Tyg Capital Fund (In Liquidation) v Hilda Hor Yee Chan And Others

HCA 1585/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1585 OF 2014

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D E C I S I O N

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Introduction

1. This case came before me last Friday. It was the return day of the ex parte order granted by Harris J on 14 August 2014 obtained by the plaintiff against the 1^st to 6^th defendants (“Ex Parte Order”). Notices to Act have been filed by all six defendants. The parties have amongst themselves filed 12 inter partes summonses returnable before me. At the hearing on Friday, I have dealt with parts of some of those summonses, and granted case management directions in respect of most of the other summonses so that the parties can fight on another day. The remaining summonses that were argued before me were between the plaintiff (ie the TYG Capital Fund) and the 1^st defendant Hilda Chan and the 2^nd defendant Daren Chan respectively.

2. The diligence of counsel presented me with close to 40 authorities and the hearing lasted until 5:30 pm, so I have adjourned the hearing to Monday, ie today, for oral delivery of decision. In view of the urgency of the matter and given that Hilda and Daren Chan have not yet filed any affirmation evidence, I do not propose to go into the detailed background of the case, which for present purposes I only have the Fund’s version. I also do not propose to analyse in detail the many authorities cited by counsel. I will concentrate on giving reasons for my conclusion so that the parties can consider their position both in Hong Kong and in the Cayman Islands accordingly.

3. For convenience, I shall adopt the abbreviations in the affirmation of John Howard Batchelor (“John Batchelor”) filed on 14 August 2014 (“Affirmation”) and in the Draft Affirmation of David Bennett referred to below. I mention here that John Batchelor and Vincent Fok of FTI were appointed as independent directors of the Fund on 7 April 2014, and they were appointed to the Governance Committee of the Fund on 6 May 2014.

4. On 14 August 2014, the Fund commenced the present action against the 1^st to 6^th defendants. In summary,

(a) the Fund seeks declaratory and monetary reliefs against Hilda Chan for a sum of US$16.995 million for breach of trust and/or fiduciary duty or alternatively for money had and received for which the consideration has wholly failed;

(b) the Fund also seeks similar reliefs against Daren Chan as constructive trustee for dishonest assistance in Hilda Chan’s breach of trust and/or fiduciary duty or alternatively for money had and received for the use of the Fund;

(c) as against the 3rd defendant TYG HK, the Fund seeks an account of all sums received from Deutsche Bank AG or others on their behalf and of the amount due to them as well as declaratory and monetary reliefs on the basis that TYG HK holds such amount (or its traceable substitutes) on trust for the Fund or is liable to account for the sum of US$16.995 million as constructive trustee on the ground of knowing receipt or for restitution or payment of the sum of US$16.995 million as money had and received for the use of the Fund;

(d) as against all defendants including the 4^th to 6^th defendants TYG Services, TYG Advisors and TYG Intl, the Fund asks for other accounts, inquiries and directions and for damages and/or equitable compensation.

5. On the day before the commencement of the present action, the Fund obtained the Ex Parte Order as follows:

(a) as against all defendants, a proprietary injunction restricting disposal of the Fund’s monies paid to TYG HK by Deutsche Bank AG or its fruits or proceeds (“Proprietary Injunction”);

(b) as against all defendants, a worldwide Mareva injunction restricting removal of or dealing with assets up to the value of US$16.995 million, including monies in various bank accounts of Hilda Chan, Daren Chan, TYG HK and TYG Services, Hilda Chan’s shares in the TYG HK, and Daren Chan’s shares in TYG HK, TYG Services, TYG Advisors or TYG Intl (“Mareva Injunction”);

(c) ancillary disclosure orders in support of the Proprietary and Mareva Injunctions;

(d) as against Hilda and Daren Chan, they be restrained, pending the determination of the Fund’s application to the Grand Court of the Cayman Islands for court supervision of the Fund’s liquidation, from voting for, whether directly or indirectly, or causing or procuring (1) the alteration of the constitution of the Fund’s board of directors or (2) the removal or replacement of the Fund’s liquidators or (3) the alteration of the constitution of the Board of directors of TYG HK (“Shareholders’ Restraint”).

6. I now turn to the summonses that have been argued before me.

7. First, the Fund took out a summons dated 14 August 2014 for continuation of the Proprietary and Mareva Injunctions and the Shareholders’ Restraint (“Continuation Summons”). At the hearing on Friday, I have granted interim continuation of the Ex Parte Order (save and except for the Shareholders’ Restraint) pending the substantive hearing of the defendants’ application for discharge.

8. Secondly, Hilda and Daren Chan respectively applied by summons on 19 August 2014 for the Shareholders’ Restraint to be discharged absolutely for material non-disclosure (“Discharge Summonses”).

9. On 21 August 2014, the Fund filed the affirmation of their Hong Kong solicitor Geoffrey Lawrence Wong exhibiting a draft affirmation by David Bennett, one of the two JVLs of the Fund, which contents he has approved and which affirmation will be affirmed and filed when he returns to Hong Kong from a business trip (“Draft Affirmation”). The Draft Affirmation gives an update of the events that have happened since the grant of the Ex Parte Order.

10. In short, the crux of the dispute before me is whether the Shareholders’ Restraint against Hilda and Daren Chan should be continued or discharged. It is necessary to bear in mind that the Shareholders’ Restraint (even if it is to be continued) will only have life up to the determination of the Fund’s application to the Grand Court for court supervision of the Fund’s liquidation, which is due to be heard on 5 September 2014.

Background

11. The Fund is a Cayman Islands company and a registered mutual fund. Its directors used to be Hilda Chan, DFG I and DFG II until Vincent Fok and John Batchelor were appointed as directors on 7 April 2014. Hilda Chan resigned with effect on 4 June 2014.

12. TYG Cayman is a Cayman Islands company and the fund manager. Its shareholders are Hilda Chan (62.5%) and Daren Chan (37.5%). Its directors used to be Daren Chan and two employees of DMS Offshore until Vincent Fok and John Batchelor were appointed as directors on 6 Mayl 2014. Daren Chan resigned with effect on 6 June 2014.

13. The investors held the non-voting Participating Shares of the Fund, and TYG Cayman held all of the voting Management Shares of the Fund. The Management Shares have no economic interest in the Fund’s assets.

14. In short, Hilda and Daren Chan hold 100% of the shareholding in TYG Cayman, which in turn holds 100% of the voting shares of the Fund.

15. The following version of events is taken from the Affirmation and Draft Affirmation since Hilda and Daren Chan have not filed affirmations in opposition as yet.

16. The Fund first accepted subscriptions in May 2013, and it published its NAV on a monthly basis. But in the course of preparing the December 2013 NAV in January 2014, DB Singapore raised queries over certain cash payments from the custodian account, and refused to calculate the NAV pending satisfactory explanation. Such explanation was not forthcoming, and in March 2014 they terminated the administration agreement which took effect on 12 June 2014.

17. The Board of the Fund was notified, and John Batchelor and Vincent Fok were appointed as independent directors on 7 April 2014. FTI’s investigations (as summarised in the FTI Report) revealed poor accounting records, incomplete documentation of payments, large payments for certain fees and expenses, and payments to Hilda and Daren Chan, entities connected to them and the Introducers. About half of the net subscriptions have been disbursed by February 2014 with more payments in March to May 2014, but it appears that only a small portion comprised legitimate payments. The Affirmation details the questionable and/or excessive payments.

18. During this time, the Strategy was devised for Hilda and Daren Chan to recover payments from the Fund’s assets and to shift control of the Fund to a Governance Committee. On 6 May 2014, the Board resolved to set up the Governance Committee, to implement the Suspension, and to notify the investors. Hilda Chan transferred her shares in the SPV to the Fund. New custodian and new administrator were appointed. CIMA and the investors were notified.

19. In June 2014, Hilda and Daren Chan signed deeds of undertaking to return relevant monies to the Fund on an ongoing basis with a long stop date by 31 July 2014. Following their resignations as directors of the Fund and TYG Cayman, they countersigned letters to acknowledge their limited role in assisting the Governance Committee to seek repayment of the questionable payments,...