ALLTOGETHER LAND CO LTD v. CHINA CREATE CAPITAL LTD

HCMP 98/2019

[2019] HKCFI 564

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 98 OF 2019

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J U D G M E N T

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1.  There is before the court an application made on behalf of a party seeking to intervene in these proceedings, Changjiang Securities Brokerage (HK) Limited (‘CSB’) for the amendment of an ex-parte Mareva injunction that was granted on 20 January 2019. That Mareva injunction was made on the application of Alltogether Land Company Limited, a BVI company and the majority shareholder of a Hong Kong listed company, Guorui Properties Limited.  I shall refer to the applicant as “Alltogether”.   The respondent to the application for the Mareva injunction is China Create Capital Limited, also a BVI company.  I shall refer to the respondent as “CCCL”.

2.  On 24 August 2018, two loan agreements were executed by which Alltogether loaned a total of approximately $310 million to CCCL.  CCCL defaulted on the payment of the first loan which triggered Alltogether’s right to terminate the second loan as well.

3.  On 20 January 2019, Alltogether exercised its right to terminate both loan agreements and issued the appropriate written notice to CCCL.  On that date, the sum owed under these agreements amounted to US$39,590,202.20, which is equivalent to HK$310,513,873.90.

4.  Shortly after this date, Alltogether commenced court proceedings in Beijing against CCCL. 

5.  Prior to the two loan agreements, on 9 April 2018, Alltogether entered into a share transfer agreement (“the STA)” with CCCL, under which Alltogether agreed to transfer 266,665,078 shares in Guorui to CCCL (“the Transferred Shares) at HK$2.3 per share.  The shares were transferred on 25 April 2018.  Payment by CCCL for the shares occurred on the completion date, 30 April 2018.  The price paid was HK$634,662,885.64. 

6.  The STA contained what has been called a “lock-in clause”, clause 5.  This provided that CCCL would not sell, transfer or dispose or establish any options, rights, privileges or encumbrances over the transferred shares for a period of 12 months from the completion date.  This 12-month period will expire on 30 April 2019.

7.  CSB, the intervener, is a securities brokerage licensed to offer, amongst other things, securities margin financing.  CCCL has for a number of years maintained a margin account with CSB.  CCCL has executed a number of agreements in favour of CSB.  They are as follows.  A securities trading agreement in 2016 (‘the ST agreement’). Next, a deed of account charge dated 24 February 2017 (‘the account charge’). Thirdly, a facility agreement dated 24 February 2017 (‘the first FA’). Fourthly, a supplemental facility agreement dated 1 March 2019 (‘the second FA’). 

8.  Under these agreements, CCCL was required to deposit and maintain assets, cash or securities, of sufficient value in the margin account to meet a loan to collateral ratio of 60 per cent.  If at any time the loan to collateral ratio exceeds 72 per cent but is not greater than 80 per cent, CCCL is obliged to ensure that the ratio is restored to 60 per cent either by depositing more assets into the margin account or repaying the appropriate portion of the loan.

9.  The ST agreement provides at clause 3.1 of Schedule B of Part 3 as follows: 

“Collateral. The client as beneficial owner of the collateral hereby charges in favour of the broker in respect of all the secured obligations by way of fixed charge all the client’s right, title, benefits and interests in the collateral, including any additional or substituted collateral and all dividends… as continuing security for the payment and discharge of the secured obligations.”

10.  Clause 17.7 of the account charge provides that CSB has the right to enforce any security without notice upon an event of default which includes, among other things, CCCL’s failure to maintain adequate assets in the margin account to meet the loan to collateral ratio.

11.  On 27 April 2018, two days after CCCL received the transferred shares from Alltogether, CCCL deposited a portion of these shares, 16.3 million, into the margin account.  At the same time, CCCL deposited a blank share transfer form signed by CCCL as transferor as required under clause 4.2 of the account charge.

12.  CSB’s application to intervene was made on 12 February 2019 and was first heard on 15 February 2019.  At that hearing, or at least on the date of the hearing, CSB disclosed documents showing that 16.3 million Guorui shares in their possession had been deposited by CCCL on 27 April 2018.  The Guorui shares deposited with CSB came from the parcel of shares that had been sold by Alltogether to CCCL and transferred to CCCL on 24 Aril 2018.

13.  On 17 and 18 January 2019, CSB disposed of 1,768,000 and 6,934,000 Guorui shares.  There are 7,598,000 Guorui shares remaining in the margin account and, as I have said, CSB seeks an order modifying the ex-parte Mareva injunction obtained by Alltogether so that it may enforce the equitable charge that attaches to those shares under the agreements by selling them.

14.  It is common ground that a Mareva injunction does not create a proprietary interest conferring on the party awarded the injunction a security interest in the assets injuncted that gives him a right to those assets that is superior to the rights of unsecured creditors; see International Associated Attorneys Limited v Eurostock Energy Limited & Others [2012] 6 HKC 570.

15.  CSB contends that it has acquired a proprietary interest over the 7,176,800 Guorui shares that remain in the margin account and which are available to meet a margin call triggered by the loan to collateral ratio exceeding 60 per cent. 

16.  CSB further submits that Alltogether has no proprietary interest in the shares in question that is capable of defeating CSB’s equitable charge.

17.  It has been argued on behalf of Alltogether that the lock-in clause gave Alltogether a right to restrain any disposition of or dealing in the 7 million-odd shares. 

18.  Ms Janine Cheung for Alltogether conceded that there was no authority that directly supported Alltogether’s argument but she sought to draw support from a number of cases where it was held that directors who are aware that shares in a private company have been transferred in breach of an obligation contained in the company’s articles to offer them first to existing shareholders must refuse to register the transfer.

19.  In my opinion, these cases of which Hunter v Hunter [1936] AC 222 is the most prominent, are all dependent on the fact that the company and all the shareholders are bound by the terms of the Articles of Association.

20.  If CSB knew of the lock-in clause when it accepted the transferred shares on 27 April 2018 or when the equitable charge in the 7 million-odd shares remaining attached under the margin arrangements, it might have been arguable that CSB was tortiously interfering with Alltogether’s contractual rights under the lock-in clause and should be restrained from continuing to act unlawfully quoad Alltogether.  However, in the third affirmation of Wong Kenty, who is the managing director of CSB, it is stated that CSB had no notice of the lock-in clause. 

21.  In my judgment, given the state of the evidence, there is no basis for the court to conclude that CSB knew of the lock-in clause or were under some duty to make inquiries that might have led to knowledge of that clause.  This, in my judgment, gives the quietus to any argument that CSB’s proposal to sell the 7 million-odd shares involves the commission of the tort of unlawfully interfering in contractual relations actionable by Alltogether.

22.  Ms Cheung also sought to rely on the wording in the blank share transfer form which was deposited with CCCL when the shares were transferred to CSB on 27 April 2018. 

23.  Clause 4.2 of the account charge provides that the chargor (here CCCL) must in respect of future shares which are to be provided by way of further security for the lending should have accompanying the transfer of those shares a blank transfer form in the wording contained in schedule 2 of the agreement.

24.  This pro forma for the instrument of transfer in schedule reads, so far as relevant, as follows:

“We, China Create Capital Ltd, the transferor, for good valuable consideration received by us from - the transferee, do hereby transfer to the transferee - “shares (the ‘shares’) standing in our name in the register of the company to hold unto the transferee, his executors, administrators and assigns, subject to the several conditions on which we held the same at the time of execution of this share transfer form and consent to our name remains on the register of the company until such time as the company enters the transferee’s name in the register of the company and we as transferee do hereby agree to take the shares subject to the same conditions.”

25.  It was argued on behalf of Alltogether that the blank transfer form that was executed by Alltogether in the terms I have just related required CSB to act in conformity with the lock-in provision.  This submission was attractively advanced, but I cannot accept it.

26.  The share transfer form is provided against the possibility that CSB as the secured party would choose to realise its security using an executed blank share transfer form. 

27.  In my judgment, it would only be if the executed share transfer form were contemplated to be used by CSB to have the benefit of its security that those conditions would apply.

28.  In his third affirmation, Wong Kenty, in paragraph 4(ii)- (vi) says this:

(ii) on 27 April 2018, the respondent caused to transfer to the Intervener the 16,000,300 shares in the Guorui Properties Limited (“Charged Guorui Shares”) by arranging for a transfer of the same from the Respondent’s securities account with Yue Xiu Securities Company Limited (“Yue Xiu”) by way of settlement instructions through the Central Clearing and Settlement System (“CCASS”), a securities settlement system operated and maintained by Hong Kong Securities Clearing Company Limited for clearing and settlement of securities transactions on the Stock Exchange of Hong Kong Limited;

(iii) At the time when the Charged Guorui Shares were transferred to the Margin Account the Intervener, only received the Settlement Instructions, which was produced and shown to me marked “WK-17” of the 2^nd Affirmation, but no other documents;

(iv) as all the Respondent’s shares in the Margin Account, including the Charged Guorui Shares are held by the Intervener in its CCASS account, the Intervener can sell, transfer or otherwise dispose of the Charged Guorui Shares by CCASS.  No transfer form is required; 

(v) Generally, if shares are bought or sold through the CCASS, no physical transfer form is needed and parties can execute such transfers electronically; and

(vi) the Intervener has never used the Blank Transfer Form to sell, transfer or otherwise dispose of the Charged Guorui Shares or any other part thereof.

29.  In my judgment, that evidence (which is not sought to be contradicted by Alltogether) convincingly answers the submission that CSB was subject to the lock-in provision by virtue of the wording of the executed blank transfer.  Those conditions would only be applicable where the executed transfer was going to be the means by which the security was realised. 

30.  Accordingly, I do not accept that the wording of the executed transfer gives Alltogether any entitlement to the remaining 7 million-odd shares which is superior to the equitable charge that undoubtedly exists over those shares in favour of CSB.

31.  In the course of the last hearing, Ms Cheung made an open offer.  She said that Alltogether offered to purchase the 7 million-odd Guorui shares at their market value and to pay the proceeds to CSB which could then be transferred into the margin account.  She further offered to pay CSB’s costs in these proceedings on an indemnity basis.  However, this offer has not been accepted.

32.  The court is not deciding finally what CSB’s proprietary rights are.  That would require a trial of the issue with discovery and possibly oral evidence subject to cross-examination.  What the court is doing is exercising a discretionary jurisdiction to decide whether or not the Mareva injunction should be varied to allow CSB to exercise its claimed proprietary interest in the shares.  The open offer is a matter that plainly enters into the scales as the court exercises its discretion.

33.  I was told that the open offer has not been accepted because it would require an off-market sale of the shares which would have to be reported to the regulatory authorities which was something that CSB did not wish to do. 

34.  CSB’s position is that under the charge and the other documentation giving rise to the unquestioned equitable interest they have in the shares, they are at liberty to deal with those shares in any way in which they choose.  They have a complete discretion as to how they would choose to realise their security beyond merely continuing to hold the shares in the margin account.

35.  I have concluded that the possibility that it might be determined at a trial of the issue that CSB does not have an unfettered proprietary right to sell or otherwise deal with these shares is remote.  It is possible that on discovery and in consequence of a full trial that it could be established that CSB has acted contrary to the rights of Alltogether and is guilty of the tort of conversion. But as I have said, I regard that possibility as remote.

36.  I have been provided with the financial statements of CSB for 2017 and have concluded that there is no obvious risk of CSB going out of business or being unable to meet a judgment that might be entered against it upon a trial of the issue where CSB fails to establish its security interest. 

37.  In these circumstances in the exercise of my discretion, I propose to vary the Mareva injunction.  I will discuss with counsel the precise terms of the order that the court must make.  The outcome is that CSB has succeeded on its intervention, an intervention that was resisted by Alltogether.

38.  In those circumstances, I propose to make an order nisi that Alltogether should pay CSB’s costs in the intervention that it has successfully mounted.

39.  Further in the circumstances, Alltogether is released from the fortification of its undertaking that it gave in respect of CSB’s intervention. It follows that Alltogether’s solicitors are released from the undertaking they gave to the court to hold HK$2 million to the order of the court.