China Metal Recycling (Holdings) Limited (in Provisional Liquidation) 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

HIGH COURT ACTION NO 1412 OF 2013

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BETWEEN

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REASONS FOR DECISION

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1.The primary application for consideration by the Court is the application made by each of the 1^st and 13^th defendants for variations of the Mareva Injunction Orders made against them on 30^th July 2013 (1^st defendant; referred to below as “Mr Chun”) and 7^th August 2013 (13^th defendant; referred to below as “Wellrun”) respectively. The first of these Orders extended to 12 defendants, but has since been discharged as against the 2^nd, 11^th and 12^th defendants. The 2^nd defendant is the wife of Mr Chun and therefore, for a period of time, both were subject to the same Injunction Order. Wellrun is the corporate vehicle through which Mr Chun holds his shareholding in the 1^st plaintiff.

2.Procedural summonses were also before the court by which leave to adduce further evidence (the 5^th affidavit of Mr Borelli) was sought by the plaintiffs, and in addition, leave to amend Mr Chun’s summons to vary the Injunction Order (to provide for an overdue tax payment) was sought by Mr Chun.  These summonses were disposed of by agreement between the parties such that leave was given for the additional affidavit evidence from Mr Borrelli to be admitted, subject to the admission of a responsive affirmation from Mr Chun (his 8^th affirmation) served immediately prior to the hearing.  Leave to amend Mr Chun’s summons was also granted.

3.Mr Chun and Wellrun were jointly represented at the hearing before me by Mr Charles Manzoni SC leading Mr Calvin Cheuk, and for the purposes of this judgment, Mr Chun and Wellrun will be referred to collectively as “the Defendants”.  Mr Russell Coleman SC, leading Ms Eva Sit represented the plaintiffs.

Background

4.The 1^st plaintiff is a listed Hong Kong company, and the 2^nd plaintiff is an associated company incorporated in Macau.  In essence the group to which the 1^st and 2^nd plaintiffs belong is engaged in the scrap metal business. Mr Chun was the chairman and CEO of the 1^st plaintiff until 26^th July, 2013 when a winding up petition was presented by the SFC in respect of the 1^st plaintiff. Presentation of that petition appears to have been the result of an investigation into the affairs of the 1^st plaintiff’s group of companies (“the Group”), which investigation was particularly focused on the affairs of the Group in the second half of 2009.  The presentation of that petition resulted in the appointment of joint and several provisional liquidators, one of whom is Mr Borrelli.

5.The SFC’s concerns as to the conduct of the business affairs of the Group, including the 1^st plaintiff, include a concern that the financial well-being of the 1^st plaintiff has been overstated in both the prospectus which was published for use in an initial public offering of shares, and in the 2009 annual report.  Those documents are said to have inflated the size of the 1^st plaintiff’s business and the revenue generated from that business.  It is alleged that a number of fictitious transactions have been created and relied on to create a false picture of the 1^st plaintiff’s financial position.

6.It is also alleged that funds have been circulated (on a “round robin”) among companies within the Group and certain customers of the group, again resulting in a false representation of the 1^st plaintiff’s financial situation.

7.There are other allegations of falsification of documents and transactions, all of which, allegedly, were intended to mislead regarding 1^st plaintiff’s position at or about the time of the initial public offering.  It is not necessary for the purposes of the applications before me to consider those allegations.  Whether the various allegations are or are not well founded (and Mr Chun is adamant in his affirmations that they are not), is a matter for another day.  It appears to be undisputed that the Group is a very substantial one indeed, employing thousands of people and having a substantial asset base in China.  The 1^st plaintiff itself, as at the date of the suspension in trading of its shares, had a market capitalisation in the order of HK$11 billion, and substantial sums in bank deposits.

8.The Provisional Liquidators, having been appointed on 26^th July 2013, moved rapidly and applied to the court, ex parte, for injunctive relief on 30^th July, 2013.  At that stage the application was made against the first 12 defendants, with Wellrun being added in a separate application shortly thereafter.  Injunction Orders were issued against all 13 defendants.

9.Four of the defendants have not taken any part in the proceedings and default judgment has been entered against these parties. Certain of these defendants are the parties who are alleged to have received very substantial payments from the 1^st plaintiff, either for no consideration, or in respect alleged transactions for which no records can be found.

10.The matter came before Mr Recorder Pow SC on 9^th August 2013.  Continuation of the Injunction Orders was not opposed by some defendants, including Mr Chun, but the learned Recorder heard the plaintiffs’ application for the continuation of the injunctive orders against the 2^nd defendant (an application which was opposed), and heard the 11^th and 12^th defendants’ applications for a discharge of the orders against them.  The Recorder refused to continue the injunction against the 2^nd defendant and discharged the injunction against the 11^th and 12^th defendants.

11.For present purposes it suffices to say that his conclusion was that the plaintiffs had failed to establish a good arguable case against the 2^nd defendant.  Moreover he was of the view that there was no evidence that the 2^nd defendant either was, or was likely to dissipate her assets.

12.So far as the 11^th and 12^th defendants were concerned, the judge’s conclusions were much the same, in that he was not satisfied that the evidence placed before the ex parte judge (and before him) was sufficient to demonstrate the existence of a good arguable case against those defendants.  He recorded in his judgment that counsel for the plaintiffs had acknowledged that there was no evidence implicating the defendants in the allegedly fictitious transactions or the alleged round robin schemes.  Furthermore the Recorder did not accept that there was either evidence of an actual risk of dissipation, or evidence upon which such a risk could reasonably be inferred.  The judge was implicitly critical of some of the evidence of Mr Borrelli as being no more than “bare assertion”.

13.The evidence has developed considerably since that date, with, among others, five affidavits now having been filed by Mr Borelli and no less than eight affirmations by Mr Chun.

14.In addition to the early concerns as to the affairs of the plaintiffs, the Provisional Liquidators say that further matters have been uncovered since their appointment, which have given rise to further concerns, and some of the substantial claims which are pleaded in the underlying proceedings.  The complaints overall were summarised in submissions in three groups; allegedly fictitious transactions in 2007-2009; fictitious transactions in 2012 involving D5 and D10; and various very substantial transactions in 2013 comprising, in part at least, allegedly doubtful transactions under which substantial payments have been made by the 1^st plaintiff, but in respect of which no relevant records exist in the plaintiffs’ offices in Hong Kong. 

15.According to Mr Chun, that may be because the relevant records are likely to be in China, not in Hong Kong; in other words, the Provisional Liquidators may be looking in the wrong place.  Although it appears such documents would be, properly speaking under the control of the Provisional Liquidators, in his 8^th affirmation he referred to having asked his staff in China to look for relevant documents, and some were exhibited to that affirmation.

16.Mr Chun also makes the point (in his 7^th affirmation) that very many of the transactions about which complaint was originally made by the Provisional Liquidators are transactions which have been independently scrutinised by banks, lawyers, and accountants for the purposes of the due diligence exercise required for the listing of the 1^st plaintiff, without any alarm having been raised.

17.In his 3^rd affidavit, Mr Borrelli summarised the sums of money said to have been received by Mr Chun and, in particular, Wellrun (the latter being treated as the “alter ego” of the former). As summarised in submissions, these parties firstly received cash dividends of approximately HK$147 million; secondly, on 27^th April 2011 Wellrun sold shares in the 1^st plaintiff and received payment in return of HK$636 million; and thirdly, since the end of 2009 Mr Chun has received close to HK$40 million in director’s fees, salaries allowances and bonuses.

18.The current assets disclosed by Mr Chun and Wellrun are to a much lower value however; in the order of HK$40 million.

Relevant Principles

19.There was no real dispute between the parties as to the principles, which were summarised by counsel for the Defendants in their written skeleton in the following way:

“In the case of an ‘ordinary’ Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, the court should consider whether the defendant has shown by sufficient evidence that: (1) he does not have other assets available to meet the payments; and (2) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendants) to frustrate the enforcement of judgments by the plaintiff.”

20.These propositions were based upon the judgment of Au J in Wharf Limited v Lau Yuen How [2010] 1 HKLRD 783.

21.There was some debate between the parties as to whether the injunctions in the present case are proprietary in nature.  However, it is not necessary for me to decide that question, and I have proceeded on an assumed basis that the injunctions are to be subject to the same considerations as regards the variation applications as would be the case for an “ordinary” Mareva injunction.

22.The Defendants remind me that in such a case the enjoined assets are the Defendants’ assets and that it is not intended by the imposition of an Injunction Order of this type to prevent the injuncted defendant from paying his debts as they fall due, or from continuing with his usual manner of living (see for example PCW Ltd v Dixon [1983] 2 All ER 158 at 162).

23.Nor is an Injunction Order made intending either to provide priority to the claimant plaintiff, or to punish the defendant for the misdeeds which are alleged against him.  Such an Injunction Order is simply to prevent assets which would otherwise be available to satisfy a judgment, if one is ultimately obtained, from being dissipated such that the plaintiff is cheated out of his claim.  By and large, continuation of an existing lifestyle, and the payment of legal costs incurred by the defendant in defending himself from the claims made against him are not ordinarily matters that could amount to dissipation of assets.

Disclosure of Assets

24.In the present case the Orders that were made by the court required the Defendants to give disclosure of assets, and a number of affidavits have been made in response to that requirement.  Affidavits have also been made by some of the other defendants, including the 2^nd defendant.

25.The assets revealed by that exercise are said to be centrally relevant to the issue of any variation to the Injunction Order as regards Mr Chun, or Wellrun.  For the plaintiff, Mr Coleman SC submits that the court is “duty bound” to have regard to the adequacy of the Defendants’ disclosure of assets on such an application.  In the present case it is submitted that the disclosure by the Defendants is palpably inadequate such that the logical inference to be drawn is that there has been non-compliance with the disclosure obligation regarding current assets.

26.There is no dispute that the court is entitled to expect a defendant seeking variation of an existing Mareva injunction to adduce credible evidence as to his other assets before the court may be satisfied that it is just that he should be able to use the frozen assets.  See generally Stephen Gee; Commercial Injunctions (5^th edition) paragraph 20.054, which includes the following:

“Because the real risk of dissipation has already been established by the evidence, judges are entitled to have a ‘very healthy scepticism’ about assertions made by the party against whom the Mareva injunction has been granted, and this should be borne in mind in deciding whether further evidence should be required. If, in addition, the defendant has been less than frank in his dealings with the court or the claimant over legal or living expenses, this would tend to reinforce the case for putting in place a regime requiring the defendant to adduce evidence showing a complete picture each time he requires further funds, thus enabling the court to police the payments.”

27.Mr Manzoni SC submits that the plaintiffs are reading too much into the Orders that were made.  There was no requirement in those Orders that the Defendants give what is said to amount to tracing discovery in regard to assets.  All that was required was a statement of what the assets now are, not a historical statement of account.  Mr Manzoni SC submits that there has been, albeit via several affirmations, compliance with the disclosure orders.

28.It is not necessary for me to form any view on the adequacy of the Defendants’ disclosure (although as appears below, significant queries are raised as to its completeness).  The evidential and persuasive burden lies firmly on the Defendants to provide sufficient evidence of their assets.  See Trustor AB v Smallbone (Unrep.) (19 January 1999; Court of Appeal; Peter Gibson and Tuckey LJJ.)

The Applications

29.The sums enjoined by the Injunction Order are, by any standards extremely substantial.  That reflects the amount of the plaintiff’s claims, and has the result that almost any variation, viewed in the context of the amount enjoined, is of relatively little significance in terms of the extent to which theplaintiff’s claims are in fact protected, as regards potential enforcement, from dissipation.

30.Nevertheless the amounts sought to be released from the strictures of the Injunction Order are far from trivial themselves.  There are, in effect, three groups of items, being firstly, provision for living expenses (of Mr Chun) which for present purposes includes his tax bill; secondly, provision for legal expenses (Mr Chun and Wellrun); and thirdly a reduction in the gross amount enjoined (Wellrun).  There are, therefore, effectively two types of application, variations to make allowance for matters which are allowed for in the usual case (living and legal expenses) and a variation to bring the Injunction Order against Wellrun in line with what is said to be Wellrun’s maximum liability under the claims made.

Living and Legal Expenses

31.So far as the Mr Chun’s living expenses are concerned, Mr Manzoni SC complains about the lack of any provision for such expenses in the original Injunction Order.  He acknowledges, very fairly, that this was potentially an oversight since the Order was obtained by the plaintiffs only a few days after the appointment of the Provisional Liquidators, and which was made against 12 defendants the majority of whom were corporate bodies.  Nevertheless he submits, and it is not really disputed, that it is axiomatic that there should, ordinarily, be provision for such living expenses in any Injunction Order of this nature.

32.Mr Manzoni SC developed a theme in his oral submissions to the effect that the plaintiffs had “overreached” in the injunction application, through submissions which built upon the rapidity with which the Injunction Order had been sought following the appointment of the Provisional Liquidators, and which highlighted the fact that the injunction had been discharged against D2, D11 and D12 by Mr Recorder Pow SC due to the lack of any good arguable case against those defendants.

33.It was suggested by counsel that the approach adopted by the plaintiffs’ was tantamount to an abuse of the process by, in effect, attempting to impose illegitimate pressure on the Defendants, in particular at the stage at which both Mr Chun and the 2^nd defendant (husband‑and‑wife) were subject to the same Injunction Order, but without any provision made for living expenses.  It may be noted that both were subject to the Injunction Order only for about 10 days.

34.That “overreaching” extended to the (separate) Injunction Order sought and obtained against Wellrun on the basis, it was submitted, of bare assertions of participation as a dishonest assister in the allegedly illicit dealings with the plaintiff.

35.As far as the quantum of this element is concerned, in keeping with the “scale” of the case the living expenses sought are substantial.  The range of matters is not unusual, encompassing rental and household expenses, travelling, food and entertainment, support for Mr Chun’s three daughters, and insurance.  The amount proposed to be allowed by way of variation, on a monthly basis, is HK$540,000.00.  The basis for the calculation is given by Mr Chun in his 5^th affirmation to which he has exhibited bank and credit card statements said to evidence his personal responsibility for certain of those expenses. 

36.The relevant starting point for a consideration of this variation is not whether the amount is reasonable however, nor is it a matter of how weak or strong the plaintiffs’ case is.  The injunction has been granted and (in this case) continued.  The plaintiffs have already established both a good arguable case and a risk of dissipation sufficiently to invoke the jurisdiction of the court to grant the injunction.  There is no application before me to discharge the injunction.  Evidence, when available, suggesting that a plaintiffs’ case may be less robust than at first appeared at the ex‑parte stage is not irrelevant, but if not deployed to seek the setting aside of the injunction, then at best it is merely a factor in the exercise of discretion as to the extent to which a variation should be made, not whether a variation should be made.  The primary question at this stage is whether the discretion of the court can be invoked at all to vary the injunction which exists.

37.As set out above, what this means in summary is; has the defendant, firstly, satisfied the court that the variation is for a proper purpose, and is not a form of dissipation of the enjoined assets, and secondly, has the defendant demonstrated that the variation should be made because, evidence shows, it is required to be made for him to meet the relevant expenses, no other source being reasonably available.

38.Without deciding the point, and leaving the amount to one side, I would be prepared to proceed on the basis that the Defendants have met the first of these hurdles.  Living and legal expenses are not, on the face of things “dissipation” where the lifestyle is a habitual one and the legal expenses reasonable.

39.However Mr Chun and Wellrun have not, in my view, come close to clearing the second hurdle, and demonstrating that there are no other viable sources of funding for these expenses.

40.The undisputed evidence is, put simply that approximately HK$800 million went into the Defendants’ pocket over the last three years or so, of which, the court has been told, about HK$40 million was turned into other assets, or remains in bank accounts.

41.Mr Coleman SC submitted that it was not practically possible to dispose of HK$750 million or so in about three years; HK$250 million per year; without either acquiring something of value or at least being able to identify where it went.  Mr Chun simply says that it has been “used, spent, or otherwise disposed of…” in his 7^th affirmation.

42.Mr Chun was not required by the disclosure orders to account for his spending over the last few years.  He is required however to satisfy the court that he has no alternative source of funds for his living and legal expenses if he wishes the court to vary the existing Injunction Order.  He has signally failed to do so.

43.The position is precisely the same in regard to legal expenses, for both Mr Chun and Wellrun.

44.It was submitted by Mr Manzoni SC that, irrespective of this, a variation was plainly necessary in respect of living and legal expenses simply because the amount enjoined (HK$1.7 billion in very round numbers) was considerably more than the combined total of the disclosed assets ($680 million) and the primary sums alleged not to have been accounted for (HK$750 million) meaning, in other words, that the entirety of Mr Chun’s and Wellrun’s assets, were on any view, enjoined, leaving no other funds for living expenses.

45.I accept that the logic of this demonstrates that in appropriate circumstances a variation to allow living expenses would be necessary.  I do not accept that logic as showing that the burden of showing an absence of other available funds has been met.

The Reduction in the Amount Enjoined

46.In money terms this is the largest element of the application.  Wellrun is subject to a restriction on any disposal of assets in the (rounded out) amount of HK$1.6 billion.  Wellrun is therefore subject to the same enjoined amount as Mr Chun.  Counsel submits, and it is not disputed, that this sum was determined based on two components, the first being the July 2013 payments which were in the order of HK$1 billion, and secondly dividend payments in 2009, 2010, and 2011 of approximately HK$673 million.

47.However, it is submitted that the plaintiff’s case in respect of Wellrun is not premised on the July 2013 payments.  The allegations made against Wellrun relate only to the dividend payments and, it is submitted, therefore the bulk of the restriction has no basis whatsoever, and should be removed.

48.Moreover the amount of those dividend payments referred to are dividends paid out to all shareholders, not just Wellrun.  It is submitted that, on the evidence, Wellrun received only approximately HK$300 million in dividend payments.  Accordingly, the sum enjoined should therefore be reduced to that figure.

49.The pleaded claim made against Wellrun is indeed, primarily, but not solely in respect of the sum of HK$357 million odd received as cash and scrip dividends and which, it is said, Wellrun (and/or Mr Chun) hold as constructive trustee.  Wellrun is alleged to have acted on behalf of Mr Chun (who is the sole director and shareholder of Wellrun) both in some of the impugned transactions, and in the dealing with monies said to have been wrongfully extracted from the plaintiffs.  Wellrun is alleged also to have dishonestly assisted Mr Chun in the IPO, and dishonestly concealed Mr Chun’s breaches of duty as director of the 1^st plaintiff. In addition to the specific assertions in relation to the dividends therefore, the plaintiffs also claim equitable damages against Wellrun.  In the circumstances it seems to me that it would be artificial to draw a distinction between the position of Wellrun and that of Mr Chun so far as the strictures of the Injunction Order are concerned.  In my judgment the circumstances require the sum enjoined to be the same in respect of Wellrun as it is in respect of Mr Chun.

50.Accordingly I am not persuaded that the Defendants are entitled to any of the variations to the Injunction Orders which are sought.  The summonses are to be dismissed.  The costs would appear inevitably to belong to the plaintiffs in such circumstances however I make this part of the order on a “nisi” basis.

Mr Russell Coleman SC leading Ms Eva Sit, instructed by Hogan Lovells, for the 1^st and 2^nd plaintiffs

Mr Charles Manzoni SC leading Mr Calvin Cheuk, instructed by Hastings & Co, for the 1^st and 13^th defendants