HCA 1704/2011
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
HIGH COURT ACTION NO 1704 OF 2011
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BETWEEN
SUPER MASTER INVESTMENTS LIMITED
Plaintiff
and
POWER APEX LIMITED
1st Defendant
PACHMAR LIMITED
2nd Defendant
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Before : Hon Yam J in Chambers
Date of Hearing : 16 and 18 November 2011
Date of Handing Down Reasons for Decision : 24 February 2012
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REASONS FOR DECISION
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1. On 10 October 2011, the plaintiff obtained an ex parte Mareva Injunction from Saunders J against the 1st and 2nd defendants, restraining them to dispose of certain shares of a listed company, Dejin Resources Group Company Ltd (Stock Code No. 1163), (“Dejin Shares ”), with an ancillary discovery order (“the Interim Order”).
2. (1) In support of its application, the plaintiff formally filed an affirmation of Cheng Pak Lung (“Cheng ”), the sole director and shareholder of the plaintiff, on 13 October 2011.
(2) The defendants in opposition filed an affirmation of Choi Sung Fung (“Choi ”) also on 13 October 2011.
(3) On 14 October Sakhrani J directed the parties to file further evidence and continued the Mareva Injunction. No argument was heard from the parties.
(4) Pursuant to the aforesaid order, the defendants filed further evidence in the form of an affirmation of Ke Jun Xiang (“Ke ”) on 1 November 2011.
(5) In reply on 10 November 2011 the plaintiff filed :
(a) the second affirmation of Cheng;
(b) the affirmation of Peter Ho Pui Tsun (“Ho ”); and
(c) the affirmation of Johnny Leung Ka Kui (“JL ”).
3. It is not in disputed between the parties that one Trade Honour Limited (“Trade Honour ”) owed the 1st defendant debt in the substantial sum of over $100 million since about February 2010 (“the Debt ”). In the pleaded case of the plaintiff, it was said that the Debt was in the sum of $140 million in February 2010. The defendants said the Debt was about $125 million in February 2010 (with daily interest accrued), and around $135 million by October 2010.
4. The Debt held by the 1st defendant through the 2nd defendant was secured by the following securities :
(1) a personal guarantee from Ke, the chairman of CIL (“CIL ”) Holdings Ltd (Stock Code No. 0479), and
(2) a mortgage over 3,500 million shares of CIL. The value of the CIL shares was estimated to be around $87.5 million at the time the 1st defendant took over the Debt. However by October 2010, the value was substantially reduced to around $30.205 million.
5. Trade Honour was unable to repay the Debt, and the security held by the defendants dropped significantly in value. The defendant intended to exercise the power under the share mortgage to sell the CIL shares.
6. Ke tried to stop the defendants from selling the CIL shares and the defendants asked for further “securities in the form of share mortgage over other shares of a listed company ” (according to Ho paragraph 17). Ke therefore agreed to advance additional collateral for the Debt and at the same time requested the 1st defendant for forbearance from suing him personally and foreclosing the CIL shares.
7. At all material times, Ke was the chairman of CIL and Ho was the deputy chairman thereof.
8. Thus the defendants said that an agreement was reached between the 1st defendant and Trade Honour in October 2010 that additional collateral would be provided to the 1st defendant for :
(1) compensation of the significant drop in the value of the CIL shares;
(2) the 1st defendant’s forbearance from foreclosing the CIL shares; and
(3) the 1st defendant’s forbearance from suing Ke for the Debt.
9. Consequently Ke then approached Ho for assistance, as both of them would like to stop the 2nd defendant from exercising the right to foreclose the CIL shares as the management of CIL had taken enormous efforts for the resumption of the trading of CIL shares.
10. (1) The plaintiff alleged that Ke told Ho that the 1st defendant would agree to grant a “new loan facility ” to Trade Honour in the sum of $135 million but only on the condition that new securities in the form of share mortgage over shares of a listed company was required.
(2) Ho alleged that he then approached Cheng for assistance in early October 2010. Cheng only said he is an “old friend” of Ho.
(3) The plaintiff’s own case is that Cheng did not know and had never met with Ke or Choi, nor had any dealings with Trade Honour or Choi or the defendants. The plaintiff also had never had any acquaintance or contact with Trade Honour or the defendants.
11. Ho then asked Cheng to help Trade Honour by providing :
(1) Cheng’s personal guarantee, and
(2) 360 million listed shares of Dejin.
12. Cheng then agreed to Ho’s suggestion even though Ke /Trade Honour are complete strangers to Cheng.
13. In this respect, it is the plaintiff’s own case that a few days later, on about 13 October 2010, Cheng “urgently caused 22 shares certificate representing the [Dejin] shares to be delivered to” the solicitors firm representing Ke and Trade Honour, JKKL, simply because Ho told Cheng to do so. [Cheng I paragraph 9]
14. Again, solely on the representation made by Ho, Cheng decided to “authorise Ho ” to stamp the Stamped Form of Transfer on the same day (ie Cheng had already executed and signed the Stamped Form of Transfer when he supposedly urgently caused the share certificate to be delivered to JKKL).
15. After Cheng knew that Dejin Shares had been transferred to the 2nd defendant, which is another stranger to the plaintiff, Cheng also said “he was not very much concerned” simply because Ho told Cheng that 2nd defendant was a nominee of the 1st defendant.
16. Cheng alleged that at that time he authorized the delivery, there was no agreement reached between Trade Honour and the 1st defendant. Cheng said that that was because Ho informed him that these documents were necessary to get the negotiation going. Apparently Cheng never made any enquiry with Ke or the defendants or Cheng’s legal representatives in JKKL.
17. Then Cheng said that he got a receipt from Ho by which the 1st defendant acknowledged receiving the Dejin Shares. It was expressly stated on the receipt that the shares “shall be executed according to Agreement”. (Cheng I paragraph 17)
18. The defendants said pursuant to the agreement reached between 1st defendant and Trade Honour in October 2010, Ke then brought to the defendants the Dejin Shares, representing Trade Honour’s additional collateral for the Debt. Choi of the 1st defendant had enquired about the identity of the plaintiff when executing the Stamped Form of Transfer, and Ke had expressly confirmed to Choi that Dejin Shares belonged to Ke himself beneficially which Ke could readily transfer as he wished.
19. After receiving the shares certificates of the Dejin Shares by the defendants and after Ke had successfully arranged the Dejin Shares to be transferred to the 2nd defendant on 26 October 2010, it is not disputed that the 1st defendant did withhold foreclosing the CIL shares, and did withhold that legal action against Ke.
20. According to the defendants, it was expressly agreed between the 1st defendant and Trade Honour that in the event that the value of Dejin Shares sell below $0.40, the 1st defendant could immediately sell the Dejin Shares and the proceeds of the sale would be applied towards repayment of the Debt.
Sale of Dejin Shares
21. Subsequently in around December 2010, the market value of Dejin Shares fell below $0.40. Notification was therefore given to Ke / Trade Honour that the 1st defendant would exercise its right to dispose of the Dejin Shares, to which Ke /Trade Honour did not raise any objection. The 1st defendant then caused the 2nd defendant to dispose of some of the Dejin Shares at various points in time, and the proceeds of the sale were applied towards reducing the Debt and diminishing Ke’s liability.
22. On the plaintiff’s side, Cheng said he found out in July 2011 about the sale /disposal of some of the Dejin Shares by the 2nd defendant and he therefore decided to instruct JKKL to write to the defendants and ask them to “deliver back” the Dejin Shares.
23. The defendants submitted that the plaintiff did not explain there and then in July 2011 whether Cheng had approached and raised queries with Ho (the authorized person for the plaintiff to deal with the Dejin Shares). Further Cheng /the plaintiff did not try to find out between October 2010 and July 2011 whether the Dejin Shares did eventually help Ke to reach an agreement with the defendants from exercising the right to foreclose the CIL shares.
24. In other words, between October 2010 and July 2011, for some 9 months, Cheng decided to sit happily on the fact that the defendant would be free to dispose the Dejin Shares with the Shares Transfer Form. He did nothing about the shares and made no enquiry simply because he said he “trusted Ho ”, and Cheng “decided to leave Ho to handle the matter and awaited him to report the progress ” (Cheng I paragraph 25).
25. The market price of Dejin Shares as at 12 October 2011 had in fact dropped to $0.081 per share. It is almost five times less than the agreed price of the Dejin Shares which would trigger the 1st defendant’s right to foreclose. The defendants therefore submitted that the disposal of part of the Deijn shares by the defendants is a wise commercial decision, serving both the interest of the borrower, Trade Honour, and the lender, the defendants.
The plaintiff’s arguable case?
26. The plaintiff contended that the Dejin Shares were delivered to the defendant “in escrow ”. However in spite of the fact that the plaintiffs’s side has been represented by solicitors, it has never mentioned that those shares were delivered in escrow pending the happening of certain events. If it was meant to be delivered in escrow , the plaintiff could have asked a stakeholder to hold the shares pending the formal written agreement reached between the parties. It had never been advised to do that and it had never adopted that option. Mr Russell Coleman S.C., appearing with Miss Josephine Tjia for the defendants pointed out that it is not the case that the plaintiff’s side did not know the expression “in escrow ”. In fact, in one of the documents, this expression “in escrow ” had been used in a totally different context. Thus, it is hardly arguable that the Dejin Shares were delivered in escrow .
27. As a businessman, the plaintiff must have understood that when a blank Shares Transferred Form is stamped and signed, the transferee would have the freedom to dispose of those shares or any part thereof at any time.
28. Further from the plaintiff’s own case and evidence, it is quite clear that there cannot be any trust (Quistclose or resulting) or any fiduciary relationship established between the plaintiff and the defendants.
29. In the present case, neither Cheng nor the plaintiff had ever stipulated to the defendant the specific purpose of transferring the Dejin Shares, or any restriction in the use of the Dejin Shares, and the terms of the restriction.
30. The plaintiff’s original case at its highest was that all the communication or directions from Cheng of the plaintiff were made orally to Ho, who in turn contacted Ke (of Trade Honour), who then in turn dealt with Choi of the 1st defendant. Cheng merely had the bare allegation that his intention was to restrict the defendants in the use of the Dejin Shares, but there is no evidence to show that such intention was actually communicated by Ke to Choi of the defendants. Cheng merely stated that he had orally reminded Ho, who then orally reminded Ke of Cheng’s intention. None of such purported reminders were recorded in writing.
31. Further, by the time new evidence was adduced by Ho, the story had changed. Apparently, some of the oral communication was not even made directly between Ho and Ke, but between the representative of Ho, (a person named Viva Chan), and Ke’s secretary (a person named Wei Qing Ying).
32. On the contrary, the defendants had Ke’s evidence who deposed in his affirmation that he had told them (ie the defendants), that he was the beneficiary owner of the Dejin Shares. In that case, there cannot be any resulting trust established between the plaintiff and the defendants. Cheng said that he trusted Ho when he passed the Dejin Shares to Ho. At best, the fiduciary relationship, if any, would therefore had been formed between the plaintiff /Cheng and Ho, but not with Ho’s representative, or with Ke, or with the defendants.
33. We only know for a fact that Cheng’s intention in providing the Dejin Shares to Ke was to assist Trade Honour to avoid the disposition of the CIL shares by the 1st defendant. On the strength of the additional collateral by way of the Dejin Shares, Ke had successfully stopped the 1st defendant from foreclosing the CIL shares.
34. It is therefore difficult to understand the plaintiff’s case of having the Quistclose Trust when the intention for providing the Dejin Shares was not violated.
35. In the end, I accepted that the defendants’ submission that even on the plaintiff’s case, the defendants are bona fide purchasers for value of the Dejin Shares.
36. The plaintiff’s case was that a new facility loan was to be granted by the 1st defendant to Trade Honour in the sum of $135 million and the Dejin Shares were meant to be part of the securities provided for the new facility loan. But eventually the negotiation “fell through” in around June 2011 and the defendants, according to the plaintiff, should return the Dejin Shares.
37. However, it is Cheng’s evidence that after he had given away the Dejin Shares in October 2010, he had only “on various occasions asked Ho about the progress of negotiation ” from February 2011 to June 2011 (Cheng I paragraph 25). Then suddenly in July 2011, Cheng purportedly discovered the sale of some of the Dejin Shares on his own accord. He then instructed the lawyer to issue a letter to the defendants for the “return” of Dejin Shares. It was not mentioned about any negotiation having fallen through 2012.
38. In Ho’s affirmation, he says something different. He alleged that he had found out about the disposal of the Dejin Shares by the 2nd defendant in March 2011 . But again, nothing is said about the negotiation falling through in June 2011. (See Ho paragraph 54)
39. There is no evidence before the Court as to :
(1) what negotiation was said to have fallen through,
(2) when it had fallen through, and
(3) what was supposed to be a result of the negotiation to have fallen through.
40. In fact, when the first lot of Dejin Shares was disposed of, notice was given to the plaintiff with no objection.
41. Further if the negotiation had really fallen through, the plaintiff also failed to explain to the Court how Ho /the plaintiff in the end managed to stop the defendants from selling the CIL shares, which was supposed to be the core reason for them to arrange for the provision of the Dejin Shares from the start.
42. On the other hand, the defendants’ case is much more credible and consistent : there was no new loan to be arranged. No money would change hands pursuant to the Agreement reached with Trade Honour in October 2010. The Debt owed by Trade Honour October 2010 was in the approximate sum of $135 million, which is the same amount to which the plaintiff alleged to be a new facility loan. The defendants merely asked for the additional collateral to be provided by Trade Honour for the Debt, or the defendants would foreclose the CIL shares. Trade Honour then provided the Dejin Shares as additional collateral and hence the defendants did not sell the CIL shares and did not sue Ke’s on personal guarantee. That is also why the repayment period of the Debt was also extended.
43. I understand it is not a trial on affidavit. However, in assessing the plaintiff’s case, I found it to be poor, inconsistent and quite incredible. I cannot accept that it has a good arguable case.
44. In the end, it is quite difficult for the plaintiff to argue, some 9 months after giving away the Dejin Shares, that it is still the beneficial owner of the Dejin Shares based on a Quistclose Trust it imposed on the defendants through Ho, Viva Chan, (Ho’s respresentative), Ke, and Wei Qing Ying (the secretary of Ke).
No full and friend disclosure of the material fact
45. In the ex parte application for the Mareva Injunction, Cheng in the first affirmation did not reveal his dealing with Trade Honour and Ke. He merely put forward a story that he had agreed to provide a personal guarantee and to give away 360 million listed shares to Trade Honour for free without receiving any benefit in return, only because he wanted to help Ho’s friend. Ho was described as Cheng’s “old friend ”.
46. However, in response to Cheng’s story, Ke himself filed the affirmation and deposed that Cheng was in fact a nominee of Ho. The Dejin Shares were in fact all beneficially owned by Ho through his nominee company (ie the plaintiff), with his designated person as a director (ie Cheng). Ke is a witness for the defendant. Further, Ho did not provide the Dejin Shares to the plaintiff for free; Ke was asked to pay for the Dejin Shares within 6 months from the date of the transfer of the Dejin Shares to the 2nd defendant, according to Ke’s own affirmation.
47. Ke further said that Cheng had actually met him in person in Hong Kong. Before Ho released the share certificate and the Stamped Form of Transfer of the Dejin Shares to the 2nd defendant, Ho asked Ke to sign the written confirmation. Ke then came to Hong Kong from the Mainland, and at the request of Ho, Ke then met with Ho and Cheng in person at the Marriott Hotel in Queensway.
48. However in the 2nd affirmation of Cheng, he did not even respond to any of the aforesaid matters.
49. In the end, I accept the defendants’ submission that it is a clear case of material non‑disclosure. The plaintiff has failed to demonstrate that he had proceeded with “the highest good faith”. The Mareva Injunction should not be continued just on this ground.
50. Further as aforesaid, the plaintiff’s case is that Cheng or Ho had never contacted Choi or the defendants. Thus Choi or the defendants could not possibly have knowledge of any kind that would raise an obligation of enquiry. At best, if there is any resulting trust, it would be formed between Ho and Cheng /the plaintiff, and it would be Ho and arguably Ke /Trade Honour who had been in breach of the specific purpose by making use of the Dejin Shares in another way, ie to give away the Dejin Shares to the defendants as additional collateral for the Debt. It is therefore difficult to accept the plaintiff’s argument on constructive notice on the part of the defendants or Choi.
51. In the end I also accepted the defendants’ submissions as to :
(1) the remedy of damages would be an adequate remedy for the plaintiff;
(2) there is no real risk of dissipation demonstrated by the plaintiff from the evidence before me, or removal of assets from the jurisdiction by the defendant;
(3) both the plaintiff and the defendants are BVI companies and it is not open to the plaintiff to complain that the defendants’ undertaking as to damages would not be sufficient; the issue regarding the place of incorporation would also be held against the plaintiff itself when it gave the same undertaking as the damages to Court for granting the injunction.
Conclusion
52. I accepted the defendants’ submissions that :
(1) the plaintiff failed to give full and frank disclosure of the material facts to the Court;
(2) the plaintiff had also failed to show to the Court that there is a good arguable case; and /or
(3) that there is any real risk of dissipation or removal of assets from the jurisdiction.
53. In the premises, the ex parte Mareva Injunction should be set aside and should not be continued and no new Mareva Injunction should be granted.
54. For the same reason, the plaintiff is not entitled to the ancillary discovery order sought from the Court by this summons.
55. There shall also be a costs order that the defendants shall have their costs, to be taxed if not agreed and paid forthwith, with certificate for two counsel.
Application for Leave to Appeal on 18 November 2011
56. For the same reason, I do not consider that the plaintiff has any reasonable chance of success in the appeal and I therefore also refused its application for leave to appeal on 18 November 2011.
57. The defendants shall also have the costs of the application for leave to appeal to be taxed, if not agreed, and paid forthwith.
(D. Yam)
Mr. Rimsky Yuen, SC leading Mr. Bernard Mak, instructed by Johnny K.K. Leung & Co., for the Plaintiff.
Mr Russell Coleman S.C. (appearing on 16 November 2011 only), leading Miss Josephine Tjia, instructed by Troutman Sanders, Solicitors and International Lawyers, for the 1st and 2nd Defendants.
Please refer to HCMP2496/2011 for the relevant appeal(s) to the Court of Appeal.