MACAU FIRST UNIVERSAL INTERNATIONL LTD v. DING XIAOHONG AND OTHERS

HCA 992/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 992 OF 2010

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DECISION

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1.  This case effectively is a dispute between 2 brothers, Ding Gang (“DG") and the 2^nd defendant Ding Yu (“DY”). Each claims sole beneficial ownership of shares in companies which own a valuable piece of land and a building erected thereon. This application is by DY for the appointment of a receiver and manager to preserve the assets pending final determination of the dispute.

THE BACKGROUND

2.  DG and Ding Xiao Hong (“DXH”) (1^st defendant and sister of DY and DG) were the holders of 99% and 1% shares respectively in the plaintiff, Macau First Universal International Ltd (“Macau First”).  Macau First was the sole shareholder of the 3^rd Defendant, Hong Kong First Mainland Co. Ltd. (“Hong Kong First”), which in turn was and still is the sole shareholder of Shanghai Bading Property Development Co. Ltd. (“Shanghai Bading”).  Shanghai Bading was and is the owner of substantial parts of Citigroup Tower, a very valuable commercial complex built over a piece of land at Shanghai Pudong (“the Land”).   The business of Shanghai Bading includes receiving rent from leasing the Citigroup Tower.  The actual management and maintenance of the Citigroup Tower was undertaken by a subsidiary of Shanghai Bading called Shanghai Citigroup Tower Property Management Co. Ltd. (“the Management Company”).

3.  DY claims that he was and is the real beneficial owner of Citigroup Tower and the Land.  DG and DXH were only his nominees acting on his instructions and directions.

4.  In May 2010, on the instructions of DY, DXH purportedly caused Macau First to transfer all its shares in Hong Kong First to themselves (“the Share Transfers”) at a purported consideration of HK$5 million, without notice to DG.

5.  In June 2010, DXH and DY sought to seize control over Shanghai Bading by taking steps to replace its existing legal representative and by obtaining its company seals.   The application to the State Administration of Industry and Commerce to change the legal representative was suspended because Macau First had presented the injunction order below referred to.  The day to day management of Shanghai Bading therefore still rests with DG.

6.  On 2 July 2010, Macau First obtained an ex parte order from Au J restraining DXH, DY and Hong Kong First from, amongst others, disposing of their interest in Shanghai Bading and taking further steps to replace the existing legal representative of Shanghai Bading.

7.  On 3 July 2010 DG procured Macau First to file the writ.

8.  DXH, DY and Hong Kong First did not contest the ex parte order.  Upon their undertakings to the Court not to dispose of their interest in Shanghai Bading and by consent, the ex parte order was continued by Suffiad J on 9 July 2010.  A cross-undertaking was given by DG and Macau First not to procure or cause the disposition or diminution in value of the assets of Hong Kong First and Shanghai Bading other than in the ordinary course of business and for fair market value (“the DG Undertakings”).

9.  On 19 October 2010, DY took out the present summons (“the Application”) for an order, amongst others, that:

(i) Interim receivers and managers be appointed to Macau First and Hong Kong First (“the Companies”);

(ii) DG do hand over all title documents in respect of the Land and Citigroup Tower, the business registration documents, seals or chops of Hong Kong First and Macau First and their subsidiaries, including those of Shanghai Bading and the Management Company and provide information or documents to the receivers;

(iii) DG be restrained from participating in the business of the Companies, Shanghai Bading and/or the Management Company (save with the consent and directions of the receivers) pending final determination of this action.

(iv) Alternatively, DG do provide to DY monthly reports and prior notice of substantial transactions of Shanghai Bading.

10.  In substance, the Application was premised on DY’s assertion that he, instead of DG, provided the funding and has been the sole beneficial owner of the Land, Citigroup Tower and the Companies. The Application is necessary to guard against the clear risk of dissipation of assets by DG despite the existence of the DG Undertakings.

DY’s CASE

11.  DY has provided detailed evidence on his background since 1985 leading up to the acquisition of the Land and his establishment of Shanghai Bading and the consequent construction of the Citigroup Tower (started in 2002 and completed in 2005). He has given an account as to his accumulation of funds since the 1980s from his businesses through various companies, the source of funds used for the construction of the Citigroup Tower and each step of his participation therein.  He alleged that DG did not have the financial means to acquire the Land and/or to construct the Citigroup Tower.

12.  DY came from a family with humble background in Shangrao.  DXH is his elder sister, Ding Wei (“DW”) the elder brother and DG his younger brother.

13.  DY described how he started off with a sole proprietorship in about 1985 in Shangrao city and then developed iron and steel business with DW.  Gradually the business expanded and various companies were set up in Hainan and then Shanghai, including in particular, 2 companies called Shanghai Purao and Shanghai Dingtai which were engaged in steel trading business.  DY claims that he provided all the funding for these companies and DG simply had no means to do so.  DG was appointed as legal representative of Shanghai Purao on the instructions of DY and as DY’s nominee.  It was DY and DW who ran the companies. 

14.  In contrast, DG, who was only educated up to secondary school level, had no proper job.  He was supported by DY and DW.  They brought him from Shangrao to Shanghai to assist in running errands.  DG, however, suffered great loss in the trading of futures.  He had to be supported by his brothers in various aspects.  In June 1993, at the instigation of their father, DY and DW executed 2 Deeds of Gift to provide for DG who had no real earning capacity or financial means.  DG denied ever seeing those Deeds.  Since moving to Shanghai in 1993 and up to 1997, DG did not have any job in Shanghai and only acted as DY’s driver and personal assistant.

15.  Shanghai Dingtai was of a substantial scale and generated large amount of profits. Notwithstanding loss of its funds as a result of DY’s trading in stocks and futures, DY still had substantial assets accumulated by early 1990s.   This company marked the beginning of DY’s property development business.

16.  In 1997, DY directed DG to assist him in collecting information about several plots of land for sale.  Initially it was DG who liaised with the vendor in relation to the Land but it was DY who eventually made the decision to purchase.  DY also authorized DG to sign the Land Transfer Agreement on 25 March 1997.  DY allegedly provided the funds for the initial deposit of RMB 2 million.  He and DW made efforts to find potential investors.  Eventually a joint venture enterprise called Shanghai Bading was formed between Shanghai Dingtain and one Balin brought in by DW.   

17.  DY was appointed vice general manager of Shanghai Bading.    Although DW and DG were appointed as vice-chairman, they had no powers in the company and DW ceased to participate in the affairs of Shanghai Bading after its establishment.

18.  Funds were injected by Shanghai Dingtai and Balin into Shanghai Bading.   After signing of the joint venture agreement, DY (representing Shanghai Dingtai) was the one involved in major discussions in relation to the Land.  He was the one involved in discussion with Citibank who eventually decided to purchase some of the office floors of the building with the right to name the building.  He also undertook an active role in the construction of Citigroup Tower, negotiating with government authorities and deciding on selling strategy.  DG did not participate in negotiation or decision making.   DY allowed him to attend meetings, sign some documents to gain some business experience and undertake simple tasks.

19.  Shanghai Bading used to have overseas investors.  Due to onset of the Asian Financial Crisis in 1998, overseas investors including Balin were not able to fufil their obligations to inject further funds and wanted to withdraw from their investment. DY established various companies in 2000 to take over the shareholdings in the overseas investors and facilitate capitalization from borrowings from those companies.   Funds for establishing such companies were provided by DY from Shanghai Dingtai or Shanghai Bading and all the shares of those companies were either held by DY or his nominees.  Since September 2000, through various transfers of shares, DY became the sole owner of Shanghai Bading.  By June 2006, Hong Kong First had completed acquisition of all the shareholding of Shanghai Bading. Since July 2006, Macau First became the 100% registered shareholder of Hong Kong First.

20.  A turning point came in around July 2003 (by whence the construction project was well underway) as a result of what was known as the Bai Xiaojiang’s incident.  Mr Bai Xiaojiang of the vendor of the Land was suspected of misappropriating state-owned assets.  In order to avoid negative impact on the sale of the Citigroup Tower and the reputation of Shanghai Bading, DY resigned as director.   So did DG.  As a result, other nominees were appointed as directors in their place in August 2003 but DY entrusted the day-to-day operations and management of Shanghai Bading to DG.  DY absented himself from the opening ceremony of the Citigroup Tower.   He also transferred his shares in Shanghai Dingtai to DXH and she also became its legal representative in his place, later replaced by Yu Xiaan (son of DY’s half-sister) at DY’s directions.  Shanghai Dingtai was deregistered in August 2008.

21.  As DY wanted to shift his focus of investment abroad, Hong Kong First was incorporated in Hong Kong in 2004 with a share capital of HK$100,000.  The initial shareholders were DXH (95%) and DY (5%).  This company does not have any business of its own but is a vehicle used to hold the shares in Shanghai Bading. 

22.  Since about 2005, DY’s focus of investment had been shifted from HK and the Mainland to overseas countries.  DW and DXH were occupied otherwise, so DY entrusted DG to manage the business in the Mainland, especially Shanghai Bading and Citigroup Tower. 

23.  In 2006, DG suggested to DXH that a company should be set up in Macau for social security fund contribution purposes and he wanted to own a company and appear to be the boss.   DY agreed and so Macau First was incorporated in Macau in that year.  At DY’s directions, the shares were allocated as to 85% to DG, 5% to DXH, 5% to DY and 5% to Su although DY was the beneficial owner. 

24.  In March 2006, DG proposed to DY that he should make DG a nominee shareholder of Hong Kong First as he had been entrusted with the operation of the business and needed to appear more assertive in front of outsiders.  DY agreed and arranged for allotment of 4,900,000 shares in Hong Kong First to be subscribed for by Macau First.  DY and DXH’s shares (save for 1% which she retained) in Macau First were also transferred to DG.  Since July 2006, all shares of Hong Kong First have been held by Macau First, as to 99% by DG and 1% by DXH. No consideration was provided for the 4,900,000 shares by Macau First or DG.  DG acted as DY’s nominee.  DXH remained as a director to assist DY in dealing with the company’s affairs.  DXH also obtained a certification that she and DG had equal rights as a director in the company. 

25.  In about March/April 2010, DY instructed DG to apply RMB 600 million from Shanghai Bading to an investment project in Jiangwan.  DG refused, claiming that Shanghai Bading did not have the funds.   He also refused to make available books and records for DY’s inspection.  Suspecting that DY had misappropriated assets of Shanghai Bading and realizing that his relationship with DG had broken down, DY thus instructed DXH to take urgent steps to retain control over Shanghai Bading.  This led to the Share Transfers, consequent upon which shares in Hong Kong First are held by DXH and DY in the proportion of 95% and 5%.

26.  DY’s case was that he had built up all the companies with his own funds.  He had the financial means to acquire the Land and construct Citigroup Tower whereas DG had not.  He denied that DG had any interest in all these assets.  DG and DHX were his nominees who acted on his instructions and directions.  At all material times, shares in Macau First and Hong Kong First were held by nominees on trust for DY.

27.  After the Bai Xiaojiang incident when DY entrusted the operation of Shanghai Bading to DG, the latter abused such position in procuring DHX to sign various documents including those in respect of changes in shareholding and legal representatives of companies, deeds of gifts and authorization letters without DY’s consent. There were allegations that some signatures of DXH were forged.

28.  In addition, DG and his ex-wife Su had caused numerous transfers of shareholdings in connected companies such as Shanghai Puding, Shanghai Dingxing, Shanghai Shenxin, Shangrao Sanxin and Shangrao Sanqing, into the names of DG’s nominees. 

29.  DY counterclaims against DG for, amongst others, a declaration that he was the sole beneficial owner of the Companies, Shanghai Bading, the Land and Citigroup Tower and breach of fiduciary duties.

DG’s CASE

30.  DG’s case is almost the exact opposite of DY’s, i.e. that he was the one who worked to accumulate wealth and whereas DY was the financially poorer one. 

31.  DG started off in the business of transport, logistics and sale of vehicle parts, etc.  He invested in railway projects.  It was he who funded the establishment of Shanghai Purao and later Shanghai Dingtai.  He appointed DY as legal representative of Shanghai Dingtai.  In about 1992 he applied profits to the stock market and earned more than RMB 10 million by 1997 whereas DY lost a lot of money and applied significant sums of Shanghai Dingtai to cover the loss. DG accumulated wealth to enable him to acquire the Land and Citigroup Tower. It was he who did the negotiation, and made the major decisions in respect of the acquisition of the land, construction of Citigroup Tower and its running. He brought in investors to form a joint venture and negotiated with Citibank N.A. over purchase of part of Citigroup Tower.  He signed important documents and attended the topping out and opening ceremonies of Citigroup Tower.  DY’s involvement was limited. 

32.  In 2004, upon the advice of the head of legal department Mr Xu, DG asked his nominees to sign some documents to evidence that they were his nominees.  DXH and Su (his major nominees) signed Gift Agreements (“the DXH Gift Agreement” and “SXP Gift Agreement”).  Although so named, those 2 documents contained an acknowledgement by DXH and Su respectively that the subject assets had been lawfully acquired by DG and that they were holding as his nominees only.  They were willing to return those assets to DG by way of gift.  The DXH Gift Agreement covered her shareholding in, amongst others, Shanghai Dingtai, Macau First and any shares or rights relating to her direct or indirect holding in Shanghai Dingtai.

33.  DG points out that DY has failed to identify overseas investment which he was occupied with. There was no substantial business or investment that needed DY’s attention which would cause him, the alleged beneficial owner, to delegate the important task of managing Shanghai Bading to DG and Su.

34.  DG claims to be the sole beneficial owner of Macau First, Hong Kong First, Shanghai Bading, the Citigroup Tower and the Land.  DXH held shares in Macau First for him but effected the Share Transfers without his authority.  DG seeks to set aside the Share Transfers and for an order that the shares in Hong Kong First be returned to Macau First.  Alternatively, he seeks damages for DXH’s breach of fiduciary duty and damages for conspiracy between her and DY.

GROUNDS FOR DY’S APPLICATION

35.  DY relies on the following heads of risk of dissipation of the assets of Shanghai Bading and/or mismanagement of the Companies or Shanghai Bading in support of his application:

Risk (1):       Attempts to sell the whole of the 5^th floor and part of the 7^th floor of the Citigroup Tower (not in 1^st supporting affirmation of DY);

Risk (2):       Failure to apply rental in repayment of the mortgage due from Shanghai Bading to Huaxia Bank (not in 1^st supporting affirmation of DY);

Risk (3):       Recent accounting irregularities in respect of Shanghai Bading based on the evidence of an independent certified tax agent (“Ms Wu”);

Risk (4):       Suspicious accounting practice since 2007 made known to DY recently;

Risk (5):       Recent suspicious transactions;

Risk (6):       Previous suspicious transactions;

Risk (7):       Recent outflow of cash assets

Risk (8):       Unacceptably low standard of commercial morality of DG;

Risk (9):       Irregular treatments of dividends paid by Shanghai Bading to Hong Kong First.

36.  It is not in dispute that DG and his nominees are currently in control of Shanghai Bading without supervision by or any need to account to DY.  In the light of those risks, DY claimed that the DG Undertakings would not be sufficient to protect his interests in the Land, the Citigroup Tower and Shanghai Bading.  It was imperative for there to be an interim receiver to preserve the status quo and to facilitate investigation of suspicious transactions.

GROUNDS IN OPPOSITION

37.  DG opposes the application on the following grounds:

(i)       That he has a much stronger case than DY.

(ii)       That there is no real risk of dissipation of assets.

(iii)       That DY has undue delay in making the application.

(iv)       That irreparable damage will be done if receivers are appointed.

(v)       That no meaningful cross-undertaking as to damages has been given by DY.

PRINCIPLES ON THE APPONTMENT OF INTERIM RECEIVER

38.  The Court has jurisdiction under section 21L(1) of the High Court Ordinance, Cap 4, to appoint a receiver “in all cases in which it appears to the Court of First Instance to be just or convenient to do so”.

39.  The power to appoint receivers on an interlocutory application is a discretionary power to be exercised flexibly on similar principles to grant an interlocutory injunction and the principles in American Cyanamid apply.    Chinese United Establishments Ltd v. Cheung Siu Ki & Anr [1997] 2 HKC 212; Re Niceline Co. Ltd. [2003] 2 HKLRD 725.  In  other words, the court needs to consider the following question:

(i)       Whether there is a serious question to be tried;

(ii)       Whether there is a real risk of dissipation of assets;

(iii)      Whether there is no or no current effective protective regime and some form of interim protection should be given to preserve the status quo;

(iv)      The risk of damage to the company if the appointment is made, and whether it can be adequately compensated by a cross-undertaking in damages.

SERIOUS ISSUE TO BE TRIED

40.  DY suggests that his detailed version supported by contemporaneous documents and affirmations from independent witnesses involved in the early stages of the construction of Citigroup Tower was more credible than the cursory account of DG which merely recited what could be deduced from the documents with no account of the process of negotiation.  DG simply lacked documentary evidence to show his accumulation of wealth.  His witnesses were not independent.  Some of them like the current employees of Shanghai Bading only joined the company in or after 2000 and had no knowledge of crucial matters.

41.  On the other hand, whilst accepting that DY has shown serious issues to be tried, Mr Chan SC for DG submits that DG’s case was clearly stronger than DY’s on the merits to justify dismissal of DY’s application. 

42.  Mr Chan SC queries why DY had to provide consideration of HK$5 million (a clear undervalue) for the Share Transfers if he were the real owner.  He relies on 7 salient features based on undisputed or indisputable evidence that unequivocally pointed to the fact that DG is the ultimate beneficial owner. 

(i) Salient feature 1: The nominees who held interest in the intervening companies that ultimately held Shanghai Bading have close relationship with DG.  They included Su, Su’s mother, mother of DG’s common law wife, DG’s nephew-in-law and DG’s friends.  They had all executed letters of authorization authorizing DG to manage and control the intervening companies.  It was hardly conceivable for DY to appoint individuals with no relationship to himself if he were the sole beneficial owner.  He had offered no explanation for these appointments.

(ii) Salient Feature 2: The DXH Gift Agreement and the SXP Gift Agreement.  The 2 Gift Agreements were executed before a qualified attesting officer in Shanghai.  Su confirmed on oath that the SXP Agreement accurately reflected the fact that DG was the ultimate beneficial owner.  DXH’s explanation was that she signed the DXH Gift Agreement without reading the content, which lacked credibility given that she was not illiterate and was chosen by her brothers to run various companies. Mr Chan SC submits that in the absence of any credible explanation, the 2 Gift Agreements were clear and solemn documentary evidence contradicting DY’s case.

(iii) Salient Feature 3: Clear evidence from officers and employees of Shanghai Bading. All the high ranking officers and employees of Shanghai Bading put in affirmations to confirm that DG (as opposed to DY) is the boss of Shanghai Bading responsible for all major business decisions.  Mr Chan SC asks rhetorically: if DY were the real boss, why would the employees side with DG?  The fact that outsiders having dealings with DY thought that he was the boss is much less probative in showing who owned the company.

(iv) Salient Feature 4: signing of major contracts by DG.  It was DG who signed all the important agreements on behalf of Shanghai Bading in respect of the acquisition of the Land and construction of the Citigroup Tower.  DY barely said that DG was signing on his instructions without explanation.  Mr Chan SC submits that the fact that DY was involved in the pre-contractual negotiations (disputed) and that DG was the person signing formal documents (indisputable) demonstrates that DG was the boss of Shanghai Bading and DY was one of the employees.

(v) Salient Feature 5: DG’s dealings with the Citigroup and his presence in ceremonies. As confirmed by evidence from officers of the Citigroup, DG was the person responsible for the negotiation between Shanghai Bading and the Citigroup.  DY seeks to rely on the evidence of one Mr Zhong to support his allegation that he was involved in the negotiation with the Citigroup when Mr Zhong had left the Citigroup in 2001 and could not possibly be involved in any negotiation on behalf of  Citigroup since then.   DG also participated in all landmark events as President of Shanghai Bading when DY was absent in all of them.  Mr Chan SC submits that DY’s explanation that he wanted to keep a low profile could not be genuine because it failed to explain his absence before the arrest of Mr Bai in 2003 and after his being ruled innocent in 2005.

(vi) Salient Feature 6: DG and DY’s immigration under different schemes.  DG emigrated to Australia under the Class 132 scheme by virtue of his being a high calibre business owner having substantial investment in companies in Australia.  In contrast, DY could only emigrate there under the Class 164 scheme for persons in senior management of large companies but not owning any company.  DY explains that he applied under Class 164 because he wanted to maintain a low profile after the arrest of Mr Bai.  Mr Chan SC submits, however, that there was no reason for DY to believe that the emigration application would make him high profile.  Further, by the time DY made the application in 2007, Mr Bai had already been ruled innocent by the court for 2 years.  It was also noteworthy that in his application for emigration, DY had not declared that he beneficially owned the Citigroup Tower.

(vii) Salient Feature 7: DY and DXH had no knowledge of being appointed as legal representatives or alteration of shareholding.  On DY’s case, there were companies established without his knowledge.  Likewise, he and DXH had been made legal representatives of some of them without his knowledge.  It was difficult to accept that as the real boss he did not have any knowledge in the change of shareholdings and left things to DG.

43.  In deciding whether or not there is any serious question to be tried, the Court will not resolve disputes of fact or even try to form a provisional view on the issues in dispute: Chan Wai Tak v. Chan Mau Ping, HCA 2321 of 2009; Re Full Billion Shipping Ltd [2003] 2 HKLRD 674, per Chu J.   Any view as to the strength of the parties’ cases should be reached only where it is apparent from the affidavit evidence and any exhibited contemporary documents that one party’s case is much stronger than the other’s: Series 5 Software Ltd v. Clarke & ors [1996] 1 All ER 853.   

44.  Both DY and DG did not have direct evidence on injection of capital for the acquisition of the Land and construction of Citigroup Tower.  The initial financial position of the parties was relevant.  With diametrically different cases, it is not surprising that each protagonist went into the long history of his past and hotly disputed the other’s case.  Despite the persuasive arguments of Mr Chan SC, it is not appropriate in my view to pick and choose the 7 Salient Features and rely on them to the exclusion of all other historical and circumstantial evidence.  After all, on DY’s case, documents did not all on their face reveal the true beneficial position and who was in real control.  DY’s version was supported by DXH, DW, his mother and independent witnesses who have no interest in the outcome of this action.  It cannot be lightly brushed aside.

45.  Having considered the evidence on both sides, I decline to hold that DG has an apparently stronger case.  Suffice to say that serious issues to be tried as to true beneficial ownership have been shown.

REAL RISK OF DISSIPATION OF ASSETS

46.  The additional remedy of appointment of a receiver would only be justified if, notwithstanding the considerable protection the DG Undertakings already afforded, there nonetheless was an imminent danger of loss or dissipation of the assets if a receiver was not appointed: Wallace Kevin James v. Merrill  Lynch International Bank Ltd [1998] 1 SLR 785.

Risk (1)       Attempted sale of the whole of the 5^th floor and part of the 7^th floor of Citigroup Tower

47.  This risk only surfaced in the reply affirmation on DY’s side, less than 2 weeks before the hearing. There was then the intervening Chinese New Year holidays, which left DG with virtually no reasonable time to respond.  Counsel has adopted a very cooperative approach of not objecting to the late inclusion of relevant affirmation evidence. 

48.  The evidence in support comprised:

(i) Evidence of one Ms Chow (daughter of DY’s friend) who claimed to have seen an advertisement for sale of the 5^th floor in the google webpage;

(ii) An article on the internet retrieved on 8 November 2010;

(iii) Transcript of a telephone conversation with an estate agent Xu in response to an advertisement; and

(iv) A private investigation report.

49.  The conversation with Ms Chow was made with DY’s solicitor.  I am satisfied that there were no leading questions and Ms Chow freely stated what she saw on the internet.  The contents of the webpage shown in early October simply stated that Citigroup Tower was on sale.  Out of curiosity, Ms Chow called the phone number on the webpage.  She was told that it was the office on the 5^th floor that was on sale.  She was also told the price but as she did not really have the intention to buy, she had forgotten it.  The webpage could no longer be located.   I do not consider that this piece of evidence alone is sufficient to show the attempted sale.

50.  The article on the internet retrieved on 8 November 2010 states that the whole of the 5^th floor of Citigroup Tower was for sale but  perhaps because the price of RMB 120,000 per square metre was too high, no one had offered to buy.  Part of the 7^th floor had also been for sale for half a year.  There was no evidence that this article was published by or on behalf of Shanghai Bading.  Mr Chan SC queries why, if the contents were true, no action had been taken by DY for half a year.  Moreover, it got the ownership wrong.  Again, I do not think this piece of evidence alone is sufficient.

51.  The transcript of a telephone conversation between DY’s solicitor and an estate agent Xu was made by the solicitor in response to an advertisement for sale on the internet. With no leading questions from the solicitor, the agent told the solicitor that 5^th floor and part of 7^th floor were on sale.  If it were a sale by transfer of shares, it would be RMB 90,000 per square metre; and if by transfer of property, RMB 120,000 per square metre.  Mr Chan SC queries the contents in that Shanghai Bading could not have authorized to sell on terms of transfer of its shares.  The answer is that sale by way of transfer of shares was probably referable to units on the 7^th floor in the hands of other owners.

52.  As shown in the private investigator’s report, the investigator was informed by the vice-manager of the Leasing Department (Ms Shen) and Leasing Department Assistant that RMB 120,000 per square metre was their quotation for the 5^th floor.  The existing tenant confirmed that the lease for the 5^th floor would not be renewed.  The investigator was asked to first consider leasing.  He was told that the cost of development of Citigroup Tower had been wholly recouped.  Shanghai Bading would not tell outsiders it wanted to sell.  The boss was not keen to sell and hence the unit price was basically not negotiable. There were a lot of interested buyers and the boss of Shanghai Bading had instructed employees of the sale and lease department not to supply any documents to outsiders.  Shanghai Bading would not lightly issue documents.  After some persuasion by the investigator, Ms Shen gave an electronic copy of a draft proposal to him.

53.  Although DG claims that since June 2010, he had ever sold or offered to sell any of the remaining floors of Citigroup Tower, the 4 items of evidence show that the internet advertisements were not isolated incidents.  Ms Shen must have known about advertisements for sale because she was not taken by surprise when the investigator mentioned the unit price regarding the 5^th floor. However, she did not actively procure a sale.  Rather it was the investigator who actively invited her to give a quotation for sale.  If Ms Shen was sure that the boss would not consider a sale or had instructed her not to sell, she would not have helped the investigator as she did.   The overall inference is that the boss of Shanghai Bading (in this context, DG) was not keen to sell, certainly not openly.  However he may consider an offer to buy if the right price was reached.  The risk of breach of the DG Undertakings exists.

54.  The terms of DG Undertakings are no different from a prohibitory injunction, breach of which may call for the appointment of an interim receiver: Akai Holdings Ltd (in compulsory liq.) v. Ho Wing On Christopher & Ors, HCCL 37 & 40 of 2005, 1.9.2009 per Stone J.

55.  DG clearly knew that a sale would be a breach because when applying for an ex parte injunction against DY, DG stated on affirmation that:

“To protect the interests of both sides, both the Plaintiff and I are also willing to give an undertaking to this Court that we will not procure or cause the disposition of or diminution in value of the assets held directly or indirectly by HK First (including, but not limited to, the “Citigroup Tower”) otherwise than in the ordinary course of business of those companies holding such assets. For the avoidance of doubt, I confirm that any sale or disposition of the “Citigroup Tower” by Shanghai Bading is not something in the ordinary course of business and is therefore prohibited by our undertakings offered to this Court.” (emphasis added)

Risk (2)       Recent Mismanagement of Assets

56.  Where there are doubts on the proper management of the company and its assets are in jeopardy, it is appropriate to appoint an interim receiver: Wilton-Davies v. Kirk [1998] 1 BCLC 274, at 278, per Judge Weeks QC.

57.  The alleged mismanagement was in the form of failure to comply with terms of the loan agreement with Huaxia Bank.  According to 4 letters in January 2011 given by Mr Zhu, Vice-President of the Bank,

(i) Shanghai Bading owed Huaxia Bank a total sum of RMB 500 million.  According to the loan agreement, Shanghai Bading had to deposit into certain designated account of Huaxia Bank a certain portion of the rental income.  However, Shanghai Bading had failed to do so to the extent of about RMB 50 million.  It also failed to repay on the due date of repayment.

(ii) Provided Shanghai Bading repaid the amount owed to Huaxia Bank and provided Citigroup Tower operated as usual, the Bank would not care about the dispute between shareholders of Shanghai Bading, including any order issued by the Hong Kong Court for appoint of a receiver for Citigroup Tower.

(iii) After detailed consideration of all circumstances, Mr Zhu confirmed that the position of Huaxia Bank was to support the making of a receivership order by the Hong Kong Court.  Huaxia Bank had not been able to get in touch with DG for 2 months.  Having considered the current mismanagement of Shanghai Bading, Huaxia Bank considered it more desirable if the management be vested in the hands of independent third parties so that the Bank would stand a better chance of recovering outstanding loans from Shanghai Bading.  It hoped that the Hong Kong Court would take its position into account.

58.  This piece of evidence was hotly disputed by DG. Even on the 3^rd day of hearing, evidence from the same Mr Zhu and Huaxia Bank continued to come in.  Effectively, the Huaxia Bank disclaimed responsibility over Mr Zhu’s letters and stated that it was Mr Zhu’s personal views only. (This met with allegations from DY’s side that Mr Zhu had been threatened by DG’s people.) 

59.  Despite Huaxia Bank’s disclaimer, neither it nor Mr Zhu had stated that the evidence of Mr Zhu was not true.  The Huaxia Bank itself confirmed that for 2 quarters, a total of RMB 51 million of rental income was not deposited into the designated account and it had to exercise its right to transfer funds from another account in settlement of the overdue.

60.  DG denied that Shanghai Bading had ever been in default in repayment of loans of Huaxia Bank.  He pointed out that there was no evidence of the Bank issuing a demand letter.  He produced bank statements to show that he had made prepayments totalling RMB 42 million in December 2010, leaving a credit balance of RMB 99 million in one account and another RMB 9 million in another account.

61.  Counsel had put forth different ways to interpret the bank statements.  The terms “餘額” 、“紅字”、“藍字”did not have a clear meaning in context.  I question whether “the balance” was a credit balance in favour of Shanghai Bading or an amount owed to Huaxia Bank.  Even giving the most favourable interpretation that Shanghai Bading has a credit balance in the 2 accounts, the bank statements did not answer the Huaxia Bank’s evidence in paragraph 59.  This risk item exists.

Risk (6)       Previous suspicious transactions

Risk (9)       Irregular treatments of dividends paid by Shanghai Bading to Hong Kong First

62.  In considering risk of dissipation, the Court is concerned with imminent risk of dissipation of assets.  It is not helpful to point to past questionable transactions to press for a receivership order: Jilin Sun & Anor v. Kenneth Chi Shing Cheung, HCA 3544 of 2003, at paras 22 to 23, per Reyes J.  

63.  Individually, the following transactions occurring several years before the Application fell within this principle:

(i) The 4 impugned agreements in 2006 under which dividends of Shanghai Bading were transferred to connected companies beneficially owned by DG in purported settlement of debts due.  A total of RMB 274 million had been so transferred.  Those companies were either deregistered or struck off shortly after receipt of the money.  DY discovered them in late August 2010 from the records of Hong Kong First.

(ii) Unauthorized investments in Huizhou and Shenzhen in around 2007-8.  Funds from Shanghai Bading were injected as capital to 3 companies in Huizhou which were listed as “long term investment” of Shanghai Bading.   Those funds were then transferred out to DG who used them for purchase of properties in Huizhou and Shenzhen in his own name.  Two of the Huizhou companies had been dissolved by deregistration within 2 years of incorporation. 

(iii) Unauthorized transfer in July 2005 of a Shanghai property owned by Shanghai Bading to DG, Su and their son without consideration.

(iv) Transfer by DXH of HK$13.5 million, HK$660,000 and CAD$100,000 to Su’s account upon DG’s request on the ground that they were to be injected into the Canadian companies held in the joint names of DG and DY.

64.  More recent “irregular” transactions happened in 2010.  In March 2010, Hong Kong First received RMB 27 million (about HK$30 million) from Shanghai Bading.  DG requested DHX to transfer it to his personal account for use of a Canadian company registered in the names of DG and DY, which she did under the belief that it was on the instructions of DY. Similarly, a sum of US$3 million was paid by Shanghai Bading  to Hong Kong First.  The sum was never booked into the account of Hong Kong First but was transferred to DG without the knowledge of DY.

65.  DG denied ever representing that the transfers were for use in Canada.  He claimed that as the beneficial owner, he could decide on the transfers without the need to seek DY’s consent.  He even accepted that they were some of the many inter-company transfers upon his directions, some of which involved DXH.

66.  All of these transactions, whether past or more recent, happened before the giving of the DG’s Undertakings.  I accept that DY, having entrusted Shanghai Bading to DG since 2005, was not aware of them until in preparation of this action.  They were not isolated incidents.  Some were, as described by Mr Yuen SC, “surreptitious”, e.g. the 4 impugned agreements, as DG’s companies were de-registered immediately after the agreements without good reason.  The transfers were all for the benefit of DG or his nominees.  One transfer to Hong Kong First was not even booked into its account.  These transactions reflected on corporate governance over a span of years.  The last known one was as recent as March 2010 at about the time when brothers’ relationship broke down.  If the “status quo” were allowed to continue so that transactions similar to the “past transactions” are repeated, there is risk of dissipation of assets of Shanghai Bading pending the litigation. 

Risk (3)       Recent account irregularities in respect of Shanghai Bading

Risk (4)       Suspicious account practice since 2007

Risk (5)       Recent suspicious transactions

Risk (7)       Recent outflow of cash assets

67.  DY relies on evidence of Ms Wu (an independent certified tax agent whose company had been providing tax auditing and tax planning services to Shanghai Bading since April 2007). I shall not rehearse every assertion of DY or the arguments of counsel. Suffice to say that these involve specific items in the accounts, DY’s view on the assets of Shanghai Bading and concerns of unexplained low levels of income and assets.  I will only identify a few that cause me concern.

68.  A specific example was the payment of a total of RMB 1.05 million to one Shanghai Hitech on 10 December 2009.  Ms Wu was of the view that Shanghai Hitech had not offered consultancy or training services as described on the face of the invoices.  This was because that company was known for issuance, management and use of commercial cards which could be used in the PRC and overseas as cash. Such cards could be converted into cash. 

69.  Further, income from the car parking spaces, curtain wall and part of the common area was not fully booked into Shanghai Bading’s account although collection of rentals from car parking spaces has been entrusted to Jones Lang LaSalle ever since the opening of the Citigroup Tower.  The monies that have been booked into Shanghai Bading’s account fell short of the real level of income. 

70.  DY also alleged that there was outflow of cash assets of Shanghai Bading.  He pointed out that the net profit of Shanghai Bading in 2005 was RMB 490 million.  As at 2008, Shanghai Bading had an outstanding loan of RMB 853 million with mortgages.   By May 2010, it had an outstanding indebtedness of RMB 809 million including 2 sums owed to the Shanghai Bank and Huaxia Bank.  There had been no material investment project undertaken by Shanghai Bading since the last financial year of 31 December 2008.  The rental income including cash received from the secured banking facilities totalled RMB 1,700 million.  However, the cash balances of Shanghai Bading as of July 2010 showed only RMB 208 million.  DY was seriously concerned that the discrepancy was caused by misappropriation of assets by DG and his nominees.

71.  Shanghai Bading’s accounts were audited and the accountant at the material times was Ms Wu’s company.  Views of DY had not taken into account the running costs, tax, interest for bank loans, dividends and the difference in revenue (from sale of part of Citigroup Tower in 2005 to leasing out for rent).  DG asserted that on a proper reading of the accounts, Shanghai Bading had been in a healthy financial condition.

72.  The subjects of DY’s concerns require the Court to resolve the differences on how to view the accounts which it will not do in an interlocutory stage.  Suffice to say that Ms Wu had given her views based on her own observation at the time when her company was still handling the accounts of Shanghai Bading.  As Mr Yuen submits, that Shanghai Bading’s accounts had been auditted does not necessarily mean there were no accounting irregularities.  More importantly, the accountants were provided only with documents supplied by Su, who controlled the Finance Department of Shanghai Bading.  Without conducting specific inquiries, the accounts simply would not be able to tell any ingenuity of those transactions. At this stage, DY is simply denied access to the accounts.

73.  If books were not properly kept, transactions not properly recorded, assets have been transferred or dissipated before the action is heard, any damages awarded at the end of the day would be difficult to assess and may well not be an adequate remedy:  Michel Hazan v. HK Sindy Footwears Ltd and others, HCMP 1240 of 2006. 

74.  In addition, viewing the risk items I have analyzed together do show that DG is in control of a whole host of companies and nominees to whom he can transfer funds of Shanghai Bading. Given the corporate governance, there are genuine doubts as to the integrity and propriety of the accounts that warrant appointment of a receiver.

“ 42. As Gee on Commercial Injunctions (5^th ed) expresses the position, at paragraph 16.08:

‘If (1) assets are liable to be dissipated or are otherwise in jeopardy and (2) cannot satisfactorily be preserved by injunction, then it may be appropriate to appoint a receiver. This arises where the defendant controls a network of overseas trusts or companies and it appears that he has arranged his affairs in such a complicated way that if the step were not to be taken he might be judgment proof.  The appointment of a receiver would be effective relief when an injunction, on its own, would not be … Other examples of situation calling for the appointment of a receiver are where the defendants are likely to act in disregard of an injunction or have already done so …” 

Akai Holdings Ltd (in compulsory liq.) v. Ho Wing On Christopher & Ors, HCCL 37 & 40 of 2005, 1.9.2009

75.  There are other heads of risk which, however they are viewed, will not affect the overall picture.  I find that DY has shown real risk of dissipation of assets or mismanagement of Shanghai Bading. 

UNDUE DELAY IN MAKING THE APPLICATION

76.  An application of this sort should be made promptly, which has been commonly understood to be a period of six weeks or so of unexplained delay and three months with an explanation given for the delay in making application for an injunction: King Fung Vacuum Ltd v. Toto Toys Ltd [2006] 2 HKLRD 785:

77.  The date from which the period runs is the date on which the person seeking an interlocutory injunction knew or ought to have been aware that interlocutory relief would be required in order to prevent what is said to be irreparable damage: Wong Chung Ming Development Fund Co. Ltd. v. Profit Surplus Ltd [2009] 3 HKLRD 514.

78.  The question of delay is also relevant in considering whether it has caused prejudice to the defendant because it has altered its position in the intervening period: Abbot GmbH & Co KG v. Pharmareg Consulting Co. Ltd. [2009] 3 HKLRD 524, per Sakhrani J at para 83.  What is important is not the length of the delay per se but whether the delay has in some way made it unjust to grant the injunction claimed: Re Wako Giken (HK) Co. Ltd. [2010] 4 HKLRD121, at para 24, per Harris J. 

79.  DY discovered the wrongful acts of DG after several years of trust.  Allegedly, in March 2010 he lost confidence in his brother and amicable discussion failed.  He discovered various acts complained of.  He took out the present application in November. Given the volume of facts that DY has to present to substantiate his case, I am not satisfied that he has unduly delayed his application.  In any case, Mr Chan SC does not suggest that DG has suffered prejudice as a result of any delay.

DAMAGES NOT A SUFFICIENT REMEDY

80.  DG is in control of Shanghai Bading to the exclusion of DY.  Unilateral and wrongful acts on the part of DG would be difficult to discover.  He is so used to using companies and nominees, some of them are out of jurisdiction.  Hence steps unilaterally taken on behalf of  Shanghai Bading without the knowledge of DY can easily cause irreparable damage. 

81.  DY did not allege in his affirmations that DG would not have the means to meet an award of damages.  However, it cannot be denied that the Land and the Citigroup Tower are unique properties.  If units in the Tower are sold, or the bank recovers possession and sells the Tower upon the failure to pay the rental income in discharge of the mortgage,  Shanghai Bading will not be the same.  Damages are clearly not a sufficient remedy.

IRREPARABLE DAMAGE IF RECEIVERS ARE APPOINTED

82.  Receivers and managers are expensive.  Their appointment will add to costs of the litigation and running costs of the business.  It will also create a stigma that the company (in this case Shanghai Bading) is in financial difficulty. 

83.  DY asks for receivers and managers of the assets and properties of the Companies to be appointed.  It is proposed that wide powers be given to them to ascertain, take possession of properties of the Companies and their subsidiaries, Shanghai Bading and the Management Company, to carry on business, to bring or defend proceedings (provided that such power shall not be used to intervene in the conduct of this action or any pending proceedings between DY and DG in respect of the ownership over the Companies and/or Shanghai Bading and/or the Management Company).  It is also proposed that DG shall be restrained from participating or interfering in whatever ways the business of the Companies, Shanghai Bading and/or the Management Company (save with the consent or at the directions of the Receivers) pending final determination of this action.  The order asked for is thus very intrusive in nature.

84.  DG deposed to the fact that appointment of receivers would necessarily lead to a change in the legal representative and the management of Shanghai Bading.  Such may deter existing and potential tenants and lead to termination of loan agreements by lending banks. 

Deterrence to existing and potential tenants

85.  As an example, one tenant has made clear that whether Shanghai Bading would be controlled by its existing management was a decisive factor in renewing the tenancy. Moreover, termination clauses in some of Shanghai Bading’s tenancy agreements might be triggered by change in management or if the assets of Shanghai Bading were taken over by a receiver.  The ramification is that Shanghai Bading may no longer maintain its status as a first class financial building. 

86.  A receiver (or manager) is aimed at preserving assets and ensuring the proper running of the subject companies pending the litigation.  He has no reason to downgrade the image of Citigroup Tower or to act contrary to the interests of Shanghai Bading.  The existing management and underlying staff can be retained if they are important to the success and smooth operation of the business; so can Jones Lang Lasalle: Michel Hazan v. HK Sindy Footwears Ltd & others, HCMP 1240 of 2006, at para 38.   Even if current tenants were to leave, I fail to see why the receiver will not look for suitable tenants in replacement.   DG has not shown that leasing of Citigroup Tower or managing other business of the Companies and Shanghai Bading will involve complexity that requires special expertise which the receivers will not be able to handle: Re Niceline Co. Ltd., [2003] 2 HKLRD 725.  Given the prime location of Citigroup Tower, any irreparable damage is more of a conjecture than reality and is likely to be financial loss which can be compensated for by money.  Moreover, tenants’ concerns can be addressed by appropriate explanations to them and receivership could be conducted with diplomacy and discretion: Michel Hazan v. HK Sindy Footwears Ltd & others.

87.  What I do not accept, however, is that DG be ousted from the management even before determination of the action.  There is no strong reason to the contrary.  The existence of the receiver and manager will be there to safeguard any potential dissipation of assets by DG.

Termination of loan agreements

88.  DG considers that there is a foreseeable risk that the loans may be called back by the banks upon change of management of Shanghai Bading.  It will cause severe financial blow to Shanghai Bading whose operation relies heavily on loans. 

89.  Clause 14 to the Shanghai bank loan provides:

“第14條 違約情形

14.1 發生下列情形之一的借款人即構成違約

14.1.5 借款人或擔保人捲入或即將捲入重大的訴訟, 仲裁及其他法律糾紛的;

14.1.8      本合同項下… … 抵質押財產發生變化,不足清償貸款本息… …”

90.  The receivers and managers to be appointed are in respect of Hong Kong First and Macau First. Although the beneficial interest over Shanghai Bading will be in issue, Shanghai Bading has not been dragged into these proceedings.   There will be no change to the Citigroup Tower as security nor has it been shown that the value of the security will be so depreciated as to be insufficient for repaying the loan.  In my view, clause 14 does not assist DG’s case.

91.  As for the Huaxia bank loans, the bank can demand immediate repayment where there is change in Shanghai Bading’s mode of operation, corporate structure or legal status (such as receivership).  It can also call back the loan if Shanghai Bading is dragged into substantial litigation or other legal disputes such that the bank’s right as a creditor is being seriously affected.  Once the loan is called back and Citigroup Tower is sold, despite there being enough to repay the loan, Shanghai Bading will never be the same.

92.  Mr Zhu (though not Huaxia Bank) supported the issue of a receivership order by the Hong Kong Court.  The Huaxia Bank is well aware of the “personal views” of Mr Zhu but has not stated otherwise.   The concern of DG is more theoretical than real.

NO MEANINGFUL CROSS-UNDERTAKING AS TO DAMAGES

93.  Mr Chan SC submits that DY is unable to show himself as having sufficient assets to honour the cross-undertaking as to damages under the present application.  His only visible asset is (apart from the subject matter in dispute) a property in Hong Kong and 2 properties in the Mainland (according to his application for emigration to Australia in 2007).  He has not disclosed how much cash or what foreign investment he has.  Such facts must weigh strongly against his application: Lau Tak Wah Andy v. Hang Seng Bank Ltd [2000] 1 HKC 280, at 294.

94.  The proper approach, in my view, has been set out in the case of Hui Chi Ming (Previously known as X) v. Koon Wing Yee & 5 others, HCA 1479 of 2009, per Deputy Judge Coleman SC.

“44. First, the burden of showing the need for fortification and the appropriate quantum of any fortification falls on the defendant seeking that fortification.

45.       Secondly, there is no obligation on a plaintiff to give full and frank disclosure of his own financial circumstances so as to oppose an order for fortification (or to argue for a lesser amount of security than is being sought).  Nevertheless, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle the drawing of an adverse inference as to his ability to meet his cross-undertaking in damages.”

95.  The burden is on DG who asks for fortification to show what amount of loss he is likely to suffer.

96.  As a matter of concession to ensure that matters can proceed, DY has through counsel offered to pay HK$15 million into court or by way of bank guarantee if necessary.  I note this offer but it is not really necessary to decide in this case whether an order should be made since there is no evidence of the potential loss to DG. Suffice to say that at this stage, it appears that the Court should accept and make it a condition that DY should give an undertaking as to damages if an order were made for the appointment of receivers.

BALANCE OF CONVENIENCE

97.  I have taken into account the fact that DG is very familiar with the use of nominees and limited companies.  He does not reside in Hong Kong.  He has companies and nominees in several countries which he can use for inter-company transfer of funds.

98.  On the other hand, one must not overlook the fact that he considered himself the real beneficial owner.  He was free to do what he liked with his assets without the need to consult DY. 

99.  If DY succeeds, it means his brother has shamelessly deprived him of his hard earned assets. That is akin to theft.  If no receiver has been appointed in the meantime, DG will be in sole control without supervision and DY might suffer irreparable damage which cannot be compensated for by damages.   If DG wins and a receiver has been appointed, any increased costs and damages are recoverable from DY. The worries that DG may have as regards reputation, retaining tenants and banks calling in loans can be allayed by appropriate explanation by the receivers to the appropriate persons. 

100.  The balance is in favour of appointing a receiver and manager for the present dispute over beneficial ownership: Mardarin Resources Corporation Ltd. v.Daid Cheng Heng Soon & others, CACV146 of 1987.

101.  I have considered the alternative of a less intrusive remedy: Akai Holdings Ltd (in compulsory liq.) v. Ho Wing On Christopher & Ors, HCCL 37 & 40 of 2005.

102.  Given the distrust between DY and DG and the scale of assets involved, a monthly report from DG’s side may not provide as much reliability as management by receivers.

TERMS OF THE APPOINTMENT

103.  Parties do not have any preference over the identity of the receiver and manager although it has been pointed out to me that 2 firms of accountants have had experience as receivers in the Mainland.  I appoint Messrs. Ernst & Young.

104.  I have discussed the amended draft terms handed up by Mr Yuen SC at the hearing with counsel. There will be an order in terms of the draft as amended with the deletion of clauses 4(10) and (16). 

CONCUSION

105.  There are serious questions to be tried as to the real beneficial ownership of the Companies, Shanghai Bading and Citigroup Tower.  There are risks of dissipation in terms of attempted sale of Citigroup Tower, failure to apply rental in repayment of the mortgage due from Shanghai Bading to Huaxia Bank, irregular transactions and  accounting irregularities in Shanghai Bading.  Damages will be a sufficient remedy for DG but not DY.  The balance is in favour of the appointment of receivers and managers. 

106.  DY has given an undertaking as to damages.  He has also undertaken to hand over seals in his possession relating to the subject companies to the receivers and managers. Upon such undertakings, I grant the Application on the following terms.

107.  With regard to paragraph 1 of the summons, there shall be appointment of Stephen Liu Yiu Keung and Mr David Yen Ching Wai of Messrs. Ernst & Young as receivers and managers as per the terms of the draft Minutes of Order Appointing Receivers and Managers as amended at the hearing.  There will be an order in terms of paragraph 2 of the Summons.  Paragraph 3 is dismissed and the draft Minutes should be adjusted  if appropriate.  No order needs to be made re paragraph 4.

108.  There will be an order nisi that costs be to DY with certificate for 2 counsel.

109.  I am most grateful to both legal teams in this case.  Their industry in preparation of the case and sifting through the evidence to present the salient facts have been of great assistance to the Court.