MARDARIN RESOURCES CORPORATION LTD v. DAVID CHENG HENG SOON AND OTHERS

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J U D G M E N T

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Cons, V.-P. delivered the judgment of the Court:

1. In a judgment delivered in this Court on the 11th November last year, I endeavoured to set out briefly the background to the proceedings which have given rise to the present appeal. For convenience we repeat what was_.then said -

"The background, as it is put forward by the Plaintiff, is that in September 1985 the Plaintiff, Mandarin Resources Corporation Limited, owned all the shares in Markle Land Limited, the 5th Defendant. The sole asset of the 5th Defendant is two blocks of flats, I think some 13 storeys high in the Repulse Bay area. The Plaintiff suggests that it was induced by the fraud of the individual Defendants, who by means of nominees control most of the other corporate Dependants save the Malayan Banking Berhad, the 8th Defendant, - to sign an agreement selling its shares in the 5th Defendant to the 4th Defendant, Lucky Man Properties Limited. The total consideration for the deal was to the value of HK$28.5 million. The agreement was executed in October but by reason of a cheque kiting fraud carried out by the Defendants, no payment was made to the Plaintiff, which has therefor suffered a loss to that extent.

        By the action from which these present proceedings arise the Plaintiff seeks various reliefs against the various Defendants, and in particular that the transaction for the sale of its shares in the 5th Defendant is null and void and that the 4th Defendant holds the shares, and thus the property ultimately controlled by those shares, in trust for the Plaintiff.

        In September this year Jones J., after a somewhat lengthy hearing, discharged a Mareva injunction which had been granted earlier against the 5th Defendant, but he continued a similar injunction granted against the 4th Defendant, extending its terms to some extent to prevent the 4th Defendant from using its shares in the 5th Defendantt to dispose of the property.

       

        However, it was felt on behalf of the Plaintiff that this was not sufficient protection of their interests in view of the control which was claimed still to be exercised by the 9th Defendant, Mr. Ho Hua Min, over the 5th Defendant, and of the lack of faith which the Plaintiff entertained as to his honesty and integrity, a lack said to be justified by his previous conduct. Therefore the Plaintiff applied for and on the 19th October obtained from Mayo J. the exparte appointment of a receiver over the shares of the 4th Defendant in the 5th Defendant and also over the assets of the 5th Defendant. The latter is no longer pursued and indeed the action against the 5th Defendant has been discontinued.

        On the 29th October Mayo J. set aside his order. The Plaintiff has appealed against that rescission, and the appeal is expected to be heard early next year as I have already mentioned. In the meantime we are asked to make.an interim order pending the result of the appeal, a course which the judge below refused to take."

2. In the event this Court acceded to the request and made an order that Mr. Raymond Barry Hughes -

"be appointed interim Receiver of the 14,999,999 shares in Markle Land Limited which are registered in the name of the 4th Defendant to make all necessary enquiries and to take all necessary steps to preserve the value of those shares and all rights that attach to then or have accrued to them since the 16th day of October 1985 until the final determination of this appeal."

3. We should add to the facts just set out that David Cheng Heng Soon, the 1st Defendant, and Wee Liang Kai the 2nd Defendant, were two of six directors of the Plaintiff at the material time, and that the 1st Defendant and Ho Hua Min, the 9th Defendant held a controlling interest in that Company.

4. The present appeal is that referred to in the earlier judgment. In effect the Plaintiff seeks to continue the interim receivership until the determination of the trial.

5. The summons before the judge below asked firstly for the appointment of a receiver over the shares in question, and secondly for the appointment of a receiver over the assets and undertaking of Markle Land Limited, who had originally been the 5th Defendant but by that time had already been dropped from the action. By reason of that Mr. Potts, who appeared then also for Markle Land, took as a preliminary point that the Court could grant no relief of that kind against a person who was no longer party to the action. He relied upon a passage in the speech of Lord Diplock in the Siskima (Cargo Owners) v. Disdos S.A.⁽¹⁾. The judge below accepted the submission and indicated that he would not continue the order against Markle Land. Then, according to his judgment, Mr. Barlow, who then appeared for the Plaintiff -

"advanced what seems to me to be a rather artificial argument. He suggested that these difficulties could be surmounted if a receiver was appointed of D4's shares in D5. One of the duties of a receiver would include safeguarding the integrity of the shares he was holding. If it was evident to the receiver that there was a risk that the assets of the Company were in jeopardy the receiver could convene an E. G. M. of the Company and remove the directors. He could then take such steps as were necessary to protect the underlying value of the shares. Mr. Barlow referred me to Chapter 7 of the l6th edition of Kerr in support of his argument that a receiver could be vested with the power I have referred to.

                I regret that I do not accept the merit of this contention. I have myself considered carefully powers and duties exercisable by receivers. I can find no authority to suggest that it would be in any way proper or appropriate to appoint a receiver to in effect conduct the affairs of a 3rd party. Indeed if any such order was made it would bring about exactly the sort of effect which Lord Diplock said should be avoided albeit by a different route."

6. With every respect to the judge below we take these words to indicate a misunderstanding of the position. What a shareholder does with his own shares, or how he exercises the rights attached to those shares, is his own affair. His conduct may of course influence the affair of a third party, in that the company in which he holds the shares has a distinct legal personality, but in no way does a shareholder as such conduct the affairs of the company. That is left to the company's board of directors. Mr. Potts, who appears for the 4th Defendants, as he did below, has not sought to uphold the judge's apparent line of thought, seeking instead to read into his words a genuine exercise of discretion on the ground that a receiver could serve no useful purpose, an argument to which we shall have to turn later.

7. The jurisdiction of the High Court to make the order sought is to be found now in Section 21L of the Supreme Court Ordinances, Cap. 4 -

"21L. (1) The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the High Court to be just or convenient to do so."

8. Mr. Potts took us on an interesting and informative journey through the authorities relative to the court's exercise of this jurisdiction, starting with the North London Railway Co. v. The Great Northern Railway Co.⁽²⁾ in 1882 up to British Airways Board v. Laker Airways Ltd. & Others⁽³⁾ in 1985, with a side trip through some passages from textbooks and authorities particularly relating to receiverships. From these Mr. Potts drew four propositions -

1. The Court can grant no relief which was not available prior to 1873. The Judicature Act of that year, which is the fons et origo of the present legislation both in England and Hong Kong, in no way enlarged the then jurisdiction of the Court;

2. The jurisdiction only exists for the protection or assertion of legal or equitable rights;

 

3. These Rights must be of such a kind that the Court, prior 1873, had jurisdiction to enforce by way of final judgment against the person in respect of whom the relief was sought; and

4.    With reference to receiverships only, the claim must be proprietary in nature, that is by way of legal or equitable  owners hip of the property over which it is sought to appoint the receiver.

9. For the purposes of this appeal we are content to accept the proposals as correctly expressing the law.

10. Mr. Potts' immediate point was that the Court had no jurisdiction to appoint a receiver in the present instance because in the particular circumstances the Plaintiff had in fact and in law no proprietary interest to protect. Mr. Potts was developing his argument by reference to Gray v. Lewis⁽⁴⁾ when Mr. Hunter, who appears for the Plaintiff, rose to object on the ground that whether the Plaintiff could have any proprietary interest in the shares, and a further point which he apprehended Mr. Potts intended to argue with regard to the imputation of knowledge of the fraud to the 4th Defendant, were matters which had been fully ventilated before Jones, J. last September; that the judge had found then that in respect of each there was a serious issue to be tried; that no appeal had been brought against the decision of Jones, J.; and that it was therefore an abuse of the process of the Court to reopen the mater in these proceedings.

11. After hearing argument we upheld Mr. Hunter's objection and made an order that this Court "will not consider or hear further argument on any point based on the suggestion that Mandarin has no cause of action either by reason that it has no proprietary interest in the shares over which it is sought to continue the appointment of the interim Receiver or by reason that the limited company Lucky Man did not have knowledge of the overall fraud alleged." We said we would give our reasons in this present judgment.

12. In answer to the objection Mr. Potts had observed that as far as the Gray v. Lewis⁽⁴⁾ submission was concerned, namely that fraudulent transactions between limited companies raise no legal or enforceable rights at all, this had not been argued before Jones, J. That would seem to be correct, although the case itself was drawn to his attention. However had counsel thought fit the point cou1d have been raised then, or possibly upon a subsequent appeal.

13. As to the knowledge of the fraud, Mr. Potts contended that the judge's conclusion related only to dealings between the 4th Defendant and Dah Yung Leasing Private Limited, the 6th Defendant, which were said to have been part of the cheque kiting scheme, or to the knowledge of the Directors of the 4th Defendant, rather than to the knowledge of the Company itself; the knowledge of a director in breach of his judicial duties to a company is not imputed to the company itself.

14. It is true that at page 11 of his judgment Jones, J. only specifically refers to the Directors of the 4th Defendant, but as he was plainly aware that the Plaintiff's claim against the 4th Defendant was that the agreement to which it was a party was null and void by reason of fraud, he must have found hat there was at least a triable issue that the Company itself was so tainted. It is true also that the judge's comments at pages 9 and 10 of his judgment deal mainly with the transactions between the Plaintiff and the 6th Defendant, but the passages are prefaced with a reference to an alleged failure of the Plaintiff to show a cause of action against Lucky Man", and we are not persuaded that his finding was in fact limited as suggested.

15. Order 59 rule 10(6) provides -

"(6)The powers of the Court of appeal in respect of an appeal shall no be restricted by reason of any interlocutory order from which there has been no appeal."

At first blush this would appear a complete answer to the objection. But it is to be noted that in White v. Witt(5) Jessel, M.R. observed that -

"... the rule was only intended to prevent the right of appeal from being interfered with by the existence of an interlocutory order which incidentally involved a decision of the point."

And James, L.J. added, -

"It was never intended that an interlocutory order, which amounts to a finding or verdict, should be open to appeal after the twenty-one days, because the time for appeal from the final order founded on it has not expired."

16. In Sugden v. Lord St. Leonards⁽⁶⁾ Mellish, L.J. made it plain that the object of rule was to prevent prejudice when the appeal as a whole was finally brought before the Court. That is not the position we have here. We have not even reached the stage of the initial trial. The ruling which Jones, J. gave did amount to a finding or verdict. It was not appealed and it seems to us that it would be an abuse of process to seek to relitigate it in the same court before a different judge. Mr. Potts submitted that there is no such thing as interlocutory issue estoppel. With every respect we would not agree. To accept the submission would leave open the undesirability of multiple proceedings and the possible embarrassment of contradictory decisions.

17. Upholding Mr. Hunter's objection effectively disposed of further argument on the question of jurisdiction. As the judge had in our view misdirected himself in that respect it became necessary, - and we were so requested -, for this Court to exercise itself the discretion whether or not to appoint a receiver, or rather whether to continue the appointment made last November.

18. Mr. Potts suggested that no useful purpose would be served by so doing, because the Receiver would not be able to do anything effective; the rights of which he might think fit to avail himself in particular that of requisitioning in extraordinary-general meeting under Section 113 of the Companies Ordinance, Cap. 32 with a view to replacing the Board of Directors, are exercisable only by "members" of a company, i.e those persons whose names are inscribed in the Register of Members. This is confirmed with regard to the 4th Defendant by its Article 12 -

12. No person shall exercise any rights of a member until his name shall have been entered in the register and he shall have paid all calls and other moneys for the time being due and payable on any share held by him."

19. A receiver submits Mr. Potts, would not be a member as such and it was not open to the Court to invest him with powers which would be in direct contradiction to the particular authority on which he would see to found his action.

20. With every respect, in our view this approach overlooks the true position of a receiver. The learned Editor of Kerr On Receivers puts that this way⁽⁷⁾ -

"The appointment of a receiver does not in any way affect the right to the property over which he is appointed. The court takes possession by its receiver, and his possession is thatof all parties to the action according to their titles: the receiver does not collect the rents and profits by virtue of any estate vested in him but by virtue of his position as an officer of the court appointed to collect property upon the title of the parties to the action."

21. Who has the beneficial title to the shares in question is in dispute and will not be known until the conclusion of the trial. The legal title is undoubtedly in the 4th Defendants by virtue of the entry in the share register. However as the position stands at the moment the power to exercise he rights which attach to that legal title has been removed from the 4th Defendant and placed in the hands of the Receiver, Mr. Hughes, in order that he may preserve the overall value of the shares until such time as the dispute has been resolved. If in his view it is necessary to exercise one or other of the particular rights in order to preserve that value, then it is his duty to do what he can; and we would have thought that all others who had notice of the Court order would be obliged to cooperate with him to accomplish that purpose. We are thus not as yet persuaded that the appointment of a receiver in instances like the present is necessarily ineffectual. But as we understand that proceedings are already on foot in which it is contended otherwise, we prefer to make no further comment.

22. As a final submission Mr. Potts suggested that there was nothing to show that the assets of the 4th Defendant were in fact in jeopardy. In support he sought leave to introduce, in the form of six affidavits or affirmations, evidence which had not been before the judge below. The first four, that is two from Tan Kok Seng, a director of Markle Land, one from Mr. Paul King, a solicitor acting for Mr. Hughes, and one from Mr. Hughes himself, deal substantively with matters that have occurred since his appointment. As such they would have been admissible: A.G. v. Birmingham, Tame, and Rea District Drainage Board⁽⁸⁾. We read them de bene esse. In our view the matters deposed to therein would have had little, if any, effect upon our decision. And we would have been bound, had we admitted them, to afford the Plaintiff the opportunity to adduce evidence in reply. For that reason we were not prepared to admit them at that late stage. The other two, respectively from Sideman Ho, another Director of Markle Land and from Poon Heng Keung, a partner in that company's firm of auditors, are evidence that could have been put before the judge below. There was no affidavit to explain its absence then and we accordingly refused to accept these affirmations as well.

23. The evidential position thus remained as it had been on ^the last occasion before this Court. When dealing then the merits of the application I ventured to put my own view in these words -

"... there are massive allegations of fraud against the Defendants, supported by affidavit. As yet the allegations have been unanswered by any form of evidence. The natural inference in these circumstances is that a repetition of fraud, unless checked as far as possible, is not unlikely to be perpetrated. Should then the Plaintiff ultimately succeed, it will find itself with an empty judgment."

24. And later, after referring to arguments which counsel then appearing had put on behalf of the 4th Defendant -

"             I accept that there is force in some of the points made by Mr. Kwok. also accept that in view of the lis pendens registered against the property it would not be easy to dispose of the assets that it represents. Nevertheless it would not be beyond the bounds of fraudulent ingenuity and fraudulent ingenuity has already been demonstrated in these proceedings. I accept that a receiver may not necessarily be able to prevent such fraudulent ingenuity, but on the other hand its success would be disastrous to the Plaintiff. A receiving order would impose no hardship on the Defendant, unless perhaps the bank should decide to call in the mortgage. Even then, in view of the value of the land, I think the hardship would be minimal."

25. As a Court we now endorse these views and would therefore continue the appointment of Mr. Hughes as Receiver until the final determination of the proceedings at first instance. We thus allow the appeal and order accordingly.

(1) [1979] A.C. 210 at 256

(2) (1882) 11 Q.B.D. 30

(3) [1985] A.C. 58

(4) [1873] 8 Ch. App. 1035

(5) [1877] 5 Ch.D. 589

(6) (1876) 1 P.D. 154 at 208

(7) 16th edition at page 122

(8) [1912] A.C. 788