INTERNATIONAL CAPITAL NETWORK HOLDINGS LTD. v. CAPITAL ACE HOLDINGS LTD. AND ANOTHER

CACV 330/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 330 of 2002

(ON APPEAL FROM HCA 1842 & 2066 OF 2002)

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HCA 1842/2002

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DECISION

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Hon Yuen JA (giving the Decision of the Court):-

1. On 30 May 2002,on an ex parte application made by Capital Ace Holdings Ltd and Wise Express Assets Ltd ("the Requisitionists") Deputy Judge Woolley gave an interlocutory injunction restraining International Capital Network Holdings Ltd ("the Company") from issuing any shares, options or other securities convertible into equity securities ("the said securities"), and restraining the Company's directors from procuring or effecting the issue of the said securities.

2. At the inter partes hearing, Deputy Judge Carlson gave an order on 5 August 2002 discharging the ex parte order. This is the appeal from Deputy Judge Carlson's order.

3. The factual circumstances forming the background of the appeal have been set out fully in the judge's Judgment dated 5 August 2002. It is not necessary to repeat them here save to record that since his decision, two events have occurred.

Petition

4. The first event is that on 9 August 2002, a petition in HCCW 898/02 was presented by International Technology Capital Ltd (one of the Company's shareholders, which is said to be beneficially owned by Cecilia Chu Oi-wah) for the winding-up of the Company on the just and equitable ground. The grounds set out in the Petition are similar to some of the complaints of the Requisitionists in this appeal. Be that as it may, it is common ground that the Petition has no effect on this appeal, and that any issue of shares is unlikely to be affected by s.182 of the Companies Ordinance.

Inter partes hearing of Company's injunction against Requisitionists

5. The second event is that on 27-28 August 2002, there was the inter partes hearing of the Company's application for an injunction restraining the convening of an EGM by the Requisitionists, the Company having successfully obtained an ex parte order from Deputy Judge Poon on 15 May 2002. Chung J reserved his decision.

6. Both parties indicated that the fact that the decision was reserved had no impact upon this appeal. However Mr Clifford Smith SC, counsel for the Requisitionists, sought to refer us to answers given on instructions by Mr Mark Strachan, counsel for the Company, to queries from Chung J. In this respect, we indicated at the hearing of this appeal that pending the determination of that summons by Chung J, it would not be appropriate for this court to take those matters into account and we did not require argument from Mr Strachan.

7. Between the date of the hearing of this appeal on 2 September and this judgment, Chung J handed down his decision on 3 September discharging the Company's injunction against the Requisitionists. Since neither party has sought to restore the appeal as a result of Chung J's decision, the decision of this court is given without reference to it.

Whether "serious question to be tried" an issue of law or discretion

8. The first issue in this appeal was whether Deputy Judge Carlson had been right in holding that there was no serious question to be tried. Mr Smith SC submitted that the issue whether there was a serious question to be tried was one of law, not of discretion. It would appear that the purpose of this submission was to avoid the perceived constraints of Hadmor Productions v Hamilton [1983] AC 191. He derived support for this submission from a passage from Dillon LJ's judgment in Carpetland (Eastbourne) Ltd v Lowndes Queensway Group Ltd LEXIS Transcript 20 December 1999, in which there was no developed discussion of the point.

9. In our view, an interlocutory injunction is clearly a discretionary remedy, and therefore whether an appellant is seeking to overturn a judge's decision that there was or was no serious question to be tried, or his decision that the balance of convenience lay with one party or the other, the principles set out in Hadmor v Hamilton apply. Having said that, those principles are not as constrictive as to treat every matter considered by the judge as being within his discretion such as to be only capable of being overturned on appeal if it could be shown to have been "aberrant".

10. In Hadmor v Hamilton, Lord Diplock held (at 220):-

"An interlocutory injunction is a discretionary relief and the discretion whether or not to grant it is vested in the High Court judge by whom the application for it is heard. Upon an appeal from the judge's grant or refusal of an interlocutory injunction the function of an appellate court ... is not to exercise an independent discretion of its own. It must defer to the judge's exercise of his discretion and must not interfere with it merely upon the ground that the members of the appellate court would have exercised the discretion differently. The function of the appellate court is initially one of review only. It may set aside the judge's exercise of his discretion on the ground that it was based upon a misunderstanding of the law or of the evidence before him or upon an inference that particular facts existed or did not exist, which, although it was one that might legitimately have been drawn upon the evidence that was before the judge, can be demonstrated to be wrong by further evidence that has become available by the time of the appeal; or upon the ground that there has been a change of circumstances after the judge made his order that would have justified his acceding to an application to vary it. Since reasons given by judges for granting or refusing interlocutory injunctions may sometimes be sketchy, there may also be occasional cases where even though no erroneous assumption of law or fact can be identified the judge's decision to grant or refuse the injunction is so aberrant that it must be set aside upon the ground that no reasonable judge regardful of his duty to act judicially could have reached it. It is only if and after the appellate court has reached the conclusion that the judge's exercise of his discretion must be set aside for one or other of these reasons, that it becomes entitled to exercise an original discretion of its own".

11. Therefore, the correct approach, it seems to us, is for the appellants to identify which of those reasons (i.e. misunderstanding of the law or the evidence, wrong inference of existence or non-existence of facts, change of circumstances, or aberration) applies to the judge's findings here that there was no serious question to be tried and that the balance of convenience lay in refusing the injunction. If the appellants succeeded in doing that, then this court would be entitled to exercise an original discretion of its own.

Whether there was a serious question to be tried

12. Turning then to the substance of the appeal, the Requisitionists submitted that the judge was wrong to have found that there was no serious question to be tried, as he had failed to apprehend the evidence of the alleged intention of the directors appointed by the 39% shareholder International Capital Network Investor Ltd ("ICNI") to issue shares for an improper purpose.

13. The Requisitionists' submissions on this point centred upon three pieces of evidence:-

(a) the letter from the Company to the SFC dated 27 March 2002;

(b) the Company's injunction of 15 May 2002 against the Requisitionists and the convening of the requisitioned EGM on 2 December 2002;

(c) the "coincidence of dates", 2 December 2002 being the first trading day after the "Lock-Up Period" when the directors would be free to dispose of their shares.

14. In relation to (a), it was submitted that the letter from the Company to the SFC dated 27 March 2002 showed that there was an intention to issue further shares of the Company when there could be no real commercial justification for doing so at the time.

15. In this regard the judge said at paragraph 46 of his Judgment that he "had regard" to the letter which appeared to him "to be above board and not worthy of the motives ascribed to them".

16. No doubt because of the short period of time available to him, the judge did not develop this more fully, but it is clear upon reading the letter that the Company was only "considering the feasibility of granting share options, issue of warrants, placing or repurchasing of shares of the Group should its price become weaker". Any intention then of ICNI to acquire further shares without triggering a General Offer was frustrated by Cecilia Chu's withdrawal from the "concert party" statement on 28 March 2002. Short of further evidence (such as an item on a board agenda, or other documentary or oral evidence to that effect) to show that the Company had an existing intention to issue further shares, it seems to us that the judge was entitled to take the view on the state of the evidence that the Requisitionists were only saying "Timeo".

17. The fact that the directors had general mandates to issue further shares and the fact that they had refused to give undertakings to the Requisitionists not to exercise that power so as to preserve the Requisitionists' shareholding position do not equate to a serious question to be tried that there was an existing intention to issue further shares for an improper purpose, which is what the Requisitionists needed to demonstrate.

18. That brings us to (b), the main argument for the Requisitionists, which was that since the Company had succeeded (by getting the injunction on 15 May 2002) in putting back the convening of the EGM, they (the Requisitionists) were entitled to an injunction to preserve their shareholding position in the meantime.

19. In our view, there could be no serious question to be tried that the Requisitionists were entitled to an injunction for such a purpose. The Company exists not only for the Requisitionists or ICNI, but also for the public, who is said to hold some 25% (or at least 17%) of the shares.

20. The board of directors' power under the general mandates is to issue shares if that would be in the best interests of the company. Mr Smith submitted that even if the Company were to issue shares to an independent party for proper business purposes, the Court should nevertheless restrain that issue of shares, simply because it would affect the Requisitionists' shareholding position. In our view, there can be no serious question to be tried as the Requisitionists are not entitled to such an injunction. Indeed it would be a breach of the directors' fiduciary duty to take into account the preservation of the position of any particular body of shareholders.

21. As to (c), the "coincidence of dates", this was not dealt with by the judge although the point was made before him as recorded at paragraph 22 of his Judgment. Mr Strachan has taken us to the materials relied upon by the Company and directors to explain why 2 December 2002 was chosen for the convening of the EGM.

22. It would not be appropriate for us to express any views at this stage as to that explanation. However, even if it is assumed that the coincidence of dates does show that these directors were providing an "escape route" for themselves if ICNI was outvoted at the EGM, that is not evidence that there was an existing intention to issue further shares for the improper purpose of increasing ICNI's shareholding or to dilute the Requisitionists' shareholding. Indeed, it might even be said to be an indication that they were apprehensive that ICNI would not be able to outvote the Requisitionists.

Whether balance of convenience favoured discharge of ex parte injunction

23. As to the balance of convenience, the Requisitionists relied on three main points:-

(a) the judge placed inordinate reliance on the regulatory safeguards imposed by the Stock Exchange and the SFC to scrutinize the independence of placees of shares issued under the general mandate;

(b) the judge failed to realize that any shares issued under the employees' share option scheme could have a significant impact on the balance of voting power;

(c) the judge failed to take account of the fact that the Company had $40m in liquid assets which it could use. Before this court, Mr Smith also added that even if those funds were earmarked for projects, and the Company needed funds for business purposes, the Company could raise loans for those purposes instead of issuing shares.

24. As for (a), the weight that the judge placed on the efficacy of the regulatory safeguards is a matter solely within his discretion, after his consideration of the various features of those safeguards identified in paragraph 46 of his Judgment. The Requisitionists have failed to show before us that the judge's decision on the reliability of those safeguards is so "aberrant" that no judge properly directing himself on the materials could have given the decision he did.

25. As for (b), if there had been any evidence that the Company was intending to issue shares under the share option scheme (and there was none, as discussed in paragraph 16 above), then the judge's dismissal of the effect of 10% on the shareholding balance of power might have been open to question. However, there was no evidence of any present intent to issue shares to employees under the share option scheme, and the Company and its directors have offered an undertaking to this court not to issue any shares under that scheme until the EGM is held.

26. As for (c), the judge had taken into account the evidence before him that the $40m had been earmarked for projects set out in the prospectus. As for Mr Smith's suggestion that if the Company had any need for funds for any business purposes, it could raise loans for that purpose, it is obvious that there may be very many proper commercial reasons why a company would prefer to allot shares for business purposes rather than raise a loan. Once it is recognised that there may be good commercial reasons for the issue of shares, it would not be proper for a court to force business decisions on a company.

Respondent's Notice based on "Clean Hands"

27. Finally, we would add that the Company sought to submit in its Respondent's Notice that the judge should have taken into account, when assessing the balance of convenience, the materials before him which it alleged show that the Requisitionists had acquired 43% of the shares of the Company in contravention of the Takeover Code and the Securities and Futures Commission Ordinance.

28. It is not necessary, in light of our views above, to deal with this submission. Further, it is clear from the skeleton submissions before the judge that he had only been asked by the Company to consider the "clean hands" argument as a pre-emptive measure to stop the Requisitionists bringing the application for an injunction at all, and had not been asked to take those matters into account when considering the balance of convenience. The judge had therefore not dealt with those matters when considering the balance of convenience.

Order

29. We would therefore record the undertaking given by the respondents set out in paragraph 25 above and dismiss this appeal with an order nisi that the costs of the appeal be to the respondents but that there be no order as to costs in respect of the Respondent's Notice.