SECURITIES AND FUTURES COMMISSION v. MANDARIN RESOURCES CORPORATION LTD. and Another

CWU No. 348 of 1996

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. In view of the lateness of the hour and the importance of my being able to give my decision tonight, I am afraid my decision will probably be shorter and less detailed than otherwise it would have been.

2. This is an application for the discharge of the appointment of provisional Liquidators. The grounds for the application are based upon misrepresentation of material facts when the original application was made, and also upon the basis that there was no urgency and no requirement for secrecy and hence the application should not have been made ex parte.

3. The appointment of the provisional Liquidators was made, as I have indicated, after an ex parte application. That application lasted for more than three hours during which I was taken through the petition and some of the evidence. The petition is lengthy, by any standards, and the evidence is voluminous. I would say at this stage that, although I have read the affidavits and some of the exhibits, I cannot pretend to have considered all the exhibits which take up many box files.

The company, Mandarin Resources Corporation Limited, was incorporated in 1972. It was quoted originally on the Kowloon Stock Exchange in 1973. Trading in its shares was suspended in November 1986, though by then, of course, there was only one Stock Exchange. No dividend has been paid by the company since 1990. On the 25th June this year the Securities and Futures Commission presented a petition for relief under section 37A of the Securities & Futures Ordinance and for winding up the company on the just and equitable ground under section 45 of the Ordinance and section 177(1)(f) of the Companies Ordinance.

4. In the petition there are four matters of particular importance which are set out. I do not, for reasons which I will come to in a moment, propose to go into them in detail. They can be referred to, however, first of all as the Markle Land sale. The nub of that complaint in the petition is that a company by the name of Markle Land was sold at an under-value to Lucky Man, a company which was then owned and controlled by Mr CHIM, who is the 2nd Respondent. Mr CHIM is now the major shareholder and chairman of Mandarin Resources Corporation Limited. Although he was the major shareholder at the time of the sale he was not the chairman of Mandarin Resources.

5. The allegation in respect of Markle Land is that the sale was made in circumstances where an immediate substantial profit would have been made to the detriment of Mandarin Resources.

6. The second allegation in the petition has been referred to as the circular transfer of funds. That entails an allegation that the proceeds of sale of the above transaction in effect went round in a circle and were used to enable Mr CHIM to acquire further shares in Lucky Man.

7. The third transaction which is the subject of complaint in the petition is the sale of a company by the name of Idmiston Limited. Previously that was a subsidiary of Mandarin Resources. It was sold in October 1991 to a company by the name of Great Prospect Development Limited, another company alleged to be controlled by Mr CHIM. The consideration for the sale was the sum of $20.00 and, in addition, according to the public documents issued at the time, the repayment of a loan of $20,000,000.00 which Mandarin Resources had made to Idmiston.

8. The grounds for the complaint are that, first of all, that a cheque for $20,000,000.00 made payable to Mandarin Resources was endorsed straight to Mr CHIM, and, secondly, that $18,000,000.00 was refunded to the purchaser in circumstances which have been unsatisfactorily explained.

9. The fourth complaint relates to the acquisition by Mandarin Resources of shares in Lucky Man at a price of $25,000,000.00 when it is alleged that those shares were in fact beneficially owned by Mr CHIM who had acquired them at a cost of $7,700,000.00.

10. The company, which makes this application to discharge, has not filed any evidence in relation to the merits of the petition, and so far as today is concerned is content to concede that the SFC has established a good prima facie case for winding up.

11. Mr CHIM, who is the 2nd Respondent, has represented himself at these proceedings. He has sought to explain the major complaints which have been made in the petition. Some of the matters which were raised by Mr CHIM did not appear to accord with the public documents which he put before me. Other submissions made by Mr. CHIM were at clear and serious variance to what had been stated in the public documents. Some of the submissions which were made by Mr CHIM caused me serious concern in respect of what might be referred to as inter-related or connected transactions. His apparent lack of comprehension of the concept of conflict of interest enhanced that concern.

12. Nevertheless, I approach this matter with caution. The transactions which are the subject of the petition are clearly very involved and clearly very inter-related. A great deal of investigation of evidence will be necessary before any concluded view can be reached. I prefer to approach this matter on the same basis that Mr Edward CHAN QC has put it, that there is a good prima facie case that the company may be wound up.

13. I turn, then, to the question of the mis-disclosure, if I might put it that way, of material facts. In the founding affidavit to support the application for the appointment of provisional Liquidators

14. Mr McMahon on behalf of the SFC said this at paragraph 8:

"8. Also of particular concern to the SFC is the prospect that any of the new transactions proposed by Mandarin Resources referred to in paragraph 246 of the petition might proceed:-

(i) As is apparent from paragraph 246(i), all of the proposed acquisitions by Mandarin Resources are connected transactions and, if they should proceed, the result would be an outflow of money from Mandarin Resources to Mr CHIM

and his associates of in excess of HK$100-million.

(ii) Of the proposed disposals by Mandarin Resources described in paragraph 246(ii), the first - the proposed disposal to Mr CHIM of Mandarin Resources' interests in Profit Sky and through it a 55% interest in a PRC joint venture - is a connected transaction.

9. In the normal course of events, notwithstanding the fact that trading in Mandarin Resources' shares on the Stock Exchange of Hong Kong is suspended, it would be expected of a properly and responsibly managed public company that all documents containing information about these proposed transactions would be circulated to shareholders of Mandarin Resources only in a form which provided full information and which had been approved by the Stock Exchange of Hong Kong and the SFC. However, I believe that there is now (as result of the matters set out in paragraph 21 et seq below) a real risk that Mandarin Resources may proceed with such transactions without seeking the necessary approval of the Stock Exchange of Hong Kong and the SFC and in manner which seriously unfairly prejudices the company's minority shareholders."

15. The reference to paragraph 21 below was a reference to the calling of an extraordinary general meeting to which I will revert shortly. One of the matters that was to be put to the meeting was a resolution that the meeting should consider whether the company should continue its application for resumption of trading of shares on the Stock Exchange of Hong Kong Limited; another was "To confirm the allegations by the SFC in the petition is a commercial decision; and to confirm and approve all transactions stated in the petition".

16. Very briefly, the grounds of complaint about what is stated in this paragraph 8, are that when the documents which go to form the basis of the allegations in paragraph 246 of the petition are considered, it can be seen at once that although Mandarin Resources would be acquiring assets in the form of shares of other companies, the consideration that was proposed to be moved from Mandarin Resources was, in the bulk, new issues of its own shares and only a very small amount of money in comparison, at any rate to the hundred million dollars, would be paid by Mandarin Resources. As Mr. CHAN QC has pointed out, there would in fact be little likelihood of such an event taking place in the immediate future, because, in the first place as envisaged in the documents to which reference is made, it is all predicated upon a re-listing of the Mandarin Resources shares on the Stock Exchange; without that a new issue would not take place and certainly would not be taken up.

17. Without going into the matter in enormous detail I have to say that I consider that this was a serious lapse in this affidavit. It happens not to have been a lapse which influenced me in whether to appoint the provisional liquidators or not. I will come in a moment to the reasons why I appointed the provisional Liquidators. But the fact that this statement did not influence me, does not, in itself answer the question of material mis-disclosure.

18. It is a cardinal rule on ex parte applications that they are made uberrimae fide and that there must be no material mis-statements in that application. It is a hard rule, but an important rule. The cases which lay that down go back well into the last century. Although it is not a matter which influenced me, it might have influenced me or indeed any other judge who might have heard that application, and as Mr CHAN QC has pointed out, this statement may also be a foundation for some of the arguments that were raised about the present conduct of the company.

In my view I have no alternative but to discharge the Order on that ground. It is thus unnecessary to go on to consider the other grounds. But the question arises as to what I should do now.

The importance of the rule relating to material misstatements cannot be over-emphasised. The fact that an application is made by a regulatory body does not alter the situation. Nevertheless the SFC in presenting this petition, and in making whatever applications it made, and in pursuing this petition, is to be equated in my view to perhaps the Secretary of State in the United Kingdom. The SFC has nothing to gain, as such, from these proceedings. It is acting in what might be regarded as a process of law enforcement. It is acting at public expense in what it sees as the public interest. This is in my view a consideration which I must bear in mind in deciding what the consequence should be of the material mis-statement.

19. In normal circumstances if a statement is deliberately made and culpably made, then the court will refuse to accede to any further applications. It does so because it will not allow a party who has obtained an Order to gain any advantage from the Order which it has gained wrongly. There is a discretion which the court can exercise, and that discretion is exercised more readily in cases where the lapse was innocent.

20. The court, of course, bears in mind explanations which have been given to it, and some criticism has been levelled by the company against the explanation that was given in the third affidavit of Mr McMahon for the lapse in his previous affidavit. I agree with Mr CHAN that perhaps the third affidavit should have been more forthcoming and acknowledged that a mistake was made. Nevertheless, I also bear this in mind, that this was extremely heavy and complex litigation by any standards. I can understand how, when an affidavit is drafted in litigation such as this, it passes, as indeed the evidence shows that it passed, through many hands, those of solicitors, junior counsel and leading counsel. My own view is that it is almost physically impossible in this case for any one person to have checked all the documents in the case and I can see that a mistake, having been made in the initial drafting, might not be picked up on later checking. Indeed, looking at the March documentation which related to the paragraph 246 proposed transactions, I can also see how the mistake might have crept into the affidavit since it does refer to "consideration" and the paragraph at the end then says the consideration will be paid for in shares. That is not to excuse the mistake, it is, however, to explain it and to put it in what I see as its context.

21. In my view I bear this in mind, that the penalty aspect which the court will usually visit upon a party that makes a material mistake, is somewhat alleviated in a case where a party is not gaining any advantage for itself; it is and is only exercising its public duty at public expense to protect the public interest. It seems to me that I must approach the question of whether there should be any re-appointment of the provisional Liquidators de novo because this application can only succeed if I consider that it is in the public interest that a provisional Liquidator be appointed. The thrust of the application and the importance of the ex parte application was to my mind based upon matters which I am coming to in a moment and it was not primarily based on this part.

22. Having considered the question of whether there is a good prima facie case for the appointment of a provisional Liquidator, the next question is whether I should re-appoint the provisional Liquidators, or, in effect, as a practical matter permit the provisional Liquidators in this case to remain in office.

23. I bear in mind first and foremost, as was said in the case of Re Yick Fung Estates Limited and Shui Hing Investment Company Limited [1986] HKLR 240 that it is an unusual and drastic step to appoint a provisional Liquidator in respect of a company that is solvent. Mr CHAN QC says that the appointment could have no effect on the matters complained of.

24. I approach this case on the basis that the allegations are very serious. I have already referred to Resolution Number 7 proposed to be put to the Company in General Meeting. That seeks to confirm and approve all the transactions in the petition. I consider that there was a grave risk that if that were passed it could have given rise to lengthy and complex legal questions as to its validity and effect. At one end of the scale such a resolution might, as it were, wipe the slate clean in respect of all the complaints made. At the other end of the scale such a resolution might be ineffective in law.

25. I do not propose to rehearse the various arguments here, but I simply say that it would not surprise me if such arguments took many years and many courts to determine. Mr CHAN QC says that if sufficient information were not given to shareholders the resolution would be invalid. That may be so, but it is an easy proposition to state and a difficult one to prove. I bear this in mind, that if there were insufficient information alleged to have been given to the shareholders it would be a question of having to invalidate a resolution which had already been made and the legal onus would thus fall on those seeking to invalidate it.

26. In the second place I bear in mind that there are many shareholders not in Hong Kong and they are likely to be represented at best by proxies and at worst unrepresented at such a meeting. The meeting, at which this resolution was to be put, was called as a result of a requisition which had been made by Mr CHIM himself. It was called virtually at the earliest opportunity that it could have been. Considerable discussion has been made in this court as to the purpose of that meeting.

27. The company has appointed the two non-executive directors to constitute an independent committee to take charge of the defence of the petition. All the directors, of course, are nevertheless in charge of the company and were therefore to be in charge of the meeting which had been requisitioned. They were calling that meeting in response to that requisition.

28. The two non-executive directors constituting what their Counsel has termed the independent committee, consider that they wished to obtain the views of the minority shareholders in order to know what stance to take in relation to the defence of the petition. Mr MA QC, on behalf of the SFC, has pointed out that the notice convening the meeting and the documents that went with it were hardly likely to give the shareholders sufficient information for them to be aware of the complaints which had been made in the petition, let alone what stance they should take in relation to the meeting.

29. I find it difficult to understand how minority shareholders, who would be unlikely to know anything at all about the petition, could give guidance of any real use to the "independent committee". The shareholders were neither given copies of the petition, nor were they given details of it, they were merely told that they could obtain copies or else go to inspect the petition. They were also told that Mr CHIM's defence of the petition could likewise be inspected and copies be taken. That is the sum total of what the minority shareholders were in effect told.

30. There is no indication, for example, in the notice calling the meeting, of the dangers of passing a resolution, such as Resolution Number 7, given the complaints which had been made. I have no doubt it will take some time for the non-executive directors to become acquainted with the facts of the petition and the facts lying behind it and what defences there are, and to be advised on it, and as to the course which they are likely to take. That does not make it any better to seek guidance from the minority shareholders who are likely to be in an even worse position.

31. I have found the question as to whether to reappoint the provisional Liquidators not an easy one, particularly in the light of the submissions of Mr CHAN and the fact that the company is solvent. In the end, however, I have come to the conclusion that I should maintain the appointment of the provisional Liquidators. Influencing my decision are the following factors:

32. First, the fact that the allegations in the petition, and in particular the four transactions to which I have alluded, are of such a nature that if proved they show serious and highly culpable mismanagement primarily by the person who is still in control of the company. Mr CHIM, who, as I said, is now the majority shareholder and chairman, clearly controls the Board since the Board comprises six persons, including his wife and his son, and he has the casting vote

33. Secondly, the immediate reaction of Mr CHIM, holding the dominant position which I have outlined, was to requisition a meeting and procure a resolution which would absolve him from liability. Thus the first reaction of the present management was to cause a situation where there was a real possibility of a major asset of the company being removed.

34. Thirdly, there has been in very recent days two attempts by those connected with the management of the company to purchase the minority shares. In the first place there is a Mr IP, who appears to be a consultant to Mandarin Resources. I was told in the course of argument that that might be a tax efficient equivalent of an employment. Be that as it may, Mr IP is clearly intimately involved with Mandarin Resources and its management. He, however, is also connected with a company by the name of Traskey, of which I have been told little.

35. Traskey has attempted, on behalf of another company by the name of Rich Profits, to acquire some of the minority shareholders' shares in Mandarin Resources at a price of $5.00 per share. An undertaking has since been given that no further purchases will be made. It has been explained in the affidavit of one of the directors, Mr SUN, that the ultimate purchaser had no connection at all with Mandarin Resources, or any of its directors and was a totally independent third party. However, the conduct of Mr IP is not something which in my view can be explained as easily as that. There are clearly questions of misuse of inside information and offences against various Ordinances, including the Protection of Investors Ordinance.

36. Secondly, today, advertisements appeared in newspapers in which Mr CHIM himself had advertised for the purchase of shares.

37. The public, I bear in mind, are primarily ignorant of the facts surrounding this petition, which I can only emphasise are complex and involved.

38. It seems to me that bearing all these matters in mind, there is a real risk that steps are likely to be taken to circumvent the proper rectification of any wrongs which may eventually be proved to have been made against the company. It would wrong to risk this happening both from the point of view of the minority and of the public.

39. I bear in mind that the company is a trading company; however, it is primarily a holding company with very few employees. There is a question of liquidation of some of its shareholdings in a listed company at a suitable price. I see no reason why that liquidation of the shareholding should not continue should the price become appropriate. I appreciate that this will generate a balance which might be impossible to trade with until the liquidation is sorted out, either by a liquidation being ordered, or the provisional Liquidators being discharged.

40. I appreciate that the transactions of which complaint is made are old transactions. On the other hand, things are clearly at the moment coming to a head and the need for vigilance and caution is something which I bear in mind.

41. In those circumstances I propose to formally discharge the provisional Liquidators, but to reappoint the provisional Liquidators on the further application. I will hear the parties as to costs and any further Orders that they may wish me to make.