SMART EDGE LTD v. LUN HAU MUN AND OTHERS

HCA 1242/2020

[2020] HKCFI 1900

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1242 OF 2020

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BETWEEN

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D E C I S I O N

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1.  There is before the court a Summons filed by the Plaintiff (“Company”) on 27 July 2020, which is purportedly represented by its Receivers and Managers (“Receivers”), against its directors (the Defendants) who had allegedly been replaced by the Receivers and Ms Chi in such role.

2.  A number of mandatory and prohibitory injunctions are sought in the Summons.  They reflect the substance of the relief sought in the Company’s Writ filed on 24 July 2020.  In effect, the injunctions would serve to take over the control of the Company from the Defendants.

3.  What underlies these proceedings is an enforcement of the Securities Agreements executed by the Company in respect of its Senior Secured Notes in the aggregate principal of HK$6.8 billion issued under a Trust Deed.  It is alleged by the Receivers that there were defaults of the payment obligations under the Notes.  Consequently, in exercise of the power under the Securities Agreements the Receivers were appointed by the Trustee on 13 July 2020 and the Defendants were purportedly replaced. 

4.  The Defendants dispute the appointment of the Receivers.  On 14 July 2020, they took out an Originating Summons (“OS”) seeking to challenge the validity of their appointment.  There is a direction hearing for the OS scheduled for 16 September 2020. 

5.  There is a notable absence of any evidence or written submission from the Defendants on why there was no event of default which might have justified the appointment of the Receivers by the Trustee.

6.  On the other hand, the Company has all along been managed by the Defendants.  There is no evidence that their continuous management will cause any damage to the Company.  Further, the evidence before the court is that the debt in question is more than sufficiently secured by, inter alia, a commercial building (“Building”) owned by the Company with a value of about HK$15 billion.

7.  I should mention that shortly before this hearing the court received another affirmation filed on behalf of the Receivers.  It appears that the purpose of the evidence is to address the written submissions of the Defendants on lack of urgency in this application or irreparable damage to the Company.  Such last minute evidence puts an unfair burden on both the Defendants and the court and is symptomatic of this application for which only a 15-minute hearing was asked for.  The evidence on these issues should have been put in place at the outset.

8.  This morning Mr Wong SC, who appears for the Defendants with Mr Ng, outlined 3 grounds for challenging the alleged events of default which grounded the appointment of the Receivers.  It was said that: (a) the event of cross default of Mr Pan (the majority shareholder of the listed entity which owns the Company) is being challenged in proceedings by him seeking to set aside a Statutory Demand and for which purpose his evidence has been filed; (b) there is dispute over the calculation of occupancy rate of the Building which had declined as a result of social unrest and for which purpose expert evidence will be adduced.  There is also an argument of force majeure on the occupancy rate drop; and (c) there is a factual dispute over the default in topping up the interest reserve account based on a moratorium arising from the discussions between the parties.

9.  Mr Walsh SC, who appears for the Receivers with Mr Wood, submitted that the 11^th hour revelation of the Defendants’ case is an abuse of process and that the grounds do not cover all the events of default relied upon by the Receivers.    

10.  It may be the case that the Defendants are merely buying time in resisting this application.  However, they are entitled to a fair opportunity to marshal their evidence and arguments to answer this application.  It is neither possible for this court to resolve the arguments in this hearing, nor to reject the Defendants’ case off-hand. 

11.  Very limited notice of this hearing has been given to the Defendants.  Their complaint of procedural unfairness is not without substance.  However, this is an interim-interim application for injunction.  This court must be guided by the applicable legal principles in resolving this application.  There is a high burden to be satisfied for the grant of an interim-interim relief: see the authorities cited in §§8.1 and 8.2 of the Defendants’ skeleton submissions.

12.  As indicated above, it is hard to see what extreme urgency there is to justify this application.  In respect of the confusion of the tenants as to the proper recipient of the rent.  It arose from the demand for such payment made by the Receivers.  It may be the case that they are entitled to the rental payments but that will have to be resolved by the court.  It would not be right, in effect, for the Receivers to rely on confusion resulted from their actions to support their own application. Further, pending the resolution of the OS, the confusion will remain.

13.  Secondly, there is disagreement between the parties whether all the bank accounts of the Company have been frozen by reason of the dispute over the control of the Company.  The Defendants say that the account with Bank of Communications is not frozen.  In any case, Goldin Financial Holdings Ltd, a company listed on the HKSE and the mother company of the Company, is prepared to undertake to the court to meet all operational expenses of the Company pending resolution of the disputes. 

14.  Finally, the Receivers referred to the continuous accrual of default interest and the potential prejudice to lenders under the “Mezzanine Loan”.  This application is made in the name of the Company and the relevant prejudice is the prejudice to the Company.

15.  Whilst default interest normally represents a financial penalty, there is no clear financial picture concerning its impact on the Company.  Further, the entitlement of default interest will turn upon the resolution of the Defendants’ case.

16.  The case of extreme urgency has not been made out.

17.  Moreover, the court must bear in mind that the relief sought has the effect of finally disposing of the dispute over the status of the Receivers.  Even if the injunctions are subsequently discharged after full argument, the consequence may be the invalidation of the actions of the Company under the direction of the replacement directors.  This may impact adversely on the Company and its innocent creditors. 

18.  I am not satisfied that will be any serious prejudice or irreparable harm to the Company if the status quo is continued.  On the other hand, to allow the replacement directors, who are unfamiliar with the operations of the Company, to take over will likely be prejudicial to the Company.  The Defendants’ contention that the Receivers have no genuine concern about the Company’s businesses apart from protecting the appointer’s interests cannot be ignored.   

19.  Finally, I believe that the proper approach to resolving the dispute is to have the alleged default under the Notes, and hence the legitimacy of the appointment of the Receivers and the replacement directors, determined expeditiously.  That may take the form of striking out the OS.  The prospect of such an application has been alluded to by Mr Walsh.

20.  For these reasons, I decline this application. I shall hear the parties on further directions and costs.