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Legal news, views and insight from LexisNexis Hong Kong
29 May 2020 | by LexisNexis Hong Kong
In Sunfund Investment & Management Co Ltd  HKCU 275, the Hong Kong Court of First Instance discharged the plaintiffs’ ex parte injunctions for restraining the second defendant from removing from Hong Kong and disposing of or dealing with its assets (including 10,000 shares in a company) in the city.
The plaintiffs first instituted proceedings against the first defendant (“SIM”) only in Mainland China for recovering their debts. The second defendant (“SHK”) was a subsidiary of SIM. On the basis of their successful case earlier in the Mainland (“Mainland Proceedings”), they then sought Chabra injunctions against SHK to freeze their assets based on a good reason to believe/expect that SHK was a debtor of SIM, so the assets held in SHK’s name would ultimately be enforceable by the courts and made available for satisfying a judgment against SIM. Further, the plaintiffs claimed that there was a real risk of dissipation of those assets in Hong Kong.
In further details, the plaintiffs applied for ex parte injunctions based on two factors:
- The Transfers: SHK was alleged to be a potential debtor of SIM because SIM transferred a large amount of investment funds to SHK that was 5 times over the shares owned by SIM, and those funds ought to be accounted for as account receivables owing to SIM as shareholder’s loans. There was a good arguable case that a creditor/debtor relationship existed between them; and
- The Risk of Dissipation: The beneficial owner and shareholder of SIM was a dishonest man of low commercial morality and suspected of fraud. He had sought to take control of SHK and its subsidiaries to dispose its assets. The plaintiffs supported their claim by producing the online records of the Beijing Public Security Bureau (“Bureau”) that he had been put on the Mainland register of fugitives.
With evidence, SHK proved to the court that the payments were not shareholders’ loans from SIM but subscription price for the allotment of new shares issued to SIM. SIM still owed SHK millions of unpaid capital for the issued shares, so SIM was a debtor not creditor of SHK.
The court then relied on a Court of Final Appeal case, Kayden Ltd v SFC (2010),to decide whether the ex parte application was permitted for serving proceedings outside the jurisdiction. Following Kayden, the court must carefully and strictly assess the application and would be permitted under exceptional and extraordinary nature of the long-arm jurisdiction of the court. Applying this rule to the present case, it was held that Chabra injunctions sought by the plaintiffs was under the exceptional jurisdiction of the court and it should be exercised with caution by the court. Further, it was only fair and just if SHK also shared the knowledge regarding the basis of the claim and was also given the opportunity to defend its case.
The Risk of Dissipation
The risk of dissipation of the assets was not proved. The court carefully considered the risk from evidence of low commercial morality. Hon Mimmie Chan J found that the statement in the online record was not cogent evidence to show the dishonesty of the beneficial owner because:
- the assertions were unsupported by any facts mentioned in the online record;
- nor did the assertions in the online record support the claim that the beneficial owner was a fugitive trying to avoid arrest by the authorities; and
- no evidence that the Bureau had informed or had lost any contacts with the beneficial owner to render him a fugitive.
The court had doubts on the provenance and authenticity of the online record. The court also found the plaintiffs had failed to make full and frank disclosure to the court at the ex parte application of the entire circumstances of the dispute between the plaintiffs and the defendants. This led to an unfair presentation of the facts to the court of the existence of a risk of dissipation. The injunctions were discharged not only for lack of a proper basis for the court to invoke its Chabra jurisidcition, for lack of evidence of risk of dissipation, and also for material non-disclosure of circumstances of the procurement of the online records.
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