PLATINUM CENTURY LTD AND OTHERS v. SUNFUND ASIA CAPITAL HOLDINGS CO LTD AND OTHERS

HCA 400/2022

[2022] HKCFI 3334

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 400 OF 2022

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BETWEEN

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DECISION

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A. INTRODUCTION

1.  The present proceedings are a common law derivative action brought by P1 to P5 (collectively, “Ps”) on behalf of D4 (the “Company”), against D1, D2, D3, D5 (collectively, the “Sunfund Ds”) and D6. The dispute is, in essence, between two groups of 50% shareholders in the Company.

2.  The hearing before me related to interlocutory injunctive relief sought by Ps against the Sunfund Ds. The three summonses before me were:

(1) Ps’ summons dated 26 May 2022 (the “Injunction Summons”) for continuation of an ex parte injunction order made by Linda Chan J dated 25 May 2022 (the “May Injunction”).

(2) The Sunfund Ds’ summons dated 10 August 2022 (the “Discharge Summons”), seeking an order that the injunction granted Peter Ng J dated 22 April 2022 (the “April Injunction”) against D1 and the May Injunction be discharged for material non-disclosure.

(3) The Sunfund Ds’ summons dated 10 August 2022 (the “Payment In Summons”) seeking an order that upon D1 providing security in the sum of US$304,996.37 by way of payment into court, the April Injunction and the May Injunction against D1 be discharged or varied.

3.  Ps were represented by Mr Daniel R Fung SC (leading Mr Kevin Lau), and the Sunfund Ds were represented by Mr Douglas Lam SC (leading Mr Justin Lam and Mr Benjamin Lam).

B. KEY FACTS/BACKGROUND

B1. Parties

4.  D1, D2, the Company (D4) and D5 are Hong Kong companies. 50% of the issued shares in the Company are held by D2, and the other 50% are held collectively by Ps^[1].

5.  D2 is a licensed corporation for Type 9 activities under the Securities and Futures Ordinance (Cap 571) (the “SFO”). D2 is a wholly owned subsidiary of D1, which is in turn a wholly-owned subsidiary of D5.

6.  D3 (Mr Yuan) is the 100% indirect owner of D5, and accordingly of D1 and D2. He is the sole director of the Company, and a director of D1, D2, and D5.

B2. Investment in NIO

7.  It is common ground that the Company made a US$2 million pre-IPO investment in a Cayman Island limited partnership known as Haixia NEV International Limited Partnership (“Haixia NEV”). Haixia NEV in turn held in interests convertible to shares in a Chinese electric vehicle manufacturer known as NIO Inc (“NIO”), which was then in the process of applying for an IPO on the New York Stock Exchange (“NYSE”). In particular:

(1) Around 7 November 2017, D5 acquired the Company as a shelf company. On the same date the Company and D2 entered into an Investment Management Agreement (the “IMA”), under which the Company appointed D2 as its investment manager.

(2) Around 8 November 2017, the Company was admitted as a series D Limited Partner of Haixia NEV and acquired 373,629 Series D preferred shares in NIO held by Haixia NEV, for consideration of US$2,000,000 plus US$80,000 management fees. This consideration was paid by D5.

(3) Ps subsequently became shareholders of the Company, acquiring between them 50% of its shares, pursuant to Sale and Purchase Agreements dated 29 December 2017 (the “SPAs”) between the respective Ps and D5. The total consideration paid was a little over US$1 million. On 5 February 2018, D5 transferred its shareholding in the Company to D2.

(4) NIO was listed on the NYSE in September 2018, and a lock-up period for the NIO shares was to end on 10 March 2019.

B3. Sale of the NIO shares

8.  In March 2020, the Company converted its investment to publicly tradeable shares in NIO.

9.  On 30 March 2020, the Company and D1 entered into a trust deed (the “Trust Deed”) pursuant to which the Company transferred to D1 its shares in NIO, to be held on trust for the Company. These shares were sold over the period April to November 2020.

10.  It is part of Ps’ complaint that the Sunfund Ds only disclosed the sale of the NIO shares and entry into the Trust Deed, recently.

B4. Winding-Up Proceedings

11.  On 6 November 2020, Ps presented a Winding-Up Petition in HCCW 364 of 2020 (the “Winding-Up Proceedings”) seeking the just and equitable winding-up of the Company, with the Company as 1^st Respondent and D2 later added as 2^nd Respondent.

12.  Ps’ pleaded case in the Winding-Up Proceedings includes the following, in summary:

(1) There was a common understanding/consensus/agreement between the Company, D2, D5 and Ps, which formed the basis and/or substratum of Ps’ investment in the Company (the “Common Understanding”), to the effect that inter alia: the Company would be a special purpose vehicle (“SPV”) with its sole asset being its interest in Haixia NEV and underlying shares in NIO; the Company would remain in operation for an envisaged horizon of 2 to 3 years; should Haixia NEV distribute NIO shares to the Company, D2 as investment manager under the IMO would sell those shares on the Company’s behalf within the envisaged horizon, with the proceeds (after deduction of fees under the IMA) distributed forthwith to the Company’s shareholders pro rata.

(2) The distribution envisaged under the Common Understanding did not occur, and instead D3 became embroiled in scandal. Since August 2018, D3 could not be located. On 12 March 2019, INTERPOL issued a Red Notice declaring D3 a fugitive. D3 consistently refused/frustrated Ps’ requests to hold EGMs of the Company; and only after constant pressure and requests from Ps did they receive in October 2019 the Company’s audited financial statements for the years ended March 2018 and March 2019 (respectively the “2018 AFS” and “2019 AFS”), which contained significant irregularities.

(3) Thereafter up to October 2020, Ps raised various queries about the Company’s assets and accounts, which were stonewalled by D3. In October 2020 D3’s alternative director, Max Li, resigned and told Ms Ng Mei Kuen Vivian (“Vivian Ng”)^[2] that the NIO shares had already been issued to the Company by April 2020, but that D3 was facing serious pressure from creditors and wished to dispose of the Company’s assets to repay his own debts.

13.  Ps seek the winding-up of the Company on the just and equitable ground, on the basis that the intended lifespan of the Company has expired; its purpose has been fulfilled and substratum lost; loss of trust and confidence in D3 as sole director of the Company; the need for investigation of the Company’s affairs; and deadlock.

14.  D2 has filed Points of Defence in Winding-Up Proceedings, and the matter has proceeded to discovery.

B5. Present Proceedings

15.  On 14 April 2022 Ps issued a writ (then against D1-D4), and a summons seeking proprietary injunctive relief against D1.

16.  The summons was supported by the 1^st affirmation of P5 (“Fan 1”). Ps relied (inter alia) on the audited financial statements for the year ended March 2021 (the “2021 AFS”) received in December 2021, said to show for the first time that the Company’s interests in Haixia NEV/NIO had been sold and converted into cash. Ps alleged accounting irregularities in the treatment of the sale proceeds, with the accounts suggesting that the cash was held by D1 rather than the Company. Ps complained that requests for information in correspondence had been ignored, but by letter dated 30 March 2022 the Company finally indicated that its main asset of cash of HK38,650,113, being the sale proceeds of the NIO shares, was held on trust by D1, and provided a copy of the Trust Deed.

17.  The said summons was heard on 22 April 2022, at which hearing counsel for D1 also appeared to offer an undertaking and seek directions. Peter Ng J made an interim interim injunction order (the April Injunction):

(1) restraining D1 from dealing with HK$38,650,133 said to be held by D1 on trust for the Company in the 2021 AFS in accordance with the purported Trust Deed and its traceable proceeds (the “Cash”); and

(2) requiring D1 to inform Ps in writing and by affidavit of the present whereabouts of the Cash (whether or not with D1), and dealings with the Cash since 1 April 2020, with supporting documents.

18.  In response to the said disclosure order, D1 filed the 1^st Affirmation of D3 (“Yuan 1”). Yuan 1 stated that D1 was not in possession/control of any of the Cash, and set out D1’s dealings with the Cash between 1 April 2020 and 22 April 2022 in a schedule (the “Schedule”). The main payees of the Cash set out in the Schedule were D1, D2, D5 and D6. Exhibited to Yuan 1 were various payment instructions from the Company to D1 (signed by D3), in respect of the payments listed in the Schedule; and D1’s bank statements (“D1’s Bank Statements”) with DBS Bank Hong Kong Limited showing dealings with the Cash including those set out in the Schedule.

19.  Following on the basis of Yuan 1, Ps applied ex parte for further injunctive relief against the other Sunfund Ds^[3]. The basis included that: it emerged from Yuan 1 that the whole of the Cash had been dissipated by D1; there had in fact there had been a much larger sum of US$6,802,262.53 held by D1 for the Company, but all of which had been transferred away to various recipients without Ps’ knowledge/consent; the purported explanations for the use of these funds were scanty and unconvincing; there was a strong argument that the Company’s assets had been wrongfully dissipated and a need for relief to trace/preserve them.

20.  On 25 May 2022, Linda Chan J made an injunction order on an ex parte basis (the May Injunction) granting:

(1) proprietary injunctions against D1, D2, D5 and D6 for the preservation of the Company’s assets, restraining each of them from dealing with the respective sums which were received under the Company’s purported payment instructions^[4] or the traceable proceeds thereof; and

(2) Mareva and prohibitory injunctive relief: (i) restraining D3 from removing from Hong Kong (or disposing of/dealing with) assets up to the value of US$6,802.262.53; and (ii) restraining D3 and the Company from disposing of 3,000 shares held by the Company in Solar Century PTE Ltd (“Solar Century”), a Singapore company.

21.  At the return date on 6 June 2022, Cheng J continued the May Injunction until determination of the Injunction Summons, and gave directions for additional evidence. Further disclosure orders were made, including requiring D1, D2, and D5 to state the whereabouts of the various sums covered by the May Injunction (ie the sums which they each had received from D1, as set out in Yuan 1, and their traceable proceeds).

22.  The parties have filed various additional affidavit evidence, including D3’s 3^rd and 4^th affirmations (“Yuan 3” and “Yuan 4”) in response to the further disclosure orders.

23.  Ps’ Statement of Claim in these proceedings was filed on 4 August 2022, with key allegations including the following:

(1) The transactions disclosed in Yuan 1 with respect to US$6,802,262.53 (the “US$6.8m Sum”) held by D1 on trust for the Company, were not genuine nor conducted bona fide in the Company’s interests or for proper purposes.

(2) The disclosed transfers to D1, D2, D3 and D5 were incompatible with the function and purpose of the Company as an asset-holding SPV with the sole function of investing in the NIO shares. The Company’s purported purchase of shares in Solar Century for approximately US$2.2 million was not a genuine arm’s-length commercial transaction.

(3) The dealings with the Company’s assets by D1, D2, D3 and D5 including the transfers out of the US$6.8m Sum were a wrongful diversion of the Company’s assets away from its control by D3 in breach of trust and duties (whether fiduciary or otherwise) owed as a director of the Company; and in allowing itself to part with the Cash and/or the US$6.8m Sum, D1 as trustee under the Trust Deed acted in breach of trust.

(4) D3 is personally liable to make good the Company’s loss of the Cash and/or the US$6.8m Sum, on the basis of breach of fiduciary/director’s duties and/or dishonest assistance in D1’s breach of trust. D1 is liable to make good the Company’s loss of the same assets on basis of breach of trust.

(5) Further/alternatively, D1, D2, D5, and D6, as recipients of parts of the Company’s US$6.8m Sum, are liable to restore the amounts they received as a result of: the Company’s property and tracing rights; the Company’s right as beneficiary to avoid a transaction made in breach of trust by D1 or D3; D1, D2 and D5 being knowing recipients of the Company’s assets, since they are all under the common control of D3.

C. KEY PRINCIPLES

24.  There was no significant dispute as to the key legal principles set out below.

C1. Interim Proprietary Injunctive Relief

25.  The principles applicable to the grant of interim proprietary injunctive relief are well known. They were summarised by Coleman J in Pacific Bulk Investment Limited v Chu Kong & Ors [2020] HKCFI 2825 at §§42 & 43, including the following requirements:

(1) There is property which is bona fide the subject matter of the cause or matter;

(2) Something ought to be done for the security of the property, which may involve showing that damages may not be an adequate remedy;

(3) There is no need to show a risk of dissipation (unlike for a Mareva injunction);

(4) Even if there is delay in making the application which might lead to the refusal of Mareva relief, a proprietary injunction may nevertheless be granted;

(5) An enquiry into the relevant merits of rival claims is not necessary;

(6) The party seeking the preservation order need only show that there is a serious issue to be tried on the merits of the claim;

(7) There is no strict requirement for an undertaking as to damages, though the court may require one where the circumstances warrant^[5].

C2. Mareva Relief

26.  The requirements for Mareva relief are also very well known, and I do not propose to here set them out in any detail. I adopt, rather, the summary of those principles in Universal Entertainment Corporation v Kazuo Okada [2020] HKCFI 1406 per Coleman J at §§34-37.

27.  The core requirements are that the applicant must show: (1) a good arguable case on the merits; (2) assets within the jurisdiction; (3) a risk of dissipation of those assets so as to render any judgment which the plaintiff may obtain nugatory; and (4) the balance of convenience lies in favour of granting the injunction^[6].

C3. Material Non-Disclosure

28.  The applicable principles were summarised in, for example, Velatel Global Communications Inc & Ors v Chinacomm Limited & Ors, HCA 1978/2011, unreported, 26 October 2012, per Au-Yeung J at §§25-31, including the following key points:

(1) On an ex parte application, the applicant must proceed with the highest good faith.

(2) The applicant’s duty is to make a full and fair disclosure of all the material facts. The material facts are those which it is material for the judge to know in dealing with the application. Materiality is decided objectively by the court and not by the assessment of the applicant or his legal advisers.

(3) In considering what matters should be disclosed, the test is whether the facts are relevant to the exercise of the court’s discretion, regardless of whether they are relevant to the merits of the claim, and irrespective of whether the matters, if disclosed, would have caused the court to refuse the ex parte order. The test is whether the court should have had the matters in the weighing scales.

(4) The applicant must make proper inquiries before making the application. The duty of disclosure applies not only to material facts known to the applicant, but also to any additional facts which would have been known following such inquiries[7].

(5) The duty to disclose cannot be fulfilled by simply exhibiting voluminous documents mentioned in the supporting affidavit, without making any distinct reference to the points in the body of the affidavit itself or when addressing the judge at the hearing.

(6) If material non-disclosure is established, the court will be astute to ensure that a plaintiff who obtains an ex parte injunction without full disclosure is deprived of any advantage he may have derived by breach of duty.

(7) Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge. Whether the non-disclosure was innocent (in the sense that the fact was not known to the applicant or its relevance was not perceived), is an important consideration, but not decisive; due to the applicant’s duty to make all proper inquiries and give careful consideration to the case being presented.

(8) It is not for every omission that the injunction will be automatically discharged. A locus poenitentiae may sometimes be afforded. The court has a discretion, notwithstanding material non-disclosure which justifies or requires immediate discharge of the ex parte order, nevertheless to continue the order or make a new order on terms.

29.  The duty of full and frank disclosures extends also to matters of law, encompassing significant factual, legal and procedural aspects of the case: East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734 per Tang ACJHC at §82.

30.  The principles governing the consequences of material non-disclosure were further set out by the Court of Appeal in Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642 at §§56-58^[8] including the following key points:

(1) If the court finds that there have been breaches of the duty of full and fair disclosure, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial.

(2) Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order.

(3) That jurisdiction should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

(4) The court should assess the degree and extent of the culpability with regard to non-disclosure. It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge. Equally, there is no general rule that a deliberate breach will attract that sanction.

(5) The court should assess the importance and significance to the outcome of the matters which were not disclosed. The fact that the judge might have made the order anyway is of little if any importance.

(6) The court can weigh the merits of the plaintiff’s claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff’s case is allowed to undermine the policy objective of the principle.

(7) The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

(8) The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence.

(9) There is a tension between two kinds of public interest in this situation. First, the court should take account of the need to protect the administration of justice and uphold the requirement of full and fair disclosure. So if material non-disclosure is established, the court will be astute to ensure that a plaintiff is deprived of any advantage to bring home to litigants the serious consequences of non-disclosure (sometimes described as “the golden rule”). The second is the general duty to do justice so that the application of the golden rule must not be allowed to become the instrument of injustice in a particular case.

(10) There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances. Each case turns very much on its facts.

(11) In exercising this discretion, the court looks both backwards and forwards. The overriding question for the court is what is in the interests of justice in the particular circumstances of the case.

D. MATERIAL NON-DISCLOSURE: GENERAL POINTS

31.  In this section I consider the key general complaints of material non-disclosure relied upon by the Sunfund Ds. Certain of the more specific complaints are dealt with in other sections of the Decision, below.

32.  The complaints focus on the materials placed before Linda Chan J on 25 May 2022, namely P5’s 2^nd affirmation (“Fan 2”) and Ps’ Skeleton Argument for that hearing (the “Ex Parte Skeleton”).

33.  Mr Fung SC was keen to point out that the question of material non-disclosure should be assessed on the basis of what was known to Ps (or what ought to have been known with reasonable inquiries), at the time of the ex parte hearing.

D1. Terms of the IMA and SPAs

34.  A central plank of the Sunfund Ds’ argument is that the terms of the IMA are inconsistent with various aspects of Ps’ case. The relevant provisions include the following:

(1) The Company appoints D2 as its investment manager (clause 2.1); and as such authorises D2 to appoint, and delegate powers to others (clause 2.2).

(2) As investment manager, D2 shall provide to the Company all investment management services and administrative services on a discretionary basis … including making investment decisions for the Company, entering into all transactions and performing other undertakings that D2 may in its discretion deem necessary or advisable to carry out such investment decisions (clause 2.3)^[9]. D2 reserves the right to effect transactions through the agency of others (clause 4.2).

(3) In carrying out its duties, D2 shall have regard to the Investment Objective, comply with the Investment Strategy and the Investment Restrictions in Schedule 2. The Investment Objective of the Company is defined as to aim to achieve medium and long-term capital growth. D2 should exercise its judgment to invest in private companies and/or other investment schemes that have a reasonable probability to achieve the objective. The investment objective will be interpreted as an objective to be achieved in the long term with due regard to market conditions. There is no assurance that D2 will be able to achieve any particular level of perforce.

(4) Provision is made for the payment of certain management fees, expenses and performance fees by the Company to D2 as investment manager.

(5) There is a Variation in Writing Clause (no variation shall be valid unless made by a supplemental agreement duly executed and delivered by each party); and an Entire Agreement Clause (the IMA sets out the entire agreement and undertaking between the parties and supersedes and replaces all previous agreements, arrangements, understandings, rights, obligations and liabilities).

35.  The Sunfund Ds also rely on the terms of the SPAs by which Ps acquired their shares in the Company, including the following:

(1) Express provision that at the date of the SPA, the Company has entered into a discretionary investment management agreement (IMA) with D2 to carry out investment management and administrative responsibilities and duties. The investment management fees and other relevant fees and expenses are contained in Schedule 1of the IMA.

(2) The IMA was one of the documents to be delivered to Ps at completion, and there was provision was that at completion, Ps agreed to be bound by the terms and conditions of the IMAs as if Ps had themselves entered into the IMA^[10].

36.  In essence, the Sunfund Ds argue that the provisions of the IMA, which were by the SPAs brought to Ps’ attention and to which Ps agreed to be bound, are wholly inconsistent with various aspects of Ps’ case including:

(1) The alleged Common Understanding; since the terms of the IMA make clear the Company was not an SPV for the single purpose of a pre-IPO investment in NIO, but rather envisaged that D2 had discretionary authority to make various investments for the Company with regard to a long-term investment objective;

(2) The assertion that the following sale of the NIO shares the proceeds fell to be distributed to the Company’s shareholders in accordance with the alleged Common Understanding;

(3) The various allegations of dishonest asset-stripping and dissipation levelled against D3, since under the IMA fees and expenses were due to D2 and further, D2 had broad discretionary authority to make investment decisions on the Company’s behalf (such as the Solar Century investment entered into with some of the proceeds of sale of the NIO shares: see below);

(4) Ps’ complaints that dealings with the Company’s assets were without Ps’ knowledge or consent, given the broad authorities given to D2 under the IMA.

37.  Even if there had been a Common Understanding as alleged, it is argued, the Company was bound by the terms of the IMA which would remain unvaried given the Variation in Writing Clause and the Entire Agreement Clause^[11].

38.  The Sunfund Ds argued that various aspects of the Ex Parte Skeleton and Fan 2, were misleading to Linda Chan J, and/or gave insufficient disclosure; essentially because they failed – sufficiently or at all – to bring to the court’s attention the above provisions of the IMA and SPA, and their significance to Ps’ allegations of wrongdoing and misappropriation. Mr Lam SC further argued that Ps ought clearly to have been aware of the significance of these points since certain of the same provisions of the IMA and SPAs formed part of D2’s pleaded Defence in the Winding-Up Proceedings (which pre-dated the Ex Parte hearing).

39.  Fan 2 contains a section on full and frank disclosure which runs for approximately 10 pages, in which various potential arguments for the Sunfund Ds are set out, and responded to in summary. The Ex Parte Skeleton contains a similar summary running to around 5 pages. The points disclosed include: (i) reference to the provisions in the IMA for management fees and performance fees, and potential argument that certain of the payments from the Company to D2 may be justified under such provisions; (ii) a potential argument that the Solar Century investment was legitimate based on the IMA provisions that D1 should exercise its judgment when making investments in furtherance of the investment objective. The Sunfund Ds argued that this was wholly insufficient by failing to draw attention to the detail of the provisions of the IMA and SPAs set out above, and their broader significance to the merits of Ps’ complaints.

40.  However, I am not persuaded that there is sufficient here to amount to material non-disclosure. The requirements of an applicant at an ex parte hearing are, of course, stringent, as summarised above. They have, however, to be tempered by realism and commonsense, bearing in mind features such as the urgency of preparations; the number of different issues which fall to be canvassed at the hearing (and disclosed to the court); the difficulty of anticipating the precise arguments which will be run by the opposing side, precisely how they will be run, and the emphasis which will be attached to each such argument; and the danger of the principles becoming an instrument of injustice or an unattainable counsel of perfection, by reference to criticism levelled at the hands of a meticulous opposing legal team with the benefit of hindsight and time^[12]. The arguments in question were, in broad terms, brought to the court’s attention together with quite a few other potential arguments which the Sunfund Ds might canvass, and I consider that what was done in Fan 2 and the Ex Parte Skeleton was sufficient.

41.  I would add that if this conclusion were incorrect, then I would have found that any non-disclosure was not deliberate, nor sufficiently serious to warrant discharge; bearing in mind all the other circumstances including the evidence supporting good reasons for the grant and continuation of injunctive relief^[13].

42.  On the merits of this issue (as distinct from the question of material non-disclosure), Ps prayed in aid further, for example:

(1) Affidavit evidence from two former directors of D2 (“Billy Leung” and “Ronald To”). They gave evidence as to their roles as directors of D2 in, at D3’s behest, liaising with Ps regarding their investment in the Company, and the preparation and signing of the IMA and SPAs. They each said that they understood the Company to be an SPV with the limited purpose of investing in shares in NIO, such that once these were sold the Company’s purpose came to an end and the net proceeds should be distributed to the shareholders rather than reinvested. There was some evidence of specific such instruction having been given to Ronald To (who prepared the IMA and SPAs) by D3 at that time, of meetings with Ps when these documents were signed, and of what was said at such meetings.

(2) Clause 6 of the SPAs which provides (inter alia) that the sole investment asset of the Company is certain limited partnership interest in Haixia NEV.

(3) An argument that on the Sunfund Ds’ version of events, Ps would be effectively locked into their investment in the Company indefinitely with no control, no access to information, and no way to ensure a distribution of the proceeds.

43.  As to point (1) above, Mr Lam SC argued that the evidence of Billy Leung and Ronald To was very limited, that Ps’ reliance on the Common Understanding lacked concrete evidence or particulars, and that even on Ps’ case things said orally could not override the contractual provisions.

44.  The merits here will of course need to be further ventilated in these proceedings. For present purposes, I go no further than concluding that there is a serious issue to be tried^[14].

D2. Legal Points

45.  The Sunfund Ds briefly canvassed two points of alleged material non-disclosure on the law. These were not emphasised in oral argument, and I consider that they can be disposed of quite shortly.

46.  First, it was argued that Ex Parte Skeleton referred to the merits threshold of a “serious issue to be tried” for proprietary injunctive relief; whereas it should have referred to the higher threshold of a prima facie case for a common law derivative action.

47.  However, the locus threshold for common law derivative actions, which applies on a strike-out application challenging locus, is rather well-known. I do not think it realistic to suppose that Linda Chan J would have been unaware of this, nor that a failure to draw it specifically to her attention would realistically have impacted her decision-making. In any event, the Ex Parte Skeleton referred to Ps’ earlier Skeleton for the principles applicable to common law derivative actions, which in turn made reference to the threshold of a prima facie case.

48.  Second, it was argued that the Ex Parte Skeleton wrongly relied on the cause of action of knowing receipt of trust property to support proprietary injunctions, whereas it could support only personal claims.

49.  Ps argued, however, that knowing receipt in fact supports both proprietary and personal remedies.

50.  In short, I do not think this point was of much significance to the hearing, since the facts complained of would (if proved) in any event support proprietary/tracing claims into any misappropriated funds in the hands of the relevant Sunfund Ds.

E. EVIDENCE OF POTENTIAL WRONGDOING: GENERAL POINTS

51.  In this section I set out some broad reasons why I consider that there is, at a general level, sufficient evidence to establish a serious issue to be tried (and good arguable case) that the Company’s funds were or may have been used in breach of trust and/or not bona fide in its interests. These reasons should be read cumulatively, and together with the more specific reasoning further below.

52.  It bears emphasis that my reasoning herein goes, of course, no further than the limited merits thresholds applicable at the interlocutory stage.

E1. Usage of Proceeds of Sale of NIO Shares

53.  It is the Sunfund D’s own case own case that by 6 November 2020 the NIO shares had all been sold for profit and the sale proceeds of US$6,657,363.48 were held in D1’s Account on trust for the Company. The proceeds were, they say, used as follows:

(1) US$304,996.37 was paid to D1 as reimbursement of expenses paid on behalf of the Company.

(2) US$1,735,013.67 was paid to D2 to settle management fees and performance fees payable under the IMA.

(3) US$2,560,032.82 was paid to D5 comprising mainly: (a) US$2,080,000 to repay a loan from D5 to D2; (b) US$464,728.36 to settle service fees payable under a service agreement.

(4) US$2,200,000 was paid to SWC on escrow for D6, for the Company to acquire a 30% interest in Solar Century.

54.  The Sunfund Ds’ evidence is to the effect that all of these were legitimate payments pursuant to the Company’s contractual obligations and/or bona fide in the Company’s interests: see further discussion below.

55.  The legitimacy of these payments falls to be considered in detail in due course at any trial of this matter. But for present purposes, I accept Ps’ general argument that the fact that such a large proportion of the proceeds of sale, which were admittedly held on trust for the Company, was paid away to entities controlled by D3, at least gives rise to a legitimate cause for concern. That is particularly so given various other matters considered below, including potential overlap between different levels of fees charged by the Sunfund Ds to the Company.

56.  As Mr Fung SC emphasised, out of the proceeds of sale over US$6.5 million, all that is apparently left for the Company is 30% sshareholding in Solar Century acquired for US$2.2 million, further discussed below; with the remainder having been paid to D3’s entities. Further, there was evidence that at least some of the funds were subsequently transferred to D3 himself.

E2. Provision of Information

57.  Ps complained that the Sunfund Ds failed to provide timely information on the whereabouts of the Company’s assets; arguing that such information had to be wrought like blood from a stone, and was only eventually obtained under compulsion of repeated court orders. This was said to reinforce a conclusion of nefarious conduct with respect to the Company’s assets.

58.  In particular Ps said:

(1) It has now emerged that D3 caused the NIO shares to be sold from April to November 2020, but this was never disclosed even after commencement of hostile litigation in November 2020. It was not disclosed in D2’s Points of Defence filed in the Winding-Up Proceedings in August 2021. It was only when the 2021 AFS were provided in late 2021, that Ps discovered that all the NIO shares had long ago been sold.

(2) In the 2021 AFS the sale proceeds were not booked as cash held by the Company, but appeared to be held by D1.

(3) From December 2021 to January 2022, Ps pressed for explanations orally and in writing, but no meaningful response was received.

(4) In response to further inquiries Ps received a solicitors’ letter dated 30 March 2022 purportedly from the Company, stating that the Company’s main cash asset of HK$38,650,113 being proceeds of the sale of NIO shares “was held on trust” by D1 pursuant to the Trust Deed signed on 30 March 2020, and enclosing the Trust Deed.

(5) The Trust Deed came as a shock to Ps. It had not been disclosed in the Company’s 2020 AFS or 2021 AFS or the Points of Defence in the Winding-Up Proceedings. The letter reinforced Ps’ concerns since: it used the past tense (“was held”), without making clear where the proceeds currently were; there was nothing to explain the commercial justification for the alleged trust arrangement; the Trust Deed ran contrary to the 2020 AFS and 2021 AFS.

(6) By letter dated 31 March 2022, Ps made a final attempt to seek clarification and further information on the current whereabouts of the proceeds of sale, and the trust arrangement, which was met with a holding response on 1 April 2022.

(7) It was only in Yuan 3 in June 2022 following the court’s orders, that Ps were finally informed of the dates when the NIO shares were sold and the (alleged) sale price.

59.  In response, Mr Lam SC argued persuasively that there was no legal obligation on the Sunfund Ds to provide the information sought by Ps. Neither D3 as a director of the Company, nor the Company itself, was legally obliged to provide such information to the Company’s shareholders, under the IMA or otherwise. The Sunfund Ds’ conduct might at most be described as high-handed, but that was a far cry from suggestive of wrongdoing or dishonesty.

60.  In addition, a very brief explanation was given in D3’s affirmations of the need for the Trust Deed: since the Company did not have bank accounts, it was not possible for it to open any securities account with brokerage firms in Hong Kong; and further D2 could not hold cash for the Company since this was prohibited under the terms of the IMA^[15].

61.  Despite these arguments, I am persuaded that the chain of events relied on by Ps, justifies serious suspicion. It may be correct that the Sunfund Ds were not legally obliged to respond to Ps’ queries in correspondence or be forthcoming with information about the Company’s assets; but the apparent reticence to do so, taken in conjunction with the other features of the case including transfer of the Company’s assets largely to D3’s entities, contribute to a legitimate concern whether those assets have been dealt with bona fides. Further, the short letter dated 30 March 2022, appears on its face to be evasive or at least deliberately tight-lipped as to the present whereabouts of the Company’s assets; with details only provided subsequently following repeated Court orders. In addition, that letter apparently states a far lower figure for the proceeds of sale of the NIO shares than has subsequently been given in D3’s evidence.

E3. Red Notice

62.  Ps rely on an INTERPOL Red Notice dated 12 March 2019 which was produced in evidence, declaring D3 a fugitive wanted for prosecution in Mainland China for the crime of illegally absorbing public deposits, and describing him as having fled to America. Ps also produced evidence of the conviction and imprisonment in Mainland China of D3’s wife for illegally accepting deposit of funds, said to arise from a company in which D3 holds a majority stake.

63.  In response, D3’s evidence was that the Red Notice was in fact a fabrication, suggested to be at the behest of Vivian Ng^[16]; and that a public search did not reveal its existence^[17]. The Sunfund Ds further argued that the arrest and conviction of D3’s wife were irrelevant.

64.  I bear in mind that the provenance of the Red Notice is disputed; and place only limited reliance on it as collateral support for the continuation of injunctive relief^[18].

E4. Absence of Validation Orders

65.  Ps relied on the fact that, despite commencement of the Winding-Up Proceedings on 6 November 2020, no validation orders were obtained for post-commencement dispositions of the Company’s assets. This applies, said Ps, to the vast majority of the dispositions of the US$6.8m Sum referred to in D3’s affirmations.

66.  The complaint was made generally, but emphasised particularly in relation to transfers from the Company to D2, D5 and D6 (see further below).

67.  In addition, by their letter dated 2 March 2022 to D5, Ps made reference to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”). This, said Ps, served as a reminder to seek validation orders, yet no such orders were subsequently sought.

68.  Ps argued that seeking validation orders would have alerted them to the impugned transactions and given them an opportunity to oppose, and that the failure to do so was a further indicator of nefarious intent. Ps also argued that post-petition dispositions should be frozen by operation of law, in much the same manner as a bank generally freezes a company’s bank accounts upon receiving notice of a winding-up order.

69.  D3’s evidence was that after commencement of the Winding-Up Proceedings, independent legal advice was sought from counsel on the Company’s legal position and ability to use its funds. An Advice dated 26 April 2021 was exhibited[19], which concluded that the Company was able to use its funds to repay loans, for operation expenses and to engage in new investments; though there was no reference to section 182 of the CWUMPO. D3’s evidence was that the Advice demonstrated that there was no ill-intent behind the failure to apply for validation orders, though he had now been advised that the Advice was wrong.

70.  Mr Lam SC argued that Ps had misapprehended the effect of section 182, which was only that a post-petition disposition was at risk of being rendered void retrospectively, in the event that a winding-up order was subsequently made. The fact of a post-petition disposition without a validation order only puts the parties at risk of that disposition being rendered void, but is not per se unlawful. Further, validation orders can be sought at a later stage. The 2021 AFS showed that the Company was solvent, and validation orders are much more readily available for solvent companies. Finally, the Advice from counsel showed that there was no mala fides.

71.  It seems to me that there are two parts to Ps’ argument based on the absence of validation orders.

72.  The first is argument that failure to apply for such orders in an indicator of D3’s nefarious intent. However, given the Advice which was received from counsel, I do not place much or any reliance on this point.

73.  The second is that the proceeds of post-petition depositions which are not validated are or ought to be frozen by the Court as a matter of principle. However, I am on balance not persuaded that this is a free-standing reason which supports Ps’ application for injunctive relief. I do not think it correct that post-petition dispositions are “frozen by operation of law”. As Mr Lam SC pointed out, there is as yet no winding-up order. It seems to me that any cause of action in the Company for restitution of (or property in) the transferred assets, does not exist at the present stage by reason of section 182. Further, no authority was cited to me where such an approach was taken in terms of injunctive relief.

E5. Undertaking to Peter Ng J

74.  Ps referred to an undertaking offered by D1 (through counsel) to Peter Ng J on 22 April 2022, not to deal with or diminish the value of the assets held by D1 in accordance with the Trust Deed. Since Yuan 1 subsequently explained that D1 was not in possession or control of the Cash, this was said to be an empty and misleading undertaking.

75.  However, I accept Mr Lam SC’s argument that this was simply an offer, given at reasonably short notice, for an undertaking to broadly mirror the terms of the injunction being sought, as is frequently done. Accordingly, I do not rely on Ps’ complaint here to support the conclusions in this Decision.

F. INJUNCTIVE RELIEF AGAINST EACH OF THE SUNFUND Ds

76.  In this section I consider the specific injunctive relief granted and sought to be continued, against each of the Sunfund Ds.

F1. 1^st Defendant

77.  The May Injunction restrains D1 from dealing with US$304,996.37 (the “D1 Sum”) received by way of various payments made from 29 September 2020 to 7 April 2022, pursuant to payment instructions from the Company, or the traceable proceeds thereof.

78.  The said payments were disclosed in Yuan 1, and appear from D1’s Bank Statements for its DBS account (“D1’s Account”) for the period July 2020 to April 2022, which were exhibited to Yuan 1. As noted above, Yuan 1 also disclosed various payment instructions from the Company for these and other payments made out of D1’s Account, which are signed by D3 as director of the Company.

79.  It is apparently the Sunfund Ds’ case that the said sums were held on trust by D1 for the Company pursuant to the Trust Deed, but were legitimately paid out to meet the Company’s contractual obligations and/or in its interests. Ps argue, conversely, that the payment instructions signed by D3 were self-serving, and the payments were made in breach of trust and/or fiduciary duty and/or not bona fide in the Company’s interests.

80.  In Yuan 3, the D1 Sum is said to represent the reimbursement of expenses paid by D1 on behalf of the Company, for items described as “operational costs”, “expense reimbursement”, “Venton payroll and MPF”, and legal fees. Various supporting documents are exhibited.

81.  Ps level a number of criticisms at the justifications given for the D1 Sum, notably:

(1) US$75,671.39 was incurred in respect of “entertainment expenses” and taxi fares. However, it is difficult to see why the Company should incur such expenses. Further, this runs contrary to Schedule 1 Clause C of the IMA, which provides that the expenses of D2 which the Company must bear in connection with the IMA exclude “all overhead expenses of an ordinary and recurring nature such as in respect of office rent, furniture and fixtures, salaries, entertainment expenses and employee insurance”.

(2) Over US$70,000 was incurred for “Venton Payroll & MPF”, which is described in Yuan 3 as being reimbursement of payments made by D1 for the Company in respect of two Consulting Services Agreements (the “CSAs”) dated 1 July 2021, exhibited to Yuan 3. The CSAs provide for the secondment of two staff members from D5 to the Company for the period 1 July 2021 to 30 June 2023, in order to perform certain services in exchange for remuneration and service fees. Ps say that: (i) D3 has not explained why the Company - which is an SPV on Ps’ case and an asset-holding vehicle on the Sunfund Ds’ case – would need such staff or why a sudden need for such staff arose in July 2021; (ii) the CSAs disclosed are partially redacted including the identity of the secondees and part of the remuneration; and (iii) the CSAs run contrary to Schedule 1 Clause C of the IMA, referring to salaries.

(3) US$20,600 is described as “legal fee HCCW 364 of 2020”, but there is no reason for the Company to incur substantial legal expenses in the Winding-Up Proceedings, given its neutral status. Similarly, D3 exhibited an invoice for another item of legal fees of HK$133,000, but the supporting document shows that that sum was charged to D2 and D3, rather than the Company, though apparently in connection with the Company.

82.  In response, Mr Lam SC essentially accepted that there may be some room for argument as to permissibility of certain items included in the D1 Sum; but the supporting documents showed, he said, that there were many items which were clearly legitimate expenses of the Company. Ultimately, there was insufficient here to suggest any fraudulent behaviour or asset-stripping, and therefore insufficient justification for injunctive relief. In any event, if the court formed a different view, D1 by the Payment-In Summons, offered to pay the sum into court.

83.  In my view, there is considerable strength in Ps’ criticisms set out above, which raise serious issues as to the legitimacy of the payments made by the Company to D1; including, for example, by reason of apparent overlap between items charged purportedly under the CSAs, and other items charged to the Company: see below.

84.  Accordingly, I consider that injunctive relief should be continued over the D1 Sum^[20].

F2. 2^nd Defendant

85.  The May Injunction restrains D2 from dealing with US$1,735,013.67 (the “D2 Sum”) received by way of payments dated 29 September 2020 (US$60,000), 6 November 2020 (US$1,555,013.67) and 2 December 2021 (US$120,000), or the traceable proceeds thereof.

86.  D3’s explanation (Yuan 1 and Yuan 3) is that these sums represent management fees and performance fees due to D2 from the Company, under clause 3.1 and Schedule 1 of the IMA. In addition to payment instructions from the Company (signed by D3), there were exhibited to Yuan 3 a Management Fee Payment Notice and a Performance Fee Payment Notice issued by D2 to the Company, each dated 6 November 2020, detailing the calculation of some of these fees.

87.  Ps’ position was that they did not object to the principle of D2 charging management fees and performance fees to the Company under the said provisions of the IMA.

88.  However, first, all of the payments save one (US$60,000 paid on 29 September 2020) were made after commencement of the Winding-Up Proceedings. In the absence of any validation order, these were liable to be rendered void in any winding-up of the Company, such that the paid amounts should remain frozen and preserved in the interim.

89.  Second, in relation to the management fees (totaling US$337,804.63), Ps argued that the calculation could not be correct in various respects, and were inconsistent with the Company’s AFS: see further below. Ps also complained of late disclosure of such fees by the Sunfund Ds, and that the timing of the payment notices (on the same day as commencement of the Winding-Up Proceedings) was suspicious and suggested an attempt to avoid the need for a validation order.

90.  Third, Ps argued that the calculation of the performance fee (totaling US$1,397,209.04) was insufficiently explained and contrary to the Company’s AFS: see further below.

91.  The Sunfund Ds’ main points here can be summarised as follows:

(1) There was material non-disclosure at the ex parte stage, since Ps had failed to inform the Court of well-established principles that there can be no proprietary claim (or claim based on constructive trust in a fraud context) where assets are transferred pursuant to a valid contract or legal obligation^[21]. Applying such principles, the Company could not have a valid claim for amounts transferred to D2 pursuant to the IMA.

(2) Ps’ disputes on these fees went only to quantum, with Ps accepting that such fees were payable in principle. Disputes as to mere quantum were not an indicator of misappropriation. Further, the Sunfund Ds had insufficient opportunity to respond to Ps’ disputes as to the precise calculation of the fees.

(3) There was material non-disclosure at the ex parte stage, since Ps had failed to draw any attention to an adjudication clause in the IMA, to the effect that any dispute between the parties as to the calculation or amount of compensation/renumeration payable to D2 may be referred to a third party adjudicator for determination^[22].

92.  I am not persuaded by the Sunfund Ds’ complaints of material non-disclosure, for the following brief reasons:

(1) As noted above, Fan 2 and the Ex Parte Skeleton brought to the court’s attention that there was provision in the IMA for the payment to D2 of performance fees and management fees, upon which the Sunfund Ds might rely to justify certain of the payments. In all of the circumstances pertaining at the time, I consider that the disclosure made to the court on this potential issue was sufficient. I do not think that there was a need to additionally inform the court of the legal principle that, if the funds in question were validly transferred pursuant to a contractual obligation, there would lie no proprietary or fraud-based claim at the Company’s behest.

(2) In respect of the adjudication clause, I can see that it is arguable that this might, ideally, have been referred to. However, I do not think that this point would have been of any great significance, particularly because the possibility of a future reference to adjudication would not deprive the court of jurisdiction or reason to grant urgent injunctive relief in the meantime. In any event, there is no evidence that even at this juncture, there has been any attempt to refer any part of the parties’ dispute to adjudication^[23].

93.  As to the merits of continuing injunctive relief, I deal with each class of fees in turn.

Management Fees

94.  Schedule 1 to the IMA contains a rather detailed provision for the calculation of management fees payable by the Company to D2, apparently on the basis of 3% of the “invested capital” per annum.

95.  The calculation of purported management fees totaling US$337,804.63 set out Yuan 3 is as follows: (i) 3% per year on “invested capital” of US$2 million, for three years (namely 2017/2018 to 2019/2020) for a total of US$180,000; plus (ii) 3% on “invested capital” of US$5,260,154.44 after the sale of the NIO shares, for the year 2020/2021 (ie US$157,804.63, as set out in the Management Fee Payment Notice).

96.  Ps argue that the elevated figure for the final year cannot be justified, since the figure for “invested capital” should remain at US$2 million irrespective of the sale of the NIO shares. Further, the figure of US$5,260,154.44 is wholly unexplained, and differs to the figure for the sale proceeds of the NIO shares set out in the Performance Fee Payment Notice.

97.  Next, Ps argue that D3’s figure for various of the management fees differ from those set out in the Company’s AFS. Further, Ps argue that on their case, no management fees should be chargeable after 4 November 2020, the final date upon which the NIO shares were sold. I also note that D3 seems only to have exhibited a Management Fee Payment Notice in respect of US$157,804.63 said to be for 2020/2021 and not for the other years; and that that document is dated 6 November 2020.

98.  Bearing in mind these points, and in the context of all of the other evidence canvassed above, I consider that there remains a serious issue and dispute as to whether the sums paid to D2 as management fees were properly so paid in the Company’s interests, and accordingly as to whether the Company has a proprietary claim to those sums and their traceable proceeds proceedings. In light of all the features of the case, I consider it just and convenient to continue the injunctive relief against D2 for these amounts.

Performance Fees

99.  Schedule 1 to the IMA provides that upon the Company’s receipt of “Proceeds” that are in the form of cash, the Company shall pay to the D2 a performance fee amounting to 30% x (Proceeds – invested capital)^[24].

100.  The calculation of the performance fee of US$1,397.209.04 is set out in Yuan 3 and the Performance Fee Notice, namely 30% of realised gains of US$6,657,363.48 minus US$2,000,000 of invested capital.

101.  Ps initially argued that there was a discrepancy between this figure, and the figure for performance fee set out in the Company’s 2021 AFS, but this point was withdrawn in oral argument. Ps further argued that the Sunfund Ds failed to explain where the figure of HK$6,657,363.48 came from, and pointed to similar arguments which Ps had made before Yvonne Cheng J.

102.  I consider this point to be rather finely balanced, particularly given Ps’ apparent acceptance that performance fees may be payable under the IMA, as a matter of principle. However, given all of other evidence levelled by Ps to support their case of wrongdoing, I remain troubled by the relative paucity of documentary evidence showing the sale of the NIO shares and the prices at which they were sold, which in turn impacts the correctness and legitimacy of the calculation of the performance fees^[25]. On balance I remain of the view that there is a serious issue to be tried in respect of the legitimacy of the performance fees, and that the balance of convenience favours the continuation of injunctive relief against D2 in respect of them pending trial.

F3. 5^th Defendant

103.  The May Injunction restrains D5 from dealing with US$2,560,032.82 (the “D5 Sum”) received by way of payments on 29 September 2020, 29 April and 2 December 2021, or the traceable proceeds thereof.

104.  The Schedule to Yuan 1 described these sums as: (i) payments made to D5 for repayment of loan; and (ii) payment to D5 regarding service fees; and exhibited corresponding payment instructions from the Company (signed by D3).

105.  Further detail was provided in Yuan 3 and Yuan 4. US$2,080,000 was said to represent repayment of a loan in the same amount, which the Company had borrowed from D5 in order to acquires shares in Haxia NEV.

106.  The amounts of US$310,191.74 and US$154,536.62 were said to have been paid to D5 under a Service Agreement, which was appended to D3’s evidence.

107.  Ps made the overarching argument that both significant transfers to D5 were after commencement of the Winding-Up Proceedings, without any validation order. I have already dealt with this point, above.

108.  The parties’ more specific arguments regarding the D5 Sum are canvassed below.

Loan Repayment

109.  It is apparently common ground that the Company’s investment in Haixia NEV of US$2,080,000 was originally funded by money lent to the Company by D5.

110.  Ps’ evidence and argument was, however, that when they paid US$1 million + to acquire 50% shares in the Company, they also contributed half of the invested amount and accordingly assumed half of the said loan. This was supported by certain evidence from P5 and Ronald To, to the effect that that had been intended. Mr Fung SC levelled detailed arguments that any contrary conclusion would defy commonsense, since under such a scenario, Ps would in effect have received very little for their investment in the Company. There was, said Ps, a dispute of fact on this issue, which could not sensibly be resolved on affidavit, such that the funds in question should be preserved pending trial.

111.  The Sunfund Ds’ central arguments here can be summarised as follows:

(1) There was material non-disclosure at the ex parte stage because:

(i) The court was not informed of the well-established principle that there can be no proprietary claim for assets transferred pursuant to a legal obligation; and

(ii) Ps’ disclosure of a potential defence based on the Company’s loan from D5, was insufficient, particularly since Ps should have been aware of the match in quantum between the US$2,080,000 loan figure and some of the sums referred in the Schedule to Yuan 1.

(2) On the merits, Ps’ position that they assumed half of the loan when they acquired shares in the Company, was untenable. The SPAs made expressly clear what Ps purchased, namely, shares in the Company. There was no document showing Ps’ purchase of a portion of the loan. This position was not implausible or uncommercial, when one considered D3’s evidence as to the potential returns on private equity investments in “unicorn” companies such as NIO, to which D3 had given Ps access.

(3) Even leaving aside these points, at least half of the amount must be regarded as legitimate since even on Ps’ case, half of the loan was owed by the Company to D5.

112.  In the context of material non-disclosure, Ps argued that at time of the Ex Parte Hearing they had very limited understanding of the loan and its quantum. They drew attention to changing quantum of loans to D5 in the Company’s 2019 to 2021 AFS, which had been queried orally and in writing but with no sensible explanation. This included an approximate doubling of the quantum of the loan as between the 2019 and 2020 AFS.

113.  As to material non-disclosure, the full and frank disclosure section of Fan 2 contained a paragraph stating that D3 may argue that the repayment of loan to D5 is genuine in that there were some bookings of loans to parent companies of a shareholding in the company’s accounts^[26]. In the context of what was known to Ps at the time, and of the matters referred to in the previous paragraph, I consider that this disclosure was sufficient. Further, I am not persuaded by the other arguments on material non-disclosure, for reasons I have already given above.

114.  On the merits, I do not think that the dispute whether half of the original loan had been assumed by Ps, can be resolved one way or another for present purposes. I conclude that there is here, a genuine issue to be tried and a good reason to preserve the funds in question pending trial in these proceedings.

115.  However, I accept Mr Lam SC’s argument that Ps apparently dispute only half of the loan from D5 to the Company, and that accordingly the other half of the D5 sum should be regarded as having been sufficiently justified for present purposes.

Service Fees

116.  As noted above, US$310,191.74 (HK$2,400,000) and US$154,536.62 (HK$1,200,000) were said to have been paid to D5 under a Service Agreement between the Company and D5, representing fees for the period April 2019 to March 2022 (36 months).

117.  The Service Agreement between D5 and the Company is dated 1 April 2019. It states that D5 shall provide office space and supporting services to the Company, referring specifically to the provision of: office space; office equipment; accounting, settlement, legal, compliance; and administrative, human resource services.

118.  In consideration of such services, the Company shall pay a monthly service fee of HK$100,000. The initial term is 24 months (1 April 2019 to 31 March 2021), after which there is automatic renewal for two successive 2-year periods (unless either party elects not to renew). The Service Agreement may be terminated by mutual written agreement. If any party purports to terminate prior to expiry, the terminating party shall pay a termination sum of 24 months’ service fee as liquidated damages.

119.  Ps’ key arguments were that:

(1) The Service Agreement was never disclosed until June 2022 (in Yuan 4). It was suspicious that the date was April 2019, yet the entire 3 years’ service fees were paid in April and December 2021.

(2) It is difficult to see why the Company needed premises or any of the service provided, given that it is either an SPV or (on the Sunfund Ds’ case) an asset-holding vehicle. D3 produced no evidence that any of these services were actually provided.

(3) The Service Agreement lacked commercial justification, including because the services referred to were already provided for under the CSAs and the IMA. For example, if D5 was already providing such services under the Service Agreement since 2019, it was unclear why there was a need for secondment under the CSAs in 2021. Further, there was overlap between legal and accounting services which were apparently charged to the Company under the D1 Sum, and the purported provision for such under the Services Agreement. Under the IMA, the Company had already been charged for management and administrative services, and the preparation of accounts.

120.  The Sunfund Ds relied on various complaints of material non-disclosure, which I have already dealt with above. Mr Lam SC further argued that there was reference to the service fees in the Company’s AFS, such that there was no intention to mislead or hide. In response, Mr Fung SC argued that Ps’ correspondence querying the service fees had not been satisfactorily answered.

121.  In short, I accept Ps’ arguments here. There is at the very least a genuine issue as to the propriety of the payments purportedly made under the Service Agreement, and whether they were bona fide in the Company’s interests. These were substantial payments made every month, and there are serious question-marks over the Company’s need for the services said to have been provided, and their potential overlap with services paid for under the IMA and CSAs. Pending trial, the funds in question should be preserved.

Conclusion on the D5 Sum

122.  For the above reasons, I will reduce the quantum of the proprietary injunction against D5 by half of the loan amount, namely US$1,040,000.

123.  I will further reduce that quantum by US$15,000, which was said to represent a repayment to D5 of a sum lent to D1 for its operating expenses^[27].

124.  Accordingly, the quantum of the proprietary injunction against D5 will be varied to US$1,505,032.82 (ie US$2,560,032.82 minus (US$1,040,000 plus US$15,000)).

F4. Solar Century

125.  The May Injunction restrained D6 from dealing with US$2,200,000 (the “D6 Sum”) received under purported a payment instruction from the Company dated 11 April 2022, or the traceable proceeds thereof.

126.  The Schedule to Yuan 1 describes this sum as payment made to D6 through Messrs. Stevenson, Wong & Co (“SWC”) regarding investment in Solar Century.

127.  By the time of the hearing before me, the D6 Sum had been paid into court, such that it is unnecessary for me to consider the continuation of injunctive relief against D6 (who did not appear before me) ^[28].

128.  However, the Solar Century transaction nevertheless featured in argument, since amongst other things, Ps relied on it as evidence of the Sunfund Ds’ wrongdoing with the Company’s funds, and to support other aspects of the injunctive relief sought.

129.  D3’s evidence explaining the Solar Century transaction, was in Yuan 3 and Yuan 5. Following sale of the NIO shares, said D3, further investments were considered for the Company. In late 2001, D3 met D6 at a business event, and learned that D6 owned Solar Century, a blockchain technology company. He thereafter explored investment by the Company in Solar Century. Based on communications with D6, due diligence conducted, and a valuation report, D3 formed the view that Solar Century had significant potential and the Company should invest. He decided (in his capacity as a director of D3 and on behalf of D2 as investment manager) that the Company should acquire a 30% shareholding for US$2.2 million, which was in due course paid to SWC as escrow agent. D3 considered that the investment would potentially yield significant returns, and was in the bona fide interests of the Company and its shareholders.

130.  The supporting documents exhibited by D3 included: a Sale and Purchase Agreement dated 8 April 2022 between the Company and D6 for the sale of 3,000 shares (30% shareholding) in Solar Century for US$2,200,000; an Escrow Agreement of the same date between the Company, D6 and SWC; evidence that purchase price was returned to SWC minus bank charges; various emails exchanged between the Company and D6 in November 2021 regarding the transaction (scheduling discussions, attaching a PowerPoint presentation regarding Solar Century’s business, and in relation to a non-disclosure agreement); and a Business Valuation Report prepared by In Black Pte Ltd dated 3 January 2022 (the “Valuation Report”), stating a business PE value of US$1,304,577,380 for Solar Century[29].

131.  Ps’ key arguments included the following:

(1) Solar Century was only incorporated on 10 August 2021, a mere 8 months before the investment, its share capital was SG$10,000, and it did not appear to have any business or official website.

(2) There was evidence that Ps’ Singapore legal representative visited Solar Century’s registered address and found it apparently occupied by other companies.

(3) The D6 sum was paid to D6 on 14 April 2022 but the transfer of the Solar Century shares took place almost a month later on 4 May 2022, which delay was unexplained. Further, completion was said to be in breach of the April Injunction. Despite Ps’ recent reference in correspondence to the section 182 of the CWUMPO, no validation order was obtained.

(4) Ps criticised the Valuation Report on various bases including: the huge valuation over US$1.3 billion; the absence of substantive analysis in the report to support that or any valuation; unexplained redactions including page numbering (such that it was unclear whether any pages were missing); numerous qualifications in the report (including to the effect that Solar Century has not been making much revenue since incorporation and was not expecting to receive any commercial income in the next financial year; that there was a lack of historical track record; and that the valuation was highly volatile and dependent on variables of assumptions). Given these features, it was unthinkable for a prudent director to invest US$2.2 million on the basis of the report.

(5) There was no evidence of due diligence reports, only some limited email communications including a PowerPoint presentation, and cash flow forecast of unknown origin. The timeline of the transaction in the SPA left only 3 days for the completion of due diligence. It was extraordinary that no proper due diligence was apparently conducted for a transaction of such magnitude.

(6) The attempted dissipation of the US$2.2 million purportedly in respect of Solar Century, was highly relevant to demonstrating dishonesty/fraud/low standards of commercial dealing and obfuscation by D3, which demonstrated the need for ring-holding relief including Mareva relief against D3.

132.  The Sunfund Ds argued, in summary, as follows:

(1) Under the terms of the IMA, D2 was fully authorised as investment manager to make decisions for the reinvestment of the proceeds of sale of the NIO shares, including the investment in Solar Century. P’s criticisms of the transaction’s commercial merits were irrelevant, given the broad investment discretions given to D2 under the IMA.

(2) In this regard, the disclosure made to the ex parte court was insufficient. Ps should have drawn attention to all the clauses of the IMA which made clear that D2 had full discretion to decide on the Company’s investments, without seeking consent from the Company or its shareholders. That would have presented a quite different picture in respect of the Solar Century transaction.

(3) D3’s evidence was to the effect that it was normal in venture capital equity financing, to invest in new companies before beginning substantive operations, or earning revenue/profits. This was precisely why Ps invested in the Company and entrusted their investment to D3 who was experienced in, and could give access to, such investments. There was nothing by its nature surprising in the price paid given optimism at that time regarding the blockchain industry, the high valuation in the Valuation Report, and the potential for very large scale returns.

(4) The supporting documents dated back to November 2021, including the involvement of solicitors, and showed that the transaction was genuine.

(5) Whilst Ps may disagree with the commercial merits of the transaction, it was well within D2’s discretion as investment manager, and fell far short of evidence sufficient to support serious allegations of fraud/dissipation.

133.  On material non-disclosure, I have noted above that the full and frank disclosure portion of Fan 2 contained a short section dealing with possible argument that the Solar Century investment was legitimate, by reference to certain provisions in the IMA. I consider this to be sufficient.

134.  As to the merits of the Solar Century transaction, at this preliminary stage I conclude only that there are features of the transaction which give rise to legitimate concerns as to whether it was bona fide in the Company’s interests; particularly when considered in combination with the other evidence.

135.  It is notable that payment of US$2,200,000 essentially emptied D1’s Account of funds (which on the Sunfund Ds’ own case were held on trust for the Company), at a time after hostile litigation was on foot, and following detailed correspondence from Ps’ seeking information on the Company’s assets.

136.  On the Sunfund Ds’ case the entirety of the remaining proceeds of sale of the NIO shares were invested in Solar Century, which according to the Valuation Report had not yet made much revenue and was not expected to receive income in the next financial year. The Valuation Report provides little or limited comfort on its face, given that there is no substantive justification for the very large valuation^[30]. I consider that there are legitimate questions to be raised as to whether the investment could be consistent with the objectives in the IMA and the duties of D2 and D3^[31].

F5. Funds Already Removed from Sunfund Ds

137.  The Sunfund Ds cited authority that a proprietary injunction relates to a specific asset held by/under control of the defendant or its traceable proceeds, and there must be reasonable evidence that the asset or its traceable proceeds are still held so held. Where the asset in question has been dissipated such that it can no longer be traced, there can be no proprietary claim and no injunction^[32].

138.  Then Sunfund Ds accordingly argued that:

(1) The injunction over the D1 Sum must be discharged, since the evidence showed that the entirety of that sum had been paid out of D1’s Account by 11 April 2022 and D1 did not retain any of it.

(2) Any injunction over the D2 Sum must be reduced to US$610,174.96, which was the remaining amount in D2’s bank account which had received the D2 Sum. The remainder had been paid out of the account and was not retained by D2.

(3) The injunction over the D5 Sum must be discharged, since D5 retained none of this amount.

139.  I do not accept these arguments. The injunctive relief granted applies not only to the various sums received by the Sunfund Ds, but also to their traceable proceeds. I do not think that it has been sufficiently demonstrated, for present purposes, that the respective Sunfund Ds do not retain any of the said traceable proceeds which they received, save for the US$610,174.96 remaining in D2’s account.

140.  More specifically, I accept the following arguments made by Mr Fung SC:

(1) D1 may hold other bank accounts, and there are entries in D1’s Account which suggest that transfers were made to other of D1’s accounts.

(2) D3’s evidence was that the sums withdrawn from D2’s account from the D2 Sum went to D1, D3 and D5. The full amount of the D2 Sum should remain covered by the injunction such that it may catch these proceeds received by D1, D3 and D5, given their notice of the injunction.

(3) As to the D5 sum, D3’s evidence that it no longer remains with D5, was entirely insufficient. D5’s bank statements were not even provided.

F6. 3^rd Defendant

141.  The May Injunction granted Mareva relief over D3’s assets in Hong Kong up to the value of US$6,802,262.53, and restrained D3 and the Company from dealing with the 3,000 shares in Solar Century held in the Company’s name^[33].

142.  Ps argued that the Mareva relief should be continued: there was plainly a good arguable case against D3, a real risk that he would seek to dissipate his assets, and the balance of convenience favoured injunctive relief. D3 was the directing mind behind all of the transfers away of the Company’s assets, his explanations for which fell roundly short. The Company had, said Ps, a clear case against D3 for breach of fiduciary duties owed as director, since D3 had preferred his own interests to the Company’s, failed to exercise reasonable diligence in safeguarding its assets, failed to observe legal/regulatory requirements; alternatively for dishonest assistance in D2’s breaches of trust.

143.  On real risk of dissipation, Ps asserted a strong prima facie case of dishonesty/fraud by D3 in dissipating assets, and attempts to conceal the same (evasive behavior keeping Ps in the dark and disclosing only under repeated compulsion of court order). Ps also argued that the present disclosures revealed the 2020 AFS to be misleading, and prayed in aid the Red Notice as well as the allegedly misleading undertaking offered to Peter Ng J.

144.  The Sunfund Ds relied again on material non-disclosure, but I am not convinced by their arguments.

145.  First, they relied on the terms of the IMA and SPA (as set out above); arguing that once these were appreciated and explained to the court, the basis for alleging dishonest dissipation fell away. I have already dealt with this point, above.

146.  Second, they argued that the citation of principles on risk of dissipation in the Ex Parte Skeleton, was incomplete/incorrect, since it failed to draw attention to (or was inconsistent with) the principle that it is insufficient to show simply a good arguable case of dishonesty; but rather necessary to scrutinise the evidence to see whether the dishonesty in question suggests that assets may be dissipated^[34].

147.  In short, I do not think that this alleged failure is sufficient to amount to material non-disclosure, nor that the ex parte court would have been unaware of the correct approach to assessing whether there is a risk of dissipation for the purposes of Mareva relief.

148.  On the merits, it was argued that the quantum of the Mareva extended to the entire sale proceeds of the NIO shares, yet D3 had explained the bona fide use of the same. Given the contractual terms and D3’s explanations, there was no sufficient evidence of fraud, wrongdoing or dishonesty, nor any reason to believe the D3 would dissipate his own assets in order to evade a potential judgment.

149.  At this preliminary stage, I am satisfied that the requirements for continuing Mareva relief against D3 have been met, and that it is just, convenient and appropriate to continue that relief. The detailed reasons are already set out above^[35]. I consider them sufficient to establish a good arguable case against D3 that the proceeds of sale of the NIO shares were paid away in breach of fiduciary duty (and/or dishonest assistance in a breach of trust); and to establish a real risk that D3 might dissipate his assets to evade a potential judgment.

150.  I will, however, reduce the quantum of the injunction against D3, to remove the sums which I consider to have been sufficiently justified: see §124 above. In addition, I will further reduce that quantum by US$2,266.32 in respect of certain payments made by D1 In Black PTE Ltd (plus charges), which Ps indicated were not controversial for present purposes^[36].

151.  There is also the injunction prohibiting dealings with the Solar Century shares. In the Ex Parte Skeleton, this was sought on a qua timet basis to prevent the D3 causing the Company to dispose of this asset potentially in breach of fiduciary duty. Ps also drew attention to a possible “double recovery” argument by injuncting both the shares and the D6 Sum^[37].

152.  I note that the D6 Sum has now been paid into court, such that it may be argued that the shares need no longer be injuncted. However, the Sunfund Ds made no such argument and did not actively address the injunction over the shares. Accordingly, I will leave that portion of the injunctive relief in place (noting that there is liberty to apply, in the event for example that there is some reason or desire to dispose of the shares).

F7. Prejudice to the Sunfund Ds: Balance of Convenience

153.  D3 gave evidence of the prejudicial effect of the injunctive relief on the operation of the Sunfund Ds and the group of which they form a part. In summary:

(1) D1 is the holding company of three SFC-licensed companies, and would normally pay for expenses of its subsidiaries including salaries. The injunctions prevented this, such that it was necessary for funds to be borrowed from a money lender company belonging to the group.

(2) D2 was licensed under the SFO to provide asset management services. The injunctions prevented it from providing such services or engaging in new business, due to restrictions on the use of banking facilities. Lost management fees alone in respect of lost business, were estimated at around HK$3 million per annum. There was also a risk that the injunctions would cause D2 to lose its SFC license.

(3) D5 was the holding company of D1, and a licensed money lender. D5 was usually responsible for paying office rent for the group, and making investments in fixed term products such as bonds. The injunctions prevented D5 from doing either, and there was a risk that D5 could lose its money lender’s license.

(4) The injunctions effectively froze the operations of the group and D3’s personal accounts, causing immense cash flow issues, and likely to cause serious damage to the businesses and reputation.

154.  Ps pointed out that the above was unsupported by documentary evidence. Further, an undertaking in damages was offered by Ps and Tam Yuk Ching Jenny^[38], the sole director and shareholder of P1. Evidence was adduced of Ms Tam’s assets, including bank balances in the region of HK$4 million and a property in Hong Kong with equity estimated above HK$20 million. The May Injunction was expressly granted on the basis of, inter alia, these undertakings.

155.  For the reasons canvassed in detail above, I consider that there are very good reasons to continue the injunctive relief as a ring-holding measure pending the trial of these proceedings. I have also taken in the balance the evidence of prejudice adduced by the Sunfund Ds, and Ps’ undertaking in damages supported by evidence of assets: see above. In all the circumstances, I conclude that the balance of convenience favours continuing the injunctions pending trial, subject to the variations referred to below.

G. DISPOSITION

156.  In respect of the Injunction Summons taken out by Ps, I will order that the May Injunction be continued against D1, D2, D3, D4 and D5 until trial or further order of the court, subject to the following variations.

(1) At §4, the figure of US$2,560,032.82 (appearing twice) be varied to US$1,505,032.82; the figure of US$2,080,000 in the table be varied to US$1,040,000; and the fourth row of the table (referring to US$15,000) be deleted.

(2) As §§6 and 7, the figure of US$6,802,262.53 be varied to US$5,774,996.21.

(3) At §11, figure of US$2,560,032.82 be varied to US$1,505,032.82, and the figure of US$6,802,262.53 be varied to US$5,774,996.21.

157.  Under the terms of the May Injunction which I continue, there is already liberty to apply.

158.  As to the costs of the Injunction Summons, I am minded to award Ps 90% of their costs of the summons in the cause, to be taxed if not agreed, with certificate for two counsel. This seems to me to be the fairest order^[39]. The reduction of 10% is on a broad-brush basis, to reflect the Sunfund Ds’ limited success in reducing the quantum of injunctive relief. I will make an order nisi to that effect.

159.  I will dismiss the Discharge Summons taken out by the Sunfund Ds (based on alleged material non-disclosure), with an order nisi that the Sunfund Ds pay Ps’ costs, to be taxed if not agreed, with certificate for two counsel.

160.  As to the Payment In Summons, at the hearing I pronounced an order (which was uncontroversial) that upon the payment of the D1 Sum into court by D1, §1 of the April Injunction against D1 and §2 of the May Injunction against D1 be discharged^[40]. To date, no such payment in has been made. For the avoidance of doubt, the injunctive relief which I have continued against D1, would be discharged upon payment of the D1 Sum into court. In any event, given the said order, the only remaining issue on the Payment In Summons appears to be costs. I will make an order nisi that there be no order as to the costs of that summons.

161.  Any application to vary the costs orders nisi set out above, shall be made in writing within 10 days of the handing down of this Decision, limited to 5 pages. The opposing party shall have a right of written reply within 7 days thereafter, limited to 5 pages. The applying party shall have a right of written reply within 5 days from service of the opposing party’s reply, limited to 3 pages.

162.  It remains only for me to thank both teams of counsel for their able assistance in this matter.