Chinacast Education Corporation and Others v. Chan Tze Ngon and Others

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

--------------------

Before: Deputy High Court Judge Sakhrani in Chambers

Date of Hearing: 25 October 2012

Date of Judgment : 25 October 2012

Date of Handing Down Reasons for Judgment : 1 November 2012

-------------------------------------------

REASONS FOR JUDGMENT

-------------------------------------------

1.By a summons dated 28 August 2012 the plaintiffs applied for an order that the 1^st defendant be summoned for cross‑examination on the content of his affirmation dated 18 July 2012 filed pursuant to the order of Tong J dated 19 June 2012.

2.Although by its summons the plaintiffs also applied for an order that the 2^nd defendant be summoned for cross‑examination on the content of his affidavit dated 20 July 2012, the application against the 2^nd defendant was not pursued.

3.On 25 October 2012, after hearing arguments, I made an order that the 1^st defendant be summoned for cross‑examination on the content of his affirmation dated 18 July 2012 filed herein (“the 1^st defendant’s affirmation”) pursuant to the order of Tong J dated 19 June 2012.  I directed that the cross‑examination be conducted before a master with an expedited hearing date estimated to last for half a day.

4.I also ordered that the costs of the application be to the plaintiffs, such costs to be taxed if not agreed.

5.I indicated at the time that reasons in writing would be given.  This I now do.

6.On 19 June 2012 on an ex parte application made by the plaintiffs Tong J granted a Mareva injunction freezing the assets of the 1^st to 4^th defendants in Hong Kong up to the value as set out in the order of Tong J.

7.By the said order of Tong J each of the defendants was also ordered to disclose to the plaintiffs all his assets in Hong Kong of an individual value of HK$250,000 or more giving the value, location and details of all such assets.  The order also provided that the disclosure was to be confirmed in an affidavit to be served on the plaintiffs’ solicitors.

8.On 19 June 2012 the 1^st defendant’s affirmation was filed pursuant to the order of Tong J.

9.The 1^st plaintiff is a company incorporated in Delaware, United States of America.  It is the ultimate holding company of companies in the CEC Group.

10.The 1^st plaintiff was until May 2012 a listed company on the NASDAQ Stock Market in the United States of America.  It was delisted in May 2012.  The plaintiffs’ case is that the 1^st plaintiff lost its listing status as a result of the 1^st to 4^th defendants’ wrongdoings as pleaded in the statement of claim.

11.The CEC Group has been providing post‑secondary and e‑learning services in the Mainland through wholly foreign owned enterprises (“WFOEs”).  The educational services are provided in two ways namely, through a traditional university group and by e‑learning services.

12.The other plaintiffs are members of the CEC Group of which the 1^st plaintiff is the ultimate parent company.  The 2^nd plaintiff is a BVI company and was the employer of the 1^st to 4^th defendants pursuant to service contracts.  The 3^rd and 4^th plaintiffs are WFOEs in the Mainland.

13.At all material times, the 1^st defendant was a director and the Chairman and Chief Executive of the 1^st plaintiff and the 2^nd plaintiffs until 26 March 2012.  He was also the Chairman and the Legal Representative of the 3^rd plaintiff and the General Manager, Executive Director and Legal Representative of the 4^th plaintiff.

14.In 2011 there were disputes between members of the board of the 1^st plaintiff which led to, inter alia, the 1^st defendant being removed on 26 March 2012 from all his positions within the CEC Group as well as the operating companies in the Mainland including the 3^rd and 4^th plaintiffs.

15.The new management team put in to take over control of the 3^rd and 4^th plaintiffs found that important financial records and other documents had been removed or destroyed.  

16.It is the plaintiffs’ case that on 30 March 2012 the 1^st defendant tried to prevent the new management team from entering premises occupied by the 3^rd and 4^th plaintiffs by changing the locks.

17.It is also the plaintiffs’ case that personnel in the Shanghai finance office continued to destroy documents and on 16 April 2012 persons not employed by the CEC Group entered the premises and forcibly removed the hard drives of computers.  Also taken away were the chops and other important documentation required for the running of the business.

18.After obtaining new chops and taking control of the Shanghai offices the new management ascertained that the 1^st defendant, inter alia, had acted in breach of fiduciary duties by misappropriating assets of the 3^rd to 5^th plaintiffs and by diverting corporate opportunities from the CEC Group for his own benefit.  The wrongful acts of the defendants including the 1^st defendant have been pleaded in the statement of claim.

19.As I have said, on 19 June 2012 Tong J granted a Mareva injunction freezing the assets of the 1^st to 4^th defendants in Hong Kong.  He also made a disclosure order against the defendants including the 1^st defendant ordering each of the defendants to disclose assets in Hong Kong over HK$250,000.

20.On 18 July 2012 the 1^st defendant made the 1^st defendant’s affirmation said to be in compliance with his duty to disclose assets under the order of Tong J.  It is a short affirmation and only discloses two assets.  The 1^st defendant states as follows:

“2. I own a car I bought two years ago at about HK$450,000. It is a Land Rover Defender with license plate PJ 3856.

3. I only have one bank account in Hong Kong. Although the balance in the account is less than HK$250,000, I disclose it for the sake of completeness. It is account no 652‑069451‑833 at HSBC. The current balance is about HK$180,000.

4. I have no other available assets in Hong Kong.”

21.The plaintiffs apply to cross‑examine the1^st defendant on the contents of the 1^st defendant’s affirmation.

22.The applicable legal principles are not disputed.

23.It is clear that the court has jurisdiction to make an order for cross‑examination pursuant to an order for disclosure in aid of Mareva injunctions (House of Spring Gardens Ltd and others v Waite and others [1985] FSR 173).

24.In Yau Chiu Wah v Gold Chief Investment Ltd and another [2002] 2 HKLRD 832, Ma J (as he then was) summarized the legal principles at paragraph 14 of his judgment.  It is not necessary to repeat these here.

25.It is important to bear in mind that the object of an order for cross‑examination is to enable a Mareva injunction to be made more effective.  The purpose of the cross‑examination is to obtain more information as to a defendant’s assets and as to the whereabouts of such assets in circumstances where the court has already formed a view that there exists a risk of dissipation of assets.  Here, Tong J has already formed that view by granting the Mareva injunction.

26.It is also important to bear in mind that the purpose of the cross‑examination is not to enable information to be obtained so as to impugn the defendant’s credit or to investigate whether there has been a breach of the Mareva injunction so as to obtain material for contempt proceedings.

27.It is also not permissible to conduct the cross‑examination for the purpose of eliciting information to be used at the trial.  The purpose is to locate the defendant’s assets to make the Mareva injunction more effective.

28.It is also clear that orders for cross‑examination made pre‑judgment are rare.  It is exceptional to make an order for cross‑examination pre‑judgment.

29.As stated at paragraph 22.023 of Gee’s Commercial Injunctions 5^th edn, such an order would normally only be contemplated where a defendant has already made an affidavit disclosing assets and there are serious justifiable concerns about the disclosure made.

30.And as stated at paragraph 22.025 of Gee’s Commercial Injunctions :

“The proper purpose of such a cross‑examination is to reveal further information about assets so that they can be located and preserved. Unless the claimant discharges the burden of showing there is some real prospect of achieving this by cross‑examination, the court should decline to make an order.”

31.As Ma J observed in Yau Chi Wah the court has to undertake a balancing exercise.  Ultimately the key to whether an order should be made lies on the justice of the situation facing the court.  The question for the court is whether the making of an order for cross‑examination would result in justice being achieved.  Conversely, if an order were not made, would there be injustice (Yau Chi Wai at paragraph 14 (4) and (5)).

32.Mr Smith SC, for the plaintiffs, submitted that the 1^st defendant’s affirmation disclosing his assets was inadequate.  Only two assets are disclosed, a car and one bank account with a credit balance of HK$180,000.

33.It seems to me that the disclosure made in the 1^st defendant’s affirmation is woefully inadequate and unsatisfactory.

34.On the evidence, the 1^st defendant and his wife owned a property namely, Flat A on 18^th Floor of No 3 Garden Terrace, Hong Kong (“the property”) which he and his wife purchased in 1998 for HK$16,800,000.

35.The property was sold by the 1^st defendant and his wife shortly after he had been ousted from the management of the CEC Group.  On the evidence, a provisional agreement for sale and purchase was made on 17 April 2012 for the sale by the 1^st defendant and his wife of the property to Happy Point Investment Ltd (“Happy Point”) for HK$63,000,000.  Although there were mortgages and legal charges on the property as evidenced by the Land Registry searches on the property, by the time of the assignment of the property to Happy Point on 18 May 2012, the mortgages and legal charges had been discharged.

36.The plaintiffs relied on the bank valuation of HSBC in June 2012 which put the value of the property at HK$74,460,000.  As this was a bank valuation and likely to be conservative, it was submitted on behalf of the plaintiffs that there was evidence that the property was sold at an undervalue.  The plaintiffs also submitted that on the evidence the purchaser Happy Point might be owned or controlled by the 1^st defendant.

37.It seems to me that the present evidence before the court does not justify an inference that Happy Point was owned or controlled by the 1^st defendant.  The 1^st defendant has in his 2^nd affirmation said that the sale to Happy Point was genuine.  Also produced in evidence was a letter from Messrs Hogan Lovells to the plaintiffs’ solicitors dated 13 July 2012 where they informed the plaintiffs’ solicitors that they were instructed that the sale to Happy Point was an arm’s length transaction and further, that they were instructed to confirm that none of the individual beneficial owners of Happy Point had any relationship with the 1^st defendant and his wife.

38.Be that as it may, it seems to me that on the assumption that the sale to Happy Point was a genuine sale, there must have been surplus monies paid to the 1^st defendant and his wife on completion of the sale even after discharging the mortgages and legal charges.

39.The monies representing the surplus proceeds of sale after discharging the mortgages and legal charges and legal expenses must have, it seems to me, been paid into a bank account in the names of the 1^st defendant and his wife.

40.Mr Cheung, for the 1^st defendant, submitted that the 1^st defendant was only obliged to disclose his assets in Hong Kong to the value of HK$250,000 or more.  He was not obliged to disclose his assets outside Hong Kong.  I accept that under order of Tong J he was only obliged to disclose assets in Hong Kong.  However, it seems to me that it is inconceivable that he only has the assets in Hong that he has disclosed in the 1^st defendant’s affirmation and no more .

41.What has happened to the surplus proceeds of sale of the property?  On completion of the sale, one would expect cheques or cashier’s orders to be made out in the names of the vendors namely, the 1^st defendant and his wife.  The cheques or cashier’s orders must have been paid into a bank account in Hong Kong.  The 1^st defendant has not said anything about the whereabouts of the surplus proceeds received from the sale of the property.

42.Mr Smith also submitted that the entering into of the second legal charge against the property by the 1^st defendant and his wife on 2 April 2012 was suspicious.  The second legal charge was entered into between the 1^st defendant and his wife as borrowers and Lakeshore Entertainment Inc, (“Lakeshore”) a BVI company, as lender.  The address given for Lakeshore is an address in Beijing.  Upon visiting that address it was discovered that the address was occupied by Blue Ridge Investment Consulting, a private equity firm established by one Justin Tang.

43.Justin Tang is an ex‑director of the 1^st plaintiff and in the same camp as the 1^st defendant before they lost control of the board of the 1^st plaintiff and were outsted on 26 March 2012.  Thus, it was submitted that the entering into of the second legal charge was suspicious.  It was submitted that entering into the second legal charge about two weeks before the sale of the property in April 2012 raised a serious issue as to whether it was a genuine legal charge or a sham.

44.Whether the second legal charge was genuine or a sham, the fact remains that at the time of the completion of the sale of the property the mortgages and the legal charges were discharged.  There must have been a surplus of proceeds which were paid to the 1^st defendant and his wife.  The whereabouts of the surplus proceeds have not been disclosed by the 1^st defendant.

45.As deposed to in the second affirmation of Derek YiYi Feng, of the plaintiffs, the 1^st defendant was earning a substantial salary of at least HK$1,800,000 per annum prior to his removal from the CEC Group.  His service contract provided for his salary to be paid in Hong Kong dollars.  It is highly likely that his salary was paid into a Hong Kong bank account.  Apart from this, the evidence shows that the 1^st defendant has been involved in different companies and ventures over the last 20 years or so.  Some of these have been based in Hong Kong.  It is highly likely, in my view, that he has received some revenues from these companies which must have been paid into bank accounts in Hong Kong.

46.There is also evidence that in May 2012 the 1^st defendant and his wife closed out their joint loan account with Bank of Communications.  The 1^st defendant also closed out his current account and savings account held in his sole name with Bank of Communications also in May 2012.  What has happened to the funds in those accounts has not been disclosed.

47.I am of the view that there are serious concerns about the disclosure of his assets made by the 1^st defendant justifying an order that he be cross‑examined on his affirmation for the purpose of identifying the location and whereabouts of his assets in Hong Kong.

48.Mr Smith also relied on the fact that the 1^st defendant failed to disclose his interest in Thriving Blue Limited (“Thriving Blue”), the 9^th defendant.  This is a BVI company wholly owned by the 1^st defendant.

49.According to a filing made by the 1^st plaintiff in December 2009, Thriving Blue held 692,520 shares in the 1^st plaintiff. Thriving Blue held the said shares on behalf of the 1^st defendant, the 2^nd defendant and Michael Santos.

50.In my view, the fact that the 1^st defendant’s interest in Thriving Blue and his interest in the shares of the 1^st plaintiff held on his behalf by Thriving Blue were not disclosed in the 1^st defendant’s affirmation does not assist the plaintiffs on this application.  By the terms of the order of Tong J the 1^st defendant was only obliged to disclose information on his assets in Hong Kong.  Thriving Blue is a BVI company.  The shares of the 1^st plaintiff held by Thriving Blue on behalf of the 1^st defendant are shares in a Delaware company.  These are not assets in Hong Kong.  The 1^st defendant was not obliged to disclose these assets under the order of Tong J and the fact that he did not do so does not assist the plaintiffs in this application.

51.Mr Cheung also submitted that the 1^st defendant was not obliged to disclose matters that occurred before the granting of the Mareva injunction.  As the sale of the property took place before the Mareva injunction was granted it was submitted that he was not obliged to disclose what happened to the proceeds of sale.  I am unable to accept the submission of Mr Cheung.  The 1^st defendant is certainly obliged to disclose all his assets in Hong Kong of a value of HK$250,000 or more.  There must have been surplus of the proceeds of sale paid to the 1^st defendant and his wife on completion of the sale of the property.  The 1^st defendant is obliged to disclose the whereabouts and location of such proceeds if indeed they are in Hong Kong.  I am unable to see how the fact that the proceeds of sale were received before the Mareva injunction was granted excuses the 1^st defendant from making a full disclosure of his assets as required by the order of Tong J.

52.As Ma J said in Yau Chi Wai at paragraph 16 of his judgment, Mareva injunctions are exceptional orders but once granted they must be made effective and practical.  Also, the reason why ancillary orders to a Mareva injunction are made is so that as far as possible, precise assets are located and identified.

53.It was also submitted on behalf of the 1^st defendant that as there is a pending application to discharge the Mareva injunction due to be heard on 27 November 2012, the plaintiffs’ application to cross‑examine the 1^st defendant on his affirmation should not be granted at this stage.  I disagree.  Unless and until the Mareva injunction is discharged, it is in place.  In my view the disclosure made is woefully inadequate and unsatisfactory.  To make the Mareva injunction more effective it seems to me that it is proper and just to make the order sought at this stage.

54.It was also submitted that there were concerns that the plaintiffs might use the cross‑examination to obtain material for the trial of the action.  Obviously, that is not a permissible purpose for the cross‑examination.  The purpose of the cross‑examination is to locate the 1^st defendant’s assets in Hong Kong to make the Mareva injunction more effective.  Any improper questioning of the 1^st defendant can be dealt with by the 1^st defendant raising objections to such questions when the cross‑examination takes place.  I do not see any justification for this concern.

55.For the above reasons I made the orders set out at paragraphs 3 and 4 above.

Mr Clifford Smith SC, instructed by Fried, Frank, Harris, Shriver & Jacobson, for the 1^st to 5^th plaintiffs

Mr Justin Cheung, instructed by Bodnar Horvath, for the 1^stdefendant