NATURAL DAIRY (NZ) HOLDINGS LTD v. CHEN KEEN (ALIAS JACK CHEN) AND OTHERS

CAMP 119/2021

[2022] HKCA 246

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 119 OF 2021

(ON AN INTENDED APPEAL FROM HCA NO 2218 OF 2017)

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J U D G M E N T

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Hon Yuen JA and Chow JA:

1.  This is the application of the 1^st defendant for leave to appeal a decision of Recorder Sit SC (“the recorder”)  given on 7 October 2020 (“the Decision”)[1] granting Mareva and proprietary injunctions against him and others. At the hearing, which took 2 days, the 1^st defendant was represented by senior and junior counsel.

Application to Court of First Instance for leave to appeal

2.1.  In a summons filed on 21 October 2020, the 1^st defendant (together with his wife the 3^rd defendant)  applied for leave to appeal on grounds drafted by legal representatives.

2.2.  At the hearing on 22 March 2021, the 1^st defendant acted in person[2].  The recorder refused to give leave to appeal for reasons set out in a decision given on 1 April 2021[3].

Application to Court of Appeal for leave to appeal

3.1.  On 13 April 2021, the 1^st defendant filed a summons in this court for leave to appeal.  The proposed ground(s)  of appeal set out in this summons was/were as follows:

“原審法官錯誤理解基本事實，及明顯地錯誤運用酌情權，詳情見附件的陳述及附件”

(“The recorder misunderstood basic facts and was plainly wrong in the exercise of her discretion, details see annexed submissions and annexure”).

3.2.  On 23 July 2021, the Registrar of Civil Appeals directed that the 1^st defendant’s draft ground(s)  of appeal and written submissions dated 20 May 2021 (nearly identical to the annexed submissions and annexure referred to in para. 3.1 above)  do stand as the 1^st defendant’s formal draft ground(s)  of appeal and written submissions, superseding previous grounds of appeal/submissions attached to other documents filed after 13 April 2021.  It should however be noted that where the 1^st defendant has alleged facts which have not been set out in affirmations, or where he has referred to documents which have not been adduced as evidence before the recorder in the proceedings below and have not been included in the bundles before this court, such allegations and documents cannot form part of our deliberations.

3.3.  This Judgment is written in English as that was the language in which the Decision was written.  If the 1^st defendant requires an oral interpretation by a court interpreter, that can be arranged.

Background

4.  The background of the case has been set out in detail in the Decision and it will not be repeated here.  However, it may assist in the understanding of our judgment to recount some pertinent matters.

5.  On 7 May 2009, the 1^st defendant was appointed an executive director, joint chairman and CEO of the plaintiff company (“the Company”)  which was listed on the Hong Kong Stock Exchange, and tasked⁴ with exploring the opportunity to acquire 20 dairy farms in New Zealand (“Crafar Farms”)  as well as the cattle stock, machinery and other chattels therein owned by various companies associated with or controlled by the Crafar family[5] (“the Acquisition”), and with negotiating and executing the terms of the Acquisition.

The SPA

6.1.On 22 May 2009, the Company entered into an agreement (“SPA”)  with UBNZ Trustee Ltd[6] (referred to as “UTCL” or UBNZ Trustee)  and UBNZ Funds Management Ltd (referred to as “UBFM” or UBNZ Funds). 

6.2.  The SPA was for the Company’s acquisition of a company called UBNZ Asset Holdings Ltd (referred to as “UBAH” or UBNZ Assets).  UTCL was the vendor and UBFM was a warrantor. 

6.3.  The SPA recited that:

-  UTCL controlled 100% of UBAH;

-  UBAH does not carry on any business as at the date of the SPA but it will prior to the completion of the Sale Shares[7] acquire all the property, assets and rights for use in the conduct of the Business and will carry on the Business; 

-  The Business was defined as “the business of cattle and dairy cattle breeding in New Zealand and production, sale and distribution of livestock and milk fat solids, to be carried on by [UBAH] on or before completion of the Sale Shares including the ownership of [properties set out in a schedule] and shares [in a New Zealand co-operative scheme].

The Company’s 2009 Announcement 

7.  The SPA was summarised in the Company’s announcement dated 4 June 2009 (“the 2009 Announcement”)  as follows:

“(a)  UTCL has conditionally agreed to dispose of and the Company has conditionally agreed to acquire ... the Sale Shares (representing 20% of the entire issued share capital of [UBAH] and the Debt[8] at the consideration of NZ$100 million (equivalent to approximately HK$479.75 million)  minus HK$1.00; and

(b)  in consideration of the sum of HK$1.00 paid by [the Company] to UTCL, UTCL has agreed to grant to [the Company] the right to require UTCL to sell to the Company ... the Option Shares (representing 80% of the entire issued share capital of [UBAH] and the Outstanding Debt[9] at the consideration of HK$ equivalent of NZ$400 million (equivalent to approximately HK$1,919 million).

Completion of the Acquisition is conditional upon fulfillment of a number of conditions including complying with all necessary consents, approvals and authorizations, including but not limited to the Overseas Investment Process Office of New Zealand.”

Events prior to the SPA

8.1.  In fact, prior to the SPA:

-  the 1^st defendant controlled 60% and the 2^nd defendant controlled 40% of UBFM[10];

-  on 3 October 2008, a “confidentiality agreement”[11]had been made between UBFM and a person called Barry Fraser (“Fraser”)  for the provision of information to UBFM about the Crafar Farms[12];

-  on 8 October 2008, a document entitled “Dairy Farm Commission Agreement”[13]had been signed by the 1^st defendant, the 2^nd defendant and a BVI company said to be owned by Fraser’s family, whereby “all parties agree that all commission received through dairy farm purchases with CraFarm Group ... will be shared equally between the said three parties”.  This document also stated that “the Confidentiality Agreement between CraFarms Group and [UBFM][14] forms part of this agreement”;

-  on 17 November 2008, a “consultancy agreement”[15] had been made between Fraser and the Crafar companies to provide for (among other things)  the provision of consultancy services by Fraser in relation to the sale of the Crafar Farms in return for a “success fee” of 2% upon sale[16];

-  in April 2009, the 1^st defendant introduced the opportunity of acquiring the Crafar Farms and the 2^nd defendant to Katherine Chan, the chairperson of the Company[17], and this led to the 1^st defendant’s appointment as director of the Company on 7 May 2009;

-  the day after his appointment, on 8 May 2009 the 1^st defendant had transferred his 60% of UBFM to UTCL; the recorder noted that there is no averment or evidence as to whether (and if so what)  consideration had been given for the transfer[18]; in the 1^st defendant’s draft ground(s)  of appeal and written submissions, he claims it was for $1 as (he said)  on 7 May 2009, UBFM had no value as it had no business;

-  10 days after the 1^st defendant’s transfer of his shares, on 18 May 2009, UBFM entered into 6 agreements (“the Farm Agreements”)  with 6 Crafar companies to acquire the businesses and assets of the Crafar Farms, at a total consideration of NZ$259 million[19], and as noted above, 4 days later, the SPA was signed whereby the Company was to acquire UBAH[20] for a total of NZ$500 million.

8.2.  It is the Company’s case that it was not aware of the 1^st defendant’s interests in UBFM (which it asserts continued after his purported transfer of shares), the Commission Agreement and the Farms Agreement.  Its case is that the 1^st defendant was in a conflicted position and was in breach of fiduciary duty.  It is noteworthy that the 2009 Announcement (made on 4 June 2009)  stated that UBFM was independent of the Company’s officers.  The 1^st defendant was a director of the Company at the time.  

The Yee emails

9.  After the SPA, the Company appointed a firm called Shinewing to perform due diligence for the Acquisition.  In this exercise, a person called Eric Yee (“Yee”)  acted for the Company’s counterparties.  Between 16 June and 27 June 2009, Yee sent a number of emails which were copied to the 1^st defendant.  The emails disclosed that the Business had suffered a loss of at least NZ$30 million up to 31 May 2009 which would “implode an Armageddon on the account balance sheet”.  Yee suggested adjustments in order to show a net profit instead of a net loss[21].

Valuation of the Properties

10.  In June 2009, a valuation of the real properties showed a lower figure (NZ$206 million)  than at the time of the SPA (NZ$320 million)[22].

The Company’s 2009 Circular

11.1.  A circular was then issued by the Company on 8 September 2009 (“the 2009 Circular”)  to its shareholders recommending shareholder approval of the SPA.  In it, the board of directors (of which the 1^st defendant was one)  first announced that “as the due diligence progresses, the Board decides to constraint the purchase on two components, namely Properties and Fixed Assets, to ring-fence transaction risk and optimize the returns.  The Stocks, Goodwill and Contracts shall not and will not be included in the proposed Target assets” [23]. Then, despite the lower valuation of the Properties, after referring to “the increasing trend in gross profit attributable to the Target Assets ... over the three preceding financial years ended 31 May 2009”, it considered that “no adjustment to the Acquisition Consideration as a result of the fall in aggregate market value of the Properties is necessary taking into account of the above-mentioned profit guarantee[24]...”.

11.2.  It is noteworthy that the 2009 Circular stated specifically that:

“To the best of the information, knowledge and belief of the Directors [of which the 1^st defendant was one] having made all reasonable enquiries, each of [UBAH], [UTCL], [UBFM], the ultimate beneficial owner of [UBAH] [UTCL] and [UBFM], the registered owners and the ultimate owners of the Properties and Fixed Assets are Independent Third Parties to the Company and its connected persons and in particular there is no existing or prior relationship or understanding between [the 1^st defendant] and [the 2^nd defendant] with respect to the Acquisition such that the Acquisition shall become a connected transaction under Chapter 14A of the Listing Rules[25]”.

The 1^st defendant’s resignation  

12.  A week after the 2009 Circular, the 1^st defendant resigned as director of the Company.  However, it is the Company’s case that he remained a de facto director, alternatively a shadow director, of the Company[26].  He was a director of two wholly owned subsidiaries of the Company until some time in 2010 and there are documents suggesting that he continued to be involved in the Acquisition in 2011[27].

Shareholder approval, completion and payment

13.  On 2 October 2009, the Company’s shareholders approved the Acquisition.  On 10 February 2010, the sale by UCTL to the Company of 20% shares of UBAH (the Sale Shares)  was completed.  Payments in various forms were made by the Company. 

1^st defendant’s financial activities   

14.  For the purposes of this application for leave to appeal on the draft ground(s)  of appeal and written submissions, it is not necessary to record any further events, save that[28]:

-  on 19 February 2010, companies controlled by the 1^st defendant purchased various properties (collectively the Anfatex Properties);

-  between 10 June and 16 August 2010, the 1^st defendant’s company received funds (the Anfatex Payments)  from New Zealand lawyers engaged by the Company for the Acquisition;

-  on 14 July 2010, the 1^st defendant together with the 3^rd defendant acquired a property (the NZ property);

-  between 23 February and 13 April 2011, the 1^st defendant together with the 3^rd defendant discharged the mortgages over some properties in New Zealand and Hong Kong (collectively the Mortgaged Properties).

It is the Company’s case that part of the Acquisition funds had been applied for the benefit of the 1^st defendant as set out above. 

Criminal proceedings

15.  Returning to the factual narrative, in December 2010, the 1^st defendant was arrested for conspiracy to defraud the Stock Exchange by making false representations or non-disclosure in respect to the Acquisition.  A Restraint Order in the sum of HK$200 million was made on the application of the Department of Justice on 26 October 2011. On 30 August 2019, the Court of Final Appeal set aside the conviction of the 1^st defendant and ordered a re-trial, which according to court records has been listed to take place in May 2023.

Civil proceedings

16.1.  Meanwhile, on 22 December 2016, a court in the Cayman Islands appointed provisional liquidators for the Company. A writ was issued in Hong Kong in 2017, and the present summons for injunctive relief was filed on 9 July 2019, the hearing of which took place before the recorder on 5-6 May 2020. 

16.2.  As noted earlier, the recorder granted proprietary and worldwide Mareva injunctions against the 1^st defendant in terms set out in §129 of the Decision.  

Discussion

17.  Applying well-established principles of law to the draft ground(s)  of appeal, the 1^st defendant can only succeed if this court is satisfied that his appeal has a reasonable prospect of success by his showing that the recorder’s exercise of discretion was based on a misunderstanding of the evidence before her.  For ease of understanding, the 1^st defendant’s submissions will be considered chronologically below.

18.  By way of preliminary observation, we note that the 1^st defendant has referred to and/or relied upon many documents in his draft ground(s)  of appeal and written submissions dated 20 May 2021 which were not adduced as evidence before the recorder in the proceedings below or included in the bundles before this court, including:

(1)  under the heading “§85”, “two important emails”, the retainer letter from the Company to Shinewing dated 3 June 2009, an email from Andy Wong to the Company in December 2009, and some accounts which Yee provided to Shinewing;

(2)  under the heading “§§88-90”, the admitted facts in criminal proceedings (presumably HCCC 309 of 2019)  dated 16 April 2021, an undated letter confirming that GFIG was struck off on 1 May 2009, UBFM Companies Registry registration documents, Confidentiality Agreement dated 3 October 2008, 6 Sale and Purchase Agreements between UBFM and Crafar, and an email from the 1^st defendant to Fraser dated 16 September 2009;

(3)  under the heading “§93”, an April email from the 2^nd defendant (which the 1^st defendant has not properly identified);

(4)  under the heading “§94”, Announcement dated 20 August 2014 and Announcement dated 18 December 2009;

(5)  under the heading “§95”, a letter to the Stock Exchange of Hong Kong Limited dated 25 January 2010;

(6)  under the heading “§96”, Annual Reports (years unspecified);

(7)  under the heading “§98”, evidence of remittance in respect of unspecified transactions; and

(8)  under the heading “§§105-106”, evidence in criminal proceedings including a January 2010 email, an email of Graham Chin dated 9 February 2010 and his authorization letter, emails and accounts from New Zealand lawyers, etc, and 1 June Announcement.

Since these documents have not been adduced in evidence before this court, the 1^st defendant is not entitled to rely on them in support of the present application for leave to appeal.

18.1.  The 1^st defendant submitted that it was not necessary for him to disclose the Commission Agreement because it stated that “the Confidentiality Agreement between CraFarms Group and [UBFM] forms part of this agreement” and that Confidentiality Agreement only had a tenor of 1-month. 

18.2.  We would note first that the Confidentiality Agreement has not been produced as evidence before the recorder or this court, and so there is no evidence that it only had a tenor of 1-month.  It is not even known if there was only one Confidentiality Agreement, as the parties referred to in §18(1)  of the Decision and those in the Commission Agreement appear to be different.  Secondly, this is a markedly different case from that put forward at the hearing before the recorder, which was that the Commission Agreement had expired by reference to an alleged 1-month tenor in the Consultancy (not the Confidentiality)  Agreement[29]. The Consultancy Agreement has similarly not been produced as evidence before the recorder or this court.

18.3.  Further, the 1^st defendant pointed out that in Schedule 3A of the SPA, clause 10 (presumably 10.3)  stated that “no one is entitled to receive from any Group Company any founder’s fee, brokerage, or other commission in connection with the purchase of the Sale Shares”.  “Group Company” is defined as UBAH and its subsidiaries (if any). However, there is no written rescission of the Commission Agreement, and it is pertinent that Fraser has continued to claim commission thereunder. 

18.4.  The Commission Agreement may well be applicable upon the execution of the Farms Agreement[30](whereby UBFM acquired the businesses and assets of the Crafar Farms)  which was made on 18 May 2009, at a time when the 1^st defendant was tasked with negotiating the acquisition for the benefit of the Company of which he had been appointed a director.

18.5.  The 1^st defendant argues that it was an agreed fact between the prosecution and the defence in his criminal case that he had never received any commission.  However, as pointed out by the recorder, there was plainly a prima facie entitlement to commission and thus there was a sufficient basis to show a conflict or possible conflict with respect to the commission payable.[31]

19.1.  The 1^st defendant submitted that on 1 May 2009, GFIG (Global Financial Investment Group Ltd, or Global Financial)  through which he held 60% of UBFM had been struck off and thus should have no value. 

19.2.  However, he has not adduced evidence before this court of the alleged striking-off.  Be that as it may, in his own submissions he referred to a letter (unidentified)  which allegedly stated that GFIG had been struck off for failure to pay annual company registration fees. If that is so, the company could have been restored to the register by payment of those fees.  In any event, it is the 1^st defendant’s case that, notwithstanding the striking-off of GFIG on 1 May 2009, GFIG divested its interests in UBFM in favour of UTCL on 8 May 2009[32].  If GFIG had indeed been struck off on 1 May 2009, the purported divestment of its interests in UBFM on 8 May 2009 might not have been valid or effective.

20.1.  The 1^st defendant also submitted that on 7 May 2009 (the day he was appointed a director of the Company), UBAH had not yet been incorporated, and UBFM had no operations and no value, so it was reasonable for him to have transferred his 60% shares in UBFM to the 2^nd defendant for $1[33].

20.2.  First, the fact that on 7 May 2009, UBAH had not yet been incorporated is immaterial.  It was only the corporate vehicle into which UTCL’s wholly owned subsidiary UBFM would inject the properties, assets and rights for use in the conduct of the Business and which would carry on the Business.

20.3.  Then, as to the transfer, we would note first that the Decision records that the transfer was made on 8 May 2009[34]. But irrespective of whether it was on the 7^th or the 8^th, the 1^st defendant’s submission ignores the factual matrix in which the transfer took place.

20.4.  The 1^st defendant’s pre-existing working relationship with the 2^nd defendant regarding the subject matter of the Acquisition is evident from the Commission Agreement which pertained to the purchase of the Crafarm dairy farms.  This was not disclosed to the Company when he was invited “to join the Company to help with negotiating with the Vendor [the 2^nd defendant’s company UTCL] on the possible acquisition”[35].

20.5.  The 1^st defendant (an officer of the counterparty)  was also copied in on the Yee emails in June 2009 (discussed below), which would have been most unlikely if the 1^st defendant had no further financial interest in UBFM. 

20.6.  On this evidence, the recorder was entitled to find a good arguable case that, despite the purported transfer, the 1^st defendant retained an interest in UBFM, putting him in a conflicted position.  As can be seen in the Decision, UBFM was the recipient of various funds paid by the Company[36].

21.1.  Then as to the Yee emails in June 2009, as far as we understand the 1^st defendant’s submissions, his first point was that what Yee provided to Shinewing were “UBAH Pro Forma” accounts, and he submitted that these were irrelevant because what the Company was acquiring was not the Crafar companies’ accounts but their assets.

21.2.  The Company says in its submissions that it is not understood what “UBAH Pro Forma” means[37].

21.3.  We take it that it is a reference to the definition of “accounts” in the SPA, which defines “accounts” as

“the unaudited balance sheets of [UBAH] on a pro forma basis assuming that [UBAH] already owned the Business and prepared as at 31 March 2009 and the unaudited profit and loss accounts of [UBAH] on a pro forma basis assuming that [UBAH] already owned the Business and prepared for the financial years ended 31 December 2008, to be provided by UTCL to [the Company] in accordance with Clause 6.5”.

So in this context, the pro forma basis is on the assumptions set out above, ie that UBAH already owned the Business.

21.4.  Contrary to the 1^st defendant’s submissions, the Yee emails were relevant as the Company was acquiring UBAH, and the “accounts” of UBAH required to be delivered to the Company under Clause 6.5 of the SPA were to be prepared on the assumption that it already owned the Business.  If (as disclosed by the emails)  the Business had suffered a loss of at least NZ$30 million up to 31 May 2009, which would “implode an Armageddon on the account balance sheet”, that would explain why the accounts had to be manipulated for a more favourable presentation[38]. 

21.5.  The 1^st defendant’s submission that he was not an accountant is not to the point.  The point was that as a director of the Company, he was made aware through the Yee emails copied to him that the Company’s counterparty was going to manipulate the accounts of the subject matter being acquired.

22.  In the same vein, the 1^st defendant’s submission that the parties to the SPA were legally represented is not to the point, as business decisions are made by the clients, not legal representatives.

23.  Further, the 1^st defendant’s submission that he did not understand English is neither here nor there as, quite apart from the points made by the recorder in §91(1)  of the Decision, he himself said in his draft ground(s)  of appeal and written submissions that he asked his staff to send out emails in English for him - thus, clearly, he had staff who could provide him with translations or interpret documents to him.

24.1.  The 1^st defendant submitted that the recorder was wrong to find that he was a “shadow director”.

24.2.  However, it is clear from the Decision that the recorder did not consider it necessary to find whether the 1^st defendant was a de facto director, or shadow director, of the Company after his resignation as a de jure director on 15 September 2009[39].  

25.1.  The 1^st defendant submitted that although on 5 October 2009, receivers were appointed for the Crafar companies[40], under the SPA the Company had a profit guarantee from UTCL and UBFM. 

25.2.  However, the recorder has noted that whether the SPA itself was uncommercial may not be a matter of great significance for the purpose of the interlocutory injunctive relief as a matter of law, given the 1^st defendant’s breaches of fiduciary duty[41].

26.1.  Finally, the 1^st defendant submitted that the Goldmate - Superworth - 3^rd defendant contracts were facts, and the Company had not shown that the transactions did not exist.

26.2.  However, the Company did not need to show that these contracts did not exist.  What the recorder did was to have analysed them for internal consistency as well as consistency with the case advanced by the 1^st defendant.  The 1^st defendant has not challenged that analysis.  The recorder was thus entitled to find that he received the benefit of some of the Acquisition funds.

Order

27.  For the above reasons, we are not satisfied that the appeal has a reasonable prospect of success on the draft ground(s)  of appeal that the recorder’s exercise of discretion was based on a misunderstanding of the evidence before her.  The summons is accordingly dismissed with an order that the 1^st defendant shall pay the plaintiff Company’s costs.  Having considered the statement of costs provided by the Company, which the 1^st defendant has not responded to, we summarily assess costs at $75,000.

28.  Since the 1^st defendant’s application for leave to appeal is totally without merit, we make an order under Order 59, r2A(8)  of the Rules of the High Court, Cap 4A, that no party may request the present determination to be reconsidered at an oral hearing inter partes.