then was).

35.In Cheer Signal Development Ltd v Wong Siu Fun & Ors (unreported, HCA 780/2015, 27 April 2015), Madam Justice Queeny Au-Yeung summarised the exercise as follows, at paragraph 45:

“ In specifying a sum for legal expenses, the court is not controlling a defendant’s choice of lawyers, supervising the conduct of the defence, making a provisional assessment of costs or setting a cap on the defendant’s costs. It is but balancing the interests of both parties so that frozen assets will not be whittled down without the plaintiff knowing.”

36.For the purpose of considering what I thought was a fair amount, I have anxiously scrutinised both the table prepared on behalf of the Defendants, the table annexed to Mr Lam’s skeleton, as well as the observations made in Mr Ho’s skeleton. 

37.To a large extent, the criticisms were directed at the solicitor’s costs rather than disbursements, and in particular, disbursements for the purpose of the hearing before the MMT itself.  I note that in terms of disbursements going forward, that figure is close to HK$8 million. 

38.The position taken by the SFC and the Company is that, having regard to all the circumstances, they consider that the Defendants should only be entitled, at most, to a further withdrawal amount of HK$16 million, whereas both in the summons and in submissions, the Defendants seek in excess of HK$37 million.

Dispostion and costs

39.Having regard to the factors outlined above, and doing the best I can, I consider that on the evidence before me the Defendants are entitled to a variation of HK$22 million. 

40.I will make an order that the Defendants do have leave to amend the injunction order made on the ex parte application of the plaintiff dated 2 February 2011, and as amended on 11 February 2011, continued by Chung J on 4 March 2011, re-amended on 27 October 2017, re‑re‑amended on 17 January 2018 and re-re-re-amended on 5 October 2018 (the Injunction Order) by increasing the Defendants’ spending limit on legal advice and representation under paragraph 6 of the Injunction Order by HK$22 million, and providing for such sum to be withdrawn from the 2^nd defendant’s account held and maintained with UBS of that account, and that be continued until further order.

Costs

41.Insofar as the variation application is concerned,  notwithstanding the misgivings I had about Mr Li’s evidence and also the fact that I found the evidence and submissions of the SFC and the Company through its liquidators to be helpful, looking at the ultimate result, although one might think that the number is probably closer to the one the SFC and the Company were prepared to agree to rather than the one the Defendants were seeking, having regard to all the circumstances and the practical reality, I am minded to make no order as to costs as between the parties.

42.Insofar as the intervention proceedings are concerned, I think although of course there is a real practical link between the joinder and the variation, as in fact is reflected in the letter where the Defendants’ conceded that the Company be joined on the basis the allowance would be increased by HK$28 million[1], I accept Mr Ho’s point that the benefit in the Company being joined goes a bit further than just this, so I will order that 50% of the costs of the joinder application be paid by the Defendants to the Company, to be taxed if not agreed.

43.It remains for this Court to thank all the parties’ counsel for their able assistance.

Mr Julian Lam, instructed by Securities and Futures Commission, for the plaintiff

Mr Norman Nip and Mr Jeff Chan, instructed by King & Wood Mallesons, for the defendants

Mr Justin Ho, instructed by Lipman Karas, for the interveners (China Forestry Holdings Company Limited (in official liquidation))