QU HONG v. LAM YIN AND ANOTHER

HCMP 322/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 322 OF 2007

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D E C I S I O N

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The application and the parties

1.  This is an application under section 114B of the Companies Ordinance, Cap. 32. I gave directions on 7 March 2007 for it to be dealt with on paper.

2.  For the background of the applicant, the two respondents, the company concerned being K Vision International Investment (H.K.) Limited (“the Company”), and the various court proceedings between them, I refer to my decisions in HCCW No. 1277 of 2004 and HCMP No. 3340 of 2004 given on 11 January 2006 (“the 1^st Decision”) and in HCMP No. 1607 of 2005 given on 5 January 2007 (“the 2^nd Decision”).

3.  As clarified in the submissions of his counsel, the applicant Qu Hong (“Qu”) seeks the following orders in this originating summons:

(1)	an extraordinary general meeting of the Company be convened by the court for the purpose of considering and if thought fit passing these resolutions:
	(a)	that Qu be authorised to represent the Company or to appoint legal representative to represent the Company in the civil proceeding numbered (2004) 二中民初字第1583號 at the Beijing City Intermediate People’s Court No. 2 (“the PRC Action”) to which the Company is a party;
	(b)	that Qu be authorised to give instructions to the Company’s legal representative (if legal representative is appointed) in the conduct of the PRC Action;
(2)	that one member of the Company present in person or by proxy shall constitute a sufficient quorum;
(3)	that one-day notice to the members of the Company shall constitute a sufficient notice for the said meeting; and
(4)	that the court may give directions as to the manner in which the said meeting is to be called, held and conducted and all such ancillary and consequential directions as it may think expedient.

4.  The Company has not been made a party to this originating summons. Mr. Victor Dawes, in his reply submissions for Qu, seeks leave to add the Company as the 3^rd respondent, so that the Company would be bound by any order made in these proceedings. I hereby give leave to join the Company. As all the shareholders have been joined and are represented, no prejudice would have been occasioned by this late joinder. I direct Qu to file and serve an amended originating summons by 10 April 2007.

5.  There is one other matter regarding the parties to the application. Miss Linda Chan for the 1^st and 2^nd respondents, Madam Lam Yin and Zhang Hong Xin (“Lam” and “Zhang” respectively), submitted that it was improper and unnecessary to join Zhang as a respondent as on Qu’s case Zhang is neither a director nor a shareholder of the Company. Zhang’s name appeared in the latest annual return of the Company made up to 20 October 2004 as a shareholder and director, although Qu has disputed the validity of Zhang’s appointment as a director on 8 May 2004 and the transfer of 1% of the shareholding from Lam to Zhang on 17 May 2004 (see paragraph 15 of the 1^st Decision). I do not think it is improper to join Zhang as a respondent in the circumstances.

The PRC Action and hearings

6.  The PRC Action was brought by the China Construction Bank (“the CCB”) on 1 November 2003. There are five defendants: CADTIC (Kinbond Holdings) Co., Limited (“Kinbond Holdings”; 中國農村發展信托投資(啟邦集團)有限公司); Kinbond (H.K.) Ltd. (“Kinbond HK”); Oriental Patron Finance Ltd. (“Oriental Finance”); the Company; and Beijing Golden Horse Great Wall Estate Construction Co. Ltd. (“Golden Horse”; 北京金馬長城房產建設有限公司).

7.  These three agreements were relied on by the CCB in support of its claim in the PRC Action:

(1)	By an agreement dated 7 January 2000 made between the CCB, Kinbond Holdings and Kinbond HK (債權債務清理協議書), it was acknowledged that the CCB has taken over the rights of the former creditor of Kinbond Holdings and Kinbond HK. Further, Kinbond Holdings and Kinbond HK agreed to transfer to the CCB, to discharge in part its debt to the latter, 17 units in Sunshine Plaza pursuant to an agreement dated 31 December 1997 made between Kinbond Holdings and Oriental Finance (“the Repayment Agreement”; 關於用房產償還債務的協議書).
(2)	In the Repayment Agreement, it was stated that Oriental Finance owned the 17 units in Sunshine Plaza as an investor and that such units were part of the units to be allocated to Golden Horse in the development project. Kinbond Holdings agreed to accept a transfer of the 17 units in settlement and discharge of the debt owed by Oriental Finance to it in the sum of US$4.43 million.
(3)	By a memorandum dated December 1997 made between Oriental Finance and the Company (“the Memorandum”), it was recited that in view of the current state of the funds position between them, that Oriental Finance was indebted to Kinbond Holdings of US$4.43 million, and that the Company owned various units in Sunshine Plaza as an investor, it was agreed that the Company would provide the relevant number of units in Sunshine Plaza on behalf of Oriental Finance to discharge the debt to Kinbond Holdings.

8.  Golden Horse has not transferred the 17 units to the CCB, so the latter claims against the five defendants the transfer of these units. There were two hearings of the PRC Action, on 9 September 2005 and on 2 February 2007. Kinbond Holdings and Kinbond HK did not attend any of the hearings. Oriental Finance was represented by one Zhang Li, who was once nominated by Qu to sit on the board of directors of the Company. Oriental Finance admitted the validity of the documents relied on by the CCB. Golden Horse was represented by lawyers and has opposed the claim.

9.  Qu represented the Company at the first hearing during which the judge directed that if Qu wanted to represent the Company, he should produce a board resolution of the Company authorising him to do so, with the attestation by a China-appointed Attesting Officer. After he was informed of the date of the second hearing, his solicitors wrote to Messrs. Siao, Wen & Leung, the solicitors of Lam and Zhang, on 27 January 2007 asking if they were agreeable to sign a resolution to authorise him to represent the Company. As he was unable to obtain a resolution from Lam (who is the only other director and shareholder whose status is not in dispute and whose participation is necessary to render quorate any board meeting or shareholders’ meeting), Qu engaged lawyers in Beijing to represent the Company at the second hearing. The judge again directed that unless the Company could produce a board resolution authorising Qu to represent the Company with proper attestation, the submissions made by Qu’s lawyers at the second hearing would not be considered. Hence, this originating summons was issued on 15 February 2007. It is expected that judgment in the PRC Action would be given at any time.

10.  Lam and Zhang did not take part in the PRC Action. Nevertheless, they managed somehow to have acquired fairly detailed knowledge of what went on at the hearings, as appeared from the information they gave to their Beijing lawyers in the legal opinion dated 12 March 2007. I note that the lawyers of Golden Horse had written directly to Messrs. Siao, Wen & Leung on 5 February 2007, although Lam has claimed this was done without her instigation.

11.  According to the evidence adduced by Lam and Zhang, which is not disputed by Qu, the CCB and Oriental Finance were not able to produce as evidence the original of the Memorandum. The Beijing lawyers of Lam and Zhang have advised in their legal opinion that although the original document cannot be produced, the parties to the Memorandum, namely Oriental Finance and the Company, can verify and confirm its authenticity. This also is not disputed. In the two hearings, Qu had made submissions on behalf of the Company to the effect that the Memorandum was authentic and valid. If he is able to produce the board resolution as required by the Beijing court, his submissions may be taken into consideration by the court.

12.  Lam and Zhang have not informed this court what evidence or submissions if any have been placed before the Beijing court by Golden Horse to oppose the claim of the CCB. It does not appear to me, from the legal advice mentioned earlier, there is any legal impediment to Lam and Zhang, if they so wish, to produce to the Beijing court any evidence they regard as relevant and material to oppose the claim of the CCB, even if not on behalf of the Company, at least on behalf of Golden Horse, which is also opposing the claim.

Two conflicting versions

13.  I should mention that the PRC Action has featured in the previous applications that I have dealt with, see the 1^st Decision, paragraphs 94(4), 98, 101, 103, 104, 112(2) and 116. Lam and Zhang prayed in aid the PRC Action to seek the intervention of this court in appointing provisional liquidators and interim receivers to the Company at the hearing in December 2005, on the basis that independent professionals should have conduct of the proceedings. Qu also pointed to the PRC Action to say that an extraordinary general meeting of the Company should be convened for the purpose of considering the appointment of additional directors to resolve the deadlock of the board and to appoint legal representatives for the Company in the PRC Action.

14.  The parties had thought at the time that judgment would be given in the PRC Action after the first hearing on 9 September 2005 and there would not be any further hearing. I dismissed the applications to appoint provisional liquidators, interim receivers and to convene a meeting to appoint additional directors, as I was not persuaded there was a real need for intervention by the court.

15.  I have also mentioned in the 1^st Decision the sharp conflicts in the affirmations filed on both sides, and that it would not be appropriate to form any view on the evidence as this was far from complete as matters stood at the time (paragraphs 95 and 96). This has remained the position today.

16.  The conflicting allegations of the parties in respect of the transactions in the PRC Action are among the many claims and contentions raised in the derivative action brought by Lam and Zhang (HCA No. 2842 of 2004) and in the winding-up petition brought by Lam (HCCW No. 1277 of 2004). These proceedings have yet to be resolved.

17.  In summary, it is alleged by Lam and Zhang that Qu misappropriated the assets of the Company, being the 17 units in Sunshine Plaza, to settle the debts owed by his own companies to Kinbond Holdings, in that the ultimate beneficial owner of Oriental Finance was Oriental Patron Holdings Limited (“OPHL”) and Qu was at the material time the majority shareholder of OPHL through his shareholdings in Well Done Investments Limited (“Well Done”) and Coston Investments Limited (“Coston”). In the submissions of Miss Chan, an additional allegation was raised that the transaction concerning the 17 units in Sunshine Plaza was voidable as Qu had failed to disclose his interest in Oriental Finance to Lam at the time he purported to execute the Memorandum on behalf of the Company.

18.  Qu has denied the above allegations. He asserted that the Company had borrowed substantial sums from Oriental Finance since 1994 to finance its development of Sunshine Plaza and Celebrity Plaza. Qu was directed by Oriental Finance to repay part of the Company’s indebtedness by transferring 20 units in Sunshine Plaza to Hainan International Trust and Investment Co. Ltd. (“HITIC”), to facilitate HITIC’s disposition of its shareholding in OPHL, as Oriental Finance did not have sufficient cash to buy out HITIC’s shareholding. As a result of this transaction, HITIC’s subsidiaries transferred their shares in OPHL to Well Done and Coston, and later Well Done and Coston divested the shares they held in OPHL; further, the Company’s indebtedness to Oriental Finance was reduced by HK$55 million. As for the 17 units to be transferred to Kinbond Holdings under the Memorandum, that was also at the direction of Oriental Finance, to repay in part the Company’s indebtedness to Oriental Finance.

19.  In the present application, Lam and Zhang have sought to persuade the court to enter into the merits of the rival contentions. They filed evidence in an attempt to demonstrate on the basis of the available accounting records that no money was due from the Company to Oriental Finance at the time the Memorandum was made; hence it would be a misappropriation of the assets of the Company to transfer the 17 units as directed by Oriental Finance under the Memorandum. They even applied to subpoena Oriental Finance to produce further documents in these proceedings. I have refused that application.

20.  It is not appropriate to resolve the conflicting versions advanced by the parties in an application of this kind and I decline to enter into the merits of the dispute. It is particularly inadvisable to do so in the dispute involving these parties, given the limited and untested information before the court and the numerous allegations and counter-allegations they have made in various proceedings. I am also conscious that the parties may quote any view I express on merits, even of a tentative kind, out of context, in their attempts to jockey for position.

Determination of the application

21.  The present application is another instance of opposing camps trying to jockey for position.

22.  The stance taken by Lam and Zhang is that if Qu should be allowed to represent the Company in the PRC Action, it would cause irretrievable damage to the Company. To back up that assertion, they obtained legal advice from Beijing lawyers, which was based on the information they provided. I cannot see how that could be of assistance to this court.

23.  I ask myself why irretrievable damage should ensue, assuming that Qu’s submissions that the Memorandum was valid are to be considered by the Beijing court. Whether his submissions would be accepted, and what weight should be attached to his submissions, is a matter for the Beijing court. As I have said, I have no idea what evidence, if any, has been adduced by Golden Horse to support its contention that the Memorandum was invalid or that Golden Horse is under no obligation to transfer the 17 units to the CCB. There is no apparent obstacle to Lam and Zhang to adduce before the Beijing court the same sort of evidence they have placed before this court in the present application. It would be up to the Beijing court to weigh and consider any relevant evidence and submissions of all the parties in the PRC Action. To deny Qu, who is the shareholder of 97% shares, the right of representing the Company in the PRC Action is, in effect, to exclude his evidence from consideration by the Beijing court. I see no reason why this court should assume this role.

24.  Whether Golden Horse is obliged to transfer the 17 units in Sunshine Plaza is the subject of the PRC Action and would be resolved by the Beijing court. As far as the interests of the Company and its minority shareholders of 3% are concerned, there is at the moment an interlocutory injunction granted by the Hong Kong court to restrain Qu from disposing of or diminishing the assets of the Company without an order of the court pending the determination of the derivative action. Any potential damage or prejudice to the Company or the minority shareholders, as a result of the transfer of the 17 units to the CCB, could be dealt with in the winding-up proceedings and in the derivative action. As I have mentioned in paragraph 32 of the 2^nd Decision, Lam and Zhang are not without a remedy.

25.  Lam and Zhang have, by the letter of Messrs. Siao, Wen & Leung dated 12 March 2007, made a proposal to Qu to resolve this application by signing a resolution to authorise Qu and a representative nominated by Lam or Zhang to represent the Company in the PRC Action. This proposal is not viable. In any event, Lam and Zhang have rejected Qu’s counter-proposal that if there should be conflict in the submissions of the two representatives, Qu’s submissions should prevail.

26.  I would exercise my discretion in favour of Qu and order that an extraordinary general meeting of the Company be convened, to consider the resolutions as mentioned earlier. As the holder of 97% shares in the Company, Qu should be given the responsibility of arranging representation for the Company in the PRC Action.

27.  I reject Miss Chan’s submission that a board meeting should be directed to be held instead of a general meeting. It does not appear to me the proposed resolutions are caught by regulation 86 of Table A, which applies to the Company.

28.  I grant the reliefs sought in the originating summons in terms of paragraph 3(1) to (3) in this decision. I order the 1^st and 2^nd respondents to pay the applicant’s costs on a party and party basis.