Sino-panel Trading Ltd and Another v. Guangxi Xunxiang Wood Import and Export Ltd

HCMP 1698/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1698 OF 2012

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REASONS FOR DECISION

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1.These are applications by the respondent to vary the terms of the Mareva injunction by allowing it to withdraw funds from 3 bank accounts with the Industrial and Commercial Bank of China (Asia) Limited (“the Accounts”) to meet the tax liability of a company incorporated in Hong Kong with the identical name of the respondent.

2.In the hearing on 5 February 2013, I refused the respondent’s applications and I now give my reasons.

Background

3.The respondent, known as “Guangxi Xunxiang Wood Import and Export Limited”, is a company incorporated in the BVI.  A company incorporated in Hong Kong with the identical name of the respondent (“HK Guangxi”) is the holder of the Accounts.

4.The link between the respondent and HK Guangxi is that one Mr Li Haibo (“Mr Li”) is the sole shareholder and director of both companies.

5.Mr Li is also the beneficial owner of another company with the same name as the respondent and HK Guangxi incorporated under the law of the Mainland (“Mainland Guangxi”).

6.On 21 September 2012, the Inland Revenue Department issued a demand note to HK Guangxi for the payment of profits tax in the amount of HK$2,404,018.  Since HK Guangxi did not pay the 1^st instalment of the profits tax in time, surcharge was levied on HK Guangxi in the sum of $120,200.  In these applications, the respondent asks for leave to withdraw funds from the Accounts to pay for such tax and surcharge.

7.The dispute between the parties arises out of 2 sale of goods contracts dated 16 March 2011 (“the Contracts”), under which the respondent agreed to sell to the respective applicants 2 lots of rosewood (“the Goods”) at a total price of US$46,800,000.

8.The applicants paid the respondent the total price of the Goods in advance by payments to one of the Accounts in March and December 2011.

9.A substantial part of the above payments made by the applicants was transferred out of Hong Kong to one or more accounts in the name of or controlled by Mr Li in Cambodia.

10.The respondent failed to deliver the Goods to the applicants.

11.The Contracts provide for disputes under the Contracts to be resolved by way of arbitration proceedings at the ICC International Court of Arbitration in London.

12.The applicants eventually commenced such arbitration proceedings against the respondent to claim for, inter alia, the return of the purchase price paid by the applicants.

13.The applicants applied for an ex parte Mareva injunction in Hong Kong in aid of the arbitration proceedings, which was granted by Barma J (as he then was) on 14 August 2012.

14.When the application for the injunction was made, it was made clear to the court that there was no certainty from the available documents which of the 3 companies owned by Mr Li with the same name “Guangxi Xunxiang Wood Import and Export Limited” was the holder of the Accounts.  The Accounts were frozen because the applicants had made payments into one of them in accordance with the respondent’s instruction.

15.Pursuant to the disclosure order contained in the ex parte order granted on 14 August 2012, Mr Li, on behalf of the respondent, wrote to the applicants’ solicitors on 16 August 2012 acknowledging that the funds in the Accounts belonged to the respondent, and the bank statements supplied by the respondent also showed that there was a total of about US$12,820,000 in the Accounts by that time.

16.By the letter from the respondent’s solicitors dated 21 August 2012, the applicants were informed for the first time that the Accounts were held in the name of HK Guangxi, and the funds therein were held by HK Guangxi on behalf of the respondent.

17.By the consent order dated 23 August 2012, withdrawals were permitted from the Accounts of up to HK$1,200,000 for the respondent to meet its legal expenses and up to HK$150,000 per month for the respondent to meet its expenses for maintaining its daily business operations.

18.By the letter dated 25 September 2012, the respondent’s solicitors requested consent from the applicants to release funds from the Accounts to pay profits tax to the Hong Kong Government in the sum of HK$2,404,018.  The relevant tax demand note was actually issued to HK Guangxi.

19.By the consent order dated 22 October 2012, the return date for the Originating Summons in these proceedings was adjourned to a date to be fixed with further directions given for the filing of affidavit evidence.

20.The applicants refused the respondent’s request for the withdrawal of funds for the payment of the aforesaid tax and surcharge, and so the respondent took out the present summonses against the applicants.

The respondent’s case in support of the applications

21.Mr Li has filed 2 affirmations in support of the applications (ie his 3^rd and 4^th affirmations). According to Mr Li, HK Guangxi is the holder of the Accounts, and it operated 2 kinds of businesses.

22.Firstly, it carried on its own business which had nothing to do with the respondent.  In support of the allegation that HK Guangxi was doing its own business, Mr Li produces some remittance advices showing that Mainland Guangxi had deposited various sums of money into the Accounts allegedly relating to these transactions.

23.Secondly, HK Guangxi also acted as an agent for the respondent in performing some business contracts, including the Contracts which are the subject matters of the dispute.  According to Mr Li, the respondent had made a number of such contracts with various subsidiaries of the Sino-Forest Corporation (“Sino-Forest”) which is the holding company of the applicants.  Such kind of contracts were performed by HK Guangxi as agent for the respondent.  As part of the arrangement, the profits earned by the respondent in these contracts were booked as the profits of HK Guangxi.  Such profits were deposited into the Accounts held by HK Guangxi and had to be returned to the respondent after the payment of the associated profits tax and other expenses. The effect of such arrangement is that profits tax was levied on these profits earned by the respondent through its agent HK Guangxi.

24.The respondent requests to withdraw funds from the Accounts to pay the profits tax levied on HK Guangxi in the period from 26 July 2010 to 31 December 2011.  During such period of time, Mr Li claims that the profits before tax referable to the business by HK Guangxi on its own account is HK$854,997.  Including provisional tax, HK Guangxi has to pay tax in the total sum of HK$281,082 in respect of such business carried on by HK Guangxi on its own account.  After the payment of such tax, a sum of $573,915 (HK$854,997 – HK$281,082) in the Accounts belongs to HK Guangxi whereas the rest should belong to the respondent.

25.In short, the respondent is now saying that a sum of HK$854,997 in the Accounts actually belongs to HK Guangxi.  In respect of such sum of money, the court should allow the respondent to withdraw money from the Accounts so as to enable HK Guangxi to pay for the portion of tax which relates to the business carried on by HK Guangxi on its own account.  The balance of the funds in the Accounts belong to the respondent.  In respect of the remaining portion of the profits tax, it relates to business carried on by HK Guangxi as agent for the respondent.  Although such business was actually carried on by the respondent, the income from such business was booked as profits of HK Guangxi.  Since the remaining funds in the Account belong to the respondent and the profits tax was actually levied on the business carried on by HK Guangxi on behalf of the respondent, the court should allow the respondent to withdraw funds from the Accounts to discharge such tax liability.

Merits of the applications

26.I refused the respondent’s applications for the following reasons.

27.Firstly, Mr Li’s factual allegations are unconvincing, and so the court should not allow the respondent to withdraw funds to pay for the profits tax levied on a separate business entity.

28.Now Mr Li says that the Accounts contain funds of which HK Guangxi is the beneficial owner.  However, Mr Li has confirmed in his statement in the letter dated 16 August 2012 and in his 1^st affirmation that the entire balances in the Accounts were funds of the respondent.  Further, when funds were released to the respondent under the consent order dated 23 August 2012, there was no claim by the respondent that the Accounts contained funds of which HK Guangxi was the beneficial owner.  Neither was this suggested in Mr Li’s lengthy affirmation made on 14 September 2012 in opposition to the Originating Summons.  If the respondent’s allegation were the truth, one would query why the respondent had not raised such allegation earlier.

29.Furthermore, there is simply insufficient evidence to support the respondent’s allegation that HK Guangxi was carrying on some business on its own and part of the funds in the Accounts belong to HK Guangxi.  The only documents produced to support such allegation are the remittance advices showing that Mainland Guangxi had deposited various sums of money in the Accounts.  However, the making of payments into the Accounts is precisely the way in which the applicants had made the advance payments for the Goods to the respondent, and so the making of these deposits is neither here nor there.  If the respondent’s allegation were the truth, the respondent should be able to produce some proper documentary evidence such as contracts and sale invoices to show that HK Guangxi was doing some business on its own.  To me, the absence of such proper documentary evidence casts serious doubt on the creditability of the respondent’s allegation that part of the funds in the Accounts belong to HK Guangxi.

30.It is also the respondent’s case that a substantial part of the funds in the Accounts actually belong to the respondent, and Mr Li has given evidence in his affirmations as to how HK Guangxi had conducted these businesses on behalf of the respondent, including the booking of the profits in the accounts of HK Guangxi and the return of the funds to the respondent after the payment of taxes and expenses.  Further, according to Mr Li’s evidence in his 4^th affirmation, HK Guangxi was not providing such kind of agency services to the respondent for free.

31.However, the problem is that Mr Li has not produced any underlying documentary evidence to prove that HK Guangxi performed the contracts as he alleges.  There is simply nothing in the accounts of the respondent or HK Guangxi to show that: (i) HK Guangxi had transferred the funds back to the respondent after the payment of taxes and expenses; or (ii) HK Guangxi was charging the respondent for the provision of the agency services. Further, if Mr Li’s evidence were the truth, the respondent would be carrying on business in Hong Kong, and yet the respondent has not been registered under Part XI of the Companies Ordinance (Cap 32) which would be a criminal offence under s 340 of the same Ordinance.

32.The respondent’s factual allegations are therefore unconvincing.  The court should always approach Mr Li’s evidence with some caution.  As Mr Li has been using 3 corporate vehicles with the same name for his business, it would not be too difficult for him to make out a case using different vehicles in order to suit his needs.  Unless the alleged business arrangement is supported by proper documentation, the court should not just accept Mr Li’s evidence at face value.  Hence in my judgment, the court should not allow the respondent to withdraw funds from the Accounts, which by earlier admission as belonging to the respondent, to pay for the profits tax levied on a different business entity. 

33.Secondly, even if Mr Li’s allegations were the truth, I would not allow the withdrawal of funds because there are not used for paying the expenses of the respondent in the normal course of its business.

34.According to the terms of the injunction order and the authorities relied on by Mr Lee, counsel for the respondent, including Kea Corporation v Parrot Corporation Ltd, unreported, decision of the Court of Appeal in England on 24 September 1986 and A. S. Design Ltd v Lam You To Joseph, unreported, HCA 3329/2001, decision of Lam J (as he then was) on 23 October 2001, anyone subject to a Mareva injunction may be allowed to withdraw part of the funds in the frozen bank accounts to pay expenses in the ordinary course of his business.

35.Even based on the respondent’s own case, tax payment on behalf of HK Guangxi cannot be regarded as the respondent’s ordinary business expenses.  This is not a case where a company subject to a Mareva injunction comes to court to ask for a variation on the basis of an established course of trade which the funds sought to be released would be used to continue (see: Avant Petroleum v Gatoil [1986] 2 Lloyd’s Law Reports 236).  It is certainly unusual, if not illegal, for the profits of the business carried on by the respondent to be booked as the profits of another entity (ie HK Guangxi), and so even based on the respondent’s own case, the respondent should not be allowed to withdraw funds in the Accounts to pay for such unusual expenses.

36.Thirdly, I refuse the application because the respondent or HK Guangxi should have other financial resources to pay for the tax concerned, or that they should make use of the funds transferred out of Hong Kong and beyond the reach of the applicants to discharge the tax liability.

37.In Assets Investments v The United Islamic Investments Foundation [1995] 1 HKC 560, Mortimer JA (as he then was) said the following in p 563C-E of the judgment:

“The purpose of a Mareva injunction is to prevent a party dissipating its assets by removing or keeping them from the court’s control so as to avoid the risk of having to satisfy a judgment, It is trite to say that if a party is in control of assets not frozen by the injunction, he must usually be made to use those assets for his ordinary and legal expenses first. There is no difference in approach if a party who is the subject of a world-wide Mareva is shown to be in control of other assets which he is wrongfully keeping out of the court’s clutches in order to avoid the risk of having to use them to satisfy a judgment.”

38.The approach in Assets Investments had been considered by Lam J (as he then was) in A. S. Design Ltd v Lam You To Joseph, supra.  According to the learned judge, the dicta of Mortimer JA are not principles of law but of approach, and every case has to be dealt with on its merits.  After considering the facts of that particular case, Lam J allowed the 1^st defendant to use part of his frozen local assets to pay for his legal and living expenses though he also had assets in the Mainland.

39.There is no dispute that Mr Li had received a substantial amount of money (ie US$46,800,000) from the applicants as advance payments for the sale of the Goods under the Contracts.  In fact, after the payment of the purchase price into the Accounts, a substantial part of the funds were transferred out of Hong Kong to one or more accounts in the name of or controlled by Mr Li in Cambodia.  The Goods were not delivered to the applicants.  The injunction is only managed to freeze a sum of about US$12,820,000 remaining in the Accounts.  Together with the other frozen assets, there is still a substantial shortfall of over US$32,100,000.  On the other hand, as of 19 July 2012, a total amount of about US$25,465,679.45 was held with Union Commercial Bank plc, Cambodia, in the names of Mr Li and 2 more of Mr Li’s companies: Xun Xiang Wood (Cambodia) Import Export co Ltd and Yu Xiang (Cambodia) Import Export Co Ltd.  Such money should be used to pay for the profits tax levied on HK Guangxi.

40.In considering whether the court should allow a defendant to use the funds subject to a Mareva injunction to pay for his legal expenses or trading expenses, it is trite law that the court should consider whether the defendant would have other financial resources to pay for such expenses.  The evidence here indicates that Mr Li has hidden away or kept substantial assets aboard, and so it would be unjust to permit the respondent, or in substance Mr Li, to use what is left of the depleted Hong Kong assets to discharge the tax liability of whatever vehicles controlled by Mr Li (see: Commercial Injunctions, Sweet & Maxwell, 5 ed, at §20.056).  This is also in line with the dicta of Mortimer JA in Assets Investments v The United Islamic Investments Foundation, supra.

41.In fact, the profits tax liability of HK Guangxi only amounts to an equivalent of US$324,000, which is only a tiny fraction of the funds sitting in Mr Li’s accounts in Cambodia.  The respondent also goes so far as to say that the respondent should be allowed to continue spending the applicants’ money transferred to Cambodia “for its ordinary business in South-East Asia” even though that is the applicants’ money paid in advance for the Goods that were not delivered.  This cannot be right. In such circumstances, even accepting the respondent’s factual allegations as the truth, the court should not allow the respondent to deplete the much lesser part of the advance payments that the applicants have managed to freeze by the Mareva injunction leaving it free to continue spending the remaining larger part of the applicant’s money which falls outside the reach of the injunction.

42.In supporting the applications, the respondent also relies on the open offer made by the applicants in their letter dated 22 November 2012, in which the applicants agreed to release an amount of HK$281,082 from the Accounts for HK Guangxi to pay the portion of profits tax allegedly attributable to the business done by HK Guangxi on its own account.  However, it was made clear in the said letter that the offer was made “solely as a matter of expediency and without prejudice to [the applicants’] position and rights”, and so I would ignore the contents of such letter in determining the substantive merits of the respondent’s applications.

43.Based on the aforesaid reasons, I exercised the discretion against the respondent and refused its applications to withdraw funds in the Accounts to pay for the profits tax levied on HK Guangxi.

44.I also made an order that the costs of both summonses be the applicants’ costs in the cause of the Originating Summons.  As the respondent fails in the present applications, there is no reason why it is entitled to claim for costs of such applications even if it succeeds in opposing the Mareva injunction in the main proceedings.  That is why I made the said costs order.

Mr Robin McLeish, instructed by Linklaters, for the applicants

Mr Lee Tung Ming, instructed by C Y Tsang & Co, for the respondent