XCHRX LEADING SPIRIT HIGH-TECH (HOLDINGS) CO. LTD. v. POP WIN INVESTMENT LTD. AND ANOTHER

HCA 16454/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16454 OF 1999

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REASONS FOR DECISION

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1. On 28 July 2000, when this matter came before me, I made an order in favour of the plaintiff continuing the injunction granted by Mr Justice Yam on 19 October 1999, and amended by Mr Justice Yeung on 29 October 1999, until trial of this action or further order, and adjourning the defendant's summons for discharge of the injunction, on the ground of material non-disclosure and/or misleading evidence, to the trial judge. I now give my reasons for so doing.

2. The plaintiff claims in this action declarations that two option deeds entered into between the plaintiff and the defendant are not effective, the defendant having failed to make advances of sums of money upon which the options were conditional, and consequential orders for, inter alia, delivery up of share certificates and instruments of transfer.

3. The plaintiff is a listed company in Hong Kong, and one of its subsidiaries is also a listed company, Leading Spirit Electric Ltd (LSE). In late 1997 and early 1998 the plaintiff's group was experiencing severe financial difficulties and sought parties who were willing to inject capital into the companies by way of loans and investment in their shares. Because of their financial situation they were unable to further approach banks or other financial institutions for advances and had to look elsewhere. Some time in 1998 a Mr Shek Shing Lee was introduced who was able through connections in Jilin to find lenders prepared to advance money to assist the group. In particular, the group needed to raise money to enable one of its subsidiaries, Guangdong Conrowa Television Company Ltd (GCTC) to pay its suppliers of raw materials, parts and components. An arrangement was accordingly devised whereby the plaintiff would grant an option to a supplier of GCTC to purchase shares held by the plaintiff in LSE, to be exercised only if the amounts due to the supplier, being the purchase price, were not paid by an agreed date. At the same time a deed of novation was entered into whereby the supplier re-granted all the benefits under the option to a lender, found by Mr Shek, save and except the right to the purchase price, and the lender would advance an agreed amount of money to the supplier. GCTC had to settle the sums due to the supplier by a certain date to enable it in turn to repay the debt from the lender, failing which the lender could exercise the option and claim the shares.

4. In order to put the scheme into effect, a number of British Virgin Islands companies were formed, one being the 1st defendant, from which the advance would come and which was accordingly the beneficiary under the option, and another being Double Harmony Ltd (DHL), to which the advance would initially be made. The amount of the advance (the first advance) was to be RMB66,682,400.00 and the number of shares in LSE which were the subject of the option was 400 million. A term of the agreement was that the advance was to be made by 28 December 1998, which date was extended by a supplemental deed of novation to 15 January 1999.

5. Meanwhile a similar arrangement was entered into between the same companies with a further advance of RMB33,317,600.00, and an option in respect of 200 million shares in LSE, the advance to be made by 22 January 1999. Both options were exercisable if DHL failed to repay the loans by 20 October 1999 by the 1st defendant delivering a Call Notice to the plaintiff on or before 29 October 1999.

6. It is the plaintiff's case that the 1st defendant failed to make the advances by the agreed dates in January 1999 and that the condition precedent to give effect to the options has not been fulfilled and they are accordingly of no effect.

7. The case of the 1st defendant is that the loans only need to be evidenced by receipts from DHL and indeed they have two receipts from DHL evidencing the loans. They have, however, according to the plaintiff, failed to respond to requests to provide further evidence of payment of the loans to DHL. The 1st defendant further contends that the sums have in fact been paid under earlier arrangements, and these later arrangements were a continuation of those.

8. There are a number of matters surrounding these agreements which are not fully explained and which will have to be investigated at trial. The most bizarre is the plaintiff's account that they authorised the release to the 1st defendant not only of the share certificates, but also instruments of transfer and sold notes, executed in blank, and the two receipts evidencing payment. These were originally deposited with the 1st defendant's solicitors, the 2nd defendant, in escrow, but release to the 1st defendant was later authorised, as had apparently been done in an earlier similar transaction between the same parties without problem.

9. The earlier arrangements which the 1st defendant maintains involved the Leading Spirit group, and under which, they say, the loans were actually made, also concerned Mr Shek and one Wong Cheuk-ling (CL Wong), the brother of Wong Shi-ling (SL Wong), the chairman and controlling shareholder of the plaintiff's group. The 1st defendant's case as to this is that CL Wong, following a meeting between him, Zheng Wei-chang, the vice-chairman and managing director of LSE, and Mr Shek in March 1998, entered into an agreement under which RMB225 million would be provided by Mr Shek in exchange for 1.25 billion LSE shares, and, indeed, that sum was paid to companies related to the plaintiff's group in April 1998, and in May a large number of share certificates, albeit without instruments of transfer, were delivered to Shek. There followed, according to the 1st defendant, further agreements from June to September that year to buy back the shares on a number of conditions, including the provision of loans for the plaintiff, and it was under these agreements and for the purpose of these loans that the option agreements were entered into, and RMB200 million was in fact paid in September 1998. The series of agreements were extremely complex arrangements of which I do not need to go into details here, and of which the account above is much simplified.

10. The plaintiff's case is that CL Wong was not, at the material times, a director or officer of the plaintiff, and had no authority to act on behalf of the plaintiff, and they deny all knowledge of the agreements recited by the 1st defendant.

11. There are certainly a number of suspicious circumstances surrounding these dealings, which lead one to suspect that those in control of the plaintiff and its group may well have had knowledge of, and a hand in, the dealings in 1998 which resulted in funds being made available for companies within that group. However, in the face of the plaintiff's plain denial that it was concerned in those dealings, whatever the weight of the affidavit evidence here, without a trial and close examination of the evidence, these differences remain serious issues to be tried. The evidence is not such that I can accept at this stage that the plaintiff has failed to disclose matters prior to the option agreements the subject of these proceedings, which would be material to the original application, in the light of their denial of knowledge of them. It may well be that, at trial, when all the surrounding circumstances have been fully investigated, it becomes apparent that there are matters which the plaintiff should have disclosed, but that will be a matter for the trial judge, who can make an appropriate order.

12. It is accordingly necessary to preserve the status quo pending trial in such way that no party is prejudiced. In this respect I accept the argument on behalf of the plaintiff that, were I now to discharge the injunction, enabling the 1st defendant to exercise the option and obtain ownership of the LSE shares, a remedy in damages were they to be successful at trial may well be of little benefit, the 1st defendant being a British Virgin Islands company with no assets in Hong Kong, and established solely for the purpose of putting the arrangements described into effect as a conduit for the funds to be advanced.

13. The balance of convenience clearly, therefore, lies in continuing the injunction, so that the option can only be exercised if the 1st defendant is successful at trial. I have no evidence that the value of these shares will suffer in the intervening period, and any loss can be compensated in damages by the plaintiff, which, although perhaps not as successful as they would wish, is apparently in no danger of liquidation in the short term, and is still a listed company, with public access to its accounts.

14. For these reasons I gave the plaintiff an order in terms of the draft submitted by them for continuation of the injunction, with costs in the cause of the action, and adjourned the defendant's summons to be dealt with by the trial judge together with the question of costs of that summons.