EXCEL JUMBO INTERNATIONAL LTD v. CYBERNAUT GREENTECH INVESTMENT HOLDING (HK) LTD AND OTHERS

HCMP 222/2022

[2022] HKCFI 3555

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 222 OF 2022

________________________

________________________

________________________

________________________

J U D G M E N T

________________________

A. INTRODUCTION

1.  This is the hearing of two applications by the Plaintiff (“P”):

(1)  By an Amended Originating Summons filed on 19 April 2022 (re-amended with leave granted by this Court at the hearing on 26 August 2022)  (“OS”), P seeks leave to commence a statutory derivative action (“Intended Action”)  in the name of the 1^st Defendant (“Company”)  pursuant to ss.732 and 733 of the Companies Ordinance (Cap 622)  (“CO”)  against the four intended defendants (“Intended Defendants”)  named in the draft Statement of Claim annexed to the OS (“Draft SOC”); and

(2)  By a Summons filed on 23 February 2022 (“Injunction Summons”), P seeks an interlocutory injunction (“Injunction”)  to restrain the 1^st Intended Defendant in the Intended Action, namely Power Investment Holding Limited (“PIL”), from proceeding with a Hong Kong arbitration administered under the rules of the China International Economic and Trade Arbitration Commission (“CIETAC”)  (Case No. HKB20210017)  (“Arbitration”), until the determination of the Intended Action or further order of the Court.

2.  At the heart of the Intended Action is P’s allegation that the Intended Defendants have conspired to strip the Company of its assets by fabricating corporate and contractual documentation, with the Arbitration being part of the alleged conspiracy (“Alleged Conspiracy”).

3.  As will be seen below, whether I should grant relief in the OS and the Injunction Summons largely turns on my assessment of the merits of the Intended Action.  Having considered the available evidence, and notwithstanding the able submissions advanced by counsel for the 2^nd and 3^rd Defendants in the OS (“D2” and “D3”)  (Ms Sabrina Ho and Ms Cherry Xu)  and counsel for PIL (Mr Jason Yu and Mr Billy Liu), I am satisfied that the Intended Action raises serious issues to be tried and justifies relief to be granted on the terms set out in [65] and [66] of this Judgment.

4.  At the outset, I should mention that, since the hearing on 26 August 2022, PIL has been wound up by the Hong Kong Court and the Official Receiver (“OR”)  has been appointed as its provisional liquidator.  Nevertheless, as will be seen in my judgment below, I would have acceded to P’s applications whether or not PIL is in liquidation.

B.  FACTUAL BACKGROUND

5.  P is a British Virgin Islands company holding 50% shares in the Company.  It is P’s case that P is and was at all material times indirectly wholly-owned by Ms Ren Ming Hong (任明紅)  (“Ms Ren”).

6.  D2 is a limited partnership established in the People’s Republic of China (“PRC”), holding the other 50% shares in the Company.  D2 belongs to a group of companies (“Cybernaut Group”)  held by Beijing Cybernaut Green-Tech Investment Management Company Limited (北京賽伯樂綠科投資管理有限公司)  (“Beijing Cybernaut”), a PRC company.

7.  The Company was incorporated in Hong Kong on 8 November 2016:

(1)  At the time of the Company’s incorporation, D2 was its sole shareholder. On 26 May 2017, D2 transferred 50% of its shareholding in the Company to P.  Since then, P and D2 have been equal shareholders of the Company.

(2)  Between 17 March 2017 and 14 April 2020, the two directors of the Company were Mr Zeng Shan (曾山)  (nominated by D2)  (“Mr Zhen”)  and Ms Wang Naifan (王乃范)  (nominated by P)  (“Ms Wang”).  On 14 April 2020, Mr Zeng was replaced by D3, Mr Wu Mengjie (吳勐劼)  (“Mr Wu”), as D2’s nominated director.  Mr Zhen and Mr Wu are the 3^rd and 4^th Intended Defendants in the Intended Action.  From 14 April 2020 up till the present, Mr Wu and Ms Wang are the two directors of the Company.

8.  L’sea Resources International Holdings Limited (利海資源國際控股有限公司)  (“L’sea”), now known as Greentech Technology International Limited (綠科科技國際有限公司), is a company listed on the Main Board of the Hong Kong Stock Exchange (“HKSE”)  (stock code: 195).  At the material times, Mr Xie Haiyu (謝海榆)  (“Mr Xie”)  was a substantial shareholder of L’sea.

9.  PIL is a company incorporated in Hong Kong:

(1)  Mr Yang Jie (楊杰)  (“Mr Yang”)  is the sole director of PIL, having been appointed on 12 July 2021.  Mr Yang is the 2^nd Intended Defendant in the Intended Action.

(2)  On 12 October 2022, PIL was wound up by the Hong Kong Court and the OR has been appointed as its provisional liquidator.

10.  On 29 April 2015, Beijing Cybernaut and L’sea entered into a non-binding Memorandum of Understanding (“MOU”)  setting out their preliminary understanding as to a possible subscription by Beijing Cybernaut of not less than 6,000,000,000 new shares in L’sea at HK$0.25 per share (or convertible bonds of equivalent value)  (“Possible Subscription”).

11.  During the negotiation over the terms of the Possible Subscription, Beijing Cybernaut designated PIL as the vehicle to enter into any subscription agreement which might materialise.  This was recorded in a circular published by L’sea via the HKSE on 22 May 2017 (“Circular”).

12.  On 16 March 2016, PIL entered into a loan agreement (“Loan Agreement”)  with L’sea as borrower and Mr Xie as guarantor, whereby PIL agreed to lend HK$176,400,000 (“Loan”)  to L’sea.  L’sea needed the Loan to redeem outstanding convertible bonds in the same amount due on 17 March 2016.

13.  Broadly speaking, the effect of the Loan Agreement was that: (1)  should the Possible Subscription materialise, the Loan would be treated as part of the share subscription monies payable by PIL to L’sea; and (2)  should the Possible Subscription fail to come to fruition, the Loan would be repayable by L’sea to PIL with interest.

14.  At the time of the Loan Agreement, by a power of attorney with effect from 16 March 2016, PIL was under the control of Beijing Cybernaut, and was a member of the Cybernaut Group. These facts were recorded in the Circular.

15.  On 17 March 2016, L’sea received the Loan from PIL and applied the proceeds to fully redeem its convertible bonds.

16.  On 6 December 2016, L’sea announced that the MOU had lapsed.  As a result, the Possible Subscription had failed to materialise, and the Loan became repayable to PIL (with interest)  under the Loan Agreement.

17.  On 29 March 2017, L’sea, Mr Xie, the Company and PIL entered into four agreements in respect of the capitalisation and repayment of the Loan (“Four Agreements”).  For present purposes, a broad summary of their effects suffices:

(1)  By a loan capitalization agreement (資本化協議)  (“LCA”)  between the Company and L’sea, L’sea agreed to allot 1,700,000,000 new shares to the Company for the price of HK$136,000,000 to be offset against the Loan.

(2)  By a loan assignment agreement (貸款權益轉讓協議)  (“LAA”)  between PIL (as the assignor), the Company (as the assignee), L’sea (as the debtor)  and Mr Xie (as the guarantor), PIL agreed to assign all its rights and obligations under the Loan Agreement to the Company.

(3)  By an amended and restated loan agreement (修改及重述借款合同)  and a supplemental loan agreement (借款合同之補充協議)  between the Company (as the new lender), L’sea (as the borrower)  and Mr Xie (as the guarantor), the parties agreed that HK$136,000,000 of the Loan would be capitalised in accordance with the LCA, and the remaining outstanding sum (being HK$40,400,000 as principal, together with accrued interest)  would be repayable by L’sea (as the borrower)  and Mr Xie (as the guarantor)  to the Company.

18.  At this juncture, it should be noted that the terms of the LAA are the focal point of the Intended Action, for two versions of that agreement with different terms have been produced in the evidence.

19.  Central to the Intended Action is P’s allegation that the version produced by D2/D3 and PIL (“Ds’ LAA”)  is fabricated whereas P’s version (“P’s LAA”)  is genuine.  The major differences between P’s LAA and Ds’ LAA may be summarised as follows:

(1)  P’s LAA shows the signature of Ms Wang (who signed on behalf of the Company)  at the bottom of each of the first 3 pages, whereas Ds’ LAA does not show such signatures.

(2)  Clause 2 of P’s LAA states that the assignment was to be at nil consideration, whereas Ds’ LAA contains a consideration clause (which provided for consideration in the sum of the Loan plus interest at 8% per annum)  (“Consideration Clause”):

權益轉讓價款：[PIL]及[the Company]一致確定上述權益轉讓價款計算為：借款本金x (1 + n x 8%)  (其中：n = 2016年3月16日放款日至轉讓價款支付日之間的日曆天數 ÷ 365，8%為資金佔用約定的年利率

(3)  Clause 4 of P’s LAA states that the Company may pursue L’sea and Mr Xie for breach should L’sea fail to repay the Loan on time, whereas Ds’ LAA states that, if the Company fails to pay the assignment consideration on time, it shall be liable to pay 2% of the assignment consideration per day for its default.

20.  On 15 June 2017, L’sea allotted 1,700,000,000 new shares (“Shares”)  to the Company pursuant to the LCA.  Immediately after the allotment, the Company’s assets comprised the Shares and its receivable of HK$40,400,000 owed by L’sea (“Sum”).

21.  On 8 December 2021, PIL commenced the Arbitration against the Company to enforce a supplemental agreement to D’s LAA dated 1 July 2019 (“Ds’ SLAA”), pursuant to which:

(1)  The Company agreed to transfer the Shares to PIL and to pay HK$40,400,000 within 30 days; and

(2)  Any dispute arising from the implementation of the Ds’ SLAA (or provisions in Ds’ LAA which related to the subject matter of Ds’ SLAA)  was to be referred to arbitration by CIETAC in Hong Kong (“Arbitration Clause”).

22.  In the Arbitration, PIL seeks (inter alia)  the transfer of the Shares to PIL and payment of HK$40,400,000 pursuant to Ds’ SLAA.

23.  On 23 March 2022, a 3-person tribunal for the Arbitration (“Tribunal”)  was constituted.  On 26 April 2022, CIETAC rejected the P’s request for a stay of the Arbitration pending the disposal of the OS. I was informed by Mr Yu that as at the date of the hearing on 26 August 2022, PIL had not yet fixed an oral hearing date for the Arbitration.  I also record that PIL through Mr Yu gave an undertaking to the Court that PIL shall not restore the oral hearing of the Arbitration until the determination of the OS and the Injunction Summons.

24.  As matters stand, based on the letter from the OR to PIL’s former solicitors dated 24 October 2022, it appears that the OR is yet to make up his mind on whether he should continue the Arbitration.

C.  THE OS

25.  The applicable legal principles for granting leave to commence a statutory derivative action under CO ss.732 and 733 are well-established:

(1)  The plaintiff must show that: (i)  there is a serious issue to be tried; (ii)  it appears to be in the company’s interests for leave to be granted; (iii)  the company has not itself brought the proceedings; and (iv)  a written notice has been served on the company in accordance with CO s.733(3)-(4): Liu Chun Kau Andy v Hung Lee Construction Engineering Limited [2019] HKCFI 1269 at [9].

(2)  As to the requirement for a serious question to be tried, the threshold is relatively low.  The prospects of success on the claim are to be investigated only to a limited extent, and the Court should be slow to refuse leave unless the prospects are so slim that the plaintiff cannot be said to have any expectation of success. The question is whether there can be seen prospects of success which, in substance and reality, exist.  Unless the pleaded claim is demurrable, or there are some easily demonstrated fatal flaws, the merits will not be further investigated.  Although the Court is not obliged to accept whatever evidence the plaintiff chooses to place before it without any critical thinking, it is not the Court’s function at the leave stage to try to resolve conflicts of evidence or difficult questions of law: Kwok Hiu Kwan v Convoy Global Holdings Limited & Ors [2021] HKCFI 814 at [56]-[57].

(3)  As to the requirement that the intended action is in the company’s interests, the threshold is also low.  In most cases, if a serious question to be tried has been demonstrated, it will follow that it is prima facie in the company’s interests that the proceedings are pursued.  The Court would take into account whether there is a realistic tangible and practical overall benefit which might be obtained, such as whether the company stands to gain in money or money’s worth in light of the costs to be incurred: Convoy at [58]-[59].

(4)  As to the notice requirement, CO s.733(4)  provides that the written notice served on the company must state (i)  the member’s intention to apply for leave under s.732 in respect of the company; and (ii)  the reasons for that intention.

(5)  In the Court’s overall discretionary exercise, the Court would consider whether the case is a proper case for the Court to exercise its discretion.  Part of the reason for the discretion is to act as a safeguard against vexatious and inappropriate proceedings by disgruntled members: Convoy at [60].

26.  In what follows, I shall first summarise the parties’ respective case and evidence for the Intended Action before turning to the various leave requirements.

C1.   P’s case in the Intended Action

27.  In summary, P’s case is as follows:

(1)  PIL was at all material times a member of the Cybernaut Group and under the control of Beijing Cyberanut.  The Loan was funded by the Cybernaut Group, even though PIL was named as the lender under the Loan Agreement.

(2)  Between 16 March 2016 (i.e. the date of the Loan Agreement)  and 1 April 2016, when Mr Xie and one Mr Li Dong (李冬)  (“Mr Li”), a shareholder of an entity in the Cybernaut Group, were discussing the Possible Subscription and possible capitalisation of the Loan, Mr Li suggested that the subscription could be completed by Mr Xie finding the Cybernaut Group a joint venture partner which would: (i)  lend RMB20,000,000 to the Cybernaut Group; (ii)  contribute to the Cybernaut Group part of the monies constituting the Loan, which would be set-off against the issue price of the L’sea shares when the Loan was capitalised; and (iii)  participate through a corporate vehicle equally owned by the Cybernaut Group and the joint venture partner (“Joint Venture”).

(3)  Mr Xie referred Mr Li’s proposal to Ms Ren (who was one of Mr Xie’s business acquaintances in the PRC)  and her brother Mr Ren Ming Xue (任明學)  (“Mr Ren”).  Mr Ren and Ms Ren agreed to participate in the Joint Venture as proposed (“Joint Venture Agreement”).  In particular, Ms Ren agreed to lend RMB20,000,000 to the Cybernaut Group and to contribute HK$73,500,000 to the monies constituting the Loan.

(4)  Pursuant to the Joint Venture Agreement:

(i)  On 31 March 2016, Ms Ren through her designated company, Guangzhou Mingjia Investment Consultation Company Limited (廣州明嘉投資信息咨詢有限公司)  (“Guangzhou Mingjia”), entered into a written loan agreement with Beijing Cybernaut as borrower to lend RMB20,000,000 to the Cybernaut Group.

(ii)  On 1 April 2016, Guangzhou Mingjia advanced the aforesaid sum to Beijing Cybernaut, which issued an acknowledge of receipt accordingly.

(iii)  On 17 May 2016, Ms Ren, through Guangzhou Mingjia, paid the sum of RMB23,850,000 as her contribution to the Loan, which was received by a company designated by Mr Li to receive such funds on behalf of the Cybernaut Group, namely Zhengzhou Yanming Lake Urban Development Investment Company Limited (鄭州雁鳴湖城市開發投資有限公司).

(iv)  On 28 June 2016, Ms Ren, again through Guangzhou Mingjia, paid the sum of RMB57,496,996.39 to a company then controlled by Mr Xie, namely L’sea Ecotourism Development Company Limited (利海生態旅遊開發股份有限公司)  (“L’sea Ecotourism”), of which sum RMB38,660,000 was to be released to the Cybernaut Group as Ms Ren’s remaining contribution to the Loan after she had received her 50% in the Joint Venture entity.

(5)  On 29 March 2017, Ms Wang (who was nominated by Ms Ren as the Company’s director)  signed 4 sets of P’s LAA at L’sea’s office, both on the execution page and at the bottom of the first 3 pages of each set.  She was the last person to sign.  Thereafter, she took away one set of the original and the other three were returned to the other signatories, namely, Mr Xie, L’sea and PIL.  P’s LAA is the same version kept by Mr Xie and L’sea.

(6)  Ms Wang was not consulted about (nor was she aware of)  the Company’s engagement of Messrs Reed Smith Richards Butler (“RSRB”)  to handle the negotiation and execution of the Four Agreements.  When Ms Wang signed on the LAA, she made sure the assignment of the Loan Agreement from PIL to the Company was at nil consideration.  It was Ms Wang’s understanding that the assignment was at nil consideration because it was Beijing Cybernaut, not PIL, which funded the Loan, and Beijing Cybernaut had already received Ms Ren’s share of contribution to the Loan.

(7)  In May 2017, L’sea Ecotourism released RMB38,660,000 to Gold Rise Industrial (Shenzhen)  Company Limited (鑫升實業(深圳)有限公司), which then remitted the same to Guangzhou Yuancheng Haohang Trading Company Limited (廣州緣城皓航貿易有限公司), a company designated by Mr Li to receive Ms Ren’s contribution to the Loan on behalf of the Cybernaut Group.

(8)  Thereafter, P became a 50% shareholder of the Company.  The loan capitalisation under the LCA was completed, with the Company being the largest shareholder of L’sea.

(9)  On around 6 or 7 January 2022, the Arbitration came to the attention of Ms Wang, Ms Ren, and P for the first time.  By then, Mr Wu (without consulting Ms Wang)  had already emailed CIETAC to consent to PIL’s application that the Arbitration be summarily disposed by a sole arbitrator.

(10)  On 28 January 2022, a board meeting of the Company was convened, during which Mr Wu and Ms Wang disagreed over the authenticity of P’s LAA, Ds’ LAA and Ds’ SLAA.  The management of the Company was therefore in a deadlock as to the controversy concerning these documents.

28.  On the strength of the aforesaid evidence, P’s complaint (as described in the Draft SOC)  is that PIL and its director (Mr Yang)  conspired with the Cybernaut Group and its nominees and/or agents (namely, Mr Zeng and Mr Wu)  to fabricate Ds’ LAA and create Ds’ SLAA, which enabled PIL to commence the Arbitration against the Company and to obtain an arbitral award to strip the Company of its only assets (namely, the Shares and the Sum).

29.  On this basis, the claims in the Intended Action are for: (1)  conspiracy against all the Intended Defendants; and (2)  breach of fiduciary duties owed to the Company, against Mr Zeng and Mr Wu.

30.  In terms of relief, the Company would seek, inter alia: (i)  declarations that Ds’ LAA and Ds’ SLAA are fabricated, void and not binding on the Company; (ii)  orders to compel PIL to withdraw, refrain from pursuing and/or otherwise terminate the Arbitration; and (iii)  damages and/or equitable compensation.

C2.   D2/D3’s countervailing case

31.  D2/D3’s case is as follows:

(1)  At the material times: (i)  Mr Xie was P’s ultimate controller; (ii)  Ms Wang, Ms Ren and Mr Ren were all subordinates and/or associates of Mr Xie, and were accustomed to acting according to Mr Xie’s instructions.

(2)  Beijing Cybernaut introduced PIL to L’sea as a potential investor which was interested in subscribing for shares in L’sea, and later as a lender (under the Loan Agreement)  when L’sea was looking for funds to redeem its convertible bonds. PIL did not fund the Loan with the Cybernaut Group’s monies.

(3)  In late 2016, PIL informed the Cybernaut Group that it did not wish to proceed with the Possible Subscription for financial reasons.  Beijing Cybernaut therefore decided to take over the Loan and use its own corporate vehicle to proceed with the Possible Subscription.

(4)  In or around February 2017, Mr Xie informed Mr Li that Mr Xie wished to retain joint control over L’sea together with the Cybernaut Group after its subscription for L’sea shares.  Mr Xie therefore requested that one of his nominees/subordinates be appointed to be the designated subscriber for the Possible Subscription.  Accordingly, 50% shares in the Company were transferred to P, and Ms Wang was appointed as one of the two directors of the Company.

(5)  No consideration was provided for P’s 50% shares in the Company.  Neither the loan nor payments referred to at [26(4)] and [26(7)] above was such consideration, and Ms Ren did not make any contribution or payment to the Cybernaut Group towards the capitalisation of the Loan or as consideration for P’s 50% shares in the Company.  There was no Joint Venture as P alleged.

(6)  Since around 20 March 2017, the parties (i.e. the Company, PIL, L’sea and Mr Xie)  and their respective solicitors had been negotiating and preparing the terms of the Four Agreements.  The draft LAA circulated between the solicitors contained the Consideration Clause.  Eventually, Ds’ LAA was executed and exchanged by the parties’ solicitors as the final version of the LAA.  Ms Wang’s signing was arranged by a former investment assistant of Beijing Cybernaut named Shi Xi 石希 (“Ms Shi”).

(7)  Since January 2018, PIL had been chasing the Company for payment of the consideration under Ds’ LAA. Since the Company was merely a corporate vehicle to take up the Loan and the Shares, the Company had little cash and its only valuable assets were the Shares.  As a result, Mr Zeng and PIL entered into Ds’ SLAA as a way to repay PIL.

(8)  After the Arbitration was commenced, on 27 December 2021, Mr Wu replied to CIETAC agreeing to PIL’s proposal for adopting the summary procedure in the Arbitration, since Mr Wu thought PIL’s claims against the Company were straightforward.  On 5 January 2022, Mr Wu by letter informed Ms Wang about the Arbitration. 

(9)  At the board meeting on 28 January 2022, Mr Wu and Ms Wang agreed that the Company should defend the Arbitration and raise any jurisdictional challenge as was necessary.  Mr Wu suggested that an independent third-party law firm may be instructed to represent the Company in the Arbitration, which suggestion Ms Wang did not oppose.  However, Ms Wang later refused to reduce the aforesaid agreement into a board resolution.

C3.   Serious issues to be tried

32.  D2/D3 contend that the Intended Action raises no serious issue to be tried on two grounds:

(1)  First, it is argued that P has failed to put forward any credible evidence to support its allegation that Ds’ LAA and Ds’ SLAA were fabricated, which allegation is one of fraud requiring cogent evidence to substantiate.  I shall refer to this as the “Evidential Point”.

(2)  Second, it is argued that: (i)  at the time of the LAA, the Company only had D2 as its sole shareholder; (ii)  the terms of Ds’ LAA were validly authorised by the Company through D2’s nominated director, namely Mr Zeng; and (iii)  accordingly, the Company could not complain about Ds’ LAA in the Intended Action.  I shall refer to this as the “Sole Shareholder Point”, which was raised by Ms Ho for the first time in her oral submissions at the hearing.

33.  As to the Evidential Point, I am not satisfied that it makes the Intended Action unarguable:

(1)  Insofar as Ds’ LAA is concerned, D2/D3 rely on the fact that RSRB, which (on its face)  prepared and executed the LAA for the Company and PIL, confirmed that they did not suspect Ds’ LAA was fabricated.  This is neither here nor there:

(i)  P’s evidence is that Ms Wang was shown the body of P’s LAA when asked to sign on the execution page of the LAA, but somehow a different version of the LAA (containing Ms Wang’s signature)  is now being propounded by D2-D3 and PIL.

(ii)  There is no suggestion or evidence that RSRB’s solicitors were present when Ms Wang signed the LAA. In fact, D2/D3’s own evidence shows that Ms Wang’s signing was handled by Ms Shi rather than RSRB.

(iii)  RSRB could not have known the circumstances in which Ms Wang executed the LAA, and RSRB’s confirmation does not render Ms Wang’s evidence (and P’s case in this respect)  unbelievable.

(2)  That the draft LAA exchanged between the solicitors in March 2017 contained the Consideration Clause does not necessarily undermine P’s case, when, on P’s case, the draft circulated was not and could not have been the one which Ms Wang eventually executed.  How the draft LAA that was circulated between the solicitors was not produced to Ms Wang for signature, and when and by whom that the LAA was swapped (if at all), are matters for trial.

(3)  I have not lost sight of Mr Xie’s evidence that when he arrived at L’sea’s office on 29 March 2017, the draft LAA which he was asked to sign contained a provision that the Company had to pay PIL for the assignment of the Loan Assignment, which was contrary to his understanding when he introduced Ms Ren to Mr Li for the Joint Venture.  He raised this with Mr Ren who then followed up with Mr Li.  Mr Li agreed to send a revised draft LAA that says the Company would not need to pay for the assignment of the Loan Agreement.  Mr Xie confirmed that the LAA which Ms Wang eventually signed that day said that the Company would not need to pay for the assignment.  Mr Ren in his affirmation confirmed Mr Xie’s account and added that when he raised the query with Mr Li, Mr Li said that there must have been some misunderstanding when his team prepared the draft LAA (他的團隊在準備貸款權益轉讓協議時一定有一些誤解)  and he agreed to provide a revised version for execution.  Ms Ho argued that the above account of events was self-serving and bare assertion unsupported by contemporaneous documents, and there was no reasonable explanation why the episode did not find its way in the first round of evidence filed by P.  Whilst I can see the force in Ms Ho’s submissions, this is a matter to be explored at trial.  Without the benefit of cross-examination of witnesses, at this stage I am unable to find that P’s case is unbelievable.

(4)  Insofar as any reliance is placed on a board resolution purported passed by the Company’s board at a meeting held on 29 March 2017 (“29 March 2017 Meeting”)  to appoint RSRB to prepare the LAA on its behalf, P’s case as stated in the Draft SOC is that there was in fact no board meeting, discussion, or resolution on 29 March 2017, and Ms Wang, Ms Ren and P were unaware of RSRB’s involvement.  This case is not entirely without evidential support, for: (i)  the board minutes for that meeting were not signed by Ms Wang; and (ii)  Ms Wang’s evidence is that she did not recall attending the aforesaid board meeting.

(5)  Insofar as Ds’ SLAA is concerned, D2/D3 rely on the fact that: (i)  Mr Zeng was validly authorised in a board meeting held at the 29 March 2017 Meeting to execute Ds’ SLAA for the Company (a point which I do not think assists for the reasons stated above; and (ii)  Mr Zeng honestly believed that he had the authority to do so.  As to the latter point, given P’s allegation in the Draft SOC that Ms Zeng is one of the co-conspirators, his state of mind is a matter to be tested at trial, and I am unable to draw any conclusion at this stage.

34.  As to the Sole Shareholder Point, I am not satisfied that it is fatal to the Intended Action:

(1)  In general, where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.  This is commonly known as the Duomatic principle: Ng Kwok Piu Philip & Ors v To Pui Kui & Ors [2020] HKCA 724 at [56.1]-[56.3].

(2)  However, the Duomatic principle implies an anterior question as to what members in a general meeting are entitled to do.  I have not been shown any authority from Ms Ho which suggests that members of a company could exercise their power in furtherance of a conspiracy to injure the company, or for a dishonest or fraudulent purpose.

(3)  Whilst at the time of Ds’ LAA, D2 was the sole shareholder of the Company, I am not satisfied that D2’s power necessarily extends to binding the Company to an agreement which, on P’s case that I find to be seriously arguable, is part of the Alleged Conspiracy to cause damage to the Company.  At the very least, this raises difficult questions of law (such as the limits to a shareholder’s power)  which I cannot determine at this leave stage summarily.

(4)  In any event, the mere fact that Ds’ LAA was authorised by the Company (even if true)  would not necessarily render the Intended Action demurrable or otherwise fundamentally flawed.  On the face of the Draft SOC, insofar as Ds’ SLAA does not bind the Company, the Company could claim against the Intended Defendants on the basis that Ds’ SLAA (being part of the Alleged Conspiracy)  has caused the Company to suffer loss and damage and/or has enabled the Arbitration to be brought wrongfully against the Company.

35.  Having considered all the available evidence before me, I could not at this stage conclude that the Intended Action discloses no serious issues to be tried.  In particular, the sworn evidence of Ms Wang, Mr Ren, and Mr Xie in support of the OS and the Intended Action, together with the exhibits thereto, provide sufficient factual foundation for the Intended Action to be seriously arguable.  Mr Xie’s evidence is particularly credible on its face, as he appears to be independent from P notwithstanding D2/D3’s allegation that P was under Mr Xie’s control – an allegation which I cannot determine at this stage.  The mere fact that P’s evidence conflicts with that of D2/D3 does not detract from this finding, as the proper stage for the resolution of such conflicts is trial, not the present leave application.

36.  For the above reasons, I am satisfied that the Intended Action is seriously arguable.

C4.   The Company’s interests in bringing the Intended Action

37.  On the basis that the Intended Action discloses serious issues to be tried, the starting point is that it is prima facie in the interests of the Company for the claims to be pursued.

38.  D2/D3 have advanced a myriad of points to militate against this position.  With respect, none of them has merits.

39.  First, it is suggested that, should P be allowed to pursue the Intended Action, there would be a risk of inconsistent findings made by the Court and the Tribunal.  This argument does not assist D2/D3. Insofar as I grant the Injunction to restrain the continuation of the Arbitration (which I am minded to do for the reasons set out below), there would be no risk of inconsistency.

40.  Second, it is suggested that, should I grant leave to commence the Intended Action, there is a “real likelihood” that the PIL would apply for a stay in favour of arbitration.  I reject this submission:

(1)  This assertion is unsubstantiated by the evidence.  Although in its written submissions, PIL has reserved its right to apply for a stay of the Intended Action should leave be granted, it falls short of suggesting that an application would be made. Accordingly, there is no basis for me to infer a “real likelihood” this would happen; a fortiori when PIL is now in liquidation, and the OR may decide not to proceed with the Arbitration at all.

(2)  In any event, the mere possibility of an arbitration stay bears little weight when compared to what is at stake in the Intended Action.  As P’s counsel (Mr Mike Lui, with him Mr Jun Lee)  rightly pointed out, if the Company is successful in the Intended Action, it stands to keep its only assets, whereas if leave is refused, it stands to lose them in the Arbitration.  I do not believe that the risk of a stay, even if substantiated, is sufficiently weighty to override the Company’s clear interests in bringing the Intended Action.

41.  Third, it is suggested that, insofar as P has any meritorious objection to the Tribunal’s jurisdiction, D2/D3 are willing to appoint an independent law firm to act for the Company in the Arbitration such that the objection could be ventilated.  I reject this submission:

(1)  The issues arising in the Intended Action are not confined to the Tribunal’s jurisdiction derived from the Arbitration Clause and Ds’ SLAA.  There are also allegations of conspiracy and/or breach of fiduciary duties against the Intended Defendants and claims of damages, none of which would be resolved by a negative jurisdictional ruling. Accordingly, the mere fact that P’s jurisdictional objection may be ventilated in the Arbitration is neither here nor there.

(2)  An independent law firm would probably be a “lame duck” where the Company’s board is unable to agree on its factual instructions.  The two present directors of the Company (Mr Wu and Ms Wang)  subscribe to two diametrically different versions of events. Fundamentally, Mr Wu believes Ds’ SLAA is genuine, whereas Ms Wang believes it is part of a conspiracy and does not bind the Company.  Since the Arbitration turns on the validity and/or enforceability of Ds’ SLAA, I am unable to see the Company’s board could practically instruct any legal representatives in the Arbitration.  Accordingly, the appointment of an independent law firm would be wholly devoid of utility.

42.  Fourth, it is suggested that D2/D3 could procure the Company to request P’s participation in the Arbitration (whether by way of joinder or consolidation under the applicable CIETAC rules)  such that P could ventilate its complaints in that forum.  This does not assist D2/D3, as they have not attempted to demonstrate the likelihood of success of the intended requests, and I have no basis to assume that they have a real chance of success.

43.  Fifth, it is suggested that P has not undertaken to shoulder the Company’s costs (or indicated an intention to do so)  in the event that the Intended Action fails.  Given what is at stake in the Intended Action, I do not consider this to be a significant factor.  Further:

(1)  Wei Xing v Willwin Development (Asia)  Company Limited & Anor [2020] HKCFI 739 does not assist D2/D3.  In that case, Linda Chan J considered that the level of recovery from the intended action (the quantum of which was not indicated in the draft statement of claim before the Judge)  did not justify the substantial costs to be incurred in pursuing it (at [33]).  On that basis, the fact that the applicant did not agree to fund the costs of the intended claim (or indemnify the company for any liability to pay adverse costs)  was rightly given weight in an assessment of the company’s interests.

(2)  By contrast, there is no suggestion (let alone evidence)  in this case that the likely costs to be incurred in the Intended Action would be unjustified in light of the value of the Company’s assets, which the Company stands to lose in the Arbitration.  Our facts are distinguishable from those in Wei Xing.

44.  Sixth and lastly, it is suggested that the intended claims against Mr Zeng and Mr Wu for breach of fiduciary duties are premature, in that: (1)  P has not served notice under CO s.733 specifically in respect of these claims; and (2)  it would not be in the Company’s interests to incur extra costs by pursuing these claims before the authenticity of Ds’ LAA and Ds’ SLAA is determined:

(1)  As to (1)  above, it is a non-starter.  Although CO s.733(4)  requires the written notice to state the reasons for the member’s intention to apply for leave to commence a statutory derivative action, there is no requirement that the member must set out all the intended causes of action in the notice.  There is no authority to this effect before this Court.

(2)  As to (2)  above, it is unsubstantiated on the evidence.  The Intended Action includes a conspiracy claim against Mr Zeng and Mr Wu, who would be parties irrespective of the existence of separate breach of fiduciary duty claims against them.  It is also plain from the Draft SOC that the Company would rely on the same set of facts for the conspiracy claim and the breach of fiduciary duty claims.  In the premises, I am not satisfied that the Company would incur substantial extra costs by reason of separate breach of fiduciary duty claims being brought against Mr Zeng and Mr Wu.

45.  For the above reasons, I am satisfied that it is in the interests of the Company for the Intended Action to be brought.

C5.   Conclusion for the OS

46.  As to the remaining requirements for leave to commence a derivative action, it is undisputed that the Company has not itself brought the Intended Action and that a written notice has been served on the Company in accordance with CO s.733(3)-(4)  (subject to D2/D3’s point about the breach of fiduciary duty claim, which I have rejected above).

47.  In light of the foregoing, I shall grant leave to P to commence the Intended Action in the name of the Company.

48.  As to costs, CO s.738(3)  provides that the Court may order the applicant’s costs in a derivative action to be indemnified out of the company’s assets if the Court is satisfied that the applicant was acting in good faith in, and had reasonable grounds for, bringing the derivative action.

49.  The Court may consider the amount of costs to be incurred and the ability of the company to pay such costs.  The Court may defer the question of indemnification until the outcome of the derivative action is known or when the position is clearer: Hung Lee at [21]-[24].

50.  On the present facts, in light of my findings that the Intended Action is seriously arguable and consistent with the Company’s interests, I am satisfied that P acted in good faith and reasonably in seeking leave to commence the Intended Action. However, there is no evidence before me as to the amount of costs to be incurred in the Intended Action; nor is there any evidence as to the Company’s ability to pay such costs.

51.  In the premises, I shall defer the question of indemnification of costs to a subsequent occasion when the outcome of the Intended Action is known or when the position is clearer.

52.  For the avoidance of doubt, the leave granted by this Court for P to commence the Intended Action in the Company’s name is not the same as the leave required to commence actions against a wound-up company under s.186 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap 32)  (“CWUMPO”). Insofar as P wishes to commence the Intended Action against PIL (which is now in liquidation pursuant to a Court order), P would have to separately apply for leave under CWUMPO s.186.

D.  THE INJUNCTION SUMMONS

53.  The applicable legal principles for the grant of anti-arbitration injunctions are well-established:

(1)  The Court has the power to grant such injunctions under s.21L of the High Court Ordinance (Cap 4): SA v KB[2016] 2 HKLRD 1249 at [74]-[84].

(2)  This power may be exercised if two conditions are satisfied, namely: (i)  the injunction does not cause injustice to the claimant in the arbitration; and (ii)  the continuance of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process: SA v KB at [88].

(3)  The Court’s discretion to grant anti-arbitration injunctions is to be exercised very sparingly and with due regard to the principles of autonomy, independence and finality of arbitration embodied in the Arbitration Ordinance (Cap 609): SA v KB at [83], [88].

D1.   Prejudice to PIL

54.  PIL complains that the Injunction would occasion injustice to PIL by way of delay and costs.

55.  Insofar as delay is concerned, it is suggested that the Injunction would delay PIL’s recovery under Ds’ SLAA, as PIL would have to wait till the determination of the Intended Action.  With respect, this is a red-herring.  Irrespective of the Injunction, PIL would probably experience delay in the recovery process because, in PIL’s own submissions, P could oppose the enforcement of PIL’s arbitral award by bringing a statutory derivative action at that stage.  In other words, PIL would have to go through the Intended Action (and experience a similar degree of delay in recovery)  with or without the Injunction.

56.  Insofar as costs are concerned:

(1)  It is suggested that the resources expended in the Arbitration would be wasted due to the Injunction.  This is a non-point.  Insofar as PIL prevails in the Intended Action, they would be able to resume the Arbitration and there would be no waste of resources.  Insofar as the Company prevails in the Intended Action, PIL would have no cause for complaints.

(2)  Further, it is suggested that the costs to be incurred in the Intended Action would exceed those incurred and to be incurred in the Arbitration.  This has nothing to do with the Injunction, as PIL would have to incur costs in the Intended Action so long as it wishes to defend the conspiracy claims therein.

57.  For the above reasons, I am satisfied that the Injunction would not cause injustice to PIL.

D2.   Oppressive, vexatious and/or unconscionable

58.  By reason of the following matters, I am satisfied that the continuation of the Arbitration would be vexatious, oppressive and/or unconscionable in the circumstances.

59.  First, since I have found the Intended Action to be seriously arguable (see Section C3 above), there is a seriously arguable case that the continuation of the Arbitration furthers a conspiracy to strip the Company of its only assets.

60.  In this respect, I am of the view that the facts of this case are more indicative of oppression and unconscionability than those in Excalibur Ventures LLC v Texas Keystone Inc & Ors [2011] 1 CLC 338, a case authority addressed by both P and PIL:

(1)  In Excalibur Ventures, the claimant started an action in the Commercial Court in England and Wales against the defendants, whilst commencing a New York arbitration against the defendants at the same time.   Some of the defendants (“Gulf defendants”)  were not signatories to the arbitration agreement, and they applied for an injunction restraining the arbitral proceedings.  Gloster J acceded to the application and restrained the continuation of the arbitration on the basis that it was oppressive or unfair and unconscionable in the circumstances.  In particular, Gloster J gave weight to the fact that the Gulf defendants have a strong claim that the New York tribunal had no jurisdiction over them: see [70(i)].

(2)  In the present case, the objection to the continuation of the Arbitration goes beyond jurisdiction and stems from the need to stop a wrongful conspiracy against the Company.  On this basis, I consider the facts of this case to indicate a stronger case of oppression and unconscionability than Excalibur Ventures.

(3)  For completeness, I note PIL’s points that: (i)  the seat of the Arbitration is Hong Kong where P has itself elected to litigate, whereas the Gulf defendants in Excalibur Ventures did not submit to the jurisdiction of New York; and (ii)  the claimant in Excalibur Ventures was criticised for forum-shopping, whereas this aggravating feature is absent in this case.  In my view, these points pale in comparison to the fact that the continuation of the Arbitration could potentially further a conspiracy against the Company.

61.  Second, there is a real risk that the Company would be unable to properly conduct its defence in the Arbitration.  PIL’s claims in the Arbitration are based on Ds’ SLAA.  Whilst Mr Wu believes that Ds’ SLAA is genuine and binds the Company, Ms Wang holds the opposite view.  In other words, the board of the Company is in a deadlock on this issue.  As a result, the Company would in all likelihood be unable to instruct its legal representatives on whether (or how)  the Company should defend PIL’s claims in the Arbitration.

62.  Third, since I have already granted leave to commence the Intended Action, unless I put a halt to the Arbitration, there would be duplication of costs and risks of inconsistent findings arising from overlapping issues in the parallel proceedings (such as the validity of Ds’ LAA and Ds’ SLAA).

63.  Fourth, the fact that, further down the road, the Company may oppose PIL’s arbitral award in the Arbitration is a non-point.  So long as I am satisfied that the continuation of the Arbitration is vexatious, oppressive and/or unconscionable at the present stage, there is no reason why I should kick the can down the road as opposed to exercising the Court’s injunctive jurisdiction now.  In any event, being subject to an arbitral award which is arguably a product of conspiracy is oppressive and/or unconscionable in and of itself, even if the award may be set aside.

D3.   Conclusion for the Injunction Summons

64.  In light of the foregoing, I shall grant the Injunction in terms of the Injunction Summons.

E.  DISPOSITION

65.  I make the following orders in respect of the OS:

(1)  Leave be granted to P to commence, in the name of the Company, a statutory derivative action against the Intended Defendants in respect of the matters averred in the Draft SOC annexed to the OS (“Derivative Action”); and

(2)  P and the Company do have liberty to apply for an order that: (i)  costs of the OS and the Derivative Action be indemnified out of the assets of the Company; and (ii)  such costs paid out of the Company’s assets should be borne jointly or severally by one or more of the Intended Defendants.

66.  I make the following orders in respect of the Injunction Summons:

(1)  PIL be restrained from taking further steps in or proceeding with and/or otherwise pursuing the claims made under the Arbitration against the Company until the determination of the Derivative Action or until further order of the Court (“Injunction Order”);[1]

(2)  P do have leave to seal and file the Injunction Order in the Derivative Action; and

(3)  Costs of the Injunction Summons be reserved.

67.  It remains for me to thank all counsel for their assistance.