Nonghyup Bank (As Trustee of Pacificbridge Gold Income Fund 1) v. Universe Income Builder Fund v. Llc and Others

HCA 2089/2020

[2021] HKCFI 107

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2089 OF 2020

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BETWEEN

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D E C I S I O N

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APPLICATION

1.By a summons dated 22 December 2020 (the “Discharge Summons”), the 7^th Defendant seeks, inter alia, the following order from this Court:

“1. The Order made by Deputy High Court Judge MK Liu on 11 December 2020 (“the Injunction Order”) and continued on 18 December 2020 (“the Continuation Order”) be discharged as against the 7^th Defendant upon the 7^th Defendant’s undertaking not to, whether individually, acting by its employee or agents or otherwise howsoever, remove from Hong Kong or in any way dispose of, deal with or diminish the value of the sum of US$4,880,024.01 held in the USD currency sub-account of the 7^th Defendant’s ICBC Account that is, the 7^th Defendant’s bank account maintained with Industrial and Commercial Bank of China (Asia) Limited (bank account no. 701-530-03411-7).”

SALIENT FACTS

2.The Plaintiff asserts that it has fallen victim to a fraudulent or dishonest scheme perpetrated by a number of defendants in the present action.

3.On 11 December 2020, it obtained an ex parte injunction, both Mareva and proprietary, against the 1^st to 6^th Defendants up to the amount of US$32,850,351.97 which is the amount of a senior note the Plaintiff subscribed and remains unpaid. It also obtained an ex parte proprietary injunction against the 7^th Defendant, Legacy Trust Company Limited, up to the full amount of its claim, namely, US$32,850,351.97.

4.The 7^th Defendant, however, is not a party to the alleged fraudulent scheme and is an innocent party which was fixed up with the alleged wrongdoings. It is not disputed that the 7^th Defendant only has US$4,880,024 in its account which can be said to be traceable back to the Plaintiff’s investments through the alleged fraudulent scheme. Nonetheless, the Plaintiff obtained and insists to have a proprietary injunction against the 7^th Defendant up to the sum of US$32,850,351.97 on the basis that “the plaintiff would not be protected if and in so far as the defendants received any sums in future which are traceable substitutes of the original sum received.”

5.However, I note that in §77(5) of the Affirmation of Lee Sang Hoon, it is stated that:

“As regards Legacy Trust, I have previously filed an affirmation in support of the Originating Summons for the Norwich Pharmacal order deposing to my belief that Legacy Trust is an innocent third party which was mixed up in the wrongdoing of the Chang Camp. I wish to point out that NB’s naming of Legacy Trust as the 7^th Defendant in the intended action does not undermine or contradict that belief. As the draft Writ of Summons and Statement of Claim shows, NB’s claim against Legacy Trust is merely as a constructive trustee of the balance of the Senior Note Amount. No wrongdoing is alleged against Legacy Trust. Legacy Trust must know by now that NB is claiming against UIBF VI and KH UAM for, inter alia, dishonest assistance and knowing receipt. Legacy Trust, as the custodian of UIBF VI and KH UAM, has no beneficial interest in the remaining balance of the Senior Note Amount. Such knowledge renders it unconscionable for Legacy Trust to retain the remaining balance of the Senior Note Amount whether for UIBF VI and KH UAM or at all. It should transfer, or be ordered by the Court to transfer, the remaining balance of the Senior Note Amount to NB. That is the only substantive relief which NB is seeking against Legacy Trust, and the proprietary injunction against Legacy Trust is to secure the funds pending resolution of the intended action.” (Emphasis added.)

6.As pointed out above, surprisingly, an ex parte proprietary injunction was granted against the 7^th Defendant in the following terms:

“The 7^th Defendant, whether individually, acting by its employees or agents or otherwise howsoever, must not remove from Hong Kong or in any way dispose of, deal with, or diminish the value of the sum of USD32,850,351.97 received in the 7^th Defendant’s ICBC Account on 26 March 2020 or in the account no. 0100011623668 (whether maintained with ICBC, the Australia and New Zealand Banking Group Limited or any other bank), and/or any proceeds, fruits, benefits, interests or assets derived from any part of such total sum (the “D7 Trust Assets”)”

7.The said ex parte proprietary injunction against the 7^th Defendant is continued by the Order of Deputy High Court Judge MK Liu dated 18 December 2020.

8.This Court notes from the written submissions for the 7^th Defendant (see §5(e)(ii)) that it was argued on behalf of the 7^th Defendant at the hearing on 18 December 2020 that:

“despite it is already apparent from P’s own evidence at [71-73] that the remaining balance held by D7 via D7’s ICBC Account in favour of other Ds were US$4,880,024 [sic] (Cf. §§5(d)(ii) and (iv) above), §4 of the Ex-parte Order [48] still states the subject value of D7’s proprietary injunction be the full sum of US$32,850,351.97. Where the assets forming the subject matter of the proprietary claim has been dissipated, a proprietary injunction cannot ordinarily be granted in respect of that dissipated amount: Zhang Yan & Ors v ASA Bullion Ltd [2019] HKCFI 179 at §11.”

9.It is relatively clear to me that the Plaintiff should never have applied for a sum exceeding the remaining balance of the Senior Note Amount against the 7^th Defendant, an innocent party.  

10.Although Deputy High Court Judge MK Liu has already adjourned the inter partes summons (the “Continuation Summons”) as against the 1^st Defendant, the 6^th Defendant and the 7^th Defendant with directions for evidence to be filed and the matter to be disposed on paper, it comes as no surprise to this Court that the 7^th Defendant took out the Discharge Summons on 22 December 2020 for this matter to be dealt with urgently.

11.I was inclined to grant an order in terms of the Discharge Summons forthwith on 31 December 2020. However, in view of Mr Phang’s submission that the Court needs to consider the relevant legal principles carefully, I allowed the parties to file further written submissions. Having considered the further legal submissions, I am of the view that the Discharge Summons must be granted and, in fact, it should have been granted much earlier.

ANALYSIS

12.First, the legal principles in relation to proprietary injunction are well established and recently helpfully summarised by Recorder Eugene Fung SC in Zhang Yan & Ors v ASA Bullion Limited, HCA1555 of 2018, unreported, 23 January 2019.  At §11, the learned Recorder said:

“11.   The relevant legal principles regarding a proprietary injunction are as follows:

(1)   Where a plaintiff asserts title to property or seeks to trace property which belongs to him, the Court has jurisdiction to grant a proprietary injunction restraining the disposal of that property: see A v C [1981] 1 QB 956 at 958D – 959D (Robert Goff J).

(2)   For the grant of a proprietary injunction, there are three elements which the plaintiff has to demonstrate, following the American Cyanamid approach: (a) that there is a serious issue to be tried on the merits; (b) that the balance of convenience is in favour of granting an injunction and (c) that it is just and convenient to grant the injunction. It is not necessary to show any risk of dissipation of assets. See eg Madoff Securities International Ltd v Raven [2012] 2 All ER (Comm) 634 at §§127 – 128 (Flaux J).

(3)   A proprietary injunction must relate to a specific asset held by or under the control of the defendant, or its traceable proceeds, in respect of which a proprietary claim is raised by the plaintiff: see任俊國 v Chin Choi Ming (unreported, HCA 2017/2017, 6 November 2017) §20 (Chow J).

(4)   In order to justify the grant of a proprietary injunction, the plaintiff should ordinarily adduce some reasonable evidence of the existence of the specific asset (or its traceable proceeds) and that the same is being held by or under the control of the defendant. Where the asset forming the subject matter of the proprietary claim has been dissipated and can no longer be traced, a proprietary injunction cannot ordinarily be granted. See 任俊國 v Chin Choi Ming (above) §§21 – 22 (Chow J).” (Emphasis added.)

13.In §13 and §24(2), the learned Recorder further said:

“In order for Ps to continue the Injunction on the basis of a proprietary claim, they need to adduce some reasonable evidence that the sum of US$10,578,027.07 is being held by or under the control of D.”

“It is well-established that a proprietary claim is confined to the property remaining in the defendant’s hands. Further, a proprietary restitutionary remedy can only be granted if the plaintiff continues to have a proprietary interest in the property which is held by the defendant when the restitutionary claim is made: see G Virgo, The Principles of the Law of Restitution (3^rd ed, 2015) p 558.” (Emphasis added.)

14.It is not clear to me as to why the above basic legal propositions have not been drawn to the attention of the ex parte judge. Applying the above legal principles, there is no legal basis upon which the Plaintiff could have subjected the 7^th Defendant, an innocent party, to a proprietary injunction for a sum exceeding the remaining balance of the Senior Note Amount, namely, US$4,880,024.

15.This is particularly so when Mr Phang for the Plaintiff submitted that the Plaintiff does not have a proprietary claim for the sum of US$32,850,351.97 against the 7^th Defendant.

16.Mr Phang for the Plaintiff submitted that the Plaintiff is entitled to trace into the proceeds of the US$32,850,351.97. That is correct.  But on the evidence before this Court, the only traceable proceeds in the hands of the 7^th Defendant is the sum of US$4,880,024.  It is incorrect for the Court to grant a larger sum just to cater for the possibility that in future, some traceable money may find its way into the accounts of the 7^th Defendant. If Mr Phang is right, then the Court will grant such injunction against every financial institution in Hong Kong to the full amount of any sum which was paid or transferred through their accounts. This cannot be right.

17.On a practical level, Mr Pang SC for the 7^th Defendant is right that even on the Plaintiff’s own case, the dissipated funds are unlikely to return to the accounts of the 7^th Defendant. This is because the 1^st to the 6^th Defendants are alleged fraudsters. It is unreal that fraudsters would return money into an account whereby the custodians (that is, the 7^th Defendant) have notice of a Mareva injunction. The repayments relied on by the Plaintiff occurred before the granting of the ex parte injunction orders. Mr Pang SC also submitted that the crux of the Plaintiff’s case appears to be that the “…Investment Scheme, was in truth, a Ponzi scheme.” (see §41 of the Affirmation of Lee Sang Hoon). Mr Pang SC asked rhetorically, how can money be returned if the same has been paid out pursuant to a Ponzi scheme. I agree.  

18.Secondly, Mr Phang for the Plaintiff submitted that the case of Société Générale, Singapore Branch v Inter-Pacific Group Pte Ltd HCA 1617 of 2019, unreported, 5 December 2019 (at §§3, 5, 8 and 18 per Recorder Stewart Wong SC) is entirely on point, and illustrates that a proprietary injunction can be obtained over the traceable substitutes of the original sum received, and one of the reasons why the injunction should not be limited to the remaining balance is that the plaintiff would not be protected if and in so far as the defendants received any sums in future which are traceable substitutes of the original sum received.

19.He referred to the fact that, MCR Singapore remitted US$1,499,748.22 and US$499,747.07 to KH UAM on 15 September 2020 and 22 September 2020 respectively, which then in turn allocated US$611,027.50 and US$203,703.57 (i.e. totaling US$814,731.07) to the 1^st Defendant as “first instalment paid by MCR to UIBF”.  It is submitted that as these funds (which are either part of the US$32,850,351.97 or its traceable proceeds) were remitted into the 7^th Defendant’s ICBC Account, there is a need for a proprietary injunction to bind the 7^th Defendant up to the sum of US$32,850,351.97, and not just for the remaining balance in the 7^th Defendant’s ICBC Account.

20.First, I am not convinced that the case of Société Générale, Singapore Branch (supra) establishes any new proposition of law that a proprietary injunction needs not be related to a specific asset held by or under the control of the defendant, or its traceable proceeds and that a proprietary injunction can be granted over some future properties which may or may not find their way back to the defendant.  If indeed it seeks to establish such a proposition of law, I have no hesitation to reject it as it is hard to justify both conceptually and practically. In any event, on the facts of the present case, there is no property or traceable proceeds beyond the remaining balance which is now in the hands of the 7^th Defendant.

21.The 7^th Defendant is an innocent third party. Any receiving banks or financial institutions will be in same position as the 7^th Defendant.  It is hard to justify that all receiving banks or financial institutions or trustee companies would have to subject to a proprietary injunction to the full amount of any claimant’s total loss when what they did were just performing their contractual and/or fiduciary duties vis-à-vis their clients on a bona fide basis. I directed further written submissions to enlighten the Court on whether a court should grant a proprietary injunction against an innocent party over assets which are no longer in the innocent party’s possession or control. Despite the diligent research of the parties, no case is cited to support such a legal proposition.   

22.Mr Phang for the Plaintiff referred this Court to a number of cases, but none of the cases really assists in the analysis.

(1)  In 任俊國 v Chin Choi Ming (unreported, HCA 2017/2017, 6 November 2017), Chow J at §22 said:

“22. I would not rule out the possibility of some special or exceptional cases in which it would be justifiable for the court to grant a proprietary injunction or make an ancillary disclosure order even where the plaintiff is unable to point to an identifiable asset in the hands of the defendant which could form the subject matter of a proprietary claim. However, this is far from such a case….”

(2)  Chow J. was reserving the position for special and exceptional cases. On the facts of the present case, there is nothing special or exceptional. I can imagine that if assets had been paid to culpable defendants who then transferred out the assets and it was not clear as to what substitutes such culpable defendants obtained in return, and on a balance of probabilities, it is more likely than not that such culpable defendants would have obtained some traceable assets in return but refused to disclose the whereabouts of the same, then, under such circumstances, the Court would be inclined to grant a proprietary injunction against such culpable defendants. (see, for example, Essilor Manufacturing (Thailand) Co Ltd v Wong Kam Wai [2020] HKCFI 756)

(3)  Pacific Bulk Investment Ltd v Chu Kong [2020] HKCFI 2825 and Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd, HCA 3023 of 2016, unreported, 2 May 2017) do not relate to innocent third parties. Further, they were decided on the special facts of the cases. The legal issue was not fully analysed in those cases.

(4  )Mr Pang SC drew to the attention of this Court the case of China City Construction & Development Co (HK) Ltd v宁波佳合港湾股权投资合伙企业 HCA 2303 of 2018, unreported, 7 August 2020 at §§76-77, Deputy High Court Judge Dawes SC said:

“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 represent 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.” (Emphasis added.)

(5)  I agree that the same analysis is applicable, a fortiori, to the Plaintiff’s pleas in its Statement of Claim.

23.Indeed, in the case of Société Générale, Singapore Branch (supra) but at a different hearing on 10 July 2020, Recorder Manzoni SC said:

“53. In all the circumstances I find it very difficult to accept that traceable assets are likely to return in the way the plaintiff relies upon, and therefore that the plaintiff has a good arguable case based on a proprietary claim for any amount greater than the assets which have been identified in the 8^th and 9^th defendants’ bank accounts. In evidential terms the plaintiff has not been able to adduce reasonable evidence of the existence and location of those further specific assets over which it seeks a proprietary injunction.”

24.I am of the firm view that, save in special and exceptional circumstances, a plaintiff can only apply for proprietary injunction against the assets remaining in the defendant’s hands and a plaintiff cannot obtain a proprietary injunction when he or she does not even have a proprietary claim against a defendant.

25.Quite apart from the objections in principle, on the facts before this Court, there is no evidence that other than the sum US$814,731.07 which was remitted to the 7^th Defendant, prior to the other defendants’ notice of the injunctions herein, there is any plausible chance that some other sums would be returned to the 7^th Defendant.  This is particularly so in view of the Fund Flow Tracing Report dated 9 December 2020 which shows that substantial sums were transferred out and out to third parties who are not clients of the 7^th Defendant.

26.Thirdly, I agree and am indeed seriously concerned that the proprietary injunction against the 7^th Defendant for an amount which well exceeds the remaining balance of the Senior Note Amount has caused prejudice to the 7^th Defendant, an innocent party.  This is a classic case of overkill.  Mr Pang SC for the 7^th Defendant submitted that all of the 7^th Defendant’s bank accounts with ICBC and ANZ have been frozen (including accounts that are not in dispute and belong to the 7^th Defendant’s other clients).  This is caused by the wide-reaching ambit of the ex parte injunction order and the Continuation Order against the 7^th Defendant.  Indeed, at the hearing, Mr Phang for the Plaintiff insisted that all the other accounts of the 7^th Defendant have to be affected simply because of a possibility that in future some proceeds of the US$32,850,351.97 might miraculously find their way back to one or some of the accounts of the 7^th Defendant. 

27.Courts have time and again reminded parties and professionals that ex parte injunction, whether Mareva or proprietary, mandatory or prohibitory, is one of the nuclear weapons of our civil justice system and has to be deployed with care.

28.Fourthly, insofar the Plaintiff relies on its need to carry out a tracing exercise into the accounts of the 7^th Defendant is concerned, in The Maitri Trust v Hong Fei Sheng (HK) Trading Co., Limited, HCA 1984/2019, unreported, 30 October 2020, Deputy High Court Judge Dawes SC at §§23-24 said:

“23.   There is no dispute that P’s right to trace the proceeds of the Fraudulent Sums in the HSB and SCB Accounts is limited to the lowest intermediate balance between 2 October 2019 and the date on which those accounts were frozen: James Roscoe (Bolton) v Winder [1915] 1 Ch 62.

24.   It is also important to bear in mind that P does not allege that D2 was a party to the Fraudulent Scheme. As a result, P’s submission that it is “entitled to elect between the rule in Clayton’s Case [sic] and the Hallett rule (whichever is the most beneficial) in conducting the tracing exercise” is incorrect insofar as D2’s dealings with the Sum are concerned: see Snell’s Equity (34^th ed) §30-57.”

DISPOSITION

29.For all the reasons stated above, I am of the view that the proprietary injunction against the 7^th Defendant up to the amount of US$32,850,351.97 must be discharged. Accordingly, I make an order in terms of paragraph 1 of the Discharge Summons.

30.I shall also mention that on 8 January 2021, the Plaintiff applied by letter to seek a “notification injunction” against the 7^th Defendant so that the 7^th Defendant shall (a) immediately notify the Plaintiff’s solicitors in writing any amount(s) that may be received by it from the list of individuals or entities in a schedule and/or to the credit of the custodian account(s) of the 1^st Defendant, 2^nd Defendant or 3^rd Defendant maintained by the 7^th Defendant, and (b) not remove from Hong Kong or in any event dispose of, deal with or diminish the value of such amount(s) without first giving the Plaintiff seven clear days’ notice of the receipt of the same.

31.I do not think it is proper for this Court to deal with such an application by letter. If the Plaintiff considers it necessary, a proper summons should be taken out and the 7^th Defendant should be given an opportunity to be heard.

32.Insofar as costs is concerned, as it is wrong to freeze assets of the 7^th Defendant over and above the remaining balance of the Senior Note Amount, I make a cost order nisi that the Plaintiff is to pay the costs of and occasioned by the Discharge Summons forthwith on an indemnity basis, to be taxed if not agreed with a certificate for two counsel.  The costs order nisi will be made absolute within 14 days herein unless the parties take out an application to vary the same within the 14-days period.

33.Finally, it remains for me to thank Mr Phang and Mr Wong for the Plaintiff and Mr Pang SC and Mr Chu for the 7^th Defendant for their helpful assistance.

Mr Roger Phang and Mr Adrian TY Wong, instructed by Swartz, Binnersley & Associates, for the plaintiff

Mr Robert Pang SC and Mr Raymond Chu, instructed by H Y Leung & Co LLP, for the 7^th defendant