VELATEL GLOBAL COMMUNICATIONS INC AND ANOTHER v. CHINACOMM LTD AND OTHERS

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

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D E C I S I O N

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1.  The Plaintiffs apply for continuation of 2 ex parte Mareva injunction orders, whereas the Defendants apply for their discharge on the ground of material non-disclosure.

SUBJECT MATTER OF THE INJUNCTIONS

2.  The Injunction Orders seek to freeze assets of D1 (Chinacomm), D4 (Smart Channel) and D10 (Feng Xiao Ming) up to US$4,749,599 (“the US$4.7 million”), including money in 3 bank accounts (collectively “the subject accounts”):

(i)  368-0080-9447 held by D1 (“the Chinacomm Account 1”);

(ii)  368-0042-3379 held by D1 (“the Chinacomm Account 2”); and

(iii)  368-0080-9455 held by D4 (“the Smart Channel Account”).

It is the Plaintiffs’ case that items (i) and (iii) had to be operated jointly by Mr Colin Tay of the Plaintiffs and Qiu Ping (D6) (“the double signature arrangement”).  However, D1/Qiu Ping wrongfully changed the signatory arrangement and removed the bulk of the US$4.7 million.  The 2^nd Injunction Order is against D10 to whom part of the funds were transferred.

BACKGROUND

3.  This action is essentially a dispute between foreign investors (the Plaintiffs) and Mainland domestic entities (the Defendants) over a joint venture investment in D1 which is a Cayman Islands company.  P1 is a United States listed company engaging in telecommunication business.  It was formerly known as Mortlock Ventures Inc and ChinaTel Group Inc.  P2 is a Hong Kong company.  Colin Tay was and is president of P1 and authorized representative of the corporate director of P2.  He was and is the person in control and ownership of P2.  At all material times, he was the central figure in the Plaintiffs’ camp.

4.  Qiu Ping was the central figure in the Defendants’ camp.  D1 was used by D6 to D8 as a special purpose company for the implementation of the joint venture between Colin Tay and Qiu Ping’s camps.  The relationship of the Defendants is tabulated as follows:

Defendant	Director/officer	Shareholders
D1 (Chinacomm)	D6, D7	D2 &D3 (51%)
D2 (company)	D7	D5 (nominee of D6-8)
D3(company)	Qiu Ping	D5 (nominee of D6-8)
D4 (Smart Channel)	D7	D1
D5 (person)
D6 (Qiu Ping)
D7 (Yuan Yi)
D8 (company) Licence holder	D6 as president; D7 as legal representative and director; D10 as director
D9 (company)	D10 as legal representative	D8 holds 60%
D10 (person)

(The highlighted Defendants will feature significantly in this Decision.)

5.  The parties’ relationship originated from negotiations between Colin Tay and Qiu Ping to develop and operate 3.5 GHz spectrum wireless broadband services in 29  major cities in Mainland China (“the Project”).  It culminated in an agreement, in broad terms, whereby Colin Tay’s camp was to purchase up to 49% equity interest in D8 at a consideration of US$196 million and then have the shares of D1 floated.  The intention was for Colin Tay’s camp to provide, amongst others, financial resources, and D8 to provide the licences to operate wireless broadband network.

6.  Anyway, the intention was for funds from D1 to flow to its wholly owned subsidiary, Smart Channel (D4), and then to Yunji, a Chinese wholly owned foreign invested enterprise (“WOFIE”) engaging in telecommunication business. The profits made by D8 (the licence holder) would be indirectly transferred to a WOFIE and further absorbed by Colin Tay’s camp (49%) and Qiu Ping’s camp (51%) through D1.  This indirect method of absorbing profits was used to get round the complicated legal restrictions against foreign investments in the telecommunications industry imposed by the Chinese government and to enable parties to achieve the listing of D1 on a stock exchange as agreed.

7.  Initially there was a Build to Suit Agreement (“BSA”) dated 1 November 2007 setting out the broad terms of the joint venture.  It was made between a company (“Trussnet Delaware”) from Colin Tay’s camp and D8.  At that time, D8 held 2 licences issued by Ministry of Industry and Information Technology, namely,

(i)  a licence for 5 cities which would expire on 31 December 2008 (“the 5 Cities Licence”); and

(ii)  a licence for 25 cities which would expire on 29 February 2008 (“the 25 Cities Licence”). 

Of these, one city (Qingdao) overlapped with the 5 Cities. Therefore, at the date of the BSA, D8 held licences covering a total of 29 cities in Mainland China.

8.  The parties subsequently entered into various agreements to govern the joint venture and the subscription for the shares in D1:

(i)  TDFA: an addendum to the BSA called the framework agreement (“TDFA”) dated 15 February 2008. It was made between Trussnet Delaware and D8.  The former was to subscribe for 49% equity of D1.

(ii)  TNFA: another framework agreement dated on 7 April 2008 between Trussnet Nevada and D8, to replace the TDFA.

(iii)  GSSA: a Subscription and Shareholders’ Agreement dated 23 May 2008 between Gulfstream Capital Partners Ltd (said to be 100% owned by P1) as investor, D2 and D3 as founders, D1 as the Company, D6 and D7 as guarantors and D8 and D9 as warrantors. 

(iv)  Supplementary Agreement: dated 17 November 2008 made between Trussnet Nevada and D8 to amend the GSSA.

(v)  TCPSSA: another Subscription and Shareholders’ Agreement dated 16 February 2009.  Save that P2 replaced Gulfstream, the other parties to this agreement were the same as those of the GSSA.

(vi)  Addendum to Subscription and Shareholders’ Agreement dated 16 February 2009 between P2 and D8 to supplement the terms of the TCPSSA.

For easy reference, the material terms of these agreements are set out in the Annexure to this Decision, and are in bold print whenever referred to in this Decision.

9.  Some features of these agreements concerning the parties, payment structure, signatory rights and timing need to be highlighted. 

10.  Insofar as parties were concerned, Colin Tay’s camp used various entities (Trussnet Delaware, Trussnet Nevada, Gulfstream, and P2) to enter into those agreements, but P1 never appeared as a party.  P2 only appeared as a party to the TCPSSA and the Addendum. 

11.  Insofar as payment structure was concerned, the terms governing the dates of payment and the amount of each tranche of the US$196 million had been changed from agreement to agreement.

12.  Insofar as signatory rights were concerned, in Article 1(b) of both the TDFA and TNFA, each of Trussnet and D8 was required to appoint one person as bank signatory of the bank accounts of inter alia D1, Smart Channel (D4) and Yunji after the first US$5 million (“the First Payment”) had been made to D1.  Article 1 of the Supplementary Agreement likewise contained a term for payment of part of the subscription price to a bank account jointly controlled by the parties.

13.  Insofar as timing was concerned, when the TDFA was executed and as all the parties were aware, the 25 Cities Licence would expire in half a month’s time on 29 February 2008.  The TNFA was entered into after expiry of the 25 Cities Licence. 

14.  Indisputably, pursuant to the TCPSSA, on 23 February 2009, D1 issued a share certificate to P2 (“the Share Certificate”), representing 2,450,000,000 (49%) shares of D1, even though a very substantial part of US$191 million remained unpaid.  On the same day, P2 signed 2 notes (“the 2 Notes”), one to acknowledge that the Share Certificate was borrowed, the other agreeing to pledge to D1 the shares representing the unpaid balance of the subscription price.

15.  As background information, the First Payment had been made in tranches in March/April 2008 to Chinacomm Account 2 and by cash, before the GSSA was signed.

THE PLAINTIFFS’ CASE AT THE STAGE OF THE EX PARTE INJUNCTIONS

16.  According to Colin Tay, he was allegedly told in early 2010 that D1 was in need of funds to meet government deadlines.  If those deadlines were not met, the licences could be revoked.  So Colin Tay negotiated with Qiu Ping in good faith to find a way to save the Project and the Plaintiffs’ investment. 

17.  According to Colin Tay, Qiu Ping’s camp had never satisfactorily accounted for expenditure of the First Payment.  So he, on behalf of the Plaintiffs, and Qiu Ping on behalf of D8, orally agreed for the Plaintiffs to inject “another US$5 million in tranches as equity to Chinacomm Limited, with the condition that new bank accounts of Chinacomm Ltd and Smart Channel would be established with the double signature arrangement”.  The money was for the specific purpose of using in the joint venture.  The Plaintiffs were funding the investment ahead of deadline because D8 had not yet renewed the licences for 29 cities as required by Article 3.2(b) of the TCPSSA[1].

18.  It is not in dispute that the Chinacomm Account 1 and Smart Channel Account were first set up in April 2010 and were subject to a double signature arrangement, with Colin Tay and Qiu Ping being the signatories.  Nor is it disputed that the US$4.7 million was paid in tranches in April to June 2010 by Colin Tay’s camp into the Chinacomm Account 1.  What was in dispute was the underlying agreement.  Colin Tay claimed that the 2 Accounts were opened pursuant to the oral agreement.

19.  Apart from the US$4.7 million, no other party had put funds into Chinacomm Account 1.

20.  In November 2011, Colin Tay learnt from the Bank that he was removed as an authorized signatory of Chinacomm Account 1.

21.  On 18 November 2011, the Plaintiffs obtained an ex parte Mareva injunction against D1, D2, D3, D6 and D7 (the 1^st Injunction Order) from Deputy Judge L Chan (as he then was).  D1, D6 and D7 were ordered to disclose by affidavits the details of the subject accounts, any other accounts under their names, details of fund movements and payees.

22.  It transpired that without notification to the Plaintiffs, Qiu Ping and Yuan Yi (D7) convened a board meeting of D1 on 24 May 2011 and removed Colin Tay’s signatory rights from Chinacomm Account 1.  Less than a month later, on 21 June 2011, Qiu Ping as sole signatory transferred US$4.5 million to the account of Feng (D10) in DBS Bank. 

23.  On 8 December 2011, the Plaintiffs obtained ex parte from Deputy Judge Lok the 2^nd Injunction Order against D10 to freeze his assets up to US$4.5 million.  D10 was ordered to disclose by affidavit, the purpose and movements of the US$4.5 million.

24.  This is the substantive hearing for the continuance of the 1^st and the 2^nd Injunction Orders.  The Defendants, however, apply to discharge them on 4 principal grounds:

A.  Material non-disclosure;

B.  Lack of serious issues to be tried or good arguable case;

C.  Lack of risk of dissipation of assets; and

D.  Balance of convenience.

SECTION A  MATERIAL NON-DISCLOSURE

The legal principles

25.  There is no dispute on principles.  An applicant must make full and frank disclosure in an ex parte application.

“On any ex parte application, the applicant must proceed with the highest good faith. The fact that the court is asked to grant relief without the person against whom the relief is sought having the opportunity to be heard makes it imperative that the applicant should make full and frank disclosure of all material facts …” Hong Kong Civil Procedure 2012, Vol 1, para 29/1/39.

26.  What is material is for the judge to decide.  Suppression of material facts will cause the court to discharge an ex parte order without going into the merits. 

“(1) The duty of the applicant is to make “a full and fair disclosure of all the material facts:” sec Rex v. Kensington Income Tax Commissioners, Ex parte Princess Edmond de Polignac [1917] 1 K.B. 486, 514, per Scrutton L.J.

(2)  The material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers: see Rex v. Kensington Income Tax Commissioners, per Lord Cozens-Hardy M.R., at p. 504, citing Dalglish v. Jarvie (1850) 2 Mac. & G. 231, 238, and Browne-Wilkinson J. in Thermax Ltd. v. Schott Industrial Glass Ltd. [1981] F.S.R. 289, 295.

(3)  The applicant must make proper inquiries before making the application: see Bank Mellat v. Nikpour [1985] F.S.R. 87. The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such inquiries.

(4)  The extent of the inquiries which will be held to be proper, and therefore necessary, must depend on all the circumstances of the case including (a) the nature of the case which the applicant is making when he makes the application; and (b) the order for which application is made and the probable effect of the order on the defendant: see, for example, the examination by Scott J. of the possible effect of an Anton Piller order in Columbia Picture Industries Inc. v. Robinson [1987] Ch. 38; and (c) the degree of legitimate urgency and the time available for the making of inquiries: see per Slade L.J. in Bank Mellat v. Nikpour [1985] F.S.R. 87, 92-93.

(5)  If material non-disclosure is established the court will be “astute to ensure that a plaintiff who obtains [an ex parte injunction] without full disclosure ... is deprived of any advantage he may have derived by that breach of duty:” see per Donaldson L.J. in Bank Mellat v. Nikpour, at p. 91, citing Warrington L.J. in the Kensington Income Tax Commissioners’ case [1917] 1 K.B. 486, 509.

(6)  Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper inquiries and to give careful consideration to the case being presented.

(7)  Finally, it ‘is not for every omission that the injunction will be automatically discharged.  A locus poenitentiae may sometimes be afforded’: per Lord Denning M.R. in Bank Mellat v. Nikpour [1985] F.S.R. 87, 90.  The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms

‘when the whole of the facts, including that of the original non-disclosure, are before [the court, it] may well grant … a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed:’ per Glidewell L.J. in Lloyds Bowmaker Ltd. v. Britannia Arrow Holdings Plc.”

In Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1356F-1357F, per Gibson LJ.  See also Gee on Commercial Injunctions,5^th ed, at p 241.

27.  In considering what matters should be disclosed to the court, the test is whether the facts are relevant to the exercise of the discretion, regardless of whether they are relevant to the merits of the claim, and irrespective of whether the matters, if disclosed, would have caused the court to refuse to grant the ex parte application.  The court was not concerned with whether the matters not disclosed would, if they had been disclosed, have caused it to refuse to grant the ex parte order.  The test was whether the court should have these matters in the weighing scales: Standard Chartered Securities Ltd v Lai Arthur & ors [1993] 1 HKC 375,at 380-381.

28.  The test of materiality is objective.

“The duty extends to placing before the court all matters which are relevant to the court’s assessment of the application, and it is no answer to a complaint of non-disclosure that if the relevant matters had been placed before the court, the decision would have been the same. The test as to materiality is an objective one, and it is not for the applicant or his advisers to decide the question; hence it is no excuse of the applicant subsequently to say that he was genuinely unaware, or did not believe, that the facts were relevant or important. All matters which are relevant to the ‘weighing operation’ that the court has to make in deciding whether or not to grant the order must be disclosed.” (Gee on Commercial Injunctions,5^th ed at para 9.002)

29.  The materiality of matters undisclosed or misstated, if relevant, will depend on the importance of the facts to the issues which were to be decided by the judge on the ex parte application: Pacific Base Services Ltd & Anor v Silver Gain Development Ltd & ors [1996] 1 HKC 610at 617I-618A.

30.  The duty to disclose cannot be fulfilled by simply exhibiting voluminous documents mentioned in the supporting affidavit without making any distinct reference to the points in the body of the affidavit itself or when addressing the judge at the hearing: Standard Chartered Securities Ltd v Lai Arthur, page 388Gfollowed in Rever (AMA) Salon Ltd v Kung Wai For Danny & others [2001] 1 HKC 241, 246E-F.

31.  Where there has been material non-disclosure in an ex parte application, the practice of the court is to discharge the order without going into the merits: R v Kensington Income Tax Commissioners, ex parte de Poliganc [1917] 1 KB 486, 514-515;Manor Electronics Ltd & Anor v Dickson & ors [1988] RPC 618at 624.

The bases of the Plaintiffs’ application before Deputy Judge L Chan

32.  At the ex parte stage, the causes of action endorsed on the writ of summons were: (i) breach of the TCPSSA by unilaterally removing Colin Tay as an authorized signatory to Chinacomm Account 1; and (ii) breach of the “agreements under the joint venture” by failure to secure the licences.

33.  In the 1^st affirmation of Colin Tay (which constituted the supporting affirmation for the 1^st Injunction Order), the 4 incidents of breach could be summarized as:

(i) Refusal to implement the double signature agreement in the TNFA;

(ii) Failure to produce valid 3.5GHz wireless broadband licences;

(iii) Unilaterally selecting equipment supplier; and

(iv) Removing Colin Tay as an authorized signatory to Chinacomm Account 1.

34.  At the ex parte hearing, it was only item (iv) that the Plaintiffs relied on in their skeleton and oral submissions (page 8R-9E of the transcript). There was no exchange between the Court and the Plaintiffs’ counsel relating to the legal bases of the causes of action. 

35.  Deputy Judge L Chan confirmed that the Plaintiffs were not relying on “all these other things about misrepresentation, about breach of warranty to renew a license or forged license …” (page 9F of the transcript).  He granted the 1^st Injunction Order solely on the basis of breach of the double signature arrangement (page 12R-T of the transcript).

36.  The statement of claim filed subsequent to the ex parte hearing relied also on other causes of action.  For the purpose of this discharge application, those additional causes should be disregarded.

The alleged non-disclosure

37.  In substance, Mr Scott SC’s submission is that the Plaintiffs had failed to draw to the Court’s attention material contractual provisions which contradicted Colin Tay’s assertion of an oral agreement, his case of “no licence, no payment”, and showed the Plaintiffs’ breach of various contractual provisions.  Mr Scott SC submits that the non-disclosure was such as to undermine the Plaintiffs’ causes of action and demonstrate that it was inappropriate for the Court to grant the Injunction Orders.  These alleged non-disclosed facts will be analyzed in accordance with the following topics:

A1.  The double signature arrangement (paras 38-52 below);

A2.  No licence, no payment (paras 53-74 below);

A3.  Failure to exhibit the note of borrowing and pledge note (paras 75-78 below);

A4.  Failure to disclose P2’s sale of shares in D1 to P1 (paras 79-84 below);

A5.  Failure to disclose P2’s assignment to P1 (paras 85-91 below);

A6.  Failure to disclose the agency relationship between the Plaintiffs (paras 92-95 below);

A7.  Failure to disclose the Plaintiffs’ financial inability to pay the balance of the subscription price (paras 96-97 below);

A8.  Failure to disclose that the Defendants have various defences and a counterclaim for return of the 49% shares (paras 96-97 below).

A1.  Non-disclosure in respect of the double signature arrangement

38.  Colin Tay alleged in his 1^st affirmation that despite the express provision in Clause 1b of the TNFA which provided that each of Trussnet Nevada and D8 shall appoint one person as bank signatory of D1, D8 and WOFIE after the First Payment has been made, D8 had been refusing to implement the double signature arrangement.  Colin Tay asserted that this was an incident of breach of the TNFA and the TCPSSA[2].

39.  The following non-disclosure was not disputed:

(i)  The TNFA had been superseded by the GSSA[3]. However, in my view, it was apparent that Deputy Judge L Chan was not misled. He knew the Framework Agreement(s) were signed “very earlier on” and then the TCPSSA signed in February 2009 “was only a replacement of the previous one” (page 9H-K of the transcript).

(ii)  The TCPSSA did not contain a provision for double signature arrangement[4]. Its Article 26.1 stated that the TCPSSA contained the entire agreement between the parties and superseded any prior agreements and arrangements, whether or not in writing, between the parties in relation to subject matter of the TCPSSA.  Hence any earlier double signature arrangement would have been superseded.

(iii)   The Plaintiffs were not parties to the TDFA or TNFA. They had no right to sue for any breach of the double signature arrangement thereunder. Similarly, only P2 was a party to the TCPSSA and P1 has no cause of action thereunder.

40.  The undisclosed facts under (ii) and (iii), if made known, might cause the Court to query whether the double signature arrangement had been waived, or whether there could have been an oral double signature arrangement amidst the series of written agreements.  I am of the view that if the Injunction Orders were obtained solely to pursue a cause of action for refusing to implement the double signature arrangement under the TNFA and TCPSSA, they must be discharged. 

41.  However, the Plaintiffs did not just rely on one cause of action.  They also relied on the failure to renew licences, D8’s unilateral selection of equipment of supplier and secret removal of Colin Tay’s signature authority. As will be seen in Section B below, these causes of action did raise serious issues to be tried.

42.  Mr Scott SC queries how the oral double signature arrangement in respect of such a substantial sum as US$4.7 million could have arisen.  He submits that P2 had breached a prior obligation to pay the balance of the Subscription Price. Article 3.2 of the TCPSSA envisaged payment to be made for the 49% shares.  Once payment was made, D1 did not have to share control with the Plaintiffs since they were not on the board of D1.  Therefore, viewing the parties’ conduct objectively, Mr Scott SC submits that the US$4.7 million must have been part of the Subscription Price.  Mr Scott SC also submits that Deputy Judge L Chan had granted the 1^st Injunction on the basis of breach of the TNFA and TCPSSA.  The Plaintiffs’ current position is reprobation from that taken before Deputy Judge L Chan.

43.  With respect to Mr Scott SC, he has confused 2 parts to the Plaintiffs’ case summarized in paragraph 33(i) and (iv) above.  The 1^st part formed background to the Plaintiffs’ case.  It was the 2^nd part relating to the distinct oral double signature arrangement that Deputy Judge L Chan made the 1^st Injunction Order.  Leaving aside the question of whether the Plaintiffs were in breach of a prior obligation to pay (see Section A2 below), the pertinent question to ask was whether the double signature arrangement was capable of belief.

44.  Qiu Ping’s version of how the accounts under the double signature arrangement were opened was as follows.  He claimed that Colin Tay did not ask for joint signatory rights for the First Payment for he was well aware that all the money received was properly disbursed to meet the overheads and day-to-day operation of the Project.  He claimed that Colin Tay kept on giving empty promises as to payment of funds.  A promise was made on 11 May 2010 that US$15 million would go into the Chinacomm Account 1 by 30 June 2011[5]. According to his 4^th affirmation (para 11), after the Share Certificate was borrowed and pledged, in early January 2010, Colin Tay promised that he would pay US$30 million instead of the whole US$50 million to Qiu Ping before March 2010 as part payment of the outstanding Subscription Price. As the Project was in need of funding, Qiu Ping agreed and on that basis accepted him as one of the joint signatories to the Chinacomm Account 1 and Smart Channel Account.  Qiu Ping said that he made it clear to Colin Tay that his right of joint signatory to Smart Channel’s Account and that of Yunji’s account was conditional upon his paying in full the US$30 million but not any lesser amount.  However, Colin Tay breached his promise and paid only US$4.7 million.

45.  This explanation was incredible in the light of the objective circumstances.  Of the 3 subject accounts, Chinacomm Account 2 was mentioned in the agreements and was the account into which the First Payment was made.  If the Subscription Price was already due, Colin Tay could have been asked to pay into Chinacomm Account 2 solely under the control of D1.  There was no need to set up 2 new accounts, 2 years after the joint venture had started, to receive the US$4.7 million.  Colin Tay was not a director of Chinacomm.  That he was made a signatory to the Chinacomm Accounts and Smart Channel Accounts clearly reflected some separate agreement with Qiu Ping/D1/D8.

46.  The TCPSSA provided for how the First Payment already paid was to be treated as part of the Subscription Price, but no written agreement provided for why the US$4.7 million should be paid and how it should be dealt with.  For over a year, the US$4.7 million had sat in the Chinacomm Account 1 despite Qiu Ping’s alleged need to obtain funds to operate the Project. 

47.  In his 9^th affirmation, Colin Tay clarified what he meant by “the Plaintiffs shall inject another US$5 million in tranches as equity to [D1].”  He said he meant an injection of capital to keep the WOFIE going.  The injection of this US$5 million was not written down in any agreement between the parties.  It was not part and parcel of the Subscription Price because the Defendants had failed to renew the licences by then.  Payment was ahead of schedule. Moreover, there were outstanding issues (such as vendor selection) to deal with.  As can be seen under Section A2 below, his views were tenable.

48.  Mr Chan, counsel for the Plaintiffs pointed out that even Qiu Ping relied on oral promise of Colin Tay to pay US$15 million (Qiu Ping’s 1^st affirmation); and US$30 million (Qiu Ping’s 4^th affirmation).  It was thus not surprising that parties might have oral arrangements between them from time to time.

49.  Viewing these circumstances, the oral double signature arrangement as alleged by Colin Tay was capable of belief and at least raised a serious issue as to its existence for the Court to try. 

50.  Qiu Ping’s explanation as to why funds were withdrawn was equally incredible.  In May 2011, the expiration of the 12 Cities Licence drew nearer. Allegedly experiencing the same pain of unfulfilled promise of payment, and receiving market information that Colin Tay had exploited the Defendants’ trust and used the Share Certificate to borrow to enable him to take control of a US listed company, Qiu Ping decided to terminate the relationship with Colin Tay.  Qiu Ping said the first thing he did was to cancel his signing right to the Chinacomm Account 1.

51.  Mr Scott SC submits that the double signature arrangement was not irrevocable.  He may well be correct but there was no agreement to have it revoked either.  Nor was there evidence of notice of revocation to Colin Tay’s camp.  Colin Tay said he discovered the revocation of the signing rights some 6 months after the withdrawals rather than being informed about any termination. His people had worked at D8’s office until they were told to leave in October 2011.  In my view, even if there had been termination of relationship, should not Qiu Ping clarify how to dispose of the US$4.7 million before unilaterally removing the same?

52.  Having regard to the analyses in Section A1, it can be seen that the non-disclosure in paragraph 39(ii) and (iii) was not material.  Deputy Judge L Chan could not be faulted.  He decided what was material.  He was aware of the Plaintiffs’ bases for application, ie loss of double signature arrangement to operate the 2 accounts.  There is no reprobation from the position before Deputy Judge L Chan.

A2.  No licence, no payment

53.  The Plaintiffs’ case was that the pre-condition for payment was D8’s renewal of licences (“the pre-condition”).  The Defendants denied and claimed that it would be essential for the required funds to be available to prove the financial ability of D8 to continue with the Project, before the licences could be renewed.  Colin Tay was allegedly aware of this because at the time the TNFA was entered into, both camps knew that the 25 Cities Licence had already expired.  Mr Scott SC submitted that this was highly indicative of Qiu Ping’s case.  But the Plaintiffs had breached prior obligations to pay.  Mr Scott SC’s arguments under this head are that:

A2.1  The Plaintiffs’ case was contradicted by terms in the various agreements, to which the Court was not referred during the ex parte hearing;

A2.2 P2 was in prior breach of agreement in failing to arrange for a US$3-5 million loan, rendering it unnecessary for the Defendants to discharge their obligation in getting renewal of the licences.

A2.1  The Plaintiffs case was contradicted by terms in the various agreements, to which the Court was not referred during the ex parte hearing

54.  Mr Scott SC relies on the provisions in the BSA, TDFA, TNFA and GSSA to show that the pre-condition did not exist.

55.  With respect to Mr Scott SC, the governing agreements at the time of payment of the US$4.7 million were the TCPSSA and the Addendum. The provisions in the preceding agreements could not be material to the injunction application, but I will deal with them for completeness’ sake.

56.  In the BSA, it is true that Article 6.03 provided that D2 shall assume the responsibility of obtaining licences but it was not expressed to be the pre-condition.  Recital O provided that D1 should first be provided with a US$10 million line of credit before the addendum to agreement could be entered into.  However, the BSA only set out the parties’ agreement in broad terms.  Further negotiation of terms of cooperation was anticipated and there had been various specific agreements entered into subsequently.  Mr Scott SC’s reliance on Recital O was misplaced because clause 4(a) of the TDFA provided that Recital O and the relevant provisions of the BSA shall be void.

57.  The TDFA and TNFA did not contain the pre-condition.

58.  The GSSA contained the pre-condition.  Paragraph (j) of Schedule 3 to the GSSA permitted oral approval of the renewal of the licences.  According to Qiu Ping, paragraph (j) had been fulfilled when, in June 2008, one Mr Xie of the Science and Technology Committee of the Ministry responsible confirmed to Colin Tay, his legal advisers and Qiu Ping that renewal of the 12 Cities Licence would not be a problem because construction works had started.  It would be imperative to start construction works for the remaining 17 cities or else the licence might not be renewed.  It was in this context that the Supplementary Agreement was entered into[6].

59.  Mr Scott SC refers to clause 4.7 of the GSSA and submits that D1 only had to provide to Gulfstream the documentary evidence in relation to the valid renewal of Chinacomm’s 3.5G licences within 90 business days from the Completion Date, ie well after payment by GSSA.

60.  I accept that the GSSA contradicted Colin Tay’s assertion of no licence, no payment.  However, the GSSA had been overridden by the Supplementary Agreement which contained the pre-condition.

61.  Article 1(b) and 2 of the Supplementary Agreement clearly stipulated for payment after the licences “have been duly renewed and all open issues between the parties have been mutually agreed”.  Faced with this clear provision, Mr Scott SC pointed to Article 4 and contended that the intention was for D1 to receive US$50 million first by the end of November 2008 before it was required to renew the licences by the end of December.  The joint signatory right would kick off only if Colin Tay paid the US$50 million but Colin Tay never did, despite being aware that funds were essential to have the licence renewed. 

62.  I set out Article 4 of the SupplementaryAgreement in full:

“This Agreement shall be void immediately as if it was never executed if (a) the Investor failed to provide evidence that US$50,000,000 has been received by the end of November 2008, or (b) the Investor [Gulfstream] failed to transfer US$50,000,000 to a bank account that jointly controlled by the parties in accordance with Article 3.2(b) as amended in Article 1 hereinabove; (c) Chinacomm failed to obtain the renewal of the 3.5G licenses by the end of December 2008…” (emphasis added)

63.  With respect to Mr Scott SC, he had left out sub-Article 4(b). That sub-Article stipulated for payment to be made “in accordance with Article 3.2(b) as amended in Article 1”, ie when “the 3.5G licences of [D8] have been duly renewed and all open issues between the Parties have been mutually agreed.”  Article 4(b) should also be read with Article 2, which obliged D8 to deliver to P2 (a) evidence for the renewal of the 3.G licences; and (b) the Share Certificate after the renewal.

64.  The correct sequence of events under Article 4 would be for P2 to show it was in receipt of funds (not to pay D1/D8) by November 2008.  Then Chinacomm shall have licences renewed by December.  After that, payment shall be made. Since D8 had failed to renew the licences by December, the Supplementary Agreement would have been void under Article 4.  These Articles support “no licence, no payment”. 

65.  Next came the governing TCPSSA.  Clause 3.2 of the TCPSSA clearly stipulated for payment of the Subscription Price within 35 days after the licences of Chinacomm have been renewed in accordance with paragraph (j) of Schedule 3 of the TCPSSA.

66.  The Plaintiffs alleged that the Defendants were in breach of (i) clause 6.2; and (ii) clause 4.2 of Part 2 of Schedule 4 to the TCPSSA in that the Warrantors (D8 and D9) were not able to renew the licences of the 29 Cities. Colin Tay has set out in his 1^st affirmation (paras 24-31) the various licences with which he was provided.  There was a 5 Cities Licence valid up to 31 December 2008.  In early 2009, there was a copy licence dated 12 February 2009 for 29 cities for 5 years about to be awarded shown to Colin Tay.  (There was a dispute between the 2 camps as to who was responsible for forging this licence which need not be resolved here.)  The latest licence was dated 17 July 2009 for only 12 cities for 2 years, and nothing more thereafter. 

67.  The Plaintiffs’ case of “no licence, no payment” was consistent with contractual provisions since the GSSA.  There was no breach of prior obligation to pay as submitted by Mr Scott SC.

68.  Colin Tay further denied that he was ever told about the risk of not having the licences renewed if funds were not available to show to PRC authorities. He pointed out that without financial backing, D8 or its predecessor had obtained the licences for a number of cities from 2002 to 2009.  It was thus complete nonsense to say that in order to seek renewal of the 29 Cities Licence it was essential for D8 be put in funds from the Plaintiffs.

69.  In my view, the need for the Plaintiffs to come up with funds should be determined by the parties’ agreement and not Colin Tay’s awareness of a situation.  Having regard to the contractual provisions referred to in Section A2, I am satisfied that the pre-condition existed but was not fulfilled at the time the US$4.7 million was paid.  The non-disclosure was immaterial and, even if the relevant facts were disclosed, they would not have affected the Court’s decision.

A2.2  Plaintiffs were in prior breach of an agreement in failing to arrange for a US$3-5 million loan, rendering it unnecessary for the Defendants to discharge their obligation in getting renewal of the licences

70.  It is the Defendants’ case that the Plaintiffs had failed to disclose the breach of a prior obligation under Article 6 of the Addendum. Article 6 provided for P2 to arrange a loan of US$3 to 5 million for D8 before 15 March 2009.  Mr Scott SC submits that the tight deadline of 15 March 2009 could have expired even before the Completion Date and that meant the parties had agreed that P2 shall arrange funding for D8 even before D8 should perform its obligations concerning the licences.  What P2 had purportedly arranged could be seen in a letter dated 8 May 2009, well after the deadline, contents of which did not in any way assist the arrangement of the loan.  Colin Tay admittedly[7] failed to bring the breach of this prior obligation to the attention of Deputy Judge L Chan although he had exhibited this document.

71.  Qiu Ping also stated, in his 1^st affirmation, that “the subsequent payments starting from 26 April to 21 June 2010, if they were loan pursuant to this obligation, came too little and too late.”  He said the Defendants could and did treat the TCPSSA as repudiated, rendering it unnecessary for the Defendants to perform their part of the obligations.

72.  Colin Tay denied that there was a breach of obligation.  The parties also disputed as to whether the credit line eventually obtained by D8 was the result of the Plaintiffs’ arrangement. 

73.  It is not necessary to resolve these disputes here.  Article 6 of the Addendum obliged P2 to arrange a loan.  Qiu Ping never asserted that the US$4.7 million was in purported discharge of the obligation under Article 6. In fact, the Defendants’ case[8] was that the US$4.7 million must be part of the Subscription Price for the 49% shares.  Moreover, there was no evidence that Qiu Ping had purported to terminate the TCPSSA or Addendum at any stage on the ground of the Plaintiffs’ breach of the obligation under Article 6.  The parties’ relationship had continued until 2011.  Qiu Ping cannot say that the Defendants were discharged from the obligation to renew the licences.

74.  I find that non-disclosure of the breach, if at all, of the prior obligation to arrange a loan was plainly immaterial to the injunction application.  I find that the Plaintiffs had ample contractual backing to say “no licence, no money.”  These findings reinforce my view on the credibility of the oral double signature arrangement.

A3.  Failure to exhibit the note of borrowing and pledge note (“the 2 Notes”)

75.  It was not in dispute that although Colin Tay had disclosed to the Court the issuing of the Share Certificate and the pledge of shares, he had failed to disclose the fact that the Share Certificate was borrowed from D8.  He also failed to disclose:

(i)  The 2 Notes;

(ii)  The contractual terms giving rise to the pledge; and

(iii)  The fact that, if the balance of the Subscription Price was not paid, D1 was entitled to withdraw the shares corresponding to the unpaid proportion.

76.  Mr Scott SC submits that the non-disclosure would evidence that P2 was not a shareholder of D1 and hence did not have the right to claim proprietary interest in the money sitting in the frozen accounts.

77.  The terms in the pledge note were as follows:

“[P2] may transfer the 49% shares to a third party upon a written notice to [D1] and the execution of an agreement among [D8], [P2] and the transferee. The transferee of the shares shall resume (sic) the rights and obligations of [P2] under the [TCPSSA], the Addendum and this note. …

[P2] shall not make other disposal of the pledged shares until the release of such shares (or any part of such shares), which shall take place proportionately to the payment of subscription price. Chinacomm may withdrawn (sic) the shares that corresponding (sic) to the outstanding subscription price in case [P2] failed to comply with the payment schedule set forth in the [TCPSSA] and any revised schedule agreed by [D1] thereafter.” (emphasis added)

The contractual terms in Article 3 of the Supplementary Agreement to the GSSA and Article 4 of the Addendum were in the same vein.

78.  I am unable to see how the borrowing, the pledge and failure to exhibit the 2 Notes would affect the Plaintiffs’ ownership of the shares.  Under Articles 4.1 and 4.2 of the TCPSSA, P2 was to become the owner of the shares on closing.  Article 1 of the Addendum fixed the closing date as 16 February 2009.  Accordingly P2 had the status of a shareholder of D1 and was so recorded on the Share Certificate.  As P2 had not failed to comply with the payment schedule in the TCPSSA (because the licences were not renewed), D1 would not be entitled to withdraw the shares.  The pledge, which only created a security, would have no effect on P2’s ownership of the shares or proprietary interest in the US$4.7 million.  The non-disclosure was not material.

A4.  Failure to disclose P2’s sale of D1’s shares to P1 (“the Sale”)

79.  Qiu Ping alleged that there had been a series of transactions over the shares in the USA.  P1 was acquired by Colin Tay on 6 March 2008 by means of a reverse takeover.  By a reorganization plan between P1 and Trussnet Nevada, the latter’s shareholders (who was Colin Tay) acquired a controlling interest in P1.  Since then, P1 had attempted to dispose of a substantial part of its shareholding to third parties, including one ASSAC, Runcom and Olotoa, but none of the attempts bore fruit.

80.  On 9 March 2009, P2 purportedly sold the 49% shares to P1 for US$196 million. P1 paid P2 cash of US$5 million and the balance of US$191 million by a promissory note that bore interest of 8% per annum, to be secured by a pledge of the shares back to P2.  The Sale was without D1’s knowledge, and without P2 having paid for those shares in full.  It was in breach of the pledge by P2 and Article 4 of the Addendum.

81.  Qiu Ping alleged that P2 had wrongly represented that it was “the lawful record and beneficial owners of the 49% share in D1, free and clear of any and encumbrances whatsoever, and the sale would convey to P1 lawful, valid and indefeasible title”. Those representations ignored the fact of borrowing and the pledge. They were made in public documents to P1’s shareholders and the United States Securities and Exchange Commission (“USSEC”).  The last of such public documents was filed on 14 November 2011[9], just 4 days before the 1^st Injunction Order.

82.  How Colin Tay used the shares in D1 to raise funds, whether P1 was in breach of duties to shareholders or USSEC, and whether the Defendants might claim against P2 for breach of the non-disposal provisions were plainly not the concern of the Court in the injunction proceedings. 

83.  The importance of the undisclosed Sale as submitted by Mr Scott SC, was that:

(i)  At the time of the ex parte hearings, P2 was either in possession of the shares, or the sale proceeds thereof.  Any purported claim concerning the double signature arrangement was already “secured” to an extent beyond US$4.7 million sought to be frozen by way of the Injunction Orders.  There was doubt as to whether the Injunction Orders were necessary.

(ii)  By agreeing to sell at the same consideration offered to D8, ie US$196 million, the Plaintiffs must have taken the view that the value of the 49% equity had not been affected.  The alleged loss and damage suffered by the Plaintiffs flowing from the Defendants’ alleged breach was in doubt.

84.  The documents relied on by Mr Scott SC showed that the Sale had been cancelled and replaced by an assignment by P2 to P1 (see Section A5 below). The non-disclosure could not be material.  Moreover, as discussed in paragraph 78 above, the right of D1 to have the proportion of unpaid shares returned had not yet arisen.  Further, the Plaintiffs’ claim for damages was not limited to the US$9.7 million it had already paid.  At this stage of the action, it cannot be said that the shares formed security beyond the Plaintiffs’ loss to disentitle them to an injunction.

A5.  Failure to disclose the assignment by P2 to P1 (“the Assignment”)

85.  By the Assignment dated 4 April 2011, P2 agreed:

“to assign, without warranty, all of its right, title and interest in the [TCPSSA] and the addendum thereto to [P1]. [P1] assumed all performance obligations of [P2], if any, under the [TCPSSA] and addendum. To the extent consent to this assignment is required from any other party to the [TCPSSA] and Addendum, [P2] agreed to continue to act as the agent for [P1], as [P1] directs. In either event, [P1] is responsible to insure that the obligations of [P2], as set forth in the [TCPSSA] and Addendum, are met timely.” [10]

86.  The Assignment was in direct contravention of the non-assignment clause in Article 30.3 of the TCPSSA, which provided that:

“[P2] may assign the whole or part of any of its rights in [the TCPSSA] to any person who has received a transfer of shares in the capital of [D1] from [P2] in accordance with the New Articles and has executed a Deed of Adherence.”

87.  No Deed of Adherence[11] was ever executed.  The assignment was also in breach of the share pledge.

88.  Mr Scott SC submitted that it was very doubtful whether an unlawful transferee was effective and was in accordance with Article 30.3 of the TCPSSA.  The implication of the purported assignment was that only P1 or P2 could be the proper plaintiff to sue upon the TCPSSA.  During the ex parte hearings, when the purported assignment was concealed from the Court, there was simply no legal or factual basis for Colin Tay to maintain an action by P1.

89.  There is substance in Mr Scott SC’s submission.  P1 was not a party to any of the agreements and its capacity to sue was never made clear.  The endorsement on the writ vaguely described P1 and D8 as joint venture partners (para 1).  Agreements including Framework Agreements were entered into at various stages between the Plaintiffs of the one part and D8 and D9 on the other pursuant to the joint venture (para 2).  US$5 million (apparently referring to the First Payment) was injected by the side of P1 (para 4).  “By the [TCPSSA], Mr Colin Tay Yong Lee, the President of [P1] and the authorized representative of the corporate director of [P2]” and D6 were appointed as the joint signatories of the Chinacomm Account 1 and Smart Channel Account.  Apparently, these pleas were based, wrongly in my view, on P1 being a contracting party to the various agreements.

90.  In the 1^st affirmation, Colin Tay said nothing about P1’s right to sue, nothing about his acting on behalf of P1 as the authorized signatories to the Chinacomm Account 1 and Smart Channel Account, and nothing about the US$4.7 million being injected by P1.  It was not until paragraph 93 of his 7^th affirmation that he said that P1, as the ultimate holding company of most of the entities on the Plaintiffs’ side “having beneficial interest in all the Subscription Agreements, and having paid or caused to pay the subscription price, has a right to sue.  This is in addition to the intellectual property rights that Qiu Ping mentioned.”  Having regard to the care in which Colin Tay chose the contracting entities from his camp, there was little room for P1 to rely on beneficial interest to establish its locus to sue.  There was no proof of P1 paying or causing to be paid the Subscription Price.  Moreover, what intellectual property rights P1 owned and was infringed were never made clear.

91.  The transaction which purportedly gave rise to P1’s interest in the joint venture and hence the capacity to sue was the Assignment.  I find that the non-disclosure of the Assignment to be material in the circumstances of this case.

A6.  Failure to disclose the agency relationship between the Plaintiffs

92.  In paragraph 79 of the statement of claim filed subsequent to the grant of the Injunction Orders, it was pleaded that P2 signed the TCPSSA as agent for P1.  Mr Scott SC pointed out that such an undisclosed agency was diametrically inconsistent with the alleged sale by P2 to P1 on 9 March 2009, because no agent would have sold an asset back to the principal for full consideration. This means either the plea of agency in the statement of claim was false or the alleged sale was a sham.

93.  Mr Scott SC went on to comment that if the Sale was a sham, then the reports filed by P1 with the USSEC would have contained false information.  P1 would then have exhibited those reports in support of the continuation of the Injunction Orders knowing that they contained false information relating to the sham Sale.

94.  Colin Tay explained in the 9^th affirmation that he was authorized by P1 to use P2 to sign the TCPSSA.  He said that the Sale was merely a way of raising money by P1.  Colin Tay was just acting as agent of P1 and did not get any benefit out of the sale of the equitable interests in the shares.  He was holding on behalf of some nominees.  He was of the view that he did not need to disclose the transactions because they were not relevant to the wrongdoings of the Defendants. It was impossible to transfer ownership of the shares without the approval of the board and without proper registration with the Registered Agent of the Cayman Islands.  The legal title in the shares remained the same.

95.  It is difficult to understand Colin Tay’s explanations.  But again, what P1 did with the USSEC and whether it could be penalized for putting forth false information were irrelevant.  Even if there had been an agency, there could be valid reasons for an agent to assign rights under its name back to his principal.  In any case, it is not appropriate to have a mini-trial on affirmations to determine the effect of various relationship and transactions. The non-disclosure was not material to the Plaintiffs’ case based on the oral double signature arrangement.

A7.  Failure to disclose the Plaintiffs’ financial inability to pay the balance of the subscription price

A8.  Failure to disclose that the Defendants have various defences and a counterclaim for return of the 49% shares

96.  Mr Scott SC relies on Exhibit CTYL-35 wherein it was stated by P1 that it “attempted to raise capital to make the required payments, but was unable to do so within the time specified”.  Mr Scott SC took that to mean that P1 admitted that at all material times, it had no ability to pay the outstanding subscription price of US$191 million to D1 and was desperate to raise funds.  Mr Scott SC submitted that non-disclosure of such impecuniosity was relevant to cast the genuineness of the Sale and hence P1’s locus to sue for breach of the TCPSSA in doubt.  Further, in some agreements, the obligation of Colin Tay’s camp to pay came before D8’s obligation to renew the licences.  It was thus highly arguable that Colin Tay’s camp remained unable to perform its contractual obligations to pay, even if the licences were duly renewed.  Finally, given the impecuniosity, the Plaintiffs would be unable to pay for the balance of the subscription price, so P2 was obliged to give up part of the shares in D1 proportionate to the unpaid subscription price.  In other words, there is a strong counterclaim by the Defendants against P2, the damages of which could easily exceed the US$4.7 million now sought to be frozen by the Injunction Orders.

97.  I do not think the Plaintiffs’ duty of full and frank disclosure extended to reveal facts concerning potential defences and counterclaim of the Defendants.  I repeat my analyses under Section A2 on “no licence, no payment”.  There are serious issues to be tried as to which party was first in breach and hence whether the Plaintiffs were obliged to return the unpaid portion of the Shares.  The double signature arrangement was an agreement on its own.  I do not find any alleged non-disclosure under this head to be material.

Summary on non-disclosure

98.  On the evidence before me, I find the oral double signature arrangement to be capable of belief and Colin Tay’s version to be more probable than Qui Ping’s.  Having considered the full set of Mr Scott SC’s submission, I reject most of the allegations on non-disclosure and find that the only material non-disclosure was the failure to refer to the Assignment to show the locus of P1 to sue.

Should a fresh injunction be granted?

99.  It is not every omission that will cause an injunction to be automatically discharged.  The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms.  When the whole of the facts, including that of the original non-disclosure, are before the court, it may well grant a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed.  Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1357F.

100.  In Yau Chiu Wah v. Gold Chief Investment Ltd, HCA 807/2001, 15 May 2001, Recorder Ma (as he then was) set out the guidelines as follows:

“Of the relevant factors that a court would consider in the exercise of its discretion, they would include the following:-

1. Whether the non-disclosure was innocent or deliberate;

2. The excuse or reason for such material non-disclosure;

3. Whether the non-disclosure would in fact have resulted in the original order not having been made in the first place or whether conversely, even if the material fact or facts have been disclosed, this would have made no difference. Here, the court is required to look at the merits and justice of the grant of a Mareva injunction.

4.   Whether the party guilty of the non-disclosure is deserving of a locus poenitentiae.”

Those principles were approved by the Court of Appeal in Cheung Kam Wah v Cheung Hon Wah,CACV 53/2004, 11 January 2005,at paras 43-45.

101.  Where a plaintiff does not have capacity to sue, an injunction will not be granted to him.  In the present case, P2’s capacity to sue was not in doubt, it being a party to the TCPSSA, holder of the Share Certificate and party to the double signature arrangement.  However, P1’s capacity to sue was in doubt.

102.  However, I find that the failure to highlight P1’s capacity or the assignment before Deputy Judge L Chan was not deliberate.  The circumstances in which the Plaintiffs came for an ex parte injunction were urgent.  Within a few days, investigation was made with the bank as to why Colin Tay was not sent the bank statements, documents had to be amassed and the endorsement of claim prepared. The series of agreements between the Plaintiffs and Defendants’ camp and the transactions between P1 and P2 were not straightforward.  All the information that formed the subject of the Defendants’ complaints were disclosed in the Plaintiffs’ exhibits or filings with USSEC.  It was not one of those cases that the applicant withheld part of a series of interlinked facts that would render the disclosed facts misleading. 

103.  The Assignment did not meet the requirements for assignment under the TCPSSA for reasons given in section A5.  Nor did it constitute a legal assignment for lack of notice to the relevant Defendant.  However, both the assignor and assignee were joined as Plaintiffs to complete the locus to sue. The evidence before the Court was not such that the locus of P1 to sue was clearly and obviously non-existent. 

104.  Ultimately, in the circumstances of this case, it is a question of whether the merits and justice warrant the grant of a Mareva injunction.  Subject to proof of meeting the requirements of American Cyanamid v Ethicon Ltd [1975] AC 396,the Injunction Orders should be continued.

SECTION B  SERIOUS ISSUES TO BE TRIED

105.  There are serious issues to be tried in this case, including locus standi of the Plaintiffs, causes of action, interpretation of terms in the various agreements, which party was first in breach and damage caused.  The analyses under Section A already covered the issues of the double signature arrangement and “no licence, no payment”.  There was also another cause of action concerning whether D8 had engaged suppliers without consent of the Plaintiffs.

106.  The requirement for P2’s consent for capital expenditure exceeding US$10,000 was stipulated by contract: Article 10.8 and Schedule 5, item (r) of the TCPSSA.  Yet D8 awarded technical equipment supply contracts to Samsung and Huawei without involving P2 in the negotiation or obtaining its written approval. 

107.  Qiu Ping claimed that the contractual obligations under Article 10.8 had come to an endbecause the investor had not fulfilled its obligation to pay the Subscription Price.

108.  In my view, Article 10.8 did not appear to be conditional on any obligation to pay the Subscription Price.  In any case, since the licences were not renewed, P2 was not in breach of the obligation to pay.  There is a serious issue to be tried on breach of Article 10.8, to which Mr Scott SC made little comment.

SECTION C  DISSIPATION OF ASSETS

109.  Qiu Ping withdrew part of the US$4.7 million from Chinacomm Account 1 allegedly for the following purposes:

(i)  US$50,000 was paid to the nominee account of the PRC lawyers for their fees;

(ii)  US$4.5 million (about RMB 30 million) was transferred to D10 as surety and pledge for a loan obtained in PRC by D8 for operational expenses, acquisition of equipment for the joint venture project, and to pay creditors who had lent funds for construction works in respect of the 12 Cities Licence.

110.  Colin Tay disputed the nature of the legal expenses or the work done by the unidentified lawyers.  He also disputed D1’s authority to sign that surety agreement and to withdraw the money in the joint signatory account to guarantee the private loan of D8.

111.  There was no documentary proof of such payments or the loan.  The surety agreement was very suspicious for the following reasons:

(i)  The lender was not even named, so how could he benefit from the surety?

(ii)  Since D1 was in possession of the US$4.5 million, why didn’t D1 pledge the sum itself instead of enlisting the assistance of D10?  To this, Qiu Ping’s explanation was that it was because of the need to structure loans in the PRC to facilitate interest bearing loans to be made.

(iii)  There was no evidence relating to the loan.  Why would the loan be for only one month from 21 June to 20 July 2011?

(iv)  There were 4 remittances totalling RMB 30 million dated 16 and 23 June 2011.  Two remittances on 15 June were even earlier than the surety agreement dated 18 June 2011.  Were those remittances for drawdowns of the loan?  Of the 4 remittances, 2 were from D9 (a 60% subsidiary of D8); one was from a company known as Wujiang Zhongse Textile Co Ltd (吴江中色纺织有限公司), and one from a Sun Xiaohua (孫小華).  Colin Tay has been advised that Chinese law prohibited companies (other than financial institutions) from lending to one another and he had not heard of the other lenders.

(v)  The intention of Colin Tay and Qiu Ping had all along been for the funds to go through D1 and Yunji and not D8.  The query was whether the loan was really obtained for the joint venture or for some ulterior purpose.

(vi)  Under Article 6 of the surety agreement, the lender could instruct D10 to set off the loan as repayment if D8 could not repay on time. There was no evidence of such instruction being given by the repayment date.

(vii)   No repayment was recorded in the Chinacomm Accounts after the transfer out of the US$4.5 million in June 2011

112.  What was more suspicious was why D10 removed approximately US$4.28 million on the following day instead of holding it for one month as surety.  There were 2 other withdrawals of US$20,000 in August and about US$190,000 in November 2011, the latter of which was made a day after the 1^st Injunction Order was served on Qiu Ping.

113.  These queries point to dissipation of the US$4.7 million.

114.  Mr Scott SC submits that there was no evidence that the Defendants intended to dissipate the funds in the frozen bank accounts so as to render any future judgment obtained by the Plaintiffs empty.  There had been no movement of funds in the SCB accounts since June 2011, well before commencement of this action in November 2011. 

115.  With the greatest respect to Mr Scott SC, this line of submission blatantly ignored the history of fund movements.  There was not much movement of funds since June 2011 simply because the bulk of it had been secretly removed before then.

116.  In addition, there was evidence that D1, D6 and D7 had not complied fully with the disclosure orders made by Deputy Judge L Chan.  It was pointed out in the affirmation of Li Aibain, legal counsel for the Plaintiffs, that amongst others, the statements of the Smart Channel account were not produced.  No explanation of the movement of funds and contacting details of the payees of any funds were given.  In particular, the contact details and bank account numbers of D10 were not disclosed.

117.  As a side note, upon the disclosure (through Lam Ping Cheung’s affirmation) by D1, Qiu Ping and Yuan Yi (D7), it was discovered that D1 had, through Qiu Ping, withdrawn the First Payment to some payees without consent of the Plaintiffs, instead of transferring the funds to Smart Channel (D4) and then to Yunji as agreed.

118.  As for D10, his affirmation was far from being full and frank disclosure required under Deputy Judge Lok’s order.  Among the many complaints of the Plaintiffs, the so called personal account number held by D10 with the DBS Bank was not an account number but just a transfer code of the SCB.  Moreover, D10 did not exhibit a single bank statement until pressed upon in correspondence.

119.  It was only in his 2^nd affirmation that D10 disclosed for the first time that: (i) the money was transferred to unidentified nominees of the shareholder of the lender; and (ii) that the loan had been settled.

120.  In my view, there had been shameless efforts by Qiu Ping’s camp to remove the US$4.7 million out of reach of the Plaintiffs and to conceal the true picture.  Dissipation was not only a risk but a fact in the present case.

SECTION D  BALANCE OF CONVENIENCE

121.  D6-D10 are domiciled in the Mainland.  D8 is the most substantial entity and the others are not worth much.  There would be difficulty over enforcement of a judgment in the Mainland.

122.  Indisputably, Smart Channel (D4) was dissolved on 22 October 2010. Likewise, Yunji was dissolved on 21 October 2011 by the Beijing Administration of Industry and Commerce for failure to participate in annual inspection. 

123.  After all the dissipation, the bank balance in the Chinacomm Account 1 and 2 totalled US$213,000; and the Smart Channel Account had zero balance.  The freezing of the accounts would cause minimal disturbance to the Defendants as they should not have dealt with the subject accounts anyway.  In fact, Mr Scott SC had not said much about balance of convenience in his submission.

124.  So far Qiu Ping and D10 had not made full and frank disclosure of the money trails and the particulars of the transferees.  They still failed to disclose their assets and bank accounts outside Hong Kong which might throw light on the disposal of the US$4.7 million.

125.  There is no issue as to why the respective Defendants were made subject to the Injunction Orders.  The analyses under Sections B and C there suggest that there was a joint enterprise among those Defendants to transfer the US$4.5 million to D10’s account.

126.  The balance of convenience is clearly in favour of the Plaintiffs.

CONCLUSION

127.  The Plaintiffs have shown a credible case on the existence of the oral double signature arrangement.  There had been material non-disclosure of P1’s capacity to sue at the ex parte stage.  The original Injunction Orders should not have been made in favour of P1.  However, the non-disclosure was not deliberate.  By virtue of the Assignment, P1 did have capacity to sue.  Had it been disclosed, the Injunction Orders would have been granted.  The Plaintiffs have met the tests in American Cyanamid.  Having considered the merits and justice of the case, and in the light of the overwhelming evidence of dissipation of the bulk of the US$4.7 million, the Injunction Orders ought to continue.

128.  I therefore dismiss the Defendants’ application to discharge the Injunction Orders.  The Plaintiffs’ summons for continuation of the Injunction Orders is granted.  The time taken for argument on the Assignment was relatively short. The Plaintiffs are the overall winners.  I make an order nisi that costs of both summonses be to the Plaintiffs to be taxed and payable forthwith.

OTHER COMMENTS

129.  Nineteen affirmations have been included in the hearing bundle.  The way the affirmations were arranged (by grouping all affirmations of each affirmant together) did not facilitate the understanding of each party’s case, the cross allegations and the manner in which disclosure was made pursuant to the disclosure orders.  Moreover, classifying bundles by various titles (such as “pleadings bundles”, “Plaintiffs’ bundles”, “PA-1”, “PA-2”, “DA-1, “DA-2”) instead of the conventional alphabetical series made reference to documents confusing.  It is hoped that careful thought be made by the parties in future in the preparation of hearing bundles.

130.  I thank counsel for their assistance.

ANNEXURE

Relevant Articles under the Various Agreements

TDFA dated 15.2.2008 (Exhibit No. CTYL-3)

Article 1b

“Each of the parties shall appoint one person as bank signatory of [D1], [D4] and WOFIE after the First Payment has been paid to [D1].”

Article 2. The Payment of Acquisition Price

“a.  After the execution of this Framework Agreement by both Parties and within 10 business days after Trussnet [Delaware] has duly received the originals of the signed shareholders’ meeting resolution and board resolution of [D1] both approving the acquisition of the 49% equity interests of [D1] by Trussnet [Delaware] through Gulfstream, Trussnet [Delaware] shall pay USD5,000,000.00 (“First Payment”) in cash in two separate payments as part of the above Acquisition Price into [D1] through Gulfstream, then Chinacomm HK shall pay such First Payment into WOFIE as part of the capital injection required by the laws of China.

b.  Trussnet [Delaware] will pay USD141,000,000.00 of the Acquisition Price in cash, within 20 business days upon the receipt of the following documents, into [D1] through Gulfstream, then Chinacomm HK shall pay such payments into WOFIE as part of the capital injection required by the laws of China, subject to the following documents being received and acceptable by Trussnet [Delaware] …

c.  The remaining USD50,000,000.00 of the Acquisition Price shall be deemed being fully paid by Trussnet if Trussnet WOFIE has transferred the equipments to WOFIE in accordance with Article 1(e).

  …

f.   Chinacomm shall provide to Trussnet the legal evidences showing that all of the 3.5G Licenses for 29 cities have been duly extended and valid.”

Article 3c

“Notwithstanding other provisions herein, if the FirstPayment is not paid by Trussnet in accordance with Article 2(a) above, this Framework Agreement shall be void.”

TNFA dated 7.4.2008 (Exhibit No. CTYL-4)

[The terms are largely similar to the TDFA.]

GSSA dated 23.5.2008 (Exhibit No. CTYL-6)

Article 3.2

“The Subscription Price shall be paid by the Investor [Gulfstream] in the following method:

(a) US$55,000,000 shall be paid as part payment and part satisfaction of the Subscription Price in accordance with relevant articles of the Framework Agreement, by electronic funds transfer to the bank account of the Company (“Bank Account”) as set out below

…

(b) US$141,000,000 shall be paid as part payment and part satisfaction of the Subscription Price by electronic fund transfer to the Bank account within sixty (60) Business Days from the Completion Date in accordance with the following schedule: (i) at least US$50,000,000 shall be paid within twenty (20) Business Days from the Completion Date; (ii) at least 100,000,000 shall be paid accumulatively within forty (40) Business Days from the Completion Date; (iii) the difference shall be paid within sixty (60) Business Days from the Completion Date.

(c)   US$50,000,000 shall be paid as part payment and part satisfaction of the Subscription Price to the Investor WOFE as registered capital within forty five (45) Business Days from the Completion Date.”

Article 4.7

“Within ninety (90) Business Days from the Completion Date the Company [D1] shall provide to the Investor [Gulfstream] the documentary evidence in relation to the valid extension of Chinacomm’s 3.5 G licenses which are expired at the time of this Agreement.”

“Completion Date” was defined in Article 1 “the fifth Business Day after all Completion Conditions have been fulfilled and/or waived”.

One of the “Completion Conditions” set out in Schedule 3, paragraph (j) of the GSSA was that “the Investor representatives has met with the relevant officials of the Ministry of Information Industry who are in charge of the issuance and extension of 3.5G licenses, and such officials has (sic) orally approved the extension of Chinacomm’s 3.5G licenses.” 

Supplementary Agreement dated 17.11.2008 (Exhibit No. CTYL-7)

Article 1

“The Parties agree to amend Article 3.2 of the Share Subscription Agreement in the following manner:

(a) No change.

(b) It shall be changed as below:

Subject to Article 2 below, US$50,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to a bank account jointly controlled by the Parties within ten (l0) Business Days after the 3.5G licenses of Chinacomm have been duly renewed and all open issues between the Parties have been mutually agreed.

(c) It shall be changed as below:

US$50,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to a bank account jointly controlled by the Parties within ninety (90) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove.

(d) One sub-article should be inserted here as below:

US% [sic] 41,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to a bank account jointly controlled by the Parties within one hundred and eighty (180) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove.

(e) One sub-article should be inserted here as below:

US$50,000,000 shall be paid as part payment of the Subscription Price by electronic funds transfer to the Investor WFOE as registered capital within one hundred and eighty (180) Business Days after the payment of the US$50,000,000 prescribed in Article 3.2(b) hereinabove.”

Article 2

“Chinacomm [D8] shall deliver to [Trussnet USA, Inc] (a) the evidence for the renewal of the 3.5G licenses; and (b) the share certificate for the 49% shares of [D1] immediately after the renewal of the 3.5G licenses.”

Article 3

“Upon payment of the US$50,000,000 specified in the amended Article 3.2(b) by the Investor, the Investor shall be entitled to the ownership of 49% shares of [D1]. Trussnet shall pledge the percentage of shares that correspond to the balance of Subscription Price to Chinacomm to guarantee its payment in accordance with the schedule specified in Article 1 hereinabove. Such pledge of shares shall be released in proportion to the payment of the balance amount of the Subscription Price by the Investor. If Trussnet fails to pay the funds according to the schedule in this contract, Chinacomm will withdraw the corresponding proportion of equity equal to the unpaid amount of funds within 180 Business Days after the payment of the first US$50,000 000.”

Article 4

“This agreement shall be void immediately as if it was never executed if (a) the Investor failed to provide evidence that US$50,000,000 has been received by the end of November 2008, or (b) the Investor failed to transfer US$50,000,000 to a bank account that jointly controlled by the Parties in accordance with Article 3.2(b) as amended in Article 1 hereinabove; (c) Chinacomm failed to obtain the renewal of the 3.5G licenses by the end of December 2008; (d) the Parties failed to reach consensus on all the open issues by the end of December 2008.”

TCPSSA dated 16.2.2009 (Exhibit No. CTYL-8)

Article 3.2

“The Subscription Price shall be paid by the Investor [P2] or its Associated Company by the following method:

(a) US$5,000,000 shall be paid as part payment and part satisfaction of the Subscription Price in accordance with relevant articles of the Framework Agreement, by electronic lands transfer to the bank account of the Company [D1] (the Bank Account) … [The account no. was 36800423379, ie Chinacomm Account 2].

(b) US$141,000,000 shall be paid as part payment and part satisfaction of the Subscription Price by electronic funds transfer to the Bank Account. Such amount shall be paid in instalments. The first instalment shall be no less than USD 20,000,000 and be paid within 35 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of this Agreement. The balance shall be paid within 180 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of this Agreement.

(c)  US$50,000,000 shall be paid as part payment and part satisfaction of the Subscription Price to the Investor WFOE as registered capital within 180 business days after the licenses of Chinacomm have been extended in accordance with item (j) of Schedule 3 of this Agreement.”

Item (j) of Schedule 3 provided that one of the subsequent payment conditions was “the delivery to [P2] of the adequate evidence in relation to the valid extension of [D8’s] 3.5G licenses which are expired at the time of this Agreement”.

Article 4.1

“Closing of the subscription by the Investor of the New Shares shall take place on the date when the First Payment is made or any other date as agreed by the Company and the Investor.”

Article 4.2

“Upon the Closing, the Investor shall become the legal owner of the 49% shares of the Company. The Company shall and the Parties shall procure the Company to deliver a share certificate for the 49% New Shares to the Investor and enter the name of the Investor into the Company’s register of members/shareholders as the holder of 49% shares of the Company.”

Article 6.2

“The Warrantors [ie D8 and D9] jointly and severally warrant to the Investor that each and every Warranty set out in Schedule 4 is true, accurate and not misleading at the date of this Agreement and of the Closing and Fulfilment Date subject only to any exceptions expressly provided for under this Agreement.”

Clause 4.2, Part 2, Schedule 4: Warranties Relating to Chinacomm:

“Chinacomm lawfully and validly holds licenses (or, if any of the licenses are expired at the time of this Agreement, Chinacomm will obtain extension of such licenses in accordance with this Agreement) issued by the PRC competent authority(ies), including but not limited to the Ministry of Information Industry, for the construction and operation of 3.5G Hz wireless broadband operation in the Territory and the Ministry of Cultural Affairs, for the operation of Internet Cafe nationwide, and there has not arisen any circumstances that may result in the temporary or permanent cancellation or termination of such licenses.”

Article 10.8

“… [D1] agrees that save with the prior written approval of the Investor [P2], it shall not effect any of the matters referred to in Schedule 5.”

Schedule 5 set out a list of matters requiring consent of P2/the Investor, including:

“(r) incur any capital expenditure (including obligations under hire-purchase and leasing arrangements) which exceeds the amount for capital expenditure exceeding US$10,000.00.”

Article 30.1

“Subject to clause 30.3, this Agreement is personal to the parties and no party shall:

(a) assign any of its rights under this Agreement; or

(b) transfer any of its obligations under this Agreement; or

(c) sub-contract or delegate any of its obligations under this Agreement; or

(d)  charge or deal in any other manner with this Agreement or any of its right or obligations.”

Article 30.3

“An Investor may assign the whole or part of any of its rights in this Agreement to any person who has received a transfer of shares in the capital of the Company from such Investor in accordance with the New Articles and has executed a Deed of Adherence.”

Addendum dated 16.2.2009 (Exhibit No. CTYL-10)

Article 1

“The Parties agree that the Closing (as defined in the Share Subscription Agreement [TCPSSA]) shall take place on February 16, 2009.”

Article 3

“Where Trussnet cannot comply with the schedule set forth in Article 3.2 of the Share Subscription Agreement, the Parties shall reach a new schedule through amicable negotiation.”

Article 4

“Trussnet shall pledge the shares corresponding to the outstanding balance of the Subscription Agreement to the Company and the Founders by the issuance of a legal note to that effect. In case that Trussnet failed to meet the Schedule in Article 3.2 or the new Schedule agreed by the Parties, the Company and the Founders (as defined in the Share Subscription Agreement) shall be entitled to withdrawn (sic) the shares that corresponding (sic) to the outstanding balance of the Subscription Price at its discretion.”

Article 6

“Trussnet agrees to arrange USD3,000,000 to USD5,000,000 for the deployment of Beijing wireless broadband network by the 15^th of March 2009 in the way of loan of other manner permitted under PRC law.”