CASEY MCDONALD AND ANOTHER v. GOLDEN DYNASTY ENTERPRISES LTD AND OTHERS

HCMP 2388/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2388 OF 2007

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(Heard Together)

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D E C I S I O N

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The application

1.  I have before me two substantially identical summonses taken out on 24 and 26 June 2008 by the plaintiffs in each of two proceedings, under Order 29 rule 1, Order 30 rule 1 and/or the inherent jurisdiction of the court.

2.  The plaintiffs in HCMP No. 2388 of 2007, Casey McDonald and Jannie Wong, are interim receivers appointed by the court in the British Virgin Islands (“the BVI”) for nine companies incorporated there.  These companies, which I will refer to as “the BVI companies”, are the defendants in the Hong Kong proceedings.

3.  The plaintiff in the other proceedings, HCMP No. 2534 of 2007, Magele Arthur Rainsford Penn, is the interim receiver appointed by the court in Samoa for four companies incorporated in that jurisdiction.  I will refer to these companies, which are the defendants in the proceedings in Hong Kong, as “the Samoan companies”.

4.  Following their appointment by the courts in the BVI and Samoa, the interim receivers brought proceedings in Hong Kong and applied to this court for interim receivers to be appointed for the BVI companies and the Samoan companies, to facilitate the discharge of their duties to identify, preserve and protect the assets of these companies. In November and December 2007, I made orders appointing Casey McDonald, Jannie Wong and Edward Simon Middleton as interim receivers for the BVI companies and Miss Wong and Mr. Middleton as interim receivers for the Samoan companies.

5.  For convenience, I will simply refer to the interim receivers appointed in the three jurisdictions as “the Receivers”, notwithstanding the difference in identity of some of the individuals.  The BVI companies and the Samoan companies are collectively referred to as “the Companies”.

6.  The Receivers seek an order against the Companies that each of them, through its proper officer or officers, do execute (1) a resolution of its board of directors in the form and manner set out in schedule 1 to the summons; and (2) a power of attorney in the form and manner set out in schedule 2 to the summons.  By the board resolution and the power of attorney, the Companies are to authorise the Receivers to take actions for and on behalf of the Companies with the view of identifying and preserving the assets of the Companies and investigating any dispositions of assets of the Companies during the receivership period.  To understand why the Receivers felt it necessary to seek such an order notwithstanding they have been vested with the corporate powers of the board of directors in the appointment orders made by the courts in the BVI, Samoa and Hong Kong, I would need to go into some of the background matters.

Worldwide litigation, the BVI Order and the Samoan Order

7.  In 2007, disputes arose from a joint venture relationship between Group Danone of France and the Hangzhou Wahaha Group Company Limited (“the Wahaha Group”) of China.  Group Danone and its subsidiaries brought a number of legal proceedings and arbitrations against the Wahaha Group and its chairman Zong Qinghou in many jurisdictions.  The main proceedings were in the United States and Sweden.  Ancillary proceedings were brought in the BVI, Samoa and Hong Kong.  The main allegation was that the Wahaha trademarks belonged to a company jointly owned by the Wahaha Group and Jinja Investments Pte Limited (“Jinja”), one of the claimants in the BVI proceedings, and that Mr. Zong and the Wahaha Group had misused the Wahaha trademarks and engaged in unlawful competition in the food and beverage market in China through entities that were not joint ventures established between the Wahaha Group and Jinja.  These entities have been referred to as “the Non-JVs” or “the PRC Subsidiaries” in various proceedings.

8.  The Companies are holding companies set up by the Wahaha Group and/or Mr. Zong in off-shore jurisdictions and they own equity interests in at least 55 Non-JVs in China.  Very substantial sums went through the bank accounts of the Companies in Hong Kong from the Non-JVs.

9.  On 9 November 2007, the Danone claimants obtained a worldwide Mareva injunction against the BVI companies in the BVI court and interim receivers were appointed over the entire assets and undertakings wherever situated of each of these companies (“the BVI Order”), pending determination of the claim in the BVI proceedings.  The BVI Order provided that the Receivers shall take all steps which they consider necessary or desirable to identify and secure the assets of the BVI companies, and to investigate the affairs of these companies for the purposes of the discharge of their duties under the order, and, in particular, to ensure compliance by these companies with the freezing order.  The Receivers were empowered to require any director or officer of these companies to supply information to them, and they were specifically authorised, among other things, to:

(1) take such steps as they consider necessary for the purpose of getting in, obtaining control and/or custody of and recovering and preserving all of the BVI companies’ assets, including as far as may be necessary taking such steps (including, if appropriate the commencement of foreign proceedings) to be recognised or appointed for such purposes in any other jurisdiction (paragraph 16.1);

(2) exercise all of the corporate powers of the BVI companies which are vested in its board of directors save for the power to conduct the BVI proceedings and the proceedings in Los Angeles, or other powers which the court on an application on notice permits any of them to exercise (paragraph 16.4).

10.  Paragraph 19 of the BVI Order made clear that the powers of the Receivers in relation to the assets of the BVI companies shall be vested in them to the exclusion of the powers of its board of directors, save that the board of directors and other officers may cause the BVI companies to make applications and take other steps in the BVI proceedings and the proceedings in Los Angeles and otherwise with the permission of the court.

11.  The order for appointment of interim receivers in Samoa (“the Samoan Order”) for the Samoan companies was to similar effect.

The Hong Kong Order

12.  I will refer to the orders I made for the appointment of interim receivers over the Companies collectively as “the Hong Kong Order”.  For ease of reference, the paragraph numbers referred to below are in respect of the order I made for the BVI companies.  The order I made for the Samoan companies was in similar terms.

13.  Under the power conferred in paragraph 16.1 of the BVI Order, the Receivers brought proceedings in Hong Kong and orders were made appointing interim receivers over the entire assets and undertakings of each of the BVI companies wherever situated and in whatever form.  It was provided that the purpose of the appointment is to preserve and secure the assets of the BVI companies in conjunction with the BVI Order.  The Receivers were ordered to take all steps which they consider necessary or desirable to identify and secure the assets of the BVI companies, to transfer into the individual or joint names of the Receivers any of such assets including any shares or other rights in any other company, or the proceeds of sale of such shares or any other asset into which they have been applied, and to investigate the affairs of the BVI companies for the purposes of the discharge of their duties under the order, and in particular, for the purpose of identifying the assets and to ensure that the BVI companies do not remove, sell, transfer, interfere with, charge or dissipate or otherwise diminish the value of any of their assets until further order.

14.  Specific powers were provided for in paragraph 4 of the Hong Kong Order and they included the powers to:

(1) take control of and exercise all rights which the BVI companies may have in relation to any of its joint-ventures, subsidiary or associated companies or other entities in which any of the BVI companies holds an interest (defined therein as “Subsidiary”), or such shares of such Subsidiary as are owned directly or indirectly by the BVI companies, as may be necessary to obtain control or management of any such Subsidiary including the power to call such meetings of the Subsidiary to appoint or remove all or any directors and other officers and agents of such Subsidiary and to take all such steps as the Receivers think fit to protect the interests of the BVI companies therein and for the purpose of protecting the assets of the BVI companies and managing the affairs of the BVI companies (sub-paragraph (h));

(2) by reason of the taking control of, or the exercise of all rights (arising from the holding of shares) which the BVI companies may have in relation to any Subsidiary, whether in Hong Kong or overseas, to do all acts in accordance with any relevant constitutional documentation of such Subsidiary, and the relevant laws of the jurisdiction in which the Subsidiary is situated, which may include the following:

(i)  to enter upon or take possession of the property of any Subsidiary, including any premises of the Subsidiary where the Receivers have reason to believe there are assets, property, books of the Subsidiary;

(ii) to ascertain, take possession of, and protect the money, books, records, documents, properties, things in action and other assets of a Subsidiary;

(iii) to ascertain and conduct investigations into the affairs of a Subsidiary;

(iv)    to preserve the assets of a Subsidiary and, so far only as may be necessary, to carry on the business of a Subsidiary (sub-paragraph (j)).

15.  As in the BVI Order, the Receivers were authorised to take such steps as they consider necessary for the purpose of getting in, obtaining control and/or custody of and recovering and preserving all of the BVI companies’ assets, including as far as may be necessary taking such steps (including, if appropriate the commencement of foreign proceedings) to be recognised for such purposes in any other jurisdiction.

16.  The Hong Kong Order also contained provisions similar to paragraphs 16.4 and 19 of the BVI Order.

The difficulties encountered by the Receivers

17.  Notwithstanding the powers given to the Receivers by the courts in the BVI, Samoa and Hong Kong, their attempts to obtain information, books and records concerning the Companies, the joint-ventures, subsidiary or associated companies of the Companies in China (i.e. the PRC Subsidiaries) and to assume control of them have not met with much success.  For one thing, they have not been able to establish direct contact with any of the directors.  Limited information relating to the Companies was provided to them through a law firm in China engaged by the Companies for that purpose.  As the Receivers have not been given sufficient information in relation to the assets and affairs of the Companies and the PRC Subsidiaries, they have not been able to identify and secure all of the assets.

18.  Furthermore, the Receivers learned that dividends received by the Companies from the PRC Subsidiaries were re-invested in these entities during the receivership without their prior knowledge and shares held by some of the Companies in some of the PRC Subsidiaries have been disposed of.  These included the sale by Platinum Net Limited (one of the BVI companies, the 3rd defendant in HCMP No. 2388 of 2007) of its 25% shareholding in Hangzhou Wahaha Children’s Clothing Co. Ltd. to a company called Pinerich International Limited (“Pinerich”) by an agreement made on 3 March 2008.  On 17 June 2008, on the application of the Receivers, the BVI court made an injunction restraining the sale to Pinerich, appointed independent receivers over the shares in Hangzhou Wahaha Children’s Clothing Co. Ltd. and gave permission to serve the relevant process documents out of the jurisdiction.

19.  On 27 June 2008, pursuant to the summonses issued by the Receivers on 13 and 24 June 2008, I made orders against the Companies (“the 27 June 2008 Orders”) that within the times stipulated:

(1) they provide the Receivers with specified information concerning them and the PRC Subsidiaries (as set out in schedule 1 to the summonses), including the names and addresses of the directors of each and the location of their assets, to be confirmed by an affidavit sworn by a proper officer of each of the Companies;

(2) they deliver up to the Receivers specified property (as set out in schedule 2 to the summonses) including their chops and seals, books and records, to be confirmed by an affidavit sworn by a proper officer of each of them;

(3) in the event that any specified items of property were once but are no longer in their possession, the affidavit should provide an explanation as to the circumstances under which and when the Companies parted with them and what has become of them.

20.  It is the Receivers’ position there was substantial non-compliance with the 27 June 2008 Orders.  They have issued summonses against the Companies on 17 September 2008, seeking to effect service of these orders endorsed with a penal notice on the directors of the Companies by substituted service, with the view to commit them for contempt of court.  They also contended in the present application that the Companies should not be heard by counsel as the court may refuse to hear a party who disobeys an order of the court, citing Hadkinson v. Hadkinson [1952] P 285 and Hotung v. Ho Yuen Ki [2007] 4 HKLRD 384 at 396 to 398, paras.29 to 33.  I will deal with the latter contention in the subsequent part of this decision.

21.  The application for substituted service, which is opposed by the Companies, has been adjourned for them to file evidence in opposition.  So at this stage, I only have the Receivers’ evidence on the extent of non-compliance with the 27 June 2008 Orders, and do not have the Companies’ account of the efforts they made to meet their obligations and their explanation insofar as there was non-compliance.  Nevertheless, it is a fact that to date, only two of the BVI companies have delivered their chops and seals to the Receivers.  According to the Hong Kong solicitors of the Companies, the company chops and seals of the others were kept by “representatives of the shareholders” for the purpose of conducting business in China.  Although in some cases the names of these representatives were given, their addresses or the location of the chops and seals were not provided.  The 9th defendant in HCMP No. 2388 of 2007 and the 2nd to 4th defendants in HCMP No. 2534 of 2007 did not file any affidavit in compliance with the 27 June 2008 Orders.  Those directors who did make affidavits did not state the place of residence of the deponents in accordance with the requirement in Order 41 rule 1(4) of the Rules of the High Court.

22.  As explained in the affidavit of Mr. Neil McDonald, the partner of Lovells who has the conduct of this matter for the plaintiffs, in the absence of co-operation from the directors and officers of the Companies, the Receivers will find it problematic to act for and on behalf of the Companies in China.  From his experience in the area of cross-border insolvency and restructuring between Hong Kong and China, he deposed that it is extremely difficult (although not impossible) to obtain recognition in China of the authority of liquidators, provisional liquidators and receivers to act for and on behalf of the companies to which they have been appointed, solely by reference to the orders or documents by which they were appointed, and this is particularly true for receivers, as there is not a concept in Chinese jurisprudence which is equivalent to the role of a receiver in common law jurisdictions.  Also from his experience, the courts, government departments, third parties including banks and trade debtors will often not recognise the authority of such appointment holders based solely on the orders or documents which appointed them, even if they are properly sealed, notarised and translated into Chinese.  This is particularly the case where the directors and officers refuse to recognise the authority of the appointment holders and continue to hold themselves out as being the sole persons of authority in relation to a company.

23.  Speaking from his experience, Mr. Neil McDonald thinks that the courts, government departments and third parties in China would recognise the authority of the board of directors of a foreign country to act for and on behalf of the company to which they are appointed, as the authority of the board of directors is a concept of corporate governance broadly recognised and accepted in China and such authority is normally recorded in both board resolutions and powers of attorney, which are routinely recognised in China.  Hence, the Receivers made this application to compel the directors of each of the Companies to pass the necessary board resolution and to execute a power of attorney, so as to appoint the Receivers as attorneys to exercise the Companies’ rights as shareholders in the PRC Subsidiaries.

24.  The Receivers have obtained expert opinion on issues of Chinese law from Zhu Lin Hai, an attorney of a law firm in Shanghai, and from Wang Weiguo, a professor of the China University of Political Science and Law in Beijing.  The Companies rely on the expert opinion of Tang Xin, an associate professor in the Tsinghua University Law School in Beijing.

Whether the Companies should be heard

25.  I have indicated to counsel at the outset of the hearing that I decided to exercise my discretion to allow the Companies to be heard in this application, notwithstanding the non-compliance with the 27 June 2008 Orders complained of by the Receivers.  These are my reasons.

26.  The starting point is that to refuse to hear a party, even a contemnor, is “a strong thing … only to be justified by grave considerations of public policy.  It is a step which a court will only take when the contempt itself impedes the course of justice and there is no other effective means of securing his compliance” (Hadkinson v. Hadkinson, supra. at 298, per Denning LJ, as approved by Lord Bridge of Harwich in X Ltd. v. Morgan-Grampian (Publishers) Ltd. [1991] 1 AC 1 at 46 to 47). Lord Bridge adding by way of clarification that:

“Certainly in a case where a contemnor not only fails wilfully and contumaciously to comply with an order of the court but makes it clear that he will continue to defy the court’s authority if the order should be affirmed on appeal the court must, in my opinion, have a discretion to decline to entertain his appeal against the order.”

27.  In all the circumstances of this case, I am inclined to think that the interests of justice and considerations of fairness are best served by hearing the Companies rather than by refusing to do so, particularly in view of the arguments they raised which go to the jurisdiction of the court in making the orders sought in this application (X Ltd. v. Morgan-Grampian (Publishers) Ltd., supra. at 50 to 51, per Lord Oliver).  There are other means at the Receivers’ disposal for securing effective compliance with the 27 June 2008 Orders, they have taken out an application for substituted service on the directors which is to be heard.  Counsel for the Companies, Mr. Winston Poon, SC, has informed the court that if it should be held that the directors should pass the necessary board resolution and execute the power of attorney, he has no instructions that the directors would continue to defy the authority of this court and disobey the new court order.  Furthermore, the Companies’ stance in this jurisdiction has been one of resistance, rather than invoking the powers of the court voluntarily for their own benefit, this should have some bearing on the proportionality of precluding them from their right to be heard (Motorola Credit Corporation v. Uzan (No. 2) [2004] 1 WLR 113 at 129F, para. 55).

The arguments in opposition

28.  Mr. Poon submitted that the application should be dismissed for one or more of these reasons, as the orders sought:

(1) contravene the BVI and Samoan Orders;

(2) are otiose and would serve no useful purpose;

(3) violate the legal principle that court appointed receivers are not agents of the companies over which appointments were made;

(4) circumvent the non-recognition of receivership orders under Chinese law;

(5) do not comply with and will not be recognised under Chinese law; and

(6) exceed the scope of the powers granted to the Receivers by the BVI, Samoan and Hong Kong Orders.

29.  I will consider the arguments in the order set out above.

If there is contravention of the BVI and Samoan Orders

30.  Mr. Poon drew my attention to the salient provisions in the BVI order, which I have set out and summarised in the earlier part of this decision.  He contended that as, by virtue of this order, each of the boards of directors of the Companies was stripped of the power to manage the affairs of the Companies during the receivership, the directors have been deprived of any power to pass the board resolution or to execute the power of attorney as sought in this application.  Since the proceedings in Hong Kong are ancillary to the BVI proceedings, in rendering proper assistance to the BVI court, the Hong Kong court should be sensitive to the BVI Order and should not grant relief if this would obstruct or hamper the management of the case by the primary court or give rise to a risk of conflicting, inconsistent or overlapping orders in other courts (Refco Inc. v. Eastern Trading Co. [1999] 1 Lloyd’s Rep. 159 at 174, per Potter LJ). He backed up his argument with further dicta from Refco Inc., supra. at 174 to 175 by Millett LJ:

“Commercial necessity resulting from the increasing globalisation of trade has encouraged the adoption of measures to enable national courts to provide assistance to one another, thereby overcoming difficulties occasioned by the territorial limits of their respective jurisdictions.  But judicial comity requires restraint, based on mutual respect not only for the integrity of one another’s process, but also for one another’s procedural and substantive laws. … Comity involves respect for the foreign court’s jurisdiction and process, not respect for the foreign judge’s feelings.”

31.  The English Court of Appeal in Motorola Credit Corporation v. Uzan (No. 2), supra. at 147E to G, para. 115 identified five considerations that should be borne in mind by a court that is invited to exercise its ancillary jurisdiction to provide assistance to the court seised of the substantive proceedings:

“First, whether the making of the order will interfere with the management of the case in the primary court e.g. where the order is inconsistent with an order in the primary court or overlaps with it. … Second, whether it is the policy in the primary jurisdiction not itself to make worldwide freezing/disclosure orders.  Third, whether there is a danger that the orders made will give rise to disharmony or confusion and/or risk of conflicting inconsistent or overlapping orders in other jurisdictions, in particular the courts of the state where the person enjoined resides or where the assets affected are located.  If so, then respect for the territorial jurisdiction of that state should discourage the English court from using its unusually wide powers against a foreign defendant.  Fourth, whether at the time the order is sought there is likely to be a potential conflict as to jurisdiction rendering it inappropriate and inexpedient to make a worldwide order.  Fifth, whether, in a case where jurisdiction is resisted and disobedience is to be expected, the court will be making an order which it cannot enforce.”

32.  Mr. Poon submitted that the first, third and fifth considerations are relevant to the present situation.

33.  Mr. John Scott, SC, counsel for the Receivers, has no quarrel with the guidance in the English authorities on judicial restraint and comity. He submitted that the orders sought are not inconsistent with and do not conflict in any way with the BVI and Samoan Orders.  The orders sought in this application do not entail a reinstatement of the powers of the directors.  There is no managerial aspect to the task of what they are enjoined by the orders to do.  They are simply to execute two documents, the board resolution and the power of attorney, for each of the Companies, the effect of which is not to put the directors back in the saddle, but to confirm that the Receivers are in the saddle for the Companies, to assist them to exercise the Companies’ rights as shareholders in the PRC Subsidiaries, which is consistent and harmonious with what they are empowered to do under the BVI and Samoan Orders.  It is only for a scintilla of time and for a limited purpose that the directors have a role to play in executing the documents required by the court.  It would be fanciful to suggest that in seeking the orders, the Receivers are diverted from the task they should perform under the BVI and Samoan Orders.

34.  I accept Mr. Scott’s submission.  The appointment of a receiver by the court supersedes and puts into abeyance any power the board of directors has in respect of management.  As stated by Lord Atkinson in Moss Steamship Co. Ltd. v. Whinney [1912] AC 254 at 263:

“This appointment of a receiver and manager over the assets and business of a company does not dissolve or annihilate the company, any more than the taking possession by the mortgagee of the fee of land let to tenants annihilate the mortgagor.  Both continue to exist; but it entirely supersedes the company in the conduct of its business, deprives it of all power to enter into contracts in relation to that business, or to sell, pledge, or otherwise dispose of the property put into the possession, or under the control of the receiver and manager.  Its powers in these respects are entirely in abeyance.”

35.  Street J described the position in this way in Hawkesbury Development Co. Ltd. v. Landmark Finance Pty Ltd. [1969] 2 NSWR 782 at 790:

“Receivership and management may well dominate exclusively a company’s affairs and dealings and relations with the outside world.  But it does not permeate the company’s internal domestic structure.  That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business management functions.  A valid receivership and management will ordinarily supersede, but not destroy, the company’s own organs through which it conducts its affairs.  The capacity of those organs to function bears an inverse relationship to the validity and scope of the receivership and management.”

36.  In In re South Western of Venezuela (Barquisimeto) Railway Company [1902] 1 Ch 701, the directors who remained in office after receivers and managers were appointed by the court were entitled to be remunerated under the articles of association for their obligation to do whatever there was to be done by them as directors, in the same amount as before, notwithstanding they would have less to do by reason of the appointment of receivers and managers.

37.  As the directors of a company remain in office with their powers of management in abeyance, they can do what the receiver requires them to do as such holders of office.  And in the event they refuse to comply, they can be compelled to act by the court.  I see no conflict or inconsistency with the BVI and Samoan Orders if the directors of the Companies are ordered to pass the board resolution and execute the power of attorney.

If the orders sought are otiose

38.  Mr. Poon pointed to the expert evidence of Mr. Wang and submitted that on the own case of the Receivers, their expert has come to the view that the Receivers would be recognised under Chinese law “to a certain extent”, such that they are entitled to preserve and protect the assets of the Companies, as well as to exercise the powers vested in them under the orders of appointment.  That being the case, he submitted that the orders sought would be otiose and serve no useful purpose.  As the court should do nothing in vain, no orders should be made since they would not be necessary (In re Casterbridge Properties Ltd. (in liquidation) [2004] 1 WLR 602 at 619E to F, para. 44; Barber v. Penley [1893] 2 Ch 447 at 460).

39.  In his affidavit, Mr. Wang reasoned that despite the fact there is no direct recognition of a receiver appointed by a foreign court in terms of the judicial practice in China, China has in fact granted recognition to “other similar bodies appointed by foreign courts, e.g. a liquidator or provisional liquidator in bankruptcy cases”.  He cited Article 3 of Section 4 of the Supreme People’s Court Answers to Several Issues as to the Adjudication of Economic Disputes Involving Parties from Hong Kong or Macau promulgated by the Supreme People’s Court in 1987 (which stipulates that a party to a lawsuit which is a Hong Kong or Macau enterprise already declared bankrupt can be represented by the liquidator of such party in the relevant litigation), and Article 15 of Section 2 of the Supreme People’s Court Circular on the Publication of the Extracts of the Minutes of the Second All-China Work Meeting on the Adjudication of Commercial and Maritime Matters Involving Foreign Parties (Supreme Court Circular [2005] No. 26) (which stipulates that where a People’s Court discovers in the course of adjudicating a case that an overseas party has been declared bankrupt or has entered into insolvency procedures, it must notify the bankruptcy assets administrator or liquidator of the foreign party to participate in the litigation).

40.  Mr. Wang argued that the instances he cited demonstrated that China has already granted direct recognition of “foreign liquidators in judicial process”, without needing to recognise the source of a foreign liquidator’s powers, i.e. the relevant order made by a foreign court, as a pre-condition.  As there is no fundamental difference in terms of legal attributes as compared to a receiver appointed by a foreign court, in order to maintain the logic of consistency in the law, he came to the view that “a receiver should also be directly recognised by the Chinese courts, or, at the very least, the receiver should be directly recognised by the Chinese courts in its capacity as the agent of the enterprise subject to receivership, without the need to recognise the source of the powers of the overseas receiver, namely the order issued by an overseas court order as a pre-condition.”

41.  The above is Mr. Wang’s opinion of what the position should be, based on theory and his reasoning from first principles.  I agree with Mr. Scott that it is not sufficient to provide the Receivers with the comfort and peace of mind they need to discharge their duties as regards the PRC Subsidiaries and to preserve the assets of the Companies in China.  What the theoretical position should be does not mean there would be no problem in practice, as could be seen from the experience of Mr. Neil McDonald and Mr. Zhu.  The fact remains that the Receivers have not been able to assume control of the Companies’ assets in China.  I do not think the orders sought would be otiose or unnecessary.  The board resolution and power of attorney, which are routinely recognised in China, would help to clear up any doubt that a third party might have in dealing with the Receivers.

If the orders sought violate the principle that court appointed receivers are not agents of the companies

42.  Mr. Poon’s next attack was premised on the legal principle that a receiver appointed by the court is not an agent of the company over which the appointment was made, or of any of the parties, but is responsible to the court and no orders of the company or of the directors can interfere with this responsibility (Burt, Boulton, & Hayward v. Bull [1895] 1 QB 276 at 279, 282, 284; Boehm v. Goodall [1911] 1 Ch 155 at 161; Moss Steamship Co. Ltd. v. Whinney, supra. at 259, 271; Parsons v. The Sovereign Bank of Canada [1913] AC 160 at 166 to 167; Evans v. Clayhope Properties Ltd. [1988] 1 WLR 358 at 361H to 362G).  He submitted the effect of the board resolution and the power of attorney sought in the orders is to make the Receivers agents of the Companies, contrary to this legal principle.

43.  The present situation is an unusual one.  In making an order for appointment of receivers, the court would have provided them with sufficient and necessary powers to assume control over the company and to preserve assets.  It would not normally have been necessary for the board of directors to do anything else to confer the receivers with the powers already given by the court.  Here, the Receivers find themselves in a position that requires additional steps to be taken by the board of directors, and for this purpose they apply to the court.

44.  Lord Esher in Burt, Boulton, & Hayward v. Bull, supra. had this to say at 279 to 280 on the incidents of the relation of a court-appointed receiver to the court:

“What is the position of such a receiver and manager?  He is not the agent of the company.  They do not appoint him; he is not bound to obey their directions; and they cannot dismiss him, however much they may disapprove of the mode in which he is carrying on the business.  Only the Court can dismiss him, or give him directions as to the mode of carrying on the business, or interfere with him, if he is not carrying on the business properly.  The incidents of his relation to the Court are such as would, if they existed as between him and an ordinary person, constitute him an agent for such person; but it is of course impossible to suppose that the relation of agent and principal exists between him and the Court.  What is the inference that necessarily arises?  It must be that the intention is that he shall act in pursuance of his appointment on his own responsibility and not as an agent, because otherwise nobody will be responsible for his acts.  The company cannot be liable, for he is not their agent, and the Court clearly cannot be liable.  Therefore any orders which he may give under such circumstances as manager must prima facie be taken to be orders given on his own responsibility and credit.  How far he may be bound to give such orders it is not now necessary to determine.  It may be that, if his relation to the Court implies that he must within the bounds of reason carry on the business, as between him and the Court it would be his duty to give the necessary orders; but I apprehend that, if he finds himself thereby placed in a difficulty, and is unwilling to give orders, he may apply to the Court and the Court would protect him.”

45.  Mr. Scott submitted this is exactly what the Receivers are doing – seeking directions from the court to enable them to assume their responsibility effectively under the orders of appointment.  The board resolution and power of attorney, which are to be made pursuant to court orders, do not alter the position that the Receivers are still carrying out their mandate under the orders of appointment, and hence acting on their own responsibility, as is made clear in paragraphs 1.3 and 1.4 of the draft board resolution.  I reject the submission that the orders sought would violate the legal principle that court appointed receivers are not the agents of the company.

If the orders sought circumvent the non-recognition of receivership orders under Chinese law

46.  It is common ground of the expert evidence on both sides that the orders of appointment made by the courts in the BVI, Samoa and Hong Kong would not be recognised, and cannot be enforced by a Chinese court.  Since the power of attorney is to enable the Receivers to discharge their duties under the BVI, Samoan and Hong Kong Orders, Mr. Poon argued that this would be tantamount to interfering with the administration of justice in China, as the Receivers are purporting to act in their capacity as such in China without permission from the relevant authorities in that jurisdiction.  He contended that the orders sought are for the sole purpose of evading Chinese law, however disguised and indirect this may be.  It would be contrary to concepts of international comity and grounds of public policy for this court to make an order designed to breach the laws in China (Tallack v. Tallack [1927] P 211 at 217 to 218, 220 to 221; Foster v. Driscoll [1929] 1 KB 470 at 510; Regazzoni v. K. C. Sethia (1944) Ltd. [1958] AC 301 at 319 to 320, 321 to 322, 326 to 327).

47.  In the board resolution, it is provided that the company secretary shall arrange for the board resolution and any of the relevant documents to be notarised, authenticated and certified; that the Receivers are to file and register any requisite documents with and seek approval from the relevant authorities in China; that they are to engage third parties with a view to identifying, tracing or investigating assets of the Companies and the PRC Subsidiaries; and that they are to request, obtain, inspect and review documents and information of the PRC Subsidiaries.  According to the opinion of Mr. Tang, the expert engaged by the Companies, the Receivers may not give notice, serve legal documents, conduct investigation or collect evidence or information in China, without the approval of the relevant authorities in China and such approval necessarily requires the recognition of the orders of appointment, by virtue of Articles 261 of the Civil Procedure Law of China, and any person seeking property preservation in China must apply to the Chinese courts requesting the courts to take such measures, by virtue of Article 249 of the Civil Procedure Law.

48.  The Receivers’ expert Mr. Wang drew a distinction between ordinary civil law acts (such as executing legal documents on behalf of the Companies and sending letters to relevant enterprises, individuals and government authorities) and judicial acts (such as service of documents, investigation and gathering evidence); for ordinary civil law acts, there is no need to seek recognition and approval from a Chinese court or other governmental authorities of the appointment orders, as such acts will not interfere with Chinese judicial sovereignty.  He opined that Mr. Tang has misread and misinterpreted the relevant laws.  I prefer the opinion of Mr. Wang in this respect.

49.  Furthermore, as submitted by Mr. Scott, the investigation and gathering of evidence to be performed by the Receivers pursuant to the powers given in the appointment orders are merely acts carried out in a private capacity, they should not be equated with judicial investigation in a civil law jurisdiction.

50.  I reject the argument that the orders sought would constitute any interference with the administration of justice in China.

If the orders sought will not be recognised under Chinese law

51.  It is the opinion of Mr. Tang that the board resolution would not be considered valid, and hence it is unlikely to be recognised as legally binding under Chinese law.  He advanced a number of reasons.

52.  Firstly, he contended that the resolution is in breach of Article 184(1) of the General Principles of Civil Law of China (“the GPCL”), which provides that the national law of a foreign legal person shall be the laws of the country where it is registered, and the civil capacity of such legal person shall be determined pursuant to its national law.  Mr. Tang opined that by virtue of the BVI Order, and under the laws of that jurisdiction, the boards of directors of the Companies have no capacity to execute the board resolution or to grant the power of attorney, even if done at the direction of the Hong Kong court.

53.  I have rejected that contention raised by Mr. Poon in the earlier part of this decision.

54.  Secondly, he argued that the resolution is in breach of Article 184(2) of the GPCL, which provides that any civil act of any foreign legal person shall be in accordance with the laws of China.  Article 55 of the GPCL provides that a civil legal act shall meet the requirements that the intention expressed is genuine and such act does not violate the law or public interest.  Article 58 of the GPCL provides that civil acts in the following categories shall be null and void: those performed by one party against his true will as a result of coercion; those that constitute violation of the law or public interest; those performed under the guise of legitimate acts while concealing illegitimate purposes.  If the Companies do not agree to execute the board resolution or the power of attorney but are compelled to do so by an order of the Hong Kong court, the documents executed are against the will of the Companies, they would not be a true expression of the Companies’ intention, and they violate the law as cited.

55.  I do not accept Mr. Tang’s opinion.  I have already rejected the contention that the orders sought violate public interest as I am of the view they do not constitute any interference with judicial sovereignty in China.  As Mr. Wang has reasoned, the will of the Receivers is the will of the Companies by virtue of the BVI Order.  Hence, if the Receivers request that the boards of directors pass the resolution, such request is deemed to be a request made by the Companies, and the directors are obliged to do so.  I agree with Mr. Wang that Mr. Tang’s application of Articles 55 and 58 of the GPCL is incorrect.  Furthermore, the validity of the board resolution should be determined in accordance with the law of the place where the resolution is passed, namely, the laws of the BVI or of Hong Kong, not the laws in China.

56.  Mr. Tang is of the view that the power of attorney would not be recognised in China as valid and legal for the same reasons as in the board resolution and for these additional reasons.

57.  He contended that the power of attorney has two significant formal defects.  Article 65(2) of the GPCL provides that the following items shall be clearly stated in the power of attorney: the entrusted tasks and the scope and duration of the power of agency.  The power of attorney in this instance does not contain specific entrusted tasks; the broad and general scope renders it ineffective.  Article 69(2) of the GPCL provides that an entrusted agency shall end when the principal rescinds the entrustment or the agent declines the entrustment.  This recognises that the principal must be able to terminate the power of attorney.  Here, the power of attorney provides that it is “irrevocable” save with the prior written consent of the Receivers; this is not in line with Article 69.

58.  I agree with Mr. Wang that the validity of the power of attorney should be governed by the laws of the BVI or Hong Kong, rather than the laws in China.  It is unnecessary to deal with the additional reasons of Mr. Tang.

59.  I reject the argument that the board of resolution and the power of attorney are not valid.  I accept the expert opinion of Mr. Zhu and Mr. Wang that the board of resolution and the power of attorney are likely to be recognised by a Chinese court.

If the orders sought exceed the powers granted to the Receivers

60.  Mr. Poon made a number of criticisms that the scope of the powers under the board resolution and the power of attorney apparently exceeds the scope of the powers conferred in the BVI and Hong Kong Orders.

61.  As mentioned earlier, the power of attorney is expressed to be “irrevocable” save with the prior written consent of the Receivers.  Mr. Scott proposed to address that by substituting the prior written consent of the Receivers with a qualification that the duration of the power of attorney is subject to the right of the court to terminate the same.  This proposed alteration would be acceptable to the court.

62.  A point was taken about delegation by the Receivers of the powers conferred.  In paragraph 2.1 of the board resolution and paragraph 1.1 of the power of attorney, the Receivers are given “full rights to delegate the rights granted hereunder to any other person” to take such actions set out under sub-paragraphs (a) to (e).  In paragraph 2.2(a) of the board resolution and paragraph 1.2(a) of the power of attorney, they have the right to “authorise any other person to take any action in connection with the exercise of the powers of the Receivers granted pursuant to the Court Order with respect to the Company”.  Mr. Poon submitted that as the Receivers are holding positions of discretion and trust requiring personal skill and competence, they have no authority to delegate their responsibilities, without express authority to do so (Halsbury’s Laws of England, 4th ed. Reissue, Vol 2(1), paras. 75, 77 & 78; John McCann & Co. v. Pow [1975] 1 WLR 1643 at 1647B to F).

63.  The power to delegate as provided in the documents may be too wide.  This can be dealt with by suitable drafting, to make clear that what the Receivers are permitted to do is to delegate acts which require no special discretion as and when it is reasonably necessary to enable them to carry out their duties in connection with the receivership.

64.  In paragraph 2.1(c) of the broad resolution and paragraph 1.1(c) of the power of attorney, the Receivers are authorised, at their sole discretion, to initiate any court proceedings in the names of the Companies in any jurisdiction including against the PRC Subsidiaries, other shareholders of the PRC Subsidiaries, the incumbent officers, or other relevant persons who have infringed the rights and interests of the Companies.  Mr. Poon complained this power is too wide.  I will confine the exercise to this power to court proceedings in China.

65.  Paragraph 2.4 of the board resolution and paragraph 1.4 of the power of attorney provide that the Companies shall indemnify the Receivers against any actions, charges, claims and demands of every kind or nature arising out of their exercise of the powers and assumption of fiduciary duties thereunder and/or pursuant to the orders of appointment.  Mr. Poon submitted that such an indemnity is contrary to the legal principle that a court appointed receiver is an officer of the court, not an agent for any other person, and must look for his indemnity to the assets which are under the control of the court (Boehm v. Goodall, supra. at 161; Kerr & Hunter on Receivers and Administrators, 2005 ed., para. 8-12; Company Receivers and Administrators by James O’Donovan, 2000 Reissue, Vol. 2, paras. [25.1010], [25.1110] & [25.1160]).  I will delete paragraphs 2.4 of the board resolution and paragraph 1.4 of the power of attorney.  Appropriate changes should be made to paragraph 2.1 of the board resolution and paragraph 1.1 of the power of attorney, where reference is made to the indemnity.

66.  Lastly, in paragraph 1.5 of the power of attorney, it is provided that the Company ratifies and confirms any acts the Receivers shall do or purport to do in furtherance or in relation to the power of attorney and/or any relevant documents entered into by the Receivers pursuant to the power.  Mr. Poon submitted this is inappropriate.  I agree.  As I have held earlier, the Receivers are acting on their own responsibility in carrying out their mandate under the orders of appointment.  I would delete this paragraph in the power of attorney.

Orders

67.  I make an order as sought in each of the summonses with the alterations mentioned earlier in the board resolution and the power of attorney.  I make an order nisi that the Companies are to pay the costs of the Receivers in this application in any event, with a certificate for two counsel.