WINLOK INVESTMENT LTD v. NICELINE CO LTD AND OTHERS

HCCW 423/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 423 OF 2002

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D E C I S I O N

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1. This is an application taken out by the petitioner, Winlok Investment Ltd ("Winlok"), under section 21L(1) of the High Court Ordinance, Cap. 4 and section 168A(2)(b) of the Companies Ordinance, Cap. 32, for an interlocutory order to appoint joint and several receivers and managers for Niceline Co. Ltd ("the Company"). The draft order annexed to the summons issued for this purpose on 11 November 2002 provides for the powers and duties of the receivers and managers in very wide terms. At the hearing of the application, and as a result of queries on my part, leading counsel for Winlok, Mr Fung, SC, informed me that Winlok would only be seeking more restricted powers and duties for the receivers and managers to be appointed and he asked me to delete various parts in the draft order which would no longer be applicable for present purpose. Essentially, the receivers and managers are to be appointed to take control of the sole asset of the Company, being its rights and interests in a development project in Beijing, known as the Lai Loi Garden Development ("the Project"), and to sell such asset by open tender or by public auction; they would not be required to carry out the development and works of the Project, or to carry on the business of the Company, as provided in the draft order annexed to the summons.

2. As I have allowed Winlok to make this application for the appointment of interim receivers and managers on the restricted basis as indicated above, for good housekeeping the summons should be amended in the manner as Mr Fung has informed me at the outset of the hearing. I make an order that within seven days of the handing down of this decision, Winlok should file and serve an Amended Summons.

3. The application I am concerned with is opposed by Sinclair Profits Ltd ("Sinclair") and Cheung Kong Holdings Ltd ("Cheung Kong"), the 2nd and 3rd respondents herein, and by New World Development Co. Ltd ("New World"), the 4th respondent herein. The Company is the 1st respondent herein and it has not taken part in this application.

4. Leading counsel for Sinclair and Cheung Kong, Mr Bunting, SC, and leading counsel for New World, Mr Chan, SC, both informed me that for the purpose of this application only, and without prejudice to their positions generally in these proceedings commenced by Winlok under section 168A or in High Court Action No. 1203 0f 2002 ("the Writ Action"), these respondents are prepared to assume that there are serious questions to be tried as to whether there was unfairly prejudicial conduct in the affairs of the Company. They oppose the application on the basis that Winlok would have an adequate remedy in the financial compensation sought in the petition and that the balance of convenience does not lie in favour of Winlok in granting the interim relief sought.

5. In view of that concession, it would not be necessary to examine in detail the voluminous evidence of over 2,000 pages filed in this application and analyse the underlying merits of the case. I will endeavour to set out succinctly the facts and matters giving rise to this application for my decision to be understood.

The various companies

6. The Company was incorporated in Hong Kong on 25 July 1991 with an authorised share capital of HK$10,000.00 divided into 1,000 shares of HK$1.00 each. The present shareholding is as follows, 30% of the shares are held by Winlok and 70% of the shares are held by Sinclair.

7. Winlok was also incorporated in Hong Kong. Its shares are beneficially owned by a couple, Cheung Chung and Dorothy Wong Choi Ha ("Dorothy Wong"). It has a paid up capital of HK$4.00 and there are two registered shareholders, Utahloy (China Holdings) Co. Ltd ("Utahloy China Holdings") and Trump Card Ltd.

8. Utahloy China Holdings was incorporated in Hong Kong. According to its latest annual return dated 3 November 2001, it has a paid up capital of HK$2.00 and the shares are held by Utahloy (Holdings) Co. Ltd ("Utahloy Holdings") and Dorothy Wong. It has liabilities of over HK$25 million as at the date of its last annual return. As for Utahloy Holdings, according to its last annual return in the Companies Registry in 2001, it has a paid up capital of HK$1,000,002.00 and carries registered charges in the sum of over HK$49 million.

9. The other shareholder of Winlok, Trump Card Ltd, was incorporated in the British Virgin Islands with an authorised share capital of US$50,000.00.

10. Sinclair is a company incorporated in the British Virgin Islands and is beneficially owned by Cheung Kong and New World as to 50% each via their subsidiaries, with equal representation on the board of directors.

The Project

11. The Company is the beneficial owner of the foreign interests in four co-operative joint ventures ("CJVs") in the mainland, for the development of four pieces of land at Tienchu Township, Shunyi County, Chaoyang District, Beijing, which is the Project. The area of the land is vast, about 1,270,500 sq.m. Each of the CJVs is the grantee of the plot of land under the contracts referred to below.

12. In November 1993, Winlok acquired the foreign interests in the CJVs by acquiring the Company from the then shareholders. Also in November 1993, four Contracts of the Assignment of Land Use Right of State-owned Land (Assignment of Undeveloped Land) ("the Land Use Rights Contracts") were entered into between the Beijing Land Administration Bureau ("the Beijing Bureau") and each of the CJVs. The Land Use Rights Contracts were amended by four supplemental agreements all dated 26 June 1995 between the Beijing Bureau and the CJVs.

13. Under the Land Use Rights Contracts, at least 20% of the works must be completed by the end of 1996 and the whole Project by early 2000. An extension of time was granted by the Bureau in the supplemental agreements.

14. Winlok sought to develop the Project with New World and Cheung Kong. On 31 December 1993, a memorandum of agreement ("the Memorandum") was signed and this was followed by a Shareholders' Agreement ("the Shareholders' Agreement") dated 14 January 1994 made between Winlok, Sinclair, the Company, Cheung Chung and Dorothy Wong.

15. The Shareholders' Agreement contained inter alia the following provisions:

(1) Sinclair would hold 70% of the shares in the Company and Winlok would hold the remaining 30% (clauses 2.1 and 5.1);

(2) Sinclair is to be responsible for the development of the Project and funding of the entire costs of the Project by shareholder's loans (clause 6.3(a));

(3) Winlok is to be responsible for procurement or assistance in getting certificates and approvals from the Beijing authorities and its performance is guaranteed by Cheung Chung and Dorothy Wong personally (clause 6.2);

(4) Winlok is to be paid HK$200 million as management fee, of which HK$100 million was already paid by the time the Shareholders' Agreement was made (clauses 6.3(a), 7.1(a) and (b), 7.2). Of the remaining HK$100 million, half is to be paid to Winlok on the obtaining of "all required PRC government and other consents for sale and/or pre-sale of the first batch of the properties constructed on the Development Sites", and the other half is to be paid to Winlok six months after the obtaining of the consents as aforesaid (clauses 7.1(c) and (d));

(5) all incomes receivable by the Company from the Project are to be distributed to Sinclair as to 70% and Winlok as to 30% by way of dividend, after deduction for repayment of the shareholder's loan of Sinclair and the payment of taxes (clause 10.1);

(6) Winlok undertakes prior to repayment to Sinclair of the shareholder's loan and interest in full, it shall not assign in any form, transfer, mortgage, charge its interest in the Company or the CJVs or otherwise dispose of any of the land use rights, ownership rights or development rights in the development sites or any part thereof to any person except Sinclair (clause 6.2(f));

(7) the Shareholders' Agreement shall be assignable only by Sinclair (clause 21).

16. Pursuant to the Shareholders' Agreement, Sinclair has appointed directors to the board of the Company. According to the annual return of the Company filed in 2001, there are eight directors, Cheung Chung, Dorothy Wong, three directors nominated by Cheung Kong and three directors nominated by New World.

17. As at 30 April 2002, the amount of outstanding shareholder's loan advanced by Sinclair to the Company including interest was HK$1,542,710,058.00. As at 30 April 2002, the total amount of outstanding loans advanced by the Company to the CJVs was HK$936,783,793.00.

Winlok's case of unfairly prejudicial conduct

18. It is Winlok's case that there is a quasi-partnership between Winlok (beneficially owned by Cheung Chung and Dorothy Wong) and Sinclair (beneficially owned by Cheung Kong and New World) for the joint development of the Project and that the Company is intended to be a vehicle for the limited purpose of carrying out the Project until completion rather than an ongoing business entity.

19. Winlok's complaints of unfairly prejudicial conduct may be summarised as follows.

(1) Excessive and continuing delay in development

20. There has been inordinate and excessive delay in carrying out the works of the Project over the nine-year period since the granting of the land use rights to the CJVs in November 1993. This has resulted in the denial of payment of the balance of the management fee to Winlok in the sum of HK$100 million. It is common ground that only site formation and some underground infrastructure have been completed and no work on superstructure has even begun. I understand from Mr Fung that the extended deadline for completing 20% of the works on two of the sites had expired earlier and the extended deadline for completing 20% of the works on the remaining two sites, which fell on 1 January 2003, has also expired. It is also common ground that because of this substantial delay and as no further extension of time for completing the Project has been obtained from the Beijing Bureau, there is a risk that the land might be repossessed by the Beijing Bureau and a penalty might be imposed.

21. New World was in charge of the Project for six years, from February 1994 to March 2000. In August 2000, Cheung Kong took over the Project from New World as the project manager on the basis that it shall not be held liable for any claims due to the acts of the previous management team, particularly in relation to the building covenant matters. The Project as initially planned was to build good quality, villa-style developments, mainly for the market of the expatriate community. Later, because of the change in economic conditions, the over supply of luxury villas in Beijing, and an increase in demand for multi-storey residential buildings of the local population, the original concept of the Project was altered.

22. There was disagreement between Cheung Kong and New World on the reworking of the concept. New World favoured building more houses and hotels whereas Cheung Kong was for building more high-rise apartments. In late 2001, Cheung Kong and New World arrived at an understanding to split up the Project in an attempt to resolve their differences, with each taking up two sites for development in accordance with their own plans. It was proposed that Winlok would retain 30% interest in each of the two new projects and that the Shareholders' Agreement was to be terminated and replaced by two new shareholders' agreements to be entered into with Cheung Kong and New World respectively. Documentation was prepared by solicitors of Sinclair and sent to Winlok for consideration. It is alleged by Winlok that Sinclair took steps to proceed with the splitting proposal irrespective of the views or interest of Winlok and this is conduct unfairly prejudicial to Winlok and to the Company. It is further alleged that Sinclair had in December 2001 asked Winlok to consider selling its interest in the Company for a "derisory sum" of HK$1 million. In the end, the splitting proposal did not materialise.

23. I should mention that it is denied by Cheung Kong and New World that the delay in development was excessive or inordinate, or that they are to be blamed for the delay. It is asserted by Sinclair that the offer to purchase Winlok's interest in the Company at HK$1 million was a "realistic" offer in the light of all the circumstances.

(2) Wrongful termination of the Shareholders' Agreement

24. In February 1999, Utahloy China Holdings was in sudden financial difficulty and approached New World for a loan. New World agreed to advance HK$20 million to Utahloy China Holdings on condition that Winlok was to provide security by assigning 45% of the receivables due to Winlok under the Shareholders' Agreement.

25. On 5 February 1999, a Deed of Assignment was duly made between Utahloy China Holdings, Winlok and New World Finance Co. Ltd Notice of the assignment was given to Sinclair on the same day without complaint from the latter.

26. On 28 February 2002, Sinclair gave notice to Winlok to terminate the Shareholders' Agreement on the ground that Winlok was in breach of clauses 6.2(f) and 21 by executing the Deed of Assignment.

27. It is alleged by Winlok that the termination was wrongful in that Sinclair already had notice of the Deed of Assignment in February 1999 and no complaint was made for a year. It is alleged that the termination was a ploy of Sinclair to exclude Winlok from any participation in the sale of the Company's interest in the Project.

(3) Exclusion of Winlok from participation in the conduct of the proposed sale

28. On 30 January 2002, the Shunyi Land Administration Bureau ("the Shunyi Bureau") issued to the CJVs a notice of recovery of land use right to state-owned land. It was stated that the Land Use Rights Contracts would be terminated in accordance with regulations entitled "Procedures of Beijing City on the Disposal of Idle Land", unless a person in charge of the CJVs would meet with the Shunyi Bureau within 15 days of the notice to discuss the commencement of construction of the Project. Such a meeting took place on 4 February 2002.

29. On 22 February 2002, an extraordinary general meeting of the Company ("the EGM") was held and a resolution was passed with Sinclair voting in favour to sell the Company's interest in the Project by open tender. It was also resolved that a committee ("the Sale Committee") consisting of Davy Chung Sun Keung ("Davy Chung"; one of the directors appointed by Cheung Kong to Sinclair) and another director of the Company be authorised to implement the sale. Sinclair was of the view that it was necessary to sell the land as soon as possible, in order to recoup as far as possible its substantial investment in the Project, as the longer the land was left idle, the greater the risk of repossession. Once the land is repossessed, there is no right to compensation under the relevant government regulations.

30. It is alleged by Winlok that the resolution to sell was in breach of the Memorandum and the Shareholders' Agreement, and that it was passed without any prior consultation with or consideration by the board of directors of the Company. There had been no notice calling the EGM stating that a proposed sale of the Project was being contemplated and Winlok had never been informed of the terms of the proposed sale.

31. On 26 February 2002, a notice was given of the appointment of Davy Chung and Edmond Ip Tak Chuen ("Edmond Ip"; also a director of Sinclair appointed by Cheung Kong) to the Sale Committee.

32. On 28 and 29 March 2002, the tender for sale of the Company's interest in the Project ("the 1st Tender") was advertised in one Chinese and one English newspaper in Hong Kong. No bid was received before the closing date of 11 April 2002. On the same day the 1st Tender was advertised, Winlok commenced proceedings in the Writ Action, which sought inter alia an injunction to restrain the sale. The Writ Action and the application for an injunction were reported in various newspapers.

33. A meeting of the board of directors of the Company was held on 9 April 2002. In the opposition of Cheung Chung and Dorothy Wong, the directors appointed by Sinclair passed a resolution to endorse and ratify the resolutions at the EGM to sell the Company's interest in the Project by open tender and to delegate to the Sale Committee full power and authority to implement the sale and execute necessary documents. Five motions proposed by Cheung Chung and Dorothy Wong - that the Company should proceed with the Project; that the board should not consider or authorise any proposal to dispose of the Company's interest in the Project unless the board was provided with a report explaining the delay in carrying out the Project, all outstanding audited financial statements of the Company, legal advice from a mainland law firm that the land can be sold with good title, detailed comparative costs and benefit analysis between continuing with the Project and abandoning the Project - were all defeated.

34. It is alleged by Winlok that quite apart from the advisability of disposing of the Company's sole asset, the manner in which the 1st Tender was conducted was most unsatisfactory. The 1st Tender was not adequately advertised. The terms and conditions of the tender were onerous and restrictive. Sinclair had indicated that it would rely on a valuation report of the Project, which gave a valuation of about HK$700 million, whereas Winlok had obtained a preliminary valuation that the Project would be worth at least HK$1.6 billion. Winlok has alleged that the 1st Tender was just a scheme devised to ensure that no outsiders would bid for the Company's interest in the Project, or if there were, they would offer a low price. This would enable Cheung Kong and/or New World to purchase the interest at the lowest price possible and force Winlok out of the quasi-partnership.

35. On 18 April 2002, Winlok presented a petition to wind up the Company on just and equitable grounds, alternatively, it seeks an order under section 168A that Cheung Kong and/or New World may be ordered to purchase the shares of Winlok in the Company at a fair price as determined by the court. Winlok further seeks an injunction to restrain the Company and Sinclair from selling or otherwise disposing of the Company's interest in the Project.

36. On 3 May 2002, a summons was issued by Sinclair to strike out that part of the petition relating to the winding-up relief on the basis that it is unreasonable for Winlok to seek such relief having regard to the alternative relief for a buy-out order and there is no real prospect of the court making a winding-up order. On 27 May 2002, Yuen J (as she then was) made an order striking out parts of the petition relating to the winding-up relief.

The Writ Action

37. The Writ Action was commenced before the petition. The defendants are the Company, Sinclair, and the two members of the Sale Committee, Davy Chung and Edmond Ip. The generally indorsed writ claims specific performance of the Memorandum and the Shareholders' Agreement, a declaration that the resolution at the EGM was null and void, an injunction to restrain the Company from selling its interest in the Project and damages for breach of contract. The relevance of the Writ Action to this application is that Winlok was unable to provide fortification for its cross undertaking in damages when it sought interim relief on a previous occasion.

38. On the same day the writ was issued, Winlok applied ex parte for an injunction to restrain the sale of the Company's interest in the Project. It was directed by Chu J that an inter partes summons should be issued for the application.

39. On the first hearing of the summons before Dep. J. Poon on 4 April 2002 (which was before the closing of the 1st Tender), a limited undertaking was offered by the defendants not to proceed with the sale, upon an undertaking as to damages given by Winlok. Fortification of Winlok's undertaking was sought by the defendants and the application was heard on 10 and 18 April 2002. On 18 April 2002, Winlok informed the court that it would no longer pursue its application for an interlocutory injunction.

40. On 11 May 2002, Winlok filed a statement of claim and a notice of discontinuance withdrawing its claim against all defendants except Sinclair. As against Sinclair, it claims an injunction to restrain Sinclair from causing the Company to sell its interest in the Project and damages for breach of the Shareholders' Agreement. The claim for specific performance was not pursued.

41. An application for security for costs was taken out by Sinclair against Winlok in the Writ Action. On 18 July 2002, security for costs in the sum of HK$400,000.00 was ordered by a Master and the amount was paid into court on 24 July 2002. I should mention that there are similar applications for security for costs by the respondents in these proceedings and these applications have been adjourned on 11 September 2002 for argument and the filing of evidence.

The 2nd Tender and the present application

42. In September 2002, 2002, Winlok discovered that the Sale Committee was again proposing to sell the Company's interest in the Project by open tender as it learnt from the surveyors previously retained by Winlok that they had been approached by the Company to conduct the sale by tender. On 8 October 2002, Edmond Ip wrote to Winlok stating that pursuant to the resolution at the EGM and the board resolution on 9 April 2002, the Company was proceeding with the open tender ("the 2nd Tender") and enclosing a set of tender documents prepared by a different firm of surveyors, DTZ Debenham Tie Leung ("DTZ"), and an advertisement of the 2nd Tender that was published in one Chinese newspaper and one English newspaper on the same day and the day following. This was the first that Winlok came to know of the 2nd Tender and its terms. The reserve price of the sale was not disclosed to Winlok.

43. The terms and conditions of the 2nd Tender are "virtually identical" to those of the 1st Tender, which are the subject of complaint in the petition, save that the marketing period for the 2nd Tender is longer and the 2nd Tender has a reserve price. The closing date of the 2nd Tender was 11 November 2002 and there is a 90-day period to decide on acceptance of any tender submitted.

44. Winlok engaged RHL Appraisal Ltd ("RHL") to advise on the terms and conditions of the 2nd Tender. RHL gave an expert report on 8 November 2002 and its findings and conclusions may be summarised as follows:

(1) There is no evidence of any approval for extension of time for the development scheme of the Project. In the event that the Beijing Bureau should repossess the land, the bidding price would have a nil value.

(2) There has been non-compliance with the conditions of land use, no market value can be attached to the land as it is not marketable.

(3) The conditions of tender are unduly onerous and they are not an appropriate means to maximise economic gain to the Company.

(4) It would make no commercial sense for any prospective outside purchaser without special interest to submit a bid in the 2nd Tender.

45. It is alleged by Winlok that the 2nd Tender is a renewed attempt to enable Sinclair, Cheung Kong and New World to purchase the Company's interest in the Project at a minimal price to the detriment of the Company's interest and to force Winlok out of the quasi-partnership thereby depriving Winlok of its entitlement to the balance of the management fee in the sum of HK$100 million and its 30% share of profits from the Project.

46. Armed with the report of RHL, on 11 November 2002 Winlok applied ex parte on notice before Dep. J. Cheung for an order to appoint interim receivers and managers for the Company to stop the sale by the 2nd Tender. An order was made that day adjourning the application for argument to an expedited hearing, with directions to file evidence, upon the undertaking of the Company not to sell its interest in the Project, the CJVs or the land, and the undertaking of Sinclair, Cheung Kong and New World not to assist the Company to do so. Dep. J. Cheung provided that no cross undertaking as to damages is required from Winlok regarding this order but the respondents are at liberty to apply for a cross undertaking from Winlok at the conclusion of the hearing or after the expiry of 90 days thereof, whichever is the earlier. So this is how the present application has come before me.

47. As I understand Winlok's position in this application, Winlok is not opposed to a sale of the Company's interest in the Project (notwithstanding the prayer for an injunction against any sale in the petition and in the statement of claim in the Writ Action), provided that the sale is conducted on terms perceived by Winlok to be fair to the Company and the minority interest, and it was submitted that the appointment of interim receivers and managers is the only way to achieve this.

48. At the closing of the 2nd Tender, five bids were received. The purchase price ranged from HK$10 million to HK$389,000,000.00. One bid was from a company beneficially owned by Chow Tai Fook Enterprises Ltd, the controlling shareholder of New World. The other four bids were made by companies in which Cheung Kong has some beneficial interest.

49. Winlok was notified by the Company by letter dated 11 December 2002 of the five tenders received.

The law

50. I turn to the law governing the principles for appointing interim receivers and managers. I begin with Section 21L of Cap. 4 which provides, inter alia, as follows:

" (1) The Court of First Instance may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so.

(2) Any such order may be made either unconditionally or on such terms and conditions as the Court thinks just. "

51. I was referred by Mr Chan to Chinese United Establishments Ltd v. Cheung Siu Ki & Anr. [1997] 2 HKC 212, a case concerned with the appointment of receivers in respect of a share in a company on an interlocutory application. Rogers J (as he then was) dealt with the principles upon which a receiver should be appointed at 223E, after citing Snell on Equity and Kerr on Receivers:

"The principles for the grant of an interlocutory injunction have now been set out of course in American Cyanamid Co. v. Ethicon Ltd [1975] AC 396.

My view of the matter is that the appointment of a receiver to act under the powers of the court must like an interlocutory injunction be a flexible power since it is a discretionary power. It should be exercised as is said in Snell on a similar basis to that of an interlocutory injunction."

52. In a similar situation in Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8 in which the petitioner in a petition under section 459 of the Companies Act 1985 (equivalent to section 168A of Cap. 32) sought interlocutory relief to restrain the sale of the company's assets unless the agreements to sell them were approved by the equity shareholders, Hoffmann J (as he then was) has this to say at 15d to e:

"Assuming that I am wrong in holding that the petitioner has not made out an arguable case, the next question is whether it is just and convenient that I should grant an injunction. That is a question to which, as it seems to me, the American Cyanamid rules apply by analogy. One cannot literally ask whether damages would be an adequate remedy because s 461 [broadly equivalent to section 168A(2) of Cap. 32] does not provide for an award of damages at common law. But the section allows the court to order various forms of financial compensation. For example, respondents can be ordered to buy the petitioner's shares at a price which reflects the value they would have had if the unfairly prejudicial conduct had not taken place."

53. I hold that in this application the American Cyanamid rules apply by analogy. The governing principle, as stated by Lord Diplock at 408B to E, is as follows:

"As to that, the governing principle is that the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant's continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction would normally be granted, however strong the plaintiff's claim appeared to be at that stage. If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff's undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction."

54. In this instance, instead of asking whether damages recoverable at common law would be an adequate remedy to Winlok, I should be directing my attention to the kind of financial compensation sought in the petition. The only financial compensation pleaded in the petition is that Cheung Kong and/or New World may be ordered to purchase the shares of Winlok in the Company at a fair price as determined by the court. Hence, the question I should ask, in applying the American Cyanamid rules by analogy, is this: if I refuse the application and Winlok were to succeed in establishing that the 1st and/or 2nd Tenders or other acts complained of were conduct unfairly prejudicial to Winlok or to the Company, would Winlok be fully compensated by orders which would enable it to receive the value its shares would have had if the unfairly prejudicial conduct had not taken place (see Re Posgate, supra. at 15h to i).

55. Much of what was submitted by Mr Fung related to the merits of Winlok's case, notwithstanding that it was conceded by Mr Bunting and Mr Chan that for the purpose of this application, there is a serious question to be tried on the allegations of unfairly prejudicial conduct. Mr Fung has impressed on me that there is a pressing need to appoint receivers and managers to hold the ring or preserve the status quo and safeguard the sole asset of the Company which is to be sold, in view of the profound dissension within the board of directors of the Company (i.e. between the Winlok appointed directors and the Sinclair appointed directors) and the Company is incapable of safeguarding its own assets. The receivers and managers appointed would see to it that safeguards be adopted to ensure that the Company's interest in the Project would be sold at the best possible price, and Cheung Kong and New World would not be prevented from making bona fide bids in a proper and equitably devised sale by open tender or public auction conducted under the aegis of the receivers and managers.

56. To all that, I would say no matter how strong the case of Winlok would appear at this stage that the 2nd Tender is an unfairly prejudicial transaction affecting the sole asset of the Company, I would still need to address the question that I have formulated earlier, applying the American Cyanamid rules by analogy. As stated by the Supreme Court of Victoria in Bond Brewing Holdings Ltd & Ors. v. National Australia Bank Ltd & Ors. (1990) 1 ASCR 445 at 460:

"... the principle that the appointment of a receiver, or for that matter any peculiarly equitable remedy, is to be had only where the remedies which the applicant could obtain from a court of law are inadequate to meet the ends of justice, insufficient to confer upon him all the relief to which he is justly entitled."

Would Winlok be adequately compensated in the fair price in a buy-out order

57. It was submitted on behalf of the respondents that if at the end of the day the court should grant the relief sought in the petition, the buy-out order would be an adequate remedy and would sufficiently compensate Winlok for all its losses. This is so since in essence the effect of the alleged unfairly prejudicial conduct is that firstly, Winlok has been unfairly denied the payment of the balance of the management fee of HK$100 million by reason of the delay (paragraph 36 of the petition); and secondly, its entitlement to 30% of any profits would be wiped out by reason of the sale of the Company's interest in the Project at an undervalue (paragraph 62 of the petition).

58. If it should transpire that the sale by the 2nd Tender were a sale at an undervalue, it was contended by Mr Fung that the 30% share of the profits that Winlok would otherwise have received are "not quantifiable". I do not accept this contention. Winlok had already engaged surveyors in Beijing in July 2002 to give a valuation of the land and a quantification of the profits of the development, on the basis of a plot ratio adjusted upward to 0.6 as approved by the Beijing Bureau. The determination of a fair price for Winlok's shares, on the basis that the unfairly prejudicial conduct of wiping out Winlok's entitlement to the 30% share of the profits had not occurred, is not a problem unfamiliar to the court, although the exercise may not be easy. I do not accept that Winlok might not be adequately compensated by a buy-out order.

59. There is and there can be no suggestion that in the event that Cheung Kong or New World is ordered to purchase the shares of Winlok in the Company at a fair price assessed on the basis that the unfairly prejudicial conduct had not occurred, the financial ability of either company is in doubt. I note from the latest annual report of New World that as at 30 June 2002, the total asset value of the New World Group is in excess of HK$126 billion. Cheung Kong is likewise a substantial publicly listed company.

60. Having reached the view that a buy-out order at a fair price to be determined would be an adequate remedy for Winlok and that the respondents are in a financial position to pay compensation, that would be sufficient to refuse Winlok's application for the appointment of interim receivers and managers (cf. Jaber v. Science & Information Technology Ltd [1992] BCLC 764 at 788a). I do not need to consider the balance of convenience as it is where there is doubt as to the adequacy of the respective remedies available to either party or to both that the question of balance of convenience arises (American Cyanamid, supra. at 408F). Nevertheless, since I have heard submissions on this, it is appropriate that I should deal with some of the arguments raised in this respect.

If the appointment of receivers and managers is practical and effective

61. Mr Bunting submitted that the appointment of receivers and managers is impractical and ineffective in the absence of adequate funding for carrying out the activities required on the land to avert the threat of repossession by the authorities and the charges and expenses of the receivers and managers, their professional advisers and staff.

62. The Company is insolvent on a balance sheet basis, with a net liability of HK$518,429,468.00. It has remained solvent because of the financial support provided by Sinclair. Sinclair had terminated the Shareholders' Agreement in February 2002 and regarded itself discharged from the obligation to provide any further funding for the Project. The Company has no independent means to continue with the development or to carry on with the minimal level of work required to avert repossession. In seeking the appointment of interim receivers and managers, Winlok has not offered any undertaking to provide funding for this. I agree with Mr Bunting that this is a valid point and would militate against the appointment.

63. As for the expenses and charges of the receivers and managers, Winlok has not offered any undertaking to pay these charges. The suggestion was made by Mr Fung that the receivers and managers should be paid out of the asset of the Company when the Company's interest in the Project is sold. Mr Fung informed me that the proposed receivers and managers are willing to act on the basis that their fees would be a first charge on the proceeds of sale of the Company's asset, so the payment of the fees and expenses of the receivership may not pose a significant problem here.

64. Mr Bunting further submitted that the appointment is also inappropriate given the complexity of the Project, in respect of which specific property development experience in mainland China is required. One of the tasks that must be undertaken, to avert the risk of repossession, is to negotiate extensions to the development timetable with the authorities. It would require someone with a good working relationship with the relevant authorities in Beijing and sufficient standing in the Beijing property market for negotiations to be successful. There is no evidence before the court that the proposed receivers and managers, who are certified public accountants, would have the necessary skills and attributes to conduct such negotiations.

65. On behalf of Winlok, it was submitted that the receivers would only be required to take control of the Project and implement a sale of the Company's interest in it on proper terms, that the proposed receivers would not be unfamiliar with the task of realizing assets as insolvency practitioners and that Winlok would be willing to assist the receivers to negotiate with the Beijing authorities to obtain the necessary extensions of time.

66. In the affirmation of Cheung Chung filed on 7 January 2003, he accepted that the manner in which the Company should approach the extension was "a sensitive issue" and that "there is a probability that a fine would be imposed if a formal application is made". It was provided in article 17 of the Land Use Rights Contracts that "if the time taken exceeds the time limit, the Land Administration Department shall, apart from imposing on the land user a penalty of 1% of the total assignment fee, have the right to recover the land use right without any compensation." The total assignment fee of the four pieces of land amounted to RMB90,092,250, RMB137,825,250, RMB153,392,250, RMB129,735,000 and RMB63,180,000, so the penalty of 1% would be RMB5,742,247.50. There is no mention in the evidence of Winlok as to how the penalty is to be paid.

67. I do not think the offer of Winlok to assist the proposed receivers in negotiating with the Beijing authorities would provide a sufficient answer. As recognised by Winlok, these negotiations are "a sensitive issue", and this brings me to the next point, which is the prejudice that may be suffered by the respondents if receivers are appointed.

68. I accept the submissions made on behalf of the respondents that the appointment of receivers and managers in these circumstances is impractical, ineffective and inappropriate, and the balance of convenience does not lie in favour of Winlok in granting the application.

If the appointment of receivers and managers would prejudice the respondents

69. It was submitted for the respondents that the appointment of receivers and managers would prejudice the Company in that it may create the impression that the Company is in financial difficulty or that its management is seriously hampered by disputes among its shareholders. It may also give cause for concern that the Project would be further delayed.

70. Sinclair is particularly concerned as to how the Beijing authorities might react to the appointment of receivers and managers for the Company and fears that this might jeopardize negotiations for extensions and cause the authorities to repossess the land. Winlok has confirmed by the letter of its solicitors dated 27 November 2002 that it "has not informed and presently has no intention of informing the Beijing Authorities" of the present application. The apprehension of Sinclair as to adverse reaction of the Beijing authorities is by no means fanciful. It is difficult to see what the proposed receivers and managers or Winlok can do to dispel the legitimate concern of the Beijing authorities so as to avert the risk of repossession of the land. The damage to the Company will be enormous, if not irreparable, once the land is resumed.

71. I was asked to heed the words of caution in Bond Brewing, supra. at 456 which are as follows:

"The appointment of a receiver is one of the oldest remedies of the Court of Chancery, and a very useful remedy it is. But its very efficacy means that a corresponding caution must attend its employment. ... The appointment of a receiver which is, so to speak, at the expense of the defendant's possession and without his consent is a step never to be taken without proper consideration of the defendant's position ... Where a receiver is sought, not merely of a particular asset of the defendant, but of all his assets, particular caution is required and where, as in the present case, the receiver is to possess himself of and to manage the assets and undertaking of a collection of companies which, whether they are solvent or not, are in a very large way of business, very great circumspection is required. Of course in a strong enough case the court might, without warning to a trading company, divest it of control of its undertaking and assets. But it must always be borne in mind that the appointment of a receiver in such a case authorises an irresistible invasion and that even if the army of occupation is withdrawn after only a short time things may never be the same again. Rights of property and the company's privacy are violated. ... And in addition to the legal consequences there was the commercial consideration that, as Picarda, Receivers and Managers p. 4 has observed, the receiver is often seen not as the company doctor but as the undertaker, so that a blow is struck to the standing and credit of the defendants."

72. I also note the dicta in Jaber, supra. at 789h and Re Mountforest Ltd [1993] BCC 565 at 571E to 572A that it would be difficult for those in the outside world to distinguish between receivers appointed on grounds of insolvency and receivers appointed for other reasons and the inevitable slur which a receivership would cast on the assets of a company and its business, and that these are factors which would weigh with the court against appointing receivers.

73. On behalf of Cheung Kong and New World, it was urged upon me that both are leading developers and have built up substantial goodwill and reputation in Hong Kong and mainland China, and that the stigma of having receivers and managers appointed over a company in which they have a substantial stake is likely to seriously affect their goodwill and reputation in a way which would be impossible to quantify.

74. Mr Fung submitted that a distinction should be drawn between the situation of appointing a receiver to an actively trading company and the present situation of appointing a receiver to the Company which is in the course of selling its entire asset. In the latter situation, he submitted that the above dicta in Bond Brewing do not apply or do not apply with equal force, as the receivership would not have any adverse effect on the business of the Company or jeopardize any contract made by the Company with outsiders. As for the business reputations that might be affected, they are the reputations of Cheung Kong and New World, not of the Company, so that is not a relevant matter for consideration.

75. In my view, the dicta in Bond Brewing are no less relevant just because the Company is not actively trading. The court should have regard to the possible effect of the receivership on the asset and undertaking of the Company in exercising its discretion as this is a drastic remedy. Here, the utmost caution and circumspection is called for in view of the prejudice that may be suffered by the Company if the land is repossessed. This is a strong factor that weighs against the appointment of receivers.

76. As for the business reputations that may be affected, I think it somewhat artificial to draw the distinction between the reputation of the Company and the reputation of Cheung Kong and New World in this situation. The Project is known to the outside world as a project developed jointly by Cheung Kong and New World. The reputation that may be affected in this instance would only be the reputations of the substantial public companies that had funded the business and undertaking of the Company. It is the perception of the outside world that is material here, not the correct understanding of the strict legal position. So for that reason, I would also regard the possible damaging effect on the business reputation of Cheung Kong and New World as one of the matters relevant to my consideration.

Would the cross undertaking offered by Winlok provide adequate compensation to the respondents

77. The cross undertaking offered by Winlok in the draft order is in these terms:

"The Petitioner by its Counsel undertakes to be answerable for what the Receivers and Managers appointed by this Order may receive or become liable to pay until they have given the security directed by this Order."

78. As for the security to be given by the receivers and managers, this is provided in the draft order as follows:

"The Receivers and Managers do within 28 days of this Order give security as such Receivers and Managers to the satisfaction of the Court either by production of their firm's indemnity policy or otherwise as a Master shall direct ..."

79. Thus, it would appear that the cross undertaking offered by Winlok is not a cross undertaking in damages in the event that the order for appointing interim receivers and managers was ultimately shown to be unjustified. The undertaking offered would appear to cover the situation in which the receivers and managers, in doing what they are empowered to do by the order of appointment, have so exercised their powers as to occasion loss to the business and undertaking of the Company.

80. There is no offer of Winlok to fortify any cross undertaking as to damages.

81. Mr Bunting has referred me to Bond Brewing, supra. In that case, the judge at first instance appointed receivers and managers over the whole of the assets and undertakings of the Bond Brewing Holdings group of companies on the ex parte application of creditors without requiring an undertaking as to damages by the applicants. The Full Court of the Supreme Court of Victoria allowed the respondents' appeal and at 476 dealt with the practice of requiring an undertaking in damages in these terms:

"The order appointing the receivers operated as an injunction ... The usual undertaking as to damages is the price that must be paid by almost every applicant for an interim or interlocutory injunction. An injunction will by its nature require a person to do or abstain from doing some act and so is by its nature an order with a tendency to prejudice the person to whom it is directed. The practice of requiring the undertaking recognizes that, the injunction being only interim or interlocutory and so the rights of the parties not having been finally determined, it may at a later stage appear that the applicant should in fairness compensate the party enjoined for the harm he has suffered."

82. On the creditors' application to the High Court of Australia for special leave to appeal (National Australia Bank Ltd & Ors. v. Bond Brewing Holdings Ltd & Ors. (1990) 1 ACSR 722), the application was refused and it was held that an appropriate undertaking as to damages was an essential condition to the appointment of receivers and managers in this instance. At 724-5, the court had this to say:

"The damage to be apprehended by the making of an order for the appointment of a receiver and manager is not so much that the receiver and manager may so exercise his powers as to occasion loss in the business to which he has been appointed. It consists of the consequences flowing from the fact of appointment and of the defendant's loss of 'its title to control its assets and affairs' (the phrase of Viscount Haldane LC in Parsons v. The Sovereign Bank of Canada [1913] AC 160 at 167).

Where damage of those kinds is to be apprehended as flowing from the appointment of a receiver by interlocutory order, consideration must be given to requiring, from the party seeking the order, at least some appropriate undertaking as to damages in the event that the appointment is ultimately shown to be unjustified."

83. Mr Fung accepted that in the case in which a company is carrying on a business, and where the appointment of a receiver may interfere with the ordinary course of business, a cross undertaking as to damages would usually be required from the applicant to make good the company's loss in the event that the appointment of a receiver is wrongly made. He submitted that in a case where a company is no longer carrying on business and seeks to dispose of its entire undertaking, the situation is very different and the court having regard to the justice of the situation should not require a cross undertaking as to damages in the exercise of its discretion (Zempilas v. J N Taylor Holdings Ltd & Ors. 3 ACSR 518 at 522).

84. As I have stated above, the present situation is not an ordinary case in which a company seeks to realize its entire undertaking, as it is complicated by the negotiations with the Beijing authorities to avert the risk of repossession, the failure of which would mean the total loss of the Company's interest in the Project. I see no reason why the Company should not be protected against loss occasioned by the appointment of receivers in the event that the appointment is ultimately shown to be unjustified.

85. Hence, for the reason that Winlok has not offered an appropriate undertaking as to damages, I would also refuse the present application.

86. It is not strictly necessary for me to consider the question of fortification of the undertaking as to damages, as an appropriate undertaking was not offered at all. For completeness, I propose to deal with this as submissions have been made by the parties.

87. It was submitted by Mr Bunting and Mr Chan that the financial standing of Winlok is doubtful. In support of this, they pointed to the fact that Winlok has only a paid up capital of HK$4.00, that it was ordered in the Writ Action to provide security for costs, and that it had to abandon its application for interlocutory relief in the Writ Action when the issue of fortification of its undertaking as to damages was raised by the defendants.

88. I am inclined to think that Winlok should be required to provide fortification of its undertaking as to damages, if such an undertaking had been offered. I understand Winlok has paid the amount of security for costs ordered in the sum of HK$400,000.00 in the Writ Action and that it has satisfied all the costs order made against it. I do not regard this as sufficient to indicate that Winlok would be in a position to meet any claim for substantial losses that may be suffered by the Company as a result of what turns out to be an unjustified appointment of receivers. So for the reason that Winlok is unable to provide fortification of an appropriate undertaking as to damages, it would not be appropriate to grant the present application.

Conclusion and orders

89. For the above reasons, I dismiss Winlok's application seeking appointment of interim receivers and managers to the Company. I further order that all four respondents be released from their various undertakings to the court on 11 November 2002 not to sell the interest of the Company or any part thereof in the Project, the CJVs and/or the land.

90. As for costs, I make an order nisi that the costs of the application, including the costs of the hearing on 11 November 2002 reserved by Dep. J. Cheung, are to be the costs of Sinclair, Cheung Kong and New World in the cause of the petition, with a certificate for two counsel for each team of counsel.