Injunctive relief to freeze a defendant's assets (ie, a Mareva injunction) can extend to third parties under the so-called 'Chabra' jurisdiction where there is good reason to suppose that the assets held by the third parties are in fact assets belonging to the defendant. This jurisdiction is described as exceptional. However, as China Metal Recycling (Holdings) Ltd (in Liquidation) v Chun Chi Wai (No 2)(1) demonstrates, while the courts are careful in exercising their jurisdiction in this regard, they will do so in deserving cases.
The case has a lengthy and protracted history. In late 2009 it was discovered that the first defendant (the chief executive officer and controlling shareholder of the plaintiff holding company) had apparently misappropriated over HK$5 billion from the company. As a result, the company was wound up in 2013 and the liquidators obtained a Mareva injunction against the first defendant, his wife and certain other defendants (including the first defendant's corporate vehicle). Certain criminal proceedings appear to be afoot and the first defendant allegedly absconded.
Subsequently, the Mareva injunction was extended to include the first defendant's three daughters (the respondents) following an application by the plaintiffs. As a result, the respondents were prevented from disposing of or dealing with (among other things) any of the first defendant's assets subject to a HK$ multi-million cap. The respondents were also required to give disclosure of assets held by them since 2013 on behalf of the first defendant and his corporate vehicle.
In response, the respondents argued that the restraint imposed on them by the extended Mareva injunction was too wide. Therefore, they applied in these proceedings to remove reference to the following categories of asset from the extended Mareva injunction:
- assets allegedly acquired through the use of funds provided by the first defendant and his corporate vehicle;
- assets which these defendants had the power to dispose of or deal with as their own; and
- assets allegedly held in accordance with the instructions of these defendants.
The respondents also challenged the part of the Mareva injunction that required them to give disclosure of assets held by them (among other things) under the first defendant's instructions. In the meantime, the plaintiffs sought to continue the Mareva injunction.
Applying established case law in Hong Kong,(2) the judge held that the categories of asset did not, of themselves, justify invoking the Chabra jurisdiction. At this stage of the proceedings, based on the available evidence before the court, the assets falling within these categories could not necessarily be said to belong to the first defendant or his corporate vehicle. Accordingly, the judge allowed the reference to these categories of asset to be struck out from the extended Mareva injunction.
As for continuation of the Mareva injunction against the first defendant's other assets held by the respondents, the judge did not accept that the remainder of the injunction was defective.
Based on inferences from the available evidence and the relationship between the first defendant and the respondents (his daughters), the judge refused to discharge the injunction or to vary the disclosure obligations. For example, the judge noted that the respondents were relatively young (students studying overseas) and did not appear to have any independent financial resources – the inference being that nearly all of their assets were given to them by their parents and another close relative allegedly caught up in the first defendant's activities. In any event, the other possible sources of the respondents' wealth appear to have been very limited.
In respect of the disclosure order, the court noted that disclosure against a third party in the context of a Mareva injunction was not standard and could be oppressive if misused. However, based on inferences from the first defendant's conduct to date, the judge was unwilling to set aside the disclosure order. The fact that the respondents were the first defendant's daughters, and that he appeared to have given them valuable assets, on balance justified the disclosure order in support of the plaintiffs' injunction. The judge noted that it ought to be possible for the respondents to ascertain the source of their wealth.(3)
With Chabra relief a plaintiff is not usually asserting a claim against a third party, but is asserting that there is good reason to believe that assets in the name of a third party are, in fact, a defendant's assets against whom the plaintiff does have a substantive claim.(4)
The judgment supports the general legal principle that, in extending Mareva relief against third parties, the test to apply is whether there is good reason to suppose that the assets held by the third party are amenable to the execution of a judgment obtained by the plaintiff against the defendant. The defendant's substantial control over an asset held by a third party is not conclusive, although (in practice) it may be a good pointer that the asset belongs to the defendant.(5)
On the face of it, the striking-out of certain categories of asset from the Mareva injunction might appear to be a setback for the plaintiffs. However, the respondents' failure to overturn the disclosure order is probably as big a setback for them (or their parents) and, once armed with further disclosure, the plaintiffs may be able to identify more of the first defendant's assets.
While Chabra relief is described as exceptional, this has a context. In an environment where some defendants seek to hide misappropriated assets through corporate structures or family connections, one can expect more developments in this area. In many such cases, the courts in Hong Kong are acutely aware of the need to maintain a balance between preventing a defendant from defeating the purpose of Mareva relief and not making orders against a third party that are oppressive or disproportionate.
There is also the point that while a party does not get to choose his or her parents, he or she can be affected by certain adverse inferences based on a parent's (or close family member's) conduct.
Despite the respondents' challenge in this case, ultimately the Mareva relief was continued with respect to certain general assets held by the respondents up to the amount capped in the injunction. As the judge noted in the final paragraph of the judgment, the plaintiffs were the "major winner" in this procedural battle.
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(5) Supra note 1, at paragraphs 19 and 23. The judge appears to have accepted that the categories of asset struck out from the extended Mareva injunction were "capable of being important pointers to the existence of good reasons to suppose that the assets under consideration are amenable to the execution of a judgment against [D1/D13]".