VALUE SUCCESS HOLDINGS LTD AND ANOTHER v. ISLAND SECRETARY LTD

HCA 1560/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1560 OF 2006

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J U D G M E N T

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1.  This is an interlocutory application for a mandatory injunction.  What originally was sought were the company kits of both plaintiffs Value Success and Chinese Investments which the defendant Island Secretary has been holding in its capacity of providing secretarial services to both plaintiffs.  The application was in the alternative; either delivery up of both sets of company kits, or delivery up of that belonging to Chinese Investments and making available that belonging to Value Success to the plaintiffs’ solicitors for the purpose of inspection and copy.

2.  Prior to the hearing Island Secretary had acceded to an order to deliver up the kit of Chinese Investments upon the usual undertaking in damages given on its behalf.  That which remains to be dealt with concerns the kit of Value Success.

History

3.  Central to the issue is a dispute over ownership of a mining company in Chile called for short Minera Clara.  In 2001 this was founded by one Abraham Weiman Hu and four colleagues.  All were made directors, but Mr Hu at all material times has been the majority shareholder (72%) and in control and in charge of the operation.

4.  Two years on, one Hao Wei, a businessman of Beijing, approached Mr Hu, indicating a willingness to invest US$5 million for a stake in Minera Clara.  Agreement in principle was reached.  Mr Hao on advice proposed a restructure of Minera Clara in two phases and this also was agreed, the paperwork to be undertaken by his professional advisers in Hong Kong.

5.  The first phase was the incorporation of two BVI companies.  This is how, in February 2004, Chinese Investments and Value Success came into existence.  The shareholding of Chinese Investments was allotted to the shareholders of Minera Clara in the same percentages and all were appointed directors.  The shareholding of Value Success was allotted to Chinese Investments, and Mr Hu was appointed sole director.  In March 2004 the shares of Minera Clara were transferred to Value Success.

6.  The second phase was designed to bring Mr Hao into the investment in the names of two BVI companies he owned and controlled, called Gold Excel Investments Limited and Goldprime Investments Limited.  The parties entered into what is called and headed “Shares Subscription Agreement” (SSA) which provided for the allotment of new shares in Value Success to be allocated to Gold Excel and Goldprime in consideration for US$5 million.

7.  However, the transaction was conditional.  The SSA required the prospective subscribers to undertake a due diligence investigation of the mining operation, with completion to take place once they were satisfied with the outcome of that, to be on or by 21 May 2004 or such later date as the parties might agree.

8.  The SSA was signed by the parties, that is Value Success, Gold Excel, Goldprime, Chinese Investments and Mr Hu, in Hong Kong on 23 March 2004.  At this time Mr Hu was introduced to one Franco Lee.  Mr Lee owns and controls Island Secretary, whose principal function is to provide secretarial services to local and offshore corporate clients.  It was proposed and agreed that Island Secretary should undertake this service for Value Success and Chinese Investments.  Mr Hu signed an authority on behalf of both companies and their company kits were handed over to Mr Lee for Island Secretary.

9.  According to Mr Hu, by August 2004 there had been no completion and no sight of the US$5 million or any payment at all.  He was told this was because the due diligence investigation was not yet complete.

10.  Notwithstanding, he agreed to come to Hong Kong and sign certain documents that had been prepared by solicitors engaged by Mr Hao for the purpose.  These included, he recalled, what he referred to as a shareholders agreement, a supplemental agreement and a guarantee document as well as undated share certificates.  There are other documents that were then signed as well.  It was apparent to him that these documents presupposed completion of the SSA and this was yet to happen.  He was told by a solicitor having conduct of the matter that the documents were in escrow pending the formality of the due diligence and completion, scheduled to take place in two to three months’ time.  It was upon this understanding that he signed.

11.  It was during the course of this visit that Mr Lee took him to open a bank account for Value Success.  He as sole director gave himself sole signing rights.

12.  Notwithstanding this positive activity of August 2004, thereafter, to Mr Hu’s knowledge, there has been no completion and no payment of any money.

13.  In early 2006 Mr Hu had cause to believe that notwithstanding their non-performance under the SSA, Gold Excel and Goldprime were being held out as shareholders of Value Success; further, that Messrs Hao and an associate called Liu Bing were holding themselves out as directors.  He engaged solicitors Messrs Fan, Wong & To (FWT) to issue a writ in the joint names of Value Success and Chinese Investments against these alleged infiltrators seeking, inter alia, injunctions to restrain their wrongful activity.

14.  Mr Hu also instructed FWT to write to Island Secretary for inspection of the company kits in order to ascertain what documents had been filed or were held concerning the shareholding and directors of Value Success.  (The matter concerning Chinese Investments’ company kit having been resolved, I do not need to refer further to the pursuit of that).

15.  There followed correspondence.  Ms Yolanda Fan of FWT had conduct of the same; Mr Lee wrote on behalf of Island Secretary. 

16.  It was not productive.  Ms Fan wrote on instruction from Chinese Investments and Mr Hu, described in her letters as respectively the sole shareholder and sole director of Value Success, seeking access to the company kit for inspection and copying.  She enclosed by way of authority a document headed “Letter of Request” signed by Mr Hu and Chinese Investments Limited as respectively director and shareholder.

17.  Mr Lee’s response was to query the right for a director and a shareholder to have access to the books of a BVI company, without the formality of a directors’ resolution authorizing the same.  The reply to that was that the Letter of Request was signed by the sole director and sole shareholder and that was sufficient authority.  This letter was dated 21 July 2006.

18.  With nothing forthcoming, FWT issued a writ on 24 July, and this application on the same date.

Evidence

19.  Ms Fan exhibited the SSA, the writ already issued, and the correspondence, to support the cause that Island Secretary had wrongfully deprived the plaintiffs (in fact Chinese Investments) from having access to the books of the company it wholly owns.

20.  Mr Lee responded.  And thus it emerged why it was he was not prepared to accede to the request for inspection from the so-called sole shareholder and sole director of Value Success.  I repeat verbatim paragraph 5 of his affidavit:

“5.         I note that it is stated in paragraph 3 of Ms Fan’s affirmation that according to the instructions given to her by Mr Hu, the 2nd Plaintiff herein is the sole shareholder of the 1st Plaintiff and Hu is the 1st Plaintiff’s sole director.  I verily believe that this is not the case.  According to the Register of Directors and Shareholders of the 1st Plaintiff and the other company secretarial documents kept by the Defendant, I verily believe that the 1st Plaintiff has presently altogether 9 directors and 3 shareholders.  There is now produced and shown to me marked ‘LWC-1’ copies of the Register of Directors and Shareholders kept in the company kit of the 1st Plaintiff.  These documents were prepared on behalf of the 1st Plaintiff according to the documents available to the Defendant.  I verily believe that the persons named in the said Register are the present directors and shareholders of the 1st Plaintiff.”

LWC 1 is a computer printout of a register of directors, nine in all, including Messrs Hau and Liu, and a register of shareholders, three in all, Chinese Investments having been joined by Gold Excel and Goldprime.

21.  Mr Lee went on to depose that he had sought an indication from two of the directors of record, Messrs Hau and Liu, as to whether they supported or opposed the inspection sought by Chinese Investments.  This brought a response by solicitors engaged by Messrs Hau and Liu called Chan, Wong & Lam:

“…

We trust you are aware that Chinese Investments Limited is not the sole shareholder of Value Success Holdings Limited and Mr Abraham Weimin Hu is also not the sole director of Value Success Holdings Limited as alleged.  Value Success Holdings Limited has other directors and shareholders in addition to our clients, and neither Mr Abraham Weiman Hu, Chinese Investments Limited, Messrs Fan, Wong & Tso nor any solicitor of the firm have been authorized by the Board of Value Success Holdings Limited to demand for the company kit from you.  Our clients object to your delivery of the company kit to anyone without the Board’s express authorization.  Our clients also dispute that Messrs Fan, Wong & Tso have the necessary authorization to represent Value Success Holdings Limited in commencing the proceedings.

…”

22.  Mr Lee was subsequently to produce three further documents from the company kit.  These are in Chinese.  I have seen the translations.  They are not certified, but no issue is taken with that.  There are three in all.  All are concerned with Value Success.

23.  The first is headed “Resolution of First Meeting of Shareholders of the First Meeting of Shareholders of the First Term”.  It is dated 15 August 2004.  It records attendance at the meeting by Abraham Weiman Hu representing Chinese Investments Limited, Hao Wei representing Gold Excel Investments Limited and one He Tao representing Goldprime Investments Limited.  There were others in attendance.  It passed resolutions which included the establishment of a Board of Directors to include appointments made by the three corporate shareholders with one independent, nine in all.  It was signed; one of the signatures I recognize to be of Mr Hu.

24.  The second document is headed “Chinese Investments Limited Letter of Appointment”.  It reads:

“Value Success Holdings Limited:

Our Board of Directors decides to appoint Madam Xie Gui Ying, Mr Abraham Weimin Hu to be the directors of Value Success Holdings Limited, who will fully represent out company’s interest in Value Success Holdings Limited and will also exercise our voting right as from the date of authorisation.

To you.

With courtesy

                                                                  [Chop and signature]
                                                            Chinese Investments Limited
                                                                     12 August 2004”

The signature is of Mr Hu.

25.  The third document is headed “Resolution of First Meeting of Directors of the First Term”.  It is dated 15 August 2004.  Those in attendance were the directors referred to as appointees to the board in the shareholders’ resolution.  Business conducted and passed by resolution included the appointment or confirmation of appointment of various officers to the company.  It was signed by the directors present.  Amongst them is the signature of Mr Hu.

26.  What has emerged from the documents in the company kit held by Island Secretary is on the face of the documents compelling evidence that what Ms Fan had been representing in her letters was no longer so; that Mr Hu and Chinese Investments were once respectively sole director and sole shareholder but that is no longer.

27.  Mr Hu claims he and his colleagues to be the victims of a fraud; that there is no proper basis which allows for Gold Excel and Goldprime to become shareholders and that the new so-called board of directors was formed by illegal appointments; that documents he was told were signed in escrow have been wrongfully acted and relied upon.  There has been no money paid.  There has been no lawful change to the status quo from the original sole shareholder and sole director.  Furthermore, he protests that Mr Lee by his conduct is a party to the deception.

Discussion

28.  Mr Hu may well be entitled to be aggrieved.  It may well be that he and his associates have been duped.  Certainly one would expect that the documents I have referred to as having come forth from the company kit would not be acted upon before completion of the SSA and payment of the consideration. 

29.  But Mr Hao and his associates and BVI companies are not parties to this action and I have no account from them concerning the legitimacy of their appointments.  And there is nothing to suggest that if there has been a fraud Mr Lee and Island Secretary are parties to it.

30.  Mr Hu in his affidavit and Mr Wong representing the plaintiffs before me in his submissions are both critical of Mr Lee, in that it is said he had a duty to follow up on Ms Fan’s request and be pro-active in establishing the authenticity of the documents appointing new directors to the board. 

31.  I do not hold he had such a duty.  He and his company are like custodians of safety deposit boxes in a bank.  If someone shows up with the right key or password, he gets access.  If not then he is politely shown the door.  He has no obligation to search out the reasons why the password, which may have once been correct, is no longer valid.

32.  In the face of the documentation in the company kit of Value Success, Island Secretary was justified in declining Ms Fan’s request.  Particulars of BVI companies are confidential and in common with other companies providing secretarial services to clients whose details are not on public record, Island Secretary would have had a strict duty to release documents for inspection only when it could be satisfied it had been given the appropriate authority.

The Application

33.  But that does not mean necessarily that I should dismiss the application.

34.  First, the legal principles.

35.  This being an application for a mandatory injunction, in respect of which the court is asked to exercise a discretion, it generally will do so if it can be satisfied with a high degree of assurance that after trial it will be found that the injunction was correctly granted.  This is usually because if it is found not to have been correctly granted, the injustice caused by ordering certain activity to be continued is likely to be more profound than injustice arising from holding the status quo, if that course is found to be wrong.

36.  Mr Wong helpfully provided me with an extract from a judgment of Ma J (as he then was) in the case Music Advanced Limited & Another v The Incorporated Owners of Argyle Centre, HCA 2574/2002 and I repeat that extract verbatim:

“…

(3)    The basic approach to interlocutory injunctions, whether mandatory or prohibitory, is the same.  Section 21L of the High Court Ordinance, Chapter 4 makes no distinction between these two types of injunctions and simply states that interlocutory injunctions may be granted if it appears to be just or convenient to do so.

(4)     At the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose or the party who has been refused one, may win.  The court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong.  This ‘fundamental’ principle is the source of the guidelines that have evolved for the determination of interlocutory injunctions (included are, of course, the American Cyanamid guidelines) and therefore, in the application of any guidelines, sight must not be lost of this principle.  See here: Films Rover International Ltd v. Cannon Films Sales Ltd [1987] 1 WLR 670 at 680 D-G, in a passage from the judgment of Hoffman J which was approved by the House of Lords in R v. Secretary of State for Transport ex parte Factortame Limited (No.2) [1991] 1 AC 603 and recently reiterated in the English Court of Appeal decision of Zockoll Group Ltd v. Mercury Communications Ltd [1998] FSR 354 (which Mr Au was kind enough to place before me).

(5)     Two common guidelines are of course the consideration of the merits of the plaintiffs’ claim and the balance of convenience.  Here, it is of course easy to see at once how they are linked to the fundamental principle: there must be a risk of injustice if the plaintiff cannot even establish a serious question to be tried or that one or the other party will be put to substantial inconvenience or prejudice if an interlocutory injunction were or were not granted.

(6)     In the case of interlocutory mandatory injunctions, the risk of injustice (being wrong in the sense referred to above) can be quite acute.  In Films Rover International Limited, it was put thus by Hoffman J at 681 B-E:

‘In Shepherd Homes Ltd v. Sandham, Megarry J spelled out some of the reasons why mandatory injunctions generally carry a higher risk of injustice if granted at the interlocutory stage : they usually go further than the preservation of the status quo by requiring a party to take some new positive step or undo what he has done in the past; an order requiring a party to take positive steps usually causes more waste of time and money if it turns out to have been wrongly granted than an order which merely causes delay by restraining him from doing something which it appears at the trial he was entitled to do; a mandatory order usually gives a party the whole of the relief which he claims in the writ and makes it unlikely that there will be a trial.  One could add other reasons, such as that mandatory injunctions (whether interlocutory or final) are often difficult to formulate with sufficient precision to be enforceable.  In addition to all these practical considerations, there is also what might be loosely called a ‘due process’ question.  An order requiring someone to do something is usually perceived as a more intrusive exercise of the coercive power of the state than an order requiring him temporarily to refrain from action.  The court is therefore more reluctant to make such an order against a party who has not had the protection of a full hearing at trial.’

(7)     This passage in my view explains just why it is that generally a court will have to feel a high degree of assurance that at the trial of an action it will be shown that the interlocutory injunction was rightly granted before an interlocutory mandatory injunction will be given; all this being an exercise in assessing the strength of the plaintiffs’ case : see sub-paragraph (1) above.  However, I emphasize that this is only generally the court’s approach.  Where it is shown, as an exception to this general approach, that the case is one in which the withholding of an interlocutory mandatory injunction would in fact carry a greater risk of injustice than granting it even though the court does not feel the ‘high degree of assurance’ as aforesaid, it would be right to grant an interlocutory mandatory injunction : see Films Rover International Limited at 681 A-B.

(8)     This of course brings into focus the balance of convenience.  Thus, if a plaintiff in seeking an interlocutory mandatory injunction cannot demonstrate more than a serious question to be tried, it will have to show that the balance of convenience tilts so much in its favour that justice requires such an injunction to be granted, even taking into account those aspects of an interlocutory mandatory injunction expressed by Hoffman J in Films Rover International limited.

(9)     At no stage, however, in the consideration of the matter does the court lose sight of the practical realities of the situation to which the injunction will apply : see NWL Limited v. Woods [1979] 1 WLR 1294 at 1306C per Lord Diplock.”

37.  With these principles in mind, how should I exercise my discretion?

38.  I have already indicated, and now repeat, that Island Secretary was justified in requiring a board resolution of Value Success to approve the request put forward on behalf of Chinese Investments, and why.

39.  But what, now, of the practical realities of the situation? 

40.  First is that the inspection and copying (and that is, now, the only realistic alternative to pursue) is not being asked for by a stranger third party.  Assuming that Gold Excel and Goldprime are shareholders with colour of right, Chinese Investments was the founder and still remains one of three shareholders.  As such it has a right in any event to inspect the books of Value Success if that is required to protect its interest.

41.  If this application is not granted it will have to go to trial with attendant additional costs, and delay and uncertainty as to whether it will succeed at trial.  Or it will have to mount a fresh claim against Value Success; more costs, more delay.

42.  On the other hand, if this application is granted all that will be avoided.  And it seems to me that there is no prospect of any prejudice to Value Success, and thus to Island Secretary, if this proves to have been wrongly granted.  In any event, Chinese Investments is willing to give the usual undertaking.

43.  In the circumstances of this case and having regard to the practical realities, I propose to exercise my discretion by giving Chinese Investments the opportunity to search the company kit of Value Success.

The Order

44.  Island Secretary shall forthwith make available to the solicitors for Chinese Investments the company kit of Value Success for the purpose of inspection and for copying of the material therein.  Any reasonable costs incurred by Island Secretary in connection with the inspection and copying shall be borne by Chinese Investments. 

45.  The sealed order shall incorporate in the preamble in usual terms the undertaking in damages given by Chinese Investments.

Costs

46.  These are nisi and thus, as a preliminary order, made without benefit of argument.  But the following my assist:

subject only to appeal it would seem unlikely this matter will go further; hence I propose a final order;

as I find that Island Secretary has behaved appropriately it should not be penalized in costs, though it has been unsuccessful in defending the application;

Value Success is not in reality a proper party in these proceedings and should not have to bear any costs;

Chinese Investments has been successful.  But in the particular circumstances of this case I find it liable to meet the costs of Island Secretary actually incurred; thus on an indemnity basis.

47.  Perhaps this is a debt that it may be entitled to recover from elsewhere in due course.