SINO RESOURCES GROUP LTD v. HUNG CHEN RICHAEL AND OTHERS

CACV201/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 201 of 2010

(On appeal from HCA No.2477 of 2009)

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BETWEEN:

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JUDGMENT

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Hon. Yuen JA:

1.  This is an appeal from a decision of Recorder Anthony Chan SC given on 20 September 2010 when he dismissed the Defendants’ application for a variation of an injunction order.  The Recorder refused leave to appeal but it was granted by Hon Cheung JA on 22 September.  A Notice of Appeal was filed on 22 September.  A Respondent’s Notice was filed on 27 September.

Background Summary

2.  The following paragraphs contain a summary of the background.  Details of particular relevance to this appeal appear thereafter.

3.  The substance of the Plaintiff company’s claim is for the rescission of an agreement under which the Plaintiff company had given cash, shares and convertible notes to the 1^st Defendant (“Hung”).  The cash, shares and notes had been given to Hung as consideration for his sale to the Plaintiff company of a BVI company called Wealth Gain Global Investment Ltd (“WG”).  Essentially the Plaintiff company claims that Hung had misrepresented what WG had agreed to buy from a PRC company.

4.  WG had agreed to buy from the PRC company (“the Mine Seller”) a PRC company that operated a coal mine in Heilongjiang (“the Coal Mine company”).  The Coal Mine company had various liabilities.  According to the Plaintiff company, Hung represented to it that WG had a valid agreement with the Mine Seller whereby the Coal Mine company would only have certain specific liabilities when the company is transferred to WG (“the 2007 Agreement”).  Instead, under an agreement between the Mine Seller and WG which was approved by the PRC authorities, the Coal Mine company would be transferred with all its liabilities (“the 2008 Agreement”).

5.  Meanwhile, the Mine Seller claimed that it had not received payment in time.  The Mine Seller sued WG in the PRC courts.  According to Hung, there was an agreement for extension of time and this was asserted as WG’s defence in the PRC courts. In February 2010, the PRC courts found that that was not proved and the Mine Seller succeeded in rescinding its agreement to sell the Coal Mine company to WG.  There is no appeal from WG. 

6.  The result is that WG does not now own the Coal Mine company, whereas Hung has become the single largest shareholder of shares in the Plaintiff company.  The Plaintiff company claims that it is entitled to rescind the WG Agreement and has done so, at the latest by 1 February 2010 when it served an amended Statement of Claim claiming rescission. 

7.  In January 2010 the Plaintiff company obtained an ex parte injunction from Yam J restraining Hung from exercising his rights as shareholder.  This was discharged for material non-disclosure but an injunction was re-granted by Chung J on 30 March 2010. 

8.  Meanwhile the Plaintiff company was due to hold AGMs for 2008 and 2009 on 30 September 2010.  On 3 September 2010, Hung issued a summons to vary the injunction so that he could exercise his rights as shareholder by voting at the AGMs.  The application was dismissed by the Recorder, hence this appeal which was heard on Monday 27 September 2010.  At the conclusion of the hearing, the court was informed that there would likely be an adjournment of at least part of the AGMs for 10 days.

9.  I shall now set out the detailed facts insofar as they are relevant to the present appeal. 

Framework Agreement

10.  On 18 July 2007 the Mine Seller, a PRC company called Heilongjiang Northern Enterprise Group Co. Ltd, entered into an agreement (“the Framework Agreement”) to sell the Coal Mine company, a PRC company called Shuangyashan Northern Sheng Ping Mining Ltd, to WG for RMB140m. 

WG Agreement

11.  WG was owned by Hung.  On 25 September 2007 Hung entered into an agreement (“the WG Agreement”) to sell WG to the Plaintiff company.  The Plaintiff company is a Cayman Islands company but its shares are listed on the Hong Kong Stock Exchange.

12.  Completion of the WG Agreement was to be on 31 March 2008, but it was conditional upon (amongst other things) the conditions precedent for completion of the “Mine Acquisition Agreement” having been fulfilled.  The “Mine Acquisition Agreement” was defined as “a contract to be entered into between the Mine Seller as vendor and WG as purchaser of the Coal Mine company in the form annexed as Annexure D”.  However we were told that there was no such annexure.  

13.  Under the terms of the WG agreement, the consideration payable by the Plaintiff company to Hung was $700m, to be paid partly in cash, and partly by the issue to Hung of shares in the Plaintiff company and convertible notes in the following way: 

(1)   a sum of $20m to be paid on signing the agreement as deposit; 

(2)   shares and convertible loan notes would be issued to Hung on completion;

(3)   3 months after completion (i.e. by 30 June 2008), the Plaintiff company would pay Hung $300m.  Hung would direct the Plaintiff company to pay such part of it as he required, directly to the creditors of the Coal Mine company.

14.  Under the WG Agreement, Hung gave a number of warranties to the Plaintiff company regarding WG and the Coal Mine company.  One of the warranties (after amendment by Supplemental Agreement dated 26 October 2007) was that upon transfer of the Coal Mine company and the payment of consideration for it, the Coal Mine company will have no liabilities other than government mining rights fees of approximately RMB77m and accounts payable in the ordinary course of business, in other words, no long-term liabilities.

The 2007 Agreement

15.  On 30 October 2007 the Mine Seller signed a formal agreement with WG for the sale of the Coal Mine company for RMB140m (“the 2007 Agreement”).  Clause 3.3 provided that the purchase price paid by WG would be “totally used to repay the long-term liabilities and interest and 2007 payable contingent liabilities” of the Coal Mine company.  The long-term liabilities were listed in Annex 1 - they amounted to approximately RMB122m, with interest at approximately RMB34m.  The “2007 payable contingent liabilities” listed in Annex 2 were the government mining rights fees of approximately RMB77m.

16.  In other words, the Mine Seller would in effect not receive any money from the purchase price, and WG would be acquiring the Coal Mine company with at least reduced long-term liabilities.

17.  The 2007 Agreement apparently received the approval of some, but not all, of the relevant Government authorities in the PRC.  One the authorities objected to clause 3.3 as it was contrary to a legal provision.

The 2008 Agreement

18.  An agreement dated 25 March 2008 between the Mine Seller and WG then came into being (“the 2008 Agreement”).  It would appear that Hung signed this agreement on WG’s behalf.

19.  Clause 3.3, the term which the Government authority had considered objectionable, was changed, such that the Mine Seller only warranted the accuracy of the long-term liabilities in its audit reports.  The purchase price of RMB140m remained payable to the Mine Seller (cl.3.2).

20.  The effect of the 2008 Agreement was that WG would be buying the Coal Mine company with accrued long-term liabilities of approximately RMB122m with interest of RMB34m, while it still had to pay the purchase price of RMB140m to the Mine Seller.

21.  The 2008 Agreement was approved by the Government authorities and registered on 16 April 2008.  Completion of the 2008 Agreement was due on 16 July 2008.

Completion of WG Agreement

22.  It is the Plaintiff company’s case that Hung did not inform them of the change in the terms of WG’s acquisition of the Coal Mine company pursuant to the 2008 Agreement (dated 25 March 2008) when the WG Agreement was completed a few days later on 31 March 2008.

Discovery of 2008 Agreement by staff of Plaintiff company

23.  The Plaintiff company also says that even when the 2008 Agreement was discovered by its senior staff a few months later in June 2008, Hung denied having knowingly signed it.

Hung’s receipt of consideration under the WG Agreement

24.  The Plaintiff company, of which Hung was now a director, continued to give him the cash, shares and convertible notes under the WG Agreement.

25.  Thus, even after the staff’s discovery of the 2008 Agreement in June 2008, the Plaintiff company paid Hung cash of approximately $8m in July 2008.

26.  Further, on 2 December 2008 the board of the Plaintiff company resolved to pay Hung $100m as part of the cash consideration.  The next day (3 December 2008) another board meeting was called at which there was tabled a letter dated 28 November 2008 from the Mine Seller’s Hong Kong solicitors objecting to public announcements made by the Plaintiff company which referred only to the 2007 Agreement and not the 2008 Agreement.  In response Hung told the board that when the Mine Seller asked him to sign documents to apply for Government approval of the agreement, he had signed some extra pages, but he was not aware that there were any changes in the terms of the acquisition.  The board resolved to delegate the matter to Hung to deal with.  

Hung’s assertion of Memorandum with Mine Seller

27.  Coming back to the question of which agreement was valid, Hung says that in July 2008 he had signed a Memorandum with the Mine Seller backdated to the same day as the 2008 Agreement, and that under this Memorandum, the Mine Seller agreed that the parties would be governed by the 2007 Agreement. 

28.  However the Mine Seller’s representative has since asserted on affirmation that the Memorandum was only presented to him by Hung in December 2008 and that he had refused to sign it.  He asserts that the signature purporting to be his has been forged.

PRC proceedings over 2008 Agreement

29.  In the meantime, it would appear that there was a dispute between the Mine Seller and WG over the currency of payment. 

30.  In January 2009 the Mine Seller issued proceedings in the PRC court.  WG defended the proceedings on the basis (as advised by Hung) that he had signed an agreement dated 31 October 2008 with the Mine Seller to extend time for payment (“the Time Extension Agreement”).  A photocopy of this document was registered with the Government authorities but the Mine Seller’s representative has since asserted on affirmation that the signature purporting to be his has been forged.  The Mine Seller has also said that an application form presented to the Government authorities for registration of the Time Extension Agreement bore a seal which was not its company seal.     

31.  In July 2009 the PRC court ordered that payment be made into court pending resolution of the dispute between the Mine Seller and WG.  The Plaintiff company raised funds from Hung and two other persons who are its directors, Gao and Chiu.  WG duly made payment into court.

32.  However WG failed to produce the original of the Time Extension Agreement.  This resulted in a judgment of the PRC courts given on 5 February 2010 holding that WG had breached the terms of the 2008 Agreement and ordering rescission of that agreement.  On 7 April 2010 the PRC courts ordered the Mine Seller to return the moneys paid into court to WG.  This money has been returned by WG to the Plaintiff company, which has refunded the funds to the persons who provided them, viz. Gao and Chiu, but not Hung.  This is one of the decisions made by the Plaintiff company’s board to which Hung objects.

33.  Further, the Plaintiff company’s board has decided not to appeal the PRC court’s judgment.  This is another of the decisions made by the Plaintiff company’s board to which Hung objects.

Hung’s withdrawal from the board

34.  It would be apparent from those decisions of the board that Hung does not now control it.  Although he had been appointed chairman in February 2009, he resigned from the board 6 months later in August 2009 and he was removed from the board of WG in December 2009 after a Special Committee Report commissioned by the Plaintiff company’s board was presented.

35.  On 10 December 2009 he was arrested in the PRC.

Proceedings in Hong Kong

36.  A few days later on 15 December 2009 the Plaintiff company issued the writ in HCA 2477/2009.

Ex parte Injunction

37.  On 22 January 2010 Yam J gave an ex parte injunction restraining Hung (and the other defendants, which are companies he controls) from dealing with the shares in the Plaintiff company that had been issued to him as part of the consideration under the WG Agreement.  Paragraph 6 also restrained them from taking part in the business of the Plaintiff company, and para. 7 restrained them “from exercising voting rights of the shares”.

Inter partes Injunction

38.  Hung moved to set aside the ex parte injunction for material non-disclosure.  In March 2010, Chung J found there had been non-disclosure but re-granted the injunction after a detailed discussion of the points raised by both parties. At para. 43 Chung J held that since the injunction was to restrain Hung from disposing of his shares, the practical effect was merely to preserve the status quo and Hung has not suggested that he is likely to suffer any real harm.

39.  There was no appeal from Chung J’s order.

Application for Variation

40.  However Hung then applied for variation of Chung J’s order.  It is said that that is because the Plaintiff company is obliged under its articles and the Listing Rules to hold its AGMs for 2008 and 2009, a requirement apparently first raised by Hung’s legal advisers.  At those AGMs, Hung wishes to elect certain other persons onto the board.  That is because he considers the present board has not been acting in the best interests of the Plaintiff company by:

(1)   refunding the loans to Gao and Chiu after payment out of the PRC court, even though the Plaintiff company is insolvent;

(2)   not causing WG to pursue an appeal from the judgment of the PRC court which held that the Mine Seller was entitled to rescind the 2008 Agreement.

The Recorder’s judgment

41.  The learned recorder refused the variation on the ground that there was no material change in circumstances.  He held that had Hung wished to exercise his voting rights, he could have pursued that argument before Chung J. as it must have been assumed by Hung that the Plaintiff company would hold an AGM when called upon to do so.

Appeal

42.  Miss Linda Chan counsel for the Defendants has argued that an interlocutory injunction is an ongoing matter and as such, a party is entitled to ask a court to reconsider its order (by way of discharge or variation) where there is new evidence or a new event, such as the holding of an AGM (Chu Hung Ching v Chan Kam Ming [2001] HKC 396).

43.  Dealing first with this point, I understand the Recorder’s approach, especially when the requirement to hold the AGMs was first raised by Hung’s legal advisers, which may lead to the inference that the holding of the AGMs has been engineered, so to speak, by Hung himself.  However the Plaintiff company is a listed company and is obliged to hold its AGMs whoever first raises that requirement.  And the fact that an AGM is to be held imminently is an event that may entitle a party to ask a court to vary an order restraining the exercise of voting rights, especially when there was no occasion for Hung to exercise those rights at the time Chung J gave his decision. 

44.  Coming then to the substantive arguments between the parties, Miss Chan’s first point was that the Plaintiff company would not suffer financially notwithstanding the difference between the 2007 and 2008 Agreements, because under the WG Agreement, Hung warranted that the Coal Mine company would not have any liabilities other than those specified.  The Plaintiff company could therefore look to Hung for any difference.  However with respect that does not mean that the Plaintiff company is not entitled to rescind the Agreement if Hung has made misrepresentations to it.  A party is not precluded from exercising its rights under one course of action because of the existence of an alternative right of action against a person, who may or may not have the means to compensate it. To put it in the bluntest terms in this case, the Plaintiff company contracted to buy a coal mine, not a lawsuit.

45.  Then Miss Chan sought to make a forensic point on the authenticity (or otherwise) of the 2008 Agreement by reference to a gap in the page numbers.  Leading Counsel for the Plaintiff company Mr Denis Chang SC  sought to counter that by making another forensic point on the positioning of text on different pages.  However this court is not in a position to decide disputes of facts, especially on matters such as the authenticity (or otherwise) of documents.  The issue for this court is simply whether the Plaintiff company has done enough to show a good arguable case that at the AGMs, Hung should be restrained from exercising his voting rights.

46.  I am mindful that Miss Chan has pointed to some apparent weaknesses or gaps in the evidence of the Plaintiff company, e.g. on the issue of the 2008 Agreement, why the Plaintiff company did not initiate investigations earlier; and on the Time Extension Agreement, why the Mine Seller did not act earlier to deny it after the public announcements made by the Plaintiff company.  There may also be questions whether acts or omissions on the part of the Plaintiff company after Hung’s departure from the board may be regarded as acts of affirmation of a contracting party or misrepresentee (negativing rescission), or simply as acts of a constructive trustee after rescission (Cartwright, Misrepresentation, Mistake and Non-disclosure, para. 4.11). 

47.  However I do not see at the moment that any of these arguments are fatal to the Plaintiff company, such as to render the injunction insupportable for lack of a good arguable case.  The affirmation of the Mine Seller’s representative supports the Plaintiff company’s case that Hung signed the 2008 Agreement knowingly, before he completed the WG Agreement with the Plaintiff company, and yet he carried on representing to the Plaintiff company that the terms of WG’s acquisition of the Coal Mine company were as per the more favourable 2007 Agreement. 

48.  If on that ground, the Plaintiff company has validly rescinded the WG agreement, then Hung has no entitlement to the shares issued to him as consideration, and consequently no entitlement to vote on the strength of those shares at the AGMs.  This is very different from a typical dispute between different camps of shareholders (cf the Isle of Wight case (1883) Ch D 320).  

49.  Of course if there is evidence that the directors themselves are acting in breach of their fiduciary duties to the company, then that is a matter which the court should take into account.  In my view however, Hung’s complaints about the directors are not such as to lead to a conclusion that he should be entitled to vote them off the board. 

50.  First, Hung has complained about the repayment of loans to Gao and Chiu which he says were made without validation orders even though he has petitioned to wind up the Plaintiff company.  In this respect, the Plaintiff company’s evidence is that the loans were made in the first place for a specific purpose, in what may amount to a Quistclose trust.   In that event, there may not have been an obligation to get a validation order.  Also there is some evidence that even though repayment of the loans was not yet due, they were repaid to Gao and Chiu to save interest, now that there was no further use for the funds.

51.  As for the decision not to appeal the PRC court’s judgment, the fact is that the original Time Extension Agreement has simply not been produced to the PRC court.  It cannot be said that the decision of the board not to pursue an appeal in those circumstances is so obviously wrong and against the interests of the company that the court should permit Hung to vote them out of office. In any event it is now too late for Hung to turn the clock back on the PRC appeal, simply by voting these directors out of office.

Order

52.  In the circumstances, I would dismiss the Defendants’ appeal from the learned Recorder’s order.  I would order the costs of the appeal to be paid by the Defendants to the Plaintiff, to be taxed if not agreed, save that the costs of preparing the Plaintiff’s own “core bundles” be deducted, for reasons already given during the hearing, of which the Plaintiff’s solicitors should be well aware.

Hon. J. Poon, J:

53.  I agree with the judgment of Yuen JA and would dismiss the Defendants’ appeal as well.  I also agree with the costs order made by her Ladyship.