THE NCHK HIGHWAY (CHENGDU MIANYANG) LTD AND ANOTHER v. THE NEW CHINA HONG KONG HIGHWAY LTD AND OTHERS

HCCW 550/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 550 OF 2009

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D E C I S I O N

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1.  This is an application by the petitioners for continuation of an ex parte order they obtained before the Duty Judge on 16 September 2009 and an application by the 2^nd to 7^th respondents for discharge of the ex parte order.  The 1^st respondent is The New China Hong Kong Highway Limited (“the Company”), being the subject of the petition for winding up and for relief under section 168A of the Companies Ordinance, Cap. 32.

2.  The petition was presented on 15 September 2009.  In the late afternoon of the same day, the petitioners’ solicitors issued a letter to all seven respondents at an address at Lippo Centre giving notice of intention to apply for an ex parte injunction with a draft order attached.  The respondents were required to reply by 5 pm on 16 September if they would give an undertaking in terms of the draft ex parte injunction.  In the morning of 16 September, the petitioners’ solicitors served a revised draft ex parte injunction at the Lippo Centre address.  In the late afternoon of 16 September, the parent company of the 2^nd respondent replied by letter to the petitioners’ solicitors stating that except for the 1^st respondent, none of the other respondents are using the Lippo Centre address to receive legal documents and the parent company declined to handle the documents purportedly served on other respondents in any way.

3.  Armed with this letter, the petitioners’ solicitors contacted the Duty Judge after court hours and requested an ex parte hearing.  The hearing took place in the evening of 16 September and ex parte injunctions of a prohibitory and mandatory nature were granted.

4.  On 18 September, the 2^nd to 7^th respondents made an ex parte application before me to stay paragraph 2 of the ex parte order, which contained mandatory injunctions, until the return date of the ex parte order.  That application was made on notice to the petitioners’ solicitors.  The petitioners’ solicitors wrote a two-page letter to the respondents’ solicitors and requested their letter to be placed before me.  They did not attend the hearing and I have no explanation why they did not do so.

5.  I granted an interim stay of paragraph 2 of the ex parte order to today.

6.  It must have been clear to the petitioners’ solicitors the ex parte application relates to a companies matter and the application should be made to a Companies Judge, not to the Duty Judge.  I have had no explanation from counsel or solicitors why they chose to make the application to the Duty Judge instead.  I regard this as wholly unacceptable.

7.  The Practice Directions are very clear.  In Practice Direction 3.1 issued in June 2002, it is clearly stated that any urgent application relating to a winding-up list matter shall be made to the Companies Judge, not the Duty Judge, and only if the application is so urgent it cannot wait until a Companies Judge is available should an application be made to the Duty Judge.

8.  Mr Ng, SC submitted on the petitioners’ behalf that under paragraph 17 of the new Practice Direction 11.1 which came into effect in April 2009, the Duty Judge may in his discretion hear the application himself or direct the application to be made to the Companies Judge instead and as the ex parte application was entertained by the Duty Judge, the Duty Judge must have considered it so urgent to warrant not referring this to the Companies Judge.

9.  These submissions are ill-founded.  It should be very clear from the terms of Practice Direction 3.1 and Practice Direction 11.1 paragraphs 13 to 17 that the obligation is squarely on those making an urgent application to apply to a Companies Judge.  The fact that the Duty Judge has discretion to hear them in a very urgent situation is immaterial.

10.  I do not propose to give the background to these proceedings and matters said to give rise to the application for interim injunctions, save to say that I have borne them in mind.

11.  It is pertinent to note these matters.

12.  Firstly, the dispute between the two camps of shareholders in the Company has been brewing since August 2008, when the respondents gained control of the board of the Company.  The petitioners’ complaints regarding the management of the Company and the Sichuan CJV dated back from August 2008.

13.  Secondly, regarding the complaint of excessive directors’ emoluments to the 3^rd and 4^th respondents, which is one of the major complaints in the petition and a material ground for ex parte relief, the petitioners had already learned of the amount of directors’ emoluments to be paid at a board meeting on 28 July 2009.

14.  Thirdly, there were discussions as to buy out since February 2009 and a written offer was put forward by the 3^rd to 7^th respondents to the 1^st petitioner on 29 July 2009.

15.  Fourthly, although the petitioners had allegedly learned of the removal of their two directors on the board of the Sichuan CJV (the exclusion from management being the other of the petitioners’ major complaints in the petition) on 31 August 2009 and 2 September 2009, they were told that on 25 March 2009 these directors had been removed and replaced by the 5^th and 6^th respondents.

16.  I see no basis for an ex parte interlocutory injunction of a prohibitory and mandatory nature.  The letter of the petitioners’ solicitors on 15 September requesting for an undertaking in the terms of the ex parte order was just a tactical move.  In my view, no real urgency was made out in this matter at all.

17.  The respondents seek discharge of the ex parte order on the ground there is no urgency for an ex parte application and for material non-disclosure.

18.  The petitioners had submitted to the Duty Judge very substantial sums are involved as Sichuan CJV (in which the Company holds 60% interest) has cash reserve of RMB 160 million according to the audited accounts for 2008, and the 3^rd and 4^th respondents are effectively in control of the bank accounts of the Company and those of Sichuan CJV as the latter’s chairman and general manager.  One of the petitioners’ directors deposed to a belief there was real risk of dissipation of the Company assets by the 2^nd to 7^th respondents.

19.  It was submitted by Mr Ho, SC on behalf of the 2^nd to 7^th respondents there are three matters constituting material non-disclosure.  The disclosure obligation applies not just to matters known by the petitioners but extends to matters which the petitioners or their agents would have known had they made all reasonable enquiries before they applied to court.

20.  Firstly, regarding the control of the bank accounts of Sichuan CJV, it is untrue to say that the respondents’ camp has control of these accounts.  The money in the bank accounts of Sichuan CJV can only be withdrawn by joint signatures of a representative from the Chinese partner and a representative from the Company’s side.  This was laid down in a board meeting of Sichuan CJV on 4 March 2005, the meeting was attended by the petitioners’ directors then sitting on the board or by their nominated representatives.

21.  This is a misrepresentation to the court.  And it is material to the weighing exercise whether an injunction should be granted to restrain disposal of the assets of the Company and of Sichuan CJV.

22.  The petitioners sought to explain this error in counsel’s submissions was made inadvertently.  It was said that the 1^st petitioner’s director (he did not deny knowledge of the minutes of the board meeting on 4 March 2005) could not be reached by the petitioners’ solicitors to give instructions on this matter shortly before the ex parte application was made.  The other director of the 2^nd petitioner, who was reached by the solicitors of the petitioners, was under the erroneous impression the 3^rd and 4^th respondents were in a position to control the bank accounts by virtue of their positions in Sichuan CJV and was not aware of the minutes of the board meeting dated 4 March 2005.

23.  The petitioners are clearly in breach of their duty to make material disclosure.  It is not necessary to find if there was any deliberate attempt to mislead the court.

24.  Secondly, regarding the control of the bank accounts of the Company, the petitioners have not drawn the attention of the Duty Judge to the fact that the petitioners’ directors sitting on the Company’s board had signed and approved the draft minutes of a board meeting on 4 September 2008 recording the resolution to change the authorised bank signatories of the Company and that the signatories’ arrangement was approved by the petitioners’ nominated directors.  There was no or no satisfactory explanation why the petitioners now feel that the signatories’ arrangement could lead to a real risk of dissipation of assets by the respondents’ camp.

25.  I regard this also as material non-disclosure, as the control of the Company’s bank accounts by the respondents was relied on by the petitioners to justify the urgency they claimed for interlocutory relief.  The fact that the respondents were in control of the Company’s bank accounts for a year, and with the approval of the petitioners’ camp, is a material consideration whether urgent interim relief should be granted.

26.  Thirdly, in the petition the petitioner relied on a statement in a placement memorandum attached to a subscription agreement dated 15 October 2004 to say there is a dividend policy forbidding the payment of directors’ emoluments.  The petitioners did not draw the attention of the Duty Judge to another part of the placement memorandum which provided that the directors may, by resolution, fix the emoluments of directors regarding services rendered or to be rendered to the Company.

27.  The payment of excessive directors’ emoluments contrary to the alleged policy that the Company would distribute most if not all of its cash received from Sichuan CJV as dividends to shareholders is a major complaint in the petition and an important ground for granting interlocutory relief to restrain the payment of directors’ emoluments to the 3^rd to 7^th respondents.  I rule this is also material non-disclosure.

28.  For the reasons there was no real urgency and for material non-disclosure, the ex parte order must be discharged.

29.  I have discretion whether to grant an interlocutory injunction having discharged the ex parte order.

30.  In the hearing today, Mr Ng sought interlocutory injunctions in more moderate terms.

31.  The 2^nd to 7^th respondents are prepared to agree not to procure the Company to pay any directors’ emoluments until the determination of the petition.  Mr Ho has confirmed that an undertaking in these terms would be offered by these respondents to the court.

32.  The 4^th respondent has deposed that there is no resolution of the board of the Company approving any directors’ emoluments and no directors’ emoluments have in fact been paid to the 3^rd or 4^th respondent.  The documents put before the board meeting of the Company on 28 July 2009 relied on by Mr Ng would appear to be just a proposal to the board, as borne out by the draft audited accounts of the Company for 2008.  There is no need to grant an injunction in terms of paragraphs 1(a), 2(a) and (b) of the ex parte order.

33.  Excessive directors’ emoluments is the only money matter in the complaints raised in the petition.  I cannot see any basis for an interim injunction to restrain the respondents from procuring any disposal of assets of Sichuan CJV exceeding RMB 3 million or assets of the Company exceeding $50,000, without the prior written consent of the petitioners or an order of the court, proposed by Mr Ng in substitution of paragraphs 1(b) and 2(c) of the ex parte order.

34.  As for reinstatement of the petitioners’ nominated directors on the board of Sichuan CJV (paragraphs 1(c) and (d) and 2(e) and (f) of the ex parte order), these directors had been removed and replaced since 25 March 2009.  I am not satisfied on the balance of convenience interim injunctions of a prohibitory and mandatory nature should be granted.

35.  Lastly, the petitioners seek to be provided with various information regarding the Company and Sichuan CJV (paragraphs 2(g)(ii) to (viii) of the ex parte order).  Paragraph 2(g)(i) is not pursued as the audited financial statements for 2008 have not been signed and the respondents have produced the draft audited accounts.  As shareholders of the Company, the petitioners would be entitled to such information they are entitled to under Cap. 32.  And if financial and other documents are relevant to the matters in issue in these proceedings, they would be disclosed on discovery.  I see no urgency to make a mandatory order requiring discovery now.

36.  For the above reasons, I discharge the ex parte injunctions granted on 16 September.  I accept the undertaking of the 2^nd to 7^th respondents mentioned earlier and dismiss the inter partes summons of the petitioners for continuation of the ex parte order.

37.  I will hear the parties on costs of these two summonses and the other summonses listed before me.