EAST KIT INDUSTRIES LTD AND ANOTHER v. MITSUMARU EAST KIT (HOLDINGS) LTD

HCA1729/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1729 OF 2004

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DECISION

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1.  As I have indicated, I am not going to give detailed reasons for my decision at this stage, but will just give the principle reasons on the basis of which I have come to the conclusion that I have reached in relation to each of the two summonses which were substantively argued before me.

2.  In relation to the defendant’s summons seeking the discharge of the ex parte order made by Suffiad J on 23 July 2004, I have concluded that it would be right for me to accede to the application and discharge the order, on the grounds of material non-disclosure in relation to the financial information that was supplied to Suffiad J at the hearing, against the background of concerns expressed as to that issue in the correspondence prior to the hearing. 

3.  The material that was put forward in paragraph 146 of Miss Yip’s first affirmation, consisted, as Mr Garland pointed out, of four discrete items.  In my view, three of those items are, strictly speaking, neutral and would not have provided the judge hearing the application with much information as to the ability of either the 1st or the 2nd Plaintiffs to meet any award of damages that might be made against them in respect of the cross-undertaking which they gave in order to obtain the ex parte order. 

4.   The remaining item was the statement that there were $4 million in fixed assets in the 1st Plaintiff.  It seems to me that given the information that was available in the form of the audited accounts which, albeit out of date, disclosed a financial position that might have caused the judge to have some pause for thought as to whether or not to accept the undertaking, or at least to seek further information in order to consider whether some form of fortification of the undertaking was called for, and also having regard to the other information that has since come to light, particularly in relation to the current financial position of the 1st Plaintiff, from which it would appear that while there is, I am inclined to accept, some $4 million in free equity in the properties that it owns, this has to set against the $3.75 million shareholders’ loan. 

5.  I am not saying that that matter would not be something that could not have been overcome.  It might, for example, have been overcome if the matter had been accompanied by an undertaking or perhaps even a clear indication from Miss Yip that she would not call in that shareholders’ loan.  However, the fact remains, I think, that this material was clearly something that should have been put before the judge.  The information should have been laid out before him and he should have been allowed to come to his own view as to the relevance and significance of those matters, and as to what, if any, steps might need to be taken to address any concerns that might exist as to the 1^st Plaintiff’s financial position.

6.  That, essentially, is the reason for which I have come to the view that there has been a material non-disclosure in this case.  It seems to me that, there having been such a non-disclosure, the appropriate course for me to take would be to discharge the injunction that was granted ex parte and to consider whether or not, in the light of the circumstances of the non-disclosure and the other factors that are relevant to the question of whether or not an injunction should be granted inter partes, to deal with that question afresh in the context of the summons for continuation of the relief obtained ex parte.

7.   Thus, the position on the Defendant’s summons is that the Defendant has succeeded.

8.   So far as the Plaintiffs’ application for an injunction pending trial is concerned, I am afraid I have come to the view that, in relation to that too, the Plaintiffs fail.  It seems to me that, having accepted that the Defendant should be allowed to carry on using its existing corporate name, as Mr Liao puts it, for the usual purposes of a holding company, the question ultimately becomes one of whether or not there is any real basis for suggesting that there is any threat that the Defendant will do something other than what could be described as the normal activities of a holding company.

9.   Mr Liao has pointed to a number of pieces of evidence that he says suggest that the Defendant is going to go beyond that role and actually become actively involved in the underlying business of the group, if I may put it that way.  However, having considered the matter, it seems to me that the evidence that has been put forward does not really justify that conclusion and I do not think it justifies an inference being drawn that there is any real risk that the defendant will so conduct itself as to do things that go beyond those that are normally done by a holding company.  In this context, I must say that I think that the normal activities of a holding company may well go beyond merely having and maintaining a listing and raising funds.

10.  A number of the matters in respect of which concerns were expressed by the Defendant seem to me to have real force, particularly in relation to matters such as its ability to communicate to the market developments in relation to the business of its subsidiaries.  That, I think, is a matter that, on a strict reading of the injunction order sought and the existing injunction that has up to now been in place under the consent order made by Tang J, might well have amounted to a breach of the injunction in the form that it stood.  Similarly, there would be legitimate concerns as to whether or not the making available of information concerning the group and its businesses generally might infringe the injunction.  Those too would be activities that would, in my view, be part of the normal function of a holding company to carry out. 

11.  At the end of the day, I am not satisfied that there is any real threat by the holding company to carry on business by itself.  It is quite clear from the corporate structure of the group that is disclosed in the prospectus, that the holding company’s role is that of a holding company, and that there are separate operating subsidiaries which carry out the actual business of the group. 

12.  In those circumstances, I have come to the view that given that the holding company is, even on the Plaintiffs’ case, entitled and is to to be permitted to use its name for certain purposes, I have difficulty in seeing what other functions are proposed to be carried out that could be said to go beyond those of a normal holding company and which would cause damage to the Plaintiffs.