Chen Yue v. Li Shan and Another

HCA 524/2022

[2023] HKCFI 1263

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 524 OF 2022

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D E C I S I O N

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1.This is the application by the plaintiff Chen Yue (“P”) by a summons dated 14 March 2023 for an interlocutory injunction and disclosure order against the 1^st defendant Li Shan (“D1”) and the 2^nd defendant Fine Elite Group Ltd (“the Company”) (collectively “the Defendants”) for the preservation of the Company’s assets and the status quo. At the conclusion of the hearing, the Decision was reserved which I now give.

Background facts

2.P and D1 met in February 2021. By April 2021, they had formed an intimate relationship.

3.The Company was incorporated as an international company in Samoa on 29 October 2019. Prior to 22 April 2021, D1 was its sole shareholder, director and secretary.

4.On 22 April 2021, P was allotted 1 share in the Company and became a 50% shareholder, with D1 holding the other 50%.

5.The Company had an account with Bank Julius Baer Co Ltd (“the JB account”) to which P was added as an authorised signatory.

6.The Company invested in shares and funds. Altogether 8 such investments (“Investment 1” to Investment 8”) [1] were made with funds provided by P between  April and June 2021.

7.P and D1 have provided competing versions of the basis upon which P became a shareholder of the Company, a matter for resolution at trial.

8.P’s version of the agreement (“P’s version”)[2] comprises the following elements:

(1)  P and D1 would each become (a) a 50% shareholder and (b) a director of the Company;

(2)  they shall have co-management powers including in relation to investments which the Company may consider and make;

(3)  they shall make equal capital contributions to finance the investments which the Company would make; and be entitled to the returns on the investments in accordance with their contributions.

9.D1’s version[3] (“D1’s version”) is as follows:

(1)  while P and D1 each become a 50% shareholder, only D1 would remain its sole director of the Company. She would be solely responsible for its management, including making decisions for investments without P’s prior consent or approval or subsequent endorsement;

(2)  P would be the primary person to make capital contributions to fund and sustain the Company’s investment activities. D1 could but at no time under any obligation to contribute to the same;

(3)  the investments which the Company may consider and may make would not be investments generally open to the public, but ones which require special expertise and connections of D1 for the Company to have access to and would mainly be projects of funds in the healthcare and blockchain industries;

(4)  P and D1 shall be entitled to any profits on the investments on an equal basis in accordance with their shareholding;

(5)  by reason of P’s and D1’s personal relationship at the material time, the Company was intended to be operated as a quasi-partnership between 2 lovers and its affairs were to be conducted on a very informal basis throughout.

10.P in fact financed all 8 Investments[4] instead of only half of the total amount invested. His case is that D1 had cash flow problems and he lent the money to the Company. D1’s case is that she could, but was not obliged to, contribute capital.

11.Between 29 April and 15 June 2021, P paid a total (in round terms) of USD 16.4 million and USDT 3 million (being equivalent to USD 3 million) to or on behalf of the Company (collectively “the Payments”). While P’s case is that these were loans advanced to the Company, according to D1, the Payments were share capital or equity contributions.

12.The relationship between P and D1 came to an end in late June 2021.

13.The Company has not had an AGM (or EGM) since P became a shareholder. It has not issued reports or accounts despite complaints made by P who commenced these proceedings on 6 May 2022 for, inter alia, a mandatory injunction against the Defendants that each should take necessary steps to appoint P as one of (not more than) 2 directors of the Company, as against the Company, repayment of the Payments and interest, an account of the Payments and the Investments and a declaration that P is entitled to all the returns on the Investments.

Events precipitating the present summons

14.On 27 January 2023, D1 proposed that a general meeting of the Company be convened to consider inter alia “the financial reports of the Company, the latest status of the investments held by the Company and the way forward”.

15.In response, on 2 February 2023, P requested that various documents be provided for consideration, including the agenda, audited financial reports, profit and loss accounts and balance sheets and the auditors’ report for the period from 22 April 2021 to date and other documents relating to the Investments.

16.D1 replied on 14 February 2023. She considered the requests excessive and unreasonable but nevertheless provided a proposed agenda and financial reports (with supporting documents) of the Company (“the FE Reports”) for the period from April 2021 to December 2022, and proposed various dates for the meeting in February 2023.

17.When scrutinized, the FE Reports reveal that the Company had redeemed part of its USD 4 million interest in EBC (Investment 8) in the amount (in round terms) of USD 2.47 million (“the Redemption Amount”). However, no entry could be found in the Company’s balance sheets showing any corresponding deposit or increase in the value of the current assets in the Redemption Amount nor is the Redemption Amount reflected in any bank balances recorded.

18.The Redemption Amount was paid out in the form of cryptocurrency on 6 June 2022[5] to D1’s personal digital wallet (“the 9117 wallet”). According to D1, this was done because the Company did not have a digital wallet of its own to receive cryptocurrency.

19.Tony Lau Ka Kit (“Mr Lau”) the accountant who was engaged by the Company to prepare the FE Reports explained that the Reports were merely “for internal use”, similar in nature to management accounts.

20.Mr Lau considered that the part of the Company’s investment in EBC which was redeemed “no longer existed in the form of interest in Investment 8”. Accordingly, he characterized the redemption as an “impairment” to Investment 8, reducing its residual value.

21.Mr Laurence Li SC, leading counsel for Mr Chen, submitted that what was redeemed (the Redemption Amount) should exist in the form of a separate asset: it did not and could not simply “disappear” as an asset of the Company. Rather, the Redemption Amount should be recorded elsewhere as a current or non-current asset.

22.Further investigations P caused to be conducted to trace the Redemption Amount (which is cryptocurrency) via public means revealed a number of possible destinations to which it could have been transferred.

23.D1 accepts that the Redemption Amount was paid into the 9117 wallet[6] on 6 June 2022 and that insofar as the Redemption Amount originates from what she described as “[the Company]’s Subscription Amount” i.e. the USDT 3 million[7] (mentioned in §11 above), represents the fruits of the Company’s investment. However, D1 has refused to disclose the present whereabouts of the Redemption Amount which appears to have “vanished”. As already noted, she ceased to maintain the 9117 wallet in September 2022.

24.P considered the FE Reports “problematic[8]” and was alarmed by the disappearance of the Redemption Amount.

25.On 14 March 2023, P caused the Summons to be issued for the injunction considered below.

26.The Summons came before Au-Yeung J on 17 March 2023. Upon D1’s undertaking to P and to the court that the Defendants would not deal with or diminish the value of the Company’s interests in Investments 1 to 8 unless with the prior consent of P’s solicitors, the Summons was adjourned for substantive argument. The undertaking continues pending this Decision.

The injunction sought

27.P seeks an injunction against the Defendants (a) to require D1 to disclose what has become of the Redemption Amount (“the Disclosure Order”); (b) for repayment of the same to the Company or into court (“the Repayment Order”); and (c) to preserve the Company’s interests in the Investments and in the Company’s JB account by restraining the Defendants from dealing or disposing of any part thereof without P’s consent (“the Preservation Order”).

28.Mr Laurence Li SC and Mr Byron Chiu, counsel for the Plaintiff submitted that the unexplained ‘disappearance’ of the Redemption Amount outlined in §§17-23 above is a compelling case of misapplication (if not misappropriation) of the Redemption Amount.

29.Further, it became apparent from these proceedings that D1’s representation to P in mid-April 2021 that the Company “already had a valuable investment in the shares of Cutia worth USD 2,000,000” (a representation repeated in D1’s Defence at §9) is untrue: that investment is not recorded in the FE Reports.

30.In a related action (HCA 525/2022), D1’s case was that the Company “held and still holds” the Cutia Investment and that the same was held by the Company on behalf of Winfair Global Limited[9] (“Winfair”). In other words, Winfair rather than the Company owned that investment, contrary to what is pleaded in D1’s Defence §9.

31.Moreover, on 14 August 2022, when D1 sought P’s consent (via unsolicited WeChat messages) for the Company to dispose of the CGO shares (Investments 1 and 7), it transpired that D1 had already executed the sale and purchase on 28 July 2022 and completed the same on 3 August 2022.

32.Notwithstanding her WeChat messages, D1’s stance is that she was under no obligation to obtain P’s consent because he had indicated in July 2021 that he wanted to get back the sum paid for Investment 7. On that basis, D1’s WeChat messages defy any rational explanation.

33.P submitted that those matters reinforce the urgent need to discover the whereabouts of that Redemption Amount and for the same to be paid to the Company and/or into court. D1 has been shown to have a propensity to misrepresent the facts, provide misleading information and unilaterally deal with the Company’s investments.

34.It is relevant to add that Investment 6 (which is the largest investment (USD 8 million) made by the Company with P’s Payments) is shown in the FE Reports as having a closing balance of USD 4.6 million as at 31 December 2022. While Investment 6 is subject to a lock-up period of 2 years, that period expires on 16 June 2023. Thereafter, it may be withdrawn with 90 days’ prior written notice[10].

35.This raises concerns: P submitted that without an injunction to preserve the status quo, there is a real risk of D1 unilaterally misapplying/misappropriating the realised amount from Investment 6 as she appears to have done with the Redemption Amount.

36.In view of the matters mentioned in §§29-34 above, it was submitted that there is a clear need for the Preservation Order. It was further submitted that such a course involves the least injustice in that it simply seeks to maintain the status quo pending the resolution of these proceedings.

37.As regards the court’s jurisdiction to grant the injunction sought, Mr Li referred to 2 extracts from HKCP 2023. The first was to §29/1/58 where the observations of Lloyd LJ in SFC Finance Co Limited v Masri [1985] 2 All ER 747, 750 under the rubric “Need for injunction restraining dealings with assets” are recorded:

“it is important that the jurisdiction should be kept flexible, so that the court can continue to do what is “just and convenient” in any given case and that the discretion of the court should not be hedged about with too many rules”.

38.The next reference was to O 29, r 2(1) which provides that on the application of any party to a cause or matter, the Court may make an order for the detention, custody or preservation of any property which is the subject-matter of the cause or matter …”.

39.The commentary at §29/8/7, in pertinent part, states as follows[11]:

“detention, custody or preservation” –

…

The applicable principles for the grant of a preservation order are: (i) There is property which is bonafide 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 an 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 rival claims is not necessary. (v) 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 … Equally, the absence of a proprietary claim to the property by the person seeking preservation of the property does not prevent a preservation order being made …”.

The Defendants’ opposition

40.The Defendants (who are separately represented) opposed the Summons. Mr Douglas Lam SC with Mr Charlie Liu, appeared for D1 and Ms Rosa Lee appeared for the Company.

41.The Company adopted the submissions made by Mr Lam on the main objection to the relief sought based on the lack of jurisdiction and made a separate submission in the event of the court granting the injunction sought in §1 of the Summons, as to its terms.

42.It would therefore be convenient to consider first the submissions made on behalf of D1.

43.Mr Lam emphasised at the outset what this action is not: it is not a derivative action, nor an unfair prejudice petition, nor a winding up petition on just and equitable grounds.

44.Rather, Mr Lam submitted that P’s claim is for repayment of a debt, being sums he had lent to the Company. P’s primary relief is thus against the Company for repayment of the sums and not D1.

45.Mr Lam stressed that although P has disavowed the present application as being an application for a Mareva injunction, he is effectively seeking a Mareva injunction through the back door by invoking the broad jurisdiction/discretion of the court to grant injunctions. Mr Lam submitted that while the court has a wide jurisdiction, in exercising that jurisdiction the court adopts a principled approach.

46.He submitted that in the present case, as P is not asserting a proprietary claim against the assets of the Company, the only proper injunction P could apply for would be a Mareva injunction but in order to do that P will have to show a real risk of dissipation.

47.P also seeks extensive tracing orders in relation to the EBC Investment. D1 contended that P has no interest whatsoever as that investment belongs to the Company.

48.D1 submitted that P has no right to the money. At most he is a shareholder of the Company. If there has been a misappropriation of the Redemption Amount, it is the Company that has a claim. Short of commencing a derivative action or issuing an unfair prejudice petition, P has no personal entitlement to make any claim to the Redemption Amount because such a claim would be barred by the doctrine of reflective loss.

49.The court was referred to Landune International Limited v Cheung Chung Leung [2006] 1 HKLRD 39 at §§24, 31-33 (where it was held that one of the principles behind the rule against reflective loss is the prevention of double recovery) and to Wah Nam Group Limited v Roderick John Sutton & Another [2018] HKCA 687 at §17 (where it was held that the “reflective loss” principle is a principle of law which is based on the nature of the loss. The focus on the nature of the shareholder claimant’s loss as the benchmark of the “no reflective loss” principle is shown in cases where that principle has been applied even though the company has itself declined or failed to sue, or has been unable to sue whether for lack of merits or lack of financial resources caused by the wrongdoer)[12]. Therefore, if the Company were to recover the Redemption Amount, P would not be prejudiced.

50.Even if P fails to recover it because the Company is controlled by wrongdoers, the proper course is to initiate a derivative action which would be governed by the law of the place of the Company’s incorporation, namely, Samoan law. Whether or not leave of the Samoan court is required for the commencement of such an action in Hong Kong is a matter governed by Samoan law.

51.Since P has chosen not to commence a derivative action, his claim against the Company is a personal one. As it is not a Mareva application, P would have to overcome the difficulty of showing that damages would not be an adequate remedy where his claim is for the recovery of the debt.

52.§3 of the Summons seeks an order that D1 repay or procure the repayment of the Redemption Amount or its equivalent value or traceable proceeds to the JB account or into court. It was submitted that it is a claim purportedly made on behalf of the Company but it is nowhere to be found in the SOC or the prayer for final relief. The only claim which concerns D1 is paragraph (1) of the relief requiring her to appoint P as a director and possibly paragraph (4) relating to accounts.

53.Mr Lam submitted that for an injunction to be granted, with the exception of a Mareva injunction, there has to be a connection between the interlocutory relief sought and the final relief founded upon the causes of action pleaded in the SOC “save and except where it is say to preserve the status quo ... in the sense of preserving the assets ...”.

54.When the court remarked that that was precisely what Mr Li is seeking - to preserve the status quo - Mr Lam appeared to accept that it was the case but somehow went on to say that it is fundamentally wrong.

55.As I understand it, his reasoning is that the Mareva injunction only came into existence in the 1980s[13]. Prior to that it was said that the court had a fundamental difficulty in granting an order which did not reflect the cause of action or did not reflect the final relief sought and that Mareva injunctions fall into this special sui generis category.

56.His submission comes to this: unless a plaintiff has a proprietary claim in which case the court can grant orders restraining the trustee from dealing with the assets and ordering him to disclose where the assets are in order to preserve the trust assets, and with the exception of Mareva injunctions, the court will not exercise its discretion or its jurisdiction to grant the kind of relief now sought by P.

57.Mr Lam was at pains to highlight the fact that since the commencement of the action in May 2022, there has been no unilateral withdrawal of the monies from the JB account to which each of P and D1 is an authorised signatory.

58.As at 31 December 2022, the FE Reports record that the JB account had a balance of approximately USD 6.4 million[14] made up of the Refunded Sum from Bernard Fung and a sum of approximately USD 4.8 million being the proceeds from the sale of the CGO shares[15].

59.D1 exhibited the latest bank balance of the JB account dated 3 February 2023 which shows that the USD 6.4 million remains intact. It was submitted that this counters any suggestion that D1 would misapply/misappropriate cash that is readily available.

60.In summary, D1’s raises a “fundamental jurisdictional objection” to the injunction sought. D1’s case is that P’s loss is nothing more than reflective loss but P has eschewed the option of commencing a derivative action. Moreover, no injunction can be granted unless there is a connection between the terms of the injunctive relief and the terms of the final relief, the only exception being a Mareva injunction.

Whether the court has jurisdiction to grant the injunction sought

61.The thrust of D1’s submissions is that notwithstanding the broad jurisdiction and discretion[16] the court has to grant injunctions, it adopts a ‘principled approach’ when exercising that jurisdiction. It would appear to be Mr Lam’s submission that, in practice, the injunctions granted are ‘limited’ to proprietary injunctions and Mareva injunctions, brushing aside the remarks made by Jessel MR[17] as they were made well before the development of Mareva relief. He maintained that there are “very clear demarcations as to the sort of relief the court would grant”.

62.That submission overlooks the observations of Lloyd LJ in the SFC Finance case (a post-Mareva case) referred to in §37 above. I do not accept that the court’s wide discretion is constrained in the manner put forward.

63.The lengthy arguments dwelling on reflective loss and derivative actions tend to obscure what is really at issue, namely, which of the competing versions of the Agreement is correct, the main protagonists to the dispute being P and D1. This case is not about P and the Company.

Whether the injunction should be granted

64.It is clear from the commentary at §29/8/7[18] that for a preservation order to be made, what has to be shown is that there is property which is bona fide the subject matter of the cause or matter.

65.As noted by Mr Li, the connection is not ‘relief’ but ‘the subject matter of the cause or matter’. The cause or matter in issue in the present case is effective control and ownership of half the Company and its assets. It is also clear from the commentary that P does not need to claim the property in order to be entitled to a preservation order.

66.Mr Li also referred to the following extract from the commentary at §29/1/4:

“Importantly, even if the application for an injunction does not mirror any pre-existing cause of action pleaded, the interlocutory injunctive relief can be granted as ancillary and incidental to the pre-existing causes of action; see Komal Patel v Chris Au [2015] 6 HKC 389[19].”

67.The pre-existing cause of action is not simply a debt claim as D1 characterised. Rather, P claims appointment as a director which, in substance, means co-control and co-management of company assets with D1 and also a rendering of accounts by the Defendants.

68.I reject D1’s characterisation of the Preservation Order as a freezing injunction or that it is a Mareva injunction in all but name.

69.The Company has no assets other than the Investments and the amounts received and/or refunded therefrom and paid into the JB account. The Preservation Order is designed to preserve those assets pending trial when it will be determined whether P’s version or D1’s version prevails which, in turn, will determine the parties’ rights and obligations.

70.The Preservation Order does not affect or extend to D1’s own assets. She is at liberty to deal with those assets as she pleases.

71.As earlier noted[20], much was made of the fact that the JB account has remained intact since the commencement of this action in May 2022. In so far as that fact is deployed to counter D1’s apparent propensity to misapply/misappropriate available funds, it is to be rejected.

72.It transpires[21] while both P and D1 are signatories, the bank officer responsible for the JB account has required the express verbal and written consent from both P and D1 before withdrawals could be executed. A preservation order would formalise that practice pending trial.

73.I consider this an appropriate case for the court to grant the injunction sought.

The terms of the Preservation Order

74.Ms Rosa Lee, counsel for the Company, submitted that the Preservation Order should contain a provision permitting the Company to use the funds and assets to pay for the legal costs in these proceedings and that it would be wrong in principle to deny the Company the ability to do so.

75.But the Company has no separate defence: its defence is entirely dependent on D1’s defence. In those circumstances, it is difficult to see any need for separate representation given the real issue in these proceedings considered above.

76.It is a general principle of company law that the company’s money should not be expended on disputes between shareholders: per Hoffman J in Re Crossmore Electrical & Civil Engineering Limited [1989] BCLC 137 at 138. If the dispute is in substance a dispute between shareholders, company funds should not be used for the defence: see the English Court of Appeal’s judgment Philip Johnson Smith v James Carl Butler [2011] EWHC 2301 at §§119-121.

Order

77.Accordingly, I make an order in terms of the Summons.

Mr Laurence Li SC and Mr Byron Chiu, instructed by Zhong Lun Law Firm LLP, for the Plaintiff

Mr Douglas Lam SC and Mr Charlie Liu, instructed by K. M. Tang & Co.[22], for the 1^st Defendant

Ms Rosa Lee, instructed by Chen & Lee Law Office, for the 2^nd Defendant