LUI CHI YAN v. IP KIN PING AND OTHERS

HCA3553/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3553 OF 2003

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J U D G M E N T

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1. This is an application by the plaintiff for injunctive relief to remain in place until the trial of this action.

Background

2. The 1st and 2nd defendants are brothers. They and the plaintiff were formerly friends and business associates. They operate a factory business, registered in the PRC, called Golden Horse which manufactures and sells chemical products. The plaintiff and the 1st defendant own 40% each of the shares in Golden Horse and the 2nd defendant has 20%. The sole registered owner of Golden Horse is the 3rd defendant, a company incorporated in Hong Kong. The plaintiff is neither a shareholder nor director of the 3rd defendant.

3. The 1st defendant also owns a factory business in the PRC called Shenzhen Lishan Chemicals ("Lishan Chemicals") and a 75% interest in a company called Dencan. The plaintiff has affirmed that the 1st defendant has told him the following. There is a joint venture between Dencan and a large PRC listed company known as Shenzhen Dongjiang Environment Company Limited ("Shenzhen Dongjiang"). The 1st defendant is proposing to sell Lishan Chemicals to Shenzhen Dongjiang and that Golden Horse will be included in the joint venture with Shenzhen Dongjiang. The plaintiff's understanding of the 1st defendant's intentions is not entirely clear but because he is fearful of his interest in Golden Horse being included in the joint venture without his consent or approval he seeks the injunctive relief applied for in this summons, as follows :

"	(a)	each of the 1st and 2nd Defendants be restrained, whether by himself, his servants or agents or otherwise from selling or otherwise disposing of their respective equity interest in 金馬(東莞)化工有限公司(literally translated as Golden Horse (Dongguan) Chemicals Company Limited and referred to hereinbelow as "Golden Horse Chemicals") until after the trial of this action or further order;
	(b)	the 3rd Defendant be restrained, whether by itself, its servants or agents or otherwise from selling or otherwise disposing of the equity interest of respectively the Plaintiff, and the 1st and 2nd Defendants, in Golden Horse Chemicals until after the trial of this action or further order;
	(c)	each of the 1st, 2nd, 3rd Defendants be restrained, whether by himself/itself, his/its servants or agents or otherwise from removing the Plaintiff from his appointment as the Legal Representative of Golden Horse Chemicals, and
	..."

4. Mr Denis Yu, counsel for the plaintiff concedes that at the trial of the action the plaintiff must prove that a partnership existed between himself and the defendants. Absent a partnership he has no cause of action. For the purpose of the injunction therefore he must show that the existence of a partnership (which is denied by the defendants) is a serious issue to be tried and that he has a real prospect of successfully proving it.

5. Mr Rimsky Yuen SC's primary submission is that the plaintiff falls at this first hurdle. If so, that is the end of the matter and the injunction will be discharged.

Is there a serious case to be tried that a partnership exists?

6. It is not for the court to decide issues of fact by reference to affidavit evidence. However a limited investigation should be made into the plaintiff's prospects of success.

7. All the following submissions made by Mr Yuen carry some weight in support of the defence contention that, in reality, the plaintiff's case that there was a partnership cannot be seriously advanced.

(a)	The alleged partnership was never registered as a business either in Hong Kong or the PRC. Whilst it is correct that such a registration is not mandatory to prove a partnership it is the sort of alleged partnership that one would have expected to be registered if for no other reason than to avoid any doubt as to under which law, Hong Kong or PRC, the partnership was formed and was to be operated.
(b)	It is not disputed that Golden Horse is a separate legal entity under PRC law. Also, it is solely owned by a Hong Kong company, the 3rd defendant. Thus, on the face of it, rather than form a partnership, it appears they chose to run the business through a corporate vehicle, registered in the PRC which was in turn owned by another corporate vehicle, registered in Hong Kong. This method of doing business, agreed on by the parties, is not consistent with a partnership agreement. The parties are all experienced businessmen who had adopted such methods before and would thus have appreciated the difference between a partnership and running a business through a limited company.
(c)	A partnership agreement under PRC law must be in writing. Thus any alleged partnership could only be an unregistered partnership under Hong Kong law.
(d)	If a partnership existed the three partners would be jointly and severally liable for Golden Horse's debts. However, Golden Horse's articles of association are not consistent with such an arrangement and neither is the plaintiff's affirmation evidence.
(e)	The 3rd defendant holds the equity interests in Golden Horse on trust for the plaintiff and 1st and 2nd defendants. Again this is inconsistent with a partnership agreement.
(f)	The suggestion of a partnership has emerged for the first time only very recently. Until 23 September 2003 no correspondence referred to a partnership. The parties were consistently referred to as "shareholders" of Golden Horse. On 23 September 2003 the plaintiff's solicitors wrote two letters, one of which was a lengthy one to each of the three defendants. This letter makes no reference to a partnership. A second short letter was sent later the same day which said, for the first time, "as the relationship between our client and Mr Ip Kin Lap is a partnership...".
(g)	The allegation of a partnership is based solely on the plaintiff's bare assertions in his affirmation. There is nothing else in support.

8. The combined effect of these submissions is that the plaintiff's case for a partnership is on the borderline between "no serious case to be tried" on the one hand and a barely arguable case on the other.

9. Erring on the side of caution I proceed on the basis that albeit weak, the case for a partnership is arguable.

10. Consequently, the next issue to be resolved is whether the plaintiff's case for the continuation of the injunctions is sustainable. I will deal with the first and second injunctions together and the third separately.

The 1st and 2nd injunctions

11. The application seeks to restrain the 1st, 2nd and 3rd defendants from disposing of its equity interests in Golden Horse. For three reasons I have decided that it would not be proper to grant this relief. The three reasons are :

(1)	There is no imminent risk of Golden Horse being disposed in this way. Three factors support this contention. Firstly, neither of the formal announcements concerning the sale of Lishan Chemicals to Shenzhen Dongjiang or the proposed joint venture between Shenzhen Dongjiang and Dencan make any reference to Golden Horse. Secondly, Shenzhen Dongjiang has formally stated that it has not entered into any agreement with any of the defendants for the sale of any interest in Golden Horse. Thirdly, and most importantly, Mr Yuen SC on behalf of all the defendants has made a statement in open court, on specific instructions and in order to show good faith, that the defendants have no intentions in the foreseeable future to dispose of any part of the legal entity, business or assets of Golden Horse.
(2)	The plaintiff's case that it is entitled to restrict the 1st and 2nd defendants in disposing of their own interests in Golden Horse is not based on any express agreement, but on an implied term. I do not propose to go into the well-established conditions for establishing the existence of an implied term. It is sufficient to say that the plaintiff faces an uphill task in establishing such an implied term.
(3)	Damages would be an adequate remedy. Should the plaintiff's speculative fear about the future of his 40% share in Golden Horse become a reality it could be compensated by damages. In view of the defendants' clear statement in open court concerning their intentions concerning Golden Horse it would be difficult for them to resist such a claim should they, in the foreseeable future, act in breach of it.

12. Moreover, the present reality is not consistent with the plaintiff's speculative fear. The defendant's do not challenge the plaintiff's 40% interest in any way. Should he, in fact, end up in a joint venture with a third party, the purpose of such a venture would plainly be to make money, not lose it. In any event, the plaintiff has never been a majority shareholder of Golden Horse and to grant the injunctions would be akin to giving him such control which would normally only be exercisable by a majority, not a minority, shareholder.

The 3rd injunction

13. This seeks to restrain the defendants from removing the plaintiff as Golden Horse's legal representative.

14. Such a restraint would give the plaintiff a status of permanent legal representative to which he is not entitled. Article 15 of the company's articles of association give the directors power to remove and replace such an office. The plaintiff was a party to the articles and is bound by them.

15. It is the plaintiff's case that the second injunction is necessary for the purpose of putting the 1st and 2nd injunctions into effect. However, in view of paragraphs (1) and (3) above, in relation to the 1st and 2nd injunctions such a necessity is illusory.

16. In all the circumstances I discharge the injunctions and make an order nisi that the defendants' costs be in the cause.