09 September 2019
This recent decision handed down on 23 August 2019 (the “Decision”) dealt with two novel issues of law. The Decision is the first decision in Hong Kong which:
(1) Examines whether a co-defendant can, based on an alternative case that it would lose at trial, seek a Mareva injunction against its co-defendant pre-trial (“Issue 1”); and
(2) Deals with the interesting doctrinal issue as to whether liability for knowing receipt or in unjust enrichment should be treated as “compensation” under the Civil Liability (Contribution) Ordinance (Cap 377) (“CLCO”) (“Issue 2”).
The Judge ruled that although a co-defendant is in theory permitted to seek a Mareva injunction against its co-defendant, on the facts of this case, a Mareva injunction should not be granted. Through a scholarly doctrinal analysis, the Judge also ruled that the English Court of Appeal decision, Charter plc & Another v City Index Ltd & Others  Ch 313, was wrongly decided since liability for knowing receipt does not constitute “compensation”.
The Plaintiff (P) in this case asserted a claim against the 1st Defendant (D1). It was alleged that D1, a securities house, had acted in breach of fiduciary duties, breach of contract and/or negligently in transferring 117 million shares in a listed company (the “Company”) (the “117 Million Shares”) to the 2nd Defendant (D2)’s account. It was alleged that the transfer had been procured by an unnamed third party impersonator posing as P.
D1 denied P’s claim, but in the alternative scenario that it might lose the case against it, issued a Third Party Notice seeking to claim (in the event that it was liable to P) against D2 on the basis of fraudulent misrepresentation and/or knowing receipt (of the 117 Million Shares).
D2 denied the claims advanced by P, and also the alternative claims advanced by D1, asserting that she was in fact the proper owner of the 117 Million Shares by reason of a legitimate subscription agreement entered into between herself and the Company. Her case was that P had in fact obtained the 117 Million Shares through means unknown to her and she had all along been trying to get her subscription shares back.
P all along had declined to seek injunctive relief against any of the Defendants.
D1 then took the unusual step of taking out an inter partes Mareva injunction application against inter alia D2. It was this application that gave rise to consideration of these novel issues of law.
Issue 1 – Can a Mareva injunction can be granted based on a co-defendant’s alternative case that it would lose at trial?
On a conceptual level, the Judge answered this question in the affirmative. One apparent difficulty faced by a co-defendant is that, strictly speaking, it does not have an accrued cause of action since it has not yet lost at trial. However, the Judge took the view that the recognition that the Court has jurisdiction to grant quia timet injunctions prior to the suffering of actual loss tends to support that an accrued cause of action in the strict sense is not required for injunctive relief. Further, the English Court of Appeal decision, Kazakhstan Kagazy plc v Zhunus  1 WLR 1360, supports the proposition that although a co-defendant does not have an accrued cause of action in the strict sense, so long as it has a right to institute proceedings (e.g. by way of contribution or third party notice), the Court has jurisdiction to grant Mareva relief. There is no sufficient reason to doubt the reasoning in Zhunus.
Just because one can, theoretically, obtain such relief does not mean that it must be granted in every case where a co-defendant asserts an alternative claim against its other co-defendant(s), however. The Judge went on to examine what was required to be shown in order to successfully obtain injunctive relief.
Of particular relevance in the present case was the fact that P here had not sought Mareva relief against any of the Defendants. This was to be contrasted the situation in Zhunus where the claimant had already sought and obtained injunctive relief against all the defendants (thereby demonstrating the claimant had a good arguable case against all of them). D2 therefore argued that before D1 could argue its own “good arguable case” (under the Third Party Notice), it also had to demonstrate that P had a good arguable case against all the Defendants. D1, in contrast, sought to circumvent this latter requirement, suggesting that it was not necessary for it to demonstrate a good arguable case of P’s case and invited the Court to err on the side of preserving the assets in any event.
The Judge rejected D1’s argument, and held that the Court should adopt a principled approach in granting Mareva relief. In other words, the Court cannot proceed on the basis that on balance, there is lesser harm in granting a Mareva injunction, then a Mareva injunction should be granted. To push D1’s argument to its logical extreme, it would mean in a case where a plaintiff does not have a good arguable case, a Mareva injunction could still be granted simply because there is a risk or possibility that one of the defendants who has issued a third party notice could be found liable after trial. This, according to the Judge, could not be right.
The Judge found that on the facts P had no good arguable case in the present case (and D1 could not demonstrate as such). On this basis alone, D1’s application for Mareva injunction could be rejected. For completeness, however, the Judge proceeded to address inter alia Issue
Issue 2 – Can liability for knowing receipt or in unjust enrichment be treated as “compensation” within the meaning of the CLCO?
Even assuming that P had a good claim in knowing receipt against D2, there was a question as to whether D1 could claim contribution against D2. After a thorough review and analysis of the authorities and commentaries, the Judge answered in the negative.
In gist, the Judge preferred the analysis of Lord Steyn in Royal Brompton NHS Trust v Hammond  1 WLR 1397 as well as the commentaries by Professor Andrew Burrows, Professor Graham Virgo and the editors of Goff & Jones (as against the English CA decision of City Index Ltd), and held that it cannot be justified in principle to treat a restitutionary claim such as knowing receipt as one for “compensation”. Knowing receipt is “purely remedial” and knowing recipients’ sole obligation is to restore the assets: Williams v Central Bank of Nigeria  2 WLR 355 per Lord Sumption. As such, the focus of this “remedy” is on what the defendant has received, and not what the plaintiff has lost.
Hence, the Judge took the view that City Index Ltd had been wrongly decided, and liability for knowing receipt or in unjust enrichment should not be treated as “compensation”. On the basis of this dicta, CLCO is not applicable insofar as it concerns P’s knowing receipt claims. In any event, as the Judge observed, D1 has not sufficiently pleaded contribution as part of its case.
This decision is legally significant as it recognised a co-defendant’s right to seek a Mareva injunction against another co-defendant to protect its interest in the event that it loses at trial. The elements that a co-defendant has to satisfy were examined at length. Notably, in a scenario where a plaintiff has not sought injunctive relief against the defendants, the co-defendant must first demonstrate that the plaintiff has a good arguable case against the defendants before then developing its own good arguable case (as to its alternative claim). Further, because of the Judge’s detailed (albeit admittedly obiter) analysis on the nature of knowing receipt claims and their interaction in the context of contribution, this Decision is potentially of wider implication to other aspects of civil and commercial litigation. Readers are invited to read the facts and analysis of this important decision in full.
Dr William Wong SC, JP was the presiding judge