VASILY TRUBNIKOV v. JULIMAR MANAGEMENT LTD AND OTHERS

HCMP 523/2024

[2025] HKCFI 575

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 523 OF 2024

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D E C I S I O N

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1.  There are 3 summonses before the court:

(1)  The summons dated 25 November 2024 (“Receivers Summons”) issued by Mr Vasily Trubnikov (“Petitioner”) for appointment of interim receivers and managers over the 1^st Respondent (“Company”);

(2)  The summons dated 13 December 2024 (“EOT Summons”) issued by the 2^nd and 3^rd Respondents (together “Rs”) for extension of time to file and serve their Points of Defence and Counterclaim (if any) for 21 days; and

(3)  The summons dated 19 December 2024 (“Fortification Summons”) issued by Rs requiring the Petitioner to pay US$45,289,374 into court as fortification of his undertaking as to damages if the court appoints receivers over the Company.

2.  The dispute arose out of an unfair prejudice petition presented by the Petitioner against the Company and Rs on 28 March 2024 (as amended on 15 November 2024) (“Amended Petition”).

3.  The Company was incorporated in Hong Kong on 13 January 2021. The Petitioner and the 2^nd Respondent are the only shareholders of the Company and each of them holds 50% of its shares. The 3^rd Respondent (“R3”) is the sole shareholder and director of the 2^nd Respondent[1].

A.  FACTUAL BACKGROUND

4.  In 2018, the Petitioner and R3 agreed to acquire a mining business in Mozambique. The acquisition was implemented in this way:

(1)  Avant Exploration Limited (“Avant”) holds 99.85% of the paid-up share capital of Tazetta Resources Limitada, a company incorporated in Mozambique (“Tazetta”). The remaining 0.15% share capital is held by Inforcom LDA (“Inforcom”) on trust for the Petitioner and R3[2].

(2)  Tazetta carries on the business of exploration, mining, production, export and marketing of heavy mineral sands extracted from Mozambique through 4 concessionary mining licenses (“Licences”) granted by the Ministry of Mineral Resources and Energy in Mozambique[3].

(3)  By a sale and purchase agreement dated 14 May 2018, all the shares in Avant were sold by the then seller to Hunan Minmetals Antimony and Titanium Limited (“Hunan Minmetals”) for US$3 million. It is the Petitioner’s case that he has contributed US$1.5 million towards the acquisition by paying the same to Hunan Minmetals[4].

(4)  After the Company was incorporated, on 1 March 2021, all the shares in Avant were transferred from Hunan Minmetals to the Company at nil consideration[5]. Since then, the Company has been the sole legal and beneficial owner of Avant and (through Avant) the mining business.

5.  It is common ground that Mr Vardan Muradyan (“Mr Muradyan”), an Armenian national, was appointed as the sole director when the Company was incorporated. He took up the appointment at the request of the Petitioner and R3 as it was thought that there might be difficulties in operating the bank accounts of the Company if either the Petitioner or R3 was appointed as its director[6].

6.  On 3 January 2023, Mr Muradyan appointed R3 as a director of the Company. On the next day, Mr Muradyan resigned as director[7]. The Petitioner complains that the resignation and appointment were ineffective as it was done without his knowledge or consent and was contrary to the terms of the SHA (as defined in §10 below).

7.  The Company is (and has always been) an investment holding company. It carries on mining business through 2 wholly owned subsidiaries incorporated in Mauritius and sub-subsidiaries incorporated in Mozambique (together “Group”). There is a dispute as to whether the Group includes E&N Mozambique Limitada (“E&N Mozambique”). The corporate structure chart of the Group[8] is reproduced in Annex 1 to this Decision.

8.  Until around late 2023, the Group carried on mining business in the following manner:

(1)  The Company has 2 wholly-owned Mauritian subsidiaries, Avant and Vema International (“Vema”). Avant and Inforcom hold all the shares in Tazetta.

(2)  Tazetta holds the Licenses and all the issued shares in 8 wholly-owned Mozambique subsidiaries, 3 of which (alongside with Tazetta) are responsible for payment of royalties (production tax) payable on the Licences; one is responsible for agricultural production and resolving issues with owners of land adjacent to the mining operation; another one is used to sign concessions or contracts to re-construct and operate a port in Pebane; and 3 are used to develop business projects in Zambezia and elsewhere[9].

(3)  Vema is the registered owner of 9 tugs and barges which are used to transport the minerals from the port at Pebane, Mozambique, to the bulk carriers due to the draught restrictions at the shore[10].

(4)  Hunan Minmetals is a company incorporated in Hong Kong, responsible for selling the minerals extracted under the Licences and collecting the sale proceeds[11]. Its sole shareholder is Mr Muradyan and its directors are Mr Muradyan and Chau Thi Thuong, both of whom are on the Petitioner’s case the nominees of R3[12].

(5)  E&N Mozambique is responsible for shipping and loading operations of the mining business[13]. Its sole shareholder is Julimar Management Inc, a BVI company (“Julimar BVI”). The Petitioner claims that E&N Mozambique should have been transferred to the Company, instead of Julimar BVI, a company wholly owned and controlled by R3.

9.  It is the Petitioner’s case that all the directors of the Company’s subsidiaries and sub-subsidiaries have been controlled by R3 and his “close associates/nominees”[14].

10.  The Petitioner and the 2^nd Respondent (represented by R3) entered into a Shareholders’ Agreement dated 11 November 2023 (“SHA”), which contains the following terms:

(1)  The Petitioner and the 2^nd Respondent are the beneficiaries of the Company with shares of 50% each (preamble);

(2)  The parties decided to distribute dividends in the amount of $100 million no later than 90 days from the date of signing the SHA. The amount/purpose of payment/beneficiary must be mutually agreed (clause 1);

(3)  In order to deposit the total funds received from the activities of the Mozambique project, the parties will make efforts to open a bank account for the Company. In the event that it is not possible to open a bank account for the Company, the parties shall establish another joint venture and open accounts for placement of these funds. If it is impossible to open a company due to sanctions restrictions, the parties may appoint their representatives as nominee shareholders (clause 2);

(4)  The parties confirm their right to appoint their representatives on the boards of “joint companies included in the general list of joint companies” in order to exercise control functions and make key decisions regarding the activities of joint companies (clause 3);

(5)  The operating and investment capital of the group of companies shall be placed in the accounts of joint ventures or in the accounts of third companies by mutual agreement of the parties (clause 7);

(6)  The parties shall refrain from taking actions that violate the shareholder rights of the parties, or are detrimental to the joint ventures and the project as a whole (clause 8); and

(7)  The parties shall provide reasonable assistance to each other in providing access to and obtaining information and documents relating to the activities of the joint ventures (clause 9).

11.  It is Rs’ case that the SHA was signed by R3 under duress and, therefore, is liable to be set aside. It is the Petitioner’s case that after the SHA had been executed, R3 failed or refused to sign the relevant forms to appoint the Petitioner as a director of the Company, Avant and Vema[15].

12.  In the meantime, the Petitioner commenced HCA 139/2024 (“Partnership Action”) against R3, Hunan Minmetals and Mr Muradyan. In the Partnership Action, the Petitioner claims that he and R3 have been partners in the mining business; in around September 2023, the parties had a dispute over distribution of the accumulated profits generated by the mining business which had been kept in the bank accounts maintained by Hunan Minmetals[16].

13.  In March 2024, the Petitioner commenced another proceedings in HCMP 763/2924 (“CR Proceedings”) to seek an order under s.42 of the Companies Ordinance (Cap. 622) (“CO”) to remove the name of R3 as director of the Company from the Companies Register[17].

14.  On 3 June 2024, the Petitioner sought an interlocutory injunction in the Partnership Action to prevent any transfer, disposal or diminution in the funds generated from the mining business and kept in Hunan Minmetals’ bank accounts.

15.  At the hearing on 7 June 2024, upon inter alia Hunan Minmetals’ undertaking to maintain a sum of no less than US$60.5 million in its bank accounts, Keith Yeung J adjourned the application for substantive arguments.

16.  In these proceedings, the Petitioner complains that by reason of the following conduct, the affairs of the Company have been conducted by Rs in an unfairly prejudicial manner:

(1)  Breach of SHA: R3 (acting for the 2^nd Respondent) refused to execute the necessary instruments to appoint the Petitioner as a director of the Company and its subsidiaries, and failed to transfer the profits of the mining business to the joint venture account.

(2)  Fabricating sale contracts/letters of credit: R3 provided the Petitioner with fabricated sales documents to hide the true value of the minerals sold through Hunan Minmetals.

(3)  Exclusion from Company/mining business: R3 (a) disabled the Petitioner’s corporate email account used for the operations of the mining business, (b) ousted the Petitioner as a director of E&N Mozambique, and (c) asserted that Hunan Minmetals had always been an independent entity that is entitled to retain the profits of the mining business and does not need to account to the Petitioner. Further, R3 was appointed as the Company’s sole director without the Petitioner’s knowledge or consent, contrary to the agreement between the Petitioner and R3 that Mr Muradyan should act as the sole director to avoid difficulties which might be caused by the sanctions.

(4)  Wrongfully holding himself out as director and populating the subsidiaries with his associates: Despite the requirement of the Company’s Articles for director to retire at the next annual general meeting (“AGM”) which must be held by 31 December 2023, R3 wrongfully remains as director and holds himself out as such. Specifically:

(a)  In March and June 2024, R3 called general meetings to confirm his appointment as director.

(b)  In February/March 2024, R3 appointed his associate, Mr Ngo Quang Anh, as director of Avant.

(c)  At the general meeting of Tazetta held on 11 March 2024, R3 and his associates purportedly passed resolutions to appoint themselves as directors of Tazetta.

(5)  Diversion/concealment of assets: R3 (a) diverted proceeds from the sale of various shipments of minerals to Hunan Minmetals, (b) concealed the true value at which the shipments were sold, and (c) wrongfully transferred the Company’s shares in E&N Mozambique to Julimar BVI. In particular, the true value of the minerals sold and the proceeds received were understated for shipments on vessels “Tan Binh 129” (“TB129 Shipment”) and “Universe Kaisa” (“Kaisa Shipment”) (together “Shipments”). R3 provided fictitious shipping and sale documents to the Petitioner and the Mozambique tax authorities.

17.  By the Receivers Summons, the Petitioner proposed to appoint Mr So Man Chun and Mr Jong Yat Kit, both of PricewaterhouseCoopers, as interim receivers and managers. The proposed scope of work and the fee structure are as follows[18]:

(1)  Scenario A: Taking control of corporate structure – Appointment of nominee directors to the Company and its subsidiaries, with “desktop oversight of the operations, which will continue to be handled by the existing ground personnel”, at a monthly capped fee of HK$250,000, exclusive of disbursement.

(2)  Scenario B: Taking control over the business operation of the group companies (if needed) – “If considered necessary, to take over control of the business operations (but only as required and with the Court’s approval or consent), on top of the monthly cap under Scenario A, fees at actual time cost basis with a 25% discount to the Standard Rate of Fees approved by the Official Receiver”.

B.  PROCEDURAL HISTORY

18.  The matter first came before this Court on 29 November 2024 (“1^st Hearing”) at which the Petitioner sought, on “interim-interim” basis, an order for appointment of receivers and managers over the Company, alternatively, an interim injunction and a disclosure order against R3.

19.  Upon Rs’ undertaking to forthwith procure the Petitioner and R3 to be appointed as directors of the Company by way of a written resolution of members in accordance with the Company’s Articles , this Court ordered, inter alia (“29.11.2024 Order”) that:

(1)  until determination of the Receivers Summons or further order of the court, R3 do provide to the Petitioner or his solicitors reports on the income and expenditure of the Company and its direct or indirect subsidiaries[19] on a monthly basis from the date of the order;

(2)  within 7 days thereof, R3 shall:

(a)  inform the Petitioner’s solicitors in writing the true and accurate details of all sales transactions, including but not limited to (i) names of all the seller(s); (ii) names of all buyer(s) up to the ultimate end buyer; (iii) price of the cargo under each sale-and-purchase; (iv) amount of sale proceeds received; and (v) recipient of the sale proceeds (collectively “Information”), in respect of the mineral shipments exported by Tazetta on board vessels “TAN BINH 129” on 8 October 2024 and “UNIVERSE KAISA” on or about 6 November 2024 (i.e. Shipments); and

(b)  provide to the Petitioner’s solicitors copies of all documents in respect of the aforementioned sale transactions including (i) bills of lading; (ii) sale and purchase contracts; (iii) invoices; (iv) letters of credit; (v) remittance slips; (vi) documents submitted to the Mozambique authorities for payment of production taxes (royalties); and (vii) certificates of quality issued by independent laboratories (collectively “Documents”).

(3)  Within 7 days from the date of any mineral shipment exported by Tazetta in the future, R3 shall:

(a)  inform the Petitioner’s solicitors in writing the true and accurate details of all sales transactions including the Information; and

(b)  provide to the Petitioner’s solicitors copies of all true documents, including but not limited to the Documents, in respect of the Shipments.

20.  By the 29.11.2024 Order, this Court also gave directions for filing of evidence and adjourned the matter for substantive arguments.

21.  R3 took the following steps to comply with the 29.11.2024 Order:

(1)  By joint letter dated 5 December 2024, the signed shareholders’ resolution dated 29 November 2024 and the signed Form ND2A were submitted to the Companies Registry for appointment of the Petitioner and R3 as directors of the Company.

(2)  On 10 December 2024, R3 provided the Petitioner with the Information and Documents in relation to the Shipments, although the Petitioner disputes the completeness and accuracy of such disclosure.

22.  At the adjourned hearing on 9 January 2025:

(1)  The Petitioner abandoned the application for interim injunction[20].

(2)  Rs through Mr Abraham Chan SC indicated that they are prepared to give an undertaking to the court to procure the appointment of the Petitioner as a director of Avant, Vema, and Tazetta.

(3)  The Petitioner through Mr Victor Dawes SC indicated his willingness to give an undertaking to the effect that he will only use the information obtained pursuant to his appointments as director to discharge his duties qua director in the ordinary course of business, and would not use such information to the detriment of the companies concerned. The undertaking was offered to address R3’s complaint that the Petitioner had been using the information and documents obtained qua director for collateral purposes including commencing legal proceedings against Rs and/or the companies within the Group and making complaints to various authorities in Mozambique which are detrimental to the interests of Tazetta and hence the Company.

(4)  As the parties have not provided the precise wordings of their respective undertaking offered, I directed the parties to submit their draft undertaking by close of business that day, and the Receivers Summons will be decided on the basis that the undertakings offered by the parties through leading counsel have been accepted by the court.

23.  Having considered their respective draft undertaking, on 13 January 2025, I directed the parties to indicate if they are willing to give undertaking to the court in the following terms:

(1)  The Petitioner undertakes to only use the information, documents, authorities and powers obtained from and in connection with his appointment as a director of board of directors of Avant, Vema, and Tazetta (“3 Subsidiaries”) for the purposes of discharging his duties as director in the ordinary course of business and not to harm the interest of the 3 Subsidiaries without leave of the court.

(2)  Rs undertake to appoint and to cause the Petitioner to be appointed as a director of the 3 Subsidiaries by no later than Friday, 24 January 2025.

24.  On the same day, the parties confirmed their willingness to provide the above undertakings respectively (together “13.1.2025 Undertakings”).

C.  DISCUSSION

C1.  Applicable principles

25.  The principles governing application for appointment of interim receivers and managers under s.21L of the High Court Ordinance (Cap. 4) have been summarised by Mimmie Chan J in Chen Hongqing v Mi Jingtian & Ors, HCMP 962/2017, 27 June 2017 at §§46-48 and may be stated as follows:

(1)  The power to appoint receivers is a discretionary power to be exercised flexibly on a similar basis to that of an interlocutory injunction, and the principles in American Cyanamid apply. The court has to assess and balance the following matters: (a) whether there is a serious question to be tried; (b) the alleged risks of dissipation of assets; (c) the current protective regime and its efficacy; and (d) the risk of damage to the defendants and the company if the appointment is made, and whether they can be adequately compensated by a cross-undertaking in damages (at §46; Re Chime Corp Ltd, HCMP 4146/2001, 25 June 2003 at §§39-40).

(2)  The court will take into consideration factors such as whether there is jeopardy to assets, whether some form of interim protection is required to preserve the status quo, whether some other less invasive form of protection suffices and balance of convenience (at §47; Re Zealot & Co Ltd [2008] 1 HKLRD 386).

(3)  The court should take whichever course which appears to carry “the lower risk of injustice if it should turn out that it is wrong” (at §48; Music Advance Ltd v Incorporated owners of Argyle Centre Phase 1 [2010] 2 HKLRD 1041).

26.  Further, the court will also take into account the following factors when considering whether an interim receiver should be appointed:

(1)  Appointment of interim receiver is a drastic remedy and the court has to consider the adverse consequences of receivership to the defendant and any third parties which may be affected by the appointment (China Shanshui Investment Co Ltd v Zhang Caikui [2017] 5 HKLRD 240 at §9).

(2)  The adverse effect of appointing receivers over an ongoing business, the expenses associated with the appointment and the damaging effect to the business (cf. Re Jessop & Baird (Hong Kong) Ltd (No 2) [2017] 5 HKLRD 314 at §15).

(3)  Where the principal relief sought is a buy-out order, it is generally desirable to let the present management or the persons who are likely to take control of the company to continue to manage the company unless it is demonstrated by the petitioner that if the present management is not displaced, there is a real likelihood that the economic value of the company would be diminished significantly and the prejudice to the petitioner cannot be compensated by a buy-out order. A common example is where it is doubtful if the present management has the means to buy out the shares held by the petitioner or that the business of the company would be deteriorated to such a state that it cannot be remedied by the court ordering the present management to compensate the company for the loss suffered.

(4)  There is no presumption that if the petitioner is excluded from management, he is entitled to have receiver appointed over the company. The court has to balance the risk of dissipation of assets or damage to economic value of the company against the disadvantages of appointing receivers. (see for eg., Re Jessop & Baird §§16-17; Re Roeders (China) Ltd, HCCW 68/2016, 26 May 2016 at §12; Re Wako Giken (HK) Co Ltd [2010] 4 HKLRD 121 at §12).

C2.  Serious issues to be tried

27.  Mr Dawes submits that the 3 complaints pleaded in the Amended Petition constitute serious issues to be tried as to whether the affairs of the Company have been conducted in an unfairly prejudicial manner[21]:

(1)  Whether R3 was entitled to exclude the Petitioner from the management and control of the Group, contrary to the parties’ understanding that the mining business would be conducted as a partnership. Reliance is placed on the SHA, which acknowledges the Petitioner’s beneficial interest in the Company and sets out the terms upon which the parties agreed to cooperate in the management of the Company and the Group.

(2)  Whether the Petitioner has a stake in the ownership and management of the “wider” Mozambique mining business, which includes not only the entities held under the Company, but also Hunan Minmetals and E&N Mozambique.

(3)  Whether the appointment of R3 as director of the Company and the acts carried out by him qua director were valid when such appointment was contrary to the SHA and R3 was required by law to retire as director by 31 December 2023.

28.  As matter now stands, save for the complaint about the ownership of Hunan Minmetals, it seems to me that the Petitioner has shown that there is a serious issue (which is not a high threshold) to be tried.

29.  On exclusion from management (the first complaint):

(1)  The SHA sets out the terms upon which the parties agreed to cooperate as co-owners of the Company and their rights are equal in that (a) they have the right to appoint their representatives to the boards of “joint companies”[22] to exercise control functions and make decisions regarding their activities (clause 3); and (b) “the operating and investment capital of the group companies” shall be placed in the accounts of joint ventures or in the accounts of “third companies by mutual agreement of the Parties” (clause 7).

(2)  R3 claims that the SHA was procured by extortion and the Petitioner’s threat to prevent cargoes from being loaded on board vessel Universe Wealthy[23]. If and insofar as R3 is seeking to set aside the SHA on the ground of duress, he bears the burden of satisfying the court that there is a valid legal basis to disown the SHA signed by him[24]. It suffices to say that the Petitioner takes issue with the alleged duress which, he says, has been expressly disavowed by R3 at the meeting between the Petitioner, Mr Muradyan and him on 21 March 2024[25].

30.  On beneficial ownership of E&N Mozambique (the second complaint):

(1)  The evidence shows that the decision to transfer E&N Mozambique to Julimar BVI was made on 27 May 2021, and R3 informed the Petitioner of the transfer by email of the same day and provide a draft power of attorney from Julimar BVI in favour of the Petitioner[26].

(2)  The Petitioner complains that the parties intended that the shares in E&N Mozambique be transferred to the Company, but R3 wrongfully diverted such shares to Julimar BVI and he only discovered the transfer in late January 2024[27]. R3’s case is that E&N Mozambique has always been owned by him and never belonged to the Company[28].

(3)  While the evidence shows that the Petitioner was aware of the transfer in May 2021, it does not support the case advanced by either party as the email did not mention anything about the beneficial ownership of E&N Mozambique.

31.  There is no serious issue to be tried in respect of the ownership of Hunan Minmetals (the second complaint):

(1)  There is no plea in the Amended Petition that Hunan Minmetals is beneficially owned by the Company or the factual bases therefor.

(2)  The fact that Hunan Minmetals has in the past sold minerals on behalf of the Company and is liable to account the proceeds generated from such sale (which is one of the main issues raised by the Petitioner in the Partnership Action) would not without more make Hunan Minmetals to become beneficially owned by the Company which is a different issue.

32.  On validity of R3’s appointment as director of the Company (the third complaint):

(1)  R3 contends that his retirement and re-appointment as a director has been confirmed (1) at the extraordinary general meeting (“EGM”) convened to be held on 21 March 2024 but adjourned to 28 March 2024, and (2) again at the AGM convened to be held on 4 June 2024 but adjourned to 11 June 2024.

(2)  As matter now stands, there is no answer to the Petitioner’s complaint that R3 was required by law to retire as director on 31 December 2023 and, as such, he could not convene the EGM or AGM qua director (s.461 of the CO; Re J&D Industrial (HK) Ltd [2006] 2 HKLRD 396 at §§50-51).

C3.  Risk of dissipation of assets

33.  Mr Dawes submits that there is a real risk of dissipation of assets for the following reasons.

34.  First, R3 fails to disclose the actual end-buyer of the Shipments. According to the Petitioner’s investigation, the buyer Delta International Trading & Logistics Company Limited (“Delta”), is a “phantom company”. The real end-buyer, Guangdong Homes Trading Co., Limited (“Guangdong Homes”) is represented by Ms Lois Huang (“Ms Huang”) with whom R3 has a business relationship. The Petitioner also relies on forensic evidence which he claims shows that the underlying sales contracts for the Shipments were digitally altered[29].

35.  Second, the Shipments were sold at an undervalue in that whilst the prevailing market prices for ilmenite were US$300-370/mt CIF China and US$1,104.55-1,148.22/mt for zircon concentrates CIF China, the cargo was sold at a substantially lower FOB price at US$150/mt and US$199/mt for ilmenite and zircon concentrate respectively. The cargo specifications were understated and the actual discharge port was different from that stated in the bill of lading[30].

36.  Third, fictitious documents in relation to the Universe Wealthy shipment were submitted to defraud the Mozambique tax authorities, and R3 has made secret profits from the shipments on Tan Binh 245 (“TB245”) and Tan Binh 279 (“TB279”)[31].

37.  Fourth, in October 2024, Vema took steps to delete 6 tugs and barges from the registries of Palau and Togo and re-flag them for St Kitts & Nevis. The only plausible explanation is that R3 intended to sell or transfer the vessels from Vema without the Petitioner’s consent[32].

38.  Fifth, R3 purportedly caused the Company to pass a special resolution on 18 September 2024 to amend Avant’s constitution which, he had been told by R3’s lawyers, was intended to allow R3 to take full control of Avant[33].

39.  Sixth, the mining business is in jeopardy because of the following acts of R3:

(1)  The wrongful transfer of E&N Mozambique to Julimar BVI, contrary to their earlier agreement when R3 removed the Petitioner from the board of E&N Mozambique[34].

(2)  The representation by R3’s lawyers to the Mozambique court that Tazetta had to cease all commercial and operational activities, and that payments to employees and suppliers were withheld[35].

(3)  The exclusion of the Petitioner from the mining business and information about the sale proceeds and R3’s denial of the existence of a partnership over the mining business[36].

(4)  R3 having maintained in the Partnership Action that Avant was acquired by Hunan Minmetals on behalf of East Coast Investment Limited (“East Coast BVI”), as opposed to the Company[37].

40.  As matter now stands, I do not think that the Petitioner has shown that there is a real risk of dissipation of assets of the Company and of the Group.

41.  First, the allegations that Delta is a mere “phantom” company and Guangdong Homes is the “real end buyer” are neither here nor there:

(1)  Even if the minerals sold to Delta were eventually shipped to a different end buyer based in China, that alone is not evidence of impropriety or risk of dissipation.

(2)  The highest the Petitioner puts its case is that Guangdong Homes is represented by Ms Huang with whom R3 “has always had a business relationship”[38]. However, this alone is innocuous. The evidence on the alleged connection – that Ms Huang used to work for buyers of minerals exported by Tazetta and that she had attended the same conference as R3[39] – is tenuous and is equally consistent with commercial activities in the ordinary course of business.

(3)  The alleged inconsistencies in the shipping documents are of no moment. Commercial men are not lawyers. The transactional documents should not be approached with a meticulous legal eye endeavouring to pick holes. They are to be read in a reasonable and commercial way, with the expectation that peripheral inconsistencies are not surprising occurrences. This is all the more so when the inconsistencies complained of relate to minute details and discrepancies between the timing of payments and the issuance of invoices[40].

(4)  Likewise, the complaint that there are reasonable grounds to infer that the underlying sales contracts for the Shipments were “digitally altered” is beside the point. The Petitioner does not allege that the Shipments were fictitious. Even if Delta’s chop and signature were digitally affixed onto the electronic copies of the sales contracts, this is equally consistent with Delta having executed the contracts digitally.

42.  Second, the Petitioner has not shown that the Shipments had been sold at an undervalue or that the difference in sale price had been siphoned off:

(1)  R3 explains that the calculations by the Petitioner are based on the prices of higher quality concentrates shipped CIF (i.e. with freight and insurance costs included), namely ilmenite concentrate with 50% TiO₂ and zircon concentrate with 35.45% ZrO₂. It is natural for Tazetta’s lower quality ilmenite and zircon concentrates (46% TiO₂ and 11% ZrO₂ respectively) shipped FOB to be sold at a lower price. Further, the price of ilmenite depends not only on the TiO₂ content, but also on the content of associated minerals and impurities such as Fe₂O₃, FeO, Cr₂O₃, P₂O₅, which were not addressed in the report relied upon by the Petitioner.

(2)  R3’s evidence shows that Tazetta has achieved a higher profit margin in selling the minerals under the Shipments as compared to the shipments sold the year before[41].

(3)  The explanations put forward by R3 about the prices at which the minerals were sold are prima facie plausible. Whether the Petitioner’s allegations can be made out at trial is not something which the court can or should resolve on an interlocutory application.

(4)  In any event, the Petitioner has now been provided with details of the whereabouts of the sale proceeds. The sum of US$6,245,000 has been paid into Tazetta’s bank account[42] rather than having been dissipated.

43.  Third, as regards the alleged tax fraud, the same complaint had already been made by the Petitioner against Tazetta and E&N Mozambique, but the District Attorney’s office of Pebane, after investigations, dismissed the complaint on the ground that it had “not found evidence of irregularities committed by the companies in question”[43].

44.  In any event, I do not think that the alleged inconsistencies in the shipping documents are sufficient to sustain the serious allegations of tax fraud:

(1)  R3’s evidence is that in Mozambique, minerals are taxable when produced, not when sold or shipped, citing article 5 of Mozambique Specific Regime of Taxation and Tax Benefits for Mining Activity (Law No. 28/2014)[44]. The Petitioner takes issue with this and cites other provisions that appear to support the contrary position[45].

(2)  The alleged discrepancies in the TB245 and TB279 shipping documents take the Petitioner no further. R3’s explanation that they pertain to different stages of the sale of the same bulk of minerals makes commercial sense[46].

(3)  As to TB245 shipment, the Petitioner’s criticism is that the sale was made to different buyers at higher prices. However, as R3 points out, the Petitioner has referred to letters of credit which concern a different batch of minerals to be shipped on TB129[47].

(4)  As regards TB279 shipment, the Petitioner complains that this shipment sold by Hunan Minmetals to an end-buyer was also sold by Tazetta to Lusan International LLC FZ (“Lusan”) at a lower price[48]. However, Tazetta has since 2019 been selling minerals to Hunan Minmetals for on-selling to third parties. R3 says that buyers typically feel more confident trading with the Hong Kong-based Hunan Minmetals, as opposed to the Mozambique-based Tazetta[49]. It is unremarkable for Tazetta and Hunan Minmetals to be involved in selling the same minerals at different prices or the interposition of Lusan as part of the commercial arrangements.

45.  Fourth, the complaint about Vema’s applications for deregistration of the vessels is misguided. The documentary evidence confirms that the tugs and barges remain registered in the name of Vema albeit under new flag of St Kitts & Nevis. R3 explains that re-registration was necessary as the registration certificates of the tugs and barges had expired[50]. There is nothing out of the ordinary for tugs and barges to change flag.

46.  Fifth, the complaint about the amendment to Avant’s constitution is misplaced. The amendment was to remove references to the former first directors of Avant and was done to comply with Mauritian law[51]. I am unable to see how the amendment would give rise to any risk of dissipation.

47.  Sixth, I am not persuaded that the acts complained of in §39 above demonstrate that R3 has jeopardised the mining business or caused an unjustified risk to the Group’s assets:

(1)  As to §39(1) above, the Petitioner had been informed of the transfer of E&N Mozambique to Julimar BVI by email on 27 May 2021 and he never objected[52]. The Petitioner’s assertion that he did not read the email’s attachments[53] rings very hollow, especially when he was a director of E&N Mozambique between 15 October 2021 and 19 January 2024[54].

(2)  As to §39(2) above, the only evidence of the statements allegedly made by R3’s Mozambique lawyer about the cessation of Tazetta’s operations were made “in the heat of the debates”. It is difficult to see how the Petitioner can criticise the statements when it was the Petitioner who sought to restrain Tazetta’s operations at every front by (a) obtaining an injunction from the District Attorney on 2 February 2024, (b) obtaining ex parte injunctions from the Mozambique court on 9 February 2024 and 5 April 2024, and (c) seeking an ex parte injunction to replace Tazetta’s board. R3’s evidence that as a result of the Petitioner’s actions since late 2023, Tazetta’s production and sales activities had been blocked for approximately 9 months and the minerals were left to accumulate in its warehouses is entirely consistent with the circumstances faced by Tazetta[55].

(3)  As to §39(3) above, the alleged exclusion from management and alleged partnership are issues to be resolved at trial. The latter issue is the subject matter of the Partnership Action.

(4)  As to §39(4) above, this argument is based on a mis-characterisation of R3’s pleaded defence in the Partnership Action. R3 does not claim that East Coast BVI beneficially owns Avant. Instead, in his Defence, R3 pleaded that the Company owns Avant[56].

48.  Further, the staleness of some of the complaints and the corresponding lack of explanation also militate against any real risk of dissipation. The court would not usually grant an injunction where significant time has elapsed and an injunction would in effect be locking the stable door after the horse has bolted (Paloma Co Ltd v Capxon Electronic Industrial Co Ltd [2020] HKCFI 3050 at §38). The same applies to an application for interim receivership, if not with greater force.

49.  In the present case, there has been substantial delay in the Petitioner’s pursuit of the Receivers Summons in that:

(1)  The Receivers Summons was taken out 8 months after the Petition had been presented.

(2)  The transfer of E&N Mozambique to Julimar BVI took place on 15 October 2021.

(3)  The alleged discrepancies in documents regarding minerals shipped on Universe Wealthy, TB245, and TB279 concern shipments in 2023.

(4)  The amendment to Avant’s constitution took place on 19 September 2024.

50.  Some of the allegations have already been raised in earlier proceedings: the complaints about the transfer of E&N Mozambique to Julimar BVI and the shipments of minerals loaded onto Universe Wealthy and TB245 have been raised in the CR Proceedings.

51.  The only explanation proffered by the Petitioner for the delay in taking out the Receivers Summons is his contention that the “final straw” was the TB129 Shipment and the Kaisa Shipment in October and November 2024 respectively, which were said to have been made without the Petitioner’s knowledge. For the reasons stated in §§41-42 above, I do not consider the complaints concerning these Shipments support the Petitioner’s contention that there is any risk of dissipation of assets of the Group.

52.  As the Petitioner fails to show that there is any risk of dissipation of the assets of the Company and of the Group, there is no proper basis for the court to appoint any interim receivers over the Company.

C4.  Effective protective regime

53.  Even if, contrary to my view, the Petitioner has demonstrated that there is a real risk of dissipation of assets of the Company or of the Group, in my view, the current protective regime is sufficient to protect the Petitioner’s interest in the Company pending determination of the Amended Petition:

(1)  First, shortly after the 1^st Hearing, the Petitioner has been appointed as a director of the Company. There are sufficient checks and balances at the board and shareholders level of the Company.

(2)  Second, pursuant to the 13.1.2025 Undertakings, the Petitioner will be appointed as a director of the board of Avant, Vema, and Tazetta by no later than 24 January 2025. Although this does not achieve equal representation on the 3 Subsidiaries’ board, in terms of involvement in the management of the 3 Subsidiaries, the Petitioner’s position is better than the situation before the parties began to have dispute.

(3)  Third, Hunan Minmetals has also undertaken to maintain a sum of no less than US$60.5 million in its bank accounts until determination of the Petitioner’s summons in the Partnership Action or further order. This is significant because on the Petitioner’s case, this sum represents his half-share of the profits generated by the mining business less (a) the dividends already paid out (approximately US$30 million) and (b) leaving US$50 million to cater for the operational expenses of the mining business[57].

(4)  Fourth, the Petitioner has obtained from Mauritius court injunctions (a) prohibiting Avant from inter alia passing shareholders’ resolutions without the Petitioner’s consent and (b) prohibiting Vema from inter alia passing resolutions or entering into major transactions without the Petitioner’s consent.

54.  The Petitioner relies on Harman J’s observations in Re a Company (No. 596 of 1986) (1986) 2 BCC 99063 that in a partnership dispute, a receiver would almost as a matter of course be appointed to hold the ring to preserve the status quo (at 99066). Mr Dawes submits that the analogy is apt in relation to a quasi partnership organised as a company[58]. If and insofar as it is suggested that receivers should be routinely appointed to preserve the status quo ante, that argument has been rightly rejected in Re Jessop & Baird (§14). The observation does not reflect the approach adopted by the court in dealing with application for appointment of receivers in shareholders disputes. In any event, the issues whether the Petitioner and R3 are partners or that the mining business is the business of the partnership are hotly contested.

C5.  Deadlock

55.  Apart from the need to protect and preserve the Company’s and the Group’s assets (discussed in Section C3 above), the Petitioner also relies on deadlock as a ground for appointment of interim receiver. Reliance is placed on Tsoi Chik Sang Lawrence v Tasty Catering Group Ltd, HCMP 812/2017, 12 September 2017 at §23; Minority Shareholders: Law Practice and Procedure, 7^th ed., §7.108 where it is said that the court would appoint interim receiver if the company is incapable of managing its own affairs due to absence of a properly constituted board or deadlock on the board[59].

56.  Mr Dawes says the present case is a classic case of deadlock justifying the appointment of interim receivers because (1) no shareholders’ resolution can be passed absent either the agreement of the Petitioner or the 2^nd Respondent and (2) no board resolution can be passed absent either the agreement of the Petitioner or R3[60].

57.  I am unable to accept this argument.

58.  First, Tsoi Chik Sang Lawrence does not assist the Petitioner. In that case, the respondents were “usurpers” of the office of director “without colour of authority” from the outset (at §28). The appointment of receivers was made on the basis that:

“First and foremost, the absence of a properly constituted board of a company that is actively trading alone would be sufficient reason. The shareholder dispute (which is unlikely to be resolved in the near future) creates an insuperable obstacle in the way of resolving the problem by convening a meeting of members to appoint the directors. Meanwhile, [the company] continues to be in breach of its statutory obligations that are criminal offences, a state of affairs that should not be allowed to continue.

The practical solution lies in the appointment of receivers. It would enable applications to be made for a meeting to be held limited to the presentation of financial statements, director’s reports etc to meet the statutory obligations.” (at §§93-94)

59.  The court in Tsoi Chik Sang Lawrence was primarily concerned with the fact that the improperly constituted board could not even cause the company to meet basic statutory obligations. It is not an authority for the proposition that interim receivers would be appointed whenever a company’s shareholding and board composition is equally divided between two “camps”.

60.  Second, the Petitioner and R3 have now been appointed as directors of the Company, they can cause the Company to fulfil its statutory obligations and exercise its rights as shareholder of the 3 Subsidiaries and through them, the sub-subsidiaries.

61.  Third, Mr Chan submits that deadlock in this context requires a “functional deadlock”, that is, where the inability of members to cooperate in the management of the company’s affairs leads to an inability of the company to function at the board or shareholder level (citing Chu v Lau [2020] 1 WLR 4656 at §14; Re Sang Kee Restaurant Limited [2021] HKCFI 1817 at §§26-29).

62.  I note that Lord Briggs in Chu v Lau described a “functional deadlock” and “an irretrievable breakdown in trust and confidence” as the two situations in which a just and equitable winding-up may be ordered (§§14-15). As I explained in Re Sang Kee at §28, whilst these are established bases for the court to wind up a company, they may not constitute unfair prejudice for the purpose of ss.724-725 of the CO. Since the Amended Petition only relies on unfair prejudice, I am unable to see how deadlock per se assists the Petitioner.

C6.  Balance of convenience

63.  In view of the conclusions above, it is unnecessary to consider whether the balance of convenience is in favour of appointing interim receivers. If it is necessary to consider this matter, the balance clearly tilts against the appointment.

64.  Mr Dawes submits balance of convenience is in favour of appointment for the following reasons:

(1)  The appointment would stop R3’s actions which jeopardise the mining business.

(2)  The Company is only an investment holding company and the appointment would not carry the same stigma as a direct appointment of receivers over operating subsidiaries.

(3)  The appointment would bring clarity to the affairs of the Company.

(4)  The proposed interim receivers are experienced practitioners and have proposed reasonable fees.

(5)  Any loss can be compensated by the Petitioner’s cross-undertaking as to damages.

(6)  The timing of the Receivers Summons is justified by the latest developments, in particular R3’s refusal to provide information for the TB129 Shipment on 28 and 30 October 2024.

65.  As the Company is an investment holding company, I accept that the risk of stigma is correspondingly reduced as compared to a company with an active business (Chen Hongqing at §44). However, insofar as the risk of stigma is reduced, this cuts both ways. The flip side to this is the lack of utility in appointing interim receivers. This is especially so when the effect of the 29.11.2024 Order and the 13.1.2025 Undertakings is to hold the ring by introducing checks and balances at the Company and the 3 Subsidiaries.

66.  As summarised in §17 above, the proposed interim receivers would only exercise “desktop oversight” of the operations, which will continue to be handled by the existing ground personnel. It is only if they considered necessary and with the court’s approval that they would take control of the business operations. This reflects the reality that the operations of the subsidiaries should best be left to the personnel on the ground, who have hitherto been operating the business and have generated substantial profits for the Group. In any event, I do not see why the court should be involved in overseeing the operations of the business in the manner suggested by the Petitioner.

67.  Nor do I see how the proposed interim receivers, who are Hong Kong-based insolvency practitioners, can manage the operations of the mining business, even assuming they have the necessary expertise or experience to do so (which they do not).

68.  Even if the proposed interim receivers do not intervene in the day-to-day operation of the Company, the prejudice is nevertheless obvious:

(1)  It remains generally undesirable to replace the management of the Company at the interlocutory stage. It is likely to adversely affect its reputation, which is a view widely held and a reality in the commercial world (China Shanshui Investment at §15). It may well cause the public to hesitate in resorting to that business or practice, as it is difficult for people in the outside world to clearly differentiate between receivers appointed on the grounds of insolvency as opposed to receivers appointed on other bases (Re Full Billion Shipping Ltd [2003] 2 HKLRD 674 at §48).

(2)  This is a fortiori where the only relief sought by the Petitioner is a buy-out order, and the matters complained of can be taken into account in the valuation of shares: see §26(3) above.

(3)  Mr Dawes’ response is that R3’s actions pose a significant and irreversible threat to the economic value of the Company, which is difficult to quantify. However, the economic value of the Company is measured by the profits generated times the P/E multiple applicable to that business. The Company has a track record of generating profits, which would be taken into account in assessing the equity value of the Company.

(4)  Mr Dawes also contends that a buy-out order is inadequate because R3’s submission of fictitious or sham documents to the Mozambique tax authorities has jeopardised the entire mining business. For the reasons explained in §43 above, I reject this argument.

D.  FORTIFICATION SUMMONS

69.  Given my decision above, it is unnecessary to consider if fortification is necessary.

70.  Even if, contrary to my view, interim receivers should have been appointed, I would still have dismissed the Fortification Summons.

71.  Fortification may be ordered where it appears just and proper to protect the defendant. The defendant must show (1) the likelihood of a significant loss arising as a result of the interim appointments and (2) it believes the plaintiff will be unable to make good that loss (Lau Lai Shan Lisa v Zhang Qi [2023] HKCFI 1465 at §12).

72.  The requirements are not satisfied.

73.  First, Mr Chan submits that there is a grave risk that the receivers will run the Group into the ground and Rs would suffer at least US$200 million in loss on a broad-brushed approach. However:

(1)  There is no basis to think that the appointment would destroy the value of the Company.

(2)  Although R3 2^nd provided a more conservative estimate of US$45,289,374 as total loss in gross profits for the 3 Subsidiaries, that still incorrectly assumes a complete halt in the Subsidiaries’ sales activities. There is no indication that appointing interim receivers at the Company level will lead to the cession of the 3 Subsidiaries’ operations.

(3)  Further, the computation of the estimated losses is dubious. The Petitioner asserts that Avant will lose “royalties” from Tazetta for using its mining technology, and Vema will lose rental payments on the charterparties signed with E&N Mozambique. However, Rs have not adduced the relevant royalty agreements or charterparties. It is also odd that there would have been such charges when (a) Avant is the holding company of Tazetta and (b) E&N Mozambique is the entity holding the license to conduct loading operations using the tugs and barges owned by Vema.

74.  Second, Rs have not properly articulated why the Petitioner will be unable to make good any potential loss when there is no dispute that the Petitioner holds 50% shareholding in the Company. The starting point is that the Petitioner is not obliged to give full and frank disclosure of his financial means. Nor am I satisfied that this is a case where Rs have demonstrated a sound basis to draw an adverse inference from an absence of disclosure of financial information (Lau Lai Shan at §12.6).

E.  DISPOSITION AND COSTS

75.  The Receivers Summons and the Fortification Summons are dismissed.

76.  As for costs, I make a costs order nisi that:

(1)  The Petitioner do pay 65% of the costs of and occasioned by the Receivers Summons to Rs, to be assessed by way of gross sum assessment, with certificate for 2 counsel;

(2)  For the purpose of gross sum assessment, Rs do lodge their statement of costs within 7 days of this Decision, the Petitioner do provide his comments on the statement, if any, within 7 days thereafter, and costs will be assessed on paper;

(3)  The costs of and occasioned by the EOT Summons in the sum of HK$1,040 be paid by Rs to the Petitioner; and

(4)  Rs do pay the costs of and occasioned by the Fortification Summons, to be assessed by way of gross sum assessment, with certificate for 2 counsel.

77.  Although the Receivers Summons is dismissed, one of the grounds for making the application is the fact that the Petitioner has been denied the right to be appointed as a director of the Company. It was only at the first hearing of the Receivers Summons and upon hearing the observations of this Court that Rs agreed to provide an undertaking to appoint the Petitioner as a director of the Company. The 35% deduction in costs reflects the fact that Rs have not been wholly successful in resisting the Receivers Summons. I do not think that there should be no order as to costs given that the Petitioner raised many allegations against Rs and much time and costs have been incurred by Rs in dealing with such allegations. It would be unjust to deprive Rs of the costs incurred in dealing with the allegations which are ultimately not accepted by the court.

78.  As for the costs of the Fortification Summons, it seems to me that costs should follow the event as there is no reason why the Petitioner should be deprived of the costs for dealing with an application which is wholly without merit.

Annex 1[61]