WAH NAM HOLDINGS CO. LTD. AND OTHERS v. EXCEL NOBLE DEVELOPMENT LTD. AND OTHERS

CACV 241/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 241 OF 1999

(ON APPEAL FROM HCA 8974 OF 1999)

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J U D G M E N T

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Ribeiro J. (giving the first judgment at the invitation of Keith J.A.) :

The issues on this Appeal

1. This is an appeal by the Plaintiffs against the decision of Yuen J on 21 July 1999 releasing the 1st to 7th Defendants from certain undertakings in lieu of injunctions given by them at a hearing (which was effectively ex parte although nominally on notice) before Pang J on 1 June 1999. Yuen J ordered the undertakings released on the ground that they had been obtained in circumstances involving material non-disclosure on the part of the Plaintiffs regarding their adverse financial condition, material to their ability to honour the cross-undertaking in damages.

2. At the hearing, Mr Benjamin Yu SC, appearing with Miss Priscilla Wong and Miss Ifan Chan on behalf of the Plaintiffs, challenged that decision on three main grounds, namely:-

(1) that Yuen J ought to have recognized that the Plaintiffs' case on the merits of the Action was overwhelming, so that any non-disclosure as to the Plaintiffs' financial resources was effectively immaterial, or not a sufficient ground for discharging the undertakings, since the cross-undertaking in damages was unlikely ever to be called upon ("the merits argument");

(2) that Yuen J erred in finding that the Plaintiffs were in a parlous financial position, the proper view on the evidence being that the Plaintiffs or one or more of them had ample financial resources to meet their cross-undertaking if necessary ("the financial position argument"); and,

(3) that the aforesaid error was compounded by the fact that Yuen J wrongly concluded that substantial losses might be suffered by the 1st to 7th Defendants as a result of the Plaintiffs obtaining ex parte injunctions or undertakings in lieu, and so adopted an incorrect framework for judging the adequacy of the Plaintiffs' financial resources in relation to the cross-undertaking in damages ("the damages argument").

3. The validity or otherwise of these attacks requires an appreciation of the underlying dispute between the parties.

The parties

4. The 8th Defendant ("the Company") is a Hong Kong listed company. The 2nd Plaintiff is and was at the time of the application before Pang J, the largest single shareholder in the Company as well as its chairman and managing director. He owns and controls the 1st and 3rd Plaintiffs, both being private companies.

5. The main protagonists among the Defendants are the 5th and 6th Defendants. The former, a professional accountant, had been chief executive officer of the Company. The latter (also an accountant) had been the Company's finance director. Both were relieved of their positions in March 1999 at the 2nd Plaintiff's instigation.

6. The 5th Defendant controls the 1st and 3rd Defendants while the 6th Defendant controls the 2nd and 4th Defendants. The 5th and 6th Defendants together control the 7th Defendant.

The issues in the Action

7. With a view to raising funds, the Company issued a number of convertible loan notes whereby in consideration of monies made available to it, the Company promised to repay the same with interest and/or to permit the holders of such notes, at their option, to convert the debt (or part of it) into shares in the Company at stated conversion rates and in accordance with specified terms.

8. The Action involves a dispute between the Plaintiffs on the one hand and the 1st to 7th Defendants on the other as to the beneficial ownership of four particular convertible loan notes ("the Notes").

9. Two of the Notes (Notes A and B) were issued on 21 June 1997 and each had a face amount of HK$15 million. The other two (Notes C and D) were issued about a year later, each with a face value of HK$28.7 million. It was until recently not in dispute that the Company had received sums equalling the total face value of the Notes, i.e., $87.4 million. However, it is now suggested that there may have been a shortfall of some $10.5 million in the amount received. Nothing however turns on this for present purposes.

10. It is common ground that Notes A and C were initially issued to the 1st and 2nd Defendants and that, after transfers effected on 25 January 1999, the 1st, 3rd and 4th Defendants became and presently constitute the legal holders of the Notes. The details are as follows:-

11. The Plaintiffs claim to be beneficially entitled to 60% of Note A and to the whole of Notes B, C and D. Their claim is based on the allegation that they provided the sums paid to the Company for the issue of such Notes (as to 60% in respect of Note A). The Plaintiffs contend that the relevant Defendants became legal holders of the Notes as their nominees.

The two $15 million Notes

12. In respect of Notes A and B, the Plaintiffs explain that the Defendants were made their nominees to avoid the transaction being deemed a connected transaction under the Listing Rules and therefore to avoid the Company having to seek approval from its shareholders for the issue of the Notes.

13. While the Defendants accept that certain cheque payments were made by the Plaintiffs to the 5th and 6th Defendants and that the proceeds of such cheques were used to fund the subscription for Notes A and B, they reject the Plaintiffs' explanation. They contend that the Plaintiffs' payments were made as a consequence of certain underlying transactions which had resulted in an agreement in Chinese dated 5 May 1997 between the 2nd Plaintiff and the 6th Defendant ("the 1st Chinese Agreement").

14. According to the 6th Defendant, he and the 2nd Plaintiff had engaged in an unspecified but highly profitable business on the mainland and had agreed that such profits should be held by a company called Charmlink International Limited ("Charmlink") to be shared equally between them. He alleges that from 1995 to 1997, they had been able to "rake in" some HK$65 million by way of profits and that, with his consent, the 2nd Plaintiff had overdrawn his share, it being agreed that such overdrawn amounts would be treated as advances from the 6th Defendant. Such overdrawn amounts are said to have come to some $28 million and that thereafter, the 6th Defendant had experienced difficulty getting repayment from the 2nd Plaintiff. He alleges that he agreed to subscribe for the Notes pursuant to the 1st Chinese Agreement because this represented a means of getting his money back since the 2nd Plaintiff was willing to make such repayment provided that the funds were ploughed back into the Company as subscription monies for Notes A and B. The 6th Defendant explains that he requested the 2nd Plaintiff to make out cheques in favour of the 5th Defendant totalling $9 million to discharge the 6th Defendant's own debt to the 5th Defendant, such funds likewise to be used for subscribing to Notes A and B via the 1st and 2nd Defendants.

15. The Plaintiffs contend in reply that the 1st Chinese Agreement is a forgery and that it is absurd to think that Charmlink made profits even remotely approaching the $65 million amount alleged. They claim that on a proper examination, as demonstrated by expert accountancy evidence, it is clear that the sums said to be profits represent merely receipts of Charmlink and not profits.

The two $28.7 million Notes

16. A similar (and no less complicated) debate arises on Notes C and D. While only those two Notes are the subject-matter of the proceedings between the parties, it is also relevant to mention that a third $28.7 million Note (Note E) was issued to the 2nd Plaintiff, naming him as holder, along with Notes C and D.

17. The Plaintiffs accept as a starting point that Notes C and D were issued by the Company to the 1st and 2nd Defendants as legal holders. Once more, they contend that those Defendants and their transferees hold such Notes as nominees for the Plaintiffs because the Plaintiffs provided the funds used to subscribe for those Notes. The Plaintiffs say that the relevant funds derived from the sale of shares in a company called Investment Austasia Limited ("IAL"), which shares had been beneficially owned by the 1st and 3rd Plaintiffs (and ultimately the 2nd Plaintiff).

18. The reason given by the Plaintiffs for constituting the 1st and 2nd Defendants their nominees is again less than reputable. The 2nd Plaintiff says that he believed (on the advice of the 5th and 6th Defendants) that subscribing to Notes C and D would not only involve a connected transaction (as in the case of Notes A and B) but would also give him an effective shareholding in the Company exceeding 35% of its enlarged share capital requiring him to make a general offer to purchase all the shares in the Company held in the market. It was with a view to avoiding such regulatory requirements that the Defendants were asked to "front" for the Plaintiffs.

19. The 2nd Plaintiff has deposed that the Company is now taking steps to inform the Stock Exchange of the Plaintiffs' interests in the Notes and so presumably the Plaintiffs wish, if possible, to avail themselves of a locus poenitentiae in respect of their deceptive conduct with regard to the Stock Exchange.

20. The Defendants' version of the events leading to the issue of Notes C and D differs and is as follows. They allege that at a time when the Company's shares were trading at a high price, they wanted to exercise their right to convert Notes A and B into shares in the Company in order to sell them on the market. The 2nd Plaintiff was much opposed to this and, so as to persuade them not to take such action, he entered into an (apparently oral) agreement with them on 5 September 1997 whereby, in consideration of the 5th and 6th Defendants agreeing not to take such action, the 2nd Plaintiff promised to purchase those Notes within 6 months (that is, before 5 March 1998) for HK$78,947,368, being an amount equivalent to that realisable by selling the relevant converted shares at HK$0.36/share.

21. The 5th and 6th Defendants say that the 2nd Plaintiff reneged on his promise and that in consequence, because of a decline in the market value of shares in the Company, they suffered loss. They therefore pressed the 2nd Plaintiff for compensation and, on 8 June 1998, entered into a written agreement in Chinese ("the 2nd Chinese Agreement") with him whereby the 2nd Plaintiff agreed to compensate them in the sum of HK$48,947,368 by transferring a total of about 10.87 million IAL shares to such Defendants. They in turn agreed to plough the proceeds of selling such IAL shares back into the Company by subscribing for Notes C and D.

22. The 5th and 6th Defendants allege that they nominated the 7th Defendant to be the transferee of the IAL shares in question and that such transfer was formalised by a Deed of Settlement dated 9 July 1998 (although it appears to have been backdated to such date after having been executed in September 1998).

23. The Deed of Settlement was executed under seal by or on behalf of the Company, the 1st and 3rd Plaintiffs and four other companies apparently owned or controlled by the Plaintiffs. On its face, it transfers all the relevant IAL shares to the 7th Defendant in full and final settlement of certain unspecified indebtedness to the 7th Defendant on the transferors' part. Accordingly, so the Defendants contend, the 7th Defendant was legally entitled to the proceeds of sale of the relevant IAL shares and to Notes C and D which were acquired using such proceeds.

24. The Plaintiffs reject this version and allege that the 2nd Chinese Agreement is a forgery. They also challenge it on the basis that it depends in the first place on the Defendants establishing that they beneficially owned Notes A and B, which, the Plaintiffs contend, is an untenable proposition resting on non-existent profits of Charmlink.

25. While he admits that his signature does appear on the Deed of Settlement, the 2nd Plaintiff says that he does not recall signing it and believes that execution of the document was induced by a misrepresentation.

26. He also deposes that he cannot recall any, and can find no, board resolutions authorising the affixing of the common seal of any of the relevant companies (i.e., the Company, 1st Plaintiff and 3rd Plaintiff) to the Deed of Settlement. However, board minutes of these three companies all purporting to be signed by the 2nd Plaintiff as chairman of each meeting were subsequently exhibited and have not been explained away.

The merits argument

27. Having outlined the issues in the Action, one may now return to the issues on the Appeal. In my judgment the merits argument must be rejected both in principle and on the facts. I deal first with the objection in principle.

28. A judge, in Yuen J's position, considering whether to uphold or set aside an ex parte injunction at the inter partes stage, applies the principles established by American Cyanamid Co v Ethicon Limited [1975] AC 396. The important change effected by that decision is that the court is no longer concerned even to ask whether the Plaintiff has demonstrated a prima facie case (except in extremis where the balance of convenience cannot be resolved in favour of either party). The approach now, so far as the merits of the Plaintiff's claim are concerned, is to ascertain merely whether there is a serious question to be tried.

29. If the answer is that there is, the court proceeds to consider whether, if the Plaintiff were to succeed in obtaining a permanent injunction at the trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the Defendant continuing to act unrestrained pending the trial. If damages would not be an adequate remedy, the court then considers whether the Defendant would be adequately protected by the Plaintiff's cross-undertaking in damages, should it later be found that the Plaintiff should not have been granted an interlocutory injunction.

30. If the court is in doubt as to the adequacy of the respective remedies of damages, then the court considers where the balance of convenience lies, this involving a discretionary assessment of the effects of granting or withholding interlocutory relief, the court seeking to preserve the status quo.

31. It is only where "the uncompensatable disadvantage to each party would not differ widely" that "it may not be improper to take into account in tipping the balance the relative strength of each party's case as revealed by the affidavit evidence adduced on the hearing of the application." However, even then, this exercise can only be undertaken "where it is apparent upon the facts disclosed by the evidence as to which there is no credible dispute that the strength of one party's case is disproportionate to that of the other party." (All the quotations in this paragraph are from American Cyanamid at p. 409)

32. The requirement that a Plaintiff must provide a cross-undertaking in damages is therefore a necessary part of the mechanism for granting interlocutory injunctions. It is a safeguard for the Defendant which enables the court to grant the Plaintiff an order for interim restraint without the merits having been canvassed. This was stressed by Lord Diplock (at p. 407- 408, all the other Law Lords agreeing) as follows :-

"It is no part of the court's function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature consideration. These are matters to be dealt with at the trial. One of the reasons for the introduction of the practice of requiring an undertaking as to damages upon the grant of an interlocutory injunction was that 'it aided the court in doing that which was its great object, viz. abstaining from expressing any opinion upon the merits of the case until the hearing': Wakefield v. Duke of Buccleugh (1865) 12 L.T. 628, 629."

33. It follows that the merits argument, involving the contention that Yuen J should have undertaken an assessment of the merits of the Plaintiffs' case with a view to absolving them from providing an undertaking in damages or from the consequences of any non-disclosure or with a view to assessing the likelihood of the undertaking being called upon, turns the true principle on its head.

34. It is plainly inappropriate to try to determine the merits at the interlocutory stage when the evidence has not been fully developed, discovery has not yet occurred and the legal advisers are not fully instructed on the merits of the case, making it inevitable that there will be gaps in the affidavits. The court is only concerned at that stage in trying to determine how the status quo can most fairly be preserved pending trial.

35. There may be exceptions based on public policy or historical reasons (such as cases involving applications by the Government, when the Defendant may have the burden of showing why a cross-undertaking should be provided: F Hoffman-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295). Otherwise, however, a Plaintiff "is almost invariably required to give an 'undertaking in damages'; and an undertaking to this effect will be implied if the court grants an injunction or accepts an undertaking in lieu thereof" (Baker & Langan, Snell's Principles of Equity, 28th Ed, p 644. See also Meagher, Gummow and Lehane, Equity Doctrines & Remedies, 3rd Ed, [2180]: "Almost as a matter of course, a court will decline to grant an interlocutory injunction unless the plaintiff undertakes to the court to abide by any order it may later make if it turns out that the injunction should not have been made: Smith v Day (1882) 21 Ch D 421").

36. When asked whether there was any authority to support the merits argument, Mr Yu referred to the following passage in Spry, The Principles of Equitable Remedies, 5th Ed, at p 483:-

"It has indeed been suggested that an undertaking as to damages 'ought to be given on every interlocutory injunction', but it is the preferable view that in very exceptional cases this course may be inappropriate. So it was said by North J., 'If in the exercise of his discretion a judge should think fit to dispense with such an undertaking he could of course do so, and there are cases in which judges have done so; but this would be under special circumstances.' (AG v Albany Hotel Co [1896] 2 Ch 696)."

37. I would be prepared to accept (as Yuen J did) that in highly exceptional cases, the court might, in its discretion, dispense with or withhold enforcement of a cross-undertaking in damages. However, nothing that North J said in AG v Albany Hotel Co suggests that such a course would be anything other than extremely rare. The quotation from Spry must be placed firmly in the context of North J's judgment, which very much adopts the orthodox line as demonstrated by the following extracts :-

"The question upon which I have now to give my decision is, whether the usual rule of the Court, that an applicant for an interlocutory injunction must give an undertaking to be answerable in damages as a condition of his obtaining the injunction, applies when the Attorney-General is the plaintiff, suing on behalf of the Crown." (at p 699)

"The insertion of such an undertaking has now become a matter of course; and James LJ in Graham v Campbell 7 Ch D 490 said that the undertaking in damages ought to be given on every interlocutory injunction, and, unless under special circumstances, effect ought to be given to it. If it should subsequently appear that such an order had been improvidently made, it is difficult to see how, in the absence of such an undertaking, the defendant could recover from the plaintiff the damages which were really sustained by him by reason of the improper order of the Court." (ibid)

"In considering whether an interlocutory injunction should be granted or not, at a time when the case is only in an early stage of development, the Court aims at keeping matters in statu quo, as far as possible, without prejudicing the rights of the parties; and it is often induced to make in favour of a plaintiff, in the belief that the defendant will be sufficiently protected against damage by the undertaking, an order which the Court would not have made if the defendant had been left without such a protection and there was a reasonable probability that he might sustain serious damage if the injunction should be ultimately discharged. This is a risk which a plaintiff who refuses to give an undertaking must run, and even the Crown may find an injunction refused by the Court when the defendant might be exposed to serious injury if the interlocutory injunction was granted, but not made perpetual, and no protection against that injury was forthcoming." (at p 702)

38. Turning to the facts of the present case, the starting-point is the Defendants' reliance on their rights as legal holders of the Notes as the basis of their ownership. However, the Plaintiffs contend that such ownership cannot be taken at face value and invite the Court to peel away the first layer of fact and to examine the underlying payments funding the subscriptions. On the basis of such payments, the Plaintiffs claim beneficial entitlement to the Notes. The Defendants respond by asking for yet another layer to be peeled away, contending that such funding was provided pursuant to the Chinese Agreements and the Deed of Settlement, making the Defendants the rightful owners of the Notes. The Plaintiffs' riposte is that the Chinese Agreements are forged, arguing that execution of the Deed of Settlement was obtained by misrepresentation and that yet deeper examination of the facts reveals that the Defendants' story is unsustainable.

39. The arguments therefore attribute an onion-like quality to the case with each party inviting the court to look beneath the surface. To my mind, this presents a perfect example of a case where it would hopeless for the court to try to resolve the parties' differences, including allegations of forgery, on the basis of affidavits and at such an early stage.

The financial position argument

40. For the protection given to the Defendant by the cross-undertaking to be real and not illusory, the Plaintiff must obviously be able to honour it if required. In American Cyanamid (at p 408), Lord Diplock saw the need for a realistic ability to meet any liability in damages as a symmetrical requirement applying both to the Plaintiff and the Defendant when considering the adequacy of damages and the cross-undertaking in damages, as follows :-

"If damages in the measure recoverable at common law would be an adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should 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." (Italics supplied)

41. It is clear that where, as in the present case, a cross-undertaking is given to the court, if nothing further is said, the court will take the Plaintiff to be impliedly representing that his financial position allows him to meet his potential liability thereunder. Scott J put this as follows in Manor Electronics Ltd v Dickson [1988] RPC 618 at 623:-

"The evidence in support of ex parte applications often includes some reference to the financial worth of the applicant. The purpose is to demonstrate that the cross-undertakings in damages will be honoured, if that should become necessary. I think, speaking for myself, that where there is no reference to the applicant's financial worth, the assumption will be that the applicant's financial substance is adequate for the purpose of the cross-undertaking that has to be given."

42. That decision was approved by this Court in New Asia Energy Limited v Concord Oil (Hong Kong) Limited (Unreported) CACV No. 347 of 1998, 3 November 1999.

43. It follows that if a Plaintiff's financial position is such that, viewed fairly, it may be said to raise realistic doubts as to the Plaintiff's ability to honour the cross-undertaking, it becomes incumbent upon the Plaintiff to make full and frank disclosure of his financial position to the ex parte judge so as to permit the judge to determine for himself the correct order to make in the light of such disclosures. The judge in such cases has various options. He may consider it proper to refuse the injunction altogether. Or, he may decide to require some degree of fortification of the cross-undertaking as a condition for the grant of the injunction. Alternatively, he may simply decide to grant the injunction against the cross-undertaking notwithstanding the risk that it may not be honoured or fully honoured if called upon. It is however crucial that all relevant material be placed before the judge so that he can make the decision for himself: Lock International plc v Beswick [1989] 1 WLR 1268 at 1279C.

44. If the facts were such that the Plaintiff came under a duty to make disclosure, it does not avail him to say that his non-disclosure was inadvertent. It was accepted in the Lock International case that the non-disclosure was inadvertent but, as Hoffmann J stated there (at p 1279D): "....... the usual penalty for material non-disclosure, whether inadvertent or not, is the discharge of the ex parte order," although the court has a discretion to maintain the order if satisfied that no injustice has been caused to the Defendants.

45. Neither does it avail the Plaintiff to say that if the ex parte judge had been told of the financial difficulties, he would nonetheless have granted the ex parte injunction: Citibank NA v Express Ship Management Services Ltd [1987] HKLR 1184 at 1190, the point again being that it is essential that full disclosure is made to enable the judge to make the decision for himself:New Asia Energy Limited v Concord Oil (Hong Kong) Limited (supra).

46. Similarly, where genuine doubts can materially be raised and there has been a failure to disclose the questionable financial position, it is no answer for the Plaintiff subsequently to argue, from a close analysis and calculation of his actual worth that he probably could meet any potential liability or that he should be excused the non-disclosure because the ex parte order (in Anton Piller cases) has borne fruit, showing the Defendant in a bad light. Scott J in the Manor Electronics case (supra), explained the court's approach as follows:-

"Failure to put the accounts before the judge showing the financial position of the companies was, in my judgment, a serious non-disclosure. The court is always very vulnerable when ex parte applications are made. The court has no alternative but to rely on the disclosure made by the applicant for the ex parte relief. There is no other source of information. Full disclosure is assumed and is a condition on which ex parte relief is granted. If subsequently it becomes apparent that there has not been full disclosure the practice of the courts is without more ado to discharge the ex parte orders." (at p 623)

"If there was inadequate disclosure then the ex parte orders ought not to have been made and ought at once to be discharged. It is no answer to say that the orders improperly obtained have in fact been fruitful. The practice of the courts when material non-disclosure has attended the obtaining of an ex parte injunction is to discharge the order without going into the merits. That is a salutary and necessary rule of practice ......." (at p 624)

47. In the present case, the Plaintiffs obtained the ex parte injunction from Pang J, giving a cross-undertaking without disclosing their financial position or otherwise suggesting that doubts might be raised as to their ability to meet it. The question relevant to the financial position argument is therefore whether, applying the principles mentioned above, the evidence shows that the Plaintiffs' status was such as to have required disclosure to be made to Pang J.

48. In my judgment, on the evidence, the Plaintiffs were, to say the least, in a highly precarious financial position, making it seriously questionable whether they would be able to honour their cross-undertaking. It was therefore incumbent on the Plaintiffs to make full and frank disclosure of that position to the ex parte judge. This they failed to do.

49. Before looking at what the available evidence discloses, it should be noted, as Mr Barrie Barlow (appearing with Mr Thomson Mo for the Defendants) pointed out, that such evidence is palpably incomplete. As the learned judge pointed out, such financial information as has been supplied is in many cases unaudited and/or not up to date. The 2nd Plaintiff is said to have assets in a private group of companies called "the Wah Hing group", but no financial statements at all have been disclosed in relation to that group. On many matters, details have not been given. This is so even though the Plaintiffs obviously realised they were under attack for non-disclosure in relation to their financial position.

50. Mr Yu sought to excuse the incomplete state of the evidence on the grounds of shortness of time for the filing of evidence, of the fact that many of the 1st Plaintiff's operations are on the mainland and of the constant need for the 2nd Plaintiff to travel in the course of his business. However, in my view, none of these grounds provides a convincing excuse. No application was made to Yuen J to allow further evidence to be filed out of time. The fact that its operations were on the mainland did not relieve the 1st Plaintiff, a Hong Kong company, from keeping proper records and fulfilling its statutory duty of preparing annual audited accounts for its shareholders. The fact that the 2nd Plaintiff may have had to travel on business did not prevent evidence being adduced by others including, for instance, Mr Patrick Cheng, formerly the 1st Plaintiff's financial controller, who in fact has provided an affidavit in these proceedings. One must therefore approach the available evidence with a certain reserve since it may not, even now, show the full extent of the Plaintiffs' assets and liabilities.

The 1st Plaintiff

51. There can be little doubt that the 1st Plaintiff's financial position is dire. At one point in recent history, it owed a company called Panbillion Finance Co. Ltd. HK$185 million. It plainly fell into default as Panbillion went so far as to issue a letter of demand enclosing a draft Writ in respect of its debt. However, the 1st Plaintiff has, since that time, reduced its Panbillion debt to HK$88 million and has warded off the threatened proceedings by providing security to Panbillion in the form of charges over two mainland properties. The Plaintiffs assert that after taking into account those charges, its residual interest in those two properties is worth RMB30 million. However, the basis of this assertion is not disclosed. Nor is it clear that such a residual interest can be realised or to what extent, if any, it would in practice be available to meet any liability under the cross-undertaking in damages.

52. The 1st Plaintiff's liabilities do not end there. It owes a substantial sum to the Company. This was put at HK$93 million by the Defendants and, in submissions made below by leading counsel then appearing for the Plaintiffs, at HK$77.3 million. Yuen J took the sum owing to be the conservative amount of HK$60 million. This illustrates the continuing uncertainty as to the 1st Plaintiff's financial position.

53. The only assets which the 1st Plaintiff is able to point to as giving it a means of meeting its liability to the Company are Notes C, D and E. Although Note E is held by the 2nd Plaintiff and not the 1st Plaintiff, I am prepared for present purposes to accept that it can be treated as an asset of the 1st Plaintiff, by assuming that the 2nd Plaintiff is willing to apply it towards reducing the 1st Plaintiff's liabilities. However, it is in principle unacceptable to treat Notes C and D as assets belonging to any of the Plaintiffs since this requires pre-judging the Action in favour of the Plaintiffs and so begs the fundamental question.

54. The value of Note E must be regarded as questionable. Its face value of $28.7 million can only be treated as its actual value if the Company can be regarded as likely to honour it in full. However, the evidence strongly suggests that the Company was at the material times (and remains) in financial trouble and most unlikely to be able to meet its liability under any of the Notes.

55. It is common ground that the Company had devised a so-called restructuring plan to dispose of some 67.3% of its assets comprising its interests in a toll road and toll bridge on the mainland respectively. Thus, a notice convening a board meeting to be held on 25 May 1999, included an agenda item in the following terms:-

"Working Capital for the period from 1st April 1999 to 31 March 2000. To overcome working capital shortfall problem, the Company has to consider to dispose of the 10% equity interest in the 3rd Bridge for about HK$50 million and 60% in HZ Toll road for about HK$85 million. The sale of Shenzhen premises for about HK$45 million if a buyer is found."

56. The minutes of that board meeting record the 5th and 6th Defendants expressing their anxiety at the proposal to sell what are described as the Company's "core business" which provides recurring income and suggesting that thereafter, "the Company would have little assets with $7 million cash remaining which would be insufficient to pay off over $90 million worth of convertible notes and $10 million to Hang Fung". Worries about the Company going into liquidation were apparently seriously aired.

57. Since the grant of the ex parte order, the Company has in fact sold off one of the abovementioned mainland interests. As Mr Barlow submitted, a plan by a listed company to sell off two-thirds of its assets, particularly its income-producing assets, must raise questions as to its financial status. This is particularly so where the plan has led the Stock Exchange's Listing Committee to question whether the company would be left with sufficient trading activity to justify its continued listing after the proposed disposals.

58. Another clear indication that the Company's financial difficulties were severe is the fact that it had defaulted in paying interest on the convertible notes, leading, in April 1999, to an Action and Order 14 proceedings being brought by the Defendant note-holders to recover such interest.

59. Accordingly, treating Note E as an asset of the 1st Plaintiff certainly does not mean attributing to it a worth of $28.7 million. So long as there was trading on the market in the Company's shares, a holder of Note E might try to realise it by converting it into shares and selling the shares on the market. The amount realisable in this way would be uncertain, depending on the achievable market price. It would however certainly be significantly less than the $28.7 million face value at the relevant times.

60. It follows that, on the available evidence, the 1st Plaintiff appears prima facie to have a deficiency of liabilities over assets. It is significant that, despite its own straitened circumstances, the Company has not seen fit to demand repayment of the sum owed by the 1st Plaintiff. This would tend to suggest that it does not consider the 1st Plaintiff able to make any such repayment.

61. In my judgment, Yuen J's finding that "there is nothing of any real worth in the 1st Plaintiff should the Court hold after trial that its case fails and orders it to pay damages to the 1st to 7th Defendants" is wholly justified and, if anything, expresses a conservative view as to the extent of the 1st Plaintiff's adverse financial position.

The 2nd Plaintiff

62. The 2nd Plaintiff has admitted that as a result of unfavourable economic conditions over the last two years, his personal wealth has diminished "quite considerably". This was touched upon in the affirmation relied on before the ex parte judge. However, in that affirmation, he denied that the Plaintiffs were in any precarious financial position and claimed that their position was "improving as the economy recovers". However, the 2nd Plaintiff has plainly not made full disclosure as to his financial situation.

63. It is common ground that he owns about 306 million shares in the Company. Their market price, while they were being traded, tended to fluctuate significantly. One measure, adopted by Yuen J, was to take their value at $0.041/per share, which was the closing price on 6 May 1999 given by the 2nd Plaintiff in his 2nd affirmation. Using this merely as a rough yardstick, such 306 million shares might be worth about $12.5 million (ignoring all pricing refinements). Given the financial problems faced by the Company, it may well be that such a rough valuation errs conservatively in favour of the 2nd Plaintiff.

64. The 2nd Plaintiff also claims to own a property in Hong Kong, the value of which is disputed. The 1st to 7th Defendants say that it has negative equity. The 2nd Plaintiff claims that such equity is worth $8 million. However, it is not at all clear what, if any, is the extent of the 2nd Plaintiff's beneficial interest in the property since it is apparently owned by a "family company." It follows that it is unclear whether that property would be available, wholly or partially, as an asset against which the cross-undertaking in damages could be enforced.

65. The 2nd Plaintiff also refers in his affirmation to his having investments in the Wah Hing and Wah Nam groups of companies without giving any particulars or even an estimate of their overall worth.

66. In relation to the Wah Nam group, the 2nd Plaintiff has exhibited (i) a balance sheet showing net liabilities of $26.5 million; and (ii) a profit and loss account showing a $28 million loss for the year and accumulated losses of $105 million. The notes to these audited financial statements are not provided, nor is the audit report. On any view, the Wah Nam group cannot be regarded as an asset. We do not know of the extent to which the 2nd Plaintiff may have personal liabilities, as guarantor or otherwise, arising out of the parlous position of that group.

67. No financial information whatsoever is given for the Wah Hing group. Such silence in the context of the 2nd Plaintiff attempting to demonstrate his financial ability to meet the cross-undertaking, supports the inference that his investment in the Wah Hing group has no value. It might of course be worse and might involve the 2nd Plaintiff incurring additional personal liabilities, but that is not in evidence.

68. On the debit side, the 2nd Plaintiff accepts that he owes a bank $5.2 million on a personal loan and that he has guaranteed the 1st Plaintiff's debts of $60 million to the Company as well as its debts to Panbillion.

69. Accordingly, looking at the 2nd Plaintiff's position overall, it appears that the value of his assets and their availability to meet any liability under the cross-undertaking is very much in doubt. He appears to have potentially significant liabilities that could over-top or equal the value of his assets. There is plainly genuine doubt as to his ability to meet any significant liability under the cross-undertaking in damages, so that once again, in my judgment, Yuen J's conclusion to the like effect cannot be faulted.

The 3rd Plaintiff

70. At the time of the ex parte hearing the 3rd Plaintiff, which carries on business as a securities broker, had voluntarily suspended its trading activities because it was unable to meet the liquidity requirements imposed by the relevant regulations. Moreover, as Yuen J held, it was not disputed that it had owed a bank about $20 million since 1998.

71. It is now contended that the 3rd Plaintiff has assets in the form of seats on the stock and futures exchanges said to be worth some $10 million and that it has recently been able to fulfil the relevant liquidity requirements and has since returned to normal trading.

72. In my judgment, even accepting that there has been an improvement in its financial position, the 3rd Plaintiff was bound to disclose to the ex parte judge that it was, at the time of the ex parte hearing, suspended because of insufficient liquidity, leaving it to the judge to decide what consequences should follow. It is no answer to say that since the time of the material non-disclosure, the financial position has improved.

73. In any event, to point to its seats on the exchange as the relevant assets justifying the giving of the cross-undertaking in damages indicates that to honour such undertaking would require the 3rd Plaintiff to dispose of its memberships in the exchanges and so end its ability to continue trading. This was plainly a material consideration for the ex parte judge.

74. Moreover, the 3rd Plaintiff is a 93% owned subsidiary of the 1st Plaintiff. Accordingly, if the 1st Plaintiff, which is plainly in a dire financial position, were to go into liquidation, any valuable assets held by the 3rd Plaintiff would have to be applied for the benefit of the 1st Plaintiff's creditors and so may not be available at all or in full to meet the Plaintiffs' potential liability under the cross-undertaking in damages.

Conclusion as to the financial position argument

75. Yuen J held that on the evidence, the Plaintiffs' financial condition was "extremely grim" and "parlous". In my view, the evidence is capable of justifying such a conclusion. However, it was perhaps strictly unnecessary for the judge to go quite so far.

76. The test is not whether, after scraping the bottom of every available barrel, the Plaintiffs might be able to meet their potential liability under the cross-undertaking. It was sufficient for Yuen J to hold that the evidence raised genuine and realistic doubts as to the Plaintiff's ability to honour their cross-undertaking in damages so that a failure to disclose the material circumstances at the ex parte stage constituted a material non-disclosure. In my view, Yuen J plainly (and, on the evidence, correctly) did take the view that at least genuine doubts existed and ought to have been disclosed.

The damages argument

77. This argument has been put in two ways, the first by the 2nd Plaintiff in his 2nd affirmation and the second, by Mr Yu in submissions. The first argument relies on the fact (which came into being after the ex parte hearing) that the Company has purported to repudiate or rescind its liability under Notes C, D and E alleging that they are somehow void. As I mention briefly below, Mr Barlow seeks to attack this development on the basis that it shows collusion between the Plaintiffs and the Company constituting an abuse of process and providing another ground for setting aside the undertakings.

78. Leaving the collusion argument aside, what the 2nd Plaintiff states in his 2nd affirmation is that, in the light of the Company's rejection of the validity of the Notes, continuing to restrain the 1st to 7th Defendants from converting or dealing with such Notes will not cause them any loss since they would in any event not have been permitted by the Company to convert, even if not subject to any restraint.

79. In my judgment, this is an unattractive and untenable argument. In the first place, the very basis of the Plaintiffs' application for an ex parte injunction (as stated at paragraphs 17.4 to 17.5 of the 2nd Plaintiff's first affirmation) was a need to prevent the note-holding Defendants from exercising their right of conversion under the Notes, the 2nd Plaintiff's fear being that the combined shareholding of such Defendants would be larger than his own, enabling them, inter alia, to change the composition of the board. At paragraph 20, he stated :-

"....... The 5th and 6th (Defendants) have embarked on a scheme by means of wrongful acts to deprive the Plaintiffs beneficial interests in the notes such that they or their vehicles will eventually emerge as the largest shareholder of the Company and for them to gain control of the Company. Should they be allowed to succeed, the damage which the Plaintiffs will suffer will be irreversible as well as incalculable."

80. It therefore lies ill in the mouths of the Plaintiffs now to say that in fact, there is no danger of the Defendants converting the Notes into shares, particularly so where the Plaintiffs seek nonetheless to continue the undertakings in lieu of injunctions obtained ex parte. The premise of the whole Action is that the Notes have substantial value and that the status quo should be preserved until the dispute as to their beneficial ownership can be resolved. It seriously undermines that case for the Plaintiffs now to say that in fact, at least in relation to Notes C and D, the Notes are valueless since the Company has repudiated them.

81. I must say, without in any way deciding the issue, that, at the moment, I find it difficult to see how a debtor who has admittedly received the relevant advances (leaving aside a question mark as to $10.5 million) and has, in consideration of receiving such funds, issued Notes constituting contractual promises to pay interest and repay capital to the holder or alternatively to permit the holder to convert the debt into shares, can unilaterally declare the Notes void.

82. Nonetheless, in my view, so long as the Plaintiffs seek to pursue the Action and seek continuation of the injunctions or undertakings obtained ex parte, the "no loss because the Notes are void" argument is not open to them. Pursuing this argument would, in my view, require the Plaintiffs to consent to the Defendants being released from their undertaking since no threat of conversion of the Notes and uncompensatable loss to the Plaintiffs could be demonstrated.

83. Secondly, the fact that the Company has subsequently purported to repudiate or rescind its liability under the Notes does not bear upon the duty of disclosure and an assessment of potential loss to the Defendants, as applicable before the ex parte judge. If one ignores the Company's subsequent act of disowning the Notes, then the potential loss and damage to the Defendants appears as a mirror-image of the loss and damage put forward by the Plaintiffs as the foundation of their application.

84. In other words, the restraint prevented the note-holding Defendants from doing what the Plaintiffs feared that they would do. This means that the injunction prevented the 1st to 7th Defendants from requiring the Company to convert the Notes into shares, thereby preventing them from acquiring the single largest block of shares in the Company with power to affect the composition of the board and the ability to assume control or at least to exert significant influence over its decisions.

85. The Defendants contend that such restraint was potentially very damaging to their interests. They point to the 2nd Plaintiff's then threat (now partially realised) of causing the Company to dispose of its core operating assets while leaving the 1st Plaintiff's debt uncalled, which is a course which they would have opposed and possibly blocked if they had been able to convert the shares and constitute themselves the single largest shareholder. Moreover, the restraint could have led to the Company proceeding to liquidate such a large proportion of its core assets that it might have lost its listing on the stock exchange which would have had a severe impact on the value of the Notes.

86. Mr Yu put the argument somewhat differently. He contended that the evidence of the Company's financial problems showed that the Notes did not bear their face value but were worth substantially less. Accordingly, a restraint on the 1st to 7th Defendants demanding repayment did not cause them loss since, in the absence of restraint, the Notes in any case would not be redeemed by the Company at face value, permitting the Defendants to realise only a much lower amount on the market. The restraint, it was argued, therefore merely prevented the 1st to 7th Defendants from incurring or crystallizing such loss and would not sound in damages under the cross-undertaking.

87. In my judgment that argument is not sound. The Notes carry alternative rights and not merely the right to demand redemption at face value. Commercially, the note-holders might have taken the view that they would never secure repayment in full and, wishing to cut their losses, might have wished to convert and sell the shares in the market while the shares were still permitted to trade. Alternatively, they might have considered it their best course to convert the debt into shares with a view to acquiring influence over the board as the controlling or largest shareholder in the hope of improving the Company's overall position. A restraint against exercising such rights, as discussed above, might well have caused substantial loss or at least posed a real risk of such loss to the note-holding Defendants.

Conclusion as to the damages argument

88. Plainly, any inquiry as to damages which may flow from a wrongly obtained ex parte injunction may involve uncertainties and complexities so that there may be considerable scope for argument as to the quantum of such damages. However, at the ex parte hearing, and also at the inter partes stage, the judge will generally be in no position to make any substantive assessment of the award of damages likely to result from an inquiry. In my judgment, so long as the circumstances give rise to a real risk of loss that is substantial and not purely insignificant, the duty of disclosure of a Plaintiff's financial situation bearing on his ability to honour his cross-undertaking in damages remains applicable.

89. Indeed, some substantial damage may often be assumed, at least pending the inter partes hearing. As illustrated in the present case, the very harm that the Plaintiff says it would suffer unless the threatened conduct of the Defendant is restrained will often be mirrored by potential harm to the Defendant as a result of his being prevented from following that intended course of conduct.

90. It is therefore my view that Yuen J's rejection of the damages argument and that her Decision as a whole are correct. The appeal must accordingly be dismissed. In my view, a costs order nisi covering the costs of the appeal in favour of the Defendants against the Plaintiffs should be made.

Matters not dealt with

91. At the commencement of the hearing, Mr Barlow applied for leave to rely on a Respondent's Notice served out of time. That Respondent's Notice had two aspects. In the first place, it sought to rely on collusion and abuse of process as an additional ground upon which to support the judgment of Yuen J. Secondly, it sought to appeal against Yuen J's separate decision, handed down on 14 October 1999, whereby she dismissed the application of the 1st to 7th Defendants to set aside the injunction which the Plaintiffs had obtained restraining the Company, inter alia from paying interest to the note-holders under the Notes.

92. This Court granted Mr Barlow leave to rely on the additional ground since it was a ground fully ventilated below and no prejudice would be suffered by the Plaintiffs in having to meet it again on appeal.

93. However, the application to be allowed to mount an appeal against Yuen J's 14 October decision was dismissed on the ground that under Order 59 rule 6, a cross-appeal under a Respondent's Notice may only be entertained if it seeks to contend that "the decision of the court below" is wrong in whole or in part. For such purposes, particularly bearing in mind the time-limits imposed by the Rules in relation to the Respondent's Notices, the only relevant "decision of the court below" was Yuen J's decision of 21 July 1999. Mr Barlow's clients subsequently issued a separate Notice of Appeal in relation to Yuen J's 14 October decision which is now pending.

94. Given the time available for the present hearing, the Court ruled that it would restrict argument to the material non-disclosure ground and reserve to another date, if necessary, a hearing on collusion and abuse of process. In the event, it has not proved necessary for the remaining grounds in support of Yuen J's decision to be argued and the Court indicated to Mr Barlow that if his Notice of Appeal was to be brought on, it was not strictly necessary for the matter to be put before the Court of Appeal as presently constituted.

95. At the start of the hearing, Mr Benjamin Chain appeared on behalf of the Company on the instructions of Messrs Siao, Wen & Leung. He explained, in my view, on good grounds, that his presence had been necessitated solely by the attempt of the 1st to 7th Defendants to appeal against Yuen J's decision of 14 October 1999 regarding the injunction against the Company using the Respondent's Notice procedure. When the Court rejected that attempt, Mr Chain and his solicitors withdrew from the hearing, with the costs of their attendance reserved.

96. If in due course the Notice of Appeal now issued in respect of the 14 October decision is brought on for hearing, this will require a fresh attendance by Mr Chain and his solicitors. Whatever the result of that hearing, the attendance by the Company's legal representatives at the start of the present appeal has involved costs thrown away as a result of a procedural error on the part of the 1st to 7th Defendants. It was an error exacerbated by the fact that the Respondent's Notice was served only on 30 November 1999, giving little time to elicit and consider any objections from the Company and to consider re-constituting the appeal sought to be raised.

97. In such circumstances, it is my view that a costs order nisi should be made against the 1st to 7th Defendants in favour of the Company for costs thrown away, limited to the costs of attendance at the commencement of this appeal. The costs of preparation of the appeal, etc., will not have been thrown away assuming that the Notice of Appeal is duly set down for hearing. The Company should be given liberty to apply in respect of any such additional costs in the event that an application to set down for hearing is not made within one month of the date of this judgment.

Keith J.A.:

98. I agree with the judgment given by Ribeiro J., and I only wish to add two observations of my own by way of emphasis rather than elaboration.

99. First, Mr. Yu's principal contention on the merits argument was that the factual premise on which the 1st to 7th Defendants' case rested, namely that the business of Charmlink generated profits (on which the 2nd Plaintiff overdrew and thereby became indebted to the 6th Defendant), can be shown to be demonstrably false. However, the door to that argument is apparently barred by the 1st Chinese agreement. It is only if the 2nd Plaintiff's signature on that agreement was forged (as the 2nd Plaintiff contends) that the door to the argument opens. The insuperable difficulty which the Plaintiffs face is that the issue as to whether the 2nd Plaintiff's signature on the 1st Chinese agreement was forged is one which cannot be determined, even on a provisional basis, at the interlocutory stage.

100. Secondly, a cross-undertaking as to damages given on an application for interim relief made ex parte relates to the losses which a defendant may sustain between (a) the original ex parte hearing and (b) the inter partes hearing at which the application for interim relief is finally determined. The question which the damages argument raised was whether substantial losses might have been incurred by the 1st to 7th Defendants during that period as a result of the undertakings which they gave at the ex parte hearing. I am very far from saying that Yuen J. did not limit her consideration of the issue to that period. But in case she did not, and in case, therefore, it was open to this court to consider the matter afresh, I agree entirely with Ribeiro J. that the 1st to 7th Defendants might well have incurred substantial losses during that period.

101. Accordingly, this appeal against the order of Yuen J. of 21 July 1999 must be dismissed, and there will be orders nisi that

(a) the Plaintiffs must pay to the 1st to 7th Defendants their costs of the appeal, and

(b) the 1st to 7th Defendants must pay to the 8th Defendant its costs of attending by counsel and solicitors on the first day of the hearing of this appeal,

in any event to be taxed if not agreed. The 8th Defendant has liberty to apply in respect of any additional costs incurred as a result of being served with the Respondent's Notice of the 1st to 7th Defendants in the event that an application to set down the appeal against the order of Yuen J. of 14 October 1999 for hearing is not made within one month of the date of this judgment.