RED VICTORY GROUP LTD v. LAM HOK CHUNG RAINIER AND ANOTHER

HCCW 332/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 332 OF 2012

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D E C I S I O N

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1.  I have before me an urgent application made by Red Victory Group Limited (“Red Victory”) in the liquidation of Wongs Investment Development Holdings Group Limited (“Wongs”). The draft summons seeks an order (1) that the liquidators of Wongs do enter into an agreement to borrow money from the applicant to discharge a prior loan; (2) that the liquidators be removed from office; and (3) that the liquidators be restrained from voting in favour of the replacement of the existing directors of China Kingstone Mining Holdings Limited (“China Kingstone”). For the purposes of today, however, Red Victory seeks “interim relief” in the form of paragraphs 1 and 3 of the summons only. So far as paragraph 3 is concerned, the restraint is sought pending the substantive determination of Red Victory’s application for removal of the liquidators or further order.

2.  Mr Joffe, who has appeared for the liquidators, submitted that there was no urgency in paragraph 1 of the summons, to which the liquidators need further time to respond.  Mr Sussex SC, who appeared for Red Victory, did not argue to the contrary and accordingly the only application I need to deal with today is Red Victory’s application for an order that:

“The Liquidators be restrained from voting in favour of the removal of the existing members of the board of directors of China Kingstone and the appointment of new members in their place pending resolution of [the application to removal the liquidators from office] or until further order of the Court.”

3.  Wongs was put into compulsory liquidation on a petition presented by BOCOM International Holdings Company Limited (“BOCOM”) in September 2012 by a winding up order made on 23 April 2013.  The present liquidators were appointed by the court in mid 2013.

4.  A substantial asset, perhaps the only substantial asset, of Wongs is its shareholding in China Kingstone, which is a company incorporated in the Cayman Islands whose shares are listed for trading on the Hong Kong Stock Exchange with the stock code 1380.  China Kingstone is an investment holding company which heads a group of companies, the principal business and activities of which are the production and sale of marble and marble related products.

5.  The present application has arisen against the background of an open offer of shares made by China Kingstone just last month. When it first went into liquidation, Wongs’ holding in China Kingstone amounted to approximately 63%.  That percentage was later reduced by certain placements but until the open offer I have referred to, Wongs had been the holder of at least approximately 50.56% in the issued share capital of China Kingstone.  The open offer was announced on 14 May 2015 and made by prospectus despatched on 5 June, whereby China Kingstone offered to allot to its shareholders one new share for every two existing shares.

6.  On 16 June, Wongs, acting through the liquidators, who took the view that the open offer had been devised by China Kingstone’s directors for the purpose of diluting the shareholding and removing the absolute majority enjoyed by Wongs, presented a petition (in HCMP 1472/2015) and issued a summons for an injunction to restrain China Kingstone from proceeding further with the open offer of shares.  On 19 June, I heard and, at the end, dismissed the summons, for reasons which were handed down on 8 July 2015.

7.  Red Victory is a BVI company that had, in April 2013, taken an assignment from a major creditor of Wongs, namely, BOCOM, of its claims against Wongs.  As security, Red Victory made a reverse assignment to BOCOM, as a result of which Red Victory became an equitable assignee of the relevant debts. Red Victory is owned by one Mr Wang Min Liang, who has been keen to acquire a controlling interest in China Kingstone and who has various connections with China Kingstone including the following (according to the liquidators’ affidavit)[1]:

(1) Mr Wang is the 100% owner of Jiang Tong Investment Limited (“Jiang Tong”). Jiang Tong is a company incorporated in the BVI and holds approximately 6.11% of the issued capital of China Kingstone prior to the open offer.

(2) On 29 November 2013, China Kingstone entered into an agreement with Kinwin International Investment Limited, a company owned by Mr Wang, for the provision of a term loan of HK$25 million to China Kingstone at an interest rate of 15% per annum.

(3) On 23 April 2014, China Kingstone announced that it had entered into a subscription transaction with Jiang Tong.  The subscription agreement gave Jiang Tong or Mr Wang 16.21% of China Kingstone’s issued share capital and diluted Wongs’ shareholding from 62.99% to 52.49%.

(4) On 30 March 2015, Jiang Tong transferred 9.5% interest in China Kingstone to Endless Joy Management Limited, another BVI company owned by one Ms Ma Lan.  The transfer of interest allowed Mr Wang to cease to be a “connected person” for the purpose of the Listing Rules.  Then immediately on 31 March 2015, China Kingstone entered into a subscription agreement to issue 302,317,201 shares, representing over 11% of the enlarged share capital, to a company called Bold Tack.  Bold Tack is ultimately wholly owned by a discretionary trust created by Mr Wang for the benefit of his daughter and her issue.

(5) In around early 2015, the liquidators received a suggestion from BOCOM regarding a proposal for a scheme of arrangement that had been proposed by Red Victory.  The terms of the scheme provided that Red Victory, as the underwriter, would agree to purchase shares at market price from the scheme creditors to whom the scheme shares were to be distributed pursuant to the scheme and who elect to receive cash consideration instead of shares. The liquidators had pursued the scheme but it was abandoned when China Kingstone announced the open offer without any prior consultation with Wongs or the liquidators.

8.  On 18 June, the liquidators wrote to all creditors or claimants who had filed proofs of debt in Wongs’ liquidation, informing them of the possibility of Wongs borrowing funds from third parties in order to participate in the open offer should the court refuse to grant the injunction. In the morning of 19 June 2015, during or shortly before the court hearing, the liquidators were given a copy of Red Victory’s letter to BOCOM indicating a willingness to provide financing for Wongs to subscribe for shares pursuant to the open offer should it fail to obtain the injunction, although no detailed terms of any offer had emerged at that stage. 

9.  According to the liquidators’ affidavit[2], after Wongs failed to obtain an injunction to stop the open offer, the liquidators called Mr Wang at about 8 pm on 19 June 2015 to try to explore terms of financing by Red Victory, but was unable to discuss any details with Mr Wang.  Shortly afterwards, at 00:02 am on 20 June 2015, the liquidators sent an email to Red Victory enquiring whether Red Victory was willing to provide a secured loan in the amount of HK$62 million.  The liquidators also sent text messages to Wang’s Hong Kong and PRC mobile phones to follow up on the email but they did not receive any call from Mr Wang.  Apparently the liquidators also called Mr Wang several times over the weekend of 20-21 June but were unable to make contact with him.

10.  On 20 June 2015, Saturday, at 4 pm, the liquidators sent a letter to all known creditors and claimants of Wongs inviting firm offers to fund the subscription for shares, with a deadline set on 9 am, 22 June, Monday. 

11.  Red Victory sent a letter by email to BOCOM copied to the liquidators at 8:31 am on 22 June, in which Red Victory offered a loan with interest at 0.01% p.a. less than the rate of any loan obtainable by the liquidators from the market.  However, apparently because a wrong email reply address had been stated in the liquidators’ letter of 20 June inviting offers, Red Victory’s letter did not come to their attention until around 10:30 am after they had made an application to the court for sanction of their proposal to borrow from a third party syndicate represented by Asian Capital (Resources) Limited (“Asian Capital”).  Sanction of the court was a condition of the loan even though the liquidators had, under s 199(2)(e) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), the power to raise money on the security of the assets of Wongs, without the sanction of the court.

12.  The liquidators did not immediately inform the court of the receipt of that offer from Red Victory.  They considered that the terms offered by Red Victory, in particular the requirement that Wongs must obtain Red Victory’s written consent before exercising its voting rights in respect of the shares, were unsatisfactory and unacceptable.  Further, the liquidators were concerned at the silence from Mr Wang over the weekend and considered that there was insufficient time remaining to settle the financing documents and ensure that funds were available in time to meet the deadline for acceptance of the open offer.

13.  Accordingly, on 22 June, pursuant to the sanction I granted on paper, Wongs obtained a loan from Asian Capital for the purpose of applying for shares under the open offer.  Acting through the liquidators, Wongs duly completed and sent to China Kingstone an application for shares together with a cashier’s order for HK$61,346,313.80 to subscribe for 613,463,138 shares at $0.10 each.

14.  Red Victory then began to complain by letters about the conduct of the liquidators and, on 25 June, sent a solicitors’ letter to China Kingstone demanding that no new shares were allotted to Wongs.  On the same day Red Victory took out a summons in these liquidation proceedings for, inter alia, an order that the liquidators’ act or decision be reversed or modified as the court deems fit, an order that China Kingstone be restrained from issuing shares pursuant to the open offer to Wongs, alternatively a declaration under s 276 of the Ordinance that the liquidators are liable to make good the loss caused to the company by their misfeasance.

15.  On 26 June, relying on Red Victory’s complaints, the board of directors of China Kingstone decided to reject Wongs’ application for shares and to allot the shares to the underwriter, Royal Moon International Limited (“Royal Moon”) instead.

16.  On 28 June, on the urgent application of Wongs in the petition proceedings (HCMP 1472/2015), I granted an injunction restraining the allotment to Royal Moon of the shares applied for by Wongs and requiring the shares to be allotted to Wongs.  On that ex parte on notice application, Red Victory appeared by counsel (Mr Roland Lau and Mr P K Fung) to oppose the grant of injunction.  Although it was not clear that Red Victory had any standing in that application, I heard its counsel de bene esse.

17.  The injunction was continued after further argument on 3 July, for reasons also handed down on 8 July.  The detailed background of the directors’ rejection of Wongs’ application for shares is dealt with in those reasons to which I refer.  Red Victory did not appear before the court on 3 July, having asked to be excused.

18.  It was against this background that Red Victory has made the application by the present summons before me.  Red Victory’s main complaints in its application are that:

(1) There had been non-disclosure of the practical effect of the loan which Red Victory said would be to strip Wongs of its only asset, ie its shares in China Kingstone.  The liquidators failed to discharge their continuing duty of disclosure in that they failed to inform the court of Red Victory’s offer which eventually came to their attention at around 10:30 am, 22 June 2015.

(2) The liquidators were unfit to remain in office because (a) there is a conflict of interests arising from what Mr Sussex characterised as their “pre-engagement touting activities” and their giving of personal advice to Mr Wang; and (b) they made various false representations to Mr Wang in procuring his support for them to be appointed to their current office.

(3) The liquidators’ intended wholesale reconstitution of the board of China Kingstone at the extraordinary general meeting to be held on 14 July 2015 is open to serious question given that the proposed appointees have no experience in the stone mining industry.

19.  Mr Sussex submitted that there is a serious issue to be tried on the application to remove the liquidators and that pending the determination of that application, there should be a restraint placed on the liquidators to prevent them from making significant decisions in relation to the assets of the company.  He submitted that the balance of convenience lies in favour of granting the order sought. 

20.  The liquidators have not yet filed evidence in opposition to the removal application as such, but even assuming there is a serious issue to be tried on that application, it seems to me the relevant status quo is that the liquidators are still the court-appointed liquidators of Wongs and that Wongs is a shareholder of China Kingstone.  The court ought generally not to be asked to “micro-manage” the assets in a liquidation.  How to vote on a motion about who should be directors of a listed company in which the liquidated company holds shares is generally a matter for the liquidators exercising their commercial judgment for the interests of the liquidation estate.

21.  It may be different where there is an allegation that the way the liquidators propose to vote is egregiously wrong.  As such that proposed act can be challenged under s 200(5) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.  As Fok J (as he then was) stated in Re Wickson Holdings Ltd [2011] 2 HKLRD 373 at §19(d):

“In the administration of the company’s assets, where a liquidator has decided to embark on a particular course of action, the person aggrieved by the liquidator’s decision will need to demonstrate, before the court will interfere with the liquidator’s decision or act pursuant to s.200(5) of the Companies Ordinance, that the liquidator has either:

(i) not exercised his power in good faith or has acted in a way in which no reasonable liquidator could have acted; or

(ii) made a ruling or decision in the course of the administration which directly affected a party’s right and has not acted even-handedly as an impartial neutral: see Eagle Queen Co Ltd v First Bangkok City Finance Ltd [1989] 2 HKLR 71, 73H-74C (Hunger JA).”

22.  But Red Victory has not sought to challenge on this basis the way the liquidators propose to vote at the EGM.  In fact the liquidators’ proposal to replace the board was first announced in May with the notice of EGM being issued on 5 June.  Yet no application has been taken out by Red Victory until now, a few days before the EGM.  Nor does the proposal to remove directors in itself form a ground in Red Victory’s application for removal of the liquidators.  I am not aware of any general principle or practice that merely because there is a potential case for the removal of the liquidators, the liquidators ought to be stopped from making significant decisions.  In the present case, there is no suggestion that the liquidators are incompetent, of unsound mind, lack commercial experience, or are acting in bad faith in the way they propose to exercise the voting rights of Wongs in China Kingstone.

23.  To the contrary, the liquidators have elaborated in evidence urgently filed this morning what they propose to do and why they consider it appropriate and necessary.  In particular, the liquidators propose to vote to remove five out of seven of the existing directors, re-appointing or retaining two existing directors in order to ensure continuity and retain relevant expertise in the mining industry and knowledge of the listed company’s operations.  The liquidators have stated that they consider that the proposed new directors are very experienced in the management of Hong Kong listed companies with a number of them being renowned professionals who are currently sitting on the board of listing companies and hold other established positions in their respective industries.  The liquidators consider that those directors will have sufficient experience to acquire the requisite talent and expertise to assist the board in running the day to day operations of China Kingstone.  In addition, one of the proposed directors also has experience in mining activities in the PRC.

24.  Further, the liquidators have also explained their lack of confidence in the existing directors, arising from the board’s actions in:

(1) refusing to appoint directors nominated by Wongs;

(2) entering into transactions that the liquidators believe to be against the best interests of China Kingstone;

(3) taking various steps for what the liquidators believe to be the improper purpose of diluting Wongs’ majority shareholding in China Kingstone;

(4) attempting to invalidate Wongs’ subscription to the open offer despite that the liquidators had duly prepared and returned the application form pursuant to the open offer together with the requisite remittance;

(5) extending the long-stop date for the completion of the China Fortune Acquisition immediately after the court granted the injunction requiring the offer shares to be issued to Wongs; and

(6) refusing to provide information to Wongs or the liquidators on the actions the board is taking on behalf of China Kingstone.  Thus, for example, despite the enquiries made by the liquidators on 30 June and 2 July 2015 to the board in relation to the proceeds of the open offer, the board has failed to provide any details as to the use of those proceeds.  Nor has the board responded substantively to the written enquiries made by the liquidators to the board on 24 May 2015 regarding the Qilu Loan Note Acquisition.

25.  The liquidators also believe that the existing directors, who are admittedly Mr Wang’s “business friends” well known to him, are acting in cohort with him with a view to diluting the shareholding of Wongs in China Kingstone.

26.  It is not necessary for me on this application to say whether these beliefs and opinions of the liquidators are correct and valid.  It is sufficient to note that it has not been suggested by Mr Sussex that they are not honestly held or that they lie so far outside the range of tenable opinion that no reasonable liquidator could have formed them. 

27.  Accordingly, on the basis of the evidence, I am not satisfied that pending the determination of paragraph 2 of Red Victory’s summons, I should intervene in the way in which Wongs’ voting power is to be exercised at a general meeting of China Kingstone.  Paragraph 3 of Red Victory’s summons must therefore be dismissed.