Pacific King Shipping Holdings Pte Ltd (in Compulsory Liquidation) v. Huang Ziqiang

HCMP 2464/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2464 OF 2012

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BETWEEN

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Introduction

1.This decision concerns two applications.  The first is an application by the defendant to discharge the freezing injunction order granted against his assets by Toh J on 1 November 2012 which was continued by Chung J on 16 November 2012.[1]  The second is an application by the plaintiff for an order of further disclosure.[2]

2.The plaintiff is a Singapore company which is in liquidation pursuant to a winding up order by the High Court of the Republic of Singapore (“the Singapore court”) dated 17 September 2010.  On the same day, Mr Timothy James Reid was appointed as the liquidator of the plaintiff.  On 31 October 2012, the plaintiff took out an originating summons against the defendant and Mr Yang Yong Jun, both ex-directors of the plaintiff.[3]  The plaintiff's claim against the defendant in the Singapore proceedings concerns breaches of his fiduciary duties owed to the plaintiff as its director and officer, and the misappropriation of funds belonging to the plaintiff during the period from 1 January 2008 to 1 December 2009.[4]

3.On 1 November 2012, the plaintiff was granted a worldwide freezing injunction order over the defendant’s assets by the Singapore court.[5]  On the same day, by an originating summons issued pursuant to s 21M of the High Court Ordinance, Cap 4, the plaintiff in aid of the Singapore proceedings, sought, and was granted, ancillary relief by way of a freezing injunction order.[6]

4.On 3 July 2013, the Singapore court dismissed an application by the defendant to discharge the Singapore injunction. The defendant did not seek leave to appeal the decision.  The defendant claims that an appeal has not been filed because no reasons for the decision have been handed down by the court.  The plaintiff points out, however, that the time period to lodge an appeal expired on 10 July 2013.[7]  On 4 November 2013, the Singapore court ordered, amongst other things, that the defendant give discovery of certain bank statements.  The defendant appealed the decision which is to be heard on 14 April 2014, having previously been fixed for 24 February 2014.

The discharge application

(a)Statutory provisions

5.So far as material s 21M provides:

“(1) Without prejudice to section 21L(1), the Court of First Instance may by order appoint a receiver or grantother interim relief in relation to proceedings which—

(a) have been or are to be commenced in a place outside Hong Kong; and

(b) are capable of giving rise to a judgment which may be enforced in Hong Kong under any Ordinance orat common law.

(2) An order under subsection (1) may be made either unconditionally or on such terms and conditions as theCourt of First Instance thinks just.

(3) Subsection (1) applies notwithstanding that—

(a) the subject matter of those proceedings would not, apart from this section, give rise to a cause of actionover which the Court of First Instance would have jurisdiction; or

(b) the appointment of the receiver or the interim relief sought is not ancillary or incidental to anyproceedings in Hong Kong.

(4) The Court of First Instance may refuse an application for appointment of a receiver or interim relief undersubsection (1) if, in the opinion of the Court, the fact that the Court has no jurisdiction apart from this section inrelation to the subject matter of the proceedings concerned makes it unjust or inconvenient for the Court to grant theapplication.

…

(7) In this section,“interim relief”includes an interlocutory injunction referred to in section21L (3).”

6.Section 21 N provides:

“(1) In exercising the power under section 21M (1), the Court of First Instance shall have regard to the fact thatthe power is—

(a) ancillary to proceedings that have been or are to be commenced in a place outside Hong Kong; and

(b) for the purpose of facilitating the process of a court outside Hong Kong that has primary jurisdictionover such proceedings.

(2) The Court of First Instance has the same power to make any incidental order or direction for the purpose ofensuring the effectiveness of an order granted under section 21M as if the order were granted under section 21L inrelation to proceedings commenced in Hong Kong.”

7.So far as material s 21L provides:

“(1) The Court of First Instance may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so.

(2) Any such order may be made either unconditionally or on such terms and conditions as the Court thinks just.

(3) The power of the Court of First Instance under subsection (1) or section 21M to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the Court of First Instance, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled or resident or present within that jurisdiction.

…”

(b) Relevant principles

8.Section 21M empowers a court to grant interim relief, including the grant of an interlocutory injunction and the appointment of a receiver, in support of intended or actual proceedings taking place outside Hong Kong, provided that those proceedings are capable of giving rise to a judgment which may be enforced in Hong Kong.[8]  The proceedings under s 21M are freestanding and solely for the purpose of obtaining interim relief in aid of foreign proceedings which will decide the merits of the case.  It provides the means for the court to assist another court of a different jurisdiction in the grant of interim relief upon being satisfied that there is a sufficient case made out to grant such relief.

9.The provision relies on comity between the courts of different jurisdictions and this is reinforced by s 21N which provides that the court is required to have regard to the fact that the power is ancillary to foreign proceedings and for the purpose of facilitating such proceedings.  A court therefore under s 21M is exercising an ancillary jurisdiction in order to grant interim relief in support of substantive proceedings taking place elsewhere and avoids the need to commence substantive proceedings in Hong Kong.  It should be noted, however, that a court is not bound to grant relief, and may decline to do so if in its opinion, the fact that it is exercising ancillary jurisdiction in support of substantive proceedings elsewhere makes it unjust or inconvenient to grant relief.  A court in the exercise of this power is required to abide by the general principles governing interim relief.  This was held in Prema Birkdale Horticulture (Macau) Ltd v Venetian Orient Ltd [2009] 5 HKLRD 89 and is also provided for under s 21N (2) which states that the power is the same as if the order were granted under s 21L in relation to Hong Kong proceedings.

10.Under s 21L of the High Court Ordinance, a court may grant a final or interlocutory injunction when it appears “to be just or convenient to do so”.  The essential principles concerning the grant of an interlocutory injunction are contained in the well known authority of American Cyanamid Co v Ethicon Ltd [1975] AC 396.[9]  A court in deciding to grant an interlocutory injunction must be satisfied that there is a serious question to be tried, that damages would not be an adequate remedy and that the balance of convenience lies in favour of granting it.  In the case of a freezing injunction, it is important to bear in mind that the fundamental imperative is to prevent injustice by preserving the assets of a defendant in order to guard against the risk of the disposal or dissipation of those assets by the defendant with a view to defeating the execution of a judgment against him.

11.In order for an applicant to obtain interim relief under s 21M, it must first be shown to the court’s satisfaction that:

(a) proceedings have been or are to be commenced in a place outside Hong Kong; and

(b) such proceedings are capable of giving rise to a judgment which can be enforced in Hong Kong under statute or at common law.

12.If the relief sought under this provision is a domestic freezing  injunction, it must further be shown to the court’s satisfaction that:

(a) there is a good arguable case on a substantive claim in the proceedings (this does not have to give rise to a cause of action justiciable in Hong Kong or be ancillary or incidental to any proceedings in Hong Kong);

(b) the defendant has assets within the jurisdiction;

(c) there is a real risk of dissipation of assets or removal of assets from the jurisdiction, which would render the plaintiff's judgment arising from the proceedings of no effect;

(d) the balance of convenience is in favour of granting the injunction in that it is just and convenient to do so bearing in mind that it is exercising ancillary jurisdiction in support of substantive proceedings elsewhere; and

(e) the plaintiff has complied with a strict duty of full and frank disclosure.

13.The defendant argues that the granting of a freezing injunction in another jurisdiction does not automatically follow that the Hong Kong court should grant injunctive relief under s 21M even though the requirement of substantive proceedings taking place elsewhere which are capable of giving rise to a judgment which may be enforced in Hong Kong is fulfilled.  It is argued, relying on Deiulemar Shipping SpA v Transfield [2011] 1 HKLRD 75, that a court has a duty to critically scrutinise the information and material before it and be satisfied that the requirements for the granting of a freezing injunction are met.  There is no doubt that a court in the exercise of this power conducts an independent and critical appraisal in order to be satisfied of the requirements.  It is specifically provided for under s 21M (4) that a court may refuse an application if it is in the opinion that it would be unjust or inconvenient to grant it.  It is also argued, that a freezing injunction is an extreme measure that could put the other party at a very real disadvantage, and from which it may never adequately recover if the wrong decision is made.  This is all very true, and that is why it has been stressed time and again that a court must carefully evaluate such an application, with the prime objective to prevent injustice and to ensure that the judicial processes are not defeated.

14.It is worthwhile examining the English equivalent of s 21M, as there is a considerable body of authority on the provision.  Section 25 of the Civil Jurisdiction and Judgments Act 1982, as extended by the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 gives the power to the English court to grant interim relief in proceedings that have been, or are about to be, commenced in a foreign jurisdiction.  Insofar as is relevant, s 25(2) reads:

“On an application for any interim relief under subsection (1) the court may refuse to grant that relief if, in the opinion of the court, the fact that the court has no jurisdiction apart from this section in relation to the subject matter of the proceedings in question makes it inexpedient for the court to grant it…”

15.Under the English provision, the test as to whether or not to grant the relief is whether it is “inexpedient” to do so, where under the Hong Kong provision it is whether it is “unjust or inconvenient” to do so.  In my view, there is very little, if any difference between the two expressions, and in their application they basically have the same meaning. 

16.In Credit Suisse Fides Trust SA v Cuoghi [1998] QB 818, Millet LJ (as he then was) discussed the test under the English provision at 826:

“It is the ancillary or subordinate nature of the jurisdiction rather than its source which is material, and the test is one of expediency. The structure of subsections (1) and (2) and the way in which their scope has been progressively widened indicate to my mind an intention on the part of Parliament that the English court should in principle be willing to grant appropriate interim relief in support of substantive proceedings taking place elsewhere, and that it should not be deterred from doing so by the fact that its role is only an ancillary one unless the circumstances of the particular case make the grant of such relief inexpedient.”

17.In Millet LJ’s analysis of the English provision, he explained the jurisdiction and the need for caution in the exercise of it at 824F-H:

“…It recognised that it would be wrong to make an order which, though purporting merely to restrain the actions of a defendant already subject to the jurisdiction of the court, might be understood to impose obligations upon persons resident abroad and not subject to its jurisdiction. This danger was avoided by including provisions in the order which made it clear that it was not to affect parties not subject to the jurisdiction of the court in respect of acts outside the jurisdiction save to the extent that the order might be enforced by the local court. The jurisdiction to make such orders is now firmly established. It is exercised with caution, and a sufficient case to justify its exercise must always be made out; but such orders are nowadays routinely made in cases of international fraud and the conditions necessary in order to preserve international comity and prevent conflicts of jurisdiction have become standardised.”

18.He went on to say at 827D-H:

“I recognise that an ancillary jurisdiction ought to be exercised with caution, and that care should be taken not to make orders which conflict with those of the court seised of the substantive proceedings. But I do not accept that interim relief should be limited to that which would be available in the court trying the substantive dispute; or that by going further we would be seeking to remedy defects in the laws of other countries. …

In other areas of law, such as cross-border insolvency, commercial necessity has encouraged national courts to provide assistance to each other without waiting for such co-operation to be sanctioned by international convention. International fraud requires a similar response. It is becoming widely accepted that comity between the courts of different countries requires mutual respect for the territorial integrity of each other’s jurisdiction, but that this should not inhibit a court in one jurisdiction from rendering whatever assistance it properly can to a court in another in respect of assets located or persons resident within the territory of the former.”

19.He concluded at 829D-E:

“It is in my judgment regrettable that a gloss has been placed on the words of section 25(2). The question for consideration is not whether the circumstances are exceptional or very exceptional, but whether it would be inexpedient to make the order. Where an application is made for in personam relief in ancillary proceedings, two considerations which are highly material are the place where the person sought to be enjoined is domiciled and the likely reaction of the court which is seised of the substantive dispute. Where a similar order has been applied for and has been refused by that court, it would generally be wrong for us to interfere. But where the other court lacks jurisdiction to make an effective order against a defendant because he is resident in England, it does not at all follow that it would find our order objectionable.”

20.In the same case, Lord Bingham also analysed the English provision and explained at 831B-E:

“Subsection (2) of that section makes plain that the court is not bound to grant such relief. This is not an entirely straightforward subsection, but its meaning is in my view accurately paraphrased and elaborated as follows: on an application for interim relief under subsection (1), the court may refuse to grant relief if it is in its opinion inexpedient to do so because the court has no jurisdiction in relation to the subject matter of the proceedings in question apart from section 25; but the court may grant relief if it is in its opinion expedient to do so even though the court has no jurisdiction in relation to the subject matter of the proceedings in question apart from the section. Thus attention is focused on the inexpediency or expediency of granting interim relief having regard to the absence of jurisdiction to do so apart from section 25.

Where substantive proceedings are brought in this country, and there is an ancillary application for a Mareva injunction and an associated disclosure order limited to England and Wales, the court will wish to satisfy itself that a sufficient case is made out for granting such relief. So it will where such an application is made under section 25, and regard will be paid to expediency as required by subsection (2).”

21.Lord Bingham addressed some of the issues that are likely to arise in the exercise of the jurisdiction and the supportive role of the jurisdiction with the primary court at 831H-832B:  

“It would be unwise to attempt to list all the considerations which might be held to make the grant of relief under section 25 inexpedient or expedient, whether on a municipal or a worldwide basis. But it would obviously weigh heavily, probably conclusively, against the grant of interim relief if such grant would obstruct or hamper the management of the case or give rise to a risk of conflicting, inconsistent or overlapping orders in the other court. It may weigh against the grant of relief by this court that the primary court could have granted such relief and has not done so, particularly if the primary court has been asked to grant such relief and declined. On the other hand, it may be thought to weigh in favour of granting such relief that a defendant is present in this country and so liable to effective enforcement of an order made in personam, always provided that granting such relief this court does not tread on the toes of the primary court or any other court involved in the case. On any application under section 25 this court must recognise that its role is subordinate to and must be supportive of that of the primary court.”

22.In Ryan v Friction Dynamics, Neuberger J (as he then was) stated the following as general principles applicable to s 25. They are commonly referred to and provide a set of useful guiding principles when considering an application under s21M.

“1 The court should always exercise caution before granting any freezing order.

2 As Lord Justice Millet emphasised in Credit Suisse Fides Trust v Cuoghi ([1997] TLR 351; [1998] QB 818) particular caution was required when a freezing order was sought under section 25.

The fact that the primary forum for the litigation was abroad meant that the court was likely to be even less fully appraised of the facts than in a case where it was exercising primary jurisdiction: see Refco Inc v Eastern Trading Co ([1999] 1 LI LR 159, 164)

3 However, factors such as comity and the need to stop international fraud meant that the High Court should not be too worried about granting an injunction under section 25 where it was satisfied that good grounds existed.

As was pointed out in Cuoghi, section 25 (2) indicated that an order should be made unless it was inexpedient to do so.

4 Just as when exercising its primary jurisdiction to grant a freezing order, the court should not make an order under section 25 unless the basic requirements were satisfied, namely that the claimant had a good arguable case and that there was a real risk of dissipation: see Refco (at pp 164 and 171).

5 Although it should be slow to do so, it might be appropriate for the High Court to grant a freezing order even where the foreign court had refused to grant an order.

6 The fact that there was a worldwide freezing order granted by the principal foreign court did not prevent the High Court from granting a freezing order at least in relation to British assets and/or against defendants resident or domiciled within the jurisdiction.

To hold otherwise would be inconsistent with the practice of the High Court.

Worldwide freezing orders were frequently granted by the High Court as the primary court on terms that specifically envisaged that the claimant would apply for freezing orders in the courts of the Channel Islands; the Isle of Man or Gibraltar in respect of assets within those jurisdictions.

Further, to hold otherwise would involve implying an absolute fetter on a statutory jurisdiction which, on its face, appeared to be intended to give a wide and flexible jurisdiction.

7 However, before such an overlapping freezing order was made under section 25 the court should expect to be given cogent reasons to justify it.

Overlapping orders meant overlapping applications which in turn resulted in substantially increased costs and court time.

Furthermore, overlapping injunctions in different jurisdictions could lead to a risk of double jeopardy for defendants and the opportunity for forum shopping by the claimants: see In re Bank of Credit and Commerce International SA ([1994] 1 WLR 708, 713).

8 Where it was appropriate to grant a freezing order under section 25 in respect of British assets and the order overlapped with a worldwide or similar freezing order from a foreign court with primary jurisdiction, it would be sensible to include some provision which indicated which court was to have the primary role for enforcing the overlapping injunction.

That would substantially reduce the risk of double jeopardy and forum shopping.

Save in a case of good reason to the contrary, it would generally be the foreign court to which such application should be made.

9 Where an overlapping order was made under section 25, it was in general desirable that it should track precisely the terms of the order made by the foreign court.

Any inconsistency could lead to uncertainty and extra complications for the defendant.

Worse, it could lead to a position where a defendant found itself bound to breach one order or the other: see the dictum of Mr Justice Jacob in State of Brunei Darussalam v Prince Jefri Bolkiah (unreported, March 20, 2000).

However, in particular cases there may be good reason why an order made under section 25 should be in different terms from the order made by the primary court.”

23.The English Court of Appeal has provided guidelines on the approach to take in deciding this issue in Motorola Credit Corp v Uzan (No 2) [2004] 1 WLR 113 where it held that there are 5 considerations which the court should bear in mind when considering the question whether it is “inexpedient” to make an order under s 25:

(1) Whether the making of the order will interfere with the management of the case in the primary court: eg where the order is inconsistent with an order in the primary court or overlaps with it.

(2) Whether it is the policy in the primary jurisdiction not itself to make worldwide freezing orders.

(3) Whether there is a danger that the orders made will give rise to disharmony or confusion and/or risk of conflicting, inconsistent or overlapping orders in other jurisdictions, in particular the courts of the state where the person enjoined resides or where the assets affected are located. If so, then respect for the territorial jurisdiction of that state should discourage the English court from using its unusually wide powers against a foreign defendant.

(4) Whether at the time the order is sought there is likely to be a potential conflict as to jurisdiction rendering it inappropriate and inexpedient to make a worldwide order.

(5) Whether, in a case where jurisdiction is resisted and disobedience to be expected, the court will make an order which it cannot enforce.

24.I have respectfully adopted the above principles and guidelines in considering this application under s 21M.

25.It is argued by the defendant that because the Singapore court has not handed down reasons for its decision to continue the Singapore injunction, a Hong Kong court should give little regard to the fact of the continuance of the injunction order by the Singapore court, and carry out its own critical appraisal of the application.  The fact that the injunction has been granted in the foreign jurisdiction is a relevant consideration in an application under s 21M unless there is some issue pertaining to the order or the jurisdiction that warrants a different approach.[10] As noted in Deiulemar, the original jurisdiction is fully versed with the claim and its history and is in the best position to decide on matters relating to interlocutory relief.  As far as I am concerned, the Singapore injunction order and its continuance, is a matter I can and should take into account in carrying out an assessment of the merits of the application in accordance with the law and requirements in Hong Kong. 

(c) Application of legal principles

(i)The plaintiff’s case

26.The plaintiff, in support of its application, relies on the affidavits of Mr Timothy James Reid, the Singapore court appointed liquidator of the plaintiff.[11]  In summary, the liquidator states that the defendant caused the plaintiff to make payments to him and Yang of over US$66 million between 31 January 2008 and 1 December 2009, at a time when the plaintiff was insolvent. The payments were made by (a) dividends in various currencies of approximately US$49.5 million; (b) bonuses in various currencies of approximately US$1.58 million; (c) purchase of a Rolls Royce motor vehicle and a yacht, valued at US$4.27 million; (d) reimbursement of entertainment and travel expenditure in various currencies of approximately US$839,000; and (e) reimbursement of petty cash claims in various currencies of approximately US$9.97 million.  The plaintiff claims that these payments made to the defendant and Yang were in breach of their fiduciary duties that they owed to the plaintiff at a time when it was in a state of insolvency.  It is claimed in the alternative, that even if the plaintiff was found to be solvent during the relevant time, it would be entitled to seek payment from the defendant of approximately US$34.3 million being the value of the dividends and bonuses paid to the defendant and Yang.  The liquidator also answers matters that have been raised by the defendant in affirmations filed on his behalf and the claim by the defendant that he has failed to disclose material matters.  I will deal with these issues later in my judgment but I am satisfied with the answers that have been given by the liquidator.

27.It is claimed by the plaintiff that the defendant left Singapore abruptly after he had liquidated the majority of his assets and shortly before the plaintiff was declared insolvent by the Singapore court.  He came to Hong Kong and sold up his entire property portfolio within a 6-month period from April to September 2012.  The net proceeds of sale of the properties amounted to about $135 million Hong Kong currency.  A holding of 4 properties in a development were sold en bloc within 9 days and at prices below bank valuation.  It is also claimed that the defendant intended to transfer the funds out of Hong Kong and relocate in Mainland China.  If the allegations against the defendant ultimately proved to be true, he has been responsible for the plaintiff’s state of insolvency and the denuding of its assets.

(ii) The defendant’s submissions

The defendant’s case

28.Ms Elaine Liu, counsel for the defendant, submits that the plaintiff was not insolvent at 31 December 2007 as claimed by the liquidator.  She submits that the company was in a sound financial state as evidenced by a $90.65 million loan facility from the Bank of China and convertible notes of $50 million from JP Morgan which had been provided after a due diligence by PricewaterhouseCoopers.  She went to the financial statements of the group of companies to which the plaintiff belonged for the year ended 31 December 2007.[12]  It showed, as she argued, that the group and the company were financially sound.  The profit of the group had increased from about US$27 million to US$42 million from 2006 to 2007.[13]  It was also during this period, she stressed, that the group had purchased a number of vessels which generated business and earnt substantial accumulated profits.  She argues that the liquidator’s opinion that the group was insolvent as at 31 December 2007 was wrong because he incorrectly relied on three main matters. The first matter was that the group’s current liabilities of about US$68 million exceeded its current assets of about US$32 million as at 31 December 2007.  This she argues did not reveal the true financial position of the group or the company.  She contends it was doing well throughout 2007 and 2008 and the figures showed that the group was making good profits.  The second matter was that the subsidiaries debt should not be treated as recoverable as at 31 December 2007.  The third matter was the unsigned draft financial statement as at 31 December 2008 which she argues, did not reflect the financial situation of the company as the defendant would have known or appreciated the situation to be at that time, because it incorporated bad debts or bad transactions that took place in 2009 and 2010. She submits that the financial statement cannot be used as a measure of the defendant’s knowledge or awareness of the company's poor financial position at that time.

29.Ms Liu argues that, contrary to the liquidator's opinion, the financial records of the company support that it was in a sound financial position throughout 2007 and 2008.  She claims that the Lehman Brothers collapse in late 2008 had a devastating impact on the shipping business generally and on the group specifically.  She acknowledged in argument that the defendant was the directing mind and will of the group and the company, and that he would have been aware of the financial dealings and transactions that were taking place within the corporate structure of the group. She claims, however, that he would not have known that the company was insolvent or leading to insolvency, but I find that hard to accept given his role and involvement in the group and the company. It may be that he did not fully appreciate the extent of the group’s financial problems, but he most definitely would have appreciated that the group was experiencing financial difficulties.  As pointed out by Ms Liu, the Bank of China sought and obtained from him a personal guarantee of US$78.15 million which he executed on 6 January 2009. This was in addition to the corporate guarantee of the company that had already been given on 9 June 2008 for a loan facility of US$90.65 million.  The funds were used to purchase a vessel which was also given as security for the loan advanced.   Ms Liu relies on this to show that at the time the defendant was confident of the company’s financial viability and not trying to misappropriate company funds as suggested by the liquidator.   All I can say at this stage, is that the reason for why this was done will be better understood when this and other matters are examined in greater detail at trial.   For the purposes of dealing with this application, it would appear that the defendant must have known that the company was in financial difficulties sometime in 2008, and this was obviously apparent to the Bank of China, otherwise it would not have requested a personal guarantee from him.

30.Ms Liu also directed my attention to the unsigned financial statements for the year ended 31 December 2008 to show that the company was involved in various court actions and other disputes in 2008 and 2009 with serious financial implications to the company, and that it was at this time when it would have been apparent that the company was going through financial difficulties.  As far as I can ascertain from these matters, they had been in the pipeline for some time and eventually surfaced in the financial statements prepared for the year ending 2008.  It will no doubt be argued that the defendant would have realised that the company was in poor financial state, and on the verge of insolvency, when substantial dividends and bonuses were being paid to himself and Yang.

Material non-disclosure

31.Ms Liu argues that there has been material non-disclosure in relation to various matters in the liquidator's affidavit which in turn has misrepresented the true situation of the company in the Singapore proceedings.  It is argued that the plaintiff had a duty to disclose all matters which were relevant to the court’s consideration when deciding whether or not to grant the injunction.  This included any obvious matters of fact or any defences which could reasonably be raised by the defendant against the making of the order had he been present at the application.[14]

32.Ms Liu argues that there was material non-disclosure in relation to the alleged insolvency as at 31 December 2007.  In submissions, she analysed the financial statements of the group and the company in an effort to argue that the company was in good financial state as at this date.  However, it is apparent that the liabilities of the group exceeded its assets and there appeared to be a number of questionable accounting entries and explanations that will no doubt come under further scrutiny at trial in order to understand the true situation.  Most of the material on which Ms Liu relies in support of her submissions comes from the affidavits of the defendant and Mr Xue Wei.  Very little, if any, supporting documentary material is provided.   The defendant claims that due diligence was carried out by PricewaterhouseCoopers on the plaintiff prior to JP Morgan entering into a share subscription agreement with the group in June 2008.  As stated by the liquidator in his 4^th affidavit, apart from what has been stated by the defendant and Mr Xue in their affidavits, he is not aware of any due diligence having been carried out and no documentary evidence has been provided to support this assertion.  The liquidator challenges a number of statements that are made by Mr Xue about financial transactions and dealings with respect to the company.  He points out that a number of matters that Mr Xue claims to have taken place are neither supported by any documentary evidence nor shown to have been effected.  He referred to the alleged set-off arrangements between the plaintiff and its subsidiaries in 2007 and 2008.  He observed that he was unable to discern from the management accounts of the company if a set-off had in fact been effected and no evidence had been provided to reflect this having occurred in the account records.  He also referred to alleged dividend payments from the group’s subsidiaries to the plaintiff.  He explained that inquiries were still being made into the matter and did not know if the amounts were in fact received by the plaintiff prior to the declaration of the US$25 million dividend.  The defendant takes issue over the liquidator’s statements about the dividends where it is alleged that the documents show that the dividends are only payable and not that they had been paid. The liquidator sets out in detail in his affidavit the issue with regard to the documentary support for the payments to the defendant.  He questions the statements by Mr Xue on this issue and provides documentary evidence supporting dividend payments.

33.Ms Liu points out that the liquidator relied on bank valuations which were not proper valuations. It is complained that the liquidator was giving a false picture when he said that the properties were sold for 11 to 16% under market value.  The liquidator relied on bank valuations obtained through the websites of two established banks in Hong Kong.  The defendant has submitted his own material which shows that the sale price of the 4 properties were within the sale price range of similar properties at the time.  It is argued that there has been a material non-disclosure. I disagree.  The liquidator made it abundantly clear that he was relying on bank valuations obtained from the websites of two banks in Hong Kong and there was no misrepresentation.  Ms Liu’s complaint is that he should have made further enquiries and obtained the material that the defendant was able to secure.  That is a matter ultimately for trial as to what the true situation was at the time, but the point remains the defendant disposed of these 4 properties in Hong Kong quickly and over a short period of time.

34.The defendant argues that there was also material non-disclosure relating to the Rolls Royce and the yacht.  The liquidator states that on his analysis of the financial records of the plaintiff it is not apparent that the sale proceeds of the Rolls Royce and the yacht were paid to the plaintiff as claimed by the defendant and no documents have been provided supporting the defendant’s assertion.

35.I am satisfied that there has not been material non-disclosure by the liquidator.  He has been appointed to examine the financial affairs of the plaintiff which he has done on the material available.  As far as I can see, he has approached his task properly and he has put the position of the plaintiff based on an analysis and evaluation of the material so far obtained. There may be issues in dispute between the parties but from what has been raised these are matters for resolution at trial.

(iii) A good arguable case?

36.In the Singapore proceedings, the plaintiff has alleged that the defendant was in breach of his fiduciary duties to the plaintiff, and wrongfully paid dividends to the benefit of himself and Yang whilst the plaintiff was either in or not in a financial position to pay such dividend.  The defendant had therefore appropriated the plaintiff’s funds to its detriment and that of its creditors.

37.The test of a “good arguable case” is not very high and a claimant need not go so far as to persuade the judge that he is likely to win.  In The Niedersachsen,[15] Mustill J held that a claimant must show that his case is “more than barely capable of serious argument, yet not necessarily one which the judge considers would have a better than 50% chance of success.”  It should be borne in mind that the requirement of a “good arguable case” is a threshold test, and given that the overriding test is whether or not it is “just and convenient” to grant the injunction, the strength or otherwise of the claimant’s case will be a relevant factor in the exercise of the court’s discretion.

38.The defendant has stressed that the court should take into account the strength and weakness of the respective case of the parties in order to decide whether or not the plaintiff’s case, on its merits, is sufficiently strong to reach the threshold of a “good arguable case”.   I agree that the court in the exercise of the discretion should take into consideration all the relevant facts and circumstances including the basis of the plaintiff’s claim and the material facts that are relied on to support it.

39.The defendant argues that the backbone of the plaintiff’s case is that the company was insolvent as at 31 December 2007 and that the defendant knew or must have known that the company was insolvent as at that date.  The defendant’s case is that the company was not insolvent as at 31 December 2007, and the defendant could not have known it was and there is no evidence he did know.  It is submitted by the defendant that the company and the group were “healthy” at the time and the downturn of the group’s business was caused by the collapse of the Lehman Brothers in late 2008.  The defendant challenges the three main bases on which the liquidator alleged the company was insolvent as at 31 December 2007 in that (a) he assessed the group’s current liabilities against the current assets as at 31 December 2007 when he did not consider the business being generated, and profits derived as a result; (b) he took into account the “Subsidiaries Debt” which should not have been treated as recoverable as at 31 December 2007; and (c) he relied on statements and figures contained in the unsigned draft financial statement as at 31 December 2007.

40.In my view, there is a good arguable case against the defendant on the basis of the liquidator’s report and the supporting material. The plaintiff in the Singapore proceedings has alleged that the defendant breached his fiduciary duties to the plaintiff by wrongfully paying dividends to the benefit of himself and Yang whilst the plaintiff was insolvent, or in the alternative, if the plaintiff was not insolvent, he wrongfully paid dividends when there was insufficient profit to do so. 

(iv) Risk of dissipation

41.The defendant argues that the plaintiff must provide “solid evidence” to support the allegation that there is a real risk that the judgment will go unsatisfied.[16]  The test of a real risk of dissipation is objective and the plaintiff needs to show that there is a real risk that the defendant will dispose of his assets other than in the ordinary course of business, and would frustrate the enforcement of any judgment.  The plaintiff only needs to show that there is a real as opposed to an insignificant or fanciful risk that assets will be dissipated.  There are a range of factors that will be relevant when assessing whether there is a real risk of dissipation of assets, such as, the nature and financial standing of the defendant and his related business, the domicile or residence of the defendant, the nature of the defendant’s assets in and out of the jurisdiction and his dealings in relation to them, and the defendant’s general behaviour in response to the claim.

42.The plaintiff submits that the defendant has, or had, a number of assets in Hong Kong, consisting of real estate in the New Territories valued about $25 million and a property on Hong Kong Island that was sold in April 2012 for $108 million, the proceeds of which may be held in bank accounts in Hong Kong.

43.The defendant argues that there was material non-disclosure relating to the alleged risk of dissipation which I have already addressed but need to deal with under this heading.  The complaint by the defendant is that the liquidator used valuations from two banks alleging the 4 properties in the New Territories were sold at an undervalue of between 12 to 21% when actual property transactions available online showed that there was no sale at undervalue.  The fact is what the liquidator relied on were the valuations of two reputable banks that were available on their respective websites.  There was no material non-disclosure or misrepresentation.   At the time of the transactions, that was the valuation of the banks.  In any event, the issue was the disposal of all 4 properties with the admitted intention of the defendant to move to Mainland China.  It was stated in the defendant’s written submissions that the sale of the Hong Kong properties by the defendant was “a pure commercial decision”.  It was claimed that the defendant’s father was diagnosed with cancer in May 2011 and that he and his family wanted to move back and live in Mainland China to take care of his father.  The stated intention of the defendant was to sell up his properties in Hong Kong and remove himself and the proceeds of the sale from Hong Kong to Mainland China.  In my view, it was no coincidence that the sale of the Hong Kong properties took place relatively quickly and over a short period of time under the spectre of the Singapore proceedings. 

44.It is also claimed by the defendant that the sale of his properties in Hong Kong was part of a long-term plan to sell up and leave Hong Kong and reside in the Mainland China.  I do not accept this explanation.  If it was a long-term plan it begs the question: why was the disposal of the properties done suddenly and in a short period of time?  Furthermore, the properties were disposed of just prior to the institution of the Singapore proceedings against the defendant in October 2012.  It provides, in my view, cogent evidence of a clear case of dissipation of assets in order to defeat the judicial processes.  The defendant’s clear intention was to convert his real estate into cash and remove the funds from the jurisdiction.

45.The principle which underlies s 21M is that courts of different jurisdictions should be willing to assist each other by providing such relief as the law of its jurisdiction permits.  The question to be asked is whether the fact that the substantive proceedings were taking place in Singapore made it unjust or inconvenient to grant interim relief.  Since the defendant resided and held property in Hong Kong, the Singapore court could not itself grant the relief sought here, it was not unjust or inconvenient for this court to make orders to preserve assets where it could assert jurisdiction in personam against the defendant and in respect of assets he held in the jurisdiction.

46.I am satisfied for the above reasons that the requirements have been met for the freezing injunction order in the terms initially granted and it is just and convenient to make the order.

The disclosure application

47.The plaintiff makes application for a disclosure order under s 21 of the Evidence Ordinance, Cap 8.  It is directed to the Hongkong and Shanghai Banking Corporation Ltd (“HSBC”) and seeks authorization for the plaintiff’s solicitors to inspect and take copies of documents in the bank’s possession relating to the defendant’s bank accounts wherever held by him from 1 January 2008 to date.

(a) Statutory provision

48.So far as material s 21provides:

“(1) On the application of any party to any proceedings, the court or a judge may order that such party be atliberty to inspect and take copies of any entries in a banker's record for any of the purposes of such proceedings.

(2) An order under this section may be made either with or without summoning the bank or any other party,and shall be served on the bank 3 clear days before the same is to be obeyed, unless the court or judge otherwisedirects.

…

(4) Any such order against a bank may be enforced as if the bank were a party to the proceeding.”

(b) Relevant principles

49.Section 21 empowers the court to order inspection of a banker’s records, whether the books relate to the account of a party to the litigation or to a third party.  The power must be exercised in conformity with the general principles of discovery and in this regard useful guidance is provided by Ma J (as he then was) in A Co v B Co [2002] 3 HKLRD 111.  In that case the court was concerned with the jurisdiction of Norwich Pharmacal [17] relief which extends to the discovery of bank books and documents, to assist a plaintiff in the investigation of the passage of monies through bank accounts in tracing a claim.  As a general rule, where innocent parties are caught up or have become involved in the tortious or wrongful activities of others, justice may require that such persons come under a duty to assist the victim of the tort or wrongful activities, by the provision of information.  When making what is known as a Norwich Pharmacal order, the following considerations apply:

(a) there must generally be cogent and compelling evidence to demonstrate that serious tortious or wrongful activities have taken place;

(b) the applicant must clearly demonstrate that the order will or will very likely reap substantial and worthwhile benefits for the applicant;

(c) the discovery sought must not be unduly wide but must be specific and restricted to documents that are necessary for the applicant’s purpose; and

(d) the court must balance the competing interest of the applicant (as the victim of the alleged wrongdoing) and the party from whom discovery is sought (as the innocent party caught up in the wrongdoing).[18]

(c) Application of legal principles

50.The defendant points out that the disclosure order is different from the discovery application made in the Singapore proceedings pursuant to the equivalent of Order 24 of the Rules of the High Court.  It is argued that the scope of discovery sought by the plaintiff in Singapore was much narrower than the disclosure order in Hong Kong.  The disclosure order sought by the plaintiff relates to specific accounts, and any other accounts held by the defendant with the bank, and the details and records of all transactions and dealings in relation to them during the relevant period from 1 January 2008 to date. 

51.It is well established that in order to make a freezing injunction effective and to ensure the judicial processes are not defeated, the court has a discretion to order the defendant to make a statement of his assets and to give discovery of documents for the purpose of ascertaining the existence, nature and location of assets.[19]  The defendant relies on Arab Monetary Fund v Hashim and Ors (No 5) [1992] 2 All ER 911 to resist the disclosure order but in my view it does not assist him.  In that case, it was held that a plaintiff who sought an order for discovery against a person who was not a party to the action had to demonstrate a real prospect that the information sought might lead to the location or preservation of assets to which the plaintiff was making a proprietary claim.  I am satisfied that the conditions as required are met in this case in that there is a real prospect that the information sought will lead to the location and preservation of assets which are the subject of the substantive proceedings in Singapore. The accounts relate to the defendant and are clearly relevant to these proceedings. [20] It is further complained that the relief sought against the defendant in the Singapore proceedings is a monetary sum and the claim is not proprietary in nature.  I disagree.  This is clearly a proprietary claim where the plaintiff is claiming against the defendant and Yang a breach of their fiduciary duties and the misappropriation of funds and property belonging to the plaintiff.  Given the nature and scope of the plaintiff’s claim, I do not consider this order to be a fishing exercise, nor do I view it as oppressive and unnecessary, as suggested by the defendant.  I agree it is wide, but for good reason, as I have explained in refusing to discharge the injunction.  The order seeks access to information and records of the defendant’s banking transactions during the relevant time it is claimed that he misappropriated funds and property belonging to the plaintiff.   

52.It has been revealed in the course of these proceedings that the defendant maintains two bank accounts with the HSBC which purportedly hold substantial funds.  On inquiry, however, it has been revealed that one of the account numbers is invalid.  The plaintiff’s application is made in order to preserve assets or realistically lead to the discovery of assets covered by the freezing injunctive order.

53.On the information before me, the defendant has successively realised assets in two jurisdictions (Singapore and Hong Kong) with the intention of transferring the proceeds obtained to another jurisdiction (Mainland China) where he intends to relocate and reside.  Both Singapore and Hong Kong have established common law legal systems that provide effective and efficient means for the conduct and resolution of civil disputes and the enforcement of court orders which can have both domestic and international application.  In my view, the defendant has quite deliberately realised his assets quickly in both these jurisdictions in order to put his funds and himself beyond the reach of the judicial processes of these jurisdictions.    

54.I am satisfied that the information sought to be disclosed would provide relevant information as to the status of bank accounts and the funds held in them in order to have a complete picture of the assets under the defendant’s control for the purpose of the claim and in aid of the freezing injunctive order.  It is complained by the defendant that the plaintiff did not seek the same terms for a disclosure order in Singapore.  I do not see that as an impediment to the order sought as long as the specified bank accounts are located in Hong Kong and it is appropriate for this order to be made.  I have no difficulty making such an order, despite the objection from the defendant that this is a matter for the primary court in Singapore.  The defendant also takes issue with the disclosure order on the basis that it may be used in the Singapore proceedings.  The very purpose of s 21M, as reinforced by s 21N, is to provide assistance in the form of interim relief to a court of a different jurisdiction in order to support and facilitate the foreign proceedings where it is just and convenient to do so.  I am satisfied that the liquidator has given an express undertaking not to use to documents obtained on discovery for any purpose beyond the Singapore or Hong Kong proceedings. The disclosure order sought under s 21, in my view, can be made and granted by virtue of s 21M in its own right or as a power ancillary to or in support of the freezing injunctive order granted under s 21M.

Conclusion

55.For the reasons I have given, I refuse the defendant’s application to discharge the freezing injunction order which will remain in force in its existing terms, and I grant the plaintiff’s application for an order of further disclosure.  I therefore make an order in the terms sought that HSBC permit the plaintiff’s solicitors to inspect and take copies of documents as specified within 7 days of service of the order.  I also make an order nisi that the defendant pay the plaintiff’s costs, to be taxed if not agreed.

56.Finally, I wish to express my appreciation to both counsel for their thorough and helpful submissions.

Mr Thomas Lee, instructed by Gall, for the plaintiff

Ms Elaine Liu, instructed by ONC Lawyers, for the defendant

Please refer to CACV94/2014 for the relevant appeal(s) to the Court of Appeal.