China Metal Recycling (Holdings) Ltd and Another v. Chun Chi Wai and Others

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2013

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BETWEEN

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REASONS FOR DECISION

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I. Background

1.On 30 July 2013, the plaintiffs (acting through their provisional liquidators) obtained an ex parte Mareva injunction against the 1^st to 12 defendants.  On 9 August 2013, which was the inter partes return date for the continuation of the ex parte injunctive orders, only the 2^nd, 11^th and 12^th defendants appeared and opposed to continuation. The 11^th and 12^th defendants also issued summonses to seek the discharge of the original ex parte injunction.  After a full day’s hearing, I ordered that:-

(1) the plaintiffs’ application for continuation of the injunctive orders against the 2^nd defendant be refused;

(2) the ex parte injunctive orders against the 11^th and 12^th defendants be discharged;

(3) the plaintiffs’ application for a re-grant of injunctive orders against the 11^th and 12^th defendants be refused;[1]

(4) leave to appeal against my orders set out in sub-paragraphs (2) and (3) above be refused; and

(5) upon parties’ consent, there be an interim injunctive order against the 11^th and 12^th defendants as per a draft order agreed between the plaintiffs and the 11^th and 12^th defendants[2].

2.I now give my detail reasons.

3.The 1^st plaintiff is a company listed in the Main Board of the Hong Kong Stock Exchange.  It has been suspended from trading since 28 January 2013. It is the holding company of a group of companies called the China Metal Group (“the Group”) including the 2^nd plaintiff which is a company incorporated in Macao.  The 2^nd plaintiff is supposedly the sourcing arm of the Group. The Group claims to be engaged in scrap metal business which includes the production of recycled scrap metal products and the resale of scrap metal.

4.The 1^st defendant is the Chairman and CEO of the 1^st plaintiff. The 2^nd defendant is his wife. She is also a non-executive director of the 1^st plaintiff. According to Macao company registry records recently filed in the evidence of the plaintiffs, the 2^nd plaintiff was established in Macao on 31 March 2005. At the beginning, the management was stated to be constituted by 2 “Administrators": the 1^st defendant and one Mr Tsui Cham To.  Mr Tsui ceased to be an administrator on 17 July 2007. His role was taken up by the 2^nd defendant. She was one of the two administrators until she resigned on 14 April 2010. Since then, the 1^st defendant became its sole administrator until 31 December 2012 when he was replaced by another gentleman named Wang Yuzhang as the sole administrator.

5.On 22 December 2009, the Commission commenced an investigation against the affairs of the Group pursuant to section 182 of the Securities and Futures Ordinance (“SFO”). The investigation targeted on affairs of the Group conducted during or aground the period from 10 June 2009 to 17 November 2009.

6.In short, the investigation conducted by the Commission revealed, amongst other things, that:-

(1) the financial position of the 1^st plaintiff was overstated in the prospectus used in its IPO and its annual report for 2009.  It was achieved by inflating the size of its business and the amount of revenue generated by the 2^nd plaintiff.  A portion of the 2^nd plaintiff’s “purchases” from its three major suppliers for the financial years of 2007, 2008 and 2009 were fictitious (“the fictitious transactions point”);

(2) there was a circulation of 2^nd plaintiff’s funds:  first from the 2^nd plaintiff to its suppliers; then from suppliers to customers; and from customers back to the 2^nd plaintiff (“the round robin point”);

(3) a number of entities were established by persons connected with the 1^st defendant. They purported to be independent suppliers and customers that transacted with the 2^nd plaintiff in doubtful transactions;

(4) transaction documents include bills of lading which appeared to contain false information regarding the location and movement of vessels; and

(5) there is evidence of exaggeration of the financial position of the 1^st plaintiff after the IPO which involved suspicious documents containing false information of vessel movements. There were also mismatches in customs declarations, reference numbers and container codes.

7.On 26 July 2013, upon the presentation of a winding-up Petition by the SFC in HCCW 210/2013, the Court appointed Mr Cosimo Borrelli (“Borrelli”) and Ms Chi Lai Man Jocelyn (“Jocelyn”) as joint and several provisional liquidators of the 1^st plaintiff. On the same day, they were also appointed as directors of the 2^nd plaintiff at the instance of the sole shareholder of the 2^nd plaintiff.  As mentioned earlier, in a matter of 4 days, Borrelli and Jocelyn caused the plaintiffs to instigate the present proceedings and obtained ex parte injunctive orders against the 1^st to 12^th defendants. The 3^rd to 10^th defendants are all corporate entities. The 13^th defendant, also a corporate entity, was shortly thereafter added as a defendant and ex parte injunctive orders were also obtained against it.  This judgment however does not concern the plaintiffs’ case against the 13^th defendant because the inter partes return date is yet to come.

8.As acknowledged by Mr Lam, counsel for the plaintiffs, the ex parte application before Tong J was presented solely as an application for a Mareva injunction. It was not presented as an application for an interim injunction for the protection of proprietary claims. Mr Lam further acknowledged, quite fairly in my view, that the Indorsement on Writ was drafted too widely.  It was an array of causes of actions with a view to prevent possible “omissions” rather than through a thoughtful process with a view to elucidation. 

9.In the first affidavit of Borrelli (the main supporting evidence for the ex parte application), he referred to the following evidential basis for the application:-

(1)   The evidence available to SFC suggested fictitious transactions between the 2^nd plaintiff and 3 of the defendants between 2007 and 2009. They are the 3^rd to 5^th defendants[3] (“the fictitious transactions issue”);

(2)   Analysis conducted by a forensic account engaged by SFC suggested that there was a “round robin of funds” in 2008 between the 2^nd plaintiff; the 3^rd to 5^th defendants (as purported suppliers) and the 6^th and 7^th defendants (as purported customers) (“the round robin issue”); and

(3)   As a result of the inflation of the Group’s revenue, the 1^st defendant as beneficial owner of a majority shareholding in the Group had thereby obtained very substantial dividends from the Group (“the dividend issue”).

10.As summarized in the plaintiffs’ Skeleton Arguments presented to the ex parte judge, the plaintiffs’ case was that the 1^st defendant was the directing mind behind the fictitious transactions and the round robin scheme and that each of the remaining defendants were incorporated, created or directed by him to participate in such a scheme[4].

11.In order to demonstrate the existence of a “good arguable case”, the plaintiffs’ Skeleton Arguments stated as follows:-

“25.  By way of brief summary, the Plaintiffs claim that they suffered substantial loss and damage of hundreds of millions of US dollars as a result of a fraudulent scheme operated by the 1^st Defendant as the directing mind or “puppet master”, which involved various false transactions and operating and implementing false trading schemes.

26. As a result, the Plaintiffs claims, inter alia, that the other Defendants:-

26.1 constituted alter egos, puppets and/or creatures of the 1^st Defendant;

26.2 caused the Plaintiffs to enter into fraudulent transactions;

26.3 received assets of the Plaintiff knowing the transactions were carried out as part of a fraudulent scheme; and

26.4 knowingly or dishonestly assisted in each other’s breaches of trust, duty of care and/or skill.”

12.Having set out the plaintiffs’ case on “good arguable case”, the Skeleton Argument subsequently dealt with the issue of “risk of dissipation” and in the course stated the followings:-

“46. The evidence of a real risk of dissipation is addressed at paragraphs 32 to 41 of Borrelli 1[5].

47. He identifies, at paragraphs 33 to 36, a series of payments in the period from 10 to 28 July 2013 (“the July 2013 Payments”), which appear to have no commercial purpose and have caused the Plaintiffs to suffer a substantial loss of HK$1,009,298,420, specifically:

47.1 the payment of HK$680,299,270 from the 2^nd Plaintiff to the 5^th Defendant, in a series of seven installments paid over the period 10 to 26 July 2013;

47.2 the payment of HK$239,231,600 from the 2^nd Plaintiff to the 10^th Defendant in a series of four installments over the period 15 to 16 July 2013;

47.3 the payment of HK$73,053,237 from the 2^nd Plaintiff to the 11^th Defendant, in a series of three installments paid on 22 July 2013; and

47.4 the payment of HK$16,714,313 from the 2^nd Plaintiff to the 12^th Defendant on 24 July 2013.

48. There is no apparent commercial purpose or legitimate explanation for the July 2013 Payments.  It is of obvious and significant concern that all of the July 2013 Payments were made to entities that appear to be the creatures of the 1^st Defendant or, at the very least, to related parties.  The very recent timing of the payments, which were made immediately before the appointment of the Provisional Liquidators, is also a matter of substantial concern to the Plaintiffs. Accordingly, it is submitted that the July 2013 Payments represent a clear and unjustified dissipation of the 1^st Plaintiff’s assets.” [emphasis added]

13.Consistent with what was presented in the Skeleton Arguments, the evidence concerning the July 2013 Payments was presented under the issue of “risk of dissipation” in the 1^st Affidavit of Borrelli[6]. Mr Lam acknowledged at the hearing that there was no evidence implicating the involvement of the 2^nd defendant in the July 2013 Payments.  She did not receive any of the July 2013 Payments.  In relation to the payments received by the 11^th and 12^th defendants respectively, Borrelli said as follows:-

“35(c) the remittance of HK$73,053,237.00 from [2^nd plaintiff] to [11^th defendant] in a series of 3 installments paid over the period 19 July 2013 to 22 July 2013, a company (as per its most recent annual return):-

(i) wholly owned by Sze Wing Sheun;

(ii) with Sze Wing Sheun as the sole director;

(iii) with Xie Mei Jing as the appointed company
secretary; and

(iv) with the registered address of Room 1321, Leighton Centre, 77 Leighton Road, Causeway Bay, Hong Kong;

35(d) the remittance of HK$16,714,313.00 from [the 2^nd plaintiff] to [12^th defendant] on 24 July 2013, a company (as per its most recent annual return):

(i) wholly owned by Lin Yuanxiao;

(ii) with Lin Zhiqian as the sole director;

(iii) with Xie Mei Jing as the appointed company secretary; and

(iv) with the registered address of Room 1321, Leighton Centre, 77 Leighton Road, Causeway Bay, Hong Kong; …

37. Although the Provisional Liquidators are still investigating the July 2013 Payments, the work of the Provisional Liquidators to date indicated that appears to be no commercial justification for the payments. The Provisional Liquidators are also seriously concerned about these payments for the following reasons:-

(i) the timing of the payments which were just prior to the appointment of the Provisional Liquidators;

(ii) the substantial amount of the payments, totaling over HK$1 billion;

(iii) the fact that the payments have been made to the entities detailed by the SFC as being at the heart of the misconduct described by the SFC;

(iv) where [the 1^st defendant] was one of the signatories on each of the authorization forms for each of the July 2013 Payments.” [emphasis added]

14.I should immediately point out that paragraph 37(iii) of the above quote was factually wrong as acknowledged by Mr Lam.  There is no evidence that the 11^th and 12^th defendants had been in any way involved in the fictitious transactions issue and the round robin issue.  Mr Lam also acknowledged that paragraph 48 of the Skeleton Arguments was also erroneous in that there is no evidence that the 11^th and 12 defendants are the creatures of the 1^st defendant or parties related to him.  In particular, there is no evidence that Mr Sze Wing Shuen, Mr/Ms Xie Mei Jing, and Mr Lin Zhiqian are in any way connected to the 1^st defendant or other corporate defendants which have been implicated in the fictitious transactions issue or the round robin issue.  Whilst the 11^th and 12^th defendants share the same registered office, which is that of a corporate secretarial services company, Mr Lam acknowledged that there is no evidence that the 11^th and 12^th defendants do not maintain a respective place of business or that they do not carry out genuine business activities.

15.To complete the picture, I should also mention the evidence of Jocelyn in her Affirmation filed 7 August 2013.  At a section entitled “Continuing Investigations by the Provisional Liquidators”, she stated:-

“46. As noted in paragraphs 23 to 24 of the First Affirmation of Chi Lai Man Jocelyn which was filed in HCCW 210 of 2013, the Provisional Liquidators’ investigations in respect of the Group remain at a very preliminary stage. The Provisional Liquidators’ initial findings are that:-

(a) there is a substantial segregation of information and duties amongst the offices and employees of the Group from which it appears that no employee or management team seems to have a full understanding of the operations and financial status of the Group…”

16.It was in the light of the above background that I was called upon to deal with the 2^nd defendant’s opposition against continuation of the ex parte injunction orders and the applications of the 11^th and 12^th defendants for the discharge of the ex parte injunction orders.  The broad grounds of the 2^nd defendant’s opposition and those of the discharge applications by 11^th and 12^th defendants were essentially the same, namely, that the materials presented to the ex parte judge disclosed no “good arguable case” and no “risk of dissipation” vis-à-vis the respective 2^nd, 11^th and 12^th defendants.

II. The 2^nd defendant

17.At the hearing, I first sought clarification from Mr Lam as to what causes of action he relied upon in the plaintiffs’ application for continuation of the injunctive orders against the 2^nd defendant. Mr Lam stated as follows:-

(1) fraudulent breach of fiduciary duties in relation to the 1^st plaintiff (as a non-executive director) and in relation to the 2^nd plaintiff (as an administrator until 14 February 2010);

(2) dishonest assistance in relation to July 2013 payments and the fictitious transactions in so far as they related to the 5^th defendant; and

(3) Conspiracy with the 2^nd plaintiff, the 1^st, 3^rd, 4^th, and 5^th to 10^th defendants in fictitious transactions (both in the round robin issue and the July 2013 payments issue).

18.Firstly, in relation to the allegation that the 2^nd defendant was involved in the July 2013 payments, Mr Lam acknowledged that there is no evidence of the 2^nd defendant receiving any part of the July 2013 payments.  The allegation against her was solely based on her connection with the 5^th defendant which was one of the parties receiving part of the July 2013 payments.

19.Similarly, on the fictitious transactions issue and the round robin issue, the allegation against the 2^nd defendant was based on:-

(i) she being a non-executive director of the 1^st plaintiff;

(ii) she being one of the 2 administrators of the 2^nd plaintiff between 17 July 2007 and 14 April 2010;

(iii) her connection with the 5^th defendant “Cheung Fat” as per paragraph 45 of SFC’s Petition in HCCW 210/2013 which read:-

“[the 5^th defendant] was incorporated in October 2007 through CPK Secretarial Company Limited…Its sole shareholder and sole director is Ms. Zhong Liue (鍾柳娥). A DBS bank cheque was issued by Worldwide International Inspection Ltd., a company incorporated in the BVI, for payment of the incorporation of [the 5^th defendant]. The signatories of the current account of Worldwide Inspection were [the 1^st defendant] and [the 2^nd defendant] (non-executive director of [the 1^st plaintiff] and wife of [the 1^st defendant]. [The 2^nd defendant] was the sole director and sole shareholder of Worldwide Inspection in the DBS account opening documents…”

20.In relation to the 2^nd defendant’s involvement in the affairs of the 1^st plaintiff, Mr Lam added that she was described, in the prospectus as a co-founder of the Group with her husband. Counsel for the 2^nd defendant, Mr Joffe submitted that it was neither here nor there. The important point was that at the material times, the 2^nd defendant was merely a non-executive director of the 1^st plaintiff and that there was no evidence from the plaintiffs to demonstrate that she had been in any way involved in the day-to-day operation of the 1^st plaintiff.  In fact, in the same prospectus, it was mentioned that the 2^nd defendant’s involvement in several companies within the Group (including the 2^nd plaintiff) was “non-executive capacity”. 

21.As for the 5^th defendant, it was incorporated in 2007. Mr Joffe submitted that the signing of a cheque of Worldwide Inspection to pay for the incorporation charges of the 5^th defendant was not evidence of the 2^nd defendant’s participation in the subsequent activities of the 5^th defendant. Mr Lam acknowledged that there was no evidence of the 2^nd defendant being involved in the payments made between the 2^nd plaintiff and the 5^th defendant, such as the signing of cheques.  There was simply no evidence to infer that the 2^nd defendant knew that the 5^th defendant was being used for any fraudulent purpose.  It was not in dispute that the shareholders of the 5^th defendant underwent successive changes. Eventually, a company named Huan Bao Steel became the sole shareholder of the 5^th defendant. The 2^nd defendant is also the sole shareholder of Huan Bao Steel.  There was however no suggestion that Huan Bao Steel has in any way been connected with the fraudulent schemes perpetrated by the 1^st defendant.  Mr Lam does not suggest that the 2^nd defendant had been a director or officer of the 5^th defendant at any time.  I accepted Mr Joffe’s submission that the evidence of signing a cheque to pay for one’s incorporation fees was not a badge of fraud.  Inference of participation in fraud must not be lightly drawn. In dealing with a Mareva injunction application, it is essential for the court to carefully and critically scrutinize the materials placed before it (see Dieulemar Shipping SpA v. Transfield ER Futures Ltd.[7]). There must be solid and cogent evidential basis (see also Dallah Albaraka (Ireland) v. Symphony Gem Nv.[8] ). 

22.In relation to the 2^nd defendant’s role as an administrator of the 2^nd plaintiff between 17 July 2007 and 14 April 2010, it is firstly important to note that it was not the plaintiffs’ case that all commercial transactions conducted by the 2^nd plaintiff were fictitious.  The plaintiffs’ case was that the volume of business/revenue was inflated.  Secondly, the fraudulent scheme involved the 2^nd plaintiff making payments to suppliers pursuant to allegedly fictitious transactions.  It was thus pertinent to note Mr Lam’s acknowledgment that there was no evidence of the 2^nd defendant being involved in any payment made by the 2^nd plaintiff. Mr Lam did not even suggest that the 2^nd defendant was a signatory to any bank account of the 2^nd plaintiff.  That was wholly consistent with her description in the prospectus, namely that her involvement with the 2^nd plaintiff was “non-executive capacity”.  

23.In the premises, I accepted Mr Joffe’s submission that there was no evidence on which one could draw an inference that the 2^nd defendant knew of and/or participated in the fictitious transactions or the round robin scheme.  Neither was there any evidence to infer that the 2^nd defendant had knowledge or and/or participated in the July 2013 Payments between the 5^th defendant and the 2^nd plaintiff.  By the time of those payments to the 5^th defendant, the 2^nd defendant had long ceased to be an administrator of the 2^nd plaintiff.  As observed before, there was simply no evidence of the 2^nd defendant’s involvement in the affairs of the 5^th defendant since its incorporation.  For the same reasons, there was no basis to suggest that the 2^nd defendant was in fraudulent breach of fiduciary duties in relation to the plaintiffs. The last allegation of “conspiracy” had not even been included in the widely drafted Indorsement on Writ. There was no evidence of any connection between the 2^nd defendant; the 3^rd and 4^th defendants; and the 6^th to 10^th defendants.  Mr Lam simply could not show me any cogent evidential basis for such an extravagant claim. 

24.In the circumstances, I was satisfied that the plaintiffs had failed to establish a good arguable case vis-à-vis the 2^nd defendant. On this ground alone, I should have refused to continue the draconian injunctive orders against her.  I further noted that there was simply no evidence that the 2^nd defendant had been in the process of or was likely dissipating her assets. She is living in Hong Kong with her three children. Having found that there was no evidence of her involvement in the fraudulent scheme, there was no basis to suggest that she had exhibited “low commercial morality” from which a risk of dissipation can be inferred. I will also refuse to continue the injunctive orders against her on this additional basis.  I accordingly ordered that the plaintiff’s summons for continuation of the ex parte injunction orders against the 2^nd defendant be dismissed. I also ordered the plaintiffs to pay for the 2^nd defendant costs of resisting the summons which should include the costs of making disclosures pursuant to the ex parte order. Such costs should be taxed if not agreed and payable forthwith. There should also be a certificate for two counsels.

III. The 11^th and 12^th defendants

25.At the hearing, when I asked Mr Lam what were the causes of action now relied upon by the plaintiffs against the 11^th and 12^th defendants, he stated that they were:-

(1) knowing receipt in breach of trust in relation to the respective remittances admittedly received by the 11^th and 12^th defendants; and

(2) alternatively, on money had and received in relation to those remittances.

26.Mr Mok SC (senior counsel for the 11^th defendant) and MrLeong SC (senior counsel for the 12^th defendant) reminded me that before the ex parte judge, the plaintiffs presented their case very differently.  The case that the 11^th and 12^th defendants were called upon to meet was as set out in the plaintiffs’ Skeleton Arguments quoted in paragraph 11 above.  It could readily be seen that paragraphs 26.1 and 26.2 of the Skeleton Argument were not sustainable for the reasons set out in paragraph 14 above. Paragraphs 26.3 and 26.4 were referable to the transactions under the “fictitious transactions and round robin issues”.  As mentioned in paragraph 12 above, the July 2013 Payments were mentioned quite separately as being relevant to the issue of “risk of dissipation”.  Having accepted that there was no evidence of the 11^th and 12^th defendants’ involvement in the fictitious transactions issue and the round robin issue, Mr Lam accepted that the case of “knowing receipt in breach of trust” could not be built on that basis.

27.Mr Lam however submitted that the 11^th and 12^th defendants had not disputed their respective receipt of funds from the 2^nd plaintiff under the remittance advices exhibited in the 1^st Affidavit of Borrelli[9].  Mr Lam relied on the principle of Seldon v Davidson[10]. He submitted that the burden shifted onto the 11^th and 12^th defendants to explain why the sums admittedly received by them were not liable to be returned to the 2^nd plaintiff. He then submitted that the 11^th and 12^th defendants failed to do so in their affirmations.  He therefore submitted that at the very least, the plaintiffs had established a case on money had and received.

28.I will first deal with the state of the evidence concerning these remittances.  There were 3 remittance advices exhibited in the 1^st Affidavit of Borrelli which related to the 11^th defendant. They amounted to US$9,417,596 (HK$73,053,237).  All these remittance advices referred, on their face, to a contract numbered HWSC2013090. In relation to the 12^th defendant, the remittance advice of US$2,154,712 (HK$16,714,313) referred to a contract numbered GDS2012087. When I enquired from Mr Lam whether there was evidence about these specific contracts, Mr Lam took instructions from his instructing solicitors[11] and told me from counsel’s bench that the Provisional Liquidators had looked for them and could not find them.  Mr Mok and Mr Leong objected and submitted that I should not accept evidence given from counsel’s bench.  They referred me to various passages in the affidavit/affirmation of Borelli and Jocelyn which I had already set out in paragraphs 13 and 15 above. They pointed out that the ex parte application was made barely 4 days after the Provisional Liquidators were appointed. Investigation into the affairs of the Group was admittedly still at a very preliminary stage and very little assistance was obtainable from the Group’s employees.  They also pointed out that when Mr Borrelli mentioned about the remittances in his affidavit, he clearly was not aware of the significance of the contract numbers, their importance was only apparent when questions were put by me to Mr Lam at the hearing.  If Mr Borrelli were aware of the references to the respective contracts in the remittance advices, and that he had undertaken a meaningful search for these contracts in vain, he would have mentioned that as a basis for saying that “there appears to be no commercial justification for the payments”. He would most probably have described the remittances as “not substantiated by any underlying transactions and documents” or words to similar effect. In a nutshell, Mr Mok and Mr Leong submitted that Mr Borrelli’s aforesaid statement was a bare assertion not backed by evidence.  No evidential value could be attached to such an alleged “appearance” of no commercial justification because it all depended on whether and if so what investigative steps had been undertaken.  They also submitted that the alleged “appearance” was contrary to documentary evidence.  On any fair reading of the remittance advices, they actually “appeared” on their faces to relate to certain commercial contracts. Unless there was evidence indicating the said contracts to be fictitious, there was indeed an “appearance of commercial justification”.

29.Mr Lam submitted that the Provisional Liquidators had gone on oath to state that there was an appearance of no commercial justification and I could act on that evidence. With respect, the statement of Mr Borrelli was in the nature of a conclusion. To be precise, it was a conclusion reached at a preliminary stage of investigation. In order to afford any weight to such a conclusion, I must first assess the steps taken by the Provisional Liquidators before arriving at that conclusion. Admittedly, the investigation was rather preliminary and ongoing even by 7 August 2013. Employees of the Group seemed unable to provide much assistance. There was no evidence of the Provisional Liquidators being aware of the contract references and hence directed their search accordingly. No details of the investigative steps undertaken were given.  In the end, I agreed with MrMok and Mr Leong that I could not place any appreciable weight on such a bare assertion.

30.Mr Lam then submitted that I could draw adverse inference from the fact that the 11^th and 12^th defendants did not assert and provide evidence in their affirmations to establish the commercial basis for the remittances. This submission was made on the basis that relying on Seldon vDavidson, the burden was squarely on the 11^th and 12^th defendants. I accepted the submissions of Mr Mok and Mr Leong that in the circumstances of this case, the burden of proof never shifted onto their respective clients.  First of all, the Seldon vDavidson principle would only apply in the absence of any “suggestion” that there was consideration backing the payments. In fact, in the judgment of Willmer LJ in Seldon v Davidson[12], his Lordship referred to “absence of circumstance” as justifying a prima facie recoverability of an admitted payment. In El Vince Ltd. v Wu Wen Sheng[13], the fact that the defendant pleaded the received sum as a part repayment of an earlier loan to the plaintiff was already sufficient to render the burden of proof remaining on the plaintiff.  Mr Leong also referred me to the dictum of Poon J in Big Island Construction (HK) Ltd. v Wu Yi Development Co. Ltd.[14] which I fully agree.  Mr Leong also referred me to the recent decision of the CFA in Lui Fai Yeung v Chui Kin Man[15] . After referring to the principle of Seldon v Davidson, Tang PJ said[16] that “I believe the proper inference to draw depends on the circumstances of the particular case and not on who has the burden of proof”.

31.In the present case, the remittance advices, on their faces, already suggested that the payments were made pursuant to certain commercial contracts. Unless there was credible evidence to the contrary, it would seem that the remittances related to specific commercial transactions. As mentioned earlier, Mr Lam acknowledged that there was no evidence that the 11^th and 12^th defendants did not maintain a respective place of business or that they did not carry out genuine business activities.  Against that, it had not been suggested by the plaintiffs that by July 2013, the 2^nd plaintiff had already ceased its business activities such that any transactions conducted in July 2013 could only have been questionable.

32.Secondly, Mr Mok was correct in submitting that the goal post had been shifted by the plaintiffs only at the inter partes hearing when I questioned Mr Lam on what causes of action were actually being pursued against the 11^th and 12^th defendants.  The affirmations filed by Mr Sze Wing Sheun and Madam Xie Mei Jing both on 7 August 2013 dealt with the case made by the plaintiffs against the 11^th and 12^th defendants as per the affidavit of Borrelli and the Skeleton Arguments presented before the ex parte judge.  Mr Lam acknowledged that the application before the ex parte judge was solely a Mareva injunction based on the causes of action identified in paragraph 26 of the Skeleton Arguments. He acknowledged that the proprietary claims of knowing receipt and/or money had and received in relation to the remittances now sought to be pursued against the 11^th and 12^th defendants were only raised at the inter parteshearing.  Although he pointed out that “money had and received” was mentioned in the admittedly too widely drafted Indorsement on Writ, it was in my view clear that money had and received was not a case presented to the ex parte judge at all. Similarly, as far as knowing receipt was concerned, the case before the ex parte Judge was in relation to the funds involved in the fictitious transactions and round robin issues.  In fact, references to the July 2013 Payments in the Skeleton Arguments and in the first Affidavit of Borrelli were made in the context of “risk of dissipation” rather than on “good arguable case”. Mr Mok and Mr Leong submitted that it was a serious allegation to suggest that the 11^th and 12^th defendants were involved in fictitious contracts.  If such allegation should be made, it should be made clearly and distinctly. It should also be backed by cogent evidence.  They submitted that on the evidence, such an allegation just could not be responsibly made by the Provisional Liquidators. In the circumstances, I agreed with Mr Mok and Mr Leong that I could not draw any adverse inference from the fact that the 11^th and 12^th defendants did not specifically deposed to the 2 contracts underlying the remittances.   

33.In the circumstances, I concluded that based on the evidence presented before the ex parte judge, the plaintiffs had not demonstrated a good arguable case on the causes of actions relied upon and set out in paragraph 26 of the Skeleton Arguments.  On this ground alone, the ex parte Mareva Injunction together with its ancillary orders must be discharged.  Furthermore, before the ex parte judge, the case of “risk of dissipation” against the 11^th and 12^th defendants was solely based on alleged “low commercial morality”.  I had rejected the plaintiffs’ arguments on the “lack of commercial justification” point in relation to the July 2013 Payments.  Mr Lam had acknowledged that there was no evidence implicating the 11^th and 12^th defendants in the fictitious transactions and round robin schemes. I was mindful of the warnings against too loosely inferring a risk of dissipation from allegedly low commercial morality as explained in Eastman Chemical Ltd. v Heyro Chemical Co. Ltd. (No. 2)[17]. There was simply no evidence in this case to suggest any lacking in commercial morality on the part of the 11^th and 12^th defendants.  There was also no evidence on actual risk of dissipation by 11^th and 12^th defendants of their assets.  Hence, I also discharged the ex parte injunction orders against the 11^th and 12^th defendants basing on this additional ground.

IV. Re-grant?

34.   Consequent upon my aforesaid orders, Mr Lam applied for a re-grant of injunctive orders against the 11^th and 12^th defendants. The application was based on the same materials but in the nature of interim preservation of the subject matters of the plaintiffs’ “proprietary claims” in relation to the remittances. Mr Lam would limit his application to the amounts of the remittances received by the 11^th and 12^th defendants respectively.  Mr Lam argued that in relation to this application, the threshold was lower. The plaintiffs merely had to establish “serious questions to be tried” as opposed to “good arguable case”.  He relied on Lewin on Trust[18]which stated:-

“To obtain an interim injunction to preserve trust assets, a beneficiary has to show that there is a series question to be tried as to whether they are trust assets and are in jeopardy. The burden of proof is not as high as it is in the case of a freezing order, where claimant has to show a “good arguable case”. This is the only practical difference between the two forms of injunction and it would there seem that the procedure involved, and the duty of fair presentation owed to the court, are the same when obtaining either form of injunction.”

35.Mr Mok submitted that a claim for money had and received is not a claim based on trust. I was again referred to the Big Island case[19] for the proposition that money had and received was grounded in “unjust enrichment”. That was of course correct but it did not provide a complete answer. Assuming the contracts referred to in the remittance advices were fictitious, then it could be argued that the 11^th and 12^th defendants would have knowledge that the remittances were paid out of the 2^nd plaintiff in breach of trust, namely, when the 1^st defendant signed the respective remittance advices, he was using company funds not for the benefit of the company.  In that case, the receipt of the remittances could amount to knowing receipt of trust moneys.  Hence, the crux of the matter remained as whether the evidence established a “serious question to be tried” in respect of the existence / absence of commercial basis for the remittances.

36.On the other hand, Mr Leong referred me to footnote 35 in Lewin on Trust. After referring to Derby & Co. Ltd. Weldon[20] , the learned author wrote:  “Note the comment that the difference is incapable of definition. The cogency of the proof needs to be weighed against the severity of the order sought, and a freezing injunction, affecting the trustee’s own asset, is more draconian. ”.  Although it would be difficult to define the difference between the “serious question to be tried test” and the “good arguable case test”, I had to recognize that there should be some difference in degree.  The logic behind the difference is as stated in Lewin on Trust, namely, that a Mareva injunction affects a person’s freedom in dealing with his own assets. It is thus more draconian.  However, it is also draconian to seek to restrain a defendant from dealing with certain assets in his possession and control simply because the plaintiff asserts (before a trial could take place) that the assets are trust properties. Before granting such a relief, the court should also closely scrutinize the plaintiff’s assertion. The court must look for the existence or otherwise of factual and evidential basis for such an assertion. One does not get an interim injunction by merely raising a “question to be tried”.  There must be a “serious question to be tried”.  In other words, the plaintiff must satisfy the court with sufficient facts and evidence such that the court can conclude that justice demands the grant of such injunctive relief. In my judgment, my decision has to be grounded on my assessment on the cogency of the evidence presented before me rather than dwelling into the semantic differences between the two tests.

37.As explained earlier, on the face of the documents, ie the remittance advices, they referred to specific contracts. There was no evidence to suggest that these contracts were fictitious or less than genuine. Mr Borrelli’s statement was no more than a bare assertion. There was no evidence that the 11^th and 12^th defendants were not companies conducting genuine businesses. There was no evidence of any link or connection between them and the 1^st defendant (the alleged frauster).  In fact there was no evidence that they were linked to any of the defendants.  There was no evidence that in July 2013, the 2^nd plaintiff could not have been conducting some genuine business transactions. Whilst payments by the 2^nd plaintiff to other defendants implicated in the fictitious transactions issue and the round robin issue would justifiably raise one’s eyebrow, the same could not be said about the 11^th and 12^th defendants.  The fact that various payments (including those to the 11^th and 12^th defendants) were made in July 2013 was neither here nor there.  As Mr Leong pointed out, the application for appointment of Provisional Liquidators was made ex parte. In any event, the 1^st defendant knew that the Group was investigated by SFC since 2009. Mr Lam stressed that the remittance advices were all signed by the 1^st defendant. In my view, this was yet another neutral point because the 1^st defendant was the CEO of the Group and obviously a signatory of the 2^nd plaintiff’s bank account. All payment documents, whether they related to genuine or fictitious transactions of the 2^nd plaintiff would have to be signed by him.  In the end, I concluded that the evidence so far presented by the plaintiffs failed to establish a serious question to be tried in relation to the two causes of action now pursued against the 11^th and 12^th defendants. I accordingly dismissed the application for re-grant.

V. Leave to appeal

38.Mr Lam orally applied for leave to appeal against my decisions. He argued that the admitted receipt of the remittance; paragraph 37 of Borrelli’s Affidavit; and the absence of explanation from the 11^th and 12^th defendants constituted a “good arguable case” or at least a “serious question to be tried”. He argued that I erred in law in not so finding.  Mr Mok and Mr Leong argued that the plaintiffs had not demonstrated a reasonable prospect of success in relation to the proposed ground of appeal.  The proposed ground sought to question the propriety of my assessment on the cogency and weight of the evidence. For the reasons explained in the course of my treatment of the evidence, I was unable to see a reasonable prospect of success in the intended appeal.  I accordingly refused to grant leave to appeal.

Mr Douglas Lam, instructed by Hogan Lovells, for the 1^st and 2^nd plaintiff

The 1^st defendant was not represented and did not appear

Mr Victor Joffe, instructed by Li & Partners for the 2^nd defendant

The 3^rd defendant was not represented and did not appear

The 4^th defendant was not represented and did not appear

The 5^th defendant was not represented and did not appear

The 6^th defendant was not represented and did not appear

The 7^th defendant was not represented and did not appear

The 8^th defendant was not represented and did not appear

The 9^th defendant was not represented and did not appear

The 10^th defendant was not represented and did not appear

Mr Johnny Mok SC, instructed by Anthony Siu & Co for the 11^th defendant

Mr Alan Leong SC, instructed by Anthony Siu & Co for the 12^th defendant

The 13^rd defendant was not represented and did not appear