China City Construction & Development Co., (HK) Ltd v. 宁波佳合港湾股权投资合伙企业（有限合伙）and Another

HCA 2303/2018

[2020] HKCFI 1925

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2303 OF 2018

____________

____________

Before:  Deputy High Court Judge Victor Dawes SC

Date of Hearing:  6 November 2019

Date of Judgment: 7 August 2020

_______________

JUDGMENT

_______________

A. INTRODUCTION

1.At issue in this dispute is the existence of two purported trusts. By an Action commenced on 3 October 2018, the Plaintiff asserts ultimate beneficial ownership over:

(1)  the 1^st Defendant’s holding of the entire issued share capital of the 2^nd Defendant (the “Shareholding”); and

(2)  the 2^nd Defendant’s holding of 69,000,000 H-shares in the Bank of Zhengzhou Co., Ltd (6196.HK) (“Bank of Zhengzhou”) (the “ListCo Shares”), including all dividends and other income and returns deriving therefrom (the “Dividends”).

2.There are now two summonses before me. The first is an application by the Plaintiff dated 20 May 2019 for interlocutory injunctions and preservation orders (the “Injunction Summons”) preventing, inter alia:

(1)  the 1^st and 2^nd Defendants from disposing of, dealing with, transferring, charging, encumbering, or diminishing the value of the Shareholding and the ListCo Shares and their traceable proceeds (including any dividends and other income received or derived from those assets);

(2)  the 1^st and 2^nd Defendants from removing out of the jurisdiction any assets, whether held in their own names or not, and whether solely or jointly owned, up to the value of RMB 28,980,000, being the dividends declared by the Bank of Zhengzhou from 2015 to 2016; and

(3)  the 1^st Defendant from exercising any power or rights (including voting rights) attached to the Shareholding and the ListCo Shares.

3.At the summons day hearing before ST Poon J (the “Judge”) on 24 May 2019, the 2^nd Defendant gave an undertaking to notify the Plaintiff within 3 days of receiving any notice to transfer its shares and not give effect to such transfer for 21 days. The 1^st Defendant was absent, and the Judge granted an injunction restraining it from (a) dealing with or diminishing the value of all of the Shareholding and (b) exercising any of its powers or rights attached to those shares save and except in the ordinary course of management of the 2^nd Defendant (the “Injunction Order”). The Plaintiff now seeks to continue the Injunction Order on the terms of the draft order attached to the Injunction Summons. 

4.The second summons is an application by the Defendants dated 19 September 2019 to set aside an order of Master Roy Yu (the “Master”) made on 6 December 2018 (the “Service Out Order”) which gave leave to the Plaintiff to issue and serve a concurrent writ of summons out of the jurisdiction on the Defendants (the “Setting Aside Summons”).

5.I shall now deal with each application in turn, starting with the Injunction Summons.

B.   BACKGROUND

The Parties

6.The Plaintiff, China City Construction & Development Co., (HK) Limited (中國城市建設開發(香港)有限公司), is a limited company incorporated under the laws of Hong Kong.

7.Until 21 July 2016, Golden Gate International Investment Co., Limited (金門國際投資有限公司) (“Golden Gate”) was the Plaintiff’s sole registered shareholder. On 21 July 2016, Golden Gate’s registered shareholdings in the Plaintiff were transferred to a BVI company known as China City Operation Co., Limited (中國城市運營有限公司) (“CCO”).  CCO is a member of a corporate group headed by a PRC company known as China City Academy Co., Limited (中国城市发研究院有限公司) (the “China City Group”and the “Academy”, respectively).

8.The 1^st Defendant, 宁波佳合港湾股权投资合伙企业 (有限合伙) (formerly 宁波惠农港湾股权投资合伙企业 (有限合伙)), a private equity firm, is a limited partnership formed under the laws of the PRC. The 1^st Defendant is a member of a corporate group helmed by Wei Li Dong (尉立东) (“Wei”).

9.The 2^nd Defendant, Huinong Fund International Investments Ltd (惠农基金国际投资有限公司) is an exempted limited company which was incorporated in the Cayman Islands on 21 July 2014. It is, and has always been, a wholly owned corporate vehicle of the 1^st Defendant. From the date of its incorporation, Wei was the 2^nd Defendant’s sole director. On 12 October 2015, Yuan Qing (袁庆) (“Yuan”) took over as the company’s director and Wei resigned on 13 October 2015. On 2 December 2015, Yuan was replaced by Wei, who remained director of the 2^nd Defendant until 17 July 2017.

The ListCo Shares

10.It all began back in September 2015, when the Bank of Zhengzhou submitted its Application Proof to the Stock Exchange of Hong Kong in preparation for a listing of its shares onto the Main Board.

11.Sometime in late 2015, the 2^nd Defendant reached an agreement with Citigroup Global Markets Limited (“Citigroup”), pursuant to which the latter would enter into a cornerstone investment agreement with the Bank of Zhengzhou to subscribe for 69,000,000 H-Shares (i.e., the ListCo Shares). Prior to the Bank of Zhengzhou’s listing on the stock market, Citigroup would then enter into a cash-settled derivative transaction (the “Derivative Transaction”) to transfer to the 2^nd Defendant its full economic exposure in the ListCo Shares, at which time the 2^nd Defendant would pay Citigroup a sum equal to the amount that it had paid to the Bank of Zhengzhou as the subscription price of the ListCo Shares (the “Citigroup Arrangements”). The details of these arrangements are set out in the Bank of Zhengzhou’s listing prospectus and are expressly accepted by both parties. There is also no dispute that (a) Wei was personally involved in the behind-the-scenes negotiations with Citigroup, and (b) the terms of the Derivative Transaction are reflected in a Confirmation (the “Confirmation”) signed by Wei and Citigroup on 9 December 2015. 

12.The Citigroup Arrangements were explained in the Bank of Zhengzhou’s listing prospectus as follows:

“Notwithstanding the Derivative Transaction, [Citigroup] will hold the Shares purchased and [the 2^nd Defendant] will have no proprietary interest in the Shares, and Huinong will not have any voting rights to the Shares which [Citigroup] subscribes for.

[The 2^nd Defendant] has construed this investment route with [Citigroup] to invest in the Shares via the Derivative Transaction as [the 2^nd Defendant] seeks only economic exposure to the Shares and does not require voting rights or beneficial ownership in the Shares. Upon expiry of the lock-up period, [Citigroup] will have the sole discretion to dispose of the Shares it holds. Both [Citigroup] and Huinong are considered as Cornerstone Investors.” (Emphasis added)

13.Pursuant to the Derivative Transaction, the 2^nd Defendant agreed paid Citigroup[1]an “Initial Exchange Amount” of HK$271,811,721 (the “Initial Exchange Amount”) on 4 December 2015.

14.As to how the Initial Exchange Amount was funded, the Plaintiff refers to banking records which show that the 2^nd Defendant received a total sum of HK$274,504,100 by way of three transfers (the “Fund Transfers”), details of which are summarised in the following table:

Date	Transferor	Amount (HK$)
3 December 2015	Huinong Private Equity Fund I (“Equity Fund I”)	252,519,250
4 December 2015	CCCC Financial Limited (“CCCC Financial”)	7,999,850
7 December 2015	Equity Fund I	13,985,000
	Total	274,504,100

15.To clarify, the Defendants have not sought to challenge the existence of these Fund Transfers; at the very least, Wei has filed affirmation evidence on the Defendants’ behalf accepting that “the funds for acquiring the ListCo Shares were provided by Equity Fund I”.

16.Subsequently, Citigroup and the 2^nd Defendant each filed substantial shareholding notices to the Stock Exchange disclosing that they had acquired interests in the ListCo Shares since 23 December 2015.

17.Around two years later, on or around 14 December 2017, the Derivative Transaction was terminated by mutual consent (the “Termination Agreement”). Pursuant to the Termination Agreement, the 2^nd Defendant agreed to pay Citigroup HK$4,509,366.30 in exchange for delivery up of the ListCo Shares. 

18.It is undisputed that the 2^nd Defendant has held (and continues to hold) the ListCo Shares through a stockbroker in Hong Kong known as Orient Securities (Hong Kong) Limited (“Orient Securities”). On 28 June 2018, the ListCo Shares were purportedly pledged as security for the provision of a HK$147,000,000 loan from Orient Credit Finance (Hong Kong) Limited (“Orient Credit”) to the 2^nd Defendant (the “Loan Agreement”). As a result of the 2^nd Defendant’s default on the Loan Agreement, Orient Credit has purportedly exercised its right to sell off part of the ListCo Shares. According to the 2^nd Defendant, 6,975,000 of the 69,000,000 ListCo Shares have been disposed of as of 23 May 2019.

C.   THE PLAINTIFF’S TRUST ALLEGATIONS

The Shareholding Trust

19.The facts I have just described are straightforward and undisputed. As far as the Defendant’s case is concerned, that really is the end of the matter. The Plaintiff, however, says otherwise. It claims to be the raison d'être of the entire investment scheme. By way of background, it claims to have been a member of the China City Group from as early as 2012, nearly 4 years before CCO became its sole registered shareholder.

20.The Plaintiff alleges that it was searching for investment opportunities in Hong Kong on or around October 2015. At the time, Yuan, who worked for the China City Group (in an unspecified capacity and position), was a business associate of Wei. Upon hearing of the Plaintiff’s investment intentions, Wei suggested to Yuan that the Plaintiff should consider investing in the Bank of Zhengzhou, which was about to be listed in the Stock Exchange of Hong Kong. Following internal discussions, the Plaintiff decided to proceed with Wei’s suggestion. Yuan and Wei also agreed that a (then unnamed) shelf company should be used to hold the shares of the Bank of Zhengzhou on behalf of the Plaintiff (the “Investment Plan”).

21.To carry out the Investment Plan, it was agreed that the 1^st Defendant would hold its Shareholding in the 2^nd Defendant on trust for the Plaintiff (the “Shareholding Trust”). On 13 October 2015, the Plaintiff and the 1^st Defendant executed a document entitled “Entrusted Shareholding Agreement” (股权代持协议) (the “Shareholding Trust Agreement”). The Shareholding Trust Agreement appears to be affixed with the 1^st Defendant’s common seal and Wei’s personalised chop mark. The Plaintiff initially stated that Wei had sealed the document himself. It subsequently averred in its pleadings that Wei had authorised one Dong Guizhen (董贵昕) to affix his chop mark onto the Shareholding Trust Agreement.

22.The material provisions of the Shareholding Trust Agreement may be broadly translated as follows:

(1)  The 1^st Defendant agrees to hold 100% of the issued share capital of the 2^nd Defendant (i.e., the Shareholding) as a nominee for Plaintiff, and will exercise its rights as a shareholder on the Plaintiff’s behalf. (Clause 1.1)

(2)  The Plaintiff, as the actual investor of the Shareholding, is entitled to all the actual rights and privileges as a shareholder of the 2^nd Defendant and shall receive the relevant returns. The 1^st Defendant, as a mere nominee shareholder, does not have the right to income or disposal of the Shareholding (such as, but not limited to the right to transfer, pledge, assign or otherwise deal with the shares). (Clause 3.1)

(3)  During the period of entrusted shareholding, the Plaintiff has the right to transfer the shareholder’s rights to itself or a designated third party, and the Plaintiff can unwind the trust under law if it believes the 1^st Defendant is not honestly fulfilling its entrusted obligations. (Clause 3.2, 3.4)

(4)  The 1^st Defendant undertakes to transfer to the Plaintiff’s designated bank account within 3 days any acquired investment returns (such as cash dividends, bonuses, and any other distribution) derived from the Shareholding. (Clause 4.3)

(5)  In the event of any dispute arising from the Shareholding Trust Agreement, the Plaintiff and the 1st Defendant shall attempt to resolve the disagreement by way of amicable negotiation. If the negotiation is unsuccessful, any party can apply to the “People’s Court” of the place where the Plaintiff is situated to commence legal proceedings. (Clause 8)

(6)  The Shareholding Trust Agreement will take effect upon being signed by the Plaintiff and the 2^nd Defendant. (Clause 9.2)

23.In contemplation of the abovementioned trust arrangement and pursuant to the Investment Plan, Yuan was appointed as a director of the 2^nd Defendant on 12 October 2015, and the 2^nd Defendant’s name was changed from Huinong Partners Ltd to Huinong Fund International Investments Ltd.

The ListCo Shares Trust

24.We now come to the Plaintiff’s assertion that the ListCo Shares and Dividends were held on trust for it as part of the Investment Plan (the “ListCo Shares Trust”). It would be an understatement to say that the Plaintiff’s case here has been in a continuous state of flux.

25.Two weeks after the commencement of the Action, the Plaintiff took out an application to serve a concurrent amended writ of summons on the Defendants out of the jurisdiction. That application was supported by an affirmation deposed on 16 October 2018 by Sze Wai Suen (施慰萱) (“Sze”) whom I understand to be the Plaintiff’s current director (“Sze’s First Affirmation”).

26.At that juncture, the Plaintiff’s case on the ListCo Shares Trust was that the 2^nd Defendant, being the 1^st Defendant’s alter ego, could be imputed with knowledge of the Shareholding Trust. When the Shareholding Trust Agreement was executed on 13 October 2015, Wei, as the 1^st Defendant’s controller, personally affixed his name chop onto the document to signify his understanding of its terms. Wei resigned as director of the 2^nd Defendant at around the same time, leaving Yuan as the company’s sole director. Yuan, who, like Wei, possessed full knowledge of the terms of the Shareholding Trust Agreement, confirmed and acknowledged that the 2^nd Defendant held the ListCo Shares and Dividends on trust for the Plaintiff. The Plaintiff provided the “purchase price” (i.e., the Initial Exchange Amount) of the ListCo Shares to the 2^nd Defendant on the basis of this understanding. At the time of the company’s receipt of the abovementioned funds from the Plaintiff, Yuan was its sole director. In the premises, the 2^nd Defendant held the ListCo Shares and Dividends “on trust and/or constructive trust in favour of the Plaintiff.”

27.On 20 May 2019, Sze filed an affirmation on behalf of the Plaintiff in support of the Injunction Summons (“Sze’s Third Affirmation”). Sze’s Third Affirmation introduced a number of crucial new allegations:

(1)  As part of the Investment Plan, the 2^nd Defendant engaged Citigroup to make the “necessary arrangement” to give effect to Plaintiff’s decision to invest in HK$271,811,721 worth of ListCo Shares.

(2)  Before any monies were paid to the 2^nd Defendant, an unwritten agreement and understanding was concluded between the 2^nd Defendant and the Plaintiff by Yuan himself (who was both a “director of the [2^nd Defendant] as well as representing the Plaintiff at the time”). Under this agreement and understanding, the ListCo Shares and Dividends would be held on trust for and on behalf of the Plaintiff. This was intended to supplement the Shareholding Trust Agreement by providing added “protection” to the Plaintiff. This “protection” was necessary because “the Plaintiff would not have agreed to pay a substantial sum of money to the 2^nd Defendant” had it not been assured of receiving beneficial ownership of the ListCo Shares.

(3)  The Plaintiff then revealed that it did not provide the “purchase price” of the ListCo Shares to the 2^nd Defendant. Instead, it now accepted that the 2^nd Defendant received these sums by way of Fund Transfers totalling HK$274,504,100 from Equity Fund I and CCCC Financial between 3-7 December 2015 (as described in paragraph 14, supra). As Yuan had resigned as director of the 2^nd Defendant on 2 December 2015, it followed that he was not in fact a director of the 2^nd Defendant at all when the Fund Transfers were received by the company.

(4)  Instead, the Plaintiff now contends that the Fund Transfers were made “on … [its] behalf and at the directions [sic] of China City Construction (International) Co Ltd (“CCCI”)”. The Academy, in turn, arranged for CCCI to transfer monies to Equity Fund I and CCCC Financial. Ultimately, the purpose of these transfers was to enable the 2^nd Defendant to acquire the ListCo Shares for the benefit of the Plaintiff.

Pausing here, it is worth observing that the Plaintiff did not introduce any evidence showing CCCI and/or the Academy’s involvement in the Fund Transfers. Instead, it relied heavily on the assertion that it was, together with Equity Fund I, CCCI and the Academy, a member of the China City Group at the time of the Fund Transfers.

28.As for the payment made by CCCC Financial, while the Plaintiff tacitly acknowledged that CCCC Financial was not an entity within the China City Group, it nevertheless insisted that the sum of HK$7,999,850 transferred by CCCC Financial to the 2^nd Defendant on 4 December 2015 “formed part of a transfer made by Equity Fund I to CCCC Financial on 27 October 2015 in the sum of US$9,960,000”, and was therefore traceable to Equity Fund I. In other words, the entire “purchase price” of the ListCo Shares was fully funded by entities under the China City Group.

29.On 10 October 2018, Sze deposed her fourth affirmation on behalf of the Plaintiff (“Sze’s Fourth Affirmation”). The Plaintiff acknowledged Wei’s participation in the Citigroup Arrangements, but denied accusations that Yuan was entirely uninvolved in the negotiation process. In addition, whilst Yuan was the 2^nd Defendant’s sole director, Wei was left to act for the company in its negotiations with Citigroup. The details of the Citigroup Arrangements were approved of by the Plaintiff. Subsequently, and at Wei’s suggestion, Yuan duly agreed to resign as director of the 2^nd Defendant.

30.By the time the Plaintiff’s Statement of Claim was filed on 13 September 2019 (the “Statement of Claim”), its case on the ListCo Shares had morphed into the following:  

(1)  At some unspecified time, there was an “oral agreement or understanding” or an “agreement or understanding by conduct” concluded between Yuan (acting on behalf of the Plaintiff) and Wei (acting on behalf of the 2^nd Defendant) that the ListCo Shares and Dividends should be obtained and held on trust for the Plaintiff by the 2^nd Defendant.

(2)  At all material times “before [the Fund Transfers] were paid to the 2^nd Defendant, these sums belonged beneficially to and were paid on behalf of the Plaintiff, and none of them belonged to either Defendant or Wei.” In other words, prior to the Fund Transfers, the Plaintiff had at some point already acquired equitable ownership in the assets of CCCI, Equity Fund I and/or CCCC Financial (or some other entity within the China City Group). The Plaintiff could therefore be regarded as having paid the entire “purchase price” of the ListCo shares via the 2^nd Defendant to Citigroup.

(3)  For these reasons, the Plaintiff became the ultimate beneficial owner of the ListCo Shares from 20 January 2016.

(4)  Further or alternatively, the Plaintiff paid and transferred, and/or caused or procured to be paid and transferred the “purchase price” of the ListCo Shares to the 2^nd Defendant. This was done under the expectation that it would obtain sole beneficial ownership of those shares. The 2^nd Defendant held the ListCo Shares entirely for and on behalf of the Plaintiff, and the Plaintiff did not intend to part with any of its beneficial ownership in those shares.

(5)  Further or alternatively, by virtue of the provisions of the Shareholding Trust Agreement, the 1^st Defendant held the ListCo Shares and Dividends on trust for the Plaintiff via the 2^nd Defendant.

Breach of Alleged Trusts

31.From 15 July 2016 to around 1 July 2019, the 2^nd Defendant is said to have received at least RMB 39,330,000 worth of Dividends from the Bank of Zhengzhou by virtue of its holding of the ListCo Shares.

32.The Plaintiff complains that the Defendants are in breach of their respective obligations under the Shareholding Trust and the ListCo Shares Trust, owing to the Defendants’ refusal of the Plaintiff’s demands to revest the Shareholding, ListCo Shares, and Dividends to it. In further breaches of the trust(s), the 2^nd Defendant entered into the Loan Agreement with Orient Credit (as described in paragraph 18 above), whereupon the ListCo Shares were charged or pledged as security and subsequently dissipated in part. 

33.It suffices to say that the Defendants dispute the existence of any trust relationship in favour of the Plaintiff. In summary, Wei says that he had never heard of the Plaintiff during his time as a director of the 2^nd Defendant and Yuan was not his business associate. He also denied having personally affixed his name chop on the Shareholding Trust Agreement or authorising anyone else to do so. The object of the 1^st Defendant was to invest in funds provided by its limited partners to achieve capital gains and not the provision of free trustee services which was of no benefit to its limited partners. The same was true of the 2^nd Defendant, whose sole responsibility was to act for the benefit of its sole shareholder, the 1^st Defendant. Accordingly, the Shareholding Trust Agreement and the Investment Plan could only have been a forgery.

D.  THE INJUNCTION SUMMONS: LEGAL PRINCIPLES

34.Mr Chong, for the Plaintiff, submits that the dispute boils down clear breach of trust on the part of a defiant trustee. The Court should therefore impose preservation orders as well as proprietary and Mareva injunctions against the Defendants in relation to the Shareholding, ListCo Shares, and Dividends.

Proprietary Injunctions

35.It is trite that proprietary injunctions are granted to preserve assets which are the subject of a proprietary claim where as Mareva injunctions are designed to prevent abusive dissipations of assets against which a plaintiff might otherwise be able to execute judgment, whether immediately or in the future. The two reliefs are fundamentally different in principle and function. Nevertheless, it may be prudent for a plaintiff to apply for a Mareva injunction in aid of a proprietary claim to supplement a proprietary injunction where there is a risk that the plaintiff’s property has been dissipated: Falcon Private Bank Ltd v Borry Bernard Edouard Charles Ltd (unrep., HCA 1934/2011, 9 July 2012) at §78.

36.The rules for granting a proprietary injunction to protect a claim for trust property are derived from the principles in American Cyanamid v Ethicon Ltd [1975] AC 396: see Heitkamp & Thumann KG v Living Profit Trading Develop Ltd (unrep., HCA 151/2017, 8 May 2018; approved on appeal in [2019] HKCA 119) at §§55-57.  The Plaintiff must show that (a) there is a serious issue to be tried on the merits of the claim, (b) the balance of convenience is in favour of granting an injunction, and (c) it is just and convenient to grant the injunction. Nevertheless, “irremediable damage need not necessarily be shown”, and the court will readily find that the balance of convenience favours the preservation of trust property pending trial: Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd (unrep., HCA 3023/2016, 2 May 2017) at §38.

37.In relation to the court’s assessment of the substantive merits of the dispute, the Plaintiff only needs to show that its claim is not “frivolous or vexatious”. Conversely, the opposing party has a heavy burden of showing that there is no serious issue to be tried, as it would be necessary to demonstrate that the claim should be struck out: [2]Pacific Rainbow (supra) at §39(1); Heitkamp & Thumann (supra) at §56.

38.As this application is made at the interlocutory stage, I bear in mind that it is not part of the court’s function at this stage to try and resolve difficult questions of law or conflicts of evidence on affidavit as to the facts on which the claim is being brought. Nevertheless, in assessing whether there is a serious issue to be tried, there must undoubtedly be some degree of evaluation regarding the strength of the parties’ competing factual claims based on the totality of the evidence (including their consistency with the applicant’s pleadings):  Nerium Biotechnology, Inc v Nerium International, LLC (unrep., HCA 1188/2016, 29 March 2018) at §75; Zimmer Sweden AB v KPN Trading Hong Kong Limited (unrep., HCA 2264/2013, 2 May 2014) at §86.

39.Unlike a Mareva injunction, there is no need for the Plaintiff to show any risk of dissipation of assets. Furthermore, delay in the course of making the application which might have led to the refusal of a Mareva injunction will not necessarily impinge upon the grant of a proprietary injunction: Madoff Securities International Ltd v Raven [2012] All ER (Comm) 634 at §§127-128; Zimmer Sweden (supra) at §§76-78.

Preservation Orders

40.The requirements for a preservation order under Order 29, rule 2 of the Rules of the High Court (Cap. 4A) (“RHC”) are summarised by Lok J in Liao Chen Toh v Loyal International (unrep., HCA 2302/2014, 30 March 2016) at §§25-27:

“Under RHC O 29 r 2(1), the court is empowered to inter alia make an order for the detention, custody or preservation of any property which is the subject matter of the cause or matter, or as to which any question may arise therein.

The applicable principles for the grant of a preservation order are well-established:

(i)  There is property which is bona fide the subject matter of the cause or matter.

(ii)  Something ought to be done for the security of the property. Part of this inquiry will involve showing that damages may not be an adequate remedy.

(iii)  Unlike application for a Mareva injunction, no risk of dissipation needs to be demonstrated. Further, even if there has been delay in making an application which may lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted.

(iv)  An enquiry into the relative merits of rival claims is not necessary.

In respect of the merits of the claim, the party seeking the preservation order only needs to show that there is a serious issue to be tried on the merits on the normal American Cyanamid principles.” (Emphasis added)

Mareva Injunctions

41.To obtain a Mareva injunction on an inter partes basis, a plaintiff must show that it has (a) a good arguable case on its substantive claims, (b) the defendants have assets within the jurisdiction, (c) the balance of convenience is in favour of granting the injunction, and (d) there is a real risk of dissipation or removal of assets from the jurisdiction which would render the plaintiff’s judgment of no effect: Hong Kong Civil Procedure 2020 (Vol. 1) at §29/1/65.

42.There are two primary hurdles which a plaintiff must overcome when seeking Mareva relief from the Court. Firstly, there is a higher threshold on the assessment of merits. A plaintiff needs to show a good arguable case, in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success: Pacific Rainbow (supra) at §§39(2), 42.

43.Secondly, there is a “relatively high” standard as far as proof of a real risk of dissipation is concerned. As the Court of Appeal emphasised in Grand Trade Development v Bonance International Limited (unrep., CACV 776/2000, 3 November 2000) at §§17-19, the Mareva injunction is a draconian remedy and a weapon of last resort. It should not be granted in the absence of a clear basis on which the court can conclude that there is a risk of dissipation of assets. A mere supposition will not suffice. In Chau Cham Wong Patrick (a bankrupt) v Chau Kar Hon Quinton [2016] 2 HKLRD 278, Ng J held that:

“31. Given the serious consequences, the standard of proving inter alia a real risk of dissipation is “relatively high”. The plaintiff must establish that risk by reference to “solid evidence” or “cogent evidence”: Laemthong v. Artis [2005] 1 Lloyd’s Rep 100 [60]-[61]; Hsin Chong Construction (Asia) Limited v. Henble Limited supra para. 20.

32. In order to establish a real risk of dissipation of assets, the plaintiff must prove at least objectively the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment – the conduct in question must be unjustifiable and there must be a real risk that the defendant’s assets will be used otherwise than for normal and proper commercial purpose: Mobil Cerro Negro Ltd v Petroleos de Venezuela SA [2008] 1 Lloyd’s Rep 684; Eastman Chemical Ltd. v Heyro Chemical Co Ltd. (No.2) [2012] 3 HKLRD 307 para 26.” (Emphasis added)

E.   THE INJUNCTION SUMMONS: IS THERE A SERIOUS QUESTION TO BE TRIED ON THE LISTCO SHARES TRUST?

Agreement and/or mutual understanding

44.To recap, the Plaintiff’s primary contention is that some form of agreement or mutual understanding arose as between it and the 2^nd Defendant, upon which the 2^nd Defendant would procure the ListCo Shares and hold them (along with the accrued Dividends) for the Plaintiff’s benefit pursuant to the Investment Plan.

45.According to the Plaintiff’s pleaded case, this agreement or mutual understanding was concluded orally or by conduct between Yuan (on behalf of the Plaintiff) and Wei (on behalf of the 2^nd Defendant). An alternative account is given in Sze’s Third Affirmation, where it is said that Yuan (acting in his capacity as the 2^nd Defendant’s sole director and as a representative of the Plaintiff) agreed and understood that the 2^nd Defendant would procure the ListCo Shares and Dividends for and on behalf of the Plaintiff. 

46.Either way, the Plaintiff accepts that no contemporaneous written agreement or expression of mutual understanding was ever created in support of these allegations. This is rather ironic, for it will be recalled that the supposed purpose of the agreement or understanding was to provide protection to the Plaintiff as a supplement to the (written) Shareholding Trust Agreement.

47.Instead, Sze’s First Affirmation refers to a document drafted by Yuan on 10 October 2018, which the Plaintiff seeks to present as an acknowledgement, amongst other things, that (a) the Shareholding Trust Agreement confers beneficial ownership of the 2^nd Defendant to the Plaintiff, (b) Yuan personally kept abreast of/followed up with preparations concerning the Citigroup Arrangements during his time as director of the 2^nd Defendant, and (c) starting from November 2015, the 2^nd Defendant appointed (委託) Citigroup to acquire 690,000,000 [sic] shares of the Bank of Zhengzhou in the capacity of a cornerstone investor, of which the Plaintiff was intended to be the ultimate beneficial shareholder.

48.There are a number of peculiarities about this document. Firstly, it repeats a typographical error found in the Indorsement of Claim filed on 3 October 2018, which wrongly overstates the quantity of ListCo Shares held on trust for the Plaintiff. Secondly, it is decidedly self-serving and non-contemporaneous; indeed, the Plaintiff took out the present Action prior to the creation of this document.

49.The Plaintiff’s evidence in relation to the Dividends is rather more startling. Contrary to the pleadings, Sze’s Fourth Affirmation concedes that the Plaintiff actually “did not address [its] mind [to] the Dividends at the material time”, and simply assumed that Wei would pass them on to the Plaintiff.

50.In the absence of any evidence referring to an agreement or mutual understanding between the parties, the next question is whether the Plaintiff has demonstrated some viable basis to show that the parties had conducted themselves in a way that might indicate the existence of an alleged agreement or mutual understanding.

51.To that end, the Plaintiff alleges that it was involved, together with the 2^nd Defendant, in acquiring of the ListCo Shares pursuant to the Investment Plan. Furthermore, it argues that it paid for the ListCo Shares in reliance on the agreement or understanding. I shall return to the second allegation in due course. As for the first allegation, I agree with the Defendants’ observation that the Plaintiff appears to be relying on nothing more than bare, unparticularised, and unsubstantiated assertions. The documentary evidence exhibited by the Plaintiff falls well short of demonstrating a serious issue to be tried.

52.The high point of the Plaintiff’s case in relation to its alleged participation in the Investment Plan is a printout of an email chain sent in late October 2015, between persons whom I assume to be Citigroup representatives and a number of individuals in Wei’s corporate group (including Wei). Whilst the email subject-line is entitled “Shareholding Entrustment Plan Update” (“代持方案更新”), there is nothing to suggest that this is a reference to the ListCo Shares Trust. The contents of the email dated 31 October 2015 is an offer by Citigroup to purchase and hold a 4.9% stake in the Bank of Zhengzhou and transfer the risks of gains and losses on the share price to Wei’s group (being a third party to the cornerstone investor agreement). It does not lend any support to the existence of a trust agreement in favour of the Plaintiff.

53.What is more, neither Yuan nor anyone else holding themselves out to be representatives of the Plaintiff or China City Group was a recipient of these emails. Nor were they recipients to other correspondence related to the Citigroup Arrangements that was placed before the Court. In one of these emails dated 30 November 2015, the parties involved in finalising the Citigroup Arrangements were listed as: “花旗 [Citigroup] 、东方证卷 [Orient Securities] 、我方律师 (长盛和达辉) [Troutman Sanders LLP and DaHui Lawyers – legal representatives of Wei’s corporate group] 、 惠农 [the 2^nd Defendant]”. In short, there is simply nothing to support the assertions in Sze’s Fourth Affirmation that Yuan and/or the Plaintiff were involved in negotiating the Citigroup Arrangements.

54.Aside from the apparent lack of contemporaneous documentation, I find it difficult to accept that the Citigroup Arrangements were ever intended to benefit the Plaintiff. According to Sze’s Third Affirmation, the 2^nd Defendant engaged Citigroup to make the “necessary arrangement” as a response to its intention to invest in HK$271,811,721 worth of ListCo Shares. Furthermore, it is said in Sze’s Fourth Affirmation that the details of the Citigroup Arrangements as set out in paragraph 11 above were approved by the Plaintiff.

55.I am of the view that these assertions are incredible. Firstly, the Derivative Transaction is essentially the operative element of the Citigroup Arrangement. It is unusual to say the least that the Plaintiff would have agreed to such a mechanism for managing the ListCo Shares if all it intended to do was acquire equitable ownership simpliciter in those shares. There is nothing in the Plaintiff’s evidence which explains why it decided to enter into a share swap investment agreement.

56.Secondly, the Plaintiff’s description that it “intended to invest HK$271,811,721 worth of the Listco Shares” cannot stand up to scrutiny. At the outset, this sum is described as the “purchase price” for the Listco Shares, which is clearly inconsistent with the terms of the Derivative Transaction. The sum of HK$271,811,721 does not correspond to the value of the Listco Shares acquired; rather, that was simply the Initial Exchange Amount paid by the 2^nd Defendant to Citigroup. The Derivative Transaction provided that if the actual amount expended by Citigroup was greater than the Initial Exchange Amount, the 2^nd Defendant would have to make payment of the difference to Citigroup, and vice versa if the Initial Exchange Amount exceeded the amount expended.

57.Thirdly, the Plaintiff is unable to elaborate on the “necessary arrangements” with Citigroup that were made in order to proceed with its investment. Once again, the Plaintiff merely advances a bare allegation that Yuan was involved in the negotiations, without specifying any details or providing any evidence of his involvement.

58.Finally, it is worth mentioning that the Plaintiff did not file any disclosure of substantial shareholding after purportedly obtaining ultimate beneficial ownership in the ListCo Shares. This omission is contrary to its assertion of beneficial ownership of the ListCo Shares and lends support to the Defendants’ position that there is no serious issue to be tried on the existence of an agreement or mutual understanding.

59.Mr Chong invites me to infer that the Plaintiff - the alleged intended beneficial owner of the ListCo Shares - was involved in the process of acquiring those shares by virtue of the fact that it was able to produce before the Court copies of the 2^nd Defendant’s confidential documents, such as the abovementioned emails and the Confirmation. However, I do not see how I can place much (if any) weight on this consideration, given the various questionable features noted above.

No express trust for voluntary transfer of expectancy / future property; purchase of ListCo Shares interest must be for value

60.Regardless of how the case is framed, to my mind, the Plaintiff must show that its money was used to acquire beneficial ownership in the ListCo Shares; the mere existence of an alleged agreement or understanding cannot in these circumstances give rise to a trust. This is because the alleged agreement or understanding was made before the 2^nd Defendant acquired any interest in the ListCo Shares. An express trust cannot arise in relation to an expectation of receiving future property. In Hoh Han Keyet v Artimax Investment Ltd (unrep., HCA 1163/2013, 30 June 2016), DHCJ Eugene Fung SC held at §73(1):

“It is impossible for a settlor to create a presently existing trust of future property. ‘Future property’ means property which a person does not presently own, but which he hopes or expects will come into his ownership sometimes in the future. It is immaterial whether the settlor makes a purported voluntary assignment of future property to trustees on declared trusts, or whether he purports to declare that he himself is holding future property on certain trusts. If the future property subsequently materialises into existing property, the intended beneficiaries have no enforceable claim to it. See Halsbury's Laws of England (5th ed, 2013) vol 98, §69.” (Emphasis added)

61.The editors of Lewin on Trusts (20^th ed., 2020) state at §2-036 that a voluntary assignment for future property is invalid because “equity will not assist a volunteer to enforce a voluntary assignment of an expectancy, even though under seal”. Support for this view can also be found in Underhill and Hayton: Law of Trust and Trustees (19^th ed., 2016) at §§10.6-10.7:

“At law, assignments of property to be acquired in the future pass nothing. Thus, a gratuitous assignment of all X’s ‘right title and interest in and to all the dividends’ which might be declared in respect of certain shares is an ineffective transfer of a mere expectancy...

Where assignments of expectancies are really only regarded as contracts, it follows that equity will not enforce them unless the conscience of the assignor is bound by valuable consideration having been given or for some other reason [reference here being made to Re Burton’s Settlement Trusts [1954] 3 All ER 193, where the assignment was made in compliance with a condition in a will]. Once the property that is the subject matter of the contract for which consideration has been received comes into the hands of the assignor, equity looks on as done that which ought to be done so that the property is held on trust for the assignee.” (Emphasis added)

62.However, as explained in the above-cited passage of Underhill and Hayton, there is no difficulty giving effect to an agreement to create a trust for future property so long as (a) the agreement is made for value, and (b) the intended trustee subsequently acquires an ascertainable interest in the trust property. The trust is constructive in nature and arises automatically upon the 2^nd Defendant’s acquisition of the subject matter of the agreement (namely, the ListCo Shares): Underhill and Hayton at §§30.84-30.85. As held by Swinfen Eady LJ in Re Lind [1915] 2 Ch 345 at 360:

“It is clear from these authorities that an assignment for value of future property actually binds the property itself directly it is acquired—automatically on the happening of the event, and without any further act on the part of the assignor—and does not merely rest in, and amount to, a right in contract, giving rise to an action. The assignor, having received the consideration, becomes in equity, on the happening of the event, trustee for the assignee of the property devolving upon or acquired by him, and which he had previously sold and been paid for.” (Emphasis added)

63.Therefore, even assuming that there was an alleged mutual understanding between Yuan on behalf of the Plaintiff and Wei on behalf of the 2^nd Defendant (or on some earlier version of events, an agreement between the Plaintiff and the 2^nd Defendant with Yuan acting for both parties) that the 2^nd Defendant would hold the ListCo Shares in trust for the Plaintiff, the Plaintiff must nonetheless show (or for purposes of this application, provide some evidential basis for the Court to infer) that it gave value under this agreement.

No evidence of direct payment from the Plaintiff

64.There is no evidence of the Plaintiff ever making a direct transfer of money to the 2^nd Defendant, whether for the purpose of purchasing the ListCo Shares or otherwise. Rather, the Plaintiff’s main contention is that the Fund Transfers were made on its behalf under the directions of CCCI and/or the Academy by Equity Fund I and/or CCCC Financial using money that was held on trust in its favour by some unspecified entities within the China City Group.

65.Even then, however, the Plaintiff has not adduced any evidence concerning its previous dealings with Equity Fund I or CCCC Financial. It has not explained how these entities were repaid after the Fund Transfers. Nor is it able to refer the Court to any prior or subsequent instances whereby Equity Fund I and/or CCCC Financial were used as conduits to effect transactions on the Plaintiff’s behalf (or for other members of the China City Group).

66.In short, the Plaintiff now submits that there is a serious issue to be tried in relation to an arrangement for an undocumented HK$274,504,100.00 one-off transfer of money sourced from and conducted through separate and seemingly unconnected entities. To support this narrative, the Plaintiff asserts that both it and Equity Fund I were members of the China City Group at the time of the Fund Transfers (alongside the Academy and CCCI).

Was the Plaintiff a member of the China City Group?

67.It is accepted by both parties that the Plaintiff’s entire issued share capital was initially held by Golden Gate. Thereafter, on 21 July 2016, Golden Gate transferred its shares to CCO, a direct, wholly owned subsidiary of the Academy. The Defendants do not dispute that the Plaintiff is currently a member of the China City Group. What is in dispute is whether the Plaintiff was a member before that date – namely, when the Fund Transfers took place.

68.The Plaintiff refers to two documents. The first item is a notice by Golden Gate dated 27 September 2019 (less than two months before the hearing date) declaring that (a) it began holding the Plaintiff’s shares on behalf of the Academy on 23 August 2012, and (b) it transferred the abovementioned shares to CCO upon the direction of the Academy on 21 July 2016. This is yet another example of the Plaintiff’s reliance on non-contemporaneous declaratory documents to frame fundamental aspects of its case.

69.The second document is an undated shareholding chart which shows that (a) the Plaintiff is a direct, fully owned subsidiary of CCO and (b) CCO is a direct, fully owned subsidiary of the Academy. This chart, however, cannot possibly represent the Plaintiff’s shareholding status before 21 July 2016. This is because according to Golden Gate’s notice, the Plaintiff was purportedly held on a trust in favour of the Academy, not CCO.

70.Save and except for this example, the Plaintiff is conspicuously absent in all of the China City Group’s other corporate shareholding charts which were placed before me by the Plaintiff. There is also no evidence of any inter-group business or transactional dealings between the Plaintiff and the Academy and/or CCCI during the material time. Mr Chong submits that the manner in which the internal funds of the China City Group are arranged or set-off is an “internal matter” for the group’s members. While that may be true, the Plaintiff’s inability or refusal to substantiate its assertions means that there is simply no evidential basis for its claim that it was a member of the China City Group.

Was Equity Fund I a member of the China City Group?

71.I am equally satisfied that the Plaintiff has failed to demonstrate any credible basis to show that Equity Fund I was a member of the China City Group at the time of the Fund Transfers. Both parties accept that during this period, the largest limited partner of Equity Fund I was Huinong Gamma Investments Ltd (“Gamma”), and Gamma’s sole registered member was in turn CCCC Financial. As noted above, the Plaintiff does not contend that CCCC Financial was a member of the China City Group.

72.Sze’s Third Affirmation nevertheless goes on to state that between 18 June 2014 to 15 June 2016, Gamma “was in fact beneficially owned by CCCI, which is why CCC[C] Financial Limited subsequently transferred [its] 100% shareholding [in Gamma] back to CCCI on 15 June 2016” and that “as part of the China City Group, CCCI used US$142,200,000 to acquire the interest in [Gamma] (which includes 99% interest in Equity Fund I) in about June 2014.”

73.This assertion is difficult to understand. It is apparent from Gamma’s share register exhibited by the Plaintiff that CCCI was in fact the sole registered shareholder of Gamma from 18 June 2014 to 30 June 2015. It was only on 30 June 2015 that the registered ownership of these shares was transferred to CCCC Financial. Furthermore, there is an apparent lack-of-fit as to the Plaintiff’s insistence that CCCI paid US$142,200,000 to acquire beneficial ownership in Gamma. Firstly, the bank remittance reference shows that payment took place on 19 August 2014, some two months after the aforesaid interest in Gamma was purportedly acquired. Secondly, the money was transmitted directly to Gamma as opposed to the vendor of the shares.

Was money held on behalf of and/or for the benefit of the Plaintiff used to purchase the ListCo Shares?

74.For these reasons, I fail to see how there can be any grounds for arguing that the Plaintiff and Equity Fund I were members of the China City Group. As a result, and in the absence of further supporting evidence, I do not consider there is any basis to say that the Fund Transfers between Equity Fund I and the 2^nd Defendant were executed upon the directions of the Academy and/or CCCI for the Plaintiff’s benefit.

75.Even if it can be shown that the Plaintiff and Equity Fund I were both members of China City Group from before mid-2016, I fail to see how this suffices to show that the Plaintiff had an equitable interest in the monies used to acquire the ListCo Shares. The Plaintiff’s allegation that the “purchase price” of those shares was initially held on trust by entities within the China City Group for the benefit of the Plaintiff before the Fund Transfers occurred is no more than a bare assertion.

76.Mr Phang, for the Defendants, cites Zhang Yan v ASA Bullion Ltd [2019] HKCFI 179 as authority for the proposition that the Plaintiff must adduce reasonable evidence to show that the Defendants held assets belonging to the Plaintiff - failing which there can be no serious issue to be tried. 

77.In Zhang Yan, the plaintiffs sought to continue a proprietary injunction in aid of a proprietary claim on the basis of a constructive trust over US$10,578,027.07 worth of misappropriated funds. They sought to assert ownership over a sum of HK$26,166,675.09 held in the defendant’s bank accounts but were unable to adduce evidence which demonstrated that any part of this amount belonged to them. Counsel for the plaintiffs also conceded that it was impossible to trace the whereabouts of the misappropriated funds, and could only suggest that there was a chance that some of the monies within the defendant’s accounts represented the assets of the plaintiffs. Recorder Eugene Fung SC gave short shrift of the plaintiffs’ application for a continuation of the injunction, ruling that they could not demonstrate a serious issue to be tried as to whether the defendants held any of the misappropriated funds.

78.The case of Zhang Yan is analogous here. Given that there is no evidence that the Plaintiff paid for the ListCo Shares or otherwise gave value for them, its claim that it is beneficially entitled to the ListCo Shares must fail.

Remaining arguments

79.For the sake of completeness, I shall briefly deal with the Plaintiff’s remaining justifications for a trust over the ListCo Shares. Firstly, the Indorsement of Claim asserts that the 1^st Defendant’s knowledge of the Shareholding Trust can be imputed onto the 2^nd Defendant. Secondly, the Statement of Claim avers that the 1^st Defendant holds the ListCo Shares on trust for the Plaintiff via the 2^nd Defendant by virtue of the Shareholding Trust Agreement. I am unable to accept either argument. Both of these arguments are confused, because they gloss over the difference in subject matter between the two trusts and fail to recognise the separate corporate personality of the 2^nd Defendant.

The ListCo Shares Trust claim overall

80.Overall, the Plaintiff’s case on the ListCo Shares Trust bears a distinctly chameleonic quality. It is rife with inconsistencies. At different times up to and including the hearing, there was significant uncertainty as to which allegations and issues the Plaintiff was attempting to put forward. When the time came for the Plaintiff to file its Statement of Claim, it resorted to a scattergun approach in a seemingly haphazard attempt at constructing a proprietary claim. Granted, deficiencies in pleadings do not necessarily mean that there are no serious issues to be tried. That said, when one considers the Plaintiff’s case here in a holistic manner, it is clear that none of the arguments are supported by credible evidence. At best, the Plaintiff resorts to a host of bare assertions and non-contemporaneous documents which appear at convenient times during the course of the Action.

81.In Yifung Properties Ltd v Manchester Securities Corp (unrep., CACV 258/2015, 9 September 2016) Kwan JA (as she then was) observed at §18:

“Although there should be no trial on affidavits, “that does not mean the court should shut its eyes to the obvious in deciding if the applicant’s case is demurrable on its face” and “clearly the court can apply common sense and test a party’s assertions against objective, contemporaneous documents” (Injunction Decision, §23). This approach was approved of in the CA Decision at §17. [3] What the judge meant by the phrase “demurrable on its face” is quite simply that the allegations were plainly unbelievable or incredible on the materials placed before the court...” (Emphasis added)

82.Having adopted the common-sense approach endorsed in Yifung, I find no serious issue to be tried in relation to the ListCo Shares Trust. Accordingly, there can be no proprietary or Mareva injunction, or preservation order against the 2^nd Defendant.

F.   THE INJUNCTION SUMMONS: IS THERE A SERIOUS QUESTION TO BE TRIED ON THE SHAREHOLDING TRUST?

The 1^st Defendant’s arguments

83.Mr Phang submits that the Plaintiff’s case against the 1^st Defendant “must rise and fall together” with its case against the 2^nd Defendant. For “[if] the Court is not satisfied that P has adduced any reasonable evidence showing that D2 held or holds the ListCo Shares on trust for P, then it is entitled to find that the tenuous and self-contradicting evidence pertaining to the [Shareholding] Trust Agreement is so unbelievable that there is also no serious question to be tried vis-à-vis D1”. Counsel made the following observations:

(1)  According to the Plaintiff’s evidence, the Plaintiff only commenced negotiations with Citigroup around late October 2015. As the Shareholding Trust Agreement purportedly took effect on 13 October 2015 pursuant to Clause 9.2, this would mean that steps had already been “taken to put in place a trust before a plan to acquire the trust assets was in place”.

(2)  There is no contemporaneous evidence of the parties having acted upon on the Shareholding Trust Agreement. Indeed, even though Clause 4.3 of the agreement required the 1^st Defendant to pay dividends and other investment returns to the Plaintiff’s designated bank account within 3 days of the former’s receipt of them, there is no indication that the Plaintiff ever provided the 1^st Defendant with its bank account details at the time. Nor did the Plaintiff make any demand for these dividends and investment returns until its demand letter on 7 September 2018.

(3)  It was only in the course of the pleadings did the Plaintiff explicitly abandon its allegation that Wei personally affixed his name chop on the Shareholding Trust Agreement (see paragraph 21, supra).

(4)  There is no commercially sensible reason for Wei and Yuan to agree to the use of one of D1’s shell companies to hold the ListCo Shares. Furthermore, it was previously determined by the Court in a separate action (HCA 2814/2016) that Yuan worked for one Mr Yu Lian (于炼). Whilst Yu was a business associate of Wei, the same could not be said for Yuan.

(5)  In his written acknowledgement dated 10 October 2018 (see paragraph 47, supra), Yuan alleged that the Shareholding Trust Agreement was a true and accurate document which conferred upon the Plaintiff beneficial ownership of the Shareholding. In the event that I doubt the veracity of the other allegations raised therein concerning the ListCo Shares Trust (as I now have), I should also come to the conclusion that the allegation as to the Shareholding Trust Agreement should also be regarded as incredible.

(6)  The nature of the Citigroup Arrangements was such that 1^st Defendant was in no position to procure the 2^nd Defendant to exercise any voting rights on the ListCo Shares or transfer them to the Plaintiff upon demand.

84.As such, Mr Phang submits that the authenticity of the Shareholding Trust Agreement is “seriously in question”.

Analysis

85.These points, as convincing as they are, must be balanced by the fact that the Shareholding Trust Agreement appears to be a contemporaneous document that bears the Plaintiff’s seal and Wei’s chop mark. The fact that the authenticity of the Shareholding Trust Agreement is “seriously in question” does not mean that there is no basis for the Plaintiff to proceed with its case. Indeed, it is precisely for this reason that there is in fact a serious issue to be tried. 

86.The Plaintiff argues that the Shareholding Trust Agreement was made in pursuit of its intention to invest in the ListCo Shares. I consider this to be a baseless allegation for the same reasons mentioned in my evaluation of the ListCo Shares Trust claim. Nonetheless, I do not think that my decision on the ListCo Shares Trust bars me from finding that there is a serious issue to be tried concerning the Shareholding Trust. To my mind, the existence of this trust is not predicated on there being an understanding that the 2^nd Defendant will subsequently purchase and hold the ListCo Shares for the Plaintiff. Rather, the trust here turns on whether the Shareholding Trust Agreement was validly made. In my Judgment, there is nothing to prevent the agreement from existing in the absence of the alleged Investment Plan. For that matter, it is worth noting that the agreement does not refer to the Bank of Zhengzhou or the nature of the investment in contemplation by the parties.

87.Insofar as I am concerned with there being a serious issue to be tried, I do not think it matters very much that (a) the Shareholding Trust Agreement arose before negotiations with Citigroup took place, (b) the remaining assertions in Yuan’s acknowledgement were incredible, or (c) the nature of the Citigroup Arrangements was such that 1^st Defendant was in no position to procure the 2^nd Defendant to exercise any rights over the ListCo Shares. I am unable to agree with Mr Phang that the Plaintiff’s case here must “rise and fall together” with that of the ListCo Shares Trust.

88.Mr Phang argues that there is no real evidence (apart from the Shareholding Trust Agreement) to support the alleged trust. This observation downplays the significance of the agreement. Here, the Plaintiff has produced the one piece of evidence that is capable of independently giving rise to the Shareholding Trust. The 1^st Defendant asserts that the Shareholding Trust Agreement is a forgery, relying on Wei and Dong’s evidence that they never affixed Wei’s chop mark on such a document, but I do not think this can be resolved at this stage on interlocutory evidence. It will also be noted that the Plaintiff has produced evidence of to the effect that the Shareholding Trust Agreement is valid notwithstanding questions as to the validity of Wei’s personal chop. It is this distinction between the Shareholding Trust and the ListCo Shares Trust that enables me to find a serious issue to be tried for the former, but not the latter. It would be a strong thing for a court at this stage to simply dismiss the Plaintiff’s case here as “frivolous and vexatious”. I accept that the evidence is of a tenuous nature. But in determining whether the claim constitutes a serious issue to be tried under the American Cyanamid principles, it matters not that the Plaintiff’s “chances of success in establishing [its case on the Shareholding Trust] at the trial are 90% or 20%”: Yifung at §16 (supra).

89.Accordingly, I am satisfied that there is a serious issue to be tried in relation to the Shareholding Trust. Bearing in mind the fact that the nature of the proprietary injunction is such that “irremediable damage need not necessarily be shown” and that the court will readily find that the balance of convenience favours the preservation of trust property pending trial, I consider that it is in the interests of justice for the Shareholding to be preserved pending the outcome of the substantive hearing.

90.As a result, I am of the view that the proprietary injunction as against the 1^st Defendant in respect of the Shareholding should be continued.

91.Given the above, it is unnecessary for me to go on to deal with the Plaintiff’s alternative application for a Mareva injunction against the 1^st Defendant.

G.  THE SETTING ASIDE SUMMONS:

Overview

92.I now come to the Plaintiff’s ex parte application in 2018 before the Master for leave to issue and serve a concurrent writ of summons out of the jurisdiction on the Defendants. Leave was granted by way of the Service Out Order dated 6 December 2018.

93.To invoke the Court’s long-arm jurisdiction for serving an originating process on defendants out of jurisdiction under Order 11 RHC, the onus is on the plaintiff to establish three things. Firstly, as a matter going to jurisdiction, there is a good arguable case that the claim falls under one of the heads of Order 11 rule 1(1). Secondly, there must be a serious issue to be tried as to the merits of the claim on a substantial question of fact or law. Thirdly, as a matter going to discretion, Hong Kong is the appropriate forum for trial of the action under the forum conveniens principles; Order 11 rule 4(2) provides that no leave to serve out of jurisdiction shall be granted unless it is clear to the court that the case is a proper one for service out of jurisdiction: Dong Shing F&T Co Ltd v Hanmec Co Ltd [2010] 5 HKLRD 261 at §26, per Fok J (as he then was); Dynasty Line Ltd v Sukamto Sia [2009] 4 HKLRD 454 at §29, per Cheung JA.

94.As against the 1^st Defendant, the Plaintiff relies on Clause 8 of the Shareholding Trust Agreement, which grants exclusive jurisdiction of any dispute in respect of the agreement to the “People’s Court” in the location of the Plaintiff. As the Plaintiff is a Hong Kong company, the dispute falls within the gateway of Order 11 rule 1(1)(d)(iv). Whilst the Defendants previously took issue with the reference to “People’s Court”, I do not think anything turns on this complaint. As against the 2^nd Defendant, the Plaintiff relies on Order 11 rule 1(1)(p) and 1(1)(c). The former concerns actions for money had or received and for relief against a defendant as a constructive trustee where the defendant’s liability arises out of acts committed within the jurisdiction. The latter applies where a person out of the jurisdiction is a necessary or proper party to a claim being brought against a person duly served within or out of the jurisdiction (namely, the 1^st Defendant).

95.It may be recalled that at the time, the Plaintiff’s case in relation to the ListCo Trust Shares was that it provided the 2^nd Defendant with the funds used to acquire the ListCo Shares. No mention was made of the Fund Transfers, the involvement of Equity Fund I and CCCC Financial, or of the China City Group. Moreover, the Plaintiff also asserted that Yuan was the 2^nd Defendant’s sole director when it received the “purchase price” of the ListCo Shares. Presumably, this meant that Yuan could impute his own knowledge of the Shareholding Trust onto the 2^nd Defendant.

96.Mr Phang says that the Plaintiff’s failure at the ex parte stage to adduce evidence explaining the source of the monies paid to the 2^nd Defendant is a clear case of material non-disclosure and misrepresentation that warrants the setting aside of the Service Out Order. Mr Chong, on the other hand, says that the omission was neither deliberate nor material to the decision of the Master to grant leave.

Legal principles on full and frank disclosure

97.The Plaintiff is obligated to comply with its duty to make full and frank disclosure of “all material facts which may have an impact on the court’s decision whether to grant leave”. The question of materiality is one that needs to be decided by this Court: Pacific Aerosupplies Ltd v Dakota Air Parts International Inc (unrep., HCA 1233/2010, 24 June 2011). In Dong Shing (supra), Fok J (as he then was) said at §27:

“The facts which the plaintiff must disclose are those facts which the court should have in the weighing scales, meaning those facts “relevant to the weighing operation which the court has to make in deciding whether or not to grant the order” (Emphasis added)

98.The duty of disclosure does not only apply to the facts known by the Plaintiff but includes any additional facts it would have known had proper inquiries been made before the ex parte application. As stated in Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1356H:

“(3) The applicant must make proper inquiries before making the application ... The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such inquiries.

99.For this reason, there is a heavy burden on ensuring that the application for service out of jurisdiction is properly prepared: Trafalgar Tours v Henry [1990] 2 Lloyd’s Rep 298 at 308. Furthermore, the fact that the failure to make full disclosure might not have affected the decision of the Master at the ex parte stage does not mean that disclosure could have been dispensed with if those matters were relevant to deciding the application. As DHCJ Russell Coleman SC (as he then was) said in Pacific Aerosupplies at §16:

“The court has a broad discretion as to how to react to a finding of material non-disclosure. It might, but need not, result in the setting aside of the order made; essentially it is a question of degree. If there is deliberate concealment, that might be punished by discharge of the order even if the undisclosed information was not central to the decision. But even inadvertent non-disclosure of information which may be central to the decision might lead to the discharge of the order, notwithstanding the lack of personal misconduct by the party or the solicitor concerned.” (Emphasis added)

100.It has been held in the context of interim injunctions in Securities and Futures Commission v “A” [2008] 1 HKC 89 at §41 that the innocence of the non-disclosure was an important consideration, albeit not a decisive one, in determining whether an ex parte order should be discharged. Kwan J (as she then was), proceeded to say that:

“Even if it is established there was material non-disclosure which justifies discharge of the ex parte order, the court has a discretion to continue the order or make a new order on terms. The court must assess the degree and extent of the culpability, the importance and significance to the outcome of the application of the matters which were not disclosed, and whether the punishment of discharging the ex parte order would be out of proportion to the failure of the applicant to make full and frank disclosure” (Emphasis added)

101.On the importance of full and frank disclosure of merits, the subsequent revelation to the Defendants of factual disputes or potential grounds of defence that were known to the Plaintiff at the time of the ex parte application does not of itself establish material non-disclosure. This does not absolve the Plaintiff from disclosing matters which might have bearing on whether there is a serious issue to be tried on the underlying claim. The same issues may also be material in determining whether there is a good arguable case for the purpose of satisfying the relevant gateway under Order 11 rule 1(1).Thus, in Hady v Bazar [2012] 3 HKLRD 29, DHCJ Peter Ng SC (as he then was) held at §§102-103:

“… even though the principle requiring full and frank disclosure is the same whether the application is for the grant of an injunction or for leave to serve a writ outside jurisdiction, the context and the focus of the inquiry is different.

In an application for leave to serve a writ outside jurisdiction, the court is concerned with whether it should assume jurisdiction – it is not concerned with the merits of the case, save that it has to be satisfied that there are serious issues to be tried... In general, a failure to refer to arguments on the merits which the defendant may seek to raise in answer to the plaintiff’s claim would not amount to material non-disclosure, unless they are of such weight that their omission may mislead the court in exercising its jurisdiction under the rule and its discretion whether or not to grant leave...” (Emphasis added)

102.Mr Chong also invites me to consider the decision of Ren Yun Liang v China Merchants Bank (unrep., HCA 1456/2005, 29 January 2007). That authority states at §26 that “facts which only go to the strength or weakness of a party’s case do not assume the same significance as in applications for Mareva injunction or Anton Piller orders”, but it certainly does not suggest that there should be no consideration whatsoever regarding the merits of the case.

Analysis

103.As far as the Plaintiff’s claim against the 2^nd Defendant is concerned, I find that the Fund Transfers were material to its application for leave to issue and serve the concurrent writ of summons out of the jurisdiction. I agree with Mr Phang’s submissions that case presented before the Master disguises a substantially weaker (if not an otherwise unsustainable) case. Sze’s First Affirmation gives one the impression that the Plaintiff directly paid for the purchase of the ListCo Shares Trust; this is a fact that can readily justify the imposition of a resulting trust. The Plaintiff’s current case is decidedly less potent, if at all viable. I have previously found that there is no serious issue to be tried concerning the ListCo Shares Trust. There is simply no evidence to suggest the Plaintiff is the recipient of a benefit conferred by some unspecified entity within the China City Group.

104.The Plaintiff’s case has also materially changed in other respects. For instance, it is no longer pleaded that the ListCo Shares Trust arose against the 2^nd Defendant by virtue of Yuan’s knowledge of the Shareholding Trust. In any event, I do not understand how this point alone can create a trust relationship.

105.It is nothing short of a truism that where an issue on merits is fundamental to the viability of the Plaintiff’s case, that issue must be disclosed. As emphatically explained by DHCJ Anita Yip SC in Tremendous Success Holdings Ltd v Sinosoft Technology Group Ltd(unrep., HCA 2345/2013, 11 July 2016) at §§191-194:

“Obviously, it is the applicant’s duty under an Order 11 application to show serious issue to be tried. A defence which is or may be fatal to the applicant’s case or which may go to demolish the applicant’s cause of action and hence no serious issue to be tried, is almost certainly material matter which influences the court’s discretion on granting or refusing leave, and therefore must be disclosed and drawn to the court’s attention. The Court of Final Appeal in Kayden has said that the court and the defendant must be appraised of the cause of action alleged.

I think Hong Jing’s case is not expressing a different view from that of Kayden. If the defence shows the claim to be groundless, it follows that there is no serious issue to be tried. The Order 11 applicant must disclose the defence.

In essence, the plaintiffs’ argument boils down to whether the defence that the defendants did not owe fiduciary duties under PRC would show their claims to be groundless. They said no and so there was no duty to disclose.

However, it is trite that materiality refers to significant matters which the court should know when dealing with the application. Materiality is to be determined by the court, not the applicant or its legal team. The test is exactly not what the plaintiffs think of the defence. It is what the court thinks.” (Emphasis added)

106.Likewise, in East Asia Satellite Television (Holdings) Ltd v New Cotai, LLC (unrep., HCMP 2218/2009, 16 July 2010), Reyes J had to deal with a claim that fell clearly within the ambit of the rule against reflective loss. The learned judge set aside an order for service out of the jurisdiction for material non-disclosure. This was partly because it was incumbent on the plaintiff to explain on its affidavit why the claim would have been arguably permissible under the rule: §§180-181. Likewise, I take the view that the Plaintiff ought to have explained at the ex parte stage how the ListCo Shares were purchased using its money and/or money held on its behalf by entities within the China City Group.

107.The Plaintiff asserts on numerous occasions that it did not see how the payments, being an “internal arrangement within the [China City] Group” was material. It says that the Master “would not have made a different decision in granting the Service Out Order”. I do not agree. As analysed above, this goes directly to the question of whether there is a serious issue to be tried. In any event, given that the Plaintiff was already legally represented at that stage, I find it hard to believe that it was unaware of the need to disclose the source of the funds that were allegedly used to acquire the ListCo Shares.

108.As a matter of principle and discretion, I consider that the application to set aside the Service Out Order is justified in relation to the 2^nd Defendant. As there is no serious issue to be tried against the 2^nd Defendant in any event, I am not minded to exercise my discretion to grant retrospective leave.

109.As far as the 1^st Defendant is concerned, I held in relation to the Injunction Summons that there was a serious issue to be tried in relation to the Shareholding Trust. While some aspects of the Plaintiff’s case are admittedly tenuous or concerning, when one considers these issues against the background of the Shareholding Trust Agreement, in my judgment the Plaintiff’s claim narrowly meets the threshold of a good arguable case. It follows from this that there is a good arguable case that the Plaintiff’s claim against the 1^st Defendant falls within the gateway in Order 11 rule 1(1)(d)(iv).

110.Furthermore, the Plaintiff’s failure to disclose the source of the Fund Transfers is not material insofar as the Plaintiff’s case against the 1^st Defendant is concerned. There is therefore no basis for me to set aside the Service Out Order as far as the 1^st Defendant is concerned.

H.  DISPOSITION

111.For the reasons above, I order that the injunction granted by the Judge against the 1^st Defendant in paragraphs 1 and 2 of the Injunction Order be continued until judgment or further order of the Court. The remainder of the Injunction Summons is dismissed.

112.I grant the Defendants’ application in part to set aside the Service Out Order insofar as it pertains to the 2^nd Defendant. Service (if any) of the Concurrent Amended Writ of Summons re-filed on 29 November 2018 on the 2^nd Defendant be set aside. I decline to grant retrospective leave to the Plaintiff for service out.

113.As for costs, given that both the Plaintiff and the Defendants have been partially successful in their respective summonses, I consider that the fair (and simplest) order to make is that there be no order as to costs. I therefore make a costs order nisi to that effect.

Mr Patrick Chong, instructed by Jun He Law Offices, for the Plaintiff

Mr Roger Phang, instructed by Withers, for the Defendants