CHEN HONGQING v. MI JINGTIAN AND OTHERS

HCMP 962/2017

[2018]HKCFI 1169

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 962 OF 2017

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REASONS FOR DECISION

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1.  On 17 May 2018, on the application of the defendants by summons dated 9 February 2018, supported by the intervener Asia Cement Corporation (“ACC”), I made an order discharging the receivers appointed by Mimmie Chan J on 27 June 2017 in respect of 104,908 shares of and in China Shanshui Investment Co Ltd (“CSI”) representing 10.49% of its issued share capital. These are my reasons for doing so. I shall refer to the receivers as the “BDO Receivers” as the two individuals were both from the accountants firm of BDO.

2.  The fuller background to the present dispute is complex and may be gleaned from Mimmie Chan J’s decision as well as my decision in the Trust Actions (defined below) dated 31 January 2018 discharging the receivers appointed in those actions; see [2018] HKCFI 194. For present purposes, the circumstances leading to the appointment of the BDO Receivers may be outlined as follows. 

3.  According to the plaintiff (“Chen HQ”), he had on 17 August 2015 entered into loan agreements (“Loan Agreements”) with 11 borrowers (“Borrowers”)[1] respectively to enable them to purchase the interests in CSI of over 2,000 of the employee-plaintiffs which were the subject matter of the “Trust Actions”[2] being prosecuted in their names against Mr Zhang Caikui (“Zhang Snr”).  It is said that in addition to the Loan Agreements, each of the Borrowers executed a share pledge agreement in favour of him in relation to the share interests that they were to acquire from the employee-plaintiffs in the Trust Actions.

4.  As additional security for the loan, it is said that Chen HQ entered into a Share Pledge and Guarantee Agreement (“SPGA”) with each of the 4 defendants herein who are minority shareholders in CSI holding the following shares:

Mi Jingtian	15,627 shares
Zhao Liping	30,479 shares
Li Maohuan	15,260 shares
Yu Yuchuan	43,542 shares

5.  Disputes subsequently arose between Chen HQ who claimed to be the counter-party to the SPGA with the 4 defendants in early 2017 with respect to the voting rights of the 4 defendants’ shares in CSI.  Chen HQ contended that the SPGA prohibited the 4 defendants from voting their shares in CSI without his consent, whereas the 4 defendants said that the version of the SPGA relied on by Chen HQ was not authentic and that the true SPGA did not contain any provision restricting the exercise of voting rights.

6.  On 10 February 2017, pursuant to the arbitration clause in the SPGA, Chen HQ made an application for arbitration by CIETAC.  The request for arbitration was subsequently varied on 26 April, 31 May and 21 September 2017 respectively.

7.  It is common ground that on 23 March 2017, ACC entered into agreements to acquire the 4 defendants’ shares in CSI (as well as the CSI shares of two other minority shareholders, namely, Dong Chengtian and Wang Yongping).  The 4 defendants claimed that they felt free to do so as they had been advised that the SPGA was ineffective or invalid under Mainland law (which was the governing law) because, inter alia, it gave rise to a cross-jurisdiction security arrangement prohibited by Mainland laws and regulations.

8.  On 31 March 2017, Chen HQ served a Stop Notice (HCSN 3/2017) on CSI requiring CSI not to register any transfer of the 4 defendants’ shares without notice given to him.

9.  By a summons dated 25 April 2017, Chen HQ applied inter alia for an order for the appointment of Receivers over the 4 defendants’ shares in CSI.  Chen HQ’s application for the appointment of Receivers was made under s 45 of the Arbitration Ordinance (Cap 609).  A temporary order was refused by Mimmie Chan J on 9 May 2017 but on 27 June 2017 her Ladyship appointed the BDO Receivers after the substantive hearing of Chen HQ’s application on 13 June 2017.

10.  Although the BDO Receivers were appointed under s 45 of the Arbitration Ordinance (Cap 609), it is not in dispute that such interim measure may be varied or revoked and that the general principles relating to the discharge of receivers appointed under s 21L of the High Court Ordinance (Cap 4) apply here.  In particular, it is common ground that this court has power to discharge receivers if there has been a material change of circumstances or it is shown that the judge on the original application had been misled in a material respect: Gee on Commercial Injunctions (6^th edn), §21.057; see also my decision discharging the receivers in the Trust Actions dated 31 January 2018 [2018] HKCFI 194 at §52.  Likewise it is stated in Kerr and Hunter on Receivers and Administrators (20^th ed) §12-5 that:

“If, in the course of the proceedings, the continuance of a receiver becomes unnecessary, he or she will be discharged. … When the receivership has ceased to serve any valid purpose, it should be discharged without delay.”

11.  In Capewell v Customs and Excise Commissioners [2004] EWCA Civ 1628, the English Court of Appeal stated (at §51):

“Unfortunately, the emphasis given by the submissions to questions of cost seems to have distorted the issues. On the question of discharge, cost is of course a factor, but it is not the primary issue. The overriding consideration is whether the receivership is still serving a valid purpose, within the overall objective set by section 82. The relevant questions for the court are likely to be:

i) For what purposes, within the overall objective, was the receivership authorised?

ii) To what extent have those purposes been achieved or overtaken?

iii) To the extent that they have not yet been achieved or overtaken, is the continuation of the receivership (as opposed to a restraint order or some other order) necessary to achieve them?

iv) In any event, having regard both to the overall objective and to fairness to the defendant, is the additional cost of continuing the receivership proportionate to the likely financial gain?”[3]

Although the case concerned an application to discharge a receiver appointed pursuant to section 77(8) of the (UK) Criminal Justice Act 1988 rather than in ordinary civil litigation, this passage is in my view of general application insofar as it emphasizes the need to focus attention on whether or not, in the light of material changes in circumstances, continuation of the receivership (as opposed to some other order) remains necessary.

12.  That said, I fully accept that it is equally important for the court to guard against litigants trying to re-litigate issues already adjudicated and to have a “second bite at the cherry”[4].

13.  On the evidence and having heard counsel’s arguments, I was satisfied that there had been a misleading case presented to the original judge as well as material changes in circumstances, justifying the immediate discharge of the BDO Receivers.  I should mention that the defendants’ application was not based on any alleged misconduct on the part of the BDO Receivers, who had quite properly taken a neutral stance on this application.

14.  When Chen HQ applied to the court for the appointment of receivers in 2017, he said that in about June 2015, Mr Li Liufa (the chairman of Tianrui (International) Holding Company Limited (“Tianrui”)), the 4 defendants and another minority shareholder in CSI, namely, Zhao Yongkui (“Zhao YK”) approached him and asked if he could provide funds to purchase the employees’ interests in the shares then held by the receivers appointed in the Trust Actions (“EY Receivers”).  He said that because he saw value in the shares and wished to assist the employees, he agreed to provide funding.  Accordingly, he entered into the Loan Agreements on the basis that he would advance loans to the Borrowers, “to enable them to purchase” the employees’ interests in CSI “as principals”.[5] It was said that the Borrowers promised to transfer to him the CSI shares if the employees succeeded in the Trust Actions.  It was said that at that time, as the Trust Actions were still ongoing, the condition for transfer had not arisen, and the “loan arrangements still stand”[6] and that he had “not yet acquired the Purchased Shares”.[7]

15.  In fact, undisclosed to the court then but as it has now transpired, Chen HQ claimed that he had in around March 2017 entered into written confirmations (“Confirmations”) with at least 1,014 employee-plaintiffs which stated:

“The Parties now execute this Letter to irrevocably confirm and ratify the following matters:

(1) The agreed number of shares sold by the Seller in the Agreement for Sales and Purchase of the Shares is [Number], 70% of the relevant consideration of which has been paid by the Buyer through the Agents of the Buyer.

(2) The beneficial interest mentioned in the Agreement for Sale and Purchase of the Shares belongs to Mr Chen Hongqing (ie the Buyer in this Confirmation Letter).

(3) Notwithstanding the terms in the Agreement for Sale and Purchase of the Shares (including but not limited to Article 2(c) of the said agreement):

(i) Upon signing this Letter of Confirmation, the Buyer would immediately pay the remaining 30% of the relevant consideration mentioned in the Agreement for Sale and Purchase of the Shares, totalling RMB [Amount].

(ii) Upon receiving the said 30% of the relevant consideration, the Seller shall irrevocably confirm that all the beneficial interest and/or related interest in the shares of China Shanshui Investment Company Limited belongs to Mr Chen Hongqing (ie the Buyer in this Letter of Confirmation), and the Seller would have no entitlement to the said beneficial interest and/or related interest in the shares.

(iii) The Seller must, according to the terms of the Agreement for Sale and Purchase of the Shares, assist Mr Chen Hongqing (ie the Buyer in this Letter of Confirmation) in his best endeavours, in recovering from Mr Zhang Caikui, the Seller’s shares of China Shanshui Investment Company Limited registered under the name of Mr Zhang Caikui and all the beneficial interest therein.  The Seller must then transfer the said shares and the beneficial interest therein to Mr Chen Hongqing (the Buyer in this Letter of Confirmation), and execute and/or sign relevant documents pursuant to his instructions.”

16.  In fact, for the hearing before Mimmie Chan J in June 2017, the defendants had managed to obtain a copy of a “Confirmation” signed by an employee-plaintiff in the Trust Actions and exhibited it in support of the argument that Chen HQ in fact purported to be the purchaser of the shares from the outset (see Zhao Liping’s 2^nd affirmation dated 9 June 2017 and “ZLP-11”) and that the Loan Agreements were not intended to have effect.  Chen HQ responded, however, in a way which in my view can only be described as disingenuous, as follows:

“12. The Defendants alleged that Tianrui asked the Employees to sign a confirmation letter which asserted and I am the true purchaser of the Employee’s interests and not the 11 Purchasers. The copy of the confirmation letter produced by the Defendants is too blurry and cannot show the essential contents and particulars therein with reasonable clarity. It also appears that the confirmation letter is incomplete in that at least the date and one of the signatures of the parties are missing. Therefore, without admitting the authenticity of the confirmation letter, I am not in the position to respond to the confirmation letter in terms of its authenticity and veracity. Even taking the Defendants’ case to its highest, whether the confirmation letter (the admissibility of which is not admitted) will be relevant evidence for the issue of whether the loan arrangements are a sham transaction is a matter of PRC law. I will defer to Counsel to make such submissions on this issue as they see fit.”[8]

17.  In his 5^th affirmation made in opposition to the present application, Chen HQ said because the document was blurry and illegible, it was “simply not prudent for [him] to attempt to respond to such document”.  The exhibit was handed up to me at the hearing and it seems to me that the key parts of the document (admittedly a poor copy) were quite legible – at least to anyone who genuinely wanted to read it.  But what is striking is that Chen HQ did not say a word why, in brushing aside the defendants’ copy as illegible, he made no mention of the Confirmations that (on his later case) he had himself obtained and which he subsequently relied upon in his joinder application in the Trust Actions and now in his own action HCA 2648/2017.

18.  After obtaining the order for receivership in these proceedings, in September 2017, Chen HQ made an application to be joined as a party to the Trust Actions.  There, in contrast to what he had said before Mimmie Chan J in these proceedings, Chen HQ claimed that pursuant to what he termed the “Share Acquisition and Loan Agreement” (“SALA”) the 11 “representatives” (no longer labelled “borrowers”) acquired the employee-plaintiffs’ interests in the CSI shares “as nominees acting for and on [his] behalf” in August 2015, that he made payment of the remaining 30% of the price in March 2017, and that he had “become the full beneficial owner of the CSI Shares previously held by 2,248 of the relevant employees … from around March 2017”.[9] He exhibited a copy of a Confirmation, which was in materially identical terms to the “blurry” copy exhibited by the defendants in these proceedings in June 2017, and which Chen HQ had clearly had in his possession or power since March 2017.  According to Chen HQ, at least 1,014 employees had executed such Confirmation in his favour.

19.  Mr Mok SC, who appeared for Chen HQ, submitted that the defendants’ reliance on the discrepancies between Chen HQ’s different versions was a mere forensic point and that in substance his case had not changed throughout.  With respect, I cannot agree.  These drastic differences were substantively material in at least two respects.  First, if the 11 representatives acted indeed as agents and nominees at the outset through whom Chen HQ agreed to purchase the employee-plaintiffs’ interests in CSI shares in August 2015, it is difficult to see how they could be said to have ever had beneficial receipt of the money in their hands, and how they could be held liable for repayment of any “loans”.  In fact, it has been revealed in Chen HQ’s new case that, according to him, he obtained the 11 representatives’ bank cards and online banking devices at the time so that he retained full control of the money.  Further, in light of the Confirmation which stated that Chen HQ “irrevocably” purchased the employee-plaintiffs’ interest in the CSI shares, it is difficult to see how Chen HQ could revert to a claim that the 11 representatives were “borrowers”.  The artificiality of the “Loan Agreements” can indeed be seen from Chen HQ’s own 5^th affirmation herein (at §29) where he stated it was in his view “beyond belief” that the 10 Borrowers, who were mere employees of the group, would have the necessary funding to repay him.  At the hearing Mr Mok was hard put to offer an explanation how Chen HQ could (to use Mr Westbrook SC’s word) “flip-flop” between electing to have the shares and still trying to recover the “loans”.  Of course, if there were no real loans and real borrowers, then the pledges of the defendants’ shares under the SPGAs as security might well be said to be ineffective because, as Mr Mok accepted, the security interest asserted by Chen HQ was for the repayment of the loans.  It is, however, not necessary for present purposes to determine the precise effect of these arrangements, which may anyhow be a matter governed by Mainland law.  It is sufficient to say – which I do – that these are highly material matters which should have been frankly placed before the original judge hearing the receivership application. 

20.  Secondly, if Chen HQ had indeed acquired the employee-plaintiffs’ interests in the CSI shares in question from the outset, there might be requirements under securities regulations such as for disclosure of interest, since CSI held a 25.09% interest in the listed company, China Shanshui Cement Group Ltd.  In the receivership application before Mimmie Chan J, when faced with the criticism that he had not made any disclosure of interest filings, Chen HQ categorically said he had “not yet acquired the Purchased Shares”,[10] which is to be contrasted with his statement in the joinder application in the Trust Actions that he had “become the full beneficial owner of the CSI Shares … from around March 2017”.[11]  Moreover, the point had been raised by the defendants before Mimmie Chan J that Chen HQ was a front-man for Tianrui.  If in fact Chen HQ had already purportedly acquired interests in CSI shares, that would bring into sharp focus whether or not the whole transaction was an attempt by Tianrui to circumvent any obligation to make a mandatory general offer under the Takeover Code, which would be relevant to whether the court’s discretion should be exercised to assist Chen HQ by appointing interim receivers.

21.  In this regard, I stated in the decision in the Trust Actions dated 31 January 2018 discharging the EY Receivers:

“35.  In my view there is serious doubt whether Chen Hongqing is in fact the “lender” because:

(1)  The banking documents suggest that the money totalling RMB700 million came from Tianrui.

(2)  Chen Hongqing appears to have been only a mid‑level manager.  It is doubtful if he himself had assets of RMB700 million and, even assuming he did, that he would spend them on purchasing the plaintiffs’ “interests” in CSI.

(3)  There is evidence suggesting he was a mid‑level manager in the Tianrui group not that long ago.

……

37.  There were documents evidencing a tortuous route through which these funds of RMB700 million, originating from Tianrui, first went to 3 individuals, and from them to another 13 individuals, and from them to the 11 Representatives in August or early September 2015, and from the 11 Representatives to the individual selling plaintiffs.”

22.  Mr Mok criticised the statement in §35(1) that the banking records suggest that RMB 700 million came from Tianrui because, he said, on his reading of those documents, only RMB 40 million clearly came from Tianrui to 3 persons known to be paying agents.  It is in my view unnecessary to delve into the question for present purposes.  Even assuming Mr Mok is correct, this still contradicts Chen HQ’s assertion that all the money came from him. Moreover, there is conspicuously still not a shred of documentary evidence that the initial RMB 700 million originated from Chen HQ – he has only exhibited documents showing the downstream payment of money by the paying agents to the 11 Borrowers. 

23.  In these circumstances, in putting forward the case he did before Mimmie Chan J in June 2017 whilst withholding from the court the transactions of March 2017 including the Confirmation, and withholding from the court the “purchasing agents” case he has since advanced in different proceedings, and in brushing aside the copy Confirmation adduced by the defendants then on the ground he found it “too blurry”, it seems to me Chen HQ had presented a misleading case before the court and suppressed relevant information.

24.  In addition, the circumstances have evolved since the appointment of the BDO Receivers in June 2017.  After being denied joinder into the Trust Actions, Chen HQ had in November 2017 instituted his own action (HCA 2648/2017) against the employees to enforce the SALA alleged by him. Further, the trial of the Trust Actions had taken place, and on 31 January 2018 judgment was given in favour of the employee-plaintiffs.  The EY Receivers were discharged at the same time.  Since then Chen HQ has taken out applications for interim relief in HCA 2648/2017 against some of the employee-plaintiffs.

25.  A further development is that the 10 Borrowers had attempted to repay the “loans” to Chen HQ.  The evidence shows that in late July 2017, the 10 Borrowers sent letters and caused advertisements to be published in the Mainland in an attempt to contact Chen HQ to confirm the amount of the loans and interest and to obtain banking details for the purpose of repayment.  However, there was no response.  On 16 August 2017, the 10 Borrowers made a “notary deposit” of RMB828.1 million with a notary in the Mainland as repayment of the entire amount of principal and interest to Chen HQ in order to meet the repayment deadline of 2 years under the Loan Agreements. It appears that the funds are still there and that Chen HQ can draw them for repayment if he wishes.  The defendants submitted, therefore, that the loans had been discharged and that, in any event, the notary deposit was sufficient security, in the light of which there was no need for the receivership to continue over their CSI shares.

26.  A number of issues have arisen in connection with this argument.  First, clause 6 of the Loan Agreements provided:

“第六條　當下列情形之一出現時，甲方對借款的償還義務即告完成：

（１）在經乙方書面同意前提下，甲方以現金或其他等價物償還了借款及全部利息；

（２）在甲方無法以現金償還借款及全部本息之情形下，甲方按照乙方之指示將其所取得的受讓權益全部轉讓予乙方或乙方指定的第三方；

……”

(In non-agreed English transaction:

Clause 6: “Party A shall be deemed to have fulfilled the repayment obligation in each of the following circumstances:

(1)  With the written consent of Party B, Party A repays the loan and all corresponding interest with cash or other equivalents of the same value;

(2)  If Party A is unable to repay the loan and all corresponding interest with cash, Party A shall, upon the directions of Party B, assign all their rights to the interest [in the Employees’ Shares] to Party B or a third party as designated by Party B.

……”)

Chen HQ contended that this clause meant that the Borrowers were not entitled to repay the loans with money without his written consent, and that instead he had the option to elect whether to acquire the relevant shares or seek repayment of money.  The defendants and ACC retorted that Chen HQ’s interpretation of the clause was distorted and incorrect.  Secondly, the defendants and ACC argued that if Chen HQ’s interpretation of clause 6 was correct, then clause 6(2) was invalid under Mainland law, in particular, Article 211 of the Property Law of the People’s Republic of China.  Thirdly, the defendants and ACC argued that if and insofar as Hong Kong law governed the question, then clause 6(2) would amount to a fetter or clog on the equity of redemption and therefore void.  Fourthly, Chen HQ argued that the notary deposit did not constitute a valid discharge of the Loan Agreements under Mainland law because discharge by making a notary deposit only applies if the identity or the whereabouts of the creditor is unclear, which (he said) was not the case here.  Fifthly, the defendants argued that in any event, under Mainland law, the sum deposited would remain with the notary for 5 years and amount to adequate security for the Loan Agreements, but this is disputed by Chen HQ.

27.  I did not think I should embark upon a detailed consideration of these arguments because there was conflicting expert evidence on Mainland law which is of course a matter of fact so far as this court is concerned.  I did not feel able in the context of this interlocutory hearing to arrive at a conclusion, with sufficient level of confidence, as to these facts simply by comparing the written reports of the experts.  Moreover, since, as I was told, the contention that the notary deposit had discharged the Loan Agreements had been raised by the defendants before the arbitral tribunal so that the award could be expected to cover it, it is not a matter that should be adjudicated upon by this court in the present context. 

28.  Nevertheless, what has emerged quite clearly was that Chen HQ was now seeking recovery of the CSI shares directly from the employees which he said were purchased on his behalf by the 11 Representatives/Borrowers as his nominees.  His case is that he was a purchaser of shares through them rather than the secured creditor he professed to be before Mimmie Chan J.  He did not wish to have the money back and had indeed refused to accept the cash repayment tendered.  Even assuming that somehow there remains a possibility that he would after all still have a claim for repayment of the loans in cash capable of being secured by the pledge of the defendants’ shares under the SPGA, in all the circumstances it was in my judgment no longer necessary or justified to have receivers appointed over the shares.

29.  The defendants were willing, pending the arbitration, to undertake not to dispose of the relevant shares or to vote them provided they may be counted towards the quorum.  ACC was also willing to undertake not to cause any transfer or registration of the shares in its name. In my view these undertakings, which I accepted, afforded ample protection to Chen HQ.

30.  Mr Mok submitted that given the arbitral tribunal had indicated that the award would be handed down on 24 June 2018, there was no urgency for the receivership to be discharged pending the publication of the award and no prejudice for the BDO Receivers to remain in place.  I was not persuaded by this argument.  First, the date of publication of the award had been extended before, and one did not know that it would not be extended again.  Secondly, as Mr Chan SC submitted for ACC, the true question is whether there was any further present need for the receivership to continue.  If not, the fact that it would in any event come to an end in due course was not a reason against immediate discharge.  To say that there would be no harm for the BDO Receivers to continue was to put the cart before the horse.  Thirdly, the arbitration was not for enforcement of the security such as the sale of pledged shares and the application of the proceeds for repayment of the loans.  In the arbitration request as finally varied on 21 September 2017, Chen HQ asked the arbitral tribunal:

(1)  to determine that the 4 defendants’ vote at the EGM of CSI on 29 June 2016 was an act in breach of clause 5 of the SPGA;

(2)  to determine that the 4 defendants’ agreement to transfer their CSI shares to ACC was an act in breach of clause 5 of the SPGA;

(3)  to order the 4 defendants to continue to perform clause 5 of the SPGA, so that without Chen HQ’s prior written consent, they will not vote their shares in CSI.

This means that even if Chen HQ was wholly successful in the arbitration, the position would simply remain unchanged – he would (at most, and assuming he could revert back to a claim for repayment in cash) continue to be a creditor secured by a pledge of the defendants’ shares.  Fourthly, given the background of the ongoing heated fight for control of CSI, to keep the receivers in place would in my view be an unnecessary involvement by the court through its officers.  Even if Chen HQ’s case is accepted in full, it simply means he has a pledge over the shares and that he has a right to insist the pledged shares not be voted without his consent; he has no right to direct that the shares be voted or how they should positively be voted.

31.  Mr Mok also submitted there had been delay on the part of the defendants in taking out the present application.  While it is true that some of the developments relied upon had emerged some time ago, judgment in the Trust Actions was only given on 31 January 2018, as a result of which the purchase of shares by Chen HQ could no longer be said to be “conditional” even on his original case.  Further, Chen HQ’s case that he had irrevocably purchased the employee-plaintiffs’ interests in CSI did not emerge publicly until the joinder application in the Trust Actions which was heard only on 10 November 2017.  Even if there was delay, there was no suggestion of any prejudice caused to Chen HQ and I do not consider it should be a bar to relief.

32.  For all these reasons I made an order discharging the BDO Receivers upon the undertakings given by the defendants and ACC.