Elitt Engineering Consultants Ltd v. Sne Engineering Co Ltd

HCA 603/2012
HCA 1312/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 603 OF 2012

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BETWEEN

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ACTION NO 1312 OF 2012

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AND BETWEEN

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Before: Deputy High Court Judge Woo in Chambers

Date of Hearing: 16 November 2012

Date of Judgment: 26 November 2012

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J U D G M E N T

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Introduction

1.On an ex parte application by the plaintiff, Deputy High Court Judge Coleman SC granted a Mareva injunction on 26 October 2012, restraining the defendant from removing from Hong Kong any of its assets up to the value of HK$2,191,065.70, the claim in HCA 603/2012.  The injunction further restrains the defendant from parting with, selling, charging or in any other way diminishing the value, disposing of or otherwise dealing with its assets up to the said value.  The order specifies as the defendant’s assets 46 items of construction equipment which are being used at various construction sites in Hong Kong.

2.By an inter partes summons dated 31 October 2012, the plaintiff seeks to continue the Mareva injunction until judgment in HCA 603/2012 or until further order.  On the other hand, by a summons dated 2 November 2012, the defendant seeks the setting aside of the ex parte Mareva injunction order made by the judge on 26 October 2012 on the ground of material non-disclosure or in any event and that there be an inquiry as to damages under the plaintiff’s cross-undertaking in damages given in paragraph (1) of schedule 2 to the Mareva injunction order.

The facts

3.According to the consolidated statement of claim, the defendant is a limited company incorporated in Hong Kong for the purpose of becoming a joint-venture vehicle between some Japanese persons and/or companies (“Japanese counterparts”) of the one part and Mr Lam Wai Kuen, Wilkin (“Lam”) of the other part for the purpose of tendering for projects of and providing services to the Mass Transit Railway Corporation in Hong Kong.  Lam is and was at all times a director and the representative of the plaintiff.

4.Until January or February 2012, the plaintiff held 30% of the shareholding in the defendant.  On 3 February 2012, the defendant increased its share capital by way of allotment of additional shares, after which, the plaintiff’s shareholding in the defendant was decreased to 0.05%. 

5.By various agreements made orally in 2009 between Lam on behalf of the plaintiff and the Japanese counterparts on behalf of the defendant, it was agreed that the total amount of expenses pertaining to the operation and/or running of the office premises including but not limited to the overhead expenses, labour costs and vehicle rental expenses would be shared between the plaintiff and the defendant in the proportion of 2/3 and 1/3 respectively.  A further oral agreement was made whereby the defendant would pay the plaintiff for the services and reimburse the plaintiff for the office expenses and settle the outstanding sums as invoiced and set out by the plaintiff in its invoices within 7 days or 30 days (as the case may be) from the date of invoice.  Between December 2011 and June 2012, the plaintiff sent a number of invoices to the defendant which totalled HK$4,013,273 but the defendant has failed and/or refused to pay save and except a sum of HK$100,000.

6.The two actions herein have later been consolidated pursuant to the Order of Master de Souza dated 12 September 2012.  The plaintiff also took out a summons dated 11 July 2012 for summary judgment, which has been fixed to be heard sometime in January next year. 

Material non-disclosure

7.The defendant now seeks to set aside the Mareva injunction on the ground that there was multiple and serious material non-disclosure by the plaintiff in obtaining the Mareva injunction.  

8.In Cheung Kam Wah v Cheung Hon Wah & Ors, CACV 53/2004, unreported, the Court of Appeal dealt with the consequence of material non-disclosure, as follows:

“43 It is well settled that upon [the court] being satisfied that there was material non-disclosure at the ex parte stage, the ex parte order so obtained should, without more ado, be discharged. See Manor Electronics Ltd v Dickson and Others [1988] RPC 618, at 623 lines 40 to 45, page 624, lines 3-8; Standard Chartered Securities Ltd v Lai Arthur [1993] 1 HKC 375, at 389B; Bank Mellat v Nikpour [1985] FSR 87, at p 91.

44. The rationale behind can be found in Balcombe LJ’s judgment in Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1358, where he said:

‘The rule that an ex parte injunction will be discharged if it was obtained without full disclosure has a two-fold purpose.  It will deprive the wrongdoer of an advantage improperly obtained: see Rex v Kensington Income Tax Commissioners, Ex parte Princess Edmond de Polignac [1917] 1 K.B., 486, 509.  But it also serves as a deterrent to ensure that persons who make ex parte applications realize that they have this duty of disclosure and of the consequences (which may include a liability in costs) if they fail in that duty.’”

9.The material non-disclosure relied on by the defendant is in relation to the following areas:

(a)  the defendant’s dissipation of assets and removal of them from Hong Kong;

(b)  material in support of the plaintiff’s cross-undertaking as to damages; and

(c)  material that support the defendant’s defence.

10.For the purposes of my decision, it is only necessary for me to deal with the first two of these three items.

The plaintiff’s financial capability to support its cross-undertaking

11.As regards the importance of the plaintiff’s financial position, the Court of Appeal stated at paragraph 28 of Cheung Kam Wah as follows:

“It seems to us clear, therefore, that it is incumbent on an applicant for interlocutory injunction ex parte to make full and frank disclosure of his financial position to demonstrate that he is able to honour his undertaking in damages where on the evidence the applicant’s financial position, viewed fairly, may be said to raise realistic doubts as to his ability to honour his cross-undertaking. This is particularly so where the circumstances give rise to a real risk of substantial and not purely insignificant loss that may be suffered by the respondent.”

12.On the plaintiff’s financial capability in this respect, Mr Clark draws my attention to Lam’s bare statement in paragraph 24 of his 3rd affirmation that the plaintiff is good for the cross-undertaking in damages.  However, in Lam’s 5th affirmation filed to provide further information after the ex parte order was granted, it is revealed that the plaintiff’s bank account is overdrawn by HK$5.5 million, although at the same time, it has banking facility from a bank totalling HK$7.5 million.

13.While it can be said that as compared with the amount of the banking facility available to the plaintiff, the overdrawn amount of $5.5 million still leaves the plaintiff with a balance of $2 million, which may go some way to show its financial capability of paying $2 million, one does not have any document to show why and on what basis, collateral or guarantee that the $7.5 million facility has been maintained by the bank in favour of the plaintiff and more importantly, whether the facility will still be available if the court orders the plaintiff to pay damages on its cross-undertaking.

14.Regarding the $5.5 million overdraft, what Lam has maintained in his affirmations so far is that the plaintiff is good for its cross-undertaking in damages, without producing any documentary evidence as to its financial capability or soundness.  Nonetheless, I must point out that an attempt was made by Mr Ng, for the plaintiff, to seek leave to put before me evidence (but not by virtue of any affidavit) of the plaintiff’s financial position at the early stage of the hearing before me.  I refused to have the evidence or even sight of it because Mr Ng had earlier on objected to the defendant’s application for leave to put in an affirmation for use before me.  Be that as it may, this sloppy way of the plaintiff in preparing evidence to support a Mareva injunction obviously does not operate to its benefit.

Dissipation of assets outside jurisdiction

15.Now I turn to the most significant non-disclosure in this case, which is in relation to the allegation of the defendant’s dissipation of assets.  In the plaintiff’s skeleton argument used before Deputy Judge Coleman, it was stated:

“Recently, P has come to know that D had been transferring a significant sum of money back to Japan since July 2011.  These are proven from the bank statements of the main account used by D, showing a total of JPY100,803,000 being transferred out of D into various accounts (belonging to its majority shareholders) in Japan in a short period of 5 months (see Exhibit “LWK-13” Bank statement of the Defendant).”

16.¥100 million is close to HK$10 million.   This information or evidence was provided by the 3^rd affirmation of Lam, paragraph 18 of which states:

“… the Defendant has been transferring a significant amount of money back to Japan since July 2011. …”

17.The relevant bank statements were exhibited to the affirmation. 

18.In the affirmations filed after the granting of the Mareva injunction, it has transpired that:

(a)  the plaintiff did not recently discover these transfers;

(b)  Lam, the deponent of his said 3rd affirmation had, in fact, approved these transfers at the time they were made;

(c)  these payments were legitimate business expenses, being payments for services provided to the defendant by the Japanese companies; and

(d)  the plaintiff had received similar payments during the period.

19.All these non-disclosures were subsequently admitted by Lam in his 6th affirmation.  He stated:

“3. … I accept that I had approved the payments to Japan from the around July 2010 until 13^th January 2012, as I was both the authorised signatory and a shareholder of the Defendant. However, I would like to add that after the change in the shareholding structure of the Defendant in January 2012, I was no longer involved in approving any payments from the Defendant. …

4. In fact, after January 2012, the relationship between the majority shareholder in the Defendant and I turned sour.”

20.However, up to the present moment, no explanation has been given as to why these matters were not disclosed.  It is by this reason that Mr Clark, counsel for the defendant, submitted that the fault of the plaintiff went beyond a material non-disclosure; it was in fact actively misleading of the court. 

21.Mr Clark has also drawn my attention to the fact that these payments made by the defendant were in fact to companies who were suppliers of the defendant and that in the same period, the plaintiff also received payments from the defendant totalling HK$2,492,714. 

22.Of course, one of the questions that must be asked in the case of a finding of non-disclosure is whether the non-disclosure is material or not.  For this purpose, it is only necessary to refer to para 29/1/56 of Hong Kong Civil Procedure 2012, Vol 1, which states:

“For a domestic Mareva injunction, the plaintiff must show:

1. that he has a good arguable case on a substantive claim over which the court has jurisdiction;

2. that there are assets within the jurisdiction;

3. that the balance of convenience is in favour of grant;

4. that there is a real risk of dissipation of assets, or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effect;

5. the plaintiff must comply with the strict duty of full and frank disclosure; and

6. in the case of ‘worldwide’ Mareva injunctions, additional factors become relevant are explained …”

23.It can therefore be seen that a real risk of dissipation of assets or removal of assets from the jurisdiction is one of the matters which the plaintiff must show to the court in order to obtain a Mareva injunction.  Its importance cannot be over-emphasised.  In the present case, the payments that were alleged to have been transferred to Japan amounted to about HK$10 million, larger than double the total amount claimed by the plaintiff in these two consolidated actions.  This alleged dissipation must have had a significant impact on the mind of the judge, or for that matter on any judge considering the application, that the plaintiff should be protected from this seemingly unreasonable conduct of the defendant.

24.During the course of argument, I asked Mr Clark whether the non-disclosure of the fact that the payments to Japan were approved by Lam could have been a mistake made by the plaintiff’s legal advisers and not Lam himself, for example because Lam, not being a lawyer, was not aware of the rule of full and frank disclosure; and the word “recently” used in the Skeleton Argument might not have been drawn to the attention of Lam and had not been expressly approved by him.  Mr Clark replied by directing my mind to the fact that after the material non-disclosure was pointed out by the defendant’s solicitors in a letter dated 31 October 2012 to the plaintiff’s solicitors, the reaction of the plaintiff was simply that Lam admitted the non-disclosure.  No explanation was ever given as I suggested and no excuse or regret has so far been expressed. 

25.In the circumstances, I have no doubt that the full rigour of the law to discharge the injunction for material non-disclosure must apply. 

Should a fresh Mareva injunction be granted?

26.Even though a Mareva injunction has been discharged for material non-disclosure, the court still has discretion to grant a fresh Mareva injunction.   In Cheung Kam Wah, after referring to Yau Chiu Wah v Gold Chief Investment Ltd & Anor, HCA 807/2001 and a number of English authorities, the Court of Appeal said:

“66. It is therefore clear, according to both English and Hong Kong authorities, that upon the discharge of an ex-parte order for material non-disclosure, the court does have discretion to grant the order inter partes. Whether it should do so depends on the circumstances of each case, and the factors for consideration include those set out in Yau Chi Wah as well as other relevant factors, depending on where the justice of the case lies.”

27.In Yau Chiu Wah,Mr Recorder G Ma, SC (as he then was) had this to say at paragraph 44 of his judgment:

“44. Of the relevant factors that a court would consider in the exercise of its discretion, they would include the following:-

1. Whether the non-disclosure was innocent or deliberate.

2. The excuse or reason for such material non-disclosure.

3. Whether the non-disclosure would in fact have resulted in the original order not having been made in the first place or whether, conversely, even if the material fact or facts have been disclosed, this would have made no difference. Here, the court is required to look at the merits and justice of the grant of a Mareva injunction.

4. Whether the party guilty of the non-disclosure is deserving of a locus poenitentiae.”

28.In the present case, I have to say that all the facts that need to be considered for a fresh Mareva injunction to be granted in favour of the plaintiff are absent.  Moreover, apart from the assets worth about HK$10 million that were alleged to have been dissipated by the defendant (but with the approval of the plaintiff), Mr Ng could only point to sums of about HK$600,000 (out of a total indebtedness of over HK$60 million) that had been paid out by the defendant since Lam lost control over the finances of the defendant in February 2012, which would not in the circumstances of this case justify the strong measure of a Mareva injunction.

29.Mr Ng attempts to persuade me to grant a fresh Mareva injunction in the terms of the discharged one, on the ground that the defendant would in effect only be prohibited from selling the items of equipment mentioned in the order at below market value and its freedom to use, move, handle and deal with the equipment in any other manner would not be subject to any restraint.  First, I am not quite sure that that would be the only prohibition imposed by the Mareva order granted ex parte.  Secondly, a mere little inconvenience will not be a justification for a grant if other considerations are already against the court exercising its discretion.

Conclusion

30.By reason of all the matters aforesaid, I am of view that this is a plain case that the Mareva injunction obtained by the plaintiff must be discharged and that there is no justification for the grant of a fresh Mareva injunction in favour of the plaintiff.

31.In the circumstances, I discharge the Mareva injunction and also make an order of inquiry as to damages that have been caused by the grant of the injunction order.  I give the parties liberty to apply regarding the process of the inquiry.  I also make an order nisi that the plaintiff do pay the defendant the costs of the plaintiff’s inter partes summons to continue the Mareva injunction and the defendant’s summons for the discharge of it, to be taxed if not agreed.

Mr Edward Ng, instructed by Y T Szeto & Co, for the plaintiff

Mr Douglas Clark, instructed by Robert Lee Law Offices, for the defendant