CROWN MASTER INTERNATIONAL TRADING CO LTD v. CHINA SOLAR ENERGY HOLDINGS LTD

HCA 21/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 21 OF 2015

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(by Original Action)

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(by Counterclaim)

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REASONS FOR JUDGMENT
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INTRODUCTION

1.  This was an application by the defendant (“the Company”) for an injunction to restrain the plaintiff (“Crown Master”) from exercising its voting right at the special general meeting of the Company to be held in Hong Kong on 15 May 2015 at 10 am (“the SGM”).

2.  The SGM, was to consider and, if deemed fit, to increase the maximum number of directors and to appoint 12 additional directors to the board (“the proposed resolution”). 

3.  The injunction would have the effect of preventing Crown Master from taking control of the management of the Company pending resolution of the dispute relating to Crown Master’s status as a shareholder.

4.  At the end of the hearing, I refused the application.  Here are my reasons.

BACKGROUND

5.  By an Acquisition Agreement dated 7 February 2011, the 1^st defendant by counterclaim (“Mr Yeung”) and the 2^nd and 3^rd defendant by counterclaim (“the Sellers”) sold Stream Fund High-Tech Group Corporation Limited (“Stream Fund”) together with its 2 subsidiaries in the Mainland (“Changzhou WFOE” and “Dali WFOE”) to the Company at a consideration of HK$350m.

6.  As part of the consideration, Mr Yeung was allotted shares subsequently consolidated to 224,100,000 shares (“the Subject Shares”) and issued with convertible notes in the principal sum of HK$36,667,800 (“the Subject CNs”). (The Subject Shares and Subject CNs shall be collectively called “the Assets”). Mr Yeung became the major shareholder, executive director and chairman of the Company.

7.  The Company’s case was that the Acquisition Agreement was voidable by reason of fraudulent misrepresentation of Mr Yeung and the Sellers and so the transfers of the Assets were liable to be set aside.

8.  Separately, Crown Master advanced a loan of HK$30m to Mr Yeung on the security of the Assets.  Mr Yeung executed a Charge Deed on 27 May 2013, pursuant to which he (i) signed and delivered an instrument of transfer and bought and sold notes in respect of the Subject Shares (“the transfer documents”); (ii) delivered the Subject Shares to a brokerage account designated by Crown Master; and (iii) delivered to Crown Master a signed settlement instruction in blank.

9.  On 26 August 2013, Mr Yeung was arrested and detained in the Mainland for suspected fraud.

10.  On 19 September 2013, Crown Master demanded for repayment from Mr Yeung, but to no avail.  On 26 March 2014, Crown Master entered default judgment against him.  On 25 September 2014, Crown Master obtained a charging order absolute in respect of the Assets.

11.  On 25 November 2014 and 4 December 2014, Crown Master exercised its rights under the Charge Deed to take possession of the subject CNs and Subject Shares respectively. On 22 December 2014, Crown Master became the registered owner of the Subject Shares and a share certificate was issued to it.

12.  The Company’s case was that the Charge Deed was void by reason of mistake or non est factum and Mr Yeung has never executed or deposited in Crown Master any document to effect change of ownership of the Assets. Accordingly Crown Master had not validly become the registered holder of the Assets.

13.  By a letter dated 12 December 2014 from its solicitor, Messrs Michael Li & Co (“MLC”) to Crown Master, the Company alleged that it was induced by fraudulent misrepresentation of Mr Yeung to enter into the Acquisition Agreement and that it had the right to set aside the same and to take steps to recover the Subject Shares.  It was common ground that this was the date on which Crown Master was first put on notice of the fraud. 

14.  As the Company refused to register Crown Master as the holder of the Subject CNs, Crown Master commenced this action on 5 January 2015 for the sum of $36,667,800 and a declaration that Crown Master was holder of the subject CNs. 

15.  On 16 February 2015, the Company (throught MLC) issued a notice to Mr Yeung, purporting to rescind the Acquisition Agreement.

16.  The Company filed its defence and counterclaim on 30 April 2015 seeking, amongst others, a declaration that Crown Master was not the legal and beneficial owner of the Assets, an order to set aside the Assets and rescission of the Acquisition Agreement.

17.  Separately, on 16 February 2015, Crown Master issued a requisition notice for an SGM of the Company to be convened for appointment of Crown Master’s nominated directors. According to Crown Master, such an act was prompted by matters which came to its attention shortly after it became a registered holder of the Subject Shares:

(i) possible misfeasance by directors (including in particular Mr Yeung) in relation to the affairs of the Company;

(ii) the Company’s subsidiaries being put into liquidation for debts of more than RMB16.5 million (Changzhou WFOE) or having had their assets seized (Dali WFOE) and its remaining business not in operation or not trading at a profit;

(iii) the Company’s failure to hold any general meeting since September 2013 or to prepare any financial statements since June 2013; and

(iv) the fact that the Hong Kong Stock Exchange (“SEHK”) has put the Company into the first stage of de-listing, demanding appropriate investigation into the allegations of misfeasance as a resumption condition, and that a resumption proposal be submitted by no later than 19 June 2015.

18.  On 26 March 2015, Crown Master presented a winding-up petition against the Company as a creditor (for the alleged debt under the Subject CNs) as well as a shareholder (for alleged lack of confidence in the Company’s management). The petition is due to be heard on 3 June 2015.

19.  The Company refused to convene the SGM as requisitioned, Crown Master thus issued a notice to convene the SGM in accordance with Bye-law 58 of the Company’s Byelaws and section 74 of the Companies Act 1981 of Bermuda.

20.  On 6 May 2015, MLC indicated that the Company opposed the SGM.  The present application was taken out on 11 May 2015.

GROUNDS FOR THE APPLICATION

21.  It was the Company’s case that there were serious issues to be tried as to:

A. Invalid transfer of the Subject Shares from Mr Yeung to Crown Master due to unilateral mistake, non est factum, and forgery of the transfer documents (collectively the “vitiating factors”);

B. The Company’s entitlement to rescission of the Acquisition Agreement;

C. Crown Master was not a bona fide purchaser for value without notice of the legal estate of the Subject Shares, as it had notice of the Company’s entitlement to rescind the Acquisition Agreement on 12 December 2014, but only became registered as a member in the Company on 22 December 2014.

22.  As Crown Master and its owner Mr Cho Feng-Min were the largest shareholders of the Company, failure to grant an injunction would mean that it was very likely that the proposed resolution would be passed and Crown Master would effectively take control over the Company.  Given the serious issues to be tried, the Company submitted that maintaining the status quo by the grant of the injunction carried the lower risk of injustice.

GROUNDS IN OPPOSITION

23.  Mr Tong SC, leading Ms Eva Sit and Mr Justin Ho, opposed the application on the grounds that:

A. The vitiating factors were personal to Mr Yeung and the Company could only decline to register the transfer or apply to set aside the registration if the board had either colluded with the transferee in procuring the registration or the registration was procured by misrepresentation on the board, which was not the case here;

B. Restitutio in integrum was no longer possible for the Company and so the Company could not rescind the Acquisition Agreement;

C. The Company has failed to establish that Crown Master was not a bona fide purchaser for value without notice.

THE PROPER TEST TO APPLY

24.  Mr Pao with Mr James Man, counsel for the defendant, relied on the familiar principles of American Cyanamid.  The test of showing a serious issue to be tried was not a high one.  The matters were not demurrable on its face, and so there was no justification to decline an injunction on the merits without a trial: Yifung Properties Ltd v Manchester Securities Corp, HCA 1341/2014, (unrep., 17 November 2014) at §§21-22.  Ultimately, the court must assess whether granting or withholding an injunction was more likely to produce a just result: see National Commercial Bank Jamaica v Olint Corporation [2009] 1 WLR 1405 at §16, per Lord Hoffmann.

25.  On the other hand, Mr Tong SC submitted that where the grant of an injunction would in effect summarily decide the litigation in favour of the plaintiff and possibly conclude the litigation altogether, the court would not apply American Cyanamid principles, but examine the merits of the claim more closely and would take account of the parties’ respective prospects of success so as to avoid injustice to the defendant. In particular, the court would be reluctant to grant injunctive relief where the evidence before it “did not present any overwhelming balance on the merits in the plaintiff’s favour, or any other overriding ground for an immediate injunction without trial”: see Cayne v Global Natural Resources plc [1984] 1 All ER 225 at 236b-f per Kerr LJ. 

26.  The Cayne principle has been followed in the Hong Kong courts on many occasions.  For example, it has been said that if the interlocutory injunction will have a finality effect, the plaintiff has to show that he is “very likely to succeed at trial”: Liao Zhiqiang & ors v Cheung Sin Ling Vicki & ors, HCA 1886/2013 (unrep., 16 Apr 2014) at §28 per DHCJ Wilson Chan; or has “a good prospect of success”Chinaplus Wines Ltd v Berry Bros & Rudd Ltd & ors, HCA 1818/2012 (unrep., 13 December 2012) at §§32-33 per Anthony Chan J.

27.  Mr Tong submitted that the injunction had a finality effect.  It sought to restrain Crown Master from exercising its voting rights at a critical point in the Company’s lifetime.  Mr Tong SC relied on this remark in the judgment of Eveleigh LJ at page 232j in Cayne:

“The importance of the voting power from the plaintiffs’ point of view is not its value as voting power generally speaking but its value at the moment in order to enable the plaintiffs to achieve a particular object which they have in mind.”

28.  He submitted that if the interim injunction was granted, the Company might be delisted and wound up well before conclusion of the trial, leaving no right over the Subject Shares that Crown Master could exercise.

29.  In my view, the situation in Cayne was distinguishable from the present.  The defendant company (D) wanted to enter into a contract with a third party which, if implemented, would require D to issue and allot shares to the third party.  The plaintiff shareholders (P) said that D’s motive was to maintain the existing board who entered into the contract.  P sought to restrain D from doing so until trial without first obtaining approval of D in general meeting. The court declined to grant the injunction as it would have a dispositive effect on the action, giving P all that they claimed for without the need for trial.

30.  The present case was distinguishable.  The change in composition of the board (if the proposed resolution was passed) would have immediate impact on administration of the Company before it was wound up or delisted.  Hopefully the Company could be salvaged.   The change in itself would not have disposed of any part of the claim or counterclaim without trial.  Even assuming that after the meeting, the claim would not be pursued or the petition was not opposed, that would be a decision of the Company and not the finality effect of the injunction, which was truly interlocutory in nature.

31.  The fact that the injunction sought would restrain Crown Master from exercising its voting rights at a critical point in the Company’s existence was more, in my view, a factor in balancing the convenience.

32.  I will therefore apply the American Cyanamid test.

SERIOUS ISSUES TO BE TRIED

A.  Invalid transfer of the Subject Shares

33.  The Company claimed that the circumstances as to how Crown Master took possession of the Assets were extremely suspicious.  There were thus substantial disputes as to the status of Crown Master as the Company’s shareholder.

34.  As revealed by the hand-written “confession statements” obtained from Mr Yeung (who was in custody in the Mainland), by an alleged oral agreement (“the Oral Loan Agreement”) entered into between him and Mr Tsoi Ki Chong (“Mr Tsoi”), Crown Master would lend HK$30m to Mr Yeung. After receiving the money, Mr Yeung was to transfer HK$15m thereof to persons designated by Mr Tsoi. 

35.  Mr Yeung had to open a brokerage account in his own name (which he did) with a securities broker designated by Mr Tsoi and deposited the Subject Shares into it.  Without consent of Crown Master, Mr Yeung shall not transfer and/or sell the Subject Shares.  Mr Yeung also delivered the original certificate of the Subject CNs to Mr Tsoi.

36.  On Mr Yeung’s evidence, the loan appeared to be interest free, for unlimited duration and with no apparent return to Crown Master.  Mr Yeung was not required to charge the Assets in favour of Crown Master.  He was only required to sign, on 27 May 2013, a Chinese document reflecting the terms of the Oral Loan Agreement.  He was also asked to sign some English documents which, as he was illiterate in English, he believed to reflect the terms of the Oral Loan Agreement.  He did not sign any document to reflect the change of ownership of the Subject Shares.

37.  It transpired that what Mr Yeung signed on 27 May 2013 were in fact:

(a) A deed of repayment (“Repayment Deed”) by which he undertook to pay Crown Master with an interest rate of 36%, within 5 months (ie by about 31 October 2013) or on demand.

(b) The Charge Deed by which he shall deliver to Crown Master all documents necessary to enable Crown Master to register the Subject Shares and the Subject CNs in its or its nominee’s name. The Charge Deed provided that Crown Master might enforce the charge and take possession of all the charged assets on the occurrence of an event of default.

38.  I accept that these facts disclosed issues as to whether or not the Repayment Deed and the Charge Deed were void by reason of unilateral mistake or non est factum of Mr Yeung.  The plea of non est factum is available to persons who have been tricked into signing the document or ignorant of the language in which the document is expressed: see Treitel on the Law of Contract (13^th ed, 2011) at 8-078.

39.  Further, there was an issue as to whether or not Mr Yeung had executed the transfer documents as he denied ever executing documents to effect change in ownership of the Assets. 

40.  The Company pointed to the “highly unusual commercial features” of the 2 Deeds.  The interest was high (36% per annum).  The repayment date was to the advantage of Crown Master.  The loan was “over collateralized” because just the Subject Shares had a face value of over HK$39 million (as at 25 May 2013).

41.  The Company also pointed to the “highly unusual” manner in which Crown Master issued a demand letter to Mr Yeung a month before 31 October 2013.  It enforced the alleged equitable charge by court action and did not take possession of the charged shares until more than a year after the default in payment and upon change to the present firm of solicitors.  As at 1 November 2013, the shares were worth HK$36,667,800 and the subject CNs HK$40,338,000 (although trading was suspended).  SFC and the Company were kept in the dark about the charge.  The Company suggested that there was support for a case in the Deeds being void and that Crown Master had forged[1] the transfer documents to effect the transfer of the Assets.

42.  On the Company’s case, if the Repayment Deed and the Charge Deed were void, the taking of the Subject Shares pursuant to the right provided by the Charge Deed would all the more be void. 

43.  By a letter of Mr Yeung’s solicitors (Messrs HM Tsang & Co) dated 7 May 2015, the Company was put on notice that Mr Yeung had not executed any documents to effect any change of ownership as regards the Assets, or ever charged them in favour of Crown Master.  Mr Yeung claimed that the conduct of Crown Master amounted to fraud and he intended to commence action.

44.  By its counterclaim, the Company sought to set aside the Subject Shares and Subject CNs and sought a declaration that Crown Master was not their legal and beneficial owner.

45.  Mr Pao submitted that if a transferee’s title to the shares was void and had no right to be registered at all, the company was entitled to deny his title: see Pennington’s Company Law (8^th ed, 2001) at p.403. The company’s register of members and the share certificate, which were no more than prima facie evidence of title, in no way affected the title of the true owner: seeSmith & Leslie: The Law of Assignment (2^nd ed, 2013) at 19.99.

46.  It was not necessary for me to weigh the evidence of Mr Yeung (being based wholly on his assertions), consider the similarity of his signatures on various documents, or Crown Master’s evidence (being based on documentary evidence and affirmations from 2 attesting witnesses).  They were disputed facts for trial. 

47.  However, a distinction had to be drawn between: 

(1) A personal claim by Mr Yeung against Crown Master based on “the vitiating factors” in respect of the Oral Loan Agreement or Charge Deed.  This would be a claim by an “outgoing” shareholder against the newly registered shareholder.  (Mr Yeung had, just the day before this hearing, issued a writ against Crown Master and the Company.)

(2) A claim by the Company against Mr Yeung for rescission of the Acquisition Agreement due to, among others, misrepresentation (part of the counterclaim).

48.  The Company could not ride on the claim in sub-paragraph (1) above to mount a counterclaim or pursue an injunction against Crown Master.  That was because an allegation of fraudulent misrepresentation between transferor and transferee of shares was to be resolved between them.  The company had nothing to do with the dispute except that it might exercise any power to refuse registration.  Unless the board had either colluded with the transferee in procuring the registration, or the registration was procured by misrepresentation on the board, the company could not apply to set aside the registration: see In re Discoverers Finance Corporation Limited [1910] 1 Ch 207, 211, 213 (Neville J); [1910] 1 Ch 312, 320-321 (CA).

49.  Mr Yeung only elected to rescind the Charge Deed by his writ issued after this injunction application was made.

50.  In the meantime, the registration of Crown Master as a shareholder (“the registration”) came through Computershare Hong Kong Investor Services Limited. There was no suggestion that there was any misrepresentation on the board or collusion with board members.  Hence, there was no basis for the Company to challenge the registration.  The issue of a writ by Mr Yeung did not take the Company’s position further.  The Company’s position was no different from any company that had notice of a dispute between two shareholders.

51.  The issue to be tried under Ground A did not concern Crown Master.  The Company could not use it to cast doubt on Crown Master’s status or restrain its voting rights.

B.  The Company’s right to rescission

B1. Legal principles

52.  Rescission is only possible if there can be restitutio in integrum.  Restitutio in integrum is not possible if the property transferred under the contract has altered its character: Chitty on Contracts (31^st ed), Vol. I, §§6-120, 6-122.

53.  However, decline in value of the property by ordinary play of market force will not prevent restitutio in integrum:  O’Sullivan, Elliott & Zakrzewski, The Law of Rescission (2^nd end) §18.92:

“Absent culpable delay, the fact the asset the rescinding claimant received has declined in value as a result of the ordinary play of market forces will not prevent him from making sufficient restitutio in integrum by simply returning it. [See The Western Bank of Scotland v Addie (1867) L.R. 1 Sc. App 145, 166.] … Nicholls V-C remarked in Cheese v Thomas that ‘[a] defendant cannot be heard to protest that such an outcome is unfair when he is receiving back the very thing he persuaded the plaintiff, by undue influence or misrepresentation, to buy from him.

It is necessary to be clear about the limits of this proposition.  First, it does not apply where the depreciation is caused by the conduct of the parties rather than market fluctuations…”

B2. Application of legal principles

54.  I accept that the Company had a viable claim of misrepresentation against Yeung and the other sellers and hence an equity of rescission with regard to the Acquisition Agreement.

55.  Here, the subject matter of the Acquisition Agreement was the shares of Stream Fund. Those shares may still be returned but its principal assets had substantially altered their character whilst under the Company’s control. The Changzhou WFOE had lost its business license, and was put into liquidation and receivership in the Mainland.  The Dali WFOE has all its assets seized by the PRC authorities.

56.  Despite that, a case on rescission was still arguable, as it was Mr Yeung’s alleged culpable conduct which caused the WFOEs not to be properly run whilst under his control.  It would be absurd and unjust to permit a fraudulent director to rely on his own serious breach of duty to resist the Company’s claim for rescission.  See Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at §131, 134 (Lord Walker NPJ). 

57.  On Ground B, there was a serious issue to be tried on rescission of the Acquisition Agreement.  Ground B is however tied to Ground C.

C.  Bona fide purchaser for value without notice

C1. Legal principles

58.  A contract for the transfer of shares induced by fraudulent misrepresentation renders the contract voidable, notvoid in equity.  Hence,

(a) The victim is entitled, at his election, to rescind the contract ab initio. However, unless and until he does so, the contract continues to be binding and enforceable: see Lonrho plc v Fayed & ors (No 2) [1992] 1 WLR 1 at 11H-12A per Millett J (as he then was).

(b) A voidable title passes to the fraudster. Unless and until the innocent party elects to set aside the transaction by way of rescission, the fraudster enjoys absolute title to the asset: see Treitel on the Law of Contract at §9-085.

59.  The consequence is that if, prior to rescission, the title comes into the hands of a bona fide purchaser for value without notice of the underlying fraud, the innocent party is barred from rescission and the bona fide purchaser acquires an indefeasible title both at law and in equity: see O’Sullivan, Elliott & Zakrzewski, The Law of Rescission (2^nd ed) §20.06.

60.  The purchaser must generally have obtained the legal interest in the property.  If he is the purchaser for value of an equitable interest then the basic rule of first in time priority instead applies.  The rule conferring priority on the purchaser for value does apply where the prior equitable right is a “mere equity” (eg a right to rescind a prior transaction for fraud) as distinct from an equitable interest.  See Snell’s Equity (32^nd ed) §4-023.

61.  There is a qualification to the rule that the purchaser must generally take a legal interest in the property.  A purchaser without notice who at the time of the purchase fails to obtain either a legal interest or the better right to one will nevertheless prevail over a prior equity if he subsequently gets in a legal interest, even if he then has notice of the equity.  Between himself and the owner of the prior equity the equities are equal, and there is no reason why the purchaser should be deprived of the advantage he may obtain at law by superior activity or diligence.  See Snell’s Equity (32^nd ed) §4-023 to §4-026.

62.  A different rule applies where shares are used as security for borrowing. Where the transferor has delivered to the transferee the share certificate (or anything equivalent to deliver possession of the shares) together with executed transfer documents so as to put the transferee in a position to vest the legal estate in the shares in himself without further recourse to the transferor, the relevant time for considering notice in the context of the bona fide purchaser doctrine is when value was given by the transferee.

63.  In other words, if such transferee originally acquired only an equitable estate, but he subsequently perfects his title into a legal estate, the relevant time for considering notice is when he gave value for the earlier transaction through which he obtained the equitable estate. 

64.  In Macmillan Inc v Bishopsgate Investment Trust plc and ors (No 3) [1995] 1 WLR 978, at 1004F-H, Millett J (as he then was) states the principle and rationale for the different rule applicable to shares:

“Where, however, the first is equitable and the second is legal the position is different. A bona fide purchaser for value who obtains the legal estate at the time of his purchase without notice actual or constructive of a prior equitable right is entitled to priority in equity as well as at law: see Pilcher v Rawlins (1872) L.R.7 Ch.App. 259. But he must have obtained the legal estate, and the question of notice is normally tested at the time when he obtained it. (at 1000B-C)

…

(b) Stocks and shares. In the case of stocks and shares, however, the position is different. Where a creditor takes an equitable security over shares by deposit of the share certificate accompanied by a share transfer form duly executed by the registered holder, he puts himself in a position where he is able to obtain the legal interest by registration without recourse to the legal owner. The company is not a trustee of the shares for the registered holder, and by completing the transfer form and submitting it to the company for registration the creditor is not guilty of inducing a breach of trust on the part of the company or of obtaining the legal estate from a person who is not justified in equity in transferring it to him. Accordingly such a creditor may gain priority over an earlier equitable interest of which he had no notice when he advanced his money if he perfects his security by registration, even if he had actual notice of the prior interest before registration. This was laid down in Dodds v Hills (1865) 2 H.&M. 424.(at 1003G-1004A)

… [after some consideration on whether Dodds v Hills remained good law]

In my judgment it remains good law. … A transferor who delivers to a transferee a share certificate together with an executed transfer may still retain the legal estate for the time being, but he has done everything in his power to vest it in the transferee, while the transferee for his part has it within his own power to vest the legal estate in himself without further recourse to the transferor. As between the transferee who has given value on the one hand and the transferor and those claiming under him on the other, this rather than the time when the transferee actually obtains the legal title is to my mind the appropriate time for the question of notice to be tested. Moreover, the decision, though more than 120 years old, is peculiarly in accord with modern conditions. As the facts of the present case show, modern commercial lending often involves frequent substitution of security, and this makes registration inconvenient and commercially unattractive. Without it, complete security cannot be obtained, since the creditor will be at risk of the diminution in the value of his security by the issue of bonus shares or fresh certificates. To expose him to the further risk of being bound by an adverse claim of which he had no notice when he advanced his money, and from which he would have been free if he had obtained registration, is in my judgment commercially unacceptable. It is welcome to find that it is also legally unsound. (1004 F-H)

65.  If a person takes a transfer of shares whose allotment was defective in substance, gives value and has no notice of the defects and is registered as a member of the company, the company is precluded from disputing his title to the shares.  This is because shares are transferable by a statutory provision, which does not provide that the transfer will be subject to equities.  Where a legal chose in action is assignable at law in this way, a purchaser for value takes free from equities of which he is unaware, whether they make the chose in action voidable, or absolutely void: see Pennington’s Company Law (8^th ed), pp 404-405.

66.  The relevant statutory provision in this case was section 48 of the Companies Act 1981 of Bermuda as the Company was incorporated in Bermuda.

C2.  Application of the legal principles

67.  A short chronology of salient facts will illustrate the application of Macmillan v Bishopsgate:

27.5. 2013	Loan made to Mr Yeung; Charge Deed executed; Subject Shares used as security.
14.12.2014	Crown Master given notice by the Company of fraud entitling the latter to rescind the Acquisition Agreement.
22.12.2014	Crown Master entered into the Company’s register of members, thereby completing its legal title in the Subject Shares.

68.  As between the Company and Mr Yeung, the Acquisition Agreement was voidable at the election of the Company.  Mr Yeung (fraudster) had a voidable title over the Subject Shares which he had passed to Crown Master.

69.  Deposit of the Subject Shares with the designated broker, with blank settlement instructions and pre-signed transfer documents enabled Crown Master to deal with the Subject Shares without recourse to Mr Yeung.

70.  Applying Macmillan v Bishopsgate, the relevant time for considering notice was when value was given by Crown Master on 27 May 2013, more than 18 months before the time the Company gave notice on 14 December 2014 of its mere equity to rescind.

71.  On 4 December 2014, Crown Master took possession of the Subject Shares and obtained an equitable title.  The transfer, which had not been registered, was an equitable assignment.  Crown Master took the equitable interest subject to the Company’s “mere equity” to rescind.  Crown Master completed its legal title on 22 December 2014, despite having notice of the Company’s mere equity.

72.  It was not until 16 February 2015 that the Company actually exercised its purported right to rescind, by letter and not by court action: see Snell’s Equity (32^nd ed) §§4-023, 4-026.

73.  This case was on all fours with Snell’s Equity (32^nd ed) §§4-023 to 4-026 and Macmillan v Bishopsgate. Crown Master had priority over the Company’s mere equity.  Ground C was demurrable on its face and this is fatal to this application.

74.  Mr Pao submitted that the scope of Macmillan v Bishopsgate has never been conclusively determined in Hong Kong or England.  However, he has not shown why itsprinciples were inapplicable in present days. 

BALANCE OF CONVENIENCE AND ADEQUACY OF DAMAGES

75.  Given my ruling on Ground C, I just deal with balance of convenience for completeness sake.

76.  For either party, damages would not be an adequate remedy.  Once new directors were elected at the SGM, they would make decisions which might be difficult to unscramble afterwards.  To Crown Master, once this opportunity to vote was denied, the Company might be in a very different form a month down the road.

Irreparable harm

77.  For the Company, Mr Pao submitted that, firstly, there would be irreparable harm if an entity who was not a valid shareholder should exercise its voting rights at the SGM.  The affairs of the Company would be put into the hands of directors in Crown Master’s camp.  Pursuit of the counterclaim might be prejudiced.  The petition might also go ahead resulting in the Company being wound up.

78.  Secondly, there was no compelling urgency to convene the SGM to appoint the nominated directors.  Crown Master (on its own case) took a year from taking possession of the Subject Shares to registration as member.  It has filed a petition to wind-up the Company, and part of its complaint was that the affairs of the Company required investigation.  Despite that, Crown Master had not made any relevant application in the HCCW proceedings on the basis that there was urgency in the matter which would require court intervention.   It should not use the proposed resolution to circumvent the need to prove the petition.

79.  Thirdly, there was no reason to believe that the current board of directors (unrelated to previous management) appointed between October and December 2014were unable or unwilling to properly discharge their functions. After the Chairman was appointed on 21 October 2014, the SIC was formed to investigate matters relating to the Group Companies on 17 November 2014. The Phase I report was not endorsed by the board until 9 February 2015.  The notice of rescission was served on Mr Yeung 7 days later.  The Company has had to deal with two sets of legal proceedings instituted by Crown Master.  In the limited time available to the board, it was clear that active steps have been taken by them to properly investigate and act as appropriate.  An explanation had been given through the Company’s announcement dated 28 January 2015 explaining the failure to hold the 2014 AGM.  Some “improvement” in business has been made.

80.  The challenge to Crown Master’s status as a shareholder was not sustainable for reasons given under Ground A above.

81.  I agree with Mr Tong SC that shareholders might want to change directors from time to time.  Such change with any change in policy would not necessarily result in irreparable harm to a company. 

82.  The Company was in a dire financial position (paragraph 17 above).  As revealed from sections D5 and D6 of the Petition, there were doubts as to the ability of the board to effectively manage the Company having regard to their ambivalent attitude and delay towards investigation, lack of progress, risk of delisting and suspicious recent transactions in 2015.

83.  The Company faced a survival issue but there was nothing to suggest that the current Board had come anywhere near putting together a viable resumption proposal to meet SEHK’s deadline in one month’s time.

84.  There was urgency in holding the SGM.  If an injunction was granted to deprive Crown Master and other shareholders of the opportunity to appoint new directors to try to turn around the Company, there was a real likelihood of the Company being delisted and wound up, contrary to the interests of all shareholders and creditors of the Company.  Crown Master would suffer irreparable and irreversible damage as the Company was apparently insolvent. 

85.  Crown Master and its sole shareholder together constituted the single largest shareholder in the Company.  Crown Master was also a very substantial creditor of the Company in respect of a debt of over HK$36m.  Crown Master clearly had an interest in seeing that the Company held an SGM in good time hopefully to salvage the Company.  In this respect, I bear in mind the words of Eveleigh LJ in the Cayne case.

86.  Crown Master did not seek to remove the existing directors but to appoint more professionals to the board to properly scrutinize and investigate the Company’s affairs so as to preserve the Company’s value.  The proposed directors to be appointed would simply be asked to carry out duties which the current board was supposed to carry out already.

87.  Since August 2013, the Company’s shares had been suspended from trading and the Petition has been presented against the Company. Hence, even if the proposed directors were appointed to the board, no major transaction or disposition would likely take place in the meantime without Court sanction. There were therefore safeguards in place to prevent any material prejudice to the Company.

88.  Directors were to serve the best interests of the Company, not a particular shareholder.  If there was misfeasance of the new directors acting contrary to the Company’s best interests in not pursuing this substantive claim, the Company could sue the directors in question, but not the shareholder nominating them.  Such claims ordinarily sounded in damages for the Company.

89.  The only real prejudice complained of by the Company was that the current members of the Board would be at risk of being outnumbered by the new appointees and losing control of the Board. This was not a prejudice caused to the Company but to the affected directors in their individual capacity.

90.  On balance, the prejudice to the Company would be more limited if an injunction was refused; but Crown Master would lose the opportunity to vote at this critical time forever.  The risk of injustice to Crown Master was greater, especially since Ground C to be tried was demurrable.

DELAY

91.  Delay may render it unreasonable or unjust to grant an interlocutory injunction: Wong Chung Ming Development Co Ltd v Profit Surplus Ltd[2009] 3 HKLRD 514 at §30 per Le Pichon JA;Dorshare Ltd v Shun Pong LtdHCA 1823/2012, 4 Jan 2013, at §§13-16 per A Chan J.

92.  The Company has had clear notice of Crown Master’s intention to convene the SGM since 16 February 2015.  Since then, Crown Master’s solicitors have continually written to the Company’s solicitors in relation to the preparatory steps for convening the SGM.  The Company took no action for almost 3 months until 6 May 2015 when its solicitors demanded Crown Master to immediately withdraw the notice of the SGM, failing which the Company intended to apply for an injunction. 

93.  Accepting that the Company needed the evidence of Mr Yeung, there was no explanation as to why the Company only obtained his confession statements made in January/February only 2 months later on 29 April 2015.

94.  However, considering what the Company had done since the last quarter of 2014 February to May 2015, I do not think the board was dragging their feet. The facts and law were not straightforward.  Where a contract is voidable for misrepresentation, the party affected is entitled to a reasonable time to investigate in order to ascertain the true facts: see O’ Sullivan, Elliott & Zakrzewski, The Law of Rescission (2^nd ed, 2014) at 24.101.  In the overall scheme of things any delay in itself was not sufficient to deny the Company relief in this case. 

USE OF COMPANY FUNDS TO LITIGATE

95.  Directors of a company should not cause the company’s funds to be expended on disputes between shareholders: Re a Company No. 004502 of 1998, ex parte Johnson [1991] BCC 234, at 235B, per Harman J; applied in Re CG & L Investment Ltd v Wyatt Estates Ltd [1993] 1 HKLR 107 at 111(25)-112(15) per Penlington JA.  The rationale for such a principle is that in such cases, the company is wholly uninterested at law in the outcome of the litigation: Re a Company,at 237C.

96.  It was inappropriate for current directors to use the Company’s funds to finance litigation under Ground A and to prevent themselves from being outnumbered on the board.

97.  In its letter of 8 May 2015, B&M had expressly asked the current directors to confirm whether they had been using the Company’s funds to finance this application.  The directors’ failure to respond spoke for itself.

98.  Balancing all factors, even though there were disputes of facts, withholding the injunction was more likely to produce a just result.

UNDERTAKING AS TO DAMAGES

99.  The Company has given an undertaking as to damages.  With respect, it was not of much meaning, given the financial difficulty it was facing.  Perhaps this meaningless undertaking had to be given by the Company because the wrong party was before the court.  Had it been eg  the outgoing shareholder, Mr Yeung seeking the injunction, an appropriate undertaking could have been sought from him.

CONCLUSION

100.  In summary, there were disputes of facts and law to be tried, but Grounds A and C in opposition were made out.  The Company should not spend its money in a dispute between an outgoing and existing shareholder or prevent the current directors from being outnumbered.

101.  The risk of injustice to Crown Master, a bona fide purchaser of the Subject Shares without notice who became a registered shareholder, was greater than to the Company if an injunction was granted.  It was in the interest of the Company to hold an SGM on an urgent basis to try and salvage the Company and meet the requirements of SEHK to resume listing.  In the premises, the balance of convenience lay in favour of withholding the injunction.

102.  I thus dismissed the application for injunction and make an order nisi that Crown Master shall have the costs of this application with certificate for 2 counsel.  Such costs shall be taxed if not agreed.

103.  I am most grateful to counsel for their thorough preparation and high standard of work under such pressure of time.