MACAU FIRST UNIVERSAL INTERNATIONL LTD v. DING XIAOHONG AND OTHERS

HCMP 1014/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1014 OF 2011

(on an intended appeal from HCA No. 992 of 2010)

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BETWEEN

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REASONS FOR DECISION
AND DECISION ON COSTS

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Hon. Yuen JA (giving the Reasons and the Decision of the Court):

1.  At the conclusion of this application for leave to appeal, we gave leave and indicated we would give brief reasons in writing.  We do so now.

Brief background

2.  A full narrative of the background to this case can be found in the Decision of Deputy Judge Auyeung handed down on 10 March 2011 from which leave to appeal was sought.  Essentially, the protagonists are 2 brothers Ding Yu (“DY”) and Ding Gang (“DG”) who both claim to be the ultimate beneficial owner of an office building in Shanghai called Citigroup Tower (apart from some units which have been sold). 

3.  The ultimate beneficial ownership is held through a series of corporate holdings.  Citigroup Tower (“the Property”) is held by a PRC company called Shanghai Bading Property Development Co Ltd (“SB”) which is wholly owned by Hong Kong First Mainland Co Ltd (“HKF”).

4.  HKF was (until the event described in the next paragraph) wholly owned by Macau First Universal International Ltd (“MF”).  The registered shareholders of MF are DG (as to 99%) and his sister DXH (as to 1%).  However DY claims that DG and DXH hold these shares as trustee for him.  DXH has agreed with this, but DG has denied this.

5.  In May 2010, DXH (on DY’s instructions) caused MF to sell all its HKF shares to DY and herself at what would appear to be an under-value. 

6.  Having thus obtained legal control of HKF, in June 2010, DY and DXH took steps to replace the legal (i.e. authorised) representative (法人) of HKF’s subsidiary SB.  The legal representative of SB is Yu Xiaan (“Yu”), who is also related to the family. 

Proceedings issued against DY, DXH and HKF

7.  However before Yu was replaced, DG caused MF to issue proceedings in Hong Kong against DY, DXH and HKF alleging that MF’s purported sale of HKF shares, effected by DXH on DY’s instructions, was null and void.       

Ex parte Injunction Order 

8.  On 2 July 2010, MF obtained from Au J an ex parte injunction (“the Injunction Order”) against DY, DXH and HKF whereby they were restrained from dealing with the HKF shares purportedly transferred to them by MF.  HKF was also restrained from taking any steps to replace Yu as SB’s legal representative.

9.  The return date of the summons was 9 July 2010.

10.  On 6 July 2010, MF issued a summons for continuation of the Injunction Order, for a variation of the Injunction Order, and for an order that HKF disclose its assets. 

Consent Order

11.  At the return date on 9 July 2010, however the parties presented a Consent Order before Suffiad J.          

12.  In the Consent Order, DY, DXH and HKF gave certain undertakings to the court, and MF and DG (although not yet a party) gave cross-undertakings in relation to dealing with assets of HKF and SB otherwise than in the ordinary course of business and for fair market value. 

13.  The material parts of the Consent Order stated as follows:

“(1) Without prejudice to any acts done by [HKF] prior to actual receipt of the Injunction Order, [HKF] shall not remove or replace and/or take any further steps to remove or replace [Yu] as the legal representative of [SB].

(2) No order be made on [MF’s] summons filed on 6^th July 2010”. (Emphasis added).

14.  In other words, the injunctions against DY, DXH and HKF were lifted in exchange for their undertakings and an order that HKF would not take steps to replace Yu as the legal representative of SB.

Receivership Order

15.  Three months later in October 2010, DY applied to the Court to appoint receivers and managers of MF and HKF on the grounds (among others) that there was a real risk of dissipation of assets.  It was alleged that notwithstanding the undertakings given by DG and MF, the 5^th floor of the Property had been offered for sale.  It was also alleged that SB had failed to pay mortgage instalments to the Huaxia Bank.  The application was opposed by DG and MF at a 3-day hearing in February 2011.

16.  Deputy Judge Auyeung gave an order on 10 March 2011 appointing Ernst and Young receivers and managers of MF and HKF (“the Receivership Order”).

17.  Of particular interest is para. 4(7) of the Receivership Order which gave power to the Receivers:

“To take control of and exercise all rights which [MF] and [HKF] may have in relation to [SB] and/or the Management Company as may be necessary to obtain control or management of [SB] and/or the Management Company including the power to appoint or remove all or any agents, directors or other officers (including but not limited to legal representatives) and to take all such steps as may be necessary to protect the interests in [SB] and/or the Management Company”. (Emphasis added).

It may reasonably be assumed that the reference to “legal representatives”means法人and not lawyers as the Receivers’ power to appoint solicitors and counsel is separately provided for under para. 4(18) of  the Receivership Order.

18.  So it would appear prima facie that the Receivership Order containing the power in para. 4(7) conflicted with para. 1 of the Consent Order.  However this point was not taken by leading counsel (not Mr Tong SC) who appeared for DG and MF in opposing the Receivership Order application.  The approach then was that there was no dissipation of assets to warrant the appointment of receivers and managers, and the undertakings in the Consent Order were adequate in any event.

Steps to remove SB’s legal representative

19.  The Receivers subsequently executed a resolution (together with DY and DHX) to remove Yu as the legal representative of SB. 

Application for Leave to Appeal

20.  After the Receivership Order was made, DG and MF made 2 applications, the 1^st for leave to appeal and a stay pending appeal, and the 2^nd for variation and clarification of the Receivership Order.

21.  In May 2011 DG and MF, having changed their legal team, made an unsuccessful attempt to adjourn the hearing of these 2 applications.  Deputy Judge Auyeung proceeded to refuse both applications.

22.  Subsequently the learned judge was asked to vary or clarify the Receivership Order to explicitly state whether it superseded para. 1 of the Consent Order.  The learned judge did not do so for reasons given in a Decision dated 26 July 2011.  However it would appear from that Decision that at the hearing in February 2011:

(1)   there was no express submission whether para. 1 of the Consent Order should be superceded by the Receivership Order (para. 4); and

(2)   no point was taken by leading counsel for DG and MF that the Consent Order could not be superceded as it embodied the parties’ agreement and therefore the learned judge did not consider it (para. 8).

23.  It was against the backdrop of these circumstances that DG and MF have applied to this court for leave to appeal.

Principles

24.  It is now established that an applicant for leave to appeal must show a reasonable prospect of success.  He has to show that the appeal is not merely fanciful, that it has merits and ought to be heard, although he does not have to demonstrate that the appeal will probably succeed (Wynn Resorts (Macau) SA v Mong Henry [2009] 5 HKC 515).

25.  It is also clear that a decision whether to appoint receivers and managers is one made in the exercise of a judge’s discretion, and that an appellate court would normally not interfere unless the judge had failed to take a relevant matter into account, or had taken into account an irrelevant matter, or had erred in law or misunderstood a material fact, or unless the decision reached was “plainly wrong”. 

Discussion

26.  We take the view that the test for leave to be given has been satisfied in this case, because when the learned judge made the Receivership Order (containing the power to replace SB’s legal representative in para. 4(7)), it would appear that the following matters had not been taken into account, viz.:

(1)     the Consent Order contained an express order that HKF would not take steps to replace Yu as SB’s legal representative; and

(2)     the Consent Order was one made by consent and as such, may not be set aside unless one of the grounds for invalidating or varying a contract is established.

For convenience, we shall refer to the above as the “Consent Order point”.

27.  We would pause here to note that in relation to sub-para. (1) above, no point has been taken before this court by leading counsel for DY that para. 1 of the Consent Order only bound HKF not to take steps to replace SB’s legal representative, whereas the application for the Receivership Order was made by DY only.  In any event, as recognized by the learned judge in para. 1 of her Decision giving the Receivership Order, the “case effectively is a dispute between 2 brothers”, DY and DG.  At the time of the Consent Order as well as the Receivership Order, DY controlled HKF.

28.  Leading counsel for DY has submitted that leave should not be given for the following reasons, in brief:

(1)     as DG and MF had not taken the Consent Order point in February 2011 at the application for the Receivership Order, they should not be allowed to take it on appeal as they should not be allowed to adopt inconsistent courses;

(2)     an interlocutory consent order may or may not have a true contractual basis, as it may simply reflect the parties’ “non-objection” to an order that was accepted as the correct one in the circumstances;

(3)     had the Consent Order point been taken in February 2011, evidence may have been adduced by DY; and

(4)     even if the point may be raised on appeal, the Consent Order did not and could not preclude the learned judge from making the Receivership Order.

29.  At this juncture, it is sufficient and appropriate for us to indicate only briefly our reasons for giving leave.  The views expressed below are preliminary only, as the test is one of “reasonable prospects of success”.

30.  As for (1), we are not persuaded at this stage that DG and MF have adopted inconsistent courses in the litigation or made an election in equity.  It is true that at the February 2011 hearing, they did not take the Consent Order point, but they have asserted throughout that it was valid and binding on the parties.  Indeed they based their opposition to the application for the Receivership Order on the effective nature of the Consent Order which contained a number of undertakings given by them.  They have not taken any benefits which would preclude them from asserting the Consent Order point now.

31.  As for (2), the issue is whether the Consent Order had a true contractual basis, or was merely another way of expressing “non-objection” to an order that both parties expected the court to make.  One should look essentially at the substance of the order in question. Contrast a consent order extending time, with a consent order in a hotly-contested case where an order (albeit interlocutory) may be of great significance.  The former would more likely be of the “non-objecting” type of consent order, whereas the latter would not.  In the present case, the effect of the Consent Order was that DY, DHX and HKF had the ex parte injunctions made against them lifted, a matter of no small import in the commercial world.  It is also relevant that although various cross-undertakings were given, the order that HKF would not take steps to replace Yu as SB’s legal representative was the single substantive paragraph in the body of the Consent Order and was not expressly stated to be “until further order”.

32.  As for (3), it has not been shown on the materials before us what evidence DY might have adduced had the Consent Order point been taken in February 2011.

33.  As for (4), it may well be for the Court of Appeal exercising the court’s discretion afresh to decide whether the Receivership Order should be granted in the face of para. 1 of the Consent Order.  Although para. 4(7) is but one power given to the Receivers, it is an important one given that in the PRC, the concept of receivership is not recognized and it is the legal representative who exercises control over a company.  As the Property is one of the most valuable assets of SB, HKF’s subsidiary, it would be an important factor to be borne in mind when the court decides whether or not to accede to an appointment of receivers and managers.

34.  Finally we should note that the Consent Order point was not the only point raised before us by both parties.  There were substantial arguments on the issue whether there had been a risk of dissipation of assets.  However we took the view that since we would give leave to appeal, it would not be appropriate to “cherry-pick” through the arguments and hence we express no view here on those other arguments.

35.  As a matter of completeness we would also record that leading counsel for DG and MF took exception to the inclusion of the Receivers 4^th Report in the Appeal Bundle on the eve of the hearing before us.  We decided that we would not consider the 4^th Report for the purposes of the application for leave, given our preliminary views on the Consent Order point.  Likewise Zhou Jie’s affirmation of 8 September 2011 was also not considered.

Costs

36.  Finally as to costs, having heard the parties, we order that the costs of the application for leave to appeal before the judge be costs in the appeal, and that the costs of the application for leave to appeal before this court be to DG and MF, with certificate for two counsel.