XU LIAN GUO AND ANOTHER v. KWOK MING FAI AND OTHERS

HCA 1710 / 2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1710 OF 2011

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J U D G M E N T

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Introduction

1. The present action was commenced by the plaintiffs (“Ps”) 3 years ago and concerned the validity of a resolution passed by the directors of the 4^th defendant (“D4”) suspending Ps’ duties as executive directors and directors of D4 and its group of companies.  The defendants (collectively “Ds”) counterclaimed against Ps for, among other things, damages for breach of fiduciary duties and for breach of contract, and, in particular, an account of the whereabouts of a sum of RMB 150m (“Fund”).

2. In February 2013, D4 issued a summons for various orders, including final judgment on parts of its counterclaim under Order 14 of RHC (“1^st O14 Summons”).  On 2 May 2013, at which hearing Ps were absent, Poon J ordered, among other things, that Ps were to account to D4  the Fund and gave judgment for the relevant parts of D4’s counterclaim,  and he had also ordered Ps to pay D4 indemnity costs (collectively “Poon’s Order & Judgment”)[1].

3. There are now 3 summonses before this court, chronologically as follows:

(i) A summons  issued by D4 on 23 December 2013 for leave to issues a writ of sequestration by reason of Ps’ non-compliance of Poon’s Order & Judgment (“Sequestration Summons”);

(ii) A summons issued by D4 on 17 February 2014 against both Ps for final judgment that Ps do jointly and severally pay D4 RMB150m and interest for D4’s counterclaim for damages for breach of Service Contract  and for costs (“2^nd O14 Summons”);

(iii) A summons issued by the 2^nd plaintiff (“P2”) on 11 June 2014 for setting aside of Poon’s Order & Judgment (“Setting Aside Summons”).

4. P1 was not legally represented and was absent at the hearing before this court.  Counsel Ms Joyce Chan appeared for P2 and Counsel Mr Henry Lo appeared for D4.  At the commencement of the hearing, Ms Chan and Mr Lo agreed that the Sequestration Summons should be dealt with in open court, and that it should be adjourned to another hearing date to be fixed after the determination of P2’s Setting Aside Summons.  I thus made an order to this effect.

5. This left only the other two summonses to be dealt with.

Brief Background

6. D4 is a company incorporated under the laws of Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong in 2001. The businesses of D4 and its subsidiaries (“Group”) included manufacturing and sale of automobile equipment, buses, trading of automobile spare parts, and also production and sale of surface treatments systems and development of new energy products.  

7. The 1^st plaintiff (“P1”) is the founder of D4 and is the elder brother of P2.  Since listing, they were respectively the chairman and vice chairman  and P2 was the chief executive officer of the Group until about 7 October 2011.  Ps were also executive directors, each having entered into a service contract dated 24 June 2004 (“Service Contract”) although their executive duties were suspended on 1 September 2011.

8. As for the other defendants, at the material times,

(i) The 1^st defendant (“D1”) was an executive director of D4;

(ii) The 2^nd defendant (“D2”) was an independent non-executive director of D4;

(iii) The 3^rd defendant (“D3”) was the D4’s company secretary and financial controller.

9. The Head Office of the Group in Mainland China (“PRC”) used to be at No 100, Kai Fang Da Dao, Yancheng, Jiangsu Province (“Kaifang Address”).

10. In the extracts from D4’s Annual Report for the year ending 30 December 2010 and issued by P1 as chairman of the Group on 31 March 2011 (“2010 AR”), there were 5 “main subsidiaries” set out, among which a Hong Kong subsidiary called 中大國際貿易公司(“HK International Trading”) and a PRC subsidiary called 中大汽車機械製造有限公司 (“Zhongda Automobile Machinery”)[2] . 

11. Zhongda Automobile Machinery appeared to be a major subsidiary, compared to the other 4, as the registered capital of this subsidiary was some RMB 45.8m, which was much higher than the other 4.  D4 was stated to hold 86.7% of its shares and as stated in the 2010 AR, the remaining 13.3% was held by P1and P2 through Zhongda Industrial[3], a company set out below. 

12. Although it did not appear in the extracts of the 2010 AR, there was no dispute that D4’s subsidiaries also included a PRC company called鹽城中大汽車設備有限公司 / Yancheng Zhongda Automobiles Equipment Company Limited (“Zhongda Automobiles Equipment”) of which D4 held 72% directly and another 28% was held by D4 through a wholly owned subsidiary. 

13. From the 2010 AR, it could be seen that D4’s關連公司 / “related companies” (“Related Companies”) included the following 2 PRC companies[4] :

(i)  中大工業集團公司(“Zhongda Industrial”), of which P1 and P2 were stated to be directors and held beneficial interest[5], and Zhongda Industrial was also stated to be “jointly controlled” by Ps[6];

(ii)   鹽城中大國際貿易有限公司 (“Yancheng International Trading”), of which P1 and P2 were also stated to be directors and held beneficial interest.

14. There was another PRC company stated in the 2010 AR to be a相聯法團 / “associated corporation” (“Associated Corporation”) 鹽城中威客車有限公司 (“Zhongwei”). D4 was stated to have purchased 20% shareholding in Zhongwei from Zhongda Industrial in April 2009, with the remaining 80% continued to be held by Zhongda Industrial[7].

15. Another PRC company which was involved in the parties’ dispute over the Fund was鹽城中大鋼結構工程有限公司 / Yancheng Zhongda Steel Structure Engineering Company Limited (“Zhongda Steel”).  From the company search record dated 5 August 2014[8], Zhongda Steel’s capital was contributed by two companies of which about 73% was from Zhongda Industrial, having paid RMB 11m out of total capital of RMB 15m, and the remaining 27% was from another of D4’s Related Companies of which according to the 2010 AR, Ps were also the directors and held beneficial interest[9] .

16. It was not disputed that according to audit confirmations executed by the Shenzhen branch of First Sino Bank (“Bank”) on about 17 January 2011 and 6 August 2011, the Fund, namely a sum of RMB 150m was held in the name of Zhongda Automobiles Equipment at the Bank as at 30 June 2011.

17. According to D4, during a meeting of the directors of D4 (“Board”) held on 14 June 2011, it was resolved, among other things, that in relation to the Fund said to be deposited by D4 at the Bank:

(i)  To settle out of the Fund  foreign debts owed to D4 or its subsidiaries of HK$ 47.95m (approximately RMB 40m)  ;

(ii)   To repay HK$ 51.85m (approximately RMB 43m) out of the Fund  to  HK International Trading being commissions for years 2007–2010 due by Zhongwei through Yancheng International Trading;

(iii)  To repay bank loans owed by Zhongda Automobile Machinery and / or Zhongda Automobiles Equipment (which was referred to as the “purchase centre” in the Fund Resolution) of approximately RMB 67m.

(“Fund Resolution”)[10]

18. For (i) above, D4 had produced documentary evidence to show that as at 30 June 2011, Zhongda Automobiles Equipment and Zhongda Automobile Machinery owed D4 a total of about RMB 40m.  For (ii) above, D4 had produced documentary evidence to show that as 30 June 2011, the commissions owed were in the total amount of about RMB 43m.  P2’s case in relation to the Fund Resolution was that as he was not in charge of the finances, he had no knowledge of the debts alleged by D4, but he also denied that “purchase centre” referred to Zongda Automobiles Equipment.

19. The Fund Resolution was signed by 6 directors of D4 including P1, D1, D2 and another director Zhang Yuqing (“Zhang”).  P2 did not sign the Fund Resolution.

20. It was D4’s case that Ps had failed to apply and use the Fund in accordance what was set out in the Fund Resolution.  Further by an audit confirmation dated 15 August 2011 and obtained from the Bank, and according to a management account produced by Ps on 23 August 2011, by then the Fund was no longer in the Zhongda Automobiles Equipment account at the Bank and its whereabouts were unknown to Ds.

21. Separately, it was also D4’s case that in about January / February 2011, Ds became aware that Zhongda Industrial conducted business activities in competition with D4 and its subsidiaries, in particular, Zhongda Industrial owned and operated an industrial park called中國國際汽車後市場産業園 (鹽城) / China International Automobile After-market Industrial Park (Yancheng) (“Industrial Park”), which manufactured and marketed products similar to and in direct competition with certain of D4’s products.

22. On about 22 July 2011, D4 received a letter from a firm of solicitors acting for a minority shareholder who complained about the business competition between Zhongda Industrial and D4 and sought clarification from the Board.  A Board meeting was then held on 28 July 2011 which resolved that a special investigation committee (“SIC”) was to be set up to investigate into the business competition between Zhongda Industrial and D4 (“SIC Resolution”)[11].

23. It was not disputed was that on 1 September 2011, there was a meeting of the Board held through telephone conference at 5 pm (“Meeting”). 

24. It was Ps’ case that eventually there were two separate meetings on the day, whereas on the other hand, it was Ds’ case that there were two sessions of the Meeting, the first at 5 pm (“1^st Session”), and the second at about 7:50pm the same day (“2^nd Session”) .

25. P2 was nominated the chairman of the 1^st Session, which was attended by P1 and P2, D1, D2 and D3, and Mr Leung Kwok Chun (“Leung”), a non-executive director and Mr Gu Yao Tian (“Gu”), who was at that time an independent non-executive director but later resigned and ceased to be a director on 30 September 2011.

26. D1, D2, D3 were present at D4’s office when they participated in the Meeting.  Ps, Leung and Gu were at places other than D4’s office.

27. The agenda of the  1^st Session[12] included :

(a)  To request Ps to explain  the use or whereabouts of the Fund deposited in the account of Zhongda Automobiles Equipment maintained with the Bank (“Fund Agenda”) ;

(b)   To request Ps to explain whether they had any interest, direct or indirect, in the Industrial Park (“Conflict of Interest Agenda”);

(c)  Should the need arise, to consider the temporary suspension of P1 and P2’s duties as executive duties in D4 and its subsidiaries, until the clarification of the above matters;

(d)   Any other business

28. It would appear that the Meeting was recorded, and transcripts had been produced by D3 in his 3^rd affirmation[13].  There were discussions on the Fund Agenda and the Conflict of Interest Agenda during the 1^st Session.  There were arguments over Ps’ explanation of the whereabouts of the Fund, which P2 had simply said was used for營運 / business trading purposes and it would appear that during the argument P1 had accused that the Fund was “manufactured” and P2 claimed he had not seen the Fund Resolution, but then later P2 had also said as he was the CEO, he had the independent authority to deal with production business matters, and did not need D1 to tell him what to do.  Subsequently, D1 proposed a motion for Ps’ executive duties in D4 and its subsidiaries be suspended (“Motion”).  The Motion was seconded by D2.

29. After this, at 6 pm, P2 made a declaration that the Meeting was dissolved (“Declaration”).

30. According to D4, P2’s Declaration was made before the Motion had been voted on, and that the Declaration was made for the sole purpose of preventing the Board from further discussing and voting on the Motion, and the Declaration was made unilaterally by P2 without the approval of a Board resolution and upon the express objection of D1 and D2.  It was D4’s case that the Declaration was null and void and of no legal effect.

31. After Ps made the Declaration, they immediately left the Meeting.  It was Ps’ case that the Meeting was brought to an end by the Declaration.  However, according to D4, as the Declaration was invalid, the departure of Ps only brought to the end of the 1^st Session, and the rest of the members of the Board who had remained at the Meeting resolved that the Meeting be suspended until 7 pm the same evening.

32. It was Ds’ case that a written notice had been sent by D3 to  Ps by fax and email to the effect that the Meeting would resume at 7 pm on the same day, and that further, later, D3 also managed to contact both P1 and P2 by telephone to inform them of the resumption of the Meeting that evening.

33. Eventually, according to Ds, the 2^nd Session of the Meeting resumed at 7:50 pm on 1 September 2011.  Ps were absent.  D1, D2, D3, and Leung attended and according to Ds, a quorum was validly constituted.  D1 was chairman of the 2^nd session of the Meeting.  The Motion was duly voted upon and the resolution unanimously passed during the 2^nd session. 

34. The resolution passed included that the scope of the investigation of SIC be extended to the “Use of Fund”, and with immediate effect, the duties of P1 and P2 as executive directors and directors in the relevant members of the Group be suspended, until the “Use of Fund” issue was satisfactorily resolved and reported to the Board (“Suspension Resolution”).

35. The following day, 2 September 2011, Ps did try and call another Board Meeting to declare the Suspension Resolution invalid, but for reasons I do not need to go into for present purposes, it was not successful.

36. The Suspension Resolution was subsequently announced publicly by D4 in late afternoon on 2 September 2011[14].

37. The passing of the Suspension Resolution led to Ps issuing the present proceedings on 10 October 2011, and its statement of claim was filed in December 2011 (“SOC”), seeking among other things, that  the Suspension Resolution be declared invalid and / or void.

38. D4 filed its defence and counterclaim in February 2012, which was later amended in March 2013 (“AD&C”).  Ps denied D4’s allegations and filed their reply and defence to the AD&C (“R&D”). D4 later also obtained leave to file a rejoinder and reply to defence to counterclaim (“Rejoinder”).

39. As mentioned earlier, D4 issued its 1^st O14 Summons in February 2013, and this was supported by the 1^st affirmation of D1.  This eventually led to Poon’s Order & Judgment which provided  that  P1 and P2 jointly and severally, among other things, as follows:

(1)   to account to D4 the Fund deposited in the bank account of Zhongda Automobiles Equipment maintained with the  Bank, with verifying affirmations;

(2)   to provide to D4 and its auditors all documents, data, information and assistance relating to D4’s subsidiaries and associates in the PRC as D4 and its auditors reasonably require for the purpose of auditing and publishing the consolidated financial statements of  D4 and its subsidiaries as at 31^st December 2011 and at 31^st December 2012 and also for the purpose of preparing and publishing D4’s interim results for 2012;

(3)   to produce to D4 all the official seals of D4’s subsidiaries in the PRC  (“Official Seals”).

40. There were altogether 12 of D4’s subsidiaries and associates in PRC named in (2) above in Poon’s Order & Judgment, 8 were subsidiary companies named in (3) above (“PRC Subsidiaries”) among which were Zhongda Automobiles Equipment and Zhongda Automobile Machinery, and the other 4 were described as associate companies (“PRC Associates”).

41. According to D4, sealed copies of the Poon’s Order & Judgment were personally served respectively, on P2 in a restaurant in the Sheraton Great Wall Hotel in Beijing on 13 June 2013[15] and, on P1 at 6 floor of the Kaifang Address on 17 July 2013[16]. 

42. Notwithstanding the above personal service, according to D4, Ps had not complied with Poon’s Order & Judgment.  D4 then issued the Sequestration Summons in December 2013. 

43. In fact, after the Ps’ then solicitors ceasing to act and after Ds filing the Rejoinder, Ps did not seem to have taken any further steps to proceed with their claim in the SOC.

44. Eventually on 29 December 2013, P2 decided to resign as a director of D4.  This was followed by D4 issuing the 2^nd O14 Summons in February 2014.

45. It was, however, not until June 2014, about a year after Poon’s Order & Judgment, that P2 issued the Setting Aside Summons.

46. Apart from various affirmations of service, D1 filed two affirmations and D3 also two (his 1^st and his 3^rd) in relation to the two summonses.  P2 had also filed two affirmations.

P2’s Setting Aside Summons

47. P2’s grounds for his application were initially twofold:

(i)  Irregularity

(ii)   P2 had a good defence to D4’s Counterclaim

Irregularity

48. It was initially P2’s contention that there was no effective service of D4’s 1^st O14 Summons and related documents on P2.  This contention was eventually dropped at the commencement of the hearing before this court.

49. This was wise, as in my view this contention would not have got off the ground, since at the time of the issue of the 1^st O14 Summons and the time of the notice of hearing thereof on 11 March 2013, P2 was still legally represented by his then solicitors.  Although an order was granted on 6 March 2013 for his then solicitors to cease to act, it was, however, not until 8 April 2013 that his then solicitors filed the certificate to officially come off record.

50. Further from a letter dated 10 May 2013 sent by P2 directly to the court 8 days after Poon’s Order & Judgment (“10.05.13 Letter”), even prior to the personal service effected on him described earlier, he was already fully aware of Poon’s Order & Judgment and he was explaining why he was not able to comply with the terms thereof.  There was no complaint by P2 in the 10.05.13 Letter that he was not properly served or that he had no notice of the 1^st O 14 Summons or the hearing on 2 May 2013. 

51. Having considered the relevant affirmation/s of service, I am of the view that there had been effective service of D4’s 1^st O14 Summons on P2 and that P2 was fully aware of the hearing on 2 May 2013.  There was no irregularity in obtaining Poon’s Order & Judgment. 

52. I now turn to consider the other ground in the Setting Aside Summons.

The Legal Principles

53. The relevant law on setting aside a regular judgment has been set out in  paragraphs 13/9/12, 13/9/13, 13/9/14 in  Hong Kong Civil Procedure 2014, and summarized by D4’s Counsel, Mr Henry Lo, as follows:

“(1) The power to set aside a default judgment which has been entered regularly is discretionary and such power is unconditional;

(2) The major consideration is whether the defendant has shown a defence on the merits to which the court should pay heed;

(3) This is not to say that a defendant who is able to demonstrate a defence which has a real prospect of success has an automatic entitlement to have the default judgment set aside. In exercising the discretion under this rule, the court has regard to all relevant circumstances. What will be relevant as a factor in any particular case will depend on the individual facts of that case. The usual factors are: why the default occurred; the defendant’s conduct after he had had notice of the proceedings; an explanation for the time taken where there has been delay in making the application; and any prejudice that would be caused to the plaintiff or to third parties if the default judgment were to be set aside. These other relevant factors will then have to be weighed against the dominant factor of the merits in order to see where the justice of the case lies;

(4) On meritorious defence, it is not sufficient to show a merely “arguable” defence that would justify leave to defend under O.14. The defendant must show that he has “a real prospect of success”. To do so, he must satisfy the court that his case and the evidence that he adduces in support of it is potentially credible and carries some degree of conviction. Thus, the court must form a provisional view of the probable outcome of the action.”

54. The burden was on P2 to show that he had a real prospect of success on D4’s counterclaim.

Merits of P2’s defence to counterclaim

55. I would summarise P2’s main lines of defence as follows:

(i)  D4 had failed to plead with sufficient particularity to enable P2 to fully understand the premise of their claim of breach of fiduciary duties (“1^st Defence”);

(ii)   There was no legal basis for the assertion of beneficial interest by D4 over the Fund (“2^nd Defence”);

(iii)  The basis for the assertion that Ps possessed “exclusive responsibility and power” in relation to “the day to day management, operation and control” of Zhongda Automobiles Equipment was not apparent, given the lack of particularity of the plea (“3^rd Defence”);

(iv)  The purported evidence did not provide support to D4’s assertion that Ps as directors of D4 had exclusive control over Zhongda Automobiles Equipment (“4^th Defence”);

(v)   The Fund Resolution did not specifically authorize or in any way empower Ps to carry out the purported plans to apply the Fund (“5^th Defence”).

1^st Defence

56. Ms Chan had submitted that there were no particulars to the pleadings in D4’s AD&C in relation to the alleged conduct that constituted the breach of the fiduciary duties or contractual duties.  In particular, there was no sufficient particularity or clarity as to:

(a)  the legal basis for the assertion of beneficial interest over the Fund;

(b)   the basis for the assertion that P2 had acted in breach of fiduciary duties owed to D4 in connection with the Fund, and to demonstrate a causal link between the breach and any loss D4 had suffered.

57. In the SOC, Ps themselves had pleaded that there was the Fund Agenda to be resolved at the Meeting and further the following took place during the  Meeting:

(i)  P1 had explained the use of the Fund deposited by in Zhongda Automobiles Equipment’s account with the Bank;

(ii)   P2 indicated that the details on the use of the Fund had been provided to the auditors of  the Group[17];

(iii)  There were heated arguments over P1’s explanation over the use of the Fund and the general affairs of D4;

(iv)  There was unanimous agreement reached among the directors of D4 that SIC should conduct an investigation on the use of the Fund.

58. It was thus not Ps’ case in the SOC that they had no duty to explain the use and whereabouts of the Fund, or that the Board was not entitled to ask Ps for an explanation in relation to the use and whereabouts of the Fund, and they knew that the purpose of the Meeting was for them to explain.

59. D4 had set out in its AD&C the respective circumstances as to how the Fund Agenda and the Conflict of Interest Agenda arose.  

60. In particular in paragraph 15 thereof, D4 had set out the Fund Resolution and Ps’ failure to apply and use the Fund in accordance with the Fund Resolution and that the Meeting was convened to require Ps to explain the whereabouts of the Fund.

61. It was pleaded by D4 in paragraph 17 of the AD&C that Ps  had admitted in the Meeting that they had used the Fund, that they had purported to given explanation as to how the Fund was used.  It was further pleaded in paragraph 18 that it was mainly P2 who addressed the Board in relation to the Fund, that Ps’ explanation was vague and not supported by any documentary proof, that they had contravened the Fund Resolution, and that at the date of the AD&C, they still had not given any information to D4’s auditors in relation to the use, whereabouts and movement of the Fund.

62. The above paragraphs in the AD&C were in defence to Ps’ SOC.  For the counterclaim, D4 had also relied on the following :

(i)  in October 2011, Messrs Deloitte, the auditors of the SIC, had contacted the chief accountant of D4 and its PRC Subsidiaries for information and documents to investigate into the whereabouts of the Fund, but the chief accountant had refused to disclose such information and documents saying that he had not received instructions from Ps to release the same;

(ii)   Ps were at all material times in effective control of the business and operation of the  PRC Subsidiaries[18];

(iii)  The directors of D4 were under rule 13.04 of the Listing Rules of the Stock Exchange of Hong Kong, collectively and individually, to ensure D4’s compliance with the Listing Rules;

(iv)  D4’s solicitors had written to Ps to demand them to procure the PRC Subsidiaries to produce to D4 their consolidated accounts and financial information for the period between August 2011 and December 2011, but Ps refused;

(v)   Further, Ps and Zhongda Industrial had operated at material times in business in competition with D4 and its subsidiaries through another PRC company of which P2 was said to be the president, and also the Industrial Park.

63. In their R&D, Ps had averred that in relation to the Fund issue, D4 did not provide sufficient particulars to enable them to identify the nature of D4’s claim against Ps, or the occasion when the alleged wrongful acts were relied upon.

64. Ps’ pleaded case in their R&D was contradictory. As mentioned earlier, they knew the purpose of the Meeting.  On one hand their pleaded case was that they were not given a full opportunity to explain the whereabouts of the Fund at the Meeting[19] and that after the Meeting they had been co-operative in that they had used their best endeavours to assist D4’s auditors including inviting D4’s representatives to the Head Office at the Kaifang Address in early December 2011 for inspection of documents regarding the PRC Subsidiaries and the use of the Fund;  on the other hand, they denied that they had been in exclusive control of the PRC Subsidiaries, saying that as their duties as directors had been removed, they were unable to gain access to the documents in the PRC Subsidiaries, and that the Official Seals were in the custody of the management of the PRC Subsidiaries. 

65. As stated in paragraph 18/12/1 of the Hong Kong Civil Procedure 2014, Volume 1[20], the purpose of pleadings is not to play a game at the expense of the litigants but to enable the opposing party to know the case against him.

66. In my view, D4’s pleadings contained sufficient particulars in relation to Ps’ failure to abide by the Fund Resolution for which, as pleaded, they had both fiduciary and contractual duties (relevant provisions in the Service Contract had been set out) to do so and what D4 was claiming was an account of the use and whereabouts of the Fund.  It was clear from the R & D that Ps were aware of D4’s case against them.  I see no sufficient cause for Ps’ criticisms.  In any event, P2 never made any request for or issued any application to seek further and better particulars from D4 before filing his R&D. 

67. The court also has power under O18 r12(3A) of the RHC to order a party to serve on any other party particulars of any claim, defence or other matter stated in his pleading on its own motion.  There was no such order made by the court prior to Poon’s Order & Judgment.

68. Having considered the above, I am of the view that the 1^st Defence had no real prospect of success.

2^nd Defence

69. Ms Chan submitted that there was no legal basis for the assertion of beneficial interest by D4 over the Fund, and that as Zhongda Automobiles Equipment and D4 were two separate legal entities, D4 had failed to show that the Fund was D4’s property to which D4 was beneficially entitled to and for which Ps acted as trustees.

70. Mr Lo submitted D4’s claim was based mainly on Ps’ breach of contractual duties under the Service Contract, as well as fiduciary duties, and that the basis for Poon’s Order & Judgment was not the beneficial interest of D4 in the Fund.  Although copies of the Service Contracts were not produced in D1’s 1^st affirmation for the hearing before Poon J, as mentioned earlier, the relevant provisions had been  set out in the pleadings.

71. P2 had not disputed his duties owed under the Service Contract.  D4 in particular relied on Clause 3.3 of the Service Contract[21] in the AD&C, under which P2 had the following duties:

(i) Under Clause 3.3(1), P2 had to carry out duties given or assigned to him by the Board, and he had to comply with all reasonable instructions issued from time to time by the Board and all employee regulations and rules issued by D4;

(ii) Under Clause 3.3(5), P2 had to be accountable and responsible to D4 for the use or excessive use of its assets;

(iii) Under Clause 3.3(7), P2 had to provide a comprehensive  report to the Board as to how he had dealt with the businesses of D4 and its subsidiaries (if necessary, such report had to be in writing), and to provide explanations at the request of the Board;

(iv) Under Clause 3.3(8), P2 had to avoid conflict of interest in his duties;

(v) Under Clause 3.3(9), P2 had to disclose in full and in a fair manner his interest in any contracts entered into by D4.

72. Clause 10.1 of the Service Contract had also set out P2’s continuing obligations for 6 months after termination of the contract for whatever reason, and under Clause 10.2, P2 had undertaken to D4 (stated to be representing itself and as trustee of each subsidiary) and each of the companies in the Group to comply with his obligations towards the Group as set out in Clause 10.1[22].

73. D4’s case was thus Ps owed duties under the Service Contract towards the Group  and that they had failed to comply with such duties, namely by Ps’ failure to comply with the Fund Resolution and failure to disclose or account for  the whereabouts of the Fund .

74. Ps had denied in their R & D paragraph 15 of the AD&C in which the Fund Resolution was set out by Ds.  However, it was only a bard denial, and it was not clear which part of paragraph 15 Ps were denying, since P1 had signed on the Fund Resolution. In fact, all P2 said during the Meeting was that he had not seen the Fund Resolution.   In fact, Ps’s 5^th Defence that the Fund Resolution did not empower or authorise them to direct Zhongda Automobiles Equipment to apply the Fund in accordance with the Fund Resolution seemed to indicate that they were not denying that there was the Fund Resolution.

75. In any event, I accept Mr Lo’s submission that the basis for D4’s counterclaim, and for the purpose of obtaining Poon’s Order & Judgment,  was not D4’s beneficial interest in the Fund or that whether Ps were trustees of the Fund.  In my view, the 2^nd Defence had no real prospect of success.

3^rd Defence and 4^th Defence

76. I will consider these two lines of defences together.

77. As mentioned earlier, D4’s pleaded case in their AD&C was that at all material times, Ps were effectively in control of the business and operation of the PRC Subsidiaries[23].  In D1’s 1^st affirmation, he had also referred to Ps having exclusive control over the day to day management and operation of the PRC Subsidiaries including in particular Zhongda Automobiles Equipment[24].  Further according to Ds, Ps used to arrange for the PRC Subsidiaries to provide D4 from time to time the financial information of the PRC Subsidiaries including monthly management statements so as to enable D4 to prepare its interim and annual financial reports, but since September 2011, they had failed to do so, and also failed to provide D4 with the Official Seals.

78. Ps denied that they had control of the PRC Subsidiaries and their case was that all decisions of the PRC Subsidiaries were made by its board of directors and Ps did not have absolute power over its management[25].

79. Ms Chan had pointed out that in a company search record exhibited by D4 that as at October 2010, P1 and P2 were not directors of Zhongda Automobiles Equipment[26], and it was her submission that there was no evidence to suggest that the affairs of D4’s subsidiaries, including Zhongda Automobiles Equipment, were under the exclusive control of Ps.

80. Ps’ case was thus mainly first of all they did not have exclusive control of the PRC Subsidiaries, and secondly, after the Suspension Resolution, their duties as directors had been suspended under the Suspension Resolution, and they were not able to gain access to the documents in the PRC Subsidiaries, nor access to the Official Seals.

81. Mr Lo had submitted that there was no suspension of Ps’ directorships in D4 at the 2^nd Session of the Meeting.  The resolution passed was only suspension of Ps executive directorships and executive duties, and they had remained directors on the Board after the Meeting and P2 only resigned on 29 December 2013.  It was D4’s case that Ps had continued to have effective/exclusive control of the PRC Subsidiaries after the Suspension Resolution on 1 September 2011.

82. As mentioned earlier, Ps’ case was contradictory. Notwithstanding Ps claimed that they had no access to documents or the Official Seals by reason of the Suspension Resolution, they were clearly able to and in fact offered to arrange for inspection of documents at the Kaifang Address and had offered to facilitate the auditors in December 2011. Also, as seen from the affirmation of service, Poon’s Order & Judgment were personally served on P1 on the 6^th floor at the Kaifang Address and this was in July 2013.

83. Further in D1’s 1^st affirmation, he had also produced copies of two civil claims issued by the Agricultural Bank of China in Yancheng City in PRC against Zhongda Automobile Machinery, Zhongwei, Zhongda Industrial and P1 personally and / or others[27].  In one of the claims Zhongda Automobile Machinery was the borrower for 11 loans totalling about RMB 89.15 m from 31 October 2011 until 5 June 2012, which were secured against landed property of Zhongda Automobile Machinery, and guarantees by the others including P1.  In the other claim, Zhongwei was the borrower of loans totalling RMB 45.5m from 25 October 2011 until 19 June 2012, secured against guarantees from Zhongda Automobile Machinery and P1.  It could thus be seen from these claims that P1 had been able to continue to raise substantial loans on behalf of Zhongda Automobile Machinery or procure Zhongda Automobile Machinery to be a guarantor, during the period from October 2011 until June 2012, which was after the Suspension Resolution. Further, P1’s address on the claims was stated to be at the Kaifang Address.

84. D1 had referred to the roles of P1 and P2 in the Group described in the Prospectus for public listing in 2001, and similarly described in D4’s 2010 AR.  

85. P2 also referred to the 2010 AR where it was stated that D1 was responsible for the Group’s executive affairs and management of the Group finance, and investments and that the other  vice chairman of the Group, Zhang, was responsible for the Group management, planning development , management of finances.

86. Anyway, P2’s case was simply he was not the legal representative or management personnel of the PRC Subsidiaries and the PRC Associates, save for one,  and that he had never been responsible for the financial matters of each of the companies in the Group[28].

87. Further, according to P2, it was only in April 2014, that under the then advice of his solicitors, he then arranged searches on several occasions at the former Head Office of the Group at the Kaifang Address for documents mentioned in Poon’s Order & Judgment[29].  He then produced in his 1^st affirmation a bundle of 18 documents which he allegedly found at the Kaifang Address (“18 Documents”) and which he then exhibited as “XLK-1” to “XLK-18” in his 1^st affirmation.

88. What he said above seemed again to be contradictory what he had said earlier in his own affirmation.  He had claimed that he had not gone back to his office at the Kaifang Address since September 2011[30], and yet he seemed to be able to have access to the Head Office at the Kaifang Address in April 2014.  Further, according to P2, since the latter half of 2011 the majority, if not all of the Group’s businesses in PRC had ceased and all documents were lost, and the staff had all went their own ways[31], and yet P1 seemed to have continued to be there well into 2013, and also P2 seemed to be able to have access and found the 18 Documents there in April 2014.

89. From the 18 Documents, what one could see was the following:

(i)  On 12 October 2010, Zhongwei was granted what appeared to be revolving credit facilities by the Bank of a maximum RMB 100m for a term of one year from 26 September 2010 to 30 September 2011 against a 盾押 / back to back deposit of 100% of the same amount by Zhongda Automobiles Equipment[32];

(ii)   On 25 October 2010, 4 PRC companies, namely Zhongda Automobiles Equipment, Zhongda Industrial, Zhongwei, and  Zhongda Steel  opened  accounts with the Bank[33];

(iii)  Thereafter, the companies which withdrew amounts were Zhongda Industrial, of two amounts of RMB 50m each on 27 and 29 October 2010 for a period of 6 months, and Zhongwei of RMB 50m on 28 October 2010 for a period of 6 months;

(iv)  On 26, 27, and 29 October 2010, Zhongda Automobiles Equipment had placed 3 deposits of RMB 50m each in structural investment products of the Bank for a period of 12 months;

(v)   On 29 July 2011, all the 3 deposits amounting to the amount of the Fund placed with the Bank under the account of Zhongda Automobiles Equipment were transferred to the account of Zhongda Steel with the Bank.

90. Out of the 4 companies connected with the transactions in the 18 Documents, only Zhongda Automobiles Equipment was a PRC Subsidiary, and for the other 3:

(i)   Zhongwei, the borrower granted the revolving credit facilities by the Bank,was an Associated Corporation of D4, and the evidence showed that after purchase of 20% by D4, Zhongwei continued to be held 80% by Zhongda Industrial.  P2 was one of the 7 directors and the chairman since June 2000 until April 2009.  Then P2 became vice chairman and according to the company search record, since July 2011, Ps were the majority of the board being 2 out of  3 directors, and P2 was registered to be the總經理 / managing director[34];

(ii)   As forZhongda Industrial, as earlier mentioned,  this was a Related Company in which Ps were stated in the 2010 AR to be directors and had beneficial interest and the company was stated to be jointly controlled by them and P1 was the chairman and legal representative ;

(iii)  Zhongda Steel was incorporated on 18 August 1998, and both Ps were on the board until the date of search.  As mentioned earlier, Zhongda Steel’s shareholding was held 73% by Zhongda Industrial of which Ps held beneficial interest and joint control and the remaining 27% by another Related Company of which Ps also were directors and held beneficial interest.  P2 was the chairman of the board and總經理 / managing director from date of incorporation in August 1998 until March 2000, then from May 2002 until January 2004 and from April 2006 until April 2008, thus seemed to be rotating every 2 years.  Anyway, as from June 2009 onwards, P1 and P2 were the majority of the board, being 2 out of 3 directors.

91. In my view, from the above, there was strong evidence that Ps were in effective, if not exclusive, control of the above 3 companies.

92. It can further be seen from the extracts of 2010 AR and the copies of search records that since incorporation of Zhongda Automobiles Equipment in July 2007, there had been 3 directors of which Ps were the majority, being 2 out of 3 directors and Zhang being the other, and P1 and P2 were respectively the chairman and the vice chairman until October 2010.

93. In the Rejoinder, D4 had further pleaded matters to support its allegation that Ps had the exclusive control over the day to day management and operation of the PRC Subsidiaries, including Zhongda Automobiles Equipment.  These matters included the following:

(1)   On about 8 October 2010, without the prior knowledge or consent of the Board, P1 approved on behalf of D4 resolutions at a meeting of the shareholders of Zhongda Automobiles Equipment  for the then directors of Zhongda Automobiles Equipment to be replaced by new members including P1’s son Xu Fei who was appointed the chairman of the board.  Xu Fei turned out to be P1’s son and P2’s nephew.

(2)   P1 had sent a message dated 28 July 2011 to all relevant staff of the PRC Subsidiaries to the effect that if any person approached any of D4’s PRC Subsidiaries for financial information, Ps’ prior approval must be sought;

(3)   P2, by a message dated 30 July 2011, directed the Chief Accountant of Zhongda Automobiles Equipment Mr Liu to inform P2 and to seek P2’s clearance before D4’s auditors could be allowed into the premises of Zhongda Automobiles Equipment.

94. D3 had further set out other evidence for  D4’s case that that Ps were in effective / exclusive control of  all  the PRC Subsidiaries and a leader in charge of the  PRC Subsidiaries / PRC Associates whether before or after the Suspension resolution[35].

95. Zhongda Automobile Machinery was one of the PRC Subsidiaries named in Poon’s Order & Judgment, and one of D4’s 5 main subsidiaries of which D4 held 86.7% and the remaining 13.3% was held in effect by P1and P2 through Zhongda Industrial.  P1 and P2 were directors since incorporation of this company in December 1993.  Thereafter Ps seemed to have taken turns to become chairman of the board and總經理 / managing director.  As from September 2005 onwards, Ps were  2 out of 3 directors, the other one being Zhang, and P1 was the chairman and the 總經理 / managing director  and it appeared  that  there had been no change since.

96. Having considered the evidence produced by D1 and D3 on behalf of D4, I am of the view that there was ample evidence to show that Ps were in effective, if not exclusive, control of Zhongda Automotiles Equipment and Zhongda Automobile Machinery, and all other PRC Subsidiaries and PRC Associates.

97. The 18 Documents did not appear to be duplicate copies sent by the Bank recently, which meant that they should be copies of the originals received by the relevant companies between October 2010 to about end of July 2011.  All this would be at least one month before the Meeting / Suspension Resolution.  What P2 had said about that it was only when he read the 18 Documents at the Kaifang Address in April 2014 that he found out the above transactions[36], and that he had claimed that he would seek further documents from the Bank. 

98. As seen from some of the 18 Documents, the address of Zhongda Industrial and Zhongwei was not at Kaifang Address and at another address.  Further, P2’s above evidence had to be viewed against the evidence that he and P1 were through Zhongda Industrial and another of the Related Companies beneficial shareholders of Zhongda Steel and also held the majority directorships of the transferee company Zhongda Steel. 

99. It would seem extremely unlikely that the beneficial shareholders and also the majority board of directors of Zhondga Steel did not know that the Fund, which was not of a small amount, had been transferred to Zhongda Steel on 29 July 2011 and that the Fund was after receipt placed in 3 structural investment products of the Bank for fixed terms.  It would in any event clearly be within the power of the majority of the board to obtain supporting documents relating to the whereabouts of the Fund after receipt by Zhongda Steel 

100. As pointed out by D3 in his 3^rd affirmation, Ps could have and should have accounted to D4 for the whereabouts of the Fund after receipt by Zhongda Steel since August 2011 and had failed to do so.

101. As for the Official Seals, from the evidence produced by D3, it would appear that they were kept by the secretary of the CEO of the Group who was P2.

102. Having considered the above, I have come to the view that P2’s 3^rd and 4^th Defences had no real prospect of success.

5^th Defence

103. P2 had said that he did not attend the meeting when the Fund Resolution was passed.  Further, he had no power, nor capacity to direct Zhongda Automobiles Equipment how to apply and use the Fund. 

104. Although P2 did not sign the Fund Resolution, it was signed by P1. 

105. Whether P2 was present or not, he was bound by the Fund Resolution which was passed and signed by the members of the Board present. So far, there had been no sufficient evidence from P2 to show that he was not aware of or had not read the Fund Resolution.

106. Clause 3.3 of the Service Contract provided, among other things, that P2 was to obey and comply with all reasonable instructions issued from time to time by the Board.  There were other obligations set out in Clause 3.3.  If P2 found that he was not able to comply with the Fund Resolution, one would have thought he would have raised it at the Meeting, if not earlier.  There was no such evidence that he had done so. On the contrary, from the transcript of the Meeting, he seemed to have asserted that as he was the CEO of the Group, he had the authority to do what he did in utilising the Fund.

107. In any event, as I have said earlier, there was ample evidence to show that he and P1 were both in effective control of Zhongda Automobiles Equipment.  I am of the view that the 5^th Defence had no real prospect of success.  

Conclusion

108. Having considered P2’s R&D and the above, I am of the view that he had not discharged the burden on him to show that his defences put forward by him had a real prospect of success.

109. Ms Chan had submitted that P2’s conduct after he had notice of Poon’s Order & Judgment was reasonable.  It was clear from the 10.05.13 Letter that P2 was aware of the Poon’s Order & Judgment, and yet there was no satisfactory explanation in the long delay of over one year before he decided to issue the Setting Aside Summons, which was only taken out after D4’s Sequestration Summons and 2^nd O14 Summons.

110. Further, up until the hearing, Ps had simply failed to comply with Poon’s Order & Judgment, and the whereabouts of the Fund after being transferred to the account of Zhongda Steel were still unknown.

111. Mr Lo had also submitted that there would be prejudice to D4, as the resumption of the trading of the shares would be jeopardized, since the 2011 and 2012 Annual Results were prepared and announced on “deconsolidation” basis, namely deconsolidating the PRC Subsidiaries and PRC Associates from the Group, since despite Poon’s Order and Judgment, the outstanding financial information of the PRC Subsidiaries and PRC Associates had not been provided to the auditors by Ps.  If Poon’s Order and Judgment were set aside, the basis for deconsolidation would become uncertain, and the resumption of the trading of shares could be seriously affected. I accept what was submitted by him.

112. Having considered all the above circumstances, I see no reason to set aside Poon’s Order & Judgment, and I dismiss P2’s Setting Aside Summons.

D4’s 2^nd O14 Summons

113. I now come to D4’s 2^nd O14 Summons.

114. As I have mentioned earlier, P1 was absent at the hearing and not legally represented.  Having read the relevant affirmations of service, I am satisfied that D4’s 2^nd O14 Summons had been properly served on P1.

115. The main submission made by Ms Chan in relation to the 2^nd O14 Summons was that whether the cause of action for D4’s counterclaim was founded on breach of fiduciary duties or contractual duties, it was still necessary in both scenarios that D4 would need make out is case for (a) its assertion of beneficial interest over the Fund (b) the basis for claiming that Ps had acted in breach of his duties.

116. As I have said earlier, D4’s case was based mainly on Ps’ breach of fiduciary duties and contractual duties, and the issue of D4’s beneficial interest in the Fund was not relevant.  The 2^nd O14 Summons stated clearly that Ds sought final judgment for their claim for damages for breach of the Service Contracts.

117. P2 had alleged that the Service Contracts was only for a term of 3 years until 23 June 2007 or the 2007 re-election of the members of the board, whichever was earlier.  As the re-election of directors took place on 31 May 2007, it was his case that the contract had expired.

118. D3 had responded by saying that the Service Contract had been continued by conduct upon Ps being re-elected as directors at end of May 2007, and that their role as executive directors had continued as before, and salaries were paid as before.  When P2 resigned on 29 December 2013, he alleged that he had not been paid his salaries[37].  Thus, the evidence showed that Ps himself had regarded the Service Contract, under which his salaries would be payable, had continued after 31 May 2007.

119. There were no further submissions advanced by Ms Chan on the above issue.

120. The burden was on Ps to show that on the merits that they had an arguable defence to the counterclaim.  For all reasons set out above, I have come to the conclusion that they had not discharged the burden.

121. Mr Lo had sought final judgment on D4’s counterclaim for damages for breach of the Service Contracts, with damages to be assessed, but requested the court to assess the damages forthwith to be at RMB 150m.

122. There were no submissions being made by Ms Chan in relation to the assessment of the damages forthwith at RMB 150m.

123. I will allow D4’s 2^nd O14 Summons and give final judgment in terms of the amended draft order submitted by Mr Lo, with damages assessed forthwith to be RMB 150m, to be paid by P1 and P2 jointly and severally to D4, with interest thereon at judgment rate from 22 February 2012 to date of judgment.  

124. As for costs, I do not see any reason as to why the costs of both summonses should not be paid by Ps jointly and severally, to be taxed and paid forthwith.  This is a costs order nisi which will be made final within 21 days.

125. Finally, I would like to thank both Counsel for their assistance to the court.

[1] B1:91-98

[2] B5:992

[3] See  B5:875/1012,  last “remarks”

[4] B5:962

[5] See notes 1 and 2 B5:962

[6] See note 1, B5:875/1012

[7] B5:954

[8] B7:1564-1565

[9] 鹽城中大汽車服務有限公司, see B5:962

[10] B3:434

[11] B6:1146-1147

[12] B3:442

[13] B8:1612-1653

[14] B3:446-448

[15] Para 2, B1: 141

[16] See para 5, B1:145

[17] Para 12, B1:8

[18] B1:44

[19] Para 12, B1:57

[20] At pg 410

[21] B4:592

[22] B4:597

[23] Para 68, B1:44

[24] B1:164

[25] Para 41, B1:67

[26] B7:1464

[27] B3:561-565

[28] Paras 8.3 and 8.4, B2:228

[29] Para 43, B2:243

[30] Para 18.7, B2:235.

[31] Para 8.7, B2:228

[32] B4:807-810

[33] B4:812-815

[34] B7-1468

[35] Para 15, B2:301-303; paras 42-51, B2: 310-313, D3’s 3^rd affirmation

[36] See para 60, B2:253

[37] B7:1341