YIFUNG PROPERTIES LTD AND OTHERS v. MANCHESTER SECURITIES CORP AND OTHERS

HCA 1341/2014 &
HCA 1359/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1359 OF 2014

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D E C I S I O N

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A. INTRODUCTION

1.  There are 2 pairs of applications before the court:

A. In respect of HCA 1359/2014 (“the 1359 Action”), an application by the plaintiff mortgagors for an injunction to restrain the defendant receivers from exercising their powers as receivers.  Related to it is an application for leave to amend the writ of summons to plead new causes of action.

B. In respect of HCA 1341/2014 (“the 1341 Action”), an application by the plaintiff (YDL) for a mandatory injunction for handing over corporate records and assets and business premises to the new directors, and to give instructions to the plaintiff’s auditors and banks.  Related to it is an application to amend the summons.

2.  The core issues in these applications are whether an event of default has occurred to justify the appointment of receivers and whether directors have been rightly removed by the receivers.

B.  THE PARTIES

3.  In the 1359 Action:

(a) The plaintiffs are “YPL”, “Wonder Earn” and “Capital Metro”, respectively (collectively “the Mortgagors”) are BVI companies.

(b) YPL and Wonder Earn hold respectively 60% and 40% of the entire issued share capital of and in Yifung Developments Limited (“YDL”), another BVI company. 

(c) Capital Metro is the sole registered and beneficial owner of the property at 20^th Floor, Shun Feng International Centre, No 182 Queen’s Road East, Hong Kong (“the Property”).

(d) YDL wholly owns a wholly owned foreign enterprise in the Mainland, Yiangjiang Fungyi Properties Ltd (“WFOE”).  WFOE, in turn, owns a property development project in Yangjiang City, Guangdong (“the Project”). 

(e) Ricky Liu is the ultimate sponsor and beneficial owner of the Project. 

(f) The 1^st defendant (“MSC”) is the lender under the facility agreement referred to in paragraph 5 below.

(g) The 2^nd and 3^rd defendants (“Mr Gronow” and “Mr Fok” respectively) are the Receivers appointed in the circumstances referred to below.

(h) The 4^th defendant (“Elliott”) is an investment advisor and agent of MSC.  One Mr James Smith was and is its employee.

4.  In the 1341 Action, YDL is the plaintiff.  The 3 defendants (“Ricky Liu”, “Robert Ho” and “Rebecca Choy”, respectively) used to be directors of YDL (“the ex-directors”) before they were removed pursuant to MSC’s enforcement of rights as described below.

C.  BACKGROUND

5.  Pursuant to a facility agreement dated 10 September 2010 (“the FA”), MSC lent US$39m (“the Loan”) to YDL, repayable by 3 instalments.  Interest was at an internal rate of return (“IRR") of 20%.  The Loan was secured by the following key security arrangements:

(1) Two equitable Share Mortgages whereby YPL and Wonder Earn respectively mortgaged all their shares in YDL (“the YDL Shares”) in favour of MSC;

(2) A legal charge over the Property granted by Capital Metro;

(3) A Rental Assignment whereby Capital Metro assigned to MSC rights in leases relating to the Property; and

(4) An Investor Rights Deed (“the IRD”) whereby MSC is, entitled to receive a “profit-linked bonus” (“the Bonus”) out of YDL’s available profits, after YDL pays (a) all amounts payable to MSC under the FA; and (b) HK$100m to YPL and Wonder Earn in accordance with clause 2.1(b) of the IRD.  MSC was entitled to receive 70% of the available profits until it shall achieve an IRR of 30% on the Loan and, thereafter, 20% of all available profits of YDL.

6.  In the event of default under the FA, MSC could appoint receivers over the YDL Shares and the Property.

7.  The 1^st installment (US$10m + US$9.2m interest) was paid. The 2^nd and 3^rd installments (each for US$14.5m + interest) has remained outstanding since 17 March 2014.

8.  By a letter dated 18 March 2014, MSC declared an Event of Default under the FA on the basis that YDL had failed to pay US$50.1m (about US$29m as to capital and US$21m as to interest) to MSC on 17 March 2014 and gave notices of the appointment of Receivers over the YDL Shares and the Property.  There was a technical issue as to whether the Notice of Event of Default was premature but, to avoid argument, the Receivers were re-appointed on 28 March 2014.

9.  On 29 April 2014, MSC sought recovery of possession of the Property under HCMP 1058/2014 (“the Order 88 Proceedings”).

10.  On 4 and 5 June 2014, MSC exercised its rights under clause 7 of the Share Mortgages to change the board of directors of YDL and WFOE.  The new directors of YDL are Mr Gronow and Mr Fok (“the new directors”). 

D.  PROCEDURAL HISTORY

11.  YDL proceeded to seek control over its books and assets of but was met with the uncooperative attitude of the ex-directors.  YDL took out proceedings in the PRC against those ex-directors and WFOE (“the PRC Proceedings”). 

12.  On 16 July 2014, YDL (acting under the new directors) commenced the 1341 Action.  Application C is YDL’s application to seek interim orders of the reliefs sought in the writ.  Application D was made in the course of the hearing before me to amend Application C.

13.  In the meantime, on 18 July 2014, the Mortgagors commenced the 1359 Action against MSC, the Receivers and Elliott to challenge the occurrence of the Event of Default, validity of the Receivers’ appointment (“the Appointment”) as well as the propriety of their acts in seeking to seize control over YDL and WFOE.  The Mortgagors issued Application A.   Application B is to amend the writ to plead new causes of action raised by the Mortgagors on affidavit in support of Application A.

E.  THE CASE OF THE MORTGAGORS AND EX-DIRECTORS

14.  It is alleged that in August 2012, Mr Smith (on behalf of MSC) invited YDL to consider obtaining refinancing to prepay the outstanding balance under the FA and MSC’s entitlement under the IRD, which MSC assessed to be US$25m.

15.  In about November 2013, MSC increased the total amount payable by YDL to approximately US$97m (being US$50m under the FA + US$47m under the IRD) (collectively “the Settlement Sums”).

16.  Whilst Ricky Liu (for YDL) was finding the necessary funding for the Settlement Sums, Mr Smith allegedly gave certain assurances to him.  Allegedly relying on the same, YDL did not make any payment under the FA in March 2014, or seek extension of time for payment of the 3^rd installment.

17.  The Morgators assert that:

(1) The transactions under the FA and the IRD are unenforceable for contravening section 24 and/or section 25 of the Money Lenders Ordinance, Cap. 163 (“MLO”) (“the MLO Point”);

(2) Even if the FA and the IRD were enforceable, MSC was estopped from declaring an Event of Default on 18 March 2014 as a result of the assurances given by MSC (“the Estoppel Point”); and

(3) The Receivers, being agents of the Mortgagors, acted in breach of their duties to the Mortgagors who are parties interested in the equity of redemption in the mortgaged assets (“the Agency Point”).

18.  The ex-directors assert that the Receivers have no basis to seek the injunctions in the 1341 Action.

19.  It is the case of the Mortgagors and the ex-directors that these points form serious issues to be tried. 

20.  I shall first deal with the common issues of the MLO Point, the Estoppel Point and the Agency Point to see if there is a serious issue to be tried before I consider each application. 

F.  SERIOUS ISSUES TO BE TRIED

21.  “Serious issue to be tried” is not a high threshold.

“…the threshold for the establishment of a 'serious issue' is not high, and it seems to me that unless the matter really can be seen, at this stage, to be demurrable on its face, there is no justification for knocking the application out on this basis absent the opportunity of seeing and hearing the witnesses who presently are recounting contradictory stories on affidavit/affirmation.”

Holyrood Ltd v. Bank of China (Hong Kong) Ltd, HCCL 35/2003, 19 September 2003, at §29 per Stone J.

22.  The case of Chinaplus Wines Ltd v Berry Bros & Rudd Ltd, HCA 1818/2012, 13 December 2012, is an illustration of how the principle is applied.  Anthony Chan J said:

“29. Last but not least, Mr Burns has rightly taken this court to the further and better particulars in HCA 905/11 where CWL was asked in no unclear terms about particulars of the Oral Agreement and none has been given. This is highly detrimental to the credibility of the Oral Agreement.

30. Although the merits of CWL’s case are hardly impressive, the threshold which it has to satisfy to demonstrate a serious issue to be tried is not very high. The low threshold is consonant with the principle that the court does not decide factual disputes on affidavits. I have been taken by Mr Huggins to the judgment of Deputy Judge To (as he then was) in AXA China Region Insurance Co Ltd v Pacific Century Insurance Co Ltd [2003] 3 HKC 1 at 13B where, referring to Alfred Dunhill Ltd v Sunoptic SA [1979] FSR 337 at 373, it was said that in the context of deciding whether there is a serious issue to be tried it is irrelevant whether the court thinks that the plaintiff’s chances of success in establishing liability are 90% or 20%.

31. In the premises, and not without considerable reluctance, I hold that CWL has a serious issue to be tried in respect of its claim over the Storage Data.”

23.  I agree with Ms Chan SC that the principles applicable to Order 14 relied on by Mr Mok SC are not in themselves applicable to an injunction application.  However, that does not mean the court should shut its eyes to the obvious in deciding if the applicant’s case is demurrable on its face.  Clearly, the court can apply common sense and test a party’s assertions against objective, contemporaneous documents, although there should be no trial on affidavits.

G.  THE MLO POINT

G1.  The legal principles

24.  Under section 2 of MLO, a “loan” includes:

“…every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan.” (emphasis added)

“Interest” “does not include”:

“any sum lawfully agreed to be paid in accordance with this Ordinance on account of stamp duty or other similar duty, but save as aforesaid includes any amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan;” (emphasis added)

25.  In considering whether a transaction amounts to a “loan” within the statutory definition:

“… what was required was to consider in overall terms what it was that the parties to the transaction were attempting to achieve and then decide whether the transaction was a ‘loan’ according to the definition” (emphasis added)

See: Pang Kam Yiu t/a Tai Kung Weaving Factory v Edward Wong Finance Co Ltd[1985] 2 HKC 62, at 65A-B, per Mayo J (as he then was).

26.  Under section 24(2) of MLO, no agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds 60% per annum.

27.  A loan that contravenes section 24 is irrecoverable and cannot be re-opened under section 25: Wong Ming Wai v Tsui Kam Ming trading as Tung Tai Construction Co, CACV 179/1999, 14 October 1999, at pp3-4, Rogers JA (as he then was).

28.  Under section 25(3), an agreement is presumed to be extortionate where the effective rate of interest exceeds 48% per annum. but the court may re-open the transaction to do justice between the parties.  Subject to section 25(3), the court may reopen an extortionate transaction under section 25(1).  In determining whether the transaction is extortionate, the court will have regard to the factors stipulated under section 25(4) to (6).

29.  Sections 24 and 25 apply to all loan transactions, whether or not the loan was made by a money lender: see s 24(1), s 25(1)(a) of MLO.

30.  In Pearldelta Group Limited v Huge Winners International Limited and Others,HCA 595/2008, 22 April 2010, §§239-240, Saunders J said that the purpose of MLO is to curb loansharking, and its provisions are not intended to catch genuine commercial transactions. Accordingly, a convertible bond containing an element of a loan and capital investment that would lead to return of a capital nature was found not to have contravened MLO and was divisible from the loan.  (The determination on the MLO issue was not overruled on appeal: see CACV 105 & 106/2010, 3 September 2010.) 

G2.  The issues under the MLO point

31.  The issues are whether the Bonus forms part of the interest, whether there was a “transaction” that should be reopened and whether the effective rate exceeded 48%.

G3.  Whether the Bonus forms part of the interest

32.  The definition of “interest” in MLO includes “any amount (by whatever name called) in excess of the principal”, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan.  The Bonus is not principal.  Arguably, it may be “interest”.

33.  In fact, Mr Smith acknowledged in his affirmation that the Bonus was part and parcel of the return for the Loan:

“12. The Profit-share Entitlement is a profit-linked bonus arrangement…This provides [MSC] with an all-in rate of return for the entire funding arrangements over the life of the Project. The Profit-share Entitlement was an important part of the compensation [MSC] agreed to when making the Loan, in light of the risks associated in making an investment in the Project (a real estate development in a third tier Chinese city)…”

34.  Relying on the Pearldelta case, Mr Mok SC argues to the contrary.  He submits that the arrangements between MSC and YDL/WFOE was of a dual nature, being a loan with interest return (subject to MLO) and an investment-type return akin to equity interest (not subject to MLO).  It was a genuine commercial arrangement after lengthy and detailed negotiations amongst commercial entities, each of which having acted under independent legal and financial advice.  Amongst the heavy commercial documentation was an enforceability opinion provided by YDL’s lawyers, which assumed that the effective rate of interest under the FA did not exceed 48% per annum.

35.  Mr Mok SC also contends that even on Ricky Liu’s own estimate, the profit forecast for the Project was contingent on several factors.  The period for the earning of such return is unascertained and unascertainable.  This may take place long after the principal has been repaid or no Bonus may be payable at all if there is no profit.  The formula for the Bonus would fail to reflect “the true annualpercentage of interest” in Schedule 2 of the MLO, which is co-extensive with the several periods during which the principal remains outstanding. 

36.  Mr Mok SC also points out that the IRD contained provisions preventing YDL/WFOE from becoming involved in certain “restricted matters” (Schedule 4 to the IRD), and allowed MSC to appoint a director to the boards of each of YDL and WFOE (clause 3.2 of the IRD).  The Bonus represented a participation right to reflect the risk that MSC assumed in providing all of Ricky Liu’s acquisition costs for the Project, which was in a third tier city in the Mainland.

37.  With respect to Mr Mok SC, his argument that the Bonus was an investment is contrary to Mr Smith’s acknowledgement in paragraph 33 above.  The opinion of YDL’s lawyers that he refers to had not taken into account the Bonus.

38.  Further, the Pearldelta case is distinguishable:

(i) It was a decision made after trial.  Here, the court has not yet had the full opportunity of investigating the circumstances leading to the FA and IRD. 

(ii) Pearldelta involved a convertible loan.  Here, there was no option to convert the Loan into YDL’s equity.  There was no capital risk on the part of MSC who would only reap the available profits but need not shoulder loss.

(iii) The loan in Pearldelta was an exempted loan under the MLO because the defendant had paid up share capital of over HK$1m, whereas YDL’s paid up capital was only US$10.

39.  In any case, issues on the nature of the Bonus as submitted by Mr Mok SC are matters that cannot be dealt with summarily.  There is clearly a serious issue to be tried as to whether the Bonus is “payable” as interest although the amount is not ascertainable at present.

G4.  Whether there was a “transaction” that should be re-opened

40.  There is a dispute as to who initiated the idea of prepayment of the Bonus – Ricky Liu who wanted to buy out MSC’s rights so as to obtain refinancing from another source, or MSC who wanted to withdraw from the Asian market.  For present purpose, I shall assume in favour of the Mortgagors and the ex-directors that it was MSC who initiated the idea.

41.  There is no dispute that agreement had not been reached over the amount needed for the Bonus but there was a dispute on the nature of the request for payment. 

42.  On MSC’s case, US$25m was proposed by MSC as an “opening offer price” and different valuations were just put forth to Ricky Liu to illustrate the reasonableness of that offer. MSC has never stated that US$25m was insufficient. 

43.  On the case of the Mortgagors and the ex-directors, however, MSC had required YDL to pay the Bonus, initially at US$25m, later US$47m. 

44.  Ms Chan SC, however, argues that MLO has chosen to use the term “transaction” in section 25(2)(a) and (b).  So something short of “agreement” would suffice if it “requires the debtor … to make payment (whether unconditionally or on certain contingencies) which are grossly exorbitant” or “otherwise contravenes ordinary principles of fair dealing”.

45.  She points out that payment of the Settlement Sums was the only option dictated by MSC.  This is because YDL was a US$10 company which required borrowing to finance repayment, and yet provisions like clause 7.4(f) of the FA expressly prohibited YDL and WFOE from incurring any “financial indebtedness” without the consent of MSC.

46.  Ms Chan SC contends that by demanding for payment of the Settlement Sums, MSC has in effect prevented YDL from performing its contractual obligations under the FA.  It is well-established that where the performance of a term of contract depends on the cooperation of the other party, that other party must refrain from doing anything that would obstruct the party’s performance (Chitty on Contracts (31^st ed) §§13-012 and 13-013). 

47.  With respect to Ms Chan SC, the suggestion that MSC had required YDL to pay US$47m was starkly contradicted by contemporaneous documents:

(a) A “Statement of Amounts Due” emailed on 12 March 2014 by Elliott to Ricky Liu, cc Mr Smith, confirmed the precise sums of principal and interest due to be paid by YDL on 17 March 2014.  It did not include any Bonus.

(b) Three days before the due date for repayment, in a letter dated 14 March 2014, MSC, having referred to YDL’s intention not to repay the US$50.1m on time, referred to the Bonus issue as“ongoing (albeit sporadic) discussion”. 

48.  It can hardly be said that MSC dictated the payment of the Bonus when the parties were clearly in negotiation only.  Ricky Liu himself regarded the US$25m as “excessive and unreasonable”, the Project being under-performing at that time.

49.  Mr Kawaii (representative of MSC appointed under the IRD to the board of YDL) then came up with a valuation summary showing 3 figures of US29m, US$47m and US$25m.  Ricky Liu did not find recent discussions on the Bonus constructive.  Despite Mr Smith’s request for a number in hand to move things forward, Ricky Liu never gave a reply.

50.  Hence, neither US$25m nor US$47m were “to be paid or payable” within the definition of “interest” in section 2 of the MLO.  It can hardly be arguable that MLO would regard negotiation as a “transaction”.  By its nature, negotiation, being something still open, does not need to be re-opened.

51.  The reference to provisions like clause 7.4(f) does not assist YDL because those were pre-existing contractual terms and did not give MSC additional powers which it did not have if it had not asked for pre-payment of the Bonus.

G5. Whether the effective rate exceeded 48%

52.  For completeness sake, I have considered the effective rate if I am wrong in saying that there was no transaction to be re-opened.  There are 2 components to the Settlement Sums: the amount due under the FA and the Bonus.

53.  For the 1^st component, several sets of figures have emerged:

(a) MSC’s request for confirmation, subsequently completed by YDL, showed that as at 30 June 2013, the amount due and owing was US$33.8m.  Even accepting Mr Smith’s explanation that the request was “in connection with an internal audit of [Elliott’s] positions”, Mr Smith has not said that that amount was in any way incorrect.

(b) Mr Kawaii’s version on 23 August 2013 was that, based on an assumption of prepayment of the 2^nd and 3^rd tranches on 15 September 2013, the total to be paid for principal and interest was about US$46.47m, a huge leap by US$12.67m from the sum due under (a) in 2 ½ months’ time.

(c) By 17 March 2014, the amount due was stated to be US$50.1m, an additional US$3.63m from the sum due under (b) in 6 months’ time.

54.  The additional sums accrued in the time frames under (b) and (c) were simply disproportionate compared to each other.  There was never any satisfactory explanation from MSC.  There is a serious issue to be tried as to what sum under the FA was due to MSC on 17 March 2014.  However, by virtue of the definition of “Event of Default” being “non-payment on the due day of any amount payable pursuant to the FA” (clause 17.1 FA), this serious issue to be tried cannot prevent an Event of Default from occurring.

55.  Even adopting US$50.1m as the amount due under the FA, Ms Chan SC accepts that MLO was not breached until there was a requirement to pay the Bonus of US$47m.

56.  There is no dispute that the effective rate based on US$50.1 plus a Bonus of US$25m was about 43%, if repayment was made on 17 March 2014.

57.  There is dispute as to whether or not the effective rate was 59.71% (Mortgagors and ex-directors’ case) or less than 48% (Receivers’ case) if the Bonus had been US$47m and repayment was made on 17 March 2014.  The methodology for computing the effective rate is a serious issue to be tried.  However, that is irrelevant since there was nothing close to a requirement being made by MSC for YDL to pay that sum. 

G6.  Summary

58.  In summary, even if there is a dispute as to who initiated the prepayment discussions, whether the nature of the Bonus was “interest” or investment return, whether the sum due under the FA was US$50.1m, MSC had not required YDL to prepay any fixed sum for the Bonus.  Even taking the opening offer of US$25m as the Bonus required to be prepaid, the effective rate of interest was less than 48%.  The MLO Point has no merits.

H. THE ESTOPPEL POINT

H1. The legal principles

59.  It is not disputed that promissory estoppel arises where:

(1) The parties are in a relationship involving enforceable or exercisable rights, duties or powers (“requirement (1));

(2) One party (the promisor) by words or conduct conveys a clear and unequivocal promise to the other (the promisee) that the promisor will not enforce or exercise some of those rights, duties or powers (“requirement (2));  and

(3) The promisee reasonably relies upon that promise and is induced to alter his or her position on the faith of it, so that it would be inequitable or unconscionable for the promisor to act inconsistently with the promise (“requirement (3)).

See Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1,at §55, per Ribeiro PJ.

60.  To be “clear and unequivocal” under requirement (2),

(i) The promise need not be express but its meaning conveyed by the promisor’s words or conduct must be clear and unequivocal.  He must make it clear that he is promising not to enforce the relevant rights or powers.  The message must be conveyed with a clarity similar to that needed to vary a contract.  Whether there is sufficient clarity is to be assessed objectively by the court.  See Luo Xing Juan, at §59;

(ii) The court will seek to ascertain the meaning in substance of the promise. It is the substance of its meaning that must be clear and unequivocal. A promisor may make his intentions perfectly plain but, not being a lawyer, may express himself in terms which are legally imprecise or inaccurate.  A promisee may likewise clearly understand the substance of what is being promised without any knowledge of the legal rights or powers within which the promise is framed. See Luo Xing Juan, at §60.

61.  If a representation is not made in such a form as to comply with requirement (2), it normally matters not that the representee should have misconstrued it and relied upon it.” Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741, at 755 F‑G, per Lord Hailsham LC.

62.  The effect of promissory estoppel is suspensory only.  The promisor can resile from his promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position.  The promise only becomes final and irrevocable if the promisee cannot resume his position: Ajayi v RT Briscoe (Nigeria) Ltd [1964] 1 WLR 1326, 1330.

H2.  The terms of the Assurance

63.  According to Ricky Liu, MSC (through Mr Smith) told him (of YDL) that YDL should continue to seek investors to finance a prepayment of the Settlement Sums.  MSC would not insist on YDL’s payment of the Outstanding Balance (probably covering both instalments) on its due date and would not declare an Event of Default should YDL delay in repayment under the FA.  Mr Smith assured Ricky Liu that “So long as YDL was sincere about repaying the Settlement Sums, and was actively seeking additional finance for such purposes, it was unnecessary for YDL to write to MSC again to extend the relevant due/repayment dates under clause 6.2 of the FA.” (“the Assurance”)

64.  Ms Chan SC submits that she is not using promissory estoppel as a sword, but defensively to prevent MSC from enforcing their strict legal rights to declare an Event of Default and to appoint the Receivers: Spencer & Bower, Estoppel by Representation (4^th ed) at XIV.4.7. 

H3.  Requirement (1)

65.  There is no dispute that Requirement (1) is met.

H4.  Requirement (2)

66.  There is no dispute that there had been discussions between the parties as to prepayment under the FA and the Bonus since August 2012 and the amount of the Bonus. 

67.  There is dispute as to who initiated the discussion which need not be resolved for present purpose.

68.  There is dispute as to whether Mr Smith had the authority to bind MSC.  Given that Mr Smith featured prominently in dealing with Ricky Liu.  He at least had apparent authority to bind MSC and I shall so assume.

69.  The core dispute is whether the Assurance was given.  The court cannot and should not resolve issues of fact in the present application but I have taken into account the following factors, all revealed in the documents before action:

70.  Firstly, in the few months leading up to 17 March 2014, MSC had repeatedly reminded Ricky Liu to repay as scheduled:

(a) Mr Kawaii constantly referred to amounts “which will shortly be payable”.  He was keen to know YDL’s plans for repayment.  See email to Ms Rebecca Choy dated 18 February 2014 and 5 March 2014; and Mr Kawaii’s handwritten note of the Board Meeting on 4 March 2014;

(b) There were also express references to the payment date of 17 March 2014.  See Mr Kawaii’s email to Ms Rebecca Choy dated 7 March 2014; and documents referred to in paragraph 47 above;

(c) In the email dated 7 March 2014, Mr Kawaii complained that “from November 2013 until the topic was re-raised by Elliott by way of a request made on 13 February 2014 for an update (followed by Mr Kawaii’s email to Rebecca Choy dated 18 February on that and other matters), there was silence on the issue from Mr. Liu.  Even at this late stage, with payment due on 17 March, I have no clarity as to how YDL is going to be able to make the single largest payment which it has had to make in its recent history ...”; and

(d) In the above letter dated 14 March 2014 MSC referred, amongst others, to the “ongoing (albeit sporadic) discussions regarding the possibility of terminating MSC’s [Bonus] rights under the IRD for an appropriate consideration payable by YDL.” MSC reserved all of its rights against YDL, including those available MSC under the FA, without further or any notice to YDL.

71.  Secondly, such reminders were uncontradicted and in fact confirmed in YDL’s letter dated 14 March 2014:

“Since you expressed the Lender’s preference to receive full repayment, and if possible earlier repayment, of the Facility at our lunch meeting on 22 August 2013 …As explained to you at subsequent meetings and phone conversations during the fourth quarter of 2013 and the first quarter of 2014, my goal has always been to put the Company into a position to meet all the obligations under the Facility Agreement.” (emphasis added)

72.  The letter then informed Mr Smith of steps taken by Ricky Liu to find refinanciers.  Ricky Liu also offered a facilitation fee of US$500,000 (“the facilitation fee”) for the lender not to declare an Event of Default for 4 weeks until 17 April 2014 to enable the potential financer to complete the deal.

73.  YDL even acknowledged in its letter to Mr Smith dated 26 March 2014 (well after the alleged Assurance had arisen) that,

“After Mr Smith informed YDL that [MSC] had no intention to roll-over or extend the loan on maturity, YDL then focused on refinancing for the purpose of repayment on maturity.”

74.  In its draft form dated 24 March 2014, that letter stated that,

“During the same period [ie from August 2013 to March 2014], Mr Smith has repeatedly informed Mr Liu that [MSC] had no intention to roll-over or extend the loan on maturity, and the purpose of the Refinancing Request was therefore changed from prepayment to repayment on maturity.”

The draft and final letter put beyond doubt that YDL knew that MSC was not extending the repayment date and that YDL knew that it was facing repayment and not prepayment.

75.  Thirdly, in all the contemporaneous correspondence, YDL/Ricky Liu had never mentioned, still less relied on, the Assurance.

76.  Fourthly, in its letter dated 20 March 2014, YDL rejected MSC’s offer of a conditional suspension of enforcement and asserted that there was no need for MSC to take the step it had taken to receive payment.  It just did not deny the existence of an Event of Default. Ricky Liu even expressed an interest in purchasing the secured assets. 

77.  Fifthly, in resisting enforcement proceedings prior to the present 2 Actions, Ricky Liu never challenged the existence of an Event of Default.  This could be seen from YDL’s issue of a notice to lessees on MSC’s request pursuant to the Rental Assignment.  Further, in the Order 88 proceedings, Ricky Liu had not challenged the amount of principal and interest due under the FA.

78.  The case on the Assurance was so contradicted by contemporaneous documents (which all pointed one way) and so inherently improbable that it was demurrable on its face.

79.  Assuming that the Assurance was made, its terms were vague.  There was no objective standard to measure whether YDL was “sincere” about repayment or was “actively seeking” additional finance and no certainty as to the time by which the repayment had to be made.  The Assurance fell short of the clarity required to vary a contract.

80.  Moreover, the meaning of the words or conduct constituting the promise or assurance has to be understood in the light of the parties’ particular relationship, and in the light of the legal rights or powers exercisable, and known to be exercisable, by the promisor.  One should put in focus not simply the actions of the promisor but the proper interpretation to be placed on those actions given the shared background and knowledge of the parties: Luo Xing Juan at §§56-57.

81.  Under clauses 25 and 26 of the FA, waiver would not be lightly given.  Any amendment to a term had to be in writing:

“25. Remedies and Waivers

No failure to exercise or to reserve, nor any delay in exercising or reserving, on the part of any Lender, any right or remedy under the Finance Documents shall operate as a waiver, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.

26. Amendments and Waivers

Any term of the Finance Documents (other than any Security Agreement) may be amended or waived only with the prior written consent of the Lender, the Borrower and the Sponsor and any parties thereto and any such amendment or waiver will be binding on all parties to such Finance Documents” (emphasis added)

82.  There had never been a waiver of the requirement of written consent by MSC in making the Assurance. 

H5.  Requirement (3)

83.  Ms Chan SC submits that reliance might take the form of inaction.   The Mortgagors have altered their positions in allowing YDL and Ricky Liu to focus on seeking financiers instead of repaying the outstanding balance before 17 March 2014 and seeking extension of the 3^rd installment.   They claim to have funds to pay from WFOE, Metro Capital and/or Ricky Liu’s personal deposit to raise the finance with, which was not disputed by MSC at all.  Ms Chan SC submits that it was thus inequitable for MSC to be permitted to go back on the Assurance and declare an Event of Default.

84.  As demonstrated above, the correspondence showed no reliance by Ricky Liu on the Assurance at all.  The offer of the facilitation fee refuted all possibility of reliance. 

85.  Despite recognizing that the declaration of an Event of Default under the FA “could potentially spell disaster for the [Project]”, Ricky Liu’s excuse was that he did not appreciate the legal significance of MSC going back on the Assurance and had acted without the benefit of legal advice when replying to MSC on 20 and 26 March 2014. There was no time for him to recount the history to his solicitors and Messrs Cheung, Mr Tong SC & Rosa only acted on behalf of Capital Metro in the Order 88 Proceedings.

86.  Although solicitors may be instructed under pressing circumstances, in my view, a person did not need to understand the legal effect of an estoppel to be able to assert a promise which he said he had relied on and was breached. 

87.  In summary, the Assurance was demurrable on its face and lacked the certainty required to establish an estoppel.  It did not matter that Ricky Liu might have misconstrued it.  There was no reliance on it before action.  The Estoppel Point cannot raise a serious issue to be tried.

J.  THE AGENCY POINT

J1.  Parties’ case

88.  Clause 8.6 of the Share Mortgages provides as follows:

“The receiver shall be the agent of the Mortgagor (which shall be solely liable for his acts, defaults and remuneration) unless and until the Mortgagor is placed into liquidation, after which time he shall act as principal. The receiver shall not at any time become the agent of the Mortgagee.” (emphasis added)

89.  Ms Chan SC submits that the Receivers were the Mortgagors’ agent.  There were 3 acts taken by the Receivers which showed that they did not act in the interests of the Mortgagors (which had an interest in the equity of redemption in the mortgaged assets) and acted to their detriment:

(i) Application for an injunction on ex parte basis;

(ii) Replacement of WFOE’s board of directors; and

(iii) Taking out PRC proceedings.

90.  Mr Mok SC submits that there was no dishonesty or bad faith on the part of the Receivers to make them liable to the Mortgagors.  Moreover, the alleged acts constituting breach of duties by the Receivers were in fact performed by Mr Gronow and Mr Fok qua directors of YDL, not as Receivers.

J2.  The legal principles

91.  The mortgagor has no say in the appointment of a receiver. There is no contractual relationship but only a duty owed in tort by the receiver to the mortgagor as a person interested in the equity of redemption.  The receiver’s primary duty is to the mortgagee and to bring about a situation where the secured debt is repaid.  The Receiver may exercise those powers even if they may be disadvantageous to the Mortgagors.  See Fisher & Lightwood, Law of Mortgage (13^th ed) at §§28.8 – 28.9:

“28.8 … Although nominally the agent of the mortgagor, his primary duty is to realise the assets of the mortgagor in the interests of the mortgagee. In practical terms the receiver has a close association with the mortgagee and the mortgagor cannot instruct the receiver how to act in the conduct of the receivership …

The peculiar incidents of the agency are significant. In particular:

(1) the agency is one where the principal, the mortgagor, has no say in the appointment or identity of the receiver and is not entitled to give any instructions to the receiver or to dismiss the receiver: ‘For valuable consideration he has committed the management of his property to an attorney whose appointment he cannot interfere with’;

(2) there is no contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and duties owed by the receiver are equitable only;

(3) the equitable duty is owed to the mortgagee as well as the mortgagor. The relationship created by the mortgage is tripartite involving the mortgagor, the mortgagee and the receiver;

(4) the duty owed by the receiver (like the duty owed by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption. The class character of the right is reflected in the class character of the relief to be granted in case of a breach of this duty. That relief is an order that the receiver account to the persons interested in the equity of redemption for what he would have held as receiver but for his default;

(5) not merely does the receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid; and

(6) the receiver is not managing the mortgagor’s property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee. His powers of management are really ancillary to that duty.

(7) in the context of such a relationship, which is no ordinary agency and is primarily a device to protect the mortgagee, general agency principles are of limited assistance in identifying the duties owed by the receiver to the mortgagor.

...

28.9 The power to appoint a receiver is given to the mortgagee as a means of securing the repayment of his debt.  Thus, the primary duty of the receiver is to the mortgagee who appointed him, not to the mortgagor, and he can exercise his powers even though they may be disadvantageous to the latter.  However, the mortgage is simply security for the repayment of that debt and the performance of the mortgagor’s other obligations.  Thus, a receiver appointed by the mortgagee must exercise his powers in good faith and for the purposes of obtaining repayment of the debt owed to the mortgagee.”

92.  The receiver owes a duty of good faith to the mortgagor: Medforth v Blake [2000] Ch 86 at 102F, per Scott VC. However, there is no fiduciary duty in the sense that the receiver must act in the best interests of the mortgagor (as in a normal principal and agent relationship) as Ms Chan SC contends. 

93.  If the mortgagor requires protection, he must insist upon them when the bargain was made and upon the inclusion of protective provisions in the mortgage.  In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and the court must give effect to them: Silven Properties Ltd and anor v Royal Bank of Scotland plc and ors [2004] 4 All ER 484, at §18.

94.  A receiver cannot be in breach of his duty of good faith to the mortgagor in the absence of some dishonesty, improper motive or element of bad faith.  Medforth v Blake [2000] Ch 86 at 103D, per Scott VC.

J3.  Application of the legal principles

95.  The Agency Point cannot be relied on to dispute the validity of the Event of Default or the Appointment.  This is because under clause 7 of the FA, once there is an Event of Default, the Mortgagee can take possession of or sell the mortgaged assets and exercise all rights as if it were the beneficial owner.  Granting an injunction to YDL will be tantamount to rewriting the contract for the parties, which the court should not do.

J4.  1^st complaint: ex parte application for an injunction

96.  The Mortgagors complain that the Receivers caused YDL to expend funds improperly for an ex parte injunction in the 1341 Action, which was subsequently discharged for want of secrecy or urgency.  It prejudiced the Mortgagors’ equity of redemption in the mortgaged assets.

97.  However, there was no evidence to show that the Receivers acted with dishonesty, improper motive or bad faith.  They cannot be said to be in breach of their duty to the Mortgagors to justify a restraint on their powers: paragraph 94 above.  At best, the Receivers can be asked to give an account: principle (4) in Fisher & Lightwood cited in paragraph 91 above. 

98.  In addition, even if the complaint is justified, it would fall foul of the principle of reflective loss for YPL and Wonder Earn to pursue the Receivers for compensation.  Capital Metro does not even have cause to complain about the wrongful steps taken in the 1341 Action.

J5.  2^nd complaint: replacement of WFOE’s board of directors

99.  Ms Chan SC complains that the Receivers have not justified its removal of Ricky Liu, Robert Ho, Lu Xiao Hua of WFOE (“the ex-WFOE directors”). The Receivers do not have the experience and expertise of the ex-WFOE directors. Their removal had caused disruption to the business of WFOE and confusion to its employees, customers, banks and government authorities dealing with WFOE; and a contractor has threatened to sue WFOE for damages.  There is real risk that such disruptive actions, if not restrained, will destroy the value of the Project.

100.  With respect, this complaint on replacement is misconceived.  All the acts complained of were not done by the Receivers as YDL is not on receivership.  The Receivers happened to have appointed themselves as the new directors of YDL.  The new directors have caused YDL, as sole shareholder of WFOE, to change the composition of the board of directors of WFOE as well.  These were achieved by dating the resignation letters signed in escrow by ex-WFOE’s directors and the written resolutions of the board of directors of YDL, which were provided to MSC as part of the security arrangement.  The exercise of such rights was not dependent on the misconduct of ex-WFOE directors or their lack of experience.

101.  Causing disruption is not a reason for MSC to cease the enforcement process either, as it was the expected result of receivership and not the dishonesty, improper motive or bad faith of the Receivers.

J6.  3^rd complaint: taking out PRC proceedings

102.  On 18 June 2014, YDL commenced the PRC Proceedings, the same day they made the request for delivery up of books and records of WFOE.  Service has not yet been effected on the ex-WFOE directors.

103.  Ms Chan SC submits that the PRC Proceedings were misconceived and unnecessary because the books and records requested for are the property of WFOE. In any event, unless and until the Receivers have been properly appointed and registered as directors of WFOE, they have no right to possession.

104.  With respect to Ms Chan SC, it should be left to the PRC court to decide the issue over the change in directorship and the right to demand for books and records.  Even if wrongly constituted, the PRC Proceedings cannot be used to invalidate the Appointment or appointment of new directors.

105.  In summary, I do not find there to be a serious issue to be tried on the Agency Point or any of the complaints. 

106.  I now consider the individual applications.

K. 1359 ACTION: MORTGAGORS’ APPLICATION FOR AN INJUNCTION TO RESTRAIN THE RECEIVERS FROM EXERCISING THEIR POWERS AS RECEIVERS

K1. Serious issues to be tried

107.  The Mortgagors no longer seek an order restraining the Receivers from holding themselves out as directors of YDL and WFOE (ie paragraphs 1(1), 2(1) and 2(2) of the Summons in the 1359 Action). Bearing in mind the principles in section F above, there is no serious issue to be tried on any of the MLO, Estoppel or Agency Points.  That is sufficient to dispose of the injunction summons.

K2.  Balance of convenience

108.  For completeness sake, I have considered the question of balance of convenience.

109.  The principles guiding the exercise of the court’s discretion whether to grant an interlocutory injunction have been explained by Lord Hoffmann in National Commercial Bank Jamaica v Olint Corporation Ltd [2009] 1 WLR 1405 at §§16-18. The court may take into account the prejudice which the plaintiff may suffer if no injunction is granted or the defendant may suffer if it is granted; the extent to which the parties may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the injunction will turn out to have been wrongly granted or withheld.

110.  The question of balance of convenience is highly fact specific.  Where the factors are evenly balanced or difficult to assess, the prudent course is to take measures to preserve the status quo: Hong Kong Civil Procedure 2014, Vol 1 pp 638-656; 2^nd Supplement pp 17-19.

K3.  Are damages an adequate remedy?

111.  Insofar as the Property is concerned, there is nothing unique in it.  Capital Metro could have used another property as office. Any loss it suffered by reason of the sale of the Property can clearly be compensated for by way of damages.

112.  Insofar as the Shares are concerned, I agree with Mr Mok SC that as shareholders of YDL, the damage that Wonder Earn and YPL may suffer will be a diminution in the value of the YDL Shares.  They do not own the assets of YDL, let alone the assets of its subsidiary WFOE: Macaura v Northern Assurance Co [1925] AC 619, 626.

113.  However, one cannot ignore the reality that the value of the YDL Shares depends on how well the Project performs.  There will be costs attendant upon the Receivers taking over the Project.  Once it is found that the appointment of Receivers was invalid after trial, it will be difficult to assess the damage or restore YDL/WFOE to its original form.  Once the YDL Shares are sold, it will also be difficult to repurchase them.  Damages are not an adequate remedy for the right to acquire shares in a private company: Spry, Equitable Remedies (9^th ed), at 61-69. 

114.  There is dispute as to who is more effective in managing the Project.  Ricky Liu’s side relies on the experience of the ex-WFOE directors.   He points out the negative effects on seeking alternative financing, triggering of cross-default provisions in other (unidentified) loans of WFOE and the knock-on effect when WFOE is perceived to be in financial difficulties. 

115.  On the other hand, the Receivers points to the costs increment and poor financial performance of the Project when run by Ricky Liu’s side.  They assert experience in managing construction projects in the Mainland and their common interests as the Mortgagors and YDL in securing the success of the Project. 

116.  In my view, the effectiveness in running the Project is an evenly balanced factor.  The Receivers have been carrying on their duties for well over 4 months by the date of the hearing, although no complaint of “delay” can be made against Ricky Liu’s side given the documentation and arguments that unfolded.

117.  MSC refers to evidence showing the size of the assets (US$24 billion) that it and Elliott manage.  I agree with Ms Chan SC that those assets do not belong to them and are irrelevant when it comes to assessing the ability of MSC or Elliott to bear an award of damages.

118.  I am of the view that damages will not be an adequate remedy to the Mortgagors.  On the other hand, MSC’s interest all along lies in having the Loan repaid with interest and the Bonus.  If the outcome of the trial is in its favour, damages will certainly be an adequate remedy for the defendants.  Such damages together with costs will be paid out of the proceeds of realizing the YDL Shares and the Property.

K4. Undertaking as to damages

119.  The Mortgagors have given an undertaking as to damages.  Subject to having the ex-WFOE directors in the board and the Receivers not interfering with the management of WFOE and the Project, Ricky Liu has offered to provide management accounts and monthly receipts and payments of WFOE to MSC.

120.  However, the Mortgagors are BVI companies. Without the benefit of seeing their accounts, their only assets appear to be the YDL Shares and the Property.  Ricky Liu suggested that YPL and Wonder Earn will be worth at least RMB1.8 billion (revenue of RMB2.9 billion minus costs of RMB1.1 billion) and far exceeds YDL’s indebtedness under the FA. That was based on projection of gross revenue of the Project up to 2017 without taking into account the liabilities.  There is no reference to more readily available capital to meet any award of damages pursuant to that undertaking.  If this court were to grant an injunction in their favour, the Mortgagors should fortify their undertaking.

121.  In summary, even though damages are not an adequate remedy to the Mortgagors, the Mortgagors’ application for an injunction against the Receivers is dismissed for lack of a serious issue to be tried.

L. RELATED APPLICATION FOR AMENDMENT TO THE WRIT OF THE 1359 ACTION

122.  The amendments seek to introduce the MLO Point and Agency Point.  Counsel are agreed that even if the injunction application is dismissed, the court still has the power to allow the amendments unless it takes the view that the amendments could have been struck out.

123.  Given my analyses on the MLO Point and the Agency Point, it is plain and obvious that the proposed causes would have been struck out for being frivolous and vexatious.  I therefore decline to give leave to amend the writ in the 1359 Action, save to the extent of adding paragraphs 5 and 6 to the indorsement of claim to plead the IRD and Equity Pledge, which are factual and non-controversial.

M. APPLICATION BY YDL FOR VARIOUS INJUNCTIONS AGAINST THE EX-DIRECTORS UNDER THE 1341 ACTION

124.  YDL’s summons applies for all the reliefs in the amended writ on an interim basis, being mandatory and prohibitory injunctions against the ex-directors.

M1.  The legal principles

125.  As mandatory injunctions may have a dispositive effect on the action, an applicant is generally required to meet a higher standard, ie to show a strong prima facie case.  The court must normally feel a high degree of assurance that at trial it will appear that the injunction was rightly granted. See Hong Kong Civil Procedure 29/1/29; Music Advance Ltd v Incorporated Owners of Argyle Centre Phase 1 [2010] 2 HKLRD 1041.  The court will examine the merits more closely and take account of the parties’ respective prospects of success: Cayne v Global Natural Resources plc [1984] 1 All ER 225, at 236b-f; Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §43.

M2. Application of the legal principles

126.  My findings that there are no serious issues to be tried on the MLO, Assurance and Agency Points apply.  There is thus no question as to validity of the appointment of Receivers and the new directors.

127.  Detinue is a wrongful detention of the owner’s goods/chattels despite demand for delivery up. Conversion is an interference with the claimant’s possessory title which causes harm to the claimant’s right or title to the goods/chattels.  Trespass to goods is an interference with the claimant’s possession or immediate right to possession of goods.  See Tort Law and Practice in Hong Kong (2^nd ed) §§6.009, 6.011, 6.016, 6.027; §§9.013, 9.040, 9.042.

128.  There is a strong prime facie case that the ex-directors would have committed the torts of detinue and conversion and trespass to goods if they still hold on to assets and corporate records of YDL after termination of their directorship.  The demand for delivery up of assets and corporate records has been given on 5 June 2014.  The only director who had complied with the demand was Mr Kawaii, but the compliance was limited.

129.  The ex-directors refused to grant YDL access to its own rented premises in Wanchai on 10 and 11 August 2014.   That would be trespass, which is intentional interference with the rights of a tenant in possession.  See Tort Law and Practice in Hong Kong (2^nd ed) §§9.002, 9.013, 9.038, 9.040.

130.  Under paragraph 1(a) of YDL’s Summons, the ex-directors were asked to deliver up YDL’s assets, including its “books and records, company seals and chops, and the share certificates in, and any other documents or materials concerning, [WFOE] in the Plaintiff’s possession or in the Defendants’ possession held on behalf of the Plaintiff”.

131.  Records of a subsidiary are not ipso facto the records of its parent company (Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 at §§44-49, per Harris J).  As the Receivers are not of WFOE, there is no basis for them (and YDL) to seek the documents or materials of WFOE under paragraph 1(a).

132.  As to the rest of the items sought under paragraph 1(a) of YDL’s Summons, all the ex-directors have confirmed that they do not have possession of them.  The chops and seals have been handed over. Minutes of all board meetings of YDL have in any case been exhibited to 2^nd affirmation of Ricky Liu.

133.  The new directors seem to have been in possession of enough documents to produce teasers and projections for advertising the sale of the Project.

134.  However, the new directors have shown that some other documents like tax returns, bank statements, employee records have not yet been handed over.  They have received some outdated documents from Mr Kawaii but still need the latest financial reports of YDL.  Those should be provided by the ex-directors.

135.  Paragraph 1(b) of YDL’s Summons seeks to restrain removal of YDL’s assets outside Hong Kong.  This is otiose because the only asset of YDL is its equity in WFOE, located in the Mainland.  The equity is subject to the equity pledge and cannot be disposed of either.  MSC confirmed through leading counsel that the Receivers have got the original share certificates. There is no asset that YDL could remove from the jurisdiction. 

136.  The ex-directors might not have been cooperative.  However, there was simply no evidence on which it can be shown that there was risk of their disposal of the assets of YDL, encumber it or otherwise act in a way detrimental to the interests of YDL.  Removal of YDL from the Property in anticipation of surrendering possession to the Receivers, having the air-conditioning and the lights to the Property turned off over lunch time and replacing the directory to avoid people asking for “the landlord”, cannot be regarded as acts to spirit away YDL’s assets and records. YDL simply fails to meet the requirement of showing risk of dissipation to justify an injunction under paragraph 1(b), which should be dismissed.

137.  Paragraph 1(c) of YDL’s Summons requiring the ex-directors to grant access to the Property, collect its assets or take copies, is ancillary to paragraph 1(a) and should be granted.

138.  Paragraph 1(d) of YDL’s Summons requires the ex-directors to give written instructions to the auditors and banks to release information, to accept and act in accordance with the instructions from YDL’s new directors.  YDL was relying on previous communications between the ex-directors and the auditors/the banks stating that the former dispute the validity of appointment of the Receivers.  Accordingly, some bank accounts could not be operated because of conflicting instructions received from one or more of the directors.  The auditors also refused to release information to the new directors. 

139.  I agree with Ms Chan SC that there is no power under the security documents for the ex-directors to comply with paragraph 1(d). It is for the new directors to give the necessary instructions to the auditors and the banks.

140.  It was only on the 3^rd day of hearing that Mr Barnett submitted a draft amendment to the terms of paragraph 1(d), quite different from the ex parte order obtained but discharged. The new order sought is for the ex-directors to write to the auditors and banks (including Bank of China which was lately discovered) to withdraw previous communications given since 4 June 2014.

141.  The amendment came very late although the evidentiary basis of YDL has not changed.  In my view, it was a clear concession of YDL that the court should not make an order under the existing paragraph 1(d).

142.  The amendment is objected to by Ms Chan SC who, and her clients, understandably did not have time to consider.  Despite that, there is little prejudice to her clients as it is not uncommon for courts, in the course of a hearing, to adjust the proposed terms of an injunction to reflect the justice of the case.  The amendment should be allowed.  Any prejudice can be covered by an appropriate order of costs.

143.  The relief sought under the new paragraph 1(d) is closely tied to others.  The ex-directors might have honestly told the banks and the auditors the truth that they were challenging the Appointment but their acts did have the effect of interfering with the operation of bank accounts and the proper management of YDL (paragraph 1(e) of the summons).  They have also held themselves out as being still in office as directors of YDL (paragraph 1(f) of the summons).  The court has now found against the ex-directors and they should be restrained from similar conduct.

144.  I find there to be a strong prima facie case and there is a high degree that at the trial it will appear the mandatory injunctions (paragraphs 1(a), (c) and (d)) are rightly granted.  For the prohibitory injunctions (paragraphs 1(e) and (f)), there are serious issues to be tried.

M3. Balance of convenience

145.  The risk of injustice in not granting the injunction to enable the new directors to properly manage YDL is greater than any conceivable prejudice to the ex-directors who have been validly removed. The injustice to YDL cannot be properly compensated for by damages, whilst any damage to the ex-directors can be compensated for by money.

M4. Undertaking as to damages

146.  Although YDL is a BVI company, its worth, based on the net asset value of WFOE as at December 2013, is approximately RMB 117m. That is more than sufficient to cover any damages or costs that may be suffered by the ex-directors in the event it is found that the injunction (except para 1(b) of the Summons) should not have been made.

N. CONCLUSION

147.  YDL did not repay the 2^nd and 3^rd installments of the Loan to MSC.  An Event of Default occurred on 17 March 2014.  MSC as lender was justified in enforcing its rights by appointing the Receivers. 

148.  Viewed against the contemporaneous documents, the grounds in opposition to MSC’s enforcement actions were but desperate attempts by a debtor to resist an impossible situation.  The MLO point, the Estoppel Point and the Agency Point are demurrable on their face.  There are no serious issues to be tried to justify an injunction or leave to amend the writ in the 1359 Action. However, there is justification to issue the injunctions (except para 1(b) of the Summons) in the 1341 Action.

149.  On costs, the arguments concerning the 3 Points are relevant to both Actions.  Therefore the costs of the 2 summonses in the 1359 Action and 50% of the costs of the hearing should be to the defendants. 

150.  As for the 1341 Action, the late amendments effectively conceded 2 main objections of Ms Chan SC under paragraphs 1(a) and (d) and YDL should be responsible for costs thrown away.  In addition, paragraph 1(b) is not granted.  On a broad brush approach, there should thus be no costs on the application to amend; costs of the amended summons together with 30% of the costs of the hearing should be in the cause. 

151.  Costs of the ex parte injunction and hearings before Deputy Judge Wilson Chan and Recorder Pow SC should be borne by YDL as the dismissal arose solely out of lack of urgency/secrecy.

152.  I order as follows:

(A) In the 1359 Action,

(1) The summons for an injunction is dismissed;

(2) Save for the addition of paragraphs 5 and 6 to the indorsement of claim, the summons for leave to amend the writ is dismissed.

(3) The amended writ together with the amended statement of claim is to be served within 21 days;

(4) On a nisi basis, costs of both summonses together with 50% of the costs of the hearing be to the defendants to be summarily assessed on 2 December 2014 on the papers.

(B) In the 1341 Action,

(5) There be leave to amend the summons to enclose the draft order on pages 69A to 69E of Bundle 1.

(6) The defendants, whether by themselves, their employees, servants or agents or any of them or otherwise:

a. shall deliver up to the plaintiff at its address c/o FTI Consulting, Level 22, The Centre, 99 Queen’s Road Central, Hong Kong, all of the plaintiff’s assets, including, without limitation, the plaintiff’s books and records, company seals and chops in the defendants’ possession held on behalf of the plaintiff;

b. shall on or before 24 November 2014:

(i) grant access to the plaintiff (acting through Nicholas James Gronow and Fok Hei Yu (“plaintiff’s directors”) or their duly appointed agent(s) in respect of the plaintiff’s business premises at 20/F Sun Feng International Centre, 182 Queen’s Road East, Wanchai, Hong Kong, in order that the plaintiff may inspect the premises, collect its assets or take copies or make arrangements for copying (either at those premises or elsewhere) of documents or computer files relating to the plaintiff.  Such access to be between the hours of 9 am and 9 pm from Monday to Friday;

(ii) give disclosure to the plaintiff of any additional or alternative business premises of the plaintiff; and

(iii) grant access to the plaintiff’s directors or their duly appointed agent(s) in respect of any such additional or alternative business premises of the plaintiff, for the same purposes and in the same manner as prescribed above.

c. shall on or before noon on 24 November 2014:

(i) write to the plaintiff’s auditors, PricewaterhouseCoopers, (copied to the plaintiff) confirming that PricewaterhouseCoopers should

1. should ignore any contrary instructions or communications which the defendants have purported to give, whether directly or indirectly, which conflict with the instructions or communications given by the plaintiff or the plaintiff’s directors since 4 June 2014;

2. should comply with any instructions from the plaintiff or the plaintiff’s directors given since 4 June 2014, including the instructions for release of the accounting documentation; and

3. should henceforth accept the instructions from the plaintiff or the plaintiff’s directors.

(ii) write to the banks at which the plaintiff maintains (or maintained at any time between September 2010 and the present) accounts, including but not limited to HSBC, Bank of China and Standard Chartered Bank (Hong Kong) Ltd, (copied to the plaintiff) confirming that the banks

1. should ignore any contrary instructions or communications which the defendants have purported to give, whether directly or indirectly, which conflict with the instructions or communications given by the plaintiff or the plaintiff’s directors since 4 June 2014;

2. should comply with any instructions from the plaintiff or the plaintiff’s directors given since 4 June 2014; and

3. should henceforth accept the instruction from the plaintiff or the plaintiff’s directors to release information to the plaintiff or to the plaintiff’s directors and to accept instructions from the plaintiff’s directors.

d. shall not interfere with the plaintiff’s relationships with its auditors and its banks.

e. shall not hold themselves out as directors, officers or representative of the plaintiff.

(7) The defendants (or any of them) be at liberty to apply to vary or discharge this order upon giving no less than 48 hours’ written notice to the plaintiff.

(8) On a nisi basis, there be no order as to costs on the application to amend, and the costs of the amended summons together with 30% of the costs of the hearing should be in the cause.

(9) On a nisi basis, costs of the ex parte injunction and hearings before Deputy Judge Wilson Chan and Recorder Pow SC should be borne by YDL to be summarily assessed on 2 December 2014 on the papers.

153.  I thank counsel for their assistance.