YIP LAI FONG AND ANOTHER v. SIN TUNG HNG AND OTHERS

HCMP2423/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.2423 OF 2002

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D E C I S I O N

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1. This is the 1st petitioner's application for appointment of interim receivers over the assets and undertakings of the 2nd respondent, Full Billion Shipping Limited ("the Company") and also 8,000 shares in the 3rd respondent, Hung Kong (Fresh Fruit) Trading Limited ("Hung Kong").

Background

2. The 1st petitioner and the 1st respondent are the two registered shareholders of the Company, each holding 50% of the shares. They are also the only directors of the Company. According to the 1st petitioner, she holds 1,000 of the 5,000 shares in the Company on trust for the 2nd petitioner, her former husband, and that she is the nominee director for the 2nd petitioner. The 1st petitioner admittedly is a resident in the United States and has taken no part in the management of the Company.

3. The 1st and 6th respondents, on the other hand, say that the Company is in fact beneficially owned by the two of them and the 2nd petitioner in equal shares, and that the 1st petitioner has no beneficial interest in the Company at all.

4. The principal asset of the Company is its 8,000 shares in Hung Kong ("the 8,000 shares"). The other 2,000 shares in Hung Kong used to be held by a company called Sun Rising Development (HK) Limited ("Sun Rising"). Sun Rising had applied to be joined as the 7th respondent to oppose this application but the summons was dismissed by me.

5. Hung Kong in turn owns 90% of the shares of a mainland company called Nanhai Lishui Fresh Fruit & Food Wholesale Market Company Limited ("Lishui"). The other 10% of the shares in Lishui is owned by two mainland companies in equal shares.

6. Lishui operates a fresh fruit distribution centre in Nanhai. It is common ground that it is a substantial and successful undertaking and the monthly revenue from the operation of the centre is said to be in the range of RMB3 to 5 million.

7. The dispute between the parties arises out of the sale of the 8,000 shares. It is common ground that sometime in early 2002, the 2nd petitioner and the 1st respondent agreed in principle to a sale of the Company and its business. It is the 1st and 6threspondents' case that the 6th respondent is also a party to this agreement.

8. By a Chinese agreement no.NHXG20020501 signed by the 1st respondent on behalf of the Company on 30 May 2002 and by the 4th respondent, Many Profit Investments Limited ("Many Profit"), on 8 June 2002, the 8,000 shares were to be sold to Many Profit at RMB126,400,000. It is the 1st petitioner's case that the sale is invalid in that there was no valid board or shareholders' resolution approving it or authorizing the 1st respondent to enter into the Chinese agreement. It is also submitted on behalf of the 1st petitioner that Many Profit was aware of the lack of board or shareholders' resolution. The 1st and 6th respondents, on the other hand, say that the 2nd petitioner had at a meeting on 29 May 2002 agreed to the sale to Many Profit and also authorized the 1st respondent to act on their behalf.

9. By another Chinese agreement no.NHXG20020502, Sun Rising also sold its 2,000 shares in Hung Kong to Many Profit.

10. By two loan agreements (融資協議), the 1st and 6th respondents agreed respectively to lend one-third of the purchase price of the 8,000 shares to Many Profit by way of a two-year term loan that carries interest at 10%. Under clause 3 of these agreements, the 1st and 6th respondents may before the full repayment of the loans, elect to convert their loans into capital investment in Many Profit and to become shareholders of Many Profit.

11. A similar loan agreement was also executed by Sun Rising in relation to the purchase price for the sale of its 2,000 shares.

12. On 20 June 2002, the 1st and 2nd petitioners commenced these proceedings claiming under section 168A Companies Ordinance for an order to buy out the 1st respondent's shares in the Company. The petition was subsequently amended to include declaratory relief in connection with the validity of the sale to Many Profit and also for the appointment of receiver and/or manager.

13. The petitioners also on 19, 26 and 30 June 2002 obtained ex parte three sets of injunctions restraining, inter alia, the sale of the shares of the Company and of the 8,000 shares, the registration of changes to the board and shareholding of Hung Kong and also the making of any changes to the board of Lishui. The hearing of the inter partes summonses for these orders had been adjourned and they are yet to be heard.

14. In the meantime, it appears that Many Profit had attempted to take over the management of the Lishui fruit market, but was resisted by the 2nd petitioner. On 15 August 2002, the 2nd petitioner was detained by the Public Security Bureau while at Foshan. According to the press release dated 26 September 2002 of Foshan Public Security Bureau, this is connected with steps that the 2nd petitioner took to resist the takeover of Lishui by Many Profit. On 21 September 2002, the 2nd petitioner was formally arrested for the offence of causing disturbance to public order. He is currently still in detention in the Mainland. Since 11 October 2002, the operation of Lishui has been undertaken by a new management involving Many Profit.

The application

15. This matter was initially set down for trial of preliminary issues and for hearing of the inter partes summonses for the injunctions on 10 March 2003. Shortly before that, it was revealed that the 2nd petitioner is an undischarged bankrupt, as a result of which various summonses were issued by the respondents for, inter alia, striking out of the petition and deferment of the trial.

16. Then on 7 March 2003, the petitioners took out the present summons for appointment of interim receivers. At the hearing before Deputy High Court Judge Barma SC on 10 March 2003, Mr Tong SC indicated that the application is only pursued by the 1st petitioner.

17. There is no dispute that the court has jurisdiction under either section 21L of the High Court Ordinance or section 168A of the Companies Ordinance to appoint interim receivers. The 1st petitioner's summons is taken out under section 21L of the High Court Ordinance, which provides that :

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

(2) Any such order may be made either unconditionally or on such terms and conditions as the Court thinks just."

18. The principles governing the exercise of the court's discretion are similar to those applicable to the grant of interlocutory injunction as set out in American Cyanamid Co. v. Ethicon Ltd [1975] AC 396 : Chinese United Establishments Ltd v. Cheung Siu Ki [1977] 2 HKC 212, 222G-223F and Winlok Investment Ltd v. Niceline Co. Ltd, (unreported) HCCW423/2002. Accordingly, the issues for consideration are :

(1) whether there is a serious issue to be tried;

(2) whether financial compensation is an adequate remedy; and

(3) the balance of convenience.

19. On the 10th affirmation of Lung Sui Wing leading the application, it is said that receivership is required to ensure that Lishui is properly run and the value of its business remains undiluted, undiverted and properly administered, so that the value of the shares in the Company is preserved. It further states the purpose of receivership to be :

(a) to supervise the operation of Lishui;

(b) to preserve the status quo of Lishui's assets; and

(c) to ensure those in possession of Lishui trading assets do not obtain advantages or siphon them away.

20. Further, in the 3rd affirmation of the 1st petitioner filed in answer to the respondents' affirmations opposing the receivership application, it is stated that "there is a real risk of dissipation of assets of the market when its business is left to the control of people without commercial morality or integrity".

21. Mr Tong SC in his opening submission puts the basis for receivership to be that :

(1) the 1st respondent had disposed of the only major asset of the Company without any resolution;

(2) the sale was not in the interest of the Company as it did not receive anything at all, leaving it and its creditors completely in the cold;

(3) the 4th respondent never intends to pay for the acquisition of the 8,000 shares;

(4) the arrangement bears the hallmarks of a device to obtain the only major asset of the Company for free; and

(5) the 1st, 4th and 6th respondents have very questionable commercial morality and have acted dishonestly in relation to the transaction.

22. The respondents oppose the application on a number of fronts. While the 1st and 6th respondents are prepared to proceed on the assumption that there is a serious issue to be tried as between them and the 1st petitioner, the 3rd to 5th respondents dispute that there is a serious issue to be tried on whether there is unfairly prejudicial conduct and on the validity of the sale of the 8,000 shares to Many Profit. All the respondents criticise the Re-Amended Petition as being deficient and different from the case relied upon for the present application. The respondents also take objections on delay and futility of the application, and further point to the prejudice and consequences of receivership as tilting the balance of convenience in favour of dismissing the application. In the event receivers are to be appointed, the respondents ask that there be fortification of the undertaking as to damages to be given by the 1st petitioner.

The petition

23. In my judgment, the 1st petitioner's application for receivership is fought with a number of serious difficulties.

24. The first of these difficulties is associated with the petition, which was further amended as recently as 12 March 2003. In the first place, while the Re-Amended Petition pleads that the 1st petitioner holds the 5,000 shares registered in her name for trust for herself and the 2nd petitioner, the Declaration of Trust creating the trust in 1,000 shares was only made on 2 July 2002, after the issue of the petition.

25. Secondly, a reading of the Re-Amended Petition and the affirmations made in the early stage of the proceedings by the 2nd petitioner does give the impression that the 5,000 shares held in the 1st petitioner's name are beneficially owned by the 2nd petitioner. To say the least, the 2nd petitioner clearly regards and treats the 5,000 shares to be his shares, even before the commencement of these proceedings. A clear instance of this is to be found in paragraph 21 of the Re-Amended Petition which pleads that the 2nd petitioner on 29 May 2002 suggested to the 1st respondent to hold a board meeting of the Company on the following day in Shenzhen, when the 1st petitioner was evidently in the United States.

26. Thirdly, on the Re-Amended Petition, the 1st petitioner is said to be the nominee director of the 2nd petitioner and plays no role in the management of the Company. The undisputed evidence also reveals her to be absent from Hong Kong or the Mainland between 1 September 1999 and August 2002. The Re-Amended Petition and the affirmations consistently suggest that while the 2nd petitioner was actively involved in the Company and the discussions on the sale of the 8,000 shares, the 1st petitioner was not involved at all. It is held in Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, 292 that a member's disinterest in the Company is a decisive factor when considering whether the conduct of the company affairs is unfairly prejudicial to his interest. Therefore to the extent that the 1st petitioner is complaining of unfairly prejudicial conduct by reason of her not being informed or consulted of the sale of the 8,000 shares, there is considerable doubt as to whether the conduct complained of, even if prejudicial, can be said to be unfair to the 1st petitioner's interest as a member of the Company. It raises the question whether behind or amongst the corporate structure, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the corporate structure as defined by the Articles of Association, and whether the court should subject the strict legal rights now insisted by the 1st petitioner to equitable considerations : O'Neill v. Philips [1999] 1 WLR 1092, at 1098G-1099F.

27. The true nature of the 1st petitioner's interest in the Company and her role in the Company also bear on the 1st and 6th respondents' assertions that the Company is in truth owned jointly by them and the 2nd petitioner and had hitherto been managed as a quasi-partnership among them, without resorting to such formalities as board or shareholders resolutions. They are also relevant in the context of the dispute over validity of the sale of the 8,000 shares. It is Many Profit's case that it deals with the Company on the basis that it is beneficially owned by the 2nd petitioner and the 1st and 6th respondents.

28. That said, however, I am conscious that in this application, the 1st petitioner needs only shows a serious issue to be tried as between her and the respondents. It is, as Mr Shieh recognises, not a very steep hurdle. Indeed, it is no part of my function to form a concluded or even a provisional view on the issues in dispute between the parties : Bond Brewing Holdings Ltd v. National Australia Bank Ltd & Ors (1990) 1 ACSR 445. Notwithstanding the observations in the preceding paragraphs on the interest and role of the 1st petitioner, I would not go so far as saying that the Re-Amended Petition and the evidence filed do not give rise to a serious question to be tried on either the issue of unfairly prejudice conduct or the issue of the validity of the sale of the 8,000 shares.

29. Despite my conclusion that there is a serious question to be tried, it is relevant and necessary for me to deal with the other criticisms made on the Re-Amended Petition, particularly with regard to the allegation of a massive fraud being perpetrated against the petitioners. It remains relevant in that it is Mr Tong SC's submissions that there is a need for the court to intervene because, among other things, the 1st and 6th respondents had acted dishonestly and had fraudulently disposed of the major asset of the Company, and that Many Profit was closely involved and implicated in it.

30. As held by the Court of Appeal in ADS v. Wheelock Marden & Co. Ltd & Ors, [1994] 2 HKC 264, allegations of fraud must be pleaded distinctly and with the utmost particularity. Where conspiracy is alleged, all the necessary ingredients had to be properly pleaded and set out. There can be no doubt that the Re-Amended Petition falls short of these requirements. Although the term "fraud" appears in several of the paragraphs, the Re-Amended Petition is unclear as to such essential particulars as by whom, on whom and the manner in which the fraud is said to be committed. And insofar as it is said in counsel's submissions that Many Profit has knowledge of the irregularities and/or has somehow participated in the fraud, there is nothing to that effect, let alone particulars, in the Re-Amended Petition.

31. There is further no mention of any unauthorized return of capital to the shareholders consequential upon the two loan agreements made between Many Profit and the 1st and 6th respondents respectively. It must be unjust for the 1st petitioner to take a point on unauthorised return of capital to shareholders and/or the sale or loan agreements being ultra vires the Company when none of these appears in the Re-Amended Petition.

32. Mr Tong SC says that the Re-Amended Petition is not elegantly drafted, but submits that the petitioners' case is clearly pleaded and all the basic facts had been set out. With respect, I cannot agree. A reading of the Re-Amended Petition, particularly from paragraph 29 onwards, will show the ambiguities and the many missing gaps in the petitioners' plea of fraud. It is also silent as to any knowledge of irregularities or improper involvement on Many Profit's part. The fact that the loan agreements were known to and discovered by the 1st respondent is irrelevant to whether the Re-Amended Petition is in order and properly meets the objectives of pleadings.

33. In this connection, it is apt to recall the observations of Bokhary JA (as he then was) in ADS v. Wheelock Maiden & Co. Ltd (at 270D) that the rules of pleading have nothing to do with technicality but are designed to do practical justice. Although a section 168A petition is not formal pleading, it serves to define and limit the scope of the dispute between the parties. Justice therefore demands that it be clearly set out and properly particularized so as to inform the respondents of the nature of the case they have to meet and the evidence they ought to be prepared for. Seen in this light, the respondents' criticisms of the Re-Amended Petition are well justified. It is not right for the 1st petitioner to mount her receivership application on a case that is not reflected in the Re-Amended Petition, bearing in mind that it was only amended less than two weeks ago and after the receivership application was made and that it is at an advanced stage of the proceedings with the trial less than six weeks away.

34. It is also not right for the 1st petitioner to suggest that the 1st respondent's attack on the Re-Amended Petition is an abuse of process and that he is precluded from making such attack. Unlike the case in Mandarin Resources Corporation v. David Cheng & Ors (unreported), CACV No. 146 of 1987, where the party did not appeal against the judge's finding that there was a serious issue to be tried, nevertheless launched attacks at the merits of the petition, the 1st respondent in this case has not abandoned his striking out application. It is still on the ground and is to be heard at the trial. The 1st respondent is not precluded from pointing out the deficiencies in the Re-Amended Petition and the variations between it and the case put forward in counsel's submissions, even if the 1st respondent has accepted that there is a serious question to be tried.

Delay

35. Another difficulty that the 1st petitioner faces is the delay in bringing the application. These proceedings were commenced in June 2002. On 11 October 2002, the new management team involving Many Profit took over the operation of Lishui. Since then, there had been a lapse of five months before the receivership application was taken out. In the context of an interim receivership application, five months is by any view a substantial period of time that calls for an explanation. No explanation has been given in the affirmations filed in support of the application. The only explanation comes from Mr Tong SC, who says that the application was made because the new legal team takes different views on the approach to the case. It is also said that the focus of the 1st petitioner and her legal representatives hitherto was on getting a speedy resolution of the dispute. These are hardly satisfactory or adequate explanations. It is also to be noted that the 1st petitioner has throughout these proceedings been legally represented by the same firm of solicitors and by counsel, including leading counsel.

36. It is correct that unreasonable delay per se is not necessarily fatal nor is it an absolute bar. Delay, particularly if unexplained, is however relevant when assessing the claim of risk of imminent irreparable injury, hence the necessity for interlocutory relief. It is therefore an important consideration when the balance of convenience is being determined : Spry, The Principles of Equitable Remedies (6th edn) p.490.

37. In the present case, the five months' delay, coupled with the lack of evidential basis supporting the assertion of risk of dissipation of assets, a matter that I shall return to, suggest that there is no present and urgent need for intervention by receivers. The delay has also resulted in material alteration of the position of Many Profit. The evidence before the court shows that since October 2002, Many Profit in connection with the new management has undertaken a number of initiatives in the operation and development of the business of Lishui. Expenses has also been incurred in relation thereto. There will be prejudice to Many Profit, whether in terms of its goodwill or the rapport it has built up with the customers or in terms of financial layout, if it were to be removed from the board of Hung Kong and in turn the management of Lishui.

Risks of dissipation of assets

38. The 1st petitioner in her 3rd affirmation puts her case for receivership on the basis that there is a real risk of dissipation of the assets of Lishui. The 10th affirmation of Lung Sui Wing leading the application also puts the preservation of the assets of Lishui as the basis and purpose of receivership. None of these affirmations however contain any evidence as supporting an imminent or real risk of dissipation. The only factual matter that has been identified and which may be relevant is the withdrawal of RMB10 million from Lishui by the 1st respondent. But that is a matter known to the petitioners as early as July 2002. It cannot be indicative of an imminent risk some eight months later.

39. The apprehension of risk seems to be put on the basis that the respondents, notably, the 1st, 4th and 6th respondents, are of questionable commercial morality or integrity. This together with the fact that Lishui is a cash business and Many Profit is a $2 BVI company are said to give rise to inferences that, if unchecked, funds or assets of Lishui may be siphoned off. Accordingly, receivers should be appointed to hold the ring in the interim period.

40. In my view, these matters, either taken individually or as a whole, do not in the circumstances of this case justify the drastic measure of receivership. There is, as pointed out, no evidence of actual diversion or dissipation of assets or funds in Lishui. On the contrary, the evidence of Liu Feng Yi, the assistant general manager of Lishui, says that since October 2002, there is no instance of withdrawals unrelated to the business. Miss Liu also deposes to a structured system of control over funds in the bank account of Lishui and the safeguards against withdrawals unrelated to the business of Lishui. Mr Tong SC has warned that Miss Liu is not a disinterested party for she is on the payroll of Many Profit. That is not borne out by the evidence. The evidence shows that she had been working with Lishui since its establishment in June 1998 and she is employed by Lishui not Many Profit.

41. At the same time, it is not to be overlooked that two of the five directors on the board of Lishui are appointees of the two mainland companies with the chairman being one of them. There is no evidence nor suggestion that they act in collusion with any of the respondents. Indeed, Mr Tong SC emphasizes in his reply submissions that no complaint is directed against the managers of Lishui. There is simply no basis for fearing that profits or funds generated from Lishui will be siphoned away by the respondents whether directly or at their direction or instigation. There is no reason to believe that the mainland directors and the management of Lishui would not be vigilant with regard to the funds and cash of Lishui, short of the presence or appointment of receivers. Mr Tong SC's repeated submissions that the appointment of interim receivers will send a message to the people running Lishui so that they would be vigilant in the management of Lishui is misplaced, quite apart from the fact it is not a consideration that justifies the drastic remedy of receivership in a case where the underlying business of the Company is trading and solvent and there is no objective evidence of misappropriation or dissipation of funds or assets.

42. As to the suggestion that the respondents lack commercial propriety and morality, it must be borne in mind that the correctness of this statement depends essentially on the court's findings at the trial on the matters in dispute, including whether there was this agreement made among the 1st petitioner and the 1st and 6th respondents on 29 May 2002 authorizing the sale and for it to be handled by the 1st respondent. It also depends on whether the respondents' case of a quasi-partnership among the 1st petitioner and the 1st and 6th respondents is to be accepted. Even with regard to the cheque for the 2nd petitioner's share of the sale proceeds, an explanation has been put forward by the 5th respondent which, if accepted, may put the matter in another light. As Mr Shieh puts it, it is not an open and shut case. It will not be appropriate to rely on the allegedly low commercial morality as justifying the appointment of interim receivers when the other factors are against it. The present case is therefore different from the circumstances in Mandarin Resources Corporation v. David Cheng where the Court of Appeal considered that a scheme of fraudulent ingenuity had been demonstrated.

Efficacy of receivership

43. Another major obstacle that the 1st petitioner faces is the apparent futility of a receivership order. The challenge comes in two ways. Firstly in terms of timing, the trial is less than six weeks away. Yet it will take at least 21 days from the date of their appointment for the receivers to be appointed to the board of Hung Kong. Thereafter, time will be required for them to gain access to the books and accounts of the Company and Hung Kong. Further time will be needed if they were to inspect the books of Lishui in their capacity as shareholders.

44. Secondly, in order to effectively serve the stated objectives of their appointment, namely, to prevent diversion of funds and to supervise the operation of Lishui, it will be necessarily for the receivers to be constituted members of the board of Lishui. If that is to be done, the expert evidence on the mainland law suggests that the approvals of the mainland authorities are required and the procedure may take up to four months. These are on the assumptions that the consent of the chairman of Lishui board is forthcoming and that the mainland registration authorities are prepared to approve the appointment of receivers to the board of a Chinese joint venture, which is said to be unprecedented.

45. Perhaps partly in recognition of this, Mr Tong SC in his reply submission contends that the risk of dissipation that the appointment of receivers may eliminate is the dissipation at the level of Hung Kong. It is submitted that the receivers will be able to control the board of Hung Kong and in turn monitor the business of Lishui through some reporting system. In this way, proper records of the cash receipts of Lishui can be preserved and maintained. I find it difficult to accept that it is sufficient for the receivers to discharge a supervisory function in the manner outlined. Either the management and the board of Lishui are to be trusted or, if not, the receivers will have to be present at the market overseeing the cash receipts or at least be present on the board of Lishui. On the assumption that mainland company law is similar to that of Hong Kong, the rights of a shareholder are limited. Examination of books and records, whether of the Company, Hung Kong or Lishui, will not be sufficient or effective to alleviate the fear of the 1st petitioner.

46. The petitioners' summons only proposes to give the directors the power to appoint directors to the board of Hung Kong and to get into the premises, the books and records of the Company and Hung Kong. That being the case and considering the submission that the receivers are expected to perform a supervisory function, it does not appear to me that there is any useful and practical purpose to be served by the appointment of interim receivers.

Consequences of receivership

47. This is to be contrasted with the inconvenience and consequences that may be brought upon the respondents, notably Many Profit, and also Lishui. In the first place, it is to be recongized that Many Profit had appointed new directors to the board of Lishui relying on the 8,000 shares it holds. The new board is actively running Lishui. Further as a result of the delay on the petitioners' part, a number of new endeavours have been undertaken by the new management of Lishui. Miss Liu Feng Yi had deposed to the likely adverse consequences on these new ventures and development plans if receivers were to be appointed. In the absence of cogent evidence to the contrary, the court cannot ignore it and dismiss it out of hand as mere blackmails or scaremongering.

48. I accept that it is probable that the appointment of receivers may be misunderstood by people dealing with Lishui as indicating that Lishui is financially or otherwise in trouble. As observed by Ferris J in Jaber v. Science & Information Technology Ltd [1992] BCLC 764, 789g, it is inevitably difficult for people in the outside world to clearly differentiate between receivers appointed on grounds of insolvency and receivers appointed on other basis. In Floydd v. Cheney [1970] 1 Ch 602, 610F-H, Megarry J further observed that :

"... I do not think that it can be denied that news that a receiver of a business or a professional practice has been appointed is news that may well cause members of the general public to hesitate in resorting to that business or practice. It may indeed be that some of the inferences that the public would draw from the appointment of a receiver would be quite wrong; but one cannot expect the public to have a precise appreciation of every aspect of the institution of receivership."

49. It may be said that the impact of receivership on the goodwill and reputation of Lishui is more indirect since currently it is only proposed that receivers be appointed to the assets and undertakings of the Company. But in reality, by effecting changes to the board of Hung Kong and ousting directly or indirectly Many Profit from the board or management of Lishui, the presence of the receivers will be felt at the level of Lishui.

50. It is therefore not fanciful for the respondents to say that the appointment of receivers may bring about consequences that will prejudice their interests. In the case of Hung Kong and Many Profit, the prejudice is readily discernable. Any loss or damage to the goodwill and reputation of Lishui, Many Profit or Hung Kong is not readily quantifiable : see Bond Brewing Holding Ltd v. National Australia Bank Ltd, at 456 and Keen Lloyd Resources Limited v. Sin Hua Bank Limited, (unreported), HCA1319 of 2001 at p.9. As for the 1st and 6th respondents, although they had divested of their beneficial interest in the 8,000 shares by the sale, their prospect of receiving repayments under the loan agreements and their right to be made shareholders of Many Profit may be prejudiced if Many Profit were to be ousted from the management of Lishui.

51. That said, I am however not persuaded that much weight can be attached to the indication that the senior management of Lishui will resign if there is receivership. While recognizing that Miss Liu and some others had resigned for fear of personal safety in June 2002 after the 2nd petitioner took over Lishui, there is no reason to believe that their safety will be threatened with receivers being appointed or even taking over the running of Lishui.

Status quo

52. In American Cyanamid Co. v. Ethicon, Lord Diplock said that when all other factors are equally balanced, it is a counsel of prudence to take such measures as are calculated to preserve the status quo : at 408G. It is also the 1st petitioner's argument the court should intervene by holding the ring and preserving the status quo. The 1st petitioner's difficulty in this regard is what should be taken as the relevant status quo.

53. In Garden Cottage Ltd v. Milk Board [1984] 1 AC 130, it is said by Lord Diplock (at 140C-D) that :

"the relevant status quo to which reference was made in American Cyanamid is the state of affairs existing during the period immediately preceding the issue of the writ claiming the permanent injunction or, if there be unreasonable delay between the issue of the writ and the motion for an interlocutory injunction, the period immediately preceding the motion. The duration of that period since the state of affairs last changed must be more than minimal, having regard to the total length of the relationship between the parties in respect of which the injunction is granted; otherwise the state of affairs before the last change would be the relevant status quo."

54. In the present case, given the unexplained delay between the issue of the Petition and the receivership application and the lapse of five months since the takeover of Lishui by the new board in October 2002, the relevant status quo should be the state of affairs immediately before the receivership application. The preservation of status quo would therefore point to no appointment of receivers.

Exercise of the court's discretion

55. Having regard to the matters above, it is evident that the balance of convenience is against the 1st petitioner. The preservation of status quo also points to the same conclusion. The court's discretion should therefore be exercised against the appointment of interim receivers.

Undertaking as to damages

56. Having reached the conclusion that receivers should not be appointed, it would not be necessary to consider the issue of fortification of damages. But for completeness sake, I will deal briefly with it. In my view, the 1st petitioner would have to fortify her undertaking if her application were successful. It is said that because she is the registered owner of 50% of the shares in the Company, there is no need for fortification. But the respondents' case is that she has no beneficial interest in the shares and therefore has no right to receive the one-third sale proceeds of the 8,000 shares. Mr Tang SC also submits that even if the 1st petitioner holds the shares on trust for the 2nd petitioner, she will be entitled to be indemnified by the 2nd petitioner for acts done in discharge of her trusteeship. This submission ignores the fact that the 2nd petitioner was an undischarged bankrupt when the shares in the Company were acquired and registered in the 1st petitioner's name and he has remained so until now. Whatever interest he has in the Company will be vested in the Official Receiver, being the trustee in bankruptcy. There is no suggestion that the petition herein was issued by the 2nd petitioner with the consent of the Official Receiver. It is also not said that the receivership application was made by the 1st petitioner in her capacity as trustee for the 2nd petitioner and/or with the consent of the Official Receiver. The submission that any liability the 1st petitioner incurred as the trustee of the shares in the Company will be a first charge on the 2nd petitioner's entitlement to sale proceeds is misconceived. As to the proceedings to annul the bankruptcy order, I need only observe that unless and until the bankruptcy order is annulled and rescinded, it is still binding and effective as a court order.

Conclusion

57. For the reasons indicated above, the summons for appointment of interim receivers is dismissed with costs against the 1st petitioner, to be taxed if not agreed. There is a certificate for two counsel.