CHI, DONG EUN v. L & A INTERNATIONAL HOLDINGS LTD AND OTHERS

HCCW 2/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 2 OF 2017

___________________

__________________

__________________

________________

D E C I S I O N

________________

1.  There are 2 applications by, respectively, the 1^st to 6^th Respondents (R1-6) and the 7^th Respondent (R7) to strike out the winding up Petition filed by the Petitioner (Chi) on 3January 2017 against the 1^st Respondent, L&A International Holdings Ltd (Company). R1-6 are members of the Board of Directors of the Company. R7 was a member of that Board.

2.  The Company was incorporated in the Cayman Islands and registered in Hong Kong under Part XI of the previous Companies Ordinance, Cap 32 and Part 16 of the current Companies Ordinance, Cap 622. It is the investment holding company of the L&A Group of companies (Group), and the Group’s principal business is manufacturing and trading of garment products.  The Company’s shares are listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. 

3.  By the Petition, Chi seeks an order to wind up the Company pursuant to s.327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (Ordinance) on the ground that it is just and equitable for the court to grant such relief.  A number of serious allegations have been made in the Petition as follows :

(a)  There was a breach of Rule 26.1 of the Takeovers Code (mandatory general offer);

(b)  R7 had improperly engaged in share pledge borrowings;

(c)  The audited accounts in support of the Company’s initial public offering were falsified;

(d)  Shareholders were prevented from participating in EGMs;

(e)  R2 to R7 have committed the criminal offence of money laundering.

4.  There are a number of common grounds in the strike out applications.  Appearing for R1-6, Ms Tai submitted that it is plain and obvious that the Petition is bound to fail because :

(a)  Chi lacks the locus to present the Petition;

(b)  Non-compliance with rule 26 of the Companies (Winding Up) Rules, Cap 32H (no verifying affirmation has been filed);

(c)  The Petition is defective in that the 3 core requirements for the winding up of a foreign company are not met and/or set out in the Petition;

(d)  There is alternative remedy available to Chi;

(e)  The just and equitable ground cannot be relied on by Chi given the absence of any quasi partnership;

(f)  The Petition is frivolous and vexatious.

5.  Grounds (c), (d) and (e) are relied upon by Mr Kung, appearing for R7.  In addition, it is contended that R7 has been improperly joined in the Petition.

6.  With respect, I believe there is force in each of the above grounds.  However, as will be seen below, it is only necessary to deal with the locus of Chi.  I should first set out the unusual background to the Petition. 

Background

7.  There has been a flood of cases brought by one Charles Zhi (Zhi), formerly Chang Hyun Chi, against a Hong Kong listed company called Siberian Mining Group Co Ltd (SMG), its directors and auditors.  The Stock Exchange of Hong Kong Ltd and the Securities and Futures Commission were/are also sued in some of these cases (including judicial reviews).  Zhi is a South Korean national and the father of Chi. 

8.  The cases brought by Zhi constituted such an abuse of process that a restricted proceedings order was made against him: see Siberian Mining Group Co Ltd v Zhi Charles [2016] 4 HKLRD 88.  It should be mentioned that Chi is a co-plaintiff in 1 of these actions brought by his father against, inter alia, SMG: see Chi Dong Eun & Zhi Charles v Kim Young Jun & Ors, HCA 1880/2015, unrep, 28 August 2015. 

9.  Recently, in dealing with another action by Zhi against Sandmartin International Holdings Ltd, another Hong Kong listed company, evidence was placed before the court that Zhi has been actively bringing proceedings in Hong Kong against a number of listed entities: see Zhi Charles v Sandmartin International Holdings Ltd, HCCW 90/2017, unrep, 21 April 2017. 

10.  As noted in that Decision, a sophisticated person like Zhi would not have invested his energy and resources for no reason.  The same must be said in respect of Chi, who holds himself out as an expert in finance.  Moreover, there is uncontradicted evidence before the court that Zhi is involved in this Petition.  Indeed, the alleged grounds for the winding up of the Company are quite similar to those advanced in HCCW 90/2017, supra.  This fortifies the evidence that Zhi is involved in both cases and the alleged grounds are simply recycled.

11.  Further, there is evidence (also uncontradicted) that a large number of people (101 in total) with Korean names and using the exact same address in an industrial building in Yau Tong (YT Address) have filed Notices of Intention to Appear on Petition in these proceedings.  All of these people allege to be a contributory of the Company and the Notices were of the same date.  However, none of their names can be found in the list of shareholders of the Company.

12.  Furthermore, during the period from 24 November 2016 to 6 February 2017 and on 13 occasions, a writ was taken out by a person with a Korean name against a combination of parties.  Some or all of the Respondents are sued in these actions.  Other parties are also involved, eg, auditors and lawyers.  Invariably, very serious allegations are made in each of the actions, eg, the commission of a crime under the Organised and Serious Crimes Ordinance, Cap 455.  In all but 4 of the 13 actions, there is only a general endorsement on the writ, which means that the allegations are unparticularised[1].  These 13 actions were actually brought by 4 persons, namely, Joung Jong Hyun, Kim Sungho, Lim Hang Young and Lee Moonkyu.  All 4 plaintiffs share the same YT Address.  These evidence are again not disputed. 

13.  The unusual circumstances demonstrated by the evidence suggest that there is a concerted effort by at least Zhi and his son, quite possibly with the participation of other people, to bring actions against Hong Kong listed companies.  It calls into question the true motive for these actions.   

14.  This brings me to other undisputed background facts.  Since July 2016, the Company has been in litigations (HCMP 1929/2016 and HCMP 2182/2016) with, inter alia, 6 Mainland parties concerning the ownership of some shares in the Company which were the subject matter of a Placement Agreement made in July 2016. 

15.  In August 2016, the Company was sued by another 3 Mainland shareholders (HCMP 2222/2016) in connection with the allotment of shares granted to 8 people under a share option.  One of the plaintiffs is named Liu Longcheng (Liu).  It will be seen below that there is a connection between Liu and Chi.  

16.  Next, I shall deal with the issues concerning Chi’s address. 

No address on Chi’s affirmations

17.  The YT Address is the address used by Chi on the Petition.  He told the court that this is his correspondence address.  However, effort was made by the solicitors of R1-6 to serve papers on Chi at that address.  The server was informed by a lady at the premises that there was no such person.  Chi told the court that it was a matter of miscommunication between himself, who only speaks English, and the lady, and he said that she might have thought that he was just one of the many Koreans there.  With respect, such explanation invites proper scrutiny of the evidence advanced by Chi.   

18.  There are 3 affirmations filed by Chi’s and in none of them any address can be found.  This is contrary to O 41, r 1(4), and affects the admissibility of Chi’s evidence. 

19.  When asked by the court about his residential address, Chi started by giving an address at Room 2808 and said that he did not know about the other details save that it was next to a hotel.  He then asked for an opportunity to check the address with his smart phone, and came up with another address at Portland Street, Mongkok.  He told the court that he was nervous and made a mental slip in giving the court an old address, namely, the one at Room 2808. 

20.  I have to say that Chi appeared to be calm.  He was articulate and confident.  Self-evidently, what he told the court about his address invites scepticism.  When asked to provide proof of his address, Chi said that he could produce a utility bill but would require time to do so. 

21.  It is highly undesirable to delay the resolution of these matters, bearing in mind in particular the interest of the investing public.  Fortunately, the evidence on Chi’s locus is clear and these applications can be disposed of on that ground alone.

Chi’s locus

22.  Chi’s case is that he had acquired some shares in the Company between January and February 2016 through a Korean agent.  Chi does not know the full name of this agent, only that he is called Kim Moon something.  The shares were in fact held in the name of nominee but Chi did not know the name of that person until he received a share certificate. 

23.  On the evidence before the court, Chi produced a share certificate (Certificate) to the Companies Court at a hearing on 28 February 2017.  It was numbered 20672, in the name of Liu and for 500,000 shares in the Company. 

24.  The undisputed evidence is that Liu did not become a shareholder until the 6 July 2016.  On 6 February 2017, at Liu’s request his shareholding of 2,500,000 under certificate no. 19503 was split into certificates of smaller amount of shares, namely, the Certificate and certificates no. 20572-20671 (100 certificates of 20,000 shares each). Subsequently, on 5 May 2017, Chi became a registered shareholder of the Company. 

25.  In the premises, putting aside the issues (a) whether those 500,000 shares were held by Chi before the Certificate was issued and (b) that he did not become a registered shareholder until months after the presentation of the Petition, Chi did not have the requisite locus to present the Petition, ie, he had not held any shares in the Company for at least 6 months during the 18 months before filing the Petition, contrary to s.179(1)(a)(ii) of the Ordinance. 

26.  In fairness to Chi, he recognised the difficulty with his locus.  However, the failure to satisfy the provisions of s.179(1)(a)(ii) means that the Petition must be struck out.

Abuse of process

27.  The unusual circumstances of this case have been alluded to above.  There is an important link between Chi and Liu, who is in litigation with the Company.  Despite Chi’s suggestion that he does not know Liu.  It is too much of a coincidence, bearing in mind in particular the timing of the relevant events. 

28.  R1-6 have protested strongly about the conspiracy between Liu, Zhi and Chi to exert pressure on them with these proceedings.  Although it is unnecessary to determine the issue, I have to say that the evidence before the court certainly gives rise to a prima facie case of abuse of process.  It should be added that the evidence of R1-6 in this regard has not been properly answered by Chi.

29.  A serious view must be taken of these matters. The litigations launched by Zhi have taken up a great deal of the resources of the court at the expense of the other court users.  The evidence in this case invites the investigation by the appropriate authority as to whether any of the common law offences of maintenance and champerty has been committed.  It is therefore the duty of the court to have a copy of this Decision sent to the Director of Public Prosecution for his consideration.

Conclusions

30.  The Petition is dismissed with costs to R1-6.  I accede to their request for such costs to be tax on indemnity basis, if not agreed.  The reason being that Chi must know full well that he did not have a proper case on locus and that the Petition has a severe impact on a public company. 

31.  With reluctance, I also award costs in favour of R7 but not on a higher scale.  As accepted by Mr Kung, R7 could have simply supported the application by the other Respondents without incurring another set of costs by bringing his strike out application shortly before this hearing.  However, R7 does have an independent ground to strike out the Petition, namely, that he has been improperly joined, and therefore I allow him his costs. 

32.  I also award costs to the Official Receiver at HK$4,100 to be deducted from the deposit.

33.  These costs order shall become absolute 14 days from today.