PROSPERFIELD VENTURES LTD v. TRIPOLE TRADING LTD AND OTHERS

HCA5370/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5370 OF 1993

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RULING

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1. This matter has caused me considerable anxiety. Mr Whitehead has made an application which, at first blush, appeared to amount to no more than a formality. It relates to an injunction dated 2nd September 1993 made by Judge Wesley Wong sitting as a Deputy High Court judge in HCA No. A5370 of 1993. The terms of the order are at pages 20 and 21 in volume 2.

2. The effect of the injunction was to prevent the 4th defendant, Madam Ding Peng, the intended 5th defendant, Mr Ng Hiu Nam, who is now not the 5th defendant but is the 3rd defendant in the related action, CL98 of 1995, and the intended 6th defendant, China Projects Limited, who were also not made defendants in the 1993 matter but who are now 5th defendants in the 1995 action, from disposing, charging or otherwise dealing with the shares in SCICL and also from causing SCICL to issue further shares.

3. The matter now comes about in this way: Mr Whitehead seeks to amend, as he describes it, the order in September 1993 by substituting the name of "SFC" for "SCICL", the reason being that under the restructuring of SCICL, as ordered by the Shenzhen Municipal Government in September 1993, the shares of SCICL were transferred to a new company, SFC, which succeeded to the business of SCICL.

4. Given the fact that no attempt has been made by the defendants to discharge this injunction and, indeed, other related injunctions made by this court at around this time, one might have expected no challenge from them on this occasion.

5. Contrary to that expectation, this matter has been very vigorously opposed on their behalf by Mrs. Kaplan on a number of grounds. This being the case, I need briefly to consider the background and the apparent reasons which lay behind the making of the injunction in the first place.

6. The complaint against the defendants in their differing capacities is that having brought about the unlawful dismantling of Mr James Peng's shareholding and control in and over a series of companies culminating in Panco Industrial Holdings Limited, "Panco", the plaintiff in the 1995 action, they thereby obtained control over Panco's very substantial shareholding in SCICL, which is now held in China Projects Limited, "China Projects", which, as I have said, is the 5th defendant in the 1995 action.

7. The desired effect of the injunction was to prevent the defendants from making use of their purported ownership of the shares in Panco in order to have Panco's shareholding in SCICL registered in the name of China Projects, and also to prohibit any dealing in SCICL's shares which they may have already obtained and had become registered shareholders of.

8. The purpose was therefore to hold the ring until after the trial of the actions when the court would pronounce on the lawfulness of the defendants' acquisition of the Panco shares.

9. Now that SCICL has become SFC, it is submitted that as a matter of form and to make the matter absolutely clear for the defendants, the order should now go to amend the injunction so as to reflect the reality of the situation.

10. Mr Whitehead has submitted that the correctness of the original order has never been challenged by any application for its discharge or variation with the consequence that I can simply make the amendment.

11. Mrs Kaplan has made several points which need to be carefully considered. Firstly, she submits that this is no mere amendment but amounts to the making of a fresh injunction which, for reasons I will explain presently, should be refused.

12. She says that this goes beyond an amendment, because some of the parties in the 1993 action under which the order was made are no longer parties in that, although they are now parties in the 1995 matter.

13. Secondly, she submits that this is a new order which is directed at assets held in China. In my judgment, that must be right, as the litigation has developed in the way that it has since the injunction was originally made.

14. Notwithstanding that, this objection really is more concerned with form than substance, because the underlying purpose and reasoning behind the making of the application remains the same, so that whatever shape the order takes, be it by amendment or by fresh injunction, the essential merits of the application remain one and the same.

15. For what it is worth, it seems to me that if I were to make the orders now sought by Mr Whitehead, it would have to come under a fresh injunction, which he has also applied for, should that be necessary.

16. From this, I turn to matters of substance. The starting point to all of this is that the defendants do not accept that these are effective injunctions, although for the past 10 years they have done nothing to test the validity of that proposition.

17. That is said to justify, amongst other reasons, the fact that since the establishment of SFC and the transfer of SCICL's shares to it and the registration of China Projects' shareholding in SCICL, now SFC, there has been substantial movement in terms of the percentage of SFC's shares held by China Projects. This is freely admitted by the defendants.

18. The plaintiffs have known of this and, save for previous applications to commit some of the defendants which were not persisted in, nothing further has been done.

19. It is said that the late timing of this application on the 19th day of the trial is reason enough in itself to justify refusal to make the order asked for. It is one that has been brought without formal notice, Mr Whitehead having informed Mrs Kaplan of his intention to make it during a short adjournment yesterday morning, immediately after which I was invited to hear the argument.

20. As a result, Mrs Kaplan has not been able to marshal any evidence, save for a draft affirmation this morning by Mr Zheng, to oppose the application nor to reflect at any length about what she might wish to say in response, although that has not been apparent from the quality of her submissions.

21. In reply to the complaint that this is now far too late, Mr Whitehead submits that the plaintiffs, whilst anxious about the matter over the years following Mr Peng's release from prison in China in 1999, have refrained from coming until the court had a fuller understanding of the evidence, which now that all the evidence is in, it does have.

22. This is said to be reinforced particularly by Mr Andrew Zheng's evidence, which is said to demonstrate that he is in breach of another injunction in the series that have been made.

23. There is therefore every reason to believe that unless the matter is made absolutely clear to the defendants by making the orders asked for, there will be repeated and further breaches. I will return to this issue presently.

24. Mrs Kaplan's main point, as I see it, is that an order of this type, which would have the effect of preventing trading in 34.5 per cent of SFC's shares, which are of course listed on the Shenzhen stock market, could have a catastrophic effect on the share price of SFC and not only cause enormous losses to China Projects but also have a similar consequence on the remaining and innocent 69 per cent of SFC's shareholders.

25. Many of these shares may have been pledged as security to banks and other creditors who would have relied on the value of SFC's shares in advancing credit. This also applies to China Projects itself, which has provided security on its SFC shareholding.

26. All of this, says Mrs Kaplan, would affect not only the debtor shareholders but also the creditor lending institutions. She reminds me that I am faced with shareholdings in SFC which run to several hundred million dollars. One only needs to state the facts to understand the gravity of the matter. This, in my judgment, is a very weighty consideration.

27. Today, Mr Zheng's proposed affirmation, which provides information on SFC's trading activities, is put in to underpin that submission. Suffice it to observe that in the 10 years that have elapsed since the restructuring was accomplished, the company has involved itself in substantial projects, including a forthcoming property development.

28. In order to do business, it needs to borrow from banks, and one of the ways that it does so is to offer the lending institution the security of its shares.

29. That having been said, Mr Whitehead points to matters of real moment on the other side of the argument. He reminds me of the importance of these shares to Panco and, through it, to Mr Peng. If Mr Peng is right in his evidence, the activities of Mr Zheng and Miss Ding have robbed him of his shareholding in SCICL, which are now in part represented by China Projects' shareholding in the successor company, SFC.

30. If those shares were to be dissipated by sale, by transfer or by having them charged, the fruits of victory in this litigation are likely to be nugatory, given the fact that the individual defendants probably have no meaningful assets in Hong Kong against which judgment could be executed and, given their connection with the mainland, are capable of making themselves in effect judgment-proof by removing themselves from Hong Kong.

31. It is therefore to this shareholding by China Projects, a Hong Kong company and therefore entirely amenable to the full rigours of the various means at the disposal of a judgment creditor seeking to levy execution, that the plaintiffs must look in order to satisfy their judgment if they are successful.

32. This consideration is made even more compelling by the nature of the action, which is a proprietary claim to the shares. These are Mr Peng's shares, says Mr Whitehead, and he is in effect seeking their return.

33. Another feature to which Mr Whitehead says I ought to have regard is that this order and the others in the series of interlocutory injunctions that were made by the various judges in 1993 were made on the basis that the plaintiffs have demonstrated a good arguable case.

34. Before me, and at no time in the past, has it been suggested that the state of the evidence is otherwise. A fortiori now, when I have heard the evidence which has been tested by cross-examination, this must remain the case. I can indicate now that this must be so.

35. Mrs Kaplan has not sought to argue that the first hurdle to the granting of any injunction has not been cleared. It is the other factors which she refers to which Mr Whitehead needs to overcome.

36. A further significant factor favouring the making of the order is that the injunction is only sought until judgment. Save for speeches, the trial is at an end. At most, the order needs to be in place for a few weeks.

37. The final consideration that I need to address relates to the question of the plaintiffs' cross-undertaking in damages. Up to now, there has been an undertaking which Mr Whitehead tells me can be fortified by the security of a banker's guarantee in the sum of $5 million.

38. Mrs Kaplan says that this amount, which although substantial in itself, must be wholly inadequate when one considers the potential havoc -- she puts it less emotively than that -- which would be wrought on the defendants by the granting of the injunction, let alone that caused to innocent third parties.

39. This must, she says, tip the balance of convenience away from the plaintiffs, who are, in any event, seeking a broad range of remedies as appear in the statements of claim and which would be sufficient and adequate remedies.

40. It is on the basis of these competing considerations that I must decide this matter. Mrs Kaplan says that if I do not care to dismiss the application outright, then I should adjourn it until I have delivered judgment in this action.

41. It seems to me that a court would be slow to interfere with an order of this type, which has never been challenged on its merits for all these years, unless the present circumstances clearly demonstrate that a contrary course should be taken.

42. Mr Whitehead's clients, having invited me to revisit the merits by making the application for the sake of clarity, as it is described, have placed themselves in the line of fire where sharp objection is now taken.

43. I have decided that I ought not to do what Mr Whitehead asks me to do. I say this for the following reasons.

44. The starting point is that I am satisfied, as I have already indicated, that a good arguable case has been made out. The battle lines must therefore be drawn around the balance of convenience.

45. Whilst I treat this, strictly speaking, as an application for a fresh injunction, I do not think that this places the plaintiffs at any additional disadvantage when one considers the background and history of the matter. It is, in effect, an application to amend the name of the company to whose shares the order would be directed.

46. The decisive factors are these: if such an order were now made in respect of SFC, which was a new company so far as the Shenzhen stock market authorities were concerned in 1993 and the other investors in its shares -- it is a substantial enterprise -- I am perfectly satisfied that an order from this court freezing China Projects' shareholding in SFC would provide the basis for enormous disruption to the trade in, and inevitably the price of, SFC's shares.

47. Whilst there was an embargo on the trading of34.5 per cent of its shares, all of the dangers referred to by Mrs Kaplan would be real and present.

48. In the exercise of my discretion, I should have regard to the effect of such an order not only on the parties themselves but also on SFC and its other shareholders.

49. In reply to that, Mr Whitehead reminds me that not infrequently a court in Hong Kong will restrain trading of substantial shareholdings in publicly-listed companies if that were the right thing to do.

50. Whilst that is undoubtedly so, the court will always attend to the particular facts of the case before it. In this matter, the order would go against a major holding in a very substantial public company.

51. The fact that it is a company listed outside Hong Kong is an added feature. I apprehend that I should be particularly careful when making any order affecting the position of, in effect, an overseas company listed on an overseas stock market.

52. I regard the real risk of harm to a broad range of interests the main factor in my refusing to make the order.

53. Delay is also a real feature here. It should be remembered that this injunction was granted 10 years ago at the very start of this litigation. It was very much a case of the court striking whilst the iron was hot.

54. Since then, much has happened. The forces of reconstruction in Shenzhen have completely altered the landscape. Investors in SFC have dealt in its shares for all of this time. To draw them into the effects of this private litigation 10 years on would not be right.

55. China Projects has dealt with SFC shares in a substantial way by reducing its percentage from 38 per cent down to 34.5 per cent. No steps were taken to prevent that.

56. I am conscious of the fact that Mr Peng spent six years in prison, from 1993 to 1999, which would have made it well nigh impossible for him to conduct operations from his prison cell. Nevertheless, four years have elapsed since then.

57. The plaintiffs have waited until the last possible moment. The situation is dramatically different in Shenzhen, with SFC's shares trading on the stock market there. I venture to think that such an application made now, for the first time, would have been doomed to fail, for the very reasons which I have given.

58. I appreciate that it might be said that to refuse the order is to allow the defendants to rely on their own wrongdoing in trading with these shares in the face of the existing injunctions. Whether they are in breach of the original injunction remains to be decided, but the fact is that I must take the overall situation as I find it now at the date of the application, which compels me to refuse to make the order.

59. As to whether there has been a breach of the injunctions, Mrs Kaplan has placed before me reasons why there have been no breaches. I cannot decide this matter now. It would require a careful enquiry before that could be done. But she has done enough to demonstrate that there is a serious argument to be made as to why there has been no breach of these orders. This issue therefore remains very much in the air.

60. I also consider the cross-undertaking in damages, even with its fortification, to be wholly inadequate. The potential losses to the defendants would vastly exceed what is on offer. In any event, I would have thought that even a substantially large amount offered as security would still not tip the balance in favour of the plaintiffs.

61. The implications of such an order over the border for SFC and for the 69 per cent of the other investors are too troubling to justify the order, particularly where it is made so late in the day in completely changed circumstances from those which were obtained 10 years ago before Judge Wesley Wong.

62. For all of these reasons, I decline to make the order sought. I propose to adjourn the application to be argued again, if the plaintiffs are so advised, at the earliest available opportunity following judgment.

63. As to the position of Mr Ng, Mr Whitehead has quite rightly withdrawn the application against him.

64. Finally, for what it is worth, the existing injunction of 3rd September 1993 will remain in place there being no application to discharge it, and its effects may well need to be considered in due course.