Michael Chen Kang Huang and Anothr v. Peter Lit Ma

HCA 218/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 218 OF 2005

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BETWEEN

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Before: Deputy High Court Judge Carlson in Chambers

Date of Hearing: 11 July 2006

Date of Judgment (Handed Down): 20 July 2006

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J U D G M E N T

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Introduction

1.I have two matters before me.  Firstly, an appeal by the Plaintiffs from an order of Master Kwong dated 14 March 2006 by which he ordered the Plaintiffs to provide security for costs in the, relatively modest, sum of $150,000 which is intended to cover the period up to discovery.  I also have a summons by the Defendant dated 28 April this year, (this summons having been taken out a month after the Plaintiffs' appeal against the Master's order on security for costs) to discharge a Mareva  Injunction made by Sakhrani J on 2 February 2005 or, alternatively, to direct that the Plaintiffs' should fortify their undertaking in damages.

The subject matter of the action

2.The basis of the application for security is the 1^st Plaintiff's admitted residence overseas in California and the 2^nd Plaintiff's registration as a BVI company.  The 2^nd Plaintiff is wholly-owned by the 1^st Plaintiff, who is its only director.  The Defendant is a Hong Kong resident.

3.This case is concerned with the practice of arranging the issuing of standby letters of credit (SBLCs') on commission.  In about February 2004, the 1^st Plaintiff was employed by Manufacturers Bank at Los Angeles.  He was approached by a Mr Anthony Luu to see if he might arrange a line of credit for him to be secured by a SBLC which would be arranged for him by the Defendant.  The 1^st Plaintiff's employers rejected that application.  This introduction to the Defendant by Mr Luu resulted in the latter telephoning the 1^st Plaintiff on 20 July 2004 who told him that he and the Defendant had been able to make a lot of money out of investing funds into the issuing of SBLC's and that an opportunity had become available to invest in a SBLC to finance the building of a pharmaceutical laboratory in Guangzhou.  He mentioned that a SBLC in the sum of US$2.5 million would be issued by Deutche Bank in New York to secure the loan from HSBC Guangzhou to the pharmaceutical company.  Mr Luu said that the Defendant was to arrange for the issue of theUS$2.5 million SBLC and would receive an issuance fee, or commission, for making this arrangement, being 23.5% of the value of the SBLC amounting to US$587,000.  He mentioned that he and the Defendant had been doing this very profitably for some 20 years.

4.It is the Plaintiffs' case that, by deceit, the Defendant was thereafter to cause the 1^st Plaintiff and the 2^nd Plaintiff to pay him a total of US$970,000 in order to invest in the issuing of a SBLC.  Whilst the details of what took place may appear somewhat opaque, given the various elements of the scheme, the essential facts are not in dispute and can be related both briefly and simply. 

5.On or about 23 July 2004, no doubt greatly encouraged by the prospect of a 23.5% return, the 1^st Plaintiff paid the sum of US$164,500 into Mr Luu's bank account with HSBC in Hong Kong in order to invest into the issuing of a SBLC to finance the Guangzhou pharmaceutical laboratory.  It is not disputed that this amount was then paid on by Mr Luu to the Defendant.

6.On 29 July 2004, Mr Luu introduced the Defendant to the 1^st Plaintiff at a restaurant at Tung Chung when it is said that the Defendant made a number of representations to him which I can take from paragraph 7 of the Statement of Claim:

“(1) That he had been arranging the issue of standby letters of credit for commissions for many years.

(2) That he worked at a company called North America Consultants & Management Group (“North America Consultants”).

(3) That North America Consultants had lines of credit and close relationships with many banks.

(4) That those banks could issue standby letters of credit for North America Consultants on payment of fees of only 23.5 percent of the value of the standby letter of credit.

(5) That North America Consultants received all its business from referrals from its customers.”

7.On 15 August 2004, Mr Luu informed the 1^st Plaintiff that HSBC had not been prepared to accept the wording endorsed on the SBLC and that it was hoped that the Bank of China might step in and takeover.  Nevertheless, that project appears to have fallen away because on 18 August 2004 both Mr Luu and the Defendant had a conference call with the 1^st Plaintiff.  They told him that another project, involving the building of a major shopping centre in Shanghai, had now come up and that this required substantial funding by means of SBLC's which offered far better prospects for profit than the pharmaceutical laboratory.  The 1^st Plaintiff was asked to consent to his US$164,500 being transferred to the funding for this project.

8.The 1^st Plaintiff was told by the Defendant and by Mr Luu that the Shanghai real estate developer who was to build the shopping centre had obtained a US$100 million line of credit from Shanghai Pudong Development Bank (“Pudong Bank”) on condition that this credit line was fully secure by SBLC and a charge over real estate.  He was also told that Pudong Bank had agreed to accept collateral SBLC's issued by a bank with which the Defendant had strong connections.  Both he and Mr Luu would be travelling to Shanghai to negotiate with the developer and obtain his agreement that the 1^st Plaintiff's company, the 2^nd Plaintiff, would issue the SBLC for the highest amount that it could provide in return for payment of a large portion of the loan as commission, presumably something approximating to the 23.5% spoken of previously.

9.Subsequently, on 21 August 2004 Mr Luu informed the 1^st Plaintiff that the property developer, a company called Zhengda, of which a Mr Zhu was chairman, required a SBLC of US$30 million to start with and that it would pay US$7.050 million as an issuing fee for the SBLC.  Mr Luu said that Zhengda required three SBLC's each to the value of US$10 million.  Each SBLC would be issued by Bank Winter in Austria after this bank had received an issuance fee of 23.5% of the value of the credit.  Zhengda had agreed to instruct its Hong Kong affiliate Cecil Enterprises Corporation to wire the ‘agreed-upon' funds to the 2^nd Plaintiff once Pudong Bank extended its line of credit to Zhengda after receiving the SBLC from Bank Winter.

10.The next day, the 22 August 2004, Mr Luu told the 1^st Plaintiff by telephone that the Defendant had told him that the applicant for the SBLC's to be issued by Bank Winter would be a Cyprus company, CPTO Limited, which was associated with North American Consultants and Development Company (the Defendant's company), and which had lines of credit with many of the banks with whom the Defendant dealt, thereby enabling it to issue SBLC's by paying an issuance fee of 23.5% of the face value of the credit.

11.Mr Luu said that in order to purchase the SBLC of US$10 million from Bank Winter, an issuance fee of US$2.350 million would need to be raised and paid to this bank.  Mr Luu told the 1^st Plaintiff that US$822,000 was already available, consisting of US$164,500 from the 1^st Plaintiff (already wired to Mr Luu's personal account on 23 July 2004) and US$657,500 of Mr Luu's own money.  He told the 1^st Plaintiff that these two amounts had already been paid to the Defendant and that a further US$1.528 million was still required.

12.The 1^st Plaintiff then set about raising money from friends and relatives in order to invest in the SBLC.  This was done by him through four investment agreements between 21 and 31 August 2004.  The individual agreements were made between the 2^nd Plaintiff and the four individuals totalling US$670,000.

13.By an e-mail of 23 August 2004, Mr Luu informed the 1^st Plaintiff that the monies raised by him were needed by the 1^st and 2^nd September and he told him that he should wire the amounts to the Defendant's personal account and that the Defendant would pass on these amounts to the issuing bank from his own account.

14.On 26 August, the 1^st Plaintiff asked Mr Luu to get the Defendant to provide a bank letter proving that Zhengda had paid the Defendant the issuance fee of US$7.050 million in respect of the SBLC's for US$30 million, in order to allay concerns by the 2^nd Defendant's largest investor.  This was responded to on the next day by the Defendant who faxed what purported to be a print-out from a Hang Seng Bank internet site showing that he had US$6,002,239.13 in his account numbered             388-567-315-882.

15.On 27 August, during a conference telephone call which included Mr Luu, the Defendant told the 1^st Plaintiff that the funds would need to be paid by 2 September.  The bank had now changed from Bank Winter to North-West Private Bank Inc (a Nauru Bank).  On 29 August, the 1^st Plaintiff had agreed to increase his own investment from US$164,500 to US$300,000 and he informed Mr Luu that the most that he and his investors could now raise was US$805,500.  On the next day, Mr Luu told him that the Defendant had agreed to put in US$252,500 and that the Defendant's investment together with his of US$657,000 and that raised by the 1^st Plaintiff totalled US$1.88 million which Mr Luu said was sufficient to issue a SBLC of US$8 million.

16.Pursuant to a request by the Defendant for the amount to be wired to him, the1st Plaintiff executed a wire transfer of US$805,500 from the 2^nd Plaintiff's account with HSBC to the Defendant's Hang Seng Account 388-567-315-882.  This comprised US$670,000 put in by the 1^st Plaintiff's investors and US$135,500 put in by the 1^st Plaintiff himself, in addition to the sum of US$164,500 that he had previously paid.

17.On 10 September, the 1^st Plaintiff and the Defendant met at a hotel in Kowloon where the Defendant told him that the SBLC for US$8 million had been issued by North-West Private Bank.

18.On 20 October, after a degree of toing and froing the Defendant informed Mr Luu and the 1^st Plaintiff that the SBLC provided by North-West Private bank had been rejected by Pudong Bank.  As a result a replacement bank had to be found by the Defendant.  On 17 October, the Defendant put forward another bank being First National of America Banc.  In the meantime, Zhengda had found a bank in India to back its development, but this bank would only accept a SBLC from Deutche Bank and not from North-West Private Bank.  By 26 November 2004, an impasse had been reached so that Zhengda had to consider its position and try to find alternative funding sources.  During this period further meetings would need to be held to decide whether the US$970,000 would be refunded to the 2^nd Plaintiff's bank account, this being the US$805,500 and the US$164,500.

19.Subsequent investigations have brought to light a number of crucial facts which are beyond dispute and which are relied upon as misrepresentations made by the Defendant which now justify the return of the US$970,000 to the Plaintiffs.  They are these:

(1) North-West Private Bank did not exist in 2004, its banking licence in Nauru having been revoked by the Government there.

(ii) CPTO Limited had been deleted from the Cyprus Reigstry of Companies on 29 August 2003.

(iii) At no time had a person called Mr Zhu, who it had been represented was president of Zhengda, worked for Zhengda.

(iv) First National of America Banc did not and does not exist.

(v) The Defendant's Hang Seng Bank Account 388-567-315-882 did not have US$6,002,239.13, in fact it only had US$239.13.

(vi)          With the result that the Defendant had not received a deposit from Zhengda in respect of the issuing fee for the SBLC of US$30 million.

20.It is the Plaintiffs case that these false representations were made to the 1^st Plaintiff to induce him to pay money into a SBLC which was either a scam in the sense of being an out and out fraud or, at best, on a false basis in the hope that all might turn out well in the end by using other people's money, being the 1^st Plaintiff and his investors, by persuading them to invest on the basis of untrue representations.  The action is one for repayment of the US$970,000 on bases that range from fraudulent misrepresentation and deceit, down to a more begnin plea of a return of money had and received for consideration that has totally failed.  There is no dispute that these amounts have all gone into the Defendant's bank account with Hang Seng Bank.

21.The nature of the defence is that the Defendant himself was unaware of these misrepresentations and that he is really in the same position as the Plaintiffs, being one party upstream from the Plaintiffs in these arrangements.  He is liable to pay these amounts to the issuing bank for the SBLC and that the Plaintiffs, in suing him, have sued the wrong party.

The status of the claim in relation to an application for security for costs

22.Given the circumstances, the Plaintiffs applied for and obtained a Mareva Injunction from Sakhrani J, the matter having been considered inter partes on a number of occasions.  As a result the Plaintiffs have been able to secure a considerable proportion of the total sum of US$970,000 in the Defendant's Hang Seng Bank account.  This order was finalised on 2 February 2005.

23.The way the application for security had been put on behalf of the Defendant before the Master and now before me is that all of these very serious allegations, even if true, cannot and should not be laid at the Defendant's door.  He is an innocent investor just like the Plaintiffs and their team of investors.  At this stage, on paper, it simply cannot be demonstrated that the Defendant nor Mr Luu are parties to any of the fraudulent activities that the Plaintiffs have been able to uncover.  Once it is shown that the Plaintiffs are overseas entities, that is to say the 1^st  Plaintiff, a resident of California, and his company, a BVI company then the usual order would be and should be to require security.

24.Quite rightly, attention is drawn to the judgment of Browne-Wilkinson VC (as he then was) in Porzelack KG v Porzelack (UK) Ltd (1987) 1 ALL ER 1074, where he made the following observations at 1077 c-f:

“The matters urged before me have spread over a fairly wide field. First there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in The Supreme Court Practice 1985 vol I, para 23/I-3/2, which says: ‘… A major matter for consideration is the likelihood of the plaintiff succeeding …'  This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action.  I do not think that is a right course to adopt on an application for security for costs.  The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence.  A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time.

         Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance.  Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed.  But for myself I deplore the attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure.”

25.Mr Wright, for the Plaintiffs, has addressed a very detailed submission the purpose of which is to show that the merits overwhelmingly favour the Plaintiffs' case that the Defendant has been a party to what is no more or less than a ‘scam' to separate the 1^st Plaintiff and his investors from their money or, at worst, now that these facts have emerged and that the Defendant has admittedly had the money, that he can have no possible justification for keeping it and that, in such circumstances, the Plaintiffs have demonstrated even at this paper stage that there is a “high degree of probability of success …” in their action.  This being the case Mr Wright submits that I am entitled to and should have regard to the merits of the Plaintiffs' case in the exercise of my discretion as to whether to order security.

26.Mr Martin Wong, in a succinct and attractive submission, has said that it is far too premature, on the basis of this material, to come to any such view of the merits, either for or against either party.  The merits can only be determined following a detailed examination as a result of a conventional trial.  This being so I am still left with the general position that at overseas Plaintiff, other things being equal, should be ordered to provide security.

27.For my part I am persuaded by Mr Wright's very helpful analysis of the evidence that at the very least on the basis of an action for money had and received that it is highly likely that the Plaintiffs will succeed.  The Plaintiffs case is very well documented and it demonstrates ‘dodgy dealing' of the lowest possible order (if I may be permitted to express it is this way) in which the Defendant and Mr Luu are very closely involved.  The Defendant will have much to explain at any trial of this action in showing that he is not in the know so far as the purported use of the struck-off banks and a de-registered Cypriot company are concerned.  And even if he can provide a clean bill of health for himself, he find himself in an almost unanswerable position when it comes to resisting the action on the basis of a claim for money had and received.

28.I have decided therefore that on the basis of the very impressive strength of the case against him that the Plaintiffs should not be required to provide security and it is on this basis that this appeal should be allowed and the Master's order be set aside.

29.For the sake of completeness and in the event of an appeal, if it were to be held that I was in error to have formed such an optimistic view of the strength of the Plaintiffs case, I ought to say that I do not believe that the amount of the security ordered would stifle the Plaintiff's claim.  The amount is very modest, the 1^st Plaintiff should be able to raise such a sum.  I appreciate that this amount is only up to discovery and that the Defendant would be able to come again for an even more substantial amount to take the matter up to the end of the trial.  In such circumstances, the modesty of the 1^st Plaintiff's financial position would have to be looked at further and his plea that such additional security would stifle his claim would need to be given much more serious consideration than at present where the amount ordered is modest.  But all of this is entirely academic where I have found against the Defendant based on the overwhelming strength of the case against him, which subject to an appeal, would put an end to this application unless the Defendant were to discover other evidence which served to undermine the present readily apparent strength of the Plaintiffs case.

The Defendant's application to discharge the Mareva Injunction and/or to require the Plaintiffs to fortify their undertaking

30.The timing of this summons is significant.  It was taken out a month after the Plaintiffs appeal against the Master's order for security and over a year after the injunction had been made in February 2005.  O. 29 r. 1 at 29/1/25 page 518 of the current practice says this about fortification: I will set out the passage in full:

“Fortifying undertaking — In a proper case, the court may impose a condition to the effect that the plaintiff's undertaking should be fortified by his giving security by the bond of an insurance company or by payment into court or by some other means, for example, by payment to the applicant's solicitor or to the solicitors for each party jointly to be held pending further order (Baxter v Claydon [1952] W.N. 376 and Practice Direction (Mareva Injunctions and Anton Piller Orders) [1994] 1 W.L.R. 1233).  In these circumstances, unless the plaintiff is willing and able to provide the security the injunction does not go.

A defendant should apply for the security at the time when the injunction is granted and the undertaking is given.  The court has no power subsequently to impose such an additional term on the grant of an injunction (Commodity Ocean Transport Corp. v Basford Unicorn Industries Ltd, The ‘Mito' [1987] 2 Lloyd's Rep. 197).  It would seem, however, that since the court could later discharge an injunction in appropriate circumstances, it might permit the continuance of the injunction, in an appropriate case, on the giving of security.

Before an application to fortify an undertaking can succeed a likelihood of a significant loss arising as a result of the injunction and a sound basis for belief that the undertaking will be insufficient must be shown (Bhimji v Chatwani; Chatwani v Bhimji (No. 2)[1992] 1 W.L.R. 1158; [1992] B.C.L.C. 387).”

31.The application is very much a late one.  Fortification was not asked for at the time and this is a matter to which I must return presently.  As for the discharge of the injunction, I can discover no change in circumstances that would justify such a course.  The Defendant could have appealed the making of the injunction in February 2005 but no such appeal was brought.  I am told that on the inter partes hearings the real issue that was canvassed concerned the withdrawal of living expenses and legal calls for the Defendant.  I am satisfied that, in the absence of any change in circumstances, the application to discharge the injunction must fail.

32.As to fortification very much the same considerations would apply where no fortification was asked for at the time although, it is right to say that the 1^st Plaintiff has now put in evidence to show that he cannot afford to raise the $150,000 security for costs that was ordered.  Nevertheless, the answer to all of this is my view of the strength of the Plaintiffs case on liability which therefore makes it most unlikely that the Plaintiff will ever be put to it to pay out damages to the Defendant on their undertakings.

33.Accordingly, both limbs of this summons must stand dismissed.

Costs

34.On the application for security I make an order nisi that the Plaintiffs will have their costs here and below in any event, and on the summons concerning the injunction the Plaintiffs should also have their costs in any event.  This order will also be an order nisi having regard to the fact that I have not heard argument from the parties on costs.

Colin Wright, instructed by Messrs Kennedys, for the 1^st and 2^nd Plaintiffs

Martin W H Wong, instructed by Messrs Paul W Tse, for the Defendant