Convoy Collateral Ltd v. Cho Kwai Chee (also known as Cho Kwai Chee Roy) and Others

HCA 399/2018

[2020] HKCFI 429

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 399 OF 2018

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D E C I S I O N

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1.On 25 June 2019 the Plaintiff, Convoy Collateral Limited (“CCL”) issued a summons for an order restraining the 1^st Defendant, Roy Cho, from disposing of his assets within or outside Hong Kong up to the value of $654,057,954. The summons came on before me on 11 July 2019 and I made directions for the substantive determination of the summons on 30 October 2019 [1].

2.CCL is an indirect wholly-owned subsidiary of Convoy Global Holdings Limited (“Convoy Holdings”), which is listed on the Main Board of the Hong Kong Stock  Exchange.  Convoy Holdings is the apex of a financial services group.  CCL is a money lender.  CCL’s business is largely funded by Convoy Holdings.

3.The writ was issued on 14 February 2018 and a 87-page Statement of Claim served on 31 May 2018.  There are five heads of claim for loss and damages pursued against Roy Cho and other of the Defendants:

(1)     Loss arising from the wrongful acquisition of shares in First Credit shares and manipulation of the First Credit share price: $259,869,800.

(2)     Loss arising from manipulation of the share price of China Green and dishonest conspiracy in failing to convert China Green convertible notes at a profit: $81,967,000 (not the larger figure in the general indorsement on the writ).

(3)     Loss arising from the wrongful acquisition of True Surplus: $89,388,153,80.

(4)     Loss arising from the wrongful grant of an unsecured loan to Athena Power on uncommercial and disadvantageous terms: $34,600,000.

(5)     Loss arising from the misappropriation of Checkmate: $33,212,800.

The total loss claimed in the General Indorsement is $715,070,754.80.

4.The Defence was served on 26 February 2019 and the Reply on 23 October 2019.

5.CCL did not at the time these proceedings were commenced apply for an ex parte injunction against Roy Cho in Hong Kong.  Instead CCL proceeded as follows.  CCL applied on an ex parte basis in the      British Virgin Islands (“BVI”) for an ex parte freezing order over Roy Cho and Broad Idea Limited’s (“Broad Idea”, which is beneficially owned by Roy Cho) assets.  On 9 February 2018 an order was granted by Chivers J:

(1)     Restraining Broad Idea from disposing of or encumbering shares it held in Town Health International Medical Group Limited (“Town Health”) or the proceeds of the sale of such shares to the value of US$75,583,490.03.

(2)     Restraining Roy Cho from disposing of or dealing with his assets in the British Virgin Islands up to the value of US$75,583,490.03 or disposing of or encumbering shares in Broad Idea.

6.The return date for the inter partes summons was 6 March 2018.  Counsel for Roy Cho objected to the Order against him on the grounds that the BVI court did not have in personam jurisdiction over him.  Roy Cho applied to have the Order set aside and after a contested hearing before Adderley J in early April 2019 the Order as against Roy Cho was set aside.  Adderley J held in his decision:

(1)     There is binding authority of the Privy Council in Mercedes Benz AG v Leiduck [1996] AC 284 and Siskina [1979] AC 210 that the BVI court has “no power to grant a free-standing injunction in aid of foreign proceedings for service outside the jurisdiction on a person who is not subject to the territorial or in personam jurisdiction of the BVI court”: [64]–[65].

(2)     There was non-disclosure to the ex parte Judge since      his attention was not drawn to the leading decision of Mercedes Benz AG and other authorities on the issue: [54].

(3)     Leave for service on Roy Cho out of jurisdiction was set aside and the BVI freezing order was discharged: [71].

7.Ten weeks then passed during which Roy Cho was not subject to a freezing order.  CCL filed a notice of appeal and applied for a stay on 2 May 2019, which was dismissed on the same day. CCL then applied for a stay from the BVI Court of Appeal.  A stay was granted on 25 June 2019.  On 25 June 2019 CCL applied for a mareva injunction (“freezing order”) in these proceedings.  When the matter came on before me on 11 July 2019 it was agreed that a freezing order was not necessary until the BVI Court of Appeal had disposed of the appeal, which was listed for hearing on 18 October 2019.  CCL’s application before me was adjourned until 30 October 2019 on the understanding that if the BVI Court of Appeal dismissed the appeal before 30 October 2019 it might be necessary for CCL to apply for an interim order pending determination of the application before me.  As far as I am aware at the time of writing the Court of Appeal’s judgment has not been delivered.

8.On 26 June 2019 Adderley J heard the inter partes application for the continuation of the Order granted by Chivers J on 9 February 2018 against Broad Idea.  Adderley J gave judgment in favour of CCL continuing the order.

9.Roy Cho opposes the present application on the following grounds:

(1)     CCL claims that the five impugned transactions have caused it loss of the $769.6 million.  However, CCL has elected to retain three of the assets acquired under the three impugned transactions involving First Credit Acquisitions, China Green and True Surplus and cannot claim that it has suffered any loss in respect of these three transactions.

(2)     As for the two other transactions relating to Checkmate      and Athena Power, at the highest CCL incurred a loss of $33.2 million and $34.6 million respectively, totalling $67.8 million, which is the maximum amount in respect of which a freezing order should be granted.

(3)     CCL is asking this Court to grant a freezing order in the event that the BVI Court of Appeal does not allow CCL’s appeal.  If it does the order sought from this Court becomes unnecessary.  In effect, CCL is asking this Court to re-grant an order which the BVI court considered to have been wrongly granted.  CCL does not dispute that this is the reason for the application [2].

10.Ms Chan submitted that in these circumstances this Court should not exercise its jurisdiction in favour of CCL:

(1)     CCL elected to seek the BVI freezing order, knowing full well that the BVI court is not seised of the substantive dispute and does not have in personam jurisdiction over Roy Cho.

(2)     There is no explanation as to why no application was made to the Hong Kong Court for any injunctive relief against Roy Cho.

(3)     This is not surprising because had the application been brought in the Hong Kong Court, it would have been obvious that there was neither urgency nor need for secrecy to justify an ex parte application, as CCL had already commenced a substantial claim against Roy Cho in (HCA 2922/2017) two months earlier, and no injunction was sought.

(4)     CCL was guilty of material non-disclosure at the ex parte application in that it failed to draw to the Court’s attention to the highest authorities, binding on BVI court, to the effect that the BVI court has no power to grant a self-standing injunction in aid of foreign proceedings where it does not have in personam jurisdiction against such person.

(5)     CCL should not be allowed to rely on its own wrong and asks the Hong Kong Court to exercise its jurisdiction in its favour, still less to grant an injunction which is even more draconian than the BVI freezing order.

11.In addition Ms Chan argued that there was no real risk of dissipation and all the time that the Broad Idea injunction remained in place (it is under appeal) there is no need for a further order.  I shall deal first with the risk of dissipation and need for an order.

12.The purpose of granting a freezing order is to restrain a defendant from evading justice by disposing of assets otherwise than in the normal course of his affairs with the result that a defendant becomes judgment proof.  It is not to provide security for the plaintiff [3]. There must be concrete evidence that there is a real risk of dissipation of assets in the sense which I have described [4]. It is not sufficient to show that a defendant has a reason or the opportunity to dissipate assets.  Gloster LJ explains this in [59] of Holyoake v Candy [5]:

“59(ii). However, the mere possibility of a party using a complex corporate structure or corporate reorganisation to dissipate assets, without more, does not equate to a risk of dissipation. Otherwise, the burden of proof would be reversed: parties subject to a freezing order application would be compelled to show that they would not dissipate assets in that way.

59(iii). This emphasis is important. An applicant must show a risk of dissipation as opposed to it merely being possible (without more) that the claimant could dissipate in that way: (a) In Mediterranean Feeders LP v Bernd Meyering Schiffahrts (unreported) 5 June 1997 the Court of Appeal approved Tuckey J’s rejection of the proposition that a freezing order was appropriate where there might be a temptation to dissipate assets—but no evidence whatsoever that the claimant to the application would yield to it. Evans LJ said:

‘Given the nature of the Mareva jurisdiction and given the fact that it is not, as the judge says: “a means of obtaining advance security for a claim”, it is inevitable that before the court can be satisfied that there is a risk of dissipation, in the sense in which that term has been used, the court must consider whether there is any evidence that in the particular case the asset will be dissipated rather than otherwise. If there is no such evidence then, in my view, it would be wrong for the injunction to be granted.’

(b) Several cases have emphasized that there is nothing implicit in complex, offshore corporate structure which evidences an unjustifiable risk of dissipation…”

13.There is no presumption either that a defendant will make himself judgment proof if he is able or that a defendant who can be shown to have the means and wherewithal to do so.  Otherwise, as Gloster LJ observes, the burden of proof would be reversed.  It is necessary for the risk to be proved and in assessing whether or not it has been proved the court will have regard to all relevant background matters that provide an aid to determining whether the risk has been demonstrated.  Commonly it is argued that evidence of dishonesty or low commercial ethics is capable of justifying the inference that a defendant will attempt to make himself judgment proof.  However, the evidence must be relevant to the risk of dissipation, not simply the underlying claim [6].

14.Amongst the matters to be considered is delay, which tends to be inconsistent with a risk of dissipation and, therefore, needs to be explained [7].

15.This case is unusual.  Despite CCL being aware of matters, which as evidenced by its application in the BVI, it believed justified seeking a freezing order at the time the writ was issued, it has waited 16 months before making the application.  CCL explains this by reference to the BVI proceedings.  I accept that CCL believed in early 2018 that there was a risk of Roy Cho disposing of his assets.  By that time the authorities were investigating the affairs of the Company and Roy Cho appeared to have fled Hong Kong.  At the time the application was made to Chivers J in the BVI, CCL had obtained evidence that suggested Roy Cho was beginning to dissipate his assets [8]. It would appear that CCL was advised that the best way of preventing further dissipation was to apply for freezing orders in the BVI against both Broad Idea and Roy Cho.  The fact that Chivers J was not informed by counsel of the jurisdictional issue that Roy Cho’s non-residence gave rise to indicates that CCL’s legal team did not recognise the jurisdictional difficulty and that the better course was to apply for an order against Roy Cho in Hong Kong.  Although, the way in which the attempts to freeze Roy Cho’s assets has been cumbersome it seems to me that the delay in applying to the Hong Kong court is understandable and of little weight.  More important are the submissions that CCL has not demonstrated an arguable cause of action for three of its five claims or a current risk of dissipation of assets.

16.The issue is a narrow one.  Can CCL claim loss in respect of transactions if it retains the assets Roy Cho caused CCL to buy.  The three transactions are as follows:

(1)     It is pleaded in section D2 of the Statement of Claim that between August and September 2016 Roy Cho and other Defendants caused CCL to acquire a 19.5% stake in First Credit Acquisitions. Initially the share price rose and then it began to fall steeply until trading in the share was suspended by the Securities and Futures Commission on 23 November 2017. In paragraph 60 of the Statement of Claim CCL claim $259,869,800:

Total number of First Credit shares acquired by CCL	1,070,400,000
Total costs of acquisition	HK$375,473,000
Market value of the shares before suspension of trading in      First Credit shares	HK$115,603,200 (ie HK$0.108 x 1,070,400,000)
Total Loss suffered by CCL	HK$259,869,800

(2)     In section F of the Statement of Claim is pleaded a claim for loss caused by a failure to exercise conversion rights to obtain shares in China Green.  In [117(1) & (2)] CCL pleads the loss it claims:

(1)     Substantial loss of at least HK$81,967,000, representing the fair value loss of acquiring the 2^nd Convertible Notes from CCL;

(2)     alternatively, substantial loss of up to around HK$298,000,000, representing the profit which could have been made by CCL, had CCL exercised conversion rights:

(i)     If CCL exercised the conversion rights, it would have acquired 1,418,666,666 China Green shares.

(ii)     If CCL sold the conversion shares when the share price of China Green shares was significantly higher than the conversion price, CCL would have obtained a significant profit.

(3)     In Section H of the Statement of Claim is pleaded a claim for self-dealing by Roy Cho.  It is alleged that Roy Cho had a substantial interest (55%) in True Surplus.  In [142] of the Statement of Claim it pleaded that by an agreement dated 5 September 2016 CCL agreed to acquire True Surplus from Roy Cho and the owner of the remaining 45% of the shares.  The purchase price was $68,062,199.90 and $21,325,953.90 for the respective shareholdings totalling $89,388,153.80.  In [157] of the Statement of Claim, CCL claims repayment of the purchase price.

17.Ms Chan did not argue that the Statement of Claim and evidence filed in support of CCL’s application did not show an arguable case of breach of duty.  Ms Chan took various points in relation to the quantification of the claims.

18.In relation to First Credit Acquisitions Ms Chan submitted that having elected to retain the Shares, CCL was bound by the consequences.  I accept for present purposes that if having discovered the breach of duty of which it complains CCL (in the form of its new board, which was not controlled by Roy Cho or directors aligned with him) continued to hold shares it may not be able to claim loss attributable to the shares’ retention. However, [60] of the Statement of Claim makes it clear that the loss is calculated as at the date of suspension of shares on 23 November 2017.  Roy Cho’s affirmation does not deal with the claims at all.  It is largely limited to the risk of dissipation and, what he suggests, is the unjustness of making a freezing order against him.  There is nothing to suggest that CCL’s new board appointed after the complaints against Roy Cho came to light, knew of the matters said to give rise to impropriety in respect of the First Credit Acquisition prior to November 2017 and could reasonably have been expected to take action to mitigate the loss caused by the transaction.  Questions were first raised about the activities of a group of companies including Convoy Holdings by David Webb in a report published by him dated 15 May 2017.  It was during the second half of 2017 that investigations began to be carried out by the SFC and the ICAC, and towards the end of 2017 Convoy Holdings, that revealed the matters, which led to action being taken against various people,including Roy Cho, involved with CCL and other Convoy group companies.  Mr Yap explains in his affirmation filed in the BVI injunction proceedings that the directors associated with Roy Cho and the conduct of which CCL complains, were removed, new Board members appointed and investigation of the affairs  of the Convoy group commenced on about 7 and 8 December 2018.  I, therefore, do not accept that CCL has failed to demonstrate a good arguable case in the amount sought; which I agree with Ms Chan is the relevant test [9].

19.On 18 November 2015, CCL advanced an unsecured loan of $190 million to China Green.  The loan was replaced by convertible notes on 22 August 2016.  The first series of convertible notes was replaced by a second series on 15 December 2016, which did not carry interest, but lowered the conversion price from $0.15 to $0.10.  From 22 August 2016 the share price was consistently higher than the conversion price, but CCL failed to exercise the conversion rights.  It is this loss of profit that is claimed.  It seems to me that the position in respect of this claim is the same as that in respect of the First Credit Acquisition. Roy Cho has not demonstrated that the decision not to exercise the option to convert was made by CCL’s new board at time when they knew of the matters founding the claim against him.

20.In respect of the True Surplus acquisition Ms Chan takes different points.  First, Ms Chan says that as CCL acquired True Surplus it must give credit in calculating loss to the value of what it has obtained, ie, the value of the True Surplus.  In [157] of the Statement of Claim, CCL claims, further or in the alternative, rescission and recovery of the purchase price of $89,388,153.80.  This is also apparent from [1(vi)] of the Prayer.  It seems to me that this is arguably the amount that CCL is entitled to recover if it is successful in its claim for rescission.

21.I am satisfied that CCL has shown a good arguable case for the $654 million.

22.Ms Chan argued that in the event that I took this view, I should still not grant a freezing order because:

(1)     There is no basis for CCL to seek a re-grant.

(2)     There is no real risk of dissipation.

(3)     It is not just and convenient to grant an order.

23.In my view it is inaccurate to characterise what CCL is trying to achieve as seeking a re-grant.  The issue is whether having tried to obtain a freezing order in the BVI and encountered the difficulties I have explained earlier, CCL has lost the right, which it would otherwise have had, to obtain a freezing order from the Hong Kong court.  I have already addressed the associated issue of delay in [15].  The submissions that I am addressing can be summarised as this: CCL having elected to apply for an order in the BVI knowing that the BVI court is not seized of the substantive dispute it should not be permitted to apply for an order here unless there is legitimate reason.

24.Ms Chan argues that it is well-established that the court seised of the substantive dispute is most suited to determining questions of injunctive relief [10]. Consistent with this principle, the Hong Kong court expects an applicant seeking injunctive relief in aid of foreign proceedings to first apply to the primary court and, if the primary court accedes to such an application, to apply to the local court for an ancillary injunction [11]. I agree.  It does not necessarily follow, however, that by choosing to go straight to a foreign jurisdiction rather than start in Hong Kong, a plaintiff loses the right to seek interim relief in Hong Kong.  It depends on why a plaintiff chose to proceed as they did and whether the reasons in some relevant way call into question the propriety or fairness of subsequently granting an injunction in the jurisdiction seized of the substantive dispute.

25.The reason CCL gives for having proceeded as it did is simple.  In about November 2017 Roy Cho disappeared and was generally believed to have fled Hong Kong, because of the investigations by the authorities into the matters I have referred to earlier in this decision.  In early 2018 CCL were principally concerned to freeze and protect the one unencumbered asset [12] that they were aware of Roy Cho owning, namely, shares in Broad Idea through which he held his interest in Town Health.  Broad Idea was incorporated in the BVI, therefore, the decision was made to apply for an order in the BVI enjoining Broad Idea and Roy Cho from disposing of or encumbering Roy Cho’s interest in Broad Idea and Broad Idea’s interest in Town Health.  Although I agree that proceeding as CCL did against Roy Cho in the BVI was probably a mistake, it does not seem to me that it is a mistake, which of itself deprives or fetters CCL’s right to seek a freezing order against Roy Cho in Hong Kong.

26.Next Ms Chan argued that no risk of dissipation has been shown.  I have explained in [11]–[13] above the principles by reference to which the Court assesses whether or not a risk of dissipation has been shown.

27.It would seem to me quite clear that Roy Cho left Hong Kong in November 2017 for Australia in order to avoid the investigations commenced by the authorities and the Convoy group in Hong Kong.  I find his evidence that his reason for spending time incommunicado in Australia was because he and his Family were in the process of emigrating to Australia at the time and that nothing adverse can be read into his disappearance, for that is what it was, entirely unconvincing.  I also take into account the inconsistencies in Roy Cho’s evidence about the reasons for his departure for Australia.  I accept that his Family may have been in the process of emigrating to Australia, but it does not follow that this is why Roy Cho left in November 2017; or why on his own case he spent far longer in Australia than was necessary to satisfy the requisite residency requirements or why he remained incommunicado in Australia until he decided to return to Hong Kong in September 2018 and surrender to the ICAC.  It seems to me a compelling inference that he decided to avoid the investigations until such time as he had decided how best to respond to them and it is against this backdrop that the question of the risk of dissipation of assets is to be considered.

28.Ms Chan argues that CCL cannot show that since the middle of 2017 Roy Cho has been dealing in his assets in a way, which suggests that he is trying to make himself judgment proof.  On CCL’s own case Roy Cho is a wealthy investor and one would expect that in managing his affairs he bought and sold investments and varied his financing of transactions.  I accept that what is relevant is what he can be shown to have done from about the time one would expect him to have become alive to the investigations into Convoy and the possibility of him being implicated in wrongdoing involving Convoy and other members of the Enigma Group.

29.It is CCL’s case that the first transaction, which suggests Roy Cho was beginning to manage his affairs in order to protect himself from possible judgment was his sale in May 2017, shortly after the Webb report was published, of his Convoy shares to people associated with the Enigma Group companies.  It is Roy Cho’s explanation that the sale took place in order to repay a loan by Credit Suisse to Broad Idea, which he had guaranteed and that the timing was a coincidence.

30.In May 2019 CCL became aware as a result of an article in Eastweek magazine that Roy Cho has an interest in various properties in addition to one in Providence Bay of which CCL was already aware and that he was selling a shop in Tsuen Wan for $33,000,000 to fund the litigation he is embroiled in.  On the assumption that it is correct that Roy Cho is selling a shop for $33,000,000 to fund his legal costs it does not seem to me that of itself that constitutes evidence of dissipation in the sense discussed in [11]–[13].  The litigation, which Roy Cho faces will no doubt be expensive (and likely cost in excess of $33,000,000) and it seems to me that selling a property (particularly if it is in order to assist in financing his legal costs) is not evidence of dissipation.

31.CCL also refer to the re-mortgaging of the Providence Bay property.  Replacing one mortgage which secured an all monies facility, which CCL says it assumed meant Roy Cho had no equity in the property and was one of the reasons that CCL decided to apply for an order in the BVI, with another is not evidence of dissipation.  CCLs suggest that the fact the new lender is Pure Stellar Limited, which has a director who appears to be an independent non-executive director of China Environmental Energy Investment Limited, which is a member of the Enigma Group makes the arrangement suspicious.  However, CCL does not explain how it demonstrates dissipation.

32.CCL also point to the fact that an article in Eastweek magazine refers to three properties, which are owned by offshore companies in some way associated with Roy Cho.  In the case of two of those properties (Harmony Garden and Kaiseng) they are ultimately owned by Town Health which is listed on the Main Board of the Hong Kong Stock Exchange in which Roy Cho has an indirect minority interest.  Clearly these properties are not Roy Cho’s assets and there is no evidence that he has the ability to direct their sale and then the distribution of the proceeds to himself.  The third (Garden Rivera) is owned by Bright Dignity, which is incorporated in the BVI.  Its ultimate beneficial owner is not known.

33.The final specific matter CCL rely on is Broad Idea closing its margin account at CSL Securities Ltd transferring the balance to Broad Idea’s account with Dah Sing Bank.  I do not see how this can be characterised as a dissipation or why there is anything unusual in it which justifies drawing an inference that it was part of a plan to make Roy Cho judgment proof.

34.CCL’s case on dissipation boils down to this.  Roy Cho is central to the allegations of dishonest dealing involving the Convoy group, which have given rise to the present action and the investigations by the authorities which has led to the ICAC charging Roy Cho in connection with the True Surplus transaction.  This suggests that Roy Cho has low commercial ethics and cannot be trusted, a conclusion, which is made more compelling by his disappearance in November 2017 for 10 months. Against this background the Court should view the purpose of the transactions that I have just described with appropriate scepticism and conclude that they evidence a real risk of dissipation.

35.As I have explained in [15], what CCL has to demonstrate is a concrete risk of dissipation and this threshold cannot be met, particularly in the case of businessman, who CCL itself has characterised as sophisticated, by pointing to largely unremarkable changes in his financial affairs, or the affairs of companies with which he is associated, and inviting the Court to draw the conclusion that he should be assumed to be trying to make himself judgment proof.  It would be wrong, as Mr Wong invites me in [35] of his reply submissions, to draw an adverse inference from Roy Cho’s failure to file evidence detailing his assets and where they are located.  This would be to reverse the burden of proof.  Neither do I think that I can properly draw much assistance from Adderley J’s conclusion that there was a real risk of dissipation in the case of Broad Idea.

36.Although I understand CCL’s concern and scepticism I am unable to find amongst CCL’s evidence sufficient to allow me properly to conclude that there is a concrete risk of dissipation of assets. If I had reached the alternative conclusion I would have made a worldwide freezing order in the first instance in the amount of $654,057,954 and allowed Roy Cho to file evidence if he wished demonstrating to the court that he did not have any assets in excess of this amount and that he needed the order to be qualified to cover his legal and personal expenses.

37.I dismiss CCL’s summons and make a costs order nisi that CCL pays Roy Cho’s costs forthwith with a certificate for two counsel, such costs to be taxed if not agreed.

Mr William Wong SC, Mr John Hui and Mr Howard Wong, instructed by Charles Chu & Kenneth Sit, for the plaintiff

Ms Linda Chan SC and Mr Peter Dong, instructed by Raymond Siu & Lawyers, for the 1^st defendant