Case Document

100%Judiciary

HCA 2895/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2895 OF 2001

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BETWEEN
	CATHAY PACIFIC AIRWAYS LIMITED	Plaintiff
	and
	LUK SHU KEUNG	1st Defendant
	CHAN CHI KEUNG	2nd Defendant
	CHAN SAU FONG	3rd Defendant
	FUNG KIT CHING	4th Defendant
	CHAN SAU YU	5th Defendant
	TOP REGENT INVETMENTS LIMITED	6th Defendant
	MACWORLD INVESTMENTS LIMITED	7th Defendant
	MACWORLD MOTORS	8th Defendant
	DIAWIN DEVELOPMENT LIMITED trading as MACWORLD MOTORS	9th Defendant
	CHINA-HK INDUSTRIAL LIMITED	10th Defendant

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Before: Deputy High Court Judge Carlson in Chambers

Date of Hearing: 16 April 2010

Date of Ruling: 16 April 2010

Date of Reasons for Ruling (Handed Down): 20 April 2010

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REASONS FOR RULING

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Introduction

1.This is an application by the 1st, 3rd and 5th to 10th Defendants to have funds currently held by a Mareva injunction, originally made on 26 June 2001 and subsequently varied in November 2001 and August 2002, released to them so that they may settle their legal bills and pay for anticipated costs up to and including the preparation of witness statements. Having heard the argument on 16 April, I directed that $678,000 should be released for this purpose within 14 days. These are my reasons for having done so.

The Application

2.The summons, dated 24 March 2010 [Bundle 1/205-207] seeks the release of $1.25 million. This is based on outstanding bills of $848,584.02 and for a further amount of $350,000 for fees incurred since the last bill was rendered to the Defendants on 31 October 2009.

History

3.By a ruling on 3 November 2006, I let the Defendants have $500,000 from the proceeds of sale of a property at Fairview Park which were not the subject of a proprietary claim by the Plaintiff. By a further ruling on 27 August 2008, I released a further amount of $900,000 from the same funds leaving over a balance of $378,000 from there.

4.Under the order that I made on 16 April, this balance will be exhausted and a further $300,000 will have to come from funds to which the Plaintiff lays a proprietary claim. It is said on its behalf that this is money which belongs to it and that the Defendants should not be allowed to use its money to fund their defence unless they are able to demonstrate that they have brought themselves within the two-stage test set out in The Ostrich Farming Corporation Ltd v Ketchell and Walker, unreported 10 December 1997. The process was described by Roch LJ, at pages 9 and 10, in this way:

“When, as in this case, a plaintiff makes a proprietary claim to funds in the possession of the defendant and has obtained from the court a Mareva injunction freezing assets in the hands of a defendant, an application by that defendant for the release of monies from the frozen funds to be used to finance his defence to the plaintiff’s claim involves a two-stage process: see Fitzgerald and others v Williams and others [1996] 2 All ER 171 at 178E, the judgment of the then Master of the Rolls, Sir Thomas Bingham.

The first stage is in effect a hurdle that the defendant must clear before the court’s discretionary power to release monies from the frozen funds for the purpose of financing the defendant’s defence arises. That hurdle is to establish on proper evidence that there are no funds or assets available to the defendant which can be used by him to pay his legal expenses other than the assets in respect of which the plaintiff brings his proprietary claim.

The reason for the first hurdle is obvious. The defendant should not be permitted to diminish the funds which the plaintiff claims are his and in respect of which the defendant is (if the plaintiff is correct) a trustee for the plaintiff. A defendant cannot clear this hurdle unless he provides evidence on affidavit giving a full and frank account of his finances to the court.

Once that hurdle is cleared, the court can make an order allowing the defendant to use part of the funds (the equitable ownership of which is claimed by the plaintiff) for the defendant’s legal expenses. That power in the court is a discretionary power. The court in deciding whether to exercise that power, must weigh the potential injustice to the plaintiff of permitting the funds which may turn out to be the plaintiff’s property to be diminished so that the defendant can be legally represented, against the possible injustice to the defendant of depriving him of the opportunity of having the assistance of professional lawyers in advancing what may, at the end of the day, turn out to be a successful defence.”

5.In this regard and in respect of the funds against which there is no proprietary claim, I have already considered the position at law in the course of my ruling in November 2006. Therefore, I do not propose to say more about this here.

The Objections

6.Mr Tollan, on behalf of the Plaintiff, points to the fact that in respect of this claim which is for $12.7 million, the net value of the security represented by monies already in court and property frozen by the injunction amounts to $9.7 million. If the Plaintiff were to succeed, there will be a $3 million shortfall on the judgment, quite apart from the added shortfall on the Plaintiff’s costs. This consideration alone must weigh very heavily in the exercise of my discretion. This having been said, Mr Tollan does recognise that there has been an increase in property prices since these properties were last valued, but even so looking at it from the Plaintiff’s point of view it is not likely to be fully covered by the injunction.

7.I have carefully read the Defendant’s affirmations in support of this application. A particular feature is that none of them has had any meaningful employment since the start to the action. The 1st Defendant says that the stigma of his prosecution for these matters, of which he was acquitted by the District Court Judge, has resulted in him not finding any employment. Subject to a matter raised by Mr Tollan about the 1st Defendant’s non-disclosure of his employment as Deputy Project Co-ordinator in a government sponsored project from 2004 to 2007 and any salary earned by him in that position, I would have thought that the cost of this litigation as reflected in the Defendants’ solicitors’ bills would almost certainly overwhelm their earnings and so in the greater scheme of things contributions from earnings would not be particularly significant. It has not been suggested by Mr Tollan that any of these Defendants has a large unfulfilled earning capacity which ought to affect the outcome of these applications to any great extent. Even without this injunction, they would have had to fund the litigation through capital either by selling property to settle legal bills or obtaining mortgages to raise the necessary funds. Subject to what I am going to say in the next paragraph, I find that the Defendants have all overcome the first hurdle of this two-stage process.

8.Nevertheless, Mr Tollan has raised very proper concerns about the 1st Defendant’s non-disclosure as Deputy Project Co-ordinator of the Government funded project for the Kowloon Fish Meal Factory Limited for the three years from 2004 to 2007.

9.By his very late affirmation, on the eve of the hearing, the 1st Defendant has said that he took up the appointment because he felt passionately about the work that was being done through this project and that he was not paid for it which is why he forgot to disclose it.

10.Mr Tollan has been able to find Government Guidelines for the funding of such projects. In these guidelines there is specific provision for the payment of the Project Director and for his Deputy. Miss Gershon, who has appeared for the Defendants, has not sought an adjournment to enable more evidence to be filed by the 1st Defendant to comment on the guidelines and why he was not paid despite specific provision being available for him to be paid out of the Government funding.

Conclusions

11.This latter aspect has concerned me because in exercising what is a discretionary jurisdiction, the court would expect, as the authorities make abundantly clear, an applicant to make full and frank disclosure.

12.In the event, I have decided, if not to overlook the omission, to defer any final conclusions for any subsequent applications for release of funds or, if there are none, to the trial itself as a matter going to the credit of the 1st Defendant.

13.In releasing the amount that I have I was satisfied that at present none of these Defendants has the ability to raise money to pay for their substantial legal bills. I have read the bills and they are, subject to taxation, properly drawn and referable to the defence of this action.

14.I have decided to release all of what is left from Fairview Park and a relatively modest amount from the proprietary assets, if I can so describe them. I expect the remaining properties will have gone up in value so as to defray most, if not all, of what I have directed to be paid out. Without receipt of these amounts I am satisfied that the Defendants would run the very real risk of not being represented in future in what is reasonably complex litigation. At present that is as far as I am prepared to go in balancing the parties competing interests on an application such as this.

The Future

15.I am at this stage in no position to ascribe blame for the worrying delay in bring this action to trial which has resulted in substantial costs for both sides. I suspect that the stage is about to be reached where the Plaintiff, even if it succeeds in full in this action, will barely break even. It runs the risk of getting less than the sum of what it says it has lost as a result of the Defendant’s alleged fraud because what is currently secured by the injunction cannot fully compensate it and there must be the near certainty that it will not be able to look to the Defendants to reimburse it for its costs in prosecuting the action against them. From the Defendants’ point of view, and I don’t wish to pre-judge any future applications to draw down further amounts to pay for legal costs, the stage has now been reached when the only assets held by the injunction are those over which a proprietary claim is being asserted. Unquestionably, the burden of persuasion for the release of more funds for legal costs, where on my calculation over $2 million has already been released, will become very much greater than it has been.

Costs

16.The costs of this application will be costs in the cause. The order will be an order nisi. The Plaintiff was fully entitled to object to the application in the way that it has and the Defendants have had to come to court and obtain a substantial amount although well short of what was asked for.