HCMP 2684/2011
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
MISCELLANEOUS PROCEEDINGS NO. 2684 OF 2011
(ON AN INTENDED APPEAL FROM HCA NO. 1377 OF 2011)
______________________
BETWEEN
HONG DA DEVELOPMENT & INVESTMENT HOLDING CO. LTD.
Plaintiff
AND
CHINA AOYUAN PROPERTY
GROUP LIMITED
1st Defendant
ZHEN FU LIMITED
2nd Defendant
SOAR WEALTH LIMITED
3rd Defendant
CHINA AOYUAN INTERNATIONAL DEVELOPMENT LIMITED
4th Defendant
CENTURY PROFIT ZONE INVESTMENTS LIMITED
5th Defendant
OSMAN MOHAMMED ARAB AND
6th Defendant
DYNAMIC BLOOM LIMITED
7th Defendant
______________________
Before: Hon Yeung VP and Yuen JA
Date of Hearing: 17 January 2012
Date of Judgment: 17 January 2012
Date of Handing Down Reasons for Judgment: 2 February 2012
______________________
REASONS FOR JUDGMENT
______________________
Hon Yeung VP (giving the reasons for judgment of the Court):
Introduction
1. This is an application for leave to appeal against the order of Deputy High Court Judge G Lam, SC (the Judge) discharging, with costs, the interlocutory injunction granted by Poon J and by Yam J restraining the defendants from disposing of or otherwise dealing with the mortgaged shares of Century Profit Zone Investments Ltd (D5) held by Hong Da Development & Investment Holding Co Ltd (the plaintiff).
2. The disputes concerned principally the plaintiff, the 1st defendant, China Aoyuan Property Group Ltd (D1) and the 4th defendant, China Aoyuan International Development Ltd (D4). The other defendants were brought in as necessary parties.
3. The primary question in issue was whether the rights of the assignee of a mortgage, including the right to sell the mortgaged property, could be affected by the contractual relationship between its holding company and the mortgagor.
4. At the end of the hearing, we rejected the plaintiff’s application for leave to appeal with costs to the defendants and certificates for two counsel for those defendants who had the benefit of services from leading counsel. We indicated that we would hand down our reasons in due course and this we now do.
The Facts
5. It is necessary to set out the rather complicated background facts, albeit just briefly and without any attempt to resolve the disputes relating thereto.
6. The plaintiff is wholly owned by a Mr Wang. D1 is a public listed company in Hong Kong and D4 is its subsidiary.
7. The plaintiff and D4 are respectively the 47.31% and the 52.69% shareholders of D5, who holds 96.8% of Beijing Yaohui Real Estate Co Ltd (“Beijing Yaohui”). The remaining 3.2% share of Beijing Yaohui is held by Beijing Wangfu Century Development Co Ltd (“Wangfu”), a company owned by Mr Wang and his associates. Beijing Yaohui is the owner and developer of a property in Beijing PRC (“the project”).
8. The 2nd defendant, Zhen Fu Ltd (D2) and the 3rd defendant, Soar Wealth Ltd (D3), are also wholly owned subsidiaries of D1. The 6th defendants (D6) are two individuals of RSM Nelson Wheeler Corporate Advisory Ltd appointed by (D3), acting for D2, as joint and several receivers and managers of D5’s shares held by the plaintiff, but mortgaged to D2’s predecessor, Industrial and Commercial Bank of China (ICBC).
9. The 7th defendant, Dynamic Bloom Ltd (D7), is the corporate vehicle used by D6 to hold the assets under receivership.
10. In or about 2004 or 2005, Beijing Capital, a state-owned enterprise, obtained 62% of the shareholding in Beijing Yaohui from Wangfu and Wangfu’s shareholding in Beijing Yaohui was reduced to 38%. Part of the arrangement was that Beijing Capital would be responsible for financing “the project” by way of shareholders’ loans and by March 2008, Beijing Capital had advanced over Rmb 1 billion to Beijing Yaohui.
11. In late 2007, Mr Wang decided to turn “the project” into a sino-foreign joint venture and for that he had to buy out Beijing Capital’s interest in Beijing Yaohui.
12. In April 2008, it was agreed between Mr Wang and Beijing Capital that Beijing Capital’s shares in Beijing Yaohui would be sold to D5 for Rmb 458.7 million and that Mr Wang would procure the repayment of the Rmb 1 billion shareholders’ loan to Beijing Capital.
13. D5 and Beijing Capital also agreed to increase the registered capital of Beijing Yaohui from Rmb 50 million to Rmb 600 million and that D5 would bear the increased capital of Rmb 550 million.
14. Despite the initial funding of US$60 million from Merrill Lynch, the financial crisis in 2008 made it difficult to raise further funding to pay Beijing Capital the sums of Rmb 458.7 million and Rmb 1 billion and alternative sources of funding had to be obtained.
15. In early 2009, Mr Wang introduced D1 as a potential investor for “the project” and according to Mr Wang, Mr Guo Zi Wen (“Mr Guo”), the Chairman of D1 had assured him that D1 had over Rmb 3 billion in bank and would be able to fund the continuation of “the project”.
16. There were then a number of agreements executed between the parties. D4 agreed to purchase 41.33% of D5 for Rmb 370 million and would subscribe for convertible notes issued by the plaintiff with the right to acquire a further 11.36% of D5 for Rmb 296 million. D4 did exercise the right and as a result, by September 2010, the percentage of shareholding in D5 by the plaintiff and D4 had become 47.31% and 52.69% respectively.
17. Mr Wang, the plaintiff, D1, D4 and D5 also executed three shareholders agreements, the original shareholders agreement, the first amended shareholders agreement and the 2nd amended shareholders agreement (“the shareholders agreement”), to regulate their contractual relationship.
18. The original shareholders agreement was intended to take effect upon the completion of the sale of the 41.33% of D5 to D4 on 28 July 2009. The first amended shareholders agreement would take effect upon D1 granting a loan of Rmb 110 million to D5 and Rmb 130 million to the plaintiff in July 2009. The 2nd amended shareholders agreement would take effect upon D4 exercising the right to acquire the additional 11.36% of D5 in September 2010.
19. Pursuant to clause 6.2 of the shareholders agreement, D4 granted a loan of Rmb 460 million to D5 to enable D5 to pay the Rmb 458.7 million to Beijing Capital for its 62% interest in Beijing Yaohui. On 22 July 2009, D4 granted a further loan of Rmb 110 million to D5 to enable D5 to contribute towards the increased capital of Beijing Yaohui.
20. D4 also granted a loan of Rmb 130 million to the plaintiff as part of the funds required to discharge the US$60-million loan from Merrill Lynch.
21. In late 2009, D4 approached ICBC for a loan for “the project” and by an agreement dated 9 December 2009 executed between D5 and ICBC’s agent, D5 obtained a loan of HK$670 million (ICBC loan) from ICBC.
22. There was a dispute as to the purpose of the ICBC loan. D1 suggested that it was obtained to repay Beijing Capital the Rmb 1 billion shareholders’ loan granted to Beijing Yaohui. The suggestion was that due to exchange control, the ICBC loan should be injected into Beijing Yaohui and could then be used to repay Beijing Capital.
23. The plaintiff disagreed, saying that the ICBC loan was obtained to increase the capital of Beijing Yaohui. The plaintiff emphasized that the ICBC loan was obtained by D5 and that D5 had agreed to bear the increased capital of Beijing Yaohui to Rmb 600 million.
24. The ICBC loan required the following collaterals; (1) a share mortgage by D4 of its 52.69% holdings in D5; (2) a share mortgage by the plaintiff of its 47.31% holding in D5 (“the share mortgage”); (3) a guarantee by D1; (4) a share pledge by D5 of its shareholding in Beijing Yaohui; and (5) an account charge by D5 of its credit balances in certain bank accounts.
25. In connection with the share mortgage by the plaintiff of its 47.31% holding in D5, one of D1’s directors (Mr Hu) signed a Chinese document (“the counter-guarantee”) undertaking the following obligations:
“Whereas:
(D5) made an application to (ICBC) for a term loan facility…of HK$670 million. As the said financing is within the responsibility of (D1), in cooperation of the said financing arrangement, (the plaintiff) agrees to pledge all its shares in (D5) to (ICBC) and execute the following legal documents:…
In the premises, (D1) hereby undertakes to provide counter-guarantee against the liabilities to be borne by (the plaintiff) under all the aforesaid legal documents including but not limited to its liabilities under the equity pledge. If (the plaintiff) suffers any loss as a result of the mandatory enforcement against its shares or other loss, (D1) should compensate all the loss suffered by (the plaintiff) arising therefrom.”
26. There were serious factual disputes as to the circumstances in which the counter-guarantee was executed.
27. D1’s contention was that Mr Hu only signed the counter-guarantee on the basis that it would be effective if Mr Guo approved it and as Mr Guo had not approved it, the parties’ relationship was only governed by the confirmation letter (“the confirmation letter”) signed by Mr Guo and Mr Wang in the following terms:
“We, (D1) and (the plaintiff), as the direct or indirect holders of the shares in (D5), hereby agree that should (D5) fail to make timely repayments to (ICBC) in accordance with the terms of the ‘ICBC loan agreement’, which causes (ICBC) to exercise its rights to appoint receivers and demand for repayment under the ‘ICBC loan agreement’, (D1) shall procure (ICBC) to enforce its rights and arrange for repayment of the indebtedness in the following order:
1. Take over and sell the shares of (D5) held by (D4);
2. Demand (D1) to repay the outstanding amount of the indebtedness under the ‘ICBC loan agreement’;
3. Take over and sell the shares of (D5) held by the plaintiff.
(D1) agrees that, should (D5) fail to make timely repayments to (ICBC)….it should be responsible for providing loans to (D5) or assisting (D5) in making other financing arrangements to enable (D5) to repay the outstanding indebtedness under the ‘ICBC loan agreement’, so as to avoid (ICBC’s) mandatory enforcement against the shares pledge by (the plaintiff), and (the plaintiff) agrees to provide corresponding cooperation in respect of such financing arrangement…”
28. The plaintiff’s position was that the confirmation letter was intended to give additional protection to the plaintiff and was not a replacement of the counter-guarantee.
29. The ICBC loan was drawn down towards the end of 2009 and “the project” continued. In April 2010, D1, through a subsidiary, extended a further loan to Beijing Yaohui of Rmb 283 million to enable Beijing Yaohui to repay the loan to Beijing Capital.
30. The relationship between the plaintiff and D1 turned sour in 2010 when D1 discovered that the plaintiff had, without the knowledge or consent of ICBC, created a second charge and a third charge over its shares in D5 in favour of other creditors, in breach of the terms of share mortgage.
31. By late 2010, “the project” had come to a deadlock when there was no sale of units and therefore no cash flow. Construction had stopped and other business operations of Beijing Yaohui had been disrupted. D1 alleged that Mr Wang, as legal representative of Beijing Yaohui, opposed any sale whereas Mr Wang suggested that it was the result of poor management.
32. By September 2010, D4, as the majority shareholder (52.69%) of D5, was entitled, under the shareholders’ agreement, to appoint the legal representative of Beijing Yaohui in place of Mr Wang. Mr Wang refused to be replaced, saying that he needed to protect the plaintiff’s interest because he had discovered the transfer of the ICBC loan from ICBC to D2.
33. In the meantime, there were discussions for D1 to exit “the project” by selling its 52.69% in D5 to Xinlu Development Ltd (“Xinlu”), an investor sourced by Mr Wang to take over D1’s interest. It was agreed that “Xinlu” would provide funds for D5 to repay the ICBC loan and consent was obtained from ICBC to bring forward the repayment date to 31 July 2011.
34. On 3 June 2011, D1, D4, the plaintiff, Mr Wang, “Xinlu” and Beijing Yaohui signed an agreement for the sale of D4’s 52.69% interest in D5 to “Xinlu” for Rmb 1,335 million if completion took place on or before 29 July 2011, or Rmb 1,350 million if completion took place on or before 31 July 2011. The payment of the Rmb 700 million-deposit was postponed from 3 June to 23 June 2011 on conditions set out in a sale and purchase confirmation, namely:
1. If “Xinlu” should fail to pay the Rmb 700 million-deposit on 23 June 2011, “Xinlu” and Mr Wang would have to pay Rmb 20 million to (D4) as compensation; and
2. The execution of a deed of release, releasing (D1) from all obligations and liabilities under “the confirmation letter”.
35. “Xinlu” was unable to pay the deposit on 23 June 2011. “Xinlu” and Mr Wang paid the Rmb 20 million-compensation to D4 and the sale of D4’s shares in D5 to “Xinlu” fell through. D1 was released from his obligations under “the confirmation letter”.
36. There had been a number of defaults under the ICBC loan, including the creation of the 2nd and 3rd charges over D1’s shares in D5; the non-payment of interest and management fee; and D5’s failure to register the pledge of its shares in Beijing Yaohui with a bureau in PRC.
37. In the meantime, D2 offered to acquire the ICBC loan from ICBC and the offer was guaranteed by D1.
38. On 28 July 2011, the ICBC loan was transferred to D2 for HK$713.43 million. On 29 July 2011, D2 appointed D3 as its facility and security agent of the loan. ICBC and D3 then notified D5 that D2 was the new lender and D3 the new agent. D3 also appointed D6 as receivers and managers of the plaintiff’s mortgaged shares in D5. D6 then transferred those shares to D7. D1 made a public announcement of the acquisition of the ICBC loan by D2 and the enforcement of the mortgage over the plaintiff’s shares in D5.
39. On 31 July 2011, solicitors acting for D2 and D3 notified the plaintiff that D2 had become the lender and mortgagee under the ICBC loan. The solicitors pointed out the defaults under the share mortgage and the loan agreement, and indicated that D2 had exercised its right to appoint receivers to arrange for the sale of the mortgaged shares. A letter to the same effect was also sent to D5, pointing out that the outstanding amount was HK$745.3 million.
40. There were then exchanges of correspondence between D1, D4, the plaintiff and Mr Wang, through their solicitors, with complaints and counter-complaints against one another.
41. The plaintiff indicated that it was prepared to pay the HK$745.3 million subject to a reasonable time for repayment and other conditions, including that D2 would hand over all the security rights in relation to the loan. The plaintiff also asked D6 not to deal with the plaintiff’s shares in D5.
42. There was, however, no attempt by the plaintiff to redeem the mortgage by tendering payment.
43. D2 refused the plaintiff’s requests and proposed to exercise their rights under the share mortgage by selling the plaintiff’s mortgaged shares in D5 by way of tender. An invitation for the tender was published in newspapers on 9 August 2011.
44. There were further arguments over the parties’ rights and obligations under the share mortgage.
The Proceedings
45. On 15 August 2011, the plaintiff issued a writ and then took out a summons for an interlocutory injunction to restrain the disposition of its shares in D5. In the summons, the plaintiff undertakes (1) to issue a summons seeking relief under Order 14A…by way of declaration that “upon the discharge by payment of the liabilities owed by (the plaintiff) to (D2) under the share mortgage…, the defendants shall take all necessary steps to forthwith assign to (the plaintiff) the debts owed by (D5) under the ICBC loan agreement…and all the rights and benefits of the securities…”; and (2) to pay into court within 14 days after issue of that summons the sum of HK$745.3 million or such other sum as may be directed by the court.
46. Poon J, on 19 August 2011, recorded the undertaking by D1 to D5 not to deal with the plaintiff’s shares in D5 and D5’s shares in Beijing Yaohui and further granted an injunction against D6 in similar terms until disposal of the plaintiff’s summons.
47. Yam J on 2 September 2011 made an order joining D7 as a party to the proceeding and an injunction order in similar terms against D7.
48. The parties appeared before the Judge in October 2011 on the plaintiff’s application for the continuation of the interlocutory injunction order.
49. By a judgment dated 19 December 2011, the Judge discharged the injunction with costs. The Judge further indicated that if he had decided to grant the injunction, he would have required the plaintiff to fortify its undertaking as to damages in the sum of HK$300 million.
The Plaintiff’s Position
50. Mr A Leong SC, on behalf of the plaintiff, accepted before the Judge that if ICBC had remained the creditor and had sought to enforce the plaintiff’s share mortgage to recover the full amount of the loan, he could have no complaint.
51. However Mr Leong said there were special features in the case leading to a number of causes of action against the defendants, including (1) breach of contract; (2) breach of fiduciary duty; (3) breach of a mortgagee’s duty to act in good faith; (4) dishonest assistance; (5) knowing receipt; and (6) conspiracy to injure with unlawful means.
The Judge’s Approach
52. The Judge did not find it necessary or possible to dispose of the factual disputes leading to the deterioration of the parties’ relationship.
53. The Judge rejected the suggestion that there was an implied term under Clause 6.1 of the shareholders’ agreement that D1 and/or D4 should ensure that D5 would have necessary funds at all times, and that they should indemnity the plaintiff against any loss suffered as a result of their failure to raise necessary funds for D5, pointing out under Clause 6.7 of the shareholders’ agreement that, “both shareholders have no obligation to provide any funding or guarantee other than as specifically provided for in Clause 6”.
54. The Judge took the view that there could be no implied term as suggested by the plaintiff in the light the wordings of Clause 6.7.
55. The Judge rejected the plaintiff’s reliance on Clause 14.1 of the ICBC loan agreement, pointing out that the plaintiff was not a party and could not have been a beneficiary of the guarantee and indemnity given by D1 therein.
56. The Judge proceeded on the basis that the counter-guarantee and the confirmation letter co-existed, but nevertheless concluded that the terms of the counter-guarantee did not give rise to any duty on the part of D1 not to do anything to harm the plaintiff’s proprietary interest in its shares in D5 and in “the project”.
57. The Judge pointed out that under the counter-guarantee, D1 only promised to compensate the plaintiff if it suffered any loss as a result of the enforcement against its shares in D5, and that such promise could not have given rise to the obligations contended for by the plaintiff that D1 had the obligation to strive to prevent the enforcement against the plaintiff’s shares by the mortgagee.
58. The Judge took the view that there was no serious issue to be tried on the plaintiff’s claim for injunctive relief on any contractual basis.
59. The Judge also found there was no serious issue to be tried on the plaintiff’s case of breach of fiduciary duty saying that the plaintiff and D1 were engaged in ordinary commercial transactions with each other, dealing with each other at arm’s length.
60. The Judge concluded that under the commercial relationship between the plaintiff and D1 in relation to the ICBC loan, D1 had no obligation to act in the plaintiff’s interest as they were adults of full capacity, and were proceeding on an equal footing with proper legal representation.
61. It was part of the plaintiff’s contention that when D2 sought to exercise its right under the mortgage, it was acting in bad faith as it had an ulterior motive other than just obtaining repayment of the loan as creditor, namely to “elbow out” the plaintiff from “the project”.
62. Despite the absence of such allegation in the pleading, the Judge considered the plaintiff’s argument.
63. The Judge had reviewed, in detail, the parties’ respective positions. The Judge pointed out that the plaintiff was entitled to redeem the mortgage by tendering payment, but it did not and just declared an intention that it was prepared to repay the loan.
64. The Judge concluded that D2 was entitled to reject the plaintiff’s conditional offer, insist on the repayment of the ICBC loan, and enforce its right by selling D5’s shares mortgaged by the plaintiff under the share mortgage. The Judge rejected the suggestion that D2 was acting in bad faith.
65. As the Judge had already ruled that there was no breach of fiduciary duty on the part of D2 in seeking repayment of the ICBC loan by selling the plaintiff’s share in D5, he did not find it necessary to deal with issues relating to the plaintiff’s complaints of “dishonest assistance”, “knowing receipt” or “conspiracy to injure by unlawful means”.
66. The Judge took the view that damages were unlikely to be adequate remedies for either the plaintiff or the defendants, although he seemed to suggest that the plaintiff’s loss of D5’s share could be substantially compensated by damages.
67. On the issue of balance of convenience, the Judge said:
“I would have exercised my discretion against the grant of an injunction having regard in particular to my views on the relative strengths of (the plaintiff’s) claims for injunctive relief, the fact that ‘the project’ is deadlocked and in a standstill, the fact that (the plaintiff) has contracted for compensation under the counter-guarantee, the relative dearth of evidence of likely damages to (the plaintiff) other than the loss of the shares, and the considerable extent to which (the plaintiff’s) loss of shares can, even if not fully, be substantially compensated by damages.”
68. As the Judge had concluded that the plaintiff had failed to raise any serious issue to be tried, he discharged the injunction granted by Poon J and Yam J.
Grounds of Appeal
69. Mr Leong argued that the Judge was wrong to hold that there was no serious issue to be tried; that damages would not be adequate remedies to the defendants; and that the balance of convenience lay in favour of the discharge of the injunction.
70. Mr Leong invited this court to exercise the discretion afresh on the basis that (1) the Judge’s decision was based on some misunderstanding of the law or of the evidence before him; and (2) it was one which, even though no erroneous assumption of law or fact can be identified, was so aberrant that no reasonable judge regardful of his duty to act judicially could have reached it.
71. Mr Leong pointed out the central findings of the judge, namely, that it was arguable:
(1) that Clause 6.1 of the shareholders’ agreement was the relevant provision;
(2) that the purpose of the ICBC loan was to fund the increase of the capital of Beijing Yaohui;
(3) that (D1) had the responsibility to obtain the necessary funding;
(4) that the counter-guarantee and the confirmation letter were intended to serve different purposes;
(5) that even if there were some overlap of the protection afforded by the two documents, it would not mean that the counter-guarantee was superseded by the confirmation letter;
(6) that the counter-guarantee has remained extant (valid and effective) throughout notwithstanding the cancellation of the confirmation letter in June 2011; and
(7) that (D1), (D2) and (D3) all shared the same “directing mind and will”.
72. Mr Leong suggested that the Judge’s dismissal of the plaintiff’s claim based on the counter-guarantee and breach of mortgagee’s duty to act in good faith was fundamentally flawed and contrary to the central findings that he had made. He suggested that the plaintiff was entitled to rely on Clasue 6.1 of the shareholders agreement and not just the implied terms arising therefrom.
73. Mr Leong also complained that the Judge had failed to remind himself of the special circumstances in which the plaintiff and D1 agreed to take part in “the project”. Mr Leong emphasized that under the shareholders’ agreement, D1 was responsible to meet the capital need of D5, including arranging the ICBC loan and repaying it when D5 was unable to do so.
74. Mr Leong pointed out that the plaintiff had initially refused to mortgage its shares in D5 as a guarantee demanded by ICBC and it only agreed to do so because of the counter-guarantee from D1 so as to be sure that it would remain harmless.
75. Mr Leong suggested that when D1 caused D2, its wholly owned subsidiary to acquire the ICBC laon and then seek to sell only the plaintiff’s shares, but not D4’s shares, D1, (1) was in breach of the expressed terms of Clause 6.1 as well as the counter-guarantee; (2) would circumvent its liability to repay the ICBC loan; and (3) had attempted to elbow the plaintiff out of “the project”.
76. Mr Leong argued that D1 was trying to get a benefit from its own wrong.
77. Mr Leong suggested that D2 and D3 had been over-secured by the terms of the ICBC loan and would suffer no conceivable loss by reason of the injunction and that the possible loss suffered by D1, D4 and D5 would not be caused by the injunction.
78. When confronted with the suggestion that D2 could not be responsible for D1’s liabilities in the absence of an application to lift their corporate veils or any suggestion that D2 was the alter ego or agent of D1, Mr Leong suggested that facts supporting such allegations had been presented and that the court was entitled to take them into consideration.
79. Mr Leung further suggested that the Judge was wrong to rule, on the issue of balance of convenience, in favour of the defendants.
Discussion
80. D1 and its associates might not have the plaintiff’s best interests in mind and what they did could have a serious adverse impact on the plaintiff’s interest. However, as emphasized by the Judge, “the plaintiff and D1 were engaged in ordinary commercial transactions with each other, dealing with each other at arm’s length.”
81. It must be remembered that D2, having paid HK$713.43 million to obtain the ICBC loan, was just trying to exercise its contractual right under the ICBC loan and the share mortgage executed by the plaintiff, which was part of the collaterals for the initial granting of the ICBC loan to D5 by ICBC.
82. Mr Leong accepted before the Judge that if ICBC had remained the creditor and had sought to enforce the share mortgage to recover the loan, he could have no complaint.
83. Mr Leong would have to accept also that if ICBC had assigned the ICBC loan to a third party, the third party would be able to enforce the share mortgage, including the exercise of the power of sale.
84. Could it then be suggested that the rights and obligations under the ICBC loan and the share mortgage somehow disappeared because of the relationship between the plaintiff and D1? Could it be suggested that D2, despite being the assignee of the ICBC loan, would not be able to enforce the share mortgage, being a security of the ICBC loan, and that the plaintiff’s obligations under the share mortgage disappeared altogether?
85. In our view the answers to the questions were obvious.
86. The plaintiff was of course entitled to redeem D5’s shares, but it chose not to. The plaintiff had offered to pay into court the sum of HK$745.3 million, but it did not. Yet the plaintiff claimed to be entitled to prevent D2, being the lawful creditor, from enforcing the ICBC loan.
87. Clearly D2, in trying to enforce the share mortgage, intended to recover the loan and the judge’s findings in relation thereto could not be faulted. Quite apart from the fact that the plaintiff had not pleaded a case of D2 not acting in good faith, the evidence did not support the plaintiff’s case at all. The suggestion that D2 owed fiduciary duties to the plaintiff not to enforce repayment of the ICBC loan was misconceived.
88. Whatever was D2’s motive and irrespective of the extent to which D1 was able to influence it, D2 was entitled to exercise the power to recover the ICBC loan, including the power of sale of the plaintiff’s shares in D5. In the absence of any application to lift the corporate veils of D2 and/or suggestion that D2 was just the alter ego/an agent for D1 and D4, the fact that D1 was able to influence D2 was not, in our view, relevant to the issues that we had to decide.
89. We did not agree with Mr Leong’s suggestion that the court could deal with the case on the basis that D1, D2 and D4, despite their separate legal identities, should be treated as one and the same in their dealings with the plaintiff. The plaintiff had not pleaded its case that way and full evidence had not been presented. The plaintiff had not argued such a case before the Judge and it could not be allowed to raise the issue for the first time in the Court of Appeal.
90. Clause 6.1 of the shareholders’ agreement, in our view, only obliged D1 to seek funds to meet Beijing Yaohui’s need for increase of capital and did not impose a duty on D1 to ensure that D5 had the necessary funds at all times. If there was a duty on D1’s part to ensure that D5 had the necessary funds at all times, Clause 6.2(a) which imposed the duty on D1 to lend the sums of Rmb 460 million and Rmb 110 million would be redundant.
91. Even if D1, under Clause 6.1 of the shareholders’ agreement, were responsible for arranging funds to meet Beijing Yaohui’s need for increase of capital and that there was an implied term that D1 and/or D4 should ensure that D5 had the necessary funds at all times, it was not an obligation that could be attributed to D2, which is a separate entity from, albeit a subsidiary of D1.
92. The Judge had considered the circumstances leading to the obtaining of the ICBC loan. The Judge had also analyzed the “special features” as emphasized by Mr Leong.
93. In our view, the Judge was right in concluding that D1 did not have any duty not to do anything harmful to the plaintiff’s proprietary interest in its shares in D5 and in “the project”. The Judge was also right in his construction of Clause 6.7 of the shareholders’ agreement and Clause 14.1 of the ICBC loan agreement.
94. If the plaintiff had any legitimate complaints against D1 in respect of the shareholders’ agreement, the counter-guarantee, the confirmation letter or “the project”, the plaintiff was entitled to take such step as might be appropriate. The plaintiff was of course entitled to claim against D1 for its pro rata obligation under the ICBC loan. The liability that D1 owed to the plaintiff could not be a reason for depriving D2 of its right to enforce the loan agreement and the share mortgage against the plaintiff. In any event, D2 had offered to release all the mortgaged shares if the plaintiff and D1 each paid its pro rata share of the loan. This offer had not been taken up by the plaintiff.
95. The ICBC loan and the share mortgage in relation thereto were separate from and independent of the other arrangements between the plaintiff and D1. The plaintiff’s complaints against D1 could not and should not have any adverse effect on D2’s contractual rights under the ICBC loan and the share mortgage executed by the plaintiff.
96. We were satisfied that in so far as the plaintiff claimed to be entitled to resist D2 enforcing the share mortgage executed by the plaintiff in order to recover the ICBC loan, there was no serious issue to be tried.
97. In any event, the Judge, in exercising his discretion, decided that it was not a proper case to grant the interim injunction sought by the plaintiff. In order to persuade the Court of Appeal to upset such exercise of discretion, the plaintiff will have to demonstrate that the Judge had erred in principle or had exercised his discretion in a way which no reasonable judge properly directing himself as to the relevant considerations could have exercised it. (See the judgment of Sir John Donaldson MR in Elan Digital Systems Ltd v Elan Computers Ltd [1984] FSR 373 at 384)
98. The Judge, in the exercise of his discretion, had taken into consideration “the relative strengths of the (plaintiff’s) claims for injunctive relief, the fact that ‘the project’ was deadlocked and in a standstill, the fact that (the plaintiff) had contracted for compensation under the counter-guarantee, the relative dearth of evidence of likely damages to (the plaintiff) other than the loss of the shares, and the considerable extent to which (the plaintiff’s) loss of share can, even if not fully, be substantially compensated by damages.”
99. The plaintiff had failed to persuade us that the Jude’s exercise of discretion was “plainly wrong”. The plaintiff’s appeal, in our view, had no reasonable prospect of success.
100. We therefore dismissed the plaintiff’s application for leave to appeal with costs to the defendants to be taxed if not agreed. We also granted D1 to D5 a certificate for two counsel.
(W Yeung)
(Maria Yuen)
Mr Alan Leong SC, Mr Lee Tung Ming and Mr Henry Cheng, instructed by Messrs Anthony Siu & Co for the plaintiff
Mr Ronny Tong SC and Ms Zabrina Lau instructed by Messrs Stevenson, Wong & Co for the 1st , 4th and 5th defendants
Mr Rimsky Yuen SC and Mr Law Man Chung, instructed by Messrs Chan & Young for the 2nd and 3rd defendants
Ms Elaine Liu, instructed by Messrs ONC Lawyers for the 6th and 7th defendants