Cheer Signal Development Ltd v. Wong Siu Fan and Others

HCA 780/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 780 OF 2015

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DECISION

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Introduction

1.The plaintiff obtained, on ex parte basis, a Mareva injunction (“the ex parte order”) before Mr Justice L Chan.  On this return date, the parties have agreed, in principle, on the terms for continuation of the ex parte order, subject to the defendants’ application for variation in relation to living expense and legal costs. The plaintiff opposes such variation.

Background

2.The facts are largely taken from the skeleton submission of Mr Chain, counsel for the plaintiff, lodged before Mr Justice L Chan (“the ex parte submission”).

3.Wong (D1) and the 2^nd defendant (“Ling (D2)”) were said to be the mastermind behind the subject fraudulent scheme.

4.Mak (D3) and Chan (D4) were joint perpetrators, playing key roles in the execution of the fraudulent scheme.

5.Orthodox (D5) to D9 are Hong Kong companies used as corporate vehicles in the perpetration of the fraudulent scheme.

6.Astroway (TP1) is a BVI company apparently controlled by Chan (D4), which is the ultimate holding company of D6 to D9.

7.Wing Sang Holdings (TP2), a Hong Kong company which holds D8 (which in turn owns D9), is apparently controlled by Astroway.

8.Wing Sang International (TP3), a Hong Kong company, shares the same registered office as Orthodox (D5) and is apparently controlled by Wing Sang Holdings.

9.Wong (D1) and Ling (D2) were first known to the plaintiffs as professionals working for Barclays Investment Bank (“Barclays”).  Between 2005 and 2010, the two of them gained the trust and confidence of the plaintiff and its parent company, Zhuhai Duty Free Enterprises Group Co. Ltd. 

10.Sometime in 2010, the plaintiff wished to be listed on the stock exchange in Hong Kong and approached Wong (D1) and Ling (D2) for assistance. 

11.Wong (D1) and Ling (D2) devised what turned out to be the fraudulent scheme, whereby:

(a)   The plaintiff would engage Orthodox (D5), the corporate vehicle of Wong (D1) and Ling (D2), as consultant.

(b)   The plaintiff would commence a seafood products business (“P’s business”). 

(c)   D6 (introduced by Wong (D1) and Ling (D2)), would be the upstream seller of seafood products (“the upstream seller”).

(d)   D7 to D9 (also introduced by Wong (D1) and Ling (D2)) would be the 3 downstream buyers.

(e)   The plaintiff would buy seafood products from the upstream seller on advance payment terms and in turn sell to the downstream buyers at a higher price on credit.  The difference in price would represent the plaintiff’s profits.  The seafood products would be delivered directly to the downstream buyers. 

(f)   For the purpose of listing, Wong (D1) and Ling (D2) would arrange for the plaintiff to eventually acquire the upstream seller and downstream buyers. 

(g)   Mak (D3) (originally staff of Orthodox (D5)) was engaged by the plaintiff as Vice President to manage P’s business on a day to day basis.

12.P’s business had been run from mid-2011 to mid-2013 with a purported sales volume of $970m and gross profit of $25m. 

13.In fact, the upstream seller and downstream buyers were secretly controlled by Wong (D1) and Ling (D2).  Chan (D4), who was the husband of Wong (D1), was the common bank signatory of the upstream seller and downstream buyers.

14.It is the case of the plaintiff, with hindsight, that monies it paid to the upstream seller in advance would be routed to the downstream buyers to pay back to the plaintiff on credit terms.  Mak (D3) was positioned to facilitate the fraudulent flow of funds and generate documentation for the sham transactions.

15.Sometime in September 2013, as the management of the plaintiff decided to supervise P’s business more closely, the 3 downstream buyers suddenly stopped paying.  It left the plaintiff out of pocket in the amount of about $120m in terms of advance payments to the upstream seller.  P’s business came to a halt.

16.Not being aware of the fraud, the plaintiff paid Orthodox (D5) monthly consulting fees for the entirety of 2014, solely for the purpose of having the latter assist in recovering monies from the downstream buyers.

17.The fraudulent scheme came to light in October 2014 upon the plaintiff’s investigation.  The matter was reported to the police.  Having been informed by the police that it would soon take steps against the defendants, the plaintiff commenced the present action.  So far, no charge has been laid against anyone.

18.It is the plaintiff’s case that when the acts of the defendants were viewed as whole, each of them was acting in furtherance of a common design under the fraudulent scheme.  Wong (D1) and Ling (D2) exploited the trust and confidence that the plaintiff had in them. The plaintiff suffered loss of about $127m.

The variation applications

19.Chan (D4) applies for variation to withdraw living expenses of $121,000 per month.

20.Two camps of defendants ask for variation to withdraw “reasonable legal costs” up to inter partes hearing of the plaintiff’s application for the Mareva injunction (“the inter partes hearing”).  They are:

(i) The 1^st, 2^nd and 5^th defendants (“the Wong (D1) parties”);

(ii) The 4^th, 6^th to 9^th defendants and the 1^st to 3^rd third parties (“the Chan (D4) parties”). 

As a fall back, the Wong (D1) parties ask for liberty to expend $750,000 (including fees of senior counsel) and the Chan (D4) parties ask for $500,000. 

Legal principles for variation in terms of living expenses and legal costs

21.There is a difference in treatment of a variation application depending on whether the plaintiff’s claim is or is not of a proprietary nature. In Wharf Ltd v Lau Yuen How [2010] HKLRD 783, at §13, Au J held:

“13.  The principles applicable to the release of funds to pay legal costs from an injunction involving proprietary claims are well settled. It is an exercise of discretion which involves a 2-stage process:

(1)   First, the defendant applying for the release of funds has to demonstrate with full and frank evidence that there are no alternative funds or assets available to him which can be used to pay his legal expenses other than the assets in respect of which the plaintiff brings the proprietary claim. If the defendant fails in this first hurdle, the Court needs not consider the 2^ndstage and the application should be dismissed.

(2)   Secondly, once the first hurdle is cleared, the Court in the exercise of its discretion will engage in a balancing exercise to weigh the potential injustice to the plaintiff if releasing the funds against the possible injustice to the defendant of depriving him of the opportunity to have legal assistance in advancing what may eventually turn out to be a successful defence. This process is a “careful and anxious judgment”, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim in the funds and the defendant’s defence to that claim. In relation to this, it is not sufficient for a defendant to merely establish that he has no other funds, for even so, he must also show that there is an arguable case for his having recourse to the funds in question, failing which, he has not right to use the money. As Millet LJ (as he then was) said in Ostrich, infra, “[n]o man has a right to use somebody else’s money, for the purpose of defending himself against legal proceedings”.

...

14.    In the case of an “ordinary” Mareva injunction, where there is no proprietary claim asserted against the enjoined assets, in the exercise of the Court’s discretion faced with an application to release the funds, the Court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet the payment, and (b) the purpose of the application is not an attempt to dissipate the assets (which prima facie are the defendant’s) to frustrate the enforcement of judgment by the plaintiff. …”

Was the plaintiff’s claim proprietary in nature?

22.Arguably, when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient; the property is recoverable and traceable in equity: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, at 716, referred to in Zimmer Sweden AB v KPN Hong Kong Ltd & anor, HCA 2264/2013, per Deputy Judge Yee, 2 May 2014, at §§89-93.

23.However, this hearing is effectively dealing with very interim measures pending the filing of evidence from the defendants for the inter partes hearing.  It is the plaintiff’s case advanced at the ex parte stage that this court should bear in mind when considering the variation application.

24.Neither the endorsement of claim nor the case at the ex parte stage identified the claim as a proprietary one, eg in the sense of $127m being paid into a designated account for a designated purpose. In §§8 and 12 of the ex parte submission, Mr Chain referred to the plaintiff’s cause of action as one of damages for fraud.  The $127m was said to be comprised of 2 parts: (a) $120m being advance payments to the upstream seller and (b) $7.41m being consultancy fees to Orthodox (D5) for managing P’s business in 2013 and assistance in recovery of outstanding payments from the downstream buyers in 2014.  As stated in §19 of the ex parte submission, the plaintiff did not have any information as to what (if any) funds were held in the bank accounts of the defendants which the plaintiff was aware of.

25.At this stage, I am not satisfied that the plaintiff has advanced a proprietary claim.  Accordingly, the 2^nd limb of Au J’s judgment applies.

Analyses of Chan (D4)’s evidence in relation to living expenses

26.Chan (D4) claims that all his assets were covered by the ex parte order and were well below HK$127m. He claims not to have other assets available to meet the living expenses and the purpose of the application is not an attempt to dissipate the assets (which prima facie are his) to frustrate the enforcement of judgment.

27.Mr Chain very fairly concedes that there is no evidence of actual dissipation of assets by Chan (D4). 

28.If a risk of dissipation has been established amidst a cogent and compelling case of deliberate fraud, the court should have a “very healthy skepticism” about assertions made by a defendant: Wang Jian v Zhang Tien Feng, unreported, HCA 607/2001, 27 August 2001, at §8, per Recorder Ronny Wong SC.

29.The fact that the defendant has not yet obeyed a disclosure order is no bar to his application for variation: the Wang Jian case, at §11.

30.In the present case, the plaintiff’s claims are complex.  Chan (D4) has had less than 2 weeks since service of the ex parte order on him to prepare for this hearing.  One can understand why he was unable to come up with a defence on the merits on this return date.  He needs further time to comply with the disclosure order, which the plaintiff has consented to.

31.However, Chan (D4) has not even said a word about his defence. He has disclosed only his residential property, his car, and company shares, which are all held by corporate vehicles.  He has an insurance policy.  The court does not have an idea of what, broadly, his other assets are and their worth.  He has not come up with sufficient evidence that he does not have other assets available to meet the payments under the 2^nd limb of Au J’s decision.

32.Lack of sufficient evidence is not fatal to the application of Chan (D4). The court still retains some discretion in allowing variation on proper grounds.  For example, notwithstanding that the plaintiff’s claim was proprietary in nature, Deputy Judge Carlson allowed the defendant to withdraw a small amount for legal expenses: Cathay Pacific Airways Ltd v Luk Shu Keung & ors, HCA2895/2001, 3 November 2006, §§19-20.

33.In Gee on Commercial Injunctions (5^th ed) at §20.066, “ordinary living expenses” has been defined as “ordinary recurrent expenses involved in maintaining the subject of the injunction in the style of life to which he is reasonably accustomed.”  It does not include exceptional expenses like the purchase of a Rolls-Royce or the equivalent in legal terms of the private employment of Queen’s counsel to defend against a serious criminal charge.  However a defendant is entitled to carry on maintaining his family and himself if this was his practice before the granting of the injunction.

34.The ex parte order already allows Chan (D4) to expend $40,000 per month.  What he is now seeking is an extra $81,000 per month broken down as: mortgage repayments ($37,500), management fees ($3,000), utilities ($5,500), car ($10,000), insurance ($10,000), expenses on his father ($15,000), personal and other household expenses ($40,000).

35.The plaintiff does not oppose to the release of $37,500 per month for the mortgage repayments, subject to Chan (D4)’s undertaking as sole director and shareholder of Top Rise (which holds the residential property) to procure Top Rise not to sell the property until the inter partes hearing (“the undertaking”).  That said, Mr Chain has commented D4’s lifestyle as “luxurious”.

36.In my view, applying common sense and having regard to the scale of business handled by Chan (D4) before the fraud was discovered, Chan (D4) might have been reasonably accustomed to the alleged living standard. 

37.However, there is nothing to show whether or not he had the practice of supporting his father before the ex parte order was granted.  Nor is there anything to show if any other family member could have taken over Chan (D4)’s expenses related to the father.  Accordingly, all the expenses in relation to the father are disallowed as a matter of principle.

38.The ex parte order has already allowed $40,000 per month for Chan (D4)’s living expenses.  That should be more or less sufficient for himself.  I do, however, permit him to withdraw $37,500 per month for his mortgage repayments and to spend, in June 2015, an additional $120,000 for the annual premium of his life insurance. These are allowed solely because such payments will practically just transfer assets from one pocket of Chan (D4) into his other pocket and there will be little loss of assets under the ex parte order.  The transfers shall be done directly into the mortgage account and the insurance company without going through the hands of Chan (D4).

Legal principles in relation to legal expenses

39.Payment of moneys in legal costs is not, prima facie, dissipation.  The principles of Au J in the Wharf Ltd case equally apply. Mr Chau, counsel for the 1^st, 2^nd and 5^th defendants, further relies on the following principles in the case of Revenue and Customs Commissioners v Begum [2010] EWHC 2186, §§39-48, per David Richards J which I summarize as follows:

(a)   Neither the claimant nor the court are entitled to control the defendant’s choice of solicitors and counsel, and the payment of their proper costs or the way in which they conduct the case. A defendant ought to be allowed to choose the legal representatives he thought best qualified to present his case and to pay them such charges as may be properly payable as a matter of contract. It does not lie in the mouth of a plaintiff to say that the defendants ought to have gone to a cheaper firm of solicitors.  (See also Wang Jian & Anr v Zhang Tien Feng & Ors, HCA No. 607 of 2001, 27 August 2001, §6.)

(b)   The court will not give the claimant the right to require a solicitor and own client assessment of the defendant’s costs or a right to attend such assessment. This would be an unjustified interference in the relationship between solicitor and client. The court simply had no jurisdiction to make such an order.

(c)   The court will not itself perform the function of a provisional assessor of costs, from time to time deciding what the defendant’s solicitors should be allowed to spend.

(d)   The court will not in general impose a cap on the defendant’s legal costs as it would be a recipe for further applications.

(e)   Protection to which the claimant is entitled is in general that provided in the standard form of an injunction, which is to the effect that the defendant may use the frozen assets for the payment of his reasonable legal costs provided that he informs the claimant as to the source of those payments.

(f)   The emphasis here is on the word “reasonable” so that the defendant’s solicitors cannot charge for unnecessary work and cannot charge unreasonably high.  If a solicitor, whose client is subject to an injunction which only allows him to spend money on ‘reasonable’ legal costs, knowingly permitted his client to pay costs which were plainly not reasonable, the solicitor would probably be in contempt of court.

(g)   In cases of injunctions  in aid of proprietary claims, there is an invasion of some, though not all, of these principles. But that is because the nature of a seriously arguably proprietary claim raises special features which require special treatment.

40.The principles in the Revenue case must be read in context.  There, the parties had a very elaborate regime to permit the 1^st defendant to use frozen funds for her defence.   The 1^st defendant applied for variation so that the injunction would not prohibit her from spending such sums as were “actually, reasonably and properly occurred” in the conduct of the proceedings, provided that before spending any money, (i) she must inform the Revenue claimant’s solicitors where the money was to come from, and (ii) the first defendant’s solicitors must certify that the costs and expenses to be paid have been actually, reasonably and properly incurred.  Revenue objected to the application. 

41.Revenue had abandoned its proprietary claims (§15 & 33 of the decision).  The unchallenged evidence was that the defendant could only conduct the defence if she was funded by the frozen assets (a trust).

42.David Richards J declined to impose a cap on costs, even one as apparently generous as that proposed by the Revenue (§60).  However he imposed a “modest check” of requiring the 1^st defendant’s solicitors to inform Revenue if and when they estimated their costs of the action as likely to exceed £2.5m.  He agreed with the 1^st defendant that the latter should not be required to provide copies of invoices and fee notes to which those costs related because that might entail disclosure of privileged information (§61).  The learned judge acceded to the 1^st defendant’s request for amendment to the exception regarding payment of legal costs, although the judgment did not spell out the terms of the order itself.

43.It was in such context that the principles summarized in paragraph 39 above were established.

44.Those principles are not inconsistent with the practice in Hong Kong. The “standard form” Mareva injunction in PD11.2 provides, as an exception to an order, that “the defendant is not prohibited from spending … $________ per week [or a reasonable sum] on legal advice and representation”.  By way of example, in Securities and Futures Commission v Jun Du (Previously “A”), HCMP 1407/2007, 23 December 2008, Kwan J (as she then was) varied a Mareva injunction to allow the defendant to withdraw $10 million for legal expenses instead of the full amount sought.

45.In specifying a sum for legal expenses, the court is not controlling a defendant’s choice of lawyers, supervising the conduct of the defence, making a provisional assessment of costs or setting a cap on the defendant’s costs.  It is but balancing the interests of both parties so that frozen assets will not be whittled down without the plaintiff knowing.

Applying the legal principles in relation to legal expenses

46.The ex parte order permits each of the defendants and the third parties to spend a one-off sum of $30,000 towards legal costs.  That, in my view, is too low for resisting a Mareva injunction with the complex factual background.  Both camps of defendants seek a variation to enable them to spend a reasonable sum on legal costs.

47.Having regard to the serious allegations, the size and complexity of the plaintiff’s claim ($127 million), the volume of documents involved, the amount of legal expenses sought by each camp may be within the reasonable range.  Engaging senior counsel was also within reasonable bounds.

48.However, Wong (D1) has not filed any affirmation to discharge his burden of proof under the 2^nd limb of Au J’s decision.  Paragraph 31 above on lack of sufficient evidence apply equally to the Chan (D4) parties.  The application of both camps of defendants should thus be dismissed.  There is nothing to persuade me to exercise my discretion in the way that Deputy Judge Carlson did in the Cathay Pacific Airways Ltd case.

Order

49.I allow, in part, Chan (D4)’s application in relation to living expenses.  I dismiss the rest of the applications of the Wong (D1) parties and Chan (D4) parties. 

50.I order as follows:

Upon the undertaking of Chan (D4) to the court and to the plaintiff (handed up at this hearing), it is ordered that:

(1)   Without prejudice to the defendants’ right to apply for variation or discharge and subject to paragraph 2 below, the Mareva injunction order (“the Order”) made by Mr Justice L Chan on 10 April 2015 be continued until the substantive hearing of the plaintiff’s summons dated 14 April 2015 (“the plaintiff’s summons”) and the defendants’ intended application to discharge the order or until further order:

(2)   The Order be varied so that:

(a)   There be added, before paragraph (2), a new paragraph (1A) under the heading “Exceptions to this Order” that,

“This order does not prohibit Chan (D4) from spending another $37,500 per month on repayment of the mortgage in respect of No. 311 Pak Kong, Sai Kung, New Territories held under the name of Top Rise Investment Company Limited, and $120,000 in June 2015 in payment of the premium of his life insurance policy (Policy number PRU-000010551438). Paragraph (1A) shall cover the period up to and including the hearing of the plaintiff’s summons. The funds for repayment of the mortgage and payment of the insurance premium shall be released directly to the mortgagee and insurance company without passing through Chan (D4) or Top Rise Investment Company Limited under any circumstances.”

(b)   The “14 days” stated in the full paragraph under the heading “Disclosure of information” be substituted by “28 days”.

(3)   The applications by the Wong (D1) parties and Chan (D4) parties for variation of paragraph (2) under “Exceptions to this Order” in relation to legal expenses are dismissed.

(4)   The defendants and the 3 third parties do take out a summons for discharge of the Mareva injunction (if so advised), and file and serve their affidavit(s) in support of the discharge summons and in opposition to the plaintiff’s summons within 21 days.

(5)   The plaintiff do file and serve its affidavit(s) in reply, if so advised, within 21 days thereafter.

(6)   No further affidavit(s) are to be filed without leave of the court.

(7)   The hearing of the plaintiff’s summons and the discharge application(s) be heard together on a date, that is not before July 2015, to be fixed in consultation with the diaries of Mr Christopher Chain, Mr Jeffrey Chau and Mr Jonathan Wong.

(8)   Costs of the plaintiff’s summons and this hearing for variation are reserved.

51.I thank counsel for their assistance.

Mr Christopher Chain, instructed by Li & Partners, for the plaintiff

Mr Jeffrey Chau, instructed by Samuel L.C. Yang & Co, for the 1st , 2^nd and 5^th defendants

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

Mr Jonathan Wong, instructed by C.L. Chow & Macksion Chan, for the 4^th, 6^th-9^th defendants and 1^st-3^rd Third Party