YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG RICKY AND OTHERS

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

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BACKGROUND

1. The plaintiff (“YDL”) is a BVI incorporated company.  This action is instituted by the plaintiff which has recently appointed directors and two receivers, Mr Gronow and Mr Fok (“the Receivers”).  The Receivers were purportedly appointed pursuant to the terms of two similar Equitable Share Mortgages.

2. These two Equitable Share Mortgages formed part of a series of financial documents executed on 10 September 2010 whereby a loan facility was granted by Manchester Securities Corp (“MSC”) as lender to YDL as borrower.  The series of financial documents included the followings:

(1)  A Facility Agreement.

(2)  An Investor Rights Deed.

(3)  Two Equitable Share Mortgages over shares of YDL owned by the two shareholders, namely Wonder Earn Group Ltd (“Wonder Earn”) and Yifung Properties Ltd (“YPL”).  These mortgages are securities under the Facility Agreement.  In the event of default under the Facility Agreement, MSC as mortgagee could appoint receivers over the shares of YDL.

(4)  A Triparte Legal Charge over a real property in Hong Kong (“the HK Property”).  The mortgagor is Capital Metro Group Ltd (“Capital Metro”) and the mortgagee is MSC.  This is also a security under the Facility Agreement.  In the event of default under the Facility Agreement, MSC can appoint a receiver for the HK Property.

(5)  There also certain related agreements which do not feature much in the current dispute between the parties.

3. Pursuant to the Facility Agreement, very substantial loan had been advanced by MSC to YDL in September 2010.  It is the plaintiff’s case that the loan and interest became repayable on 17 March 2014.  On that day, YDL defaulted in repayment.  On 18 March 2014, MSC issued a letter to YDL declaring an event of default under the Facility Agreement and notified YDL of its intention to enforce the securities by appointing receivers to effect a sale of the HK Property.  On the same day, MSC also appointed Mr Gronow and Mr Fok as receivers under the two Equitable Mortgages.

4. On 20 March 2014, the 1^st defendant (who was at that time a director of YDL) in his letter to MSC and copies to the Receivers said:

“Given the Lenders [MSC] has declared the Borrower [YDL] to be in default, and that receivers have been appointed in relation to the securities under the Securities, the receivers may exercise their power of sale and/or transfer the title of assets over which security has been given under the Securities Agreement.

Please take notice that in such event, I will be interested in purchasing the aforesaid assets.  Please keep me informed in good time of the manner and necessary details of the sale and/or transfer.”

Based on this letter, the Receivers believed that the 1^st defendant seemed to have accepted their appointment.

5. Yet, by a letter dated 26 March 2014, it appeared that the 1^st defendant raised challenge to the appointment of the Receivers on the ground that no time had lapsed between the delivery of the demand for payment (on 18 March 2014) and the Receivers’ appointment.  The challenge was purportedly based on clause 7.9(c)(i) of the Equitable Share Mortgages providing that a period of one hour must have elapsed before MSC can take enforcement action following a demand for repayment.  To avoid technical arguments, MSC re‑appointed the Receivers on 28 March 2014.

6. Then on 28 March 2014, the receivers received a solicitor’s letter from Messrs DLA acting on behalf of YPL, Wonder Earn, the 1^st defendant.  They reiterated the same challenge based on “appointment time”.  Then it was followed by a “without prejudice” letter whereby they suggested some uncertainty in the amount of repayment demanded without elaboration.  This was promptly replied to by the Receivers on 2 April 2014 stating that the Receivers were not aware of any dispute on the sum demanded by MSC.

7. It is the plaintiff’s case that the Receivers encountered the following obstructions in the exercise of their rights and duties:

(1) after the appointment, the Receivers successfully replaced the directors of YDL.  They also attempted to change the legal representative and supervisor of a WFOE in PRC owned by YDL.  This WFOE held and operated a property development project in the PRC named “Riviera Project”.  They were unable to register a change in directors, legal representatives and supervisor of the WFOE.  The chops of WFOE remained in the hands of the defendants;

(2) when they asked the defendants for delivery up of all property, books, records etc of YDL and/or WFOE, the defendant simply ignored the repeated demands;

(3) they were denied access to the premises of the WFOE;

(4) when they attempted to gain control over the bank accounts of YDL (maintained with HSBC and SCB), they were informed by the banks that the banks were unable to continue operating the accounts because of conflicting instructions received from the defendants;

(5) they were also prevented from obtaining records of YDL from its auditors because the latter had been informed by Li, Wong, Lam & W.I. Cheung (“LWL”) that they acted for YDL and Wonder Earn.  LWL informed the auditors that legal proceedings in the High Court had been instituted to challenge the validity of the Receivers’ appointment;

(6) then by a writ search, the Receivers discovered that on 20 June 2014, YPL and Wonder Earn issued HCA 1143/2014. This writ was never served on MSC.  The writ purported to claim for “termination or rescission of the Facility Agreement and other relevant contracts due to [MSC’s] misrepresentation (fraudulent, negligent and/or innocent misrepresentation) and/or breach of terms of the Facility Agreement and/or oral agreements and/or collateral warranties”; and

(7) it was also discovered that YDL no longer occupied the HK Property as its office which remained locked with lights off.

8. Consequently, on 16 July 2014, YDL issued a writ in HCA 1341/2014.  By an ex parte application before DHCJ Wilson Chan on the same day, YDL obtained an ex parte injunction against the defendants consisting of the following orders:

(1)  a mandatory order of delivering up assets (including books and records) of YDL;

(2)  a prohibitory order of not to remove YDL’s assets outside jurisdiction;

(3)  a mandatory order of providing access to the HK Property and other business premises of YDL;

(4)  a mandatory order of giving instructions to YDL’s auditors for the release of YDL’s financial documents and to YDL’s bankers to accept current directors’ instructions;

(5)  a prohibitory order not to interfere with YDL’s relationships with bankers and auditors; and

(6)  a prohibitory order of not holding out as directors/officers of YDL.

THE APPLICATION TO DISCHARGE THE EX PARTE INJUNCTION

9. Counsel for the 1^st defendant Mr Chen attacked the propriety of the ex parte injunction on two basis:

(1)  there was no urgency or need for secrecy; and

(2)  there was material non‑disclosures.

Urgency/secrecy

10. In relation to the first ground, Mr Chen made the following points:

(1)  He relied on the dictum of Lam J (as he then was) in Slik Hong Kong Co Ltd v Gerald Rhoslyn[1]to the effect that ex parte applications should be regarded as exceptional and the court should not entertain the same unless there are cogent justifications usually in term of either extreme urgency or secrecy.  He also relied on the dictum of Ma J (as he then was) in Brand, Farrar Buxbaum v Samuel-Rozenbaum Diamond[2]in which his Lordship said:

“…. At the risk of repeating the obvious, ex parte orders are only made where the situation is of such extreme urgency that there is literally no time to warn the defendant of what is proposed or where the purpose of the injunction will or may be frustrated if the defendant is informed…” (my emphasis)

(2)  He submitted that there was neither urgency nor need for secrecy.  He submitted that putting the plaintiff’s case to the highest, its case of urgency/secrecy was built upon (a) non‑cooperation of the 1^st defendant in handing over management control of YDL to the Receivers; and (b) the discovery on the 10 July 2014 visit to the HK Property that the premises were closed down with YDL’s name removed from the building directory.

(3)  On “secrecy”, he first pointed out that in letter dated 5 June 2014 from the Receivers to the defendants, the former demanded the latter to hand over assets of YDL.  The defendants did not respond.  By another letter dated 18 June 2014, the receivers reiterated the demand and threatened that legal proceedings would be commenced without further notice in the event of the defendants failing to deliver up the assets.  He submitted that this letter completely dispelled any suggestion of need for secrecy.  If there were any nefarious intent on the part of the 1^st defendant to dissipate YDL’s assets, he would have done so given that the ex parte application was made nearly one month later.  He referred to a similar observation made by Lam J in Cheung Yuk Chun v Yeung Wo Fai[3].  In similar vein, Mr Chen referred me to the fact that on 16 June 2014, the plaintiff also commenced proceedings in the PRC against the 1^st defendant.

(4)  On “urgency”, he submitted firstly that the plaintiff had no urgency to get the various orders sought in its ex parte application, especially those that are mandatory in nature.  For instance, the plaintiff had no real urgency to seize the books and records of YDL which is in nature a holding company of a WFOE in the PRC.  As to access to the HK Property, the plaintiff had already instituted a mortgagee action.  The attempt to gain access to the office premises was no more urgent than the intention to seize the books and records of YDL.  Similarly, there was no urgency to obtain the financial records from YDL’s auditors.  As for the bankers, they already indicated that the bank accounts of YDL had been frozen due to conflicting instructions.  There was no risk of YDL’s money being dissipated.

(5)  In any event, Mr Chen submitted that the plaintiff had nearly a month after 18 June 2014 to make an inter partes application if it really felt necessary to obtain such interlocutory reliefs as early as possible.  There was no justification not to do so.  An inter partes application can easily be made and heard on any Summons Day.  Not only did the plaintiff choose to proceed ex parte, it chose not to give notice to the defendants of the application.  This is particular unfair in the light of the plaintiff’s stance before DHCJ Wilson Chan.  Before the learned judge, the plaintiff submitted that it had an “overwhelming” case justifying the imposition of mandatory reliefs.  Mr Chen submitted that the plaintiff’s conduct was wholly unjustified in view of the following dictum of Lam J in the Slik case[4]:

“Whether the Plaintiff has a strong case or not, the usual rule is that the Defendants are entitled to be heard. As mentioned above, an inter partes hearing can be arranged within a relatively short time and even if the Defendant might ask for more time to respond, the court will then be in a position to assess whether any interim relief should be granted after hearing the Defendant on a preliminary basis.”

(6)  Mr Chen submitted that based on this ground alone, the ex parte injunction should be set aside, quoting Luck Continent Ltd v Leonora Yung[5].

11. Counsel for the plaintiff Mr Bartlett submitted that he has no arguments with the applicable legal principles.  He submitted that in the context of this case, “urgency” was based on the fact that YDL’s directors have positive duties to protect assets of the company.  YDL owned a WOFE in the PRC which ran the Riviera Project.  It was necessary for the directors to have access to books and records of YDL and its subsidiary to see whether the PRC project is still viable.  He submitted that the invoking incident was the Receivers’ attempted visit to the HK Property on 10 July 2014.  Having notified the 1^st defendant beforehand, it was alarming to the Receivers to find the premises locked up on a week day, 2:50 pm.  It was also alarming to find that YDL’s name had been removed from the building’s directory.  This caused panic and that was the basis of the “secrecy and urgency” element.

DISCUSSION

12. I am unable to accept Mr Bartlett’s submissions.  I find the following chain of emails exchanged between the Receivers and the 1^st defendant rather revealing:

(1) By an email from Mr Gronow to the defendants on 9 July 2014, Mr Gronow expressed his disappointment on the defendants’ failure to hand over records of YDL.  He then mentioned that his staff would attend the HK Property to take possession of YDL’s records.

(2) Then the visit to the HK Property took place on 10 July 2014.

(3) The 1^st defendant’s reply email was on 11 July 2014 where he mentioned that he had been discussing settlement matters with MSC directly.  He also reiterated that he would like to settle with MSC and focus back on his business as soon as possible.  He also complained about disruptive activities from MSC/Receivers. The 1^st defendant expressly stated that:

“In view of the above and in order to avoid any further inaccuracies and misunderstandings, please send all your further correspondence to my solicitors, Mr. Dennis Lam of Messrs. Li, Wong, Lam & W.I. Cheung or contact him at telephone number 3181-xxxx. ”

(4) Mr Gronow replied to the 1^st defendant’s email on 12 July 2014.  He accused the 1^st defendant of declining his various requests and reneged on his earlier intimation of willingness to cooperate with the new directors.  He also stated that “further correspondence will be sent to your solicitors”.

13. It did not seem that the Receivers were alarmed by the 10 July 2014 incident.  Neither did Mr Gronow question the 1^st defendant why YDL’s premises was locked and why YDL’s name was removed from the building’s directory.  Mr Gronow was given the clear identify and contact of the 1^st defendant’s solicitors.  Mr Gronow did not make any complaint or express any alarm to the 1^st defendant or his solicitors over the 10 July 2014 incident.  This is rather odd if Mr Gronow was truly alarmed by the incident and feared that YDL’s books, records and assets would likely be dissipated.  In fact, Mr Gronow in his affidavit deposed to the fact that there were settlement negotiations between the 1^st defendant and MSC during which the 1^st defendant indicated his intention to seek refinancing with a view to buying out MSC’s interest.  In my view, it must have been clear to Mr Gronow that the 1^st defendant was trying to hold onto YDL rather than seeking to harm YDL.  Mr Gronow must have treated the 10 July 2014 incident as part of the 1^st defendant’s uncooperative attitude and refusal to hand over management control of YDL to the new directors.  Hence, the contents and tone of the 12 July 2014 email.

14. More importantly, the plaintiff (through the Receivers) was given the identity and contact of the 1^st defendant’s solicitors.  10 July 2014 was a Thursday.  If the plaintiff was truly alarmed by the incident and wished to take immediate action, there was ample time to make preparation and file an inter partes summons on or before 15 July 2014 such that the application could be heard on 18 July 2014, a Summons Day.  I can see absolutely no justification for planning to go on an ex parte basis.  Even assuming that the use of ex parte application can somehow be justified, I can see no reason whatsoever not to proceed on “ex parte on notice” basis.  I agree with Mr Chen’s submission that no element of secrecy could have been involved.

15. Mr Bartlett was unable to provide any explanation as to why no notice of the intended application before DHCJ Wilson Chan was given to the 1^st defendant’s solicitors.  In my view, the attitude of the plaintiff was akin to what Rogers VP observed in Luck Continent case[6]:

“The whole matter seems to me, in reality, to be a push by the plaintiff to get some kind of victory under its belt as quickly as possible against the other parties or the other shareholders in CY Foundation, with whom it appears to be at loggerheads.”

16. In the circumstances, I agree with the submissions of Mr Chen that the ex parte injunction should be set aside on this ground alone, following the approach of the Court of Appeal in the Luck Continent case.

17. Given my decision, it is strictly unnecessary for me to deal with the “material non‑disclosure” ground.  I will just briefly set out my views as follows:

(1)  Mr Chen submitted that there were three material non‑disclosures:

(i) failure to disclose the existence of settlement negotiations between the defendants and MSC;

(ii) non‑disclosure of the PRC proceedings commenced by the plaintiff and its exact nature; and

(iii) failure to alert the judge of the “final dispositive effect” of his orders.

(2)  Mr Bartlett submitted that there was clear and sufficient disclosure of (i) and (ii) matters in paragraphs 76 and 77 of the affidavit of Mr Gronow.  As for complaint (iii), Mr Bartlett took me to the skeleton arguments he relied on before DHCJ Wilson Chan. I can see that in explaining the injunctive orders sought, he made clear cross‑references to each of the corresponding prayers in the writ. Furthermore, Mr Bartlett drew the learned Judge’s attention to the fact that some of the orders sought were mandatory in nature which required a “strong degree of assurance” in the strength of the plaintiff’s case.  Mr Bartlett then submitted to the learned judge that the plaintiff had an overwhelming case justifying the grant of mandatory orders.  Mr Bartlett submitted that the very reason why the grant of mandatory orders requires a “strong degree of assurance” is because such orders normally carry “final dispositive effect”. He therefore submitted that the learned judge was sufficiently alerted in the circumstances of this case.

(3)  I accept Mr Bartlett’s submissions.  I do not find that there was material non‑disclosure which would cause me to exercise my discretion to set aside the ex parte order.

CONCLUSION

18. For the above reasons, I had on 25 July 2014 set aside and discharged the ex parte orders granted by DHCJ Wilson Chan.