China Construction Realty Ltd v. Lucky Dragon Ltd and Others

HCA 1237 of 2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1237 OF 2012

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

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

D E C I S I O N

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

1.This is the 4^th defendant’s application for discharge of the injunction, granted ex parte by DHCJ Sakhrani on 17 July 2012 and as continued by a consent order made by DHCJ M Chan (as she then was) on 20 July 2012 (“the Consent Order”); or alternatively for fortification of the plaintiff’s undertaking as to damages.

2.The background may be summarized as follows.

A.  BACKGROUND

A1.  SBS Agreement

3.Situated at the development site at Area 6 in the Dalian National Resort, Dalian, Liaoning Province is a valuable piece of land (“the Dalian Land”).  Before June 1997, the plaintiff had the ultimate predominant ownership and control of the Dalian Land through the following corporate structure :

4.The Dalian JV Company, the 2^nd and 3^rd defendants were at all material times engaged in a project to develop the Dalian Land.

5.By an agreement dated 26 June 1997 (“the SBS Agreement”), the plaintiff agreed to sell its 90% shareholdings in GPB (“the WIW Shares”) to Sino Business Services Proprietary Limited (“SBS”) for AUS$46,500,760.00, payable in tranches as stipulated.  Pursuant to the SBS Agreement, the plaintiff transferred the WIW Shares to Leisureline Holdings Limited (“LHL”), nominated by SBS, on or sometime after 26 June 1997.

6.On or about 6 November 1997, LHL acquired 90% of the shares of China Hotel Holdings Limited (“CHHL”).  At the same time, LHL transferred the WIW Shares to CHHL.  On or about 5 January 1998, CHHL acquired the remaining 10% of the shareholding in GPB from Asia Management Limited.

7.SBS had paid the first tranche of the price under the SBS Agreement in the sum of AUS$500,760.00.  However, by letter dated 13 November 1998, it purported to repudiate the SBS Agreement.  It had since failed to make any further payment for the balance of the price or return the WIS Shares to the plaintiff.  On 9 November 2001, the plaintiff commenced proceedings in Victoria, Australia to seek damages for breach of contract or alternatively the return of the WIW Shares.

A2.  Lucky Dragon Agreement

8.In around April or May 2003, while the Australian proceedings were still pending, SBS, LHL and CHHL had, secretly and without disclosing the same to the plaintiff or the Australian court, procured GPB to enter into an agreement with the 1^st defendant (“the Lucky Dragon Agreement”) under which all the equity interests held by GPB in the Dalian JV Company, the 2^nd and 3^rd defendants were all transferred to the 1^st defendant.  The completion date of the Lucky Dragon Agreement was stated to be 28 May 2003.  The 1^st defendant had since purportedly acquired the ownership and control of the Dalian Land and the land use rights.  The plaintiff only became aware of the Lucky Dragon Agreement on or about 25 September 2003.

9.On 26 March 2004, the Australian court gave judgment in favour of the plaintiff for the sum of AUS$46 million with interest.  SBS failed to pay the judgment debt and was wound up on 14 April 2005.  The judgment remains wholly unsatisfied to date.

A3.  HCA1294/2005

10.The plaintiff then commenced HCA1294/2005 in Hong Kong on 26 September 2005 against SBS, LHL, CHHL, GPB and the 1^st defendant, claiming for, among other things, a declaration that the Lucky Dragon Agreement constituted a disposition of property with an intent to defraud the plaintiff; an order that the Lucky Dragon Agreement and the purported sale and transfer of the shares made thereunder be set aside pursuant to section 60 of the Conveyancing and Property Ordinance[2] (“Section 60”); and damages for conspiracy.

11.The plaintiff obtained default judgment against all the defendants on 24 August 2006.  The 1^st defendant then successfully set aside the default judgment on 2 February 2007.  The trial of the plaintiff’s claims against the 1^st defendant then took place before Suffiad J on 9 February 2011, which lasted for 11 days.

12.On 15 February 2011, in the middle of the trial, the plaintiff applied for and obtained an interlocutory injunction restraining the 1^st defendant from, among other things, transferring, disposing and/or otherwise dealing with any shares and interests in the Dalian JV Company, the 2^nd and 3^rd defendants, DIEFC and DIEC, or to take any steps to cause or procure any change in the registered shareholders, directors or legal representatives of these companies.

13.On 25 March 2011, Suffiad J entered judgment in favour of the plaintiff on its claims and further ordered that the aforesaid injunction be continued until further order.

A4.  Empire Star Agreements

14.In the course of enforcing the said judgment, the plaintiff discovered for the first time that back in January 2010, the 2^nd and 3^rd defendants had already transferred their 60% equity interest in DIFEC and DIEC to the 4^th defendant for the respective consideration of HK$48 million and HK$36 million (“the Empire Star Agreements”).

15.The plaintiff complained that the Empire Star Agreements effectively stripped the 2^nd and 3^rd defendants of all its valuable assets.  The plaintiff is again left with an empty judgment.

A5.  Present proceedings

16.On 17 July 2012, the plaintiff obtained the ex parte injunction from the Deputy Judge Sakhrani, restraining the 4^th defendant from disposing of its shareholding in DIEFC and DIEC.  The ex parte injunction was continued by the Consent Order, which read :

“BY CONSENT, IT IS ORDERED that :-

1. The Order of Deputy High Court Judge Sakhrani made on 17 July 2012 be continued until trial or further Order of the Court.

2. Costs of the application by way of Consent Summons dated 19 July 2012 and costs of the plaintiff’s Summons dated 17 July 2012 be in the cause of this action.

3. There be liberty to apply.”

17.By summons dated 26 September 2012, the 4^th defendant took out the present application for discharge and fortification of undertaking damages.

B.  PRELIMINARY OBJECTION

18.The plaintiff took a preliminary objection, arguing that the 4^th defendant is debarred from making the application by virtue of the Consent Order.

19.The applicable principles have been well summarized by Au J in Keep Bright Ltd v Super Auto Investments Ltd :[3]

“(1) The Court would only generally consider varying or discharging an interim injunction or an undertaking on good grounds or change of circumstances being shown : Chanel v FW Woolwich & Co Ltd [1981] 1 WLR 485 at 492D-E.

(2) Further, in an interim order where it is made effectively by consent, or following an inter-partes hearing when both parties were legally represented and had full opportunities to bring to the court’s attention matters relevant to the making of the order, the person seeking to vary the interim order is not entitled to do so as of right or to re-argue it as if it was a re-hearing. The burden is on the party seeking to vary the order to show either there has been some significant change of circumstances or it has become aware of facts that it could not have reasonably found out at the time of interim order: Dynamic Creations Ltd v Mint Gem & Jewelry Manufacturing Co Ltd (unrep, HCA 378/2006, 12 April 2006) at paras 42 & 44 per Chu J (as she then was); Butt v Butt [1987] 1 WLR 1351 at 1353F-G per Nourse LJ.

(3) However, the position may be different if the parties had contemplated at the time of the interim order that the issues thereunder would be revisited or where the injunction by its terms show that it was not substantively disposed of but adjourned sine die generally with liberty to apply.  The parties may be able in those circumstances to re-open the arguments afresh:  Butt v Butt, supra, at 1353H-1354D, 1354F-G (Nourse LJ), 1355 (Mustill LJ); Gantenbrink v BBC [1995] FSR 162 at 164-165 (Sir Donald Nicholls VC).”

20.Here, the plaintiff obtained the ex parte order on 17 July 2012, returnable on 20 July 2012.  At about 5:30 pm on 17 July 2012, the order and the relevant papers were served on the solicitors acting for the 4^th defendant.  A notice to act was then filed on 19 July 2012.  On the same day at about 3 pm, the plaintiff’s solicitors wrote (by way of fax) to the 4^th defendant’s solicitors, asking the latter to confirm in writing by return before 4 pm that same day whether the 4^th defendant would consent to the order in terms of the inter parte summons, failing which they would treat the 4^th defendant as opposing the summons.  The 4^th defendant’s solicitors immediately wrote back.  They first complained about the lack of time to respond and then went on to say :

“ The large bundle of documents were delivered to the 4^th Defendant after office hours on the 17 July 2012. Instructions were only confirmed to us to act for the 4^th Defendant yesterday afternoon. It is only fair and reasonable to allow us time to peruse the papers and to take preliminary instructions from client.

In any event, the hearing tomorrow is merely a return date fixed for 15 minutes so that the Court may give directions as to filing of further evidence in the event our client wishes to oppose your client’s summons. As such, we doubt the need to instruct Counsel to attend tomorrow.

In view of the press of time, our client is prepared to consent to paragraph 1 of your summons dated 17 July 2012 with liberty to apply and costs be reserved.”

21.A consent summons was then signed.  At the short hearing before Deputy Judge Chan, the Consent Order was made based on the consent summons.

22.When the circumstances leading to the making of the Consent Order is properly understood objectively, it is tolerably clear that when the Consent Order was made, the solicitors contemplated that the injunction would be revisited at a later stage if the 4^th defendant so desired, after legal advice had been obtained from counsel.  The injunction had not been substantively disposed of before the Deputy Judge.  Effectively, the matter was adjourned sine die, giving the 4^th defendant time to take legal advice while protecting the plaintiff’s position by continuing the ex parte order in the meantime.  The 4^th defendant is not debarred from making the discharge application as the plaintiff now contends.

23.The plaintiff’s preliminary objection fails.  I proceed to deal with the substance of the defendant’s discharge application.

C.  DISCHARGE APPLICATION

24.In mounting the discharge application, Ms Tam, SC for the 4^th defendant, relied on four grounds :

(1) No serious issue to be tried;

(2) Material non-disclosure;

(3) No risk of dissipation of assets; and

(4) Delay and lack of urgency.

I will deal with them in turn.

C1.  Serious question to be tried

25.This ground can be disposed of shortly.

26.Section 60 provides :

“(1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

27.The burden rests on the transferee to show valuable consideration and good faith and no notice of intent to defraud for the purpose of Section 60(3) : Honour Finance v Poon Ting-chau & Anor;[4] Lloyds Bank Ltd v Marcan & Ors.[5]

28.The plaintiff claimed that the 4^th defendant had accepted the transfer of the shares in DIFEC and DIEC in a conspiracy aimed at defrauding the plaintiff, the judgment creditor of the 1^st defendant.  The purported sale pursuant to the Empire Star Agreements were grossly undervalued when the market value of the shares was around RMB22 million to 789 million, depending on the state of the development of the Dalian Land.  The plaintiff contended that the Empire Star Agreements were caught by Section 60.

29.I have read the evidence and the submissions placed before the ex parte Judge.  There can be doubt in my mind that the plaintiff had shown a serious question to be tried on the evidence then available.

30.The defence of the 4^th defendant is to be found in its defence filed on 3 October 2012.  The evidence in support of the discharge application is filed by Mr Zhang Xi, a director of the 4^th defendant.  In short, the 4^th defendant alleged that it had signed a Framework Agreement dated 14 December 2009 with 濟南環山房地產開發有限公司 (“the Jinan Company”) for the sale of the shares in DIEFC and DIEC for RMB540 million.  The sum was to be used first to clear substantial debts of up to RMB500 million incurred by DIFEC and DIEC and set aside the judicial confiscation orders in respect of the Dalian Land.  The 4^th defendant had caused full due diligence to be conduct in respect of the Dalian Land and obtained reports on valuation and the legal rights to use the Land.  Mr Zhang also exhibited copy remittances to show that sums totaling RMB530 million were paid on behalf of the 4^th defendant to the firm of PRC lawyers acting for Jinan Company pursuant to the Framework Agreement.

31.Ms Tam argued that the evidence shows that the Empire Star Agreements were bona fide transactions for market consideration and that there is no substance at all in the alleged link or conspiracy between the 4^th defendant and the 1^st defendant to defeat the plaintiff’s claim arising from the judgment of Suffiad J.

32.In my view, Ms Tam is in effect asking me to conduct a mini trial on affidavit, make findings in favour of the 4^th defendant and to conclude that it has discharged the burden of proof under Section 60(3).  With respect, this is simply impermissible.  Further, as rightly submitted by Mr Huggins, SC, for the plaintiff, there are doubts in Mr Zhang’s evidence and hence the veracity of the 4^th defendant’s case.  For example :

(1) There is no evidence to show that the Jinan Company did hold the 60% equity interests in DIEFC and DIEC as alleged in the Framework Agreement.  To the contrary, according to public records and what was stated in the Empire Star Agreements, the 2^nd and 3^rd defendants held those 60% interests at the material time.  The inconsistency of the purported owner(s) of the 60% interests in DIEFC and DICE is not satisfactorily explained.  Mr Zhang said that the Jinan Company was the holder of the 60% interest but registration of such shareholding had not completed.  This allegation is not borne out by any evidence at all.

(2) Mr Zhang said that Framework Agreement contained the actual terms of the transaction and the Empire Star Agreements were only used for registration purposes and do not reflect the parties’ actual agreement.  The 4^th defendant’s PRC law expert said it is common practice in the Mainland to have agreements drawn up for the purpose of seeking approval from the authorities and to have separate agreements to lay out the actual terms agreed between the parties.  This point is strongly disputed by the plaintiff’s PRC law expert.  For my part, I have grave doubt if this so-called common practice, which is misrepresentation, to say the least, is legal.  Further, the Framework Agreement was not registered under the relevant PRC regulations.  And without proper registration, the Framework Agreement is not enforceable.  Mr Zhang has not explained why the 4^th defendant and the Jinan Company would be content to enter into an unenforceable agreement for such a substantial transaction.

(3)     Mr Zhang said it was he who signed the Framework Agreement. But his purported signature differs from the one he affixed to his affirmations, raising a legitimate doubt it he did sign the Framework Agreement.  Mr Zhang has not explained the discrepancy.

(4) The Empire Star Agreements made no reference to the Framework Agreement, which is most odd.

(5) All due diligence and valuation reports were allegedly issued only after the Framework Agreement was already entered into, pursuant to which the 4^th defendant had already committed to paying RMB100 million as deposit within 3 days.  (Mr Zhang said the payment was already made by 21 December 2009.)  It makes no commercial sense for the investigations to be conducted or completed only after the deal had already been struck.

(6) There are doubts, which I do not repeat here, in the bank remittances.  I can see the force of the plaintiff’s submission that these might not be genuine payment records.

33.I reject Ms Tam’s submission and find that there is a serious question to be tried on the plaintiff’s claim against the 4^th defendant.

C2.  Material non-disclosure

34.Ms Tam took a number of points on material non-disclosure.  They all are completely answered by Mr Huggins as follows.

	Alleged Material Non‑Disclosure	Answer
(1)	Payment of RMB 530 million by the 4th defendant to Jinan company for the shares in DIFEC and DIEC, evidence of which would have been disclosed to the plaintiff had it made inquiries with the 4th defendant before applying for injunctive relief.	It is simply not feasible for Plaintiff to have made inquiries with the 4th defendant before applying for injunctive relief, given the plaintiff’s case that there was a serious risk of dissipation.
(2)	The fact that the sums of HK$48 million and 36 million stated in the Empire Star Agreements were merely the par value of the equity interest for the purpose of administrative approval, rather than the actual consideration for the sale, as would have been apparent from publicly available documents concerning DIFEC and DIEC.	The Empire Star Agreements were the only agreements that were apparent from the public records.  There is nothing which could have alerted the plaintiff that the consideration therein stated did not reflect the actual agreed consideration for the sale.  Indeed, the plaintiff does not accept that the Framework Agreement (which had not been registered) is a genuine document nor is it accepted that it is “common practice” to have a separate agreement for registration purposes only.
(3)	Mr Zhang’s positions in publicly listed companies, as well as his successful acquisitions of majority shareholdings in those companies, which would have dispelled any suspicion that the 4th defendant was “not a company of any substance.”	As regards Mr Zhang, the plaintiff had conducted public searches as regards assets under his name and his shareholdings and directorships, which was specifically alluded to in the supporting affirmation plead before the ex parte judge.  In any case, Mr Zhang’s positions in the listed companies do not say anything about the 4th defendant’s financial capabilities, particularly given that he is no longer a shareholder of the company.
(4)	The substantial debts owed by DIFEC to judgment creditors resulting in registered charges on the Dalian land, which would have affected the court’s view on the adequacy or otherwise of the purported consideration.	It is not accepted that the Dalian Land is as a matter of fact encumbered with the alleged charges.  Even on the 4th defendant’s own case, they allegedly paid RMB540M for 60% interest in the Dalian Land.  It cannot therefore be possibly disputed that the consideration under the Empire Agreements represented a gross undervalue.
(5)	The existence of the Framework Agreement containing detailed terms of the sale (including the actual consideration for the transaction) referred to in Clause 4 of the Empire Star Agreements.	Clause 4 of the Empire Star Agreements did not refer to the Framework Agreement or indeed any supplemental agreement that had been entered into between the parties.
(6)	The fact that the Empire Star Agreements and the consequent changes in the shareholders of DIFEC and DIEC were all matters of public record and subject to approval and registration by PRC authorities (as confirmed by the plaintiff’s own expert evidence), which would have put paid to the allegation that the transactions had been deliberately concealed from the plaintiff.	The ex parte Judge was indeed informed that the Subject Agreements and the changes in shareholding were matters of public record.  Indeed at the ex parte hearing, Ms Sara Tong told the Judge that it was through a public search that the plaintiff discovered the same.  But this transaction was deliberately concealed from the plaintiff throughout HCA 1294/2005 by Lucky Dragon.
(7)	The fact that the sale by Lucky Dragon to Jinan Company of its 60% interest in CICL and CEL in April 2009 was also (at least for a period of time) a matter of public record, concealment being quite impossible if the transaction were to receive official approval and registration.	Even on the 4th defendant’s own case, the alleged sale by Lucky Dragon to Jinan Company of 60% interest in CICL and CEL in April 2009 was “not completed”.  Suffiad J found that this alleged sale was not genuine.
(8)	The inability of the plaintiff, a BVI investment vehicle, to honour its cross-undertaking in damages, as shown by its lack of assets within the jurisdiction.	The plaintiff fully disclosed that it is an offshore company in Mr Shan Chang’s 1st Affirmation.  Mr Shan Chang also confirmed in his 2nd Affirmation that the plaintiff would honour its undertaking and has sufficient resources to do so.  Where the evidence of the plaintiff did not raise any genuine doubt as to its ability to honour its undertaking as to damages, and the defendants raised no realistic doubt as to such ability, there is basis for the defendant to require the plaintiff to make full and frank disclosure of its financial position as this would be “fishing” for evidence.

35.The complaints about material non-disclosure all fail.

C3.  Risk of dissipation

36.Ms Tam argued that the risk of dissipation is largely inferred from the conspiratorial nature of the impugned transactions and the lack of substance on the part of the 4^th defendant.  Given the evidence now placed by the 4^th defendant, there is no evidence of either allegation.  Further, all the transactions including the Empire Star Agreements were carried out openly in accordance with the requirements in the Mainland for registration and approval.  Whatever might be said about the 1^st defendant and others, the plaintiff’s attempt to paint the 4^th defendant with the same conspiratorial brush is unwarranted.  But as I have demonstrated, the evidence adduced by the 4^th defendant has failed to dispel the conspiratorial nature of the plaintiff’s claim.  The risk of dissipation is still there.

37.Ms Tam next submitted that since the Empire Star Agreements, the 4^th defendant has taken no step to dispose of the shares in DIFEC and DIEC.  It shows that the risk of dissipation is minimal.  I disagree. In my view, the mere fact that the 4^th defendant has not taken any step so far to dispose of the shares does not detract from such an obvious risk of dissipation.

38.This ground fails.

C4.  Delay and urgency

39.Ms Tam complained that the plaintiff has not explained when and how it came upon the Empire Star Agreements.  They were executed in January 2010 and presumably registered with the Dalian authorities shortly thereafter.  There was a period of 2 ½ years of inaction on the part of the plaintiff.  The lapse of time has not been explained.  However, as rightly submitted by Mr Huggins, there is no evidence as to when the Agreements were registered.  More importantly, the basis of going ex parte was secrecy. It was in fact made clear to the ex parte Judge that the application was made by reason of a need for confidentiality due to the risk of dissipation.

40.This ground also fails.

C5.  Conclusion

41.For the above reasons, the 4^th defendant’s application for discharge is dismissed.

D.  FORTIFICATION

42.I now turn to the 4^th defendant’s application for fortification of the plaintiff’s undertakings as to damages.

43.The plaintiff is a BVI company.  Ms Tam argued that the 4^th defendant would suffer a significant loss as a result of the injunction which the plaintiff would be unable to make good from assets available within the jurisdiction or elsewhere.  The 4^th defendant as the 60% shareholder in DIFEC and DIEC would have to continue to finance the Dalian project, having already paid RMB530 million for the stakes.  There is no evidence that the 4^th defendant intends to sell its stake in DIFEC and DIEC but since it is, ex hypothesi, enjoined from so doing it would be unable to reap the fruits of its substantial investment until the action is tried and determined.  Furthermore the injunction has caused and will continue to cause significant damage to the 4^th defendant’s reputation, and may affect the intended acquisition of the other 40% (Chinese) interests in DIFEC and DIEC.  As a rough and ready estimate the 4^th defendant would put the appropriate amount of fortification at HK$10 million.

44.Mr Huggins contended that a defendant seeking fortification of an undertaking must show a likelihood of a significant loss arising as a result of the injunction and a sound basis for the belief that the undertaking will be insufficient (ie the plaintiff would be unable to make good the loss).  The 4^th defendant has not provided any evidence as to what loss it will likely suffer as a result of the injunction, which simply preserves the status quo and essentially restrains the 4^th defendant from encumbering/disposing of the shares in DIEC and DIFEC and the Dalian Land pending trial.  Should there be any genuine need for the 4^th defendant to deal with these assets, they can apply to the court for a variation with the necessary evidence showing a change in circumstances.  In the absence of any evidence as to what damages the 4^th defendant is likely to suffer as a result of the injunction, there is no justification for an order for fortification of the plaintiff’s Undertaking.  Further, the 4^th defendant has not provided any evidence justifying the proposed quantum of fortification in the sum of HK$10M that it seeks from the plaintiff in the event that the court does order fortification.  There is simply no evidence to suggest that the 4^th defendant is likely to suffer losses of this amount at all.  Given the lack of evidence, there is no factual basis upon which the court should order fortification of the plaintiff’s undertaking.

45.I agree with Mr Huggins’ submissions entirely.

46.The application for fortification is therefore refused.

E.  COSTS

47.Costs should follow the event.  I make an order nisi that the 4^th defendant do pay the plaintiff the costs of its failed applications, to be taxed if not agreed, with a certificate for two counsel.

Mr Adrian Huggins SC leading Ms Sara Tong, instructed by Winston Chu & Co, for the plaintiff

Ms Winnie Tam SC leading Mr C W Ling, instructed by Edwards Wildman Palmer, for the 4^th defendant