GOLD MIGHT LTD AND ANOTHER v. YANG LI JING SHENG AND OTHERS

HCA 3387/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3387 OF 2003

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JUDGMENT

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1.  This is an application by the plaintiffs to continue an ex parte injunction against the defendants.  The defendants also have a summons to discharge this injunction.  The 1^st defendant Yang Li Jing Sheng (“Yang”) is a director of the 1^st plaintiff Gold Might Ltd. (“Gold Might”).  The injunction enjoined Yang from acting as a director of Gold Might for the purpose of negotiating or entering into any agreement on behalf of Gold Might including any agreement for the sale of Gold Might’s shareholding in one Beijing Dong Long Real Estate Development Co. Ltd. (“Dong Long”).  It also enjoins the 2^nd and 3^rd defendants from purporting to act as or holding out as directors of Gold Might and from negotiating or entering into any agreement on behalf of Gold Might including any agreement for the sale of Gold Might’s shareholding in Dong Long.  The parties agreed that the summons to discharge should be dealt with first. 

The application

2.  The ex parte injunction was granted on 10 September 2003 on the basis of the matters deposed to in an affirmation of a solicitor Mr. Chan Kwok Kang Dennis (“Dennis Chan”) filed on the same day. 

The Sakura project

3.  Mr. Chan said in his affirmation that the 2^nd plaintiff Liu Zhong Min (“Liu”) was the registered shareholder of 60% of the shares of Gold Might since 1994 and Yang the registered shareholder of the remaining 40%.  However, 15% of the Gold Might shares as registered in his name were held by him as trustee for Liu.  Liu was thus the legal owner of 60% Gold Might shares and beneficial owner of 75% of these shares.  Liu purchased the 75% shares from other shareholders through Yang at US$400,000.  At that time, Gold Might was investing in a real estate project called Sakura Villa in Beijing (“Sakura project”).  Yang asked Liu to let him have 15% shares registered under his name as trustee so that he would on record be the registered holder of 40% shares and that would facilitate his conduct of the business of Gold Might.  Liu agreed and hence the trust arrangement for the 15% shares and Liu was the registered holder of only 60% shares. 

4.  The Sakura project was resumed by the Central Government in March 1998 with compensation.  Liu thought that the calculation of compensation was incorrect and he should have received another RMB4.76 million from Yang.

5.  Liu had a stroke in 1998 and Yang did not report to him on any business that he had transacted for Gold Might.  Liu thus did not know the financial standing of Gold Might.  He told Chan that he in fact did not know about the affairs of Gold Might since he had become its shareholder. 

Offer to purchase Gold Might shares

6.  After a lapse of five years, Yang went to see Liu on 3 July 2003 with a female Zhang Zili who claimed to be a Mainland lawyer.  Yang reported to Liu the business and financial situation of Gold Might.  He said that since 1998, he had taken on many business ventures for Gold Might.  They included a business in making locks and an investment in leisure boats.  Gold Might had made a lost was thus heavily indebted.  There were people who might sue it for compensation and damages and that might drag Liu in.  Yang then offered to buy out all Liu’s shares in Gold Might by paying him US$300,000 within one year.  Yang also signed and delivered a letter of promise to Liu there and then.  The letter was witnessed by Madam Zhang.  A copy was produced in the affirmation.  It said that Gold Might had been managed by Yang alone since 1998 and all debts and economic loss so generated would be the responsibility of Yang alone and had nothing to do with Liu.  It also said that Liu would transfer the 60% Gold Might shares as owned by him to Yang and, after the transfer, Yang would pay Liu US$300,000 in full within a year. 

7.  On 6 July 2003, Yang and Zhang came again.  Yang suggested to Liu that he should engage a lawyer to prepare documents and handle the transaction for him so that when he agreed to transfer the shares, it could be completed quickly.  He also suggested to Liu to engage a third party like Madam Zhang to process the preparatory steps whilst negotiation was underway.  Liu then signed a power of attorney, three blank instruments of transfer and three blank bought and sold notes and handed them to Zhang for her to follow up with the preparatory works and for safe custody. 

Liu’s investigations

8.  However, Liu had second thoughts and asked his son-in-law Yu Xiao Ning (“Yu”) to handle the transaction for him.  On 8 July 2003, he instructed Eugene Cha of Cha & Cha LL P (a US law firm with office in Beijing) to act for him.  He also signed a cancellation for the power of attorney that he had given Madam Zhang.  Copies of the cancellation were served on Zhang’s firm in Beijing and on her personally by Cha on 9 and 10 July 2003 respectively.  But Zhang did not return the power of attorney, the blank instruments of transfer and the bought and sold notes to him.  Zhang had told Cha and Patrick Lam, Yang’s Hong Kong solicitor that she had passed the documents to Yang.  Yang later returned one instrument of transfer and one bought and sold note to Liu but kept the rest of the documents. 

9.  Liu through his agents later discovered that Yang had without his knowledge did various things in relation to Gold Might.  In 1999, Yang caused Gold Might to enter into a joint venture agreement with one Osmond Investment & Realty Inc. (“Osmond”) to set up Dong Long.  Since 1999, he had held out to the joint venture partner that he owned all the shares of Gold Might.  On 8 October 2001, he appointed one Wang Chang Ling (“Wang”) as a director of Gold Might.  On 23 May 2003, he purportedly conducted a shareholders’ meeting of Gold Might with Wang and one Gao Zhong Lai (“Gao”).  The three of them declared in the meeting that they were the original shareholders of Gold Might and Gold Might shares would be allotted to them on 10 June 2003 at the ratio of their investments into Dong Long.  The three of them purportedly held another shareholders’ meeting on 7 June 2003 in which Yang, inter alia, confirmed to Wang and Gao that Liu had signed a share transfer form for his 60% shares in Gold Might and had passed the form to Yang.  Copies of the minutes of the two meetings were produced.  Yang had failed to procure the transfer of shares to Wang and Gao who then instituted High Court Action No. 2293 of 2003 against Yang, Liu and Gold Might for transfer of shares.  Yang had also filed notifications to the Companies Registry saying that: Liu had resigned his directorship with Gold Might on 4 July 2003; Wang had been removed as a director in an EGM of Gold Might on 7 July 2003 and Mr. Zhang Yun the 2^nd defendant and Miss Mung Ngan the 3^rd defendant had been appointed new directors on 15 July 2003. 

10.  All these matters have also been set forth in a letter dated 22 August 2003 from Messrs. Gallant Y. T. Ho on behalf of Liu to Yang.  The letter demanded Yang to, inter alia, withdraw from the Companies Registry the various notifications, return to Liu the power of attorney, the instruments of transfer and bought and sold notes and to sign all necessary documents to transfer to Liu 15% of the Gold Might shares within seven days. 

Directors’ meeting on 5 August 2003

11.  The letter also mentioned there was a directors’ meeting on 5 August 2003 which was attended to by Liu, Yang and Wang.  It also said that the meeting had resolved inter alia, that the appointment of Wang as a director on 8 October 2001 be ratified and Yang’s appointment as the chairman and general manager of Dong Long be removed.  Dennis Chan’s affirmation elaborated on this meeting.  He said that it took place at Liu’s place and Gao, Yu, Eugene Cha and one Liu Changjian were appointed as new directors of Gold Might.  He also said that Yang had refused to sign the minutes despite having been asked to do so.  Liu and Wang then signed the minutes and a neighbour signed as a witness.

Directors’ meeting on 25 August 2003

12.  Prior to sending out this letter, Gallant Y. T. Ho had on 21 August 2003 sent Yang a notice of a directors’ meeting to be held on 25 August 2003 at Liu’s place.  Yang replied on 22 August 2003 saying that Liu had resigned as a director on 4 July 2003 and he did not recognize the notice of directors’ meeting and would not attend the same. 

13.  Apart from demanding Yang to return the blank forms and the 15% Gold Might shares, Gallant Y. T. Ho also wrote letters dated 5 September 2003 to the 2^nd and 3^rd defendants demanding them not to act as directors of Gold Might.

14.  Liu also told Dennis Chan that Yang had been trying to gain control of Gold Might so as to sell its 85.72% shares in Dong Long.  He also said that Yang was about to receive consent from the Chinese joint venture partner one Beijing East Farm for Gold Might to effect the sale.  The joint venture agreement provided that each joint venture partner had a prior right to purchase the Dong Long shares of the other partners.  Hence, consent from the Chinese partner for the sale was necessary.  Liu wished to have Yang the other defendants to be enjoined from acting as Gold Might’s directors to sell the Dong Long interest. 

Yang’s reply

The Sakura project and Liu’s investment in Gold Might

15.  Yang made his first response by filing an affirmation on 18 November 2003.  He said he acquired Gold Might as a shell company in 1991 in Hong Kong for investing in the Mainland and to benefit from the open door policy.  He procured 50% of the shares to be allotted to him, 40% allotted to his wife Qian Wei and 10% to his then assistant Poon Sheung Mo.  He then caused Gold Might as the foreign party to enter into an agreement with one Beijing Yuyen Tian Park (“Yuyen Tian”) as the Chinese party to form a sino-foreign joint venture company called Sakura Villa Estate Development Co. Ltd. (“Sakura project”) on 8 November 1993.  In 1994, one Kailee Enterprises Co. Ltd. (Kailee”) through its employee Liuenquired with Yang on the possibility of Kailee participating in the Sakura project.  Kailee was wholly owned by the Chinese army and it wanted to invest in the Mainland as a foreign investor by sheltering behind Gold Might.  Yang accepted Kailee’s suggestion as he had been doing business with Kailee through Gold Might since 1991.  After discussion with Liu, he agreed to transfer 60% of the shares in Gold Might to Liu to be held as a nominee for Kailee so that Kailee could get the benefit of the investment as a foreign investor.  He and Kailee would invest into the Sakura project at the ratio of 40% and 60%.  He and Kailee also agreed that:

(a)	Gold Might had other business apart from the Sakura project and Kailee’s investment in Gold Might was confined to the Sakura project and Gold Might’s profit and loss in other business had nothing to do with Kailee; and
(b)	The joining of Kailee into Gold Might was for the Sakura project only and once the project was finished, Kailee’s interest in Gold Might would cease.

16.  After the making of the agreement with Kailee, Liu was appointed by Kailee as its nominee to hold the shares and to sit in Gold Might’s board.  Yang then procured 60% of Gold Might’s shares to be transferred to him on 1 July 1994.  He said the transfer of the 60% Gold Might shares to Liu was to secure Kailee the 60% of the net profit in foreign currency to be remitted to Gold Might upon conclusion of the Sakura project.  He further said that Liu in fact was a cadre of the Chinese Communist Party and the deputy general manager of Kailee.  His salary was no more than RMB3,000 per month and he would not have been able to acquire an investment with a nominal value of HK$600,000 or to invest millions of US dollars into the Sakura project.  He emphasised that the transfer of 60% of the Gold Might shares to Liu was to effect a form of security for Kailee and not a real transfer of Gold Might shares to Liu as Gold Might had other business investments unconnected with the Sakura project.  Since there was no actual transfer of shares, Kailee or Liu had not paid him any money for the transfer.  He also denied that Liu had acquired 75% of Gold Might shares or that he was holding 15% of Gold Might shares on trust for Liu.  He challenged Liu to produce documentary evidence to show that Liu had paid for the transfer of the Gold Might shares. 

17.  Kailee later brought in one Capital Enterprises Co. Ltd. (“Capital Enterprises”) as another investment partner for the Sakura project.  After this, the ratio of investment in the Sakura project became:

Yang	37.19%;
Kailee and Capital Enterprises	62.81%.
(Capital Enterprises        37.72%)

Resumption and compensation for Sakura project

18.  In 1996, the Sakura project was resumed by the Department of Foreign Affairs with compensation at the open market value as assessed by the Government.  An audit exercise was necessary to determine how much capital had been invested into the project and whether the capital was truly foreign.  Yang said that the audit report revealed that the RMB32,321,500 invested by Liu was in fact made up of RMB20,733,500 (equivalent to US$2.5 million) from Kailee and RMB11,588,000 from Capital enterprises.  He said that the report also revealed that both Kailee and Capital Enterprises were local corporations and not qualified to benefit as foreign investors.  He also said that the audit revealed that Liu was a mere nominee of Kailee and his investment was the investment of Kailee and Capital Enterprises. 

Audited report and Liu’s own investment

19.  The audited report as produced by Yang however told a fuller story which is different from that of Yang.  It said that prior to the resumption, the total investment into the Sakura project was RMB85,691,434.17.  Of this sum, the foreign party invested RMB31,869,934.17.  The Chinese party Yuyen Tian invested the land for the project which had a worth of RMB21,500,000.  It further said:

“In addition, Liu in the capacity of “foreign merchant” invested RMB32,321,500 (on the basis that it did not include the investment of Gold Might which contained Liu’s share).  This RMB32,321,500 was made up of an injection of a loan of US$2.5 million from the liquid assets of Shangong Province International Trust and Investment Company made through Kailee.  The remaining RMB11,588,000 was by the use of Kailee’s capital injected through Capital Enterprises.” 

The report thus said that of the total investment of RMB85,691,434.17, the foreign investment was at RMB31,869,934.17, the Chinese investment was at RMB53,821,500 (of which Yuyen Tian invested RMB21,500,000 and Liu invested RMB32,321,500).  The investment ratio was 37.19% for the foreign party and 62.81% for the Chinese party (of which Liu owned 37.72%).  Apparently, Liu’s share of investment made through Gold Might was not treated as part of the investment under his own name whilst the investment in his own name was treated as part of the Chinese investment despite that it had been injected by him purportedly as a “foreign merchant”. 

Purchase of Gold Might shares at RMB3,512,000

20.  The annexure to the audited report is clearer on the amounts invested by different parties into the Sakura project at different times.  It said that Liu had invested US$2,000,000 on 21 December 1993 and US$500,000 on 8 October 1994.  These two sums were equivalent to RMB20,733,500 at an exchange rate of US$1 to RMB8.2934.  It further said that Liu had invested RMB11,300,000 in 1993 and RMB3,800000 in 1994, but had taken back RMB3,512,000 in July 1994 to purchaseGold Might shares.  Liu thus invested RMB11,588,000.  The total of US dollars and Renminbi invested by Liu was equivalent to RMB32,321,500.  The figures in the annexure tallied with those in the body of the audited report.  The annexure further said that Liu had purchased the Gold Might shares with RMB3,512,000. 

Compensation for investments but not for RMB3,512,000

21.  Yang also produced a copy of the resumption agreement dated 19 January 1998.  The agreement incorporated the audited report as annexure 2.  The agreement said that the compensation was only paid for the investment in the Sakura project but not for the value of land assessed at RMB21,500,000 (which was the investment of Yuyen Tian).  The compensation for the value of the land of Yuyen Tian was to be separately dealt with between the relevant government departments.  That means compensation was only paid for the total investment sum of (RMB85,691,434.17 – RMB21,500,000) RMB64,191,434.17.  Of this sum, RMB31,869,934.17 was foreign investment and RMB32,321,500 was Liu’s investment.  The ratio of investment was 49.65% (foreign) to 50.35% (Liu).  The total compensation was at RMB97,819,827.28 which was divided between the foreign party and Liu at RMB48,577,614.24 and RMB49,242,213.04 respectively.  The ratio of division was almost the same as the ratio of foreign investment vis-à-vis Liu’s investment.  Paragraph 6.2 of the agreement also said that apart from Liu’s share of compensation, the amounts of compensation that should be distributed to the respective investors of the foreign party should be discussed and decided by the respective investors of the foreign party.  The plain meaning of paragraph 6.2 is different from the meaning as contended by Yang in his affirmation.  He said paragraph 6.2 provided that the compensation payable to the foreign party was to be determined by him through Gold Might. 

Liu was nominee of Kailee and Capital Enterprises for RMB32,321,500 investment

22.  Yang also produced receipts to show that the compensation of RMB49,242,213.04 was divided between Kailee and Capital Enterprises at RMB36,242,213.04 and RMB13,000,000 respectively.  He also produced letters from Kailee and Capital Enterprises to the resumption department showing that Liu was acting as a nominee of Kailee and Capital Enterprises in investing in the Sakura project.  It could well be that Liu was acting as the nominee of Kailee and Capital Enterprises in the RMB32,321,500 investment (made up of US$2.5 million and RMB11,588,000).  Hence, the compensation of RMB49,242,213.04 was shared by them.  Yang also produced a letter from Kailee to the resumption department saying that the investment money had come from a loan and Kailee had to pay penalty interest.  I think this fact has already been borne out in the audited report which says that the US$2.5 million came from a loan from a Shandong Province company.  But the audited report treated this as a loan to Liu which Liu purportedly invested in the capacity of “foreign merchant”. 

RMB3,512,000 for purchase of Gold Might shares from Capital Enterprises

23.  The letter from Capital Enterprises dated 8 April 1998 as produced by Yang referred to Liu as its deputy general manager.  It also said that of Liu’s investment in the Sakura project, a sum of RMB15,100,000 was paid out of the account of an item for which Liu was responsible.  If one goes back to the annexure of the audited report, one can see that this sum is the total of Liu’s investment in Renminbi in the project before RMB3,512,000 was taken back for purchasing Gold Might shares.  From these documents, it could be inferred that the money Liu used to buy the Gold Might shares came from Capital Enterprises.  There are however other documents as will be referred to below that may show otherwise.  In any case, whether Liu is holding these shares in his own right or as a nominee for Capital Enterprises is a crucial question in this application.  It is however clear from the ratio of investment and of distribution of compensation between Liu and the foreign party at 49.65% (foreign) to 50.35% (Liu) referred to above that the RMB3,512,000 had not been taken into account for payment of compensation.  If the audited report is correct that this sum was used by Liu to buy Gold Might shares, there was of course no reason why compensation would have been separately paid for it as there was already compensation for Gold Might’s investment.

24.  Yang continued to say in his affirmation that upon resumption of the Sakura project, the joint venture between him and Kailee came to an end.  All the investments by Kailee and Capital Enterprises through Gold Might into the project had been paid off by the compensation.  Liu had also not made any investment into the project through Gold Might.  Liu should thus transfer the 60% Gold Might shares back to him.  Yang also produced an undated statement by his assistant one Miss Li Binbin saying that she had visited Liu in the hospital in October 1999 and Liu had promised her that he would sign the transfer papers if and when Yang went to see him. 

25.  However, Yang’s case is contradicted by the treatment of the RMB3,512,000 in the audited report which said that the sum was used by Liu to purchase Gold Might shares.  The audited report was incorporated as part of the agreement for resumption and compensation and presumably accepted by everybody to be correct. 

Dong Long project

26.  Yang then referred to the Dong Long project which is also a joint venture.  It was initially established in 1993 by one Agricultural and Industrial Co. Ltd. of Beijing (“Beijing Agricultural”) as the Chinese party and Osmond as the foreign party.  Gold Might became one of the investment parties by entering into an agreement with Beijing Agricultural and Osmond on 18 June 1999 whereby Gold Might agreed to invest US$10,603,000 into the Dong Long project and Osmond would invest US$1,767,000 making a total of US$12,370,000.  Gold Might would thus have 85.72% interest in this project.  The compensation received by Gold Might for the resumption of the Sakura project was remitted directly into the Dong Long project as Gold Might’s investment therein.  Yang further said that neither Kailee nor Liu had contributed anything to Gold Might’s investment in Dong Long. 

27.  In fact, there was an earlier agreement dated 6 April 1999 between Gold Might and Osmond whereby Osmond, which was then holding 70% of the US$12,370,000 investment (or US$8,659,000), agreed to transfer ⁶/₇ of such investment to Gold Might.  The later agreement in June 1999 thus enlarged Gold Might’s interest in the project.  By a further agreement of 16 March 2001 made between Gold Might and one San Fat Co. LLC of USA (“San Fat”), Gold Might agreed to transfer 35% of its interest in Dong Long to San Fat.  Yang went on to say that because of his participation, the price of the Dong Long project had shot up and there were many people expressing interest to join it.  Such interested parties included Liu and his family but not Kailee.  He then referred to the demand letter dated 19 June 2003 from the solicitors of Wang and Gao demanding transfer of Gold Might shares and said that the letter made him recall that 60% of Gold Might’s shares were still registered in Liu’s name.  He then tried to locate Liu.  But his assertion that he only recalled on or after 19 June 2003 that Liu was still the registered owner of the 60% shares is contradicted by the minutes of shareholders’ meeting on 7 June 2003 which he had signed.  The minutes recorded his confirmation on that day that Liu had already signed a share transfer form for his 60% shares in Gold Might and passed the form to Yang.  He also did say anything about the contents of the minutes of the two purported shareholders’ meetings.

HCA 2293 and resignation as director

28.  Yang then referred to the receipt of the writ of summons in HCA 2293 of 2003 issued by Wang & Gao suing him, Liu and Gold Might for transfer of Gold Might shares.  He then visited Liu on 1 July 2003 and gave him a copy of the writ and told him the background.  Since the Sakura project had come to an end and the interest of Kailee and Capital Enterprises had ceased, he told Liu that he himself should shoulder all responsibility and asked Liu to re-transfer the Gold Might shares.  On 3 July 2003, he went to see Liu again together with Zhang Zili.  He also brought along the documents for transfer of shares.  Regarding the letter of promise he gave Liu, he said Liu’s wife had mentioned that Liu had suffered because the audit exercise disclosed that Kailee’s investment was not foreign.  She thus asked him to give Liu some ex-gratia payment.  He agreed to give Liu a gratuitous sum of US$300,000 as suggested by Liu’s wife but to be paid within a year.  The letter of promise was written by him as dictated to him by Liu for Liu’s protection.  After that, Liu executed the documents for the transfer of shares and passed them to him.  On 6 July 2003, he on the advice of solicitors visited Liu again and asked him to sign a letter resigning from the directorship of Gold Might.  Liu duly signed the letter and returned it to him.  The copy of the resignation letter produced is dated 4 July 2003.  He denied that Liu had signed any document in blank on those occasions.

Authorization for Zhang

29.  He further said Liu wanted to avoid the need to go back and forth on matters relating to HCA 2293.  He therefore signed a letter of authorization to Zhang for her to act for him to deal with the relevant authorities in Hong Kong in relation to his share interest in Gold Might.  But the letter of authorization made no mention of HCA 2293 at all. 

Other projects

30.  Yang then referred to the Harbin Precision Measuring Tape Co. Ltd. (“Harbin Precision”) and the Wuhan Amusement Centre (“Wuhan Centre”) which were projects of Gold Might.  Her produced evidence showing that Gold Might had invested US$300,000 into Harbin Precision and the project was to last for 15 years from October 1992.  These projects were like the Dong Long project in that Kailee or Liu had no interest therein.  He said that Liu had discovered that Gold Might was a substantial company and wanted to take benefit from his being the registered shareholder of 60% of the shares.  He also challenged the authority of the solicitors of Liu to act for Gold Might in this action.  He denied that there was any meeting of the shareholders or directors of Gold Might on 5 August 2003.  It is Liu’s case that there was a directors’ meeting on this day in which Yang was stripped off his roles as the chairman and general manager of Dong Long. 

31.  Yang then said that as a result of the ex parte injunction, he and the other directors of Gold Might had been restrained from acting for Gold Might in the Dong Long project and the project had come to a standstill.  He had through Gold Might invested US$10.603 million into the project.  The project had suffered considerable loss.  The Chinese partner had also demanded payment of damages resulting from the suspension.  The injunction also prevented him from participating in the business of Harbin Precision as a director of Gold Might.  This has caused considerable disruption in its business.  He could not travel overseas to seek buyers for the petroleum measuring equipment produced by it.  The joint-venture partners had also threatened to sue for breach of joint-venture agreement.  He said the injunction was contrary to the financial interests of Gold Might and would cost loss to it and to him.

Yu Xiao Ning’s affirmation in response

32.  The plaintiffs filed an affirmation of Yu Xiao Ning on 27 February 2004 to replied to Yang’s affirmation.  Yu’s information for the affirmation came from Liu and the documents of the plaintiffs.  He produced documents obtained from the Companies Registry which show that Zhang Gen Jie, Lau Wai Chung and Lu Chao Fang George were appointed as directors of Gold Might in November 2002 to replace Yang’s wife Qian Wei and his assistant Poon Sheung Mo Johnny.  Zhang, Lau and Lu also became registered shareholders of Gold Might on 6 May 1994 with each holding 25% of the shares.  When Yang asked Liu to invest in Gold Might, Yang told Liu that Gold Might was involved in the Sakura project and his then partners Zhang, Lau and Lu wanted to pull out from the project.  After negotiation conducted through Yang, Liu agreed to purchase the shares owned by Zhang, Lau and Lu at US$400,000.  Yu also repeated Liu’s case on why 15% of the shares were transferred to Yang to hold on trust for Liu.  The documents of the Registry show that 60% Gold Might shares were transferred to Liu on 20 July 1994 and 15% were transferred to Yang on 3 August 1994.  Yu also produced a Chinese agreement signed by Liu and Yang and dated 16 May 1994 stating that Liu had agreed to purchase the 75% of Gold Might shares from Zhang, Lau and Lu at US$400,000 and 15% of the Gold Might shares would be registered under the name of Yang for him to manage but are owned by Liu. 

33.  In addition, Yu also produced a statement dated 20 October 1994 signed by one of the outgoing shareholders Lau Wai Chung.  The statement said that in July 1994, Lau had discussed with Liu and Yang on transfer of Gold Might shares.  Liu had agreed to purchase the 75% shares originally owned by Zhang, Lau and Lu.  He also said that at the time, Liu and Yang had verbally agreed that Yang would be authorized by Liu to manage 15% shares for Liu.  It was Lau’s recollection of the discussion that the actual purchase price was paid by Liu.  But he did not know the actual source of the purchase price.

34.  Yu also produced two auditors’ fact-finding certificates Nos. 28 and 29 both dated 12 May 1997.  The certificates confirm that Yang had in July 1994 remitted RMB3,512,000 (which was exchanged to US$400,000) from the account of Sakura and that sum had remained in Sakura’s suspense account.  They also said that as confirmed by information furnished by Yang to the auditors, that sum was Liu’s investment into Gold Might, it was paid by Sakura from the loan of RMB15,100,000 advanced by Capital Enterprises and was used to purchase the 75% Gold Might shares from Zhang, Lau and Lu.  Both certificates bear Yang’s signature. 

35.  Yu also revealed that Liu was a retired colonel of the army and was well acquainted with many influential persons and enterprises in China. Yang wanted Liu’s participation because he wanted to use Liu’s connections to solicit investment for the Sakura project.  Liu also wanted to invest in a Hong Kong company so as to benefit from the status of “foreign investor” and to enjoy the tax incentives by the government.  To support this, Yu also produced a statement dated 27 February 2004 by Capital Enterprises confirming that RMB3,512,000, which was equivalent to US$400,000, had been lent to Liu and this loan had already been settled between them.

36.  On the assertion in the undated statement by Miss Li Binbin that Liu had promised her that he would sign the transfer papers if and when Yang went to see him, Yu produced a statement dated 19 February 2004 by Wang saying that the visit was in 2000 and he was also there.  Wang explained that the purpose of the visit was to explain to Liu, who was the managing director of Gold Might, that Gold Might had been late in filing the annual return and was penalized by the Government.  On that occasion, Miss Li had not mentioned anything about transfer of shares.  She went there for the purpose of apologizing to Liu for her negligence in the discharge of her duties as the company secretary.

37.  On the Dong Long project, Liu was not aware of it until July 2003.  Liu also denied that he had resigned as a director of Gold Might.  He denied that he had signed the resignation letter which was dated 4 July 2003 or that he had resigned from the directorship.  Yu did not deal with Harbin Precision and Wuhan Centre.  There is no evidence that Liu was aware of these projects. 

38.  Finally, Yu produced documents to show that Yang had purportedly divested Gold Might of its 85.72% interest in the Dong Long project to a Bolivian company Italian Furniture Ltd. of which Yang was the legal representative. 

Second round of reply by Yang

39.  Yang made his second supplemental affirmation to reply to Yu’s affirmation.  He said that Zhang, Lau and Lu each only had 25% in the Sakura project and not in the other projects of Gold Might.  He further asserted that each of Zhang, Lau and Lu had agreed to give him 5% of their interest in the Sakura project if the Central Government would give approval for the project.  The project was approved on 6 May 1994 and on that day, he procured the transfer of 20% shares to each of Zhang, Lau and Lu.  He then became on records the registered owner of 40% of the shares.  But his assertion did not tally with the annual returns filed with the Companies Registry which show that on 6 May 1994, each of Zhang, Lau and Lu was transferred 25% of the shares.  Yang also said that the shares were transferred to Zhang, Lau and Lu as security of their investment in the Sakura Villa and none of them had paid any money for the transfer of the shares. 

40.  On the withdrawal of Zhang, Lau and Lu from the project, Yang said that they did not want to continue for fear that Kailee, a military corporation, was also involved.  He therefore paid them RMB3,6876 (equivalent to US$400,000) has return of their investment.  He further said that the sum was entered in the Sakura records as account receivable from him.  Zhang, Lau and Lu then transferred their 60% shares to Liu at Yang’s direction.  Yang also denied that Capital Enterprises had lent RMB3.512 million to Liu.  He also said that it was illegal under the Mainland’s law for Capital Enterprises to have advanced the said sum to Liu to invest in Gold Might shares. 

41.  Regarding the two auditors’ fact-finding certificates, he explained that he signed the certificates as prepared by Liu just to assist Liu.  The reason he gave was that both Kailee and Capital Enterprises had breached the law in investing through Gold Might and the auditors were threatening to report this corruption scandal to the Central Government.  Thus, Liu prepared certificate No. 28 for him to confirm that the RMB3.512 million was part of a loan of RMB15.10 million from Capital Enterprises and the sum had been used by Liu to purchase the shares from Zhang, Lau and Lu.  But these matters as confirmed in the two certificates reveal exactly a breach of the law as alleged by him and referred to in the last paragraph because they show that RMB3.512 million as advanced by Capital Enterprises had been used by Liu to purchase the 75% Gold Might shares.  Yang did not say why the auditors did not report this infringement of law to the Central Government.  He also said that there was never any record saying that Capital Enterprises had lent any money to the Sakura project and there was never any loan agreement.  In fact the audited report and its annexure produced by Yang in his first affirmation showed that the investments from Kailee and Capital Enterprises had been treated as loans to Liu and used by Liu as investment in the Sakura project with RMB3.512 million used by Liu to purchase Gold Might shares. 

42.  It is possible that in 1997 when the auditors were auditing the Sakura accounts, the investments of Kailee and Capital Enterprises were treated as loans to Liu.  But the fact remains that no compensation had been paid separately for the RMB3.512 million. 

43.  Yang further argued that the statement in the audited report saying:

“Liu in the capacity of “foreign merchant” invested RMB32,321,500 (on the basis that it did not include the investment of Gold Might which contained Liu’s share).  This RMB32,321,500 was made up of an injection of a loan of US$2.5 million from the liquid assets of Shandong Province International Trust and Investment Company made through Kailee.  The remaining RMB11,588,000 was by the use of Kailee’s capital injected through Capital Enterprises.”

was a reference by the auditors to the investment of Kailee and Capital Enterprises and not investment of Liu.  But this contradicts his position that he had signed the auditors’ fact-finding certificates and shrouded the nature of the investments by Kailee and Capital Enterprises and made them appear as loans only.  Furthermore, the wording of the audited report is plain which says that the investment of RMB32,321,500 was treated as Liu’s and the funding came from loans.  

44.  On the Chinese agreement signed by Liu and Yang and dated 16 May 1994 stating, inter alia, that Liu had agreed to purchase 75% of Gold Might shares and 15% would be registered under Yang’s name for him to manage but are owned by Liu, Yang explained that the document was prepared by Liu and signed by him to assure Liu to half of 15% net profit of the project in return for Liu’s participation.  He further said that as the government resumed the project, this agreement was frustrated. 

45.  Yang’s solicitor Miss Koo also produced a Chinese statement by Lau Wai Chung dated 19 March 2004.  This statement qualified the previous Chinese statement by Lau dated 20 October 1994 and produced by Yu.  In the earlier statement, Lau acknowledged that Liu had agreed to purchase the 75% shares of Gold Might originally owned by Zhang, Lau and Lu and that Liu agreed to authorize Yang to manage 15% shares for him.  In this new statement, Lau said that his earlier statement was copied by him from a draft produced by Liu who asked him to make the statement for the records of Kailee.  Lau further said that he did not agree that the RMB3.512 million was from Liu, hence when he did the copying, he did not specify that it was from Liu.  He further said that the payment was by Yang. 

Yu’s 2^nd affirmation in second round of response

46.  Yu Xiao Ning made his 2^nd affirmation to further respond to Yang.  He explained that Liu was in poor health and could not make an affirmation for use in the action.  On Liu’s case that he had been underpaid RMB4.76 million compensation, Yu produced an accountant’s report which showed that the underpayment of compensation to Liu’s investment of RMB32,321,500 (or the investment of Kailee and Capital Enterprises) was RMB5,104,811.84.  The accountant referred to the resumption agreement in performing the calculation and the calculation was based on different rates of return for funds injected in different year as stipulated in the agreement.  However, the analysis above on ratio of investment and ratio of compensation at 49.65% (foreign) to 50.35% (Liu) (excluding the value of land from Yuyen Tian assessed at RMB21,500,000) show that the distribution of compensation was probably made without regard to the different rates of return for funds injected in different years.  The distribution appeared to have been made simply on the basis of the ratio of funds injected by the parties.  In any case, the argument on whether Liu had been underpaid RMB4.76 million or RMB5,104,811.84 was on the amount of compensation payable for the investments of RMB32,321,500.  It was not compensation on the sum of RMB3.512 which the documents say had been used by Liu to purchase Gold Might shares.  The argument on the shortfall is a separate issue and not the cause of action. 

Forged signature in resignation letter

47.  Both sides have also filed affirmations on whether Liu or those assisting him should have at the time of the application for ex parte injunction seen the letter of resignation dated 4 July 2003 allegedly signed by Liu.  I do not think there is sufficient evidence to show that Liu or those assisting him were aware of the letter when the ex parte application was made or before a copy of the letter had been produced by Yang. 

Defendants’ Submissions

48.  The defendants’ summons for discharge does not state any ground.  The skeleton argument of counsel for the defendants stated two grounds; namely:

(1)	the plaintiffs have been guilty of material non-disclosure of facts; and
(2)	the plaintiffs have misrepresented and suppressed material facts.

49.  The defendants argued that the injunction was sought on the basis that Yang’s roles as a director and the general manager of Dong Long had been removed in the directors’ meetings on 5 August 2003 and 25 August 2003, but they said the resolutions were invalid and thus the application was without basis.  That submission is not entirely correct.  The injunction was sought to prevent Yang from acting as director of Gold Might to dispose of Gold Might’s interest in Dong Long.  It was not to prevent Yang from acting as a director and general manager of Dong Long.  Even if Yang is still a director and the general manager of Dong Long, the plaintiffs may still have a cause in preventing him from disposing of Gold Might’s interest in Dong Long.  Counsel for the defendants further argued that Liu had ceased to be a director of Gold Might by reason of rotation of directors under Table A.  But the same applies to Yang.  If that was the case, Yang would have no authority to represent Gold Might to dispose of its interests in Dong Long.

50.  The defendants also raised the point that the plaintiffs should have informed the ex parte judge that Yang had been precluded from acting as a director of Gold Might by rotation of directors under Table A and that the directors’ meeting on 25 August 2003 could not have appointed directors as directors could only be appointed in members’ general meeting.  These are points of law that were only raised in the skeleton argument and not in the defendant’s affirmations.  I cannot assume that the plaintiffs were aware of these points but had deliberately suppressed them.  I also note that the appointment of directors by Liu is not a basis for the application for injunction.  Furthermore, even if these submissions on law are correct, there is clear evidence that Yang had, regardless of his having vacated the board of Gold Might, still tried to dispose of the Dong Long interest on behalf of Gold Might. 

51.  On the case of the 2^nd and 3^rd defendants, counsel argued that the legal basis to enjoin them from acting as Gold Might’s directors is wanting.  Counsel further argued that notice of meeting for appointing them as directors need not be served on Liu and there was no a valid resolution to remove them as directors.  Even if this is correct, so long as Liu can establish a serious question to be tried on whether he is the beneficial owner of 75% of Gold Might shares, there can still be a case for enjoining the two of them from disposing of Gold Might’s interest in Dong Long.

52.  The defendants also argued that the grounding affirmation was made by Dennis Chan and not by Liu.  I note that Liu is in poor health and cannot travel to Hong Kong and his case is well supported by contemporaneous documents. 

53.  The defendants have made the point that Gold Might could not have authorized this action.  Counsel for the defendant relied on the case of Wright and Anor v. Atlas Wright (Europe) Ltd. [1999]2 BCLC 301 and 306 and argued that Liu has the right to attend and vote at the general meeting and has assented to the authority to sue.  This is a matter that the general meeting of Gold Might could carry into the fact.  Such assent was therefore as binding as a resolution in general meeting.  I think there is merit in this argument particularly when Yang’s case is that both Liu and he himself have vacated from the board by rotation of directors.  The defendants however insist that this principle is only applicable when the assent is from 100% of the shareholders.  But I do not see the reason for that.  Even if it were wrong to include Gold Might as the 1^st plaintiff for want of authority, Liu himself can still institute this action for the injunctive relief if he is the 75% owner of the shares and Gold Might is paralysed for want of a board and deadlock of shareholders.  To hold otherwise would be to ignore the majority shareholder’s interest in the company and to allow Yang to benefit from the deadlock. 

54.  On material nondisclosure, the defendants’ first point is that Liu had not disclosed his having been merely an employee of Kailee and had retired in July 1994.  I cannot see why this is a material fact.  Liu is suing in the capacity of the owner of 75% of Gold Might shares, he is not suing as a representative of Kailee in respect of Kailee’s investment in Gold Might.  The defendants also argued that Liu should have disclosed that he was a Communist cadre earning a meagre income so that the ex parte judge could consider whether he could have invested US$400,000 into the project that may only be participated by foreign investors.  I think this is a criticism that Liu had failed to disclose Yang’s defence.  But even when this point was raised by Yang, Liu had provided an answer to it.  I cannot see why Liu should be criticised for not anticipating Yang’s defence especially where the defence has not featured in any contemporaneous document.

55.  The defendants also attacked Liu for having painted himself as an innocent investor who had invested US$400,000 into Gold Might and was still owed RMB4.76 million.  This unfortunately is not exactly Liu’s case.  Liu is suing in the capacity of the beneficial owner of 75% of Gold Might shares and not for profits arising from the RMB4.76 million.  Liu is also not suing for the return of Kailee’s investment.  That had been compensated though possibly with a shortfall.  Likewise, the defendants’ attack on Liu that he had suppressed the fact that Kailee had invested through Gold Might so as to take the benefit of the open door policy is also not justified.  Liu might have invested for Kailee purportedly as a “foreign merchant”.  But this action is about Liu’s own investment and not what he did for Kailee. 

56.  The defendants also submitted that Liu had failed to disclose various documents showing that the Dong Long project had existed since 1993 and Gold Might only became involved in 1998.  I cannot see why such matters are material for the purpose of this application.  The criticism against Liu for failing to mention about Gold Might’s investments in Harbin Precision and Wuhan Centre is also ill founded because there is no evidence showing that Liu was aware of these projects.

57.  The defendants finally submitted that what Yang tried to do was to transform rather than dissipate the asset of Gold Might as Gold Might would receive from Italian Furniture 2,500 square metres of floor area in the completed development free from encumbrance and RMB2 million.  There is insufficient material for me to conclude whether this deal would merely result in a transformation and not dissipation of assets.  However, the disposal of 85.72% of Dong Long, which is a very substantial development project, is something that the controlling shareholder should have a say.

Serious issue to be tried

58.  Liu’s case of being the beneficial owner of 75% of Gold Might shares is well supported by contemporaneous documents.  On the other hand, Yang’s case depends on a number oral assertions some of which are contrary to the contemporaneous documents.  These assertions are:

(1)	The transfer of 60% of the shares of Gold Might to Liu was for Liu to hold as nominee for Kailee.  The transfer of the 60% shares was to secure Kailee’s interest in the Sakura project and not a real transfer.  It also had nothing to do with Gold Might’s other projects.
(2)	The document signed by Yang acknowledging Liu’s beneficial ownership to 15% of Gold Might shares which were registered in Yang’s name was signed by Yang so as to give half of the 15% net profit of the Sakura project in return for Liu’s participation.
(3)	The US$400,000 paid to Zhang, Lau and Lu was from the capital previously injected into the Sakura project and not from Liu (this is contrary to the documents produced by Yu).
(4)	The contents of the two auditors’ fact-finding certificates are all untrue and Yang signed them just to help Liu out of trouble.
(5)	Before October, 1999, Liu had signed an instrument of transfer to transfer the shares back to Yang and he had in about October, 1999 orally promised Yang through Li Binbin that he would sign all necessary documents to effect the transfer of the shares back to Yang.
(6)	The US$300,000 referred to in the letter of promise was a gratuity Yang agreed to pay Liu because Liu had suffered in the audit exercise (and not as purchase price for the 60% shares of Gold Might).  The letter was written by Yang but was dictated by Liu and the terms therein did not represent the true purpose of the payment.  Yang did not explain why the payment of a gratuity was expressed as a payment for the shares.  He also did not explain why he had agreed to those terms and wrote them out on a piece of paper when they did not represent the truth.  He has also not explained why Madam Zhang would have agreed to witness something which was untrue.

59.  When Liu’s case is considered in isolation, he has clearly established that his beneficial ownership of 75% of Gold Might shares is a serious issue to be tried.  When his case is viewed against Yang’s case, his case would appear to be more convincing though I would not go any further than holding that there is a serious issue to be tried. 

Balance of convenience

60.    The evidence shows that Yang is attempting to divest Gold Might’s interest in the Dong Long project to Italian Furniture, a Bolivian company, and Italian furniture appears to be controlled by Yang who is a Bolivian citizen.  If the injunction is discharged, Gold Might would lose all interest in the Dong Long project.  One cannot tell the value of the return from Italian Furniture to Gold Might.  The loss to Gold Might and hence to Liu would be difficult to quantify.  Damages does not appear to be an adequate remedy to Gold Might or Liu.  Balance of convenience also favours the status quo. 

Scope of the injunction

61.  However, even if the injunction should not be discharged altogether, it is necessary to consider whether it should be continued in the present terms.  Since Liu is not aware of the Harbin Precision and Wuhan Centre projects and has not expressed any fear about their dissipation, I do not think it necessary to enjoin Liu and the 2^nd and 3^rd defendants from managing these two projects.  For paragraph 1 of the injunction, I will narrow it down so that Yang is restrained from acting as a director of Gold Might for the purpose of negotiating or entering into any agreement on behalf of Gold Might for the sale of Gold Might’s shareholding in the Dong Long project.  This paragraph as amended does not prevent him from acting in such capacity to continue with the Dong Long project or in other matters.  For the same reason, I do not think it necessary to temper with paragraph 2 of the injunction.  However, I do not see the need for paragraph 3 if the injunction is just to preserve Gold Might’s interest in Dong Long.  I would therefore discharge paragraph 3 of the injunction. 

Continuation

62.  Having dealt with the defendants’ summons to discharge, I now deal with the plaintiffs’ summons to continue.  For the same reasons given for the summons to discharge, I continue paragraphs 1 and 2 of the injunction with the same amendment to paragraph 1.

Costs

63.  I would also make a costs order nisi that the costs of the ex parte application and the inter partes hearing before Deputy Judge To on 25 March 2003 be in the cause and the costs of the argument for discharge and continuation be to the plaintiffs.  I make this order despite the amendment to paragraph 1 and the discharge of paragraph 3.  The reason being that at the hearing, the plaintiffs did not really oppose any relaxation of the injunction on matters other than the Dong Long project and had invited the defendants to propose a variation.  But the offer had not been taken up by the defendants.  Hence, I think it proper to make this order nisi.