HIGH FASHION NEW MEDIA CORPORATION LTD v. LEONG MA LI AND ANOTHER

HCA 1953/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1953 OF 2014

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D E C I S I O N

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Introduction

1. I have before me a summons taken out by the plaintiff (“New Media”) seeking an interlocutory injunction against the 1^st defendant (“Leong”) to, inter alia:

(i) compel her to act in accordance with a board resolution of the 2^nd defendant (“Longford”) dated 26 September 2014 (“the Resolution”) relating to the operation of Longford’s bank account with ICBC Shanghai, numbered 1001201629016236908 (“the Longford ICBC Capital Account”); and

(ii) restrain her from operating or dealing with the Longford ICBC Capital Account except in accordance with the Resolution.

Background facts

2. The background facts are set out in a decision of this court in HCA 1724/2014 separately handed down, and will not be repeated here.

3. Relevantly for the present purpose, New Media is a joint venture company set up by High Fashion Apparel Limited (“HFA”) and Hansen International Limited (“Hansen”). 

4. HFA and Hansen are the only two shareholders of New Media, holding 65% and 35% respectively of the entire issued share capital of New Media.

5. HFA is controlled and ultimately owned by Lam Foo Wah (“Lam Senior”), Lam Gee Yu, Will (“Will Lam”), and Lam Din Yu, Well (“Well Lam”).  Lam Senior is the father of Will Lam and Well Lam.  The three of them will hereinafter collectively be referred to as “the Lams”.

6. Hansen is indirectly wholly owned by Leong.

7. Longford is a PRC corporation and a wholly owned subsidiary of New Media.  It has four directors, namely, Lam Senior, Will Lam, Well Lam and Leong.  Apparently, Leong is also the legal representative and chairman of the board of directors of Longford.

8. According to the Lams:

(1) On 23 April 2014, a protocol (“the Longford Account Protocol”) was agreed in the course of a telephone conversation between Will Lam and Leong in relation to the operation of (inter alia) the Longford ICBC Capital Account, on terms that:

(a) all transactions in that account for less than RMB1 million would require (i) the joint signatures of Leong and Angela Yau and (ii) Longford’s finance chop; and

(b) all transactions in that account exceeding RMB1 million would require (i) the joint signatures of Leong and Will Lam and (ii) Longford’s finance chop.

(2) Subsequently, Lam Senior and Well Lam also agreed to the Longford Account Protocol.

(3) However, on or about 28 April 2014, Leong made herself the sole signatory of the Longford ICBC Capital Account without the consent of or authorization by the other directors of Longford or New Media.

(4) On or about 25 and 26 August 2014, Leong attempted to withdraw the sums of RMB300,000 and RMB10 million respectively from the Longford ICBC Capital Account without the consent of or authorization by the other directors of Longford or New Media.

(5) The acts of Leong mentioned in (3) and (4) above were committed in breach of her fiduciary duties owed to Longford and New Media and contrary to their interests, and show that Leong intended to steal or misappropriate the funds in the Longford ICBC Capital Account.

9. Pausing here, it would appear that when the parties referred to a signature of a person being required in the context of operating a bank account in the PRC, it was understood to mean the application of the personal seal of that person.

10. On the other hand, Leong’s case, in summary, is that:

(1) She was in principle agreeable to an arrangement whereby the Longford ICBC Capital Account could only be operated by two groups of signature (which was different from the Longford Account Protocol as alleged by the Lams).  However, on 23 April 2014 when Angela Yau and two other staff from the accounts department of Longford attended the Xintiandi branch of ICBC in Shanghai for the purpose of setting up a bank mandate for the Longford ICBC Capital Account, the proposed form of bank mandate was rejected by the bank because (inter alia) it was considered to be too complicated.

(2) Subsequently, in view of the refusal of Will Lam and Angela Yau to leave behind their personal seals in Shanghai with Leong to enable her to set up the bank mandate, it was agreed by Angela Yau that Leong should handle the bank mandate in respect of the Longford ICBC Capital Account herself, which she did on or about 25 April 2014.

(3) The eventual form of the bank mandate for operating the Longford ICBC Capital Account, as approved by the bank and evidenced by a seal specimen card dated 28 April 2014, required only “Longford’s Dedicated Finance Chop” and Leong’s personal seal.

(4) It was known to the Lams, from the very start since April 2014, that the Longford ICBC Capital Account could be operated by her personal seal and Longford’s Dedicated Finance Chop only, and neither Will Lam nor Angela Yau was ever a signatory to the Longford ICBC Capital Account.

(5) There was a transfer of RMB300,000 from the Longford ICBC Capital Account on 26 August 2014 for normal operational needs of Longford, but there was no attempt whatsoever to withdraw RMB10 million from the Longford ICBC Capital Account as alleged by the Lams.

11. The above disputes of fact cannot be resolved in the current interlocutory application on affidavit evidence alone.  Neither do I consider it necessary to do so for the purpose of disposing of the present summons.

12. On 18 September 2014, HFA commenced proceedings, HCMP 2336/2014, under sections 732 and 733 of the Companies Ordinance (Cap 622) for leave to bring a derivative action on behalf of New Media (suing in its personal capacity or, in the alternative, suing on behalf of itself as the sole shareholder of Longford) against Leong to seek an injunction to restrain her from operating or dealing with the Longford ICBC Capital Account except in accordance with the Longford Account Protocol.

13. On the same date, ie 18 September 2014, HFA made an urgent application, ex parte with notice to Leong/Hansen, in HCMP 2336/2014 seeking an interim injunction against Leong to restrain her from operating or dealing with the Longford ICBC Capital Account except in accordance with the Longford Account Protocol.  That matter eventually came before me on 26 September 2014.

14. After hearing submissions from counsel for the parties, I made an order restraining Leong from operating or dealing with the Longford ICBC Capital Account except in accordance with the Longford Account Protocol “or any further arrangement as subsequently determined by a resolution of the board of directors of [New Media]” upon the undertaking of HFA to “pay all legitimate business expenses in the ordinary course of business as they fell due of [New Media] and its subsidiaries (on behalf of [New Media]) upon presentation of invoices or relevant documents”.

15. At that time, I was informed that the purpose of the interim injunction sought in the proceedings in HCMP 2336/2014 was essentially to hold the ring until New Media could pass and implement a board resolution to confirm the Longford Account Protocol and authorize the commencement of proceedings on its behalf.

16. Eventually, a board resolution of Longford (ie the Resolution) was passed on 26 September 2014 resolving, inter alia, that:

(1) Longford shall adopt the Longford Account Protocol;

(2) Will Lam and Well Lam shall execute and arrange all relevant procedures on behalf of Longford in relation to the implementation of the Resolution; and

(3) Leong, as the legal representative of Longford, must strictly comply with the Resolution, and execute and change all documents in relation to the list and rules of signatories of Longford’s bank accounts.

17. As can be seen from the minutes of the board meeting held on 26 September 2014, that meeting was attended by all four directors of Longford, with Lam Senior and Will Lam attending in person and Well Lam and Leong attending by telephone.  It is also recorded in the minutes of the board meeting that the Lams all agreed with the Resolution, and Leong “expressed no opinion” on the Resolution.

18. By letter dated 2 October 2014 from Leong’s solicitors (Winston & Strawn) to New Media’s solicitors (Oldham, Li & Nie), Leong made it clear that she considered the calling of the board meeting held on 26 September 2014 was unlawful and therefore the Resolution passed at that meeting was null and void.  In that letter, Winston & Strawn referred to an earlier letter dated 16 September 2014 sent by Leong’s lawyers, Zoomlaw Attorneys‑At‑Law, to Lam Senior, which I shall return to later in this decision.

19. On 3 October 2014, New Media commenced the present action (suing on behalf of itself and also in its capacity as the sole shareholder of Longford) to seek an order that Leong do act in accordance with the Resolution and an injunction to restrain her from operating or dealing with the Longford ICBC Capital Account except in accordance with the Resolution.

20. On the same date, ie 3 October 2014, New Media took out the present summons.

Serious issue to be tried

21. The applicable principles for granting or refusing to grant an interlocutory injunction are well established.  The court has to consider whether there are serious issues to be tried, whether damages would be an adequate remedy for either side, and if damages would not be adequate, where the balance of convenience lies in terms of whether or not to grant an interlocutory injunction pending the trial of the action.

22. The mode of operation of a company’s bank account is, generally speaking, a matter falling within the powers of the board of directors of that company.  Prima facie, Leong, being a director of Longford, ought to abide by the Resolution.  She contends, however, that the board meeting which passed the Resolution was not properly convened or held.

23. In paragraph 16 of her affirmation filed herein on 22 October 2014, Leong stated that her PRC‑qualified legal adviser had advised her that in accordance with (1) the Articles of Association of Longford and (2) the Company Law of the PRC, any board meeting of a foreign‑invested company must be convened and chaired by its Chairman, and therefore the purported calling of the board meeting (eventually held on 26 September 2014) was unlawful and invalid.  In paragraph 17 of that affirmation, Leong went on to state that she instructed her PRC‑qualified legal adviser to issue a legal opinion to Lam Senior on 16 September 2014, and exhibited a copy of the aforesaid letter from Zoomlaw Attorneys‑At‑Law as being the “legal opinion”.

24. It is apparent, however, from a perusal of the aforesaid letter from Zoomlaw Attorneys‑At‑Law that it did not purport to be any legal opinion issued by that law firm.  All that the letter did was to set out the position or contention of Leong for the information of Lam Senior.  It is thus clear that Leong’s contention that the board meeting held on 26 September 2014 was not properly convened or held and the Resolution was null and void under PRC law cannot be supported by the aforesaid letter from Zoomlaw Attorneys‑At‑Law.

25. This having been said, she is still entitled to rely on the apparent meaning of the relevant provisions in Longford’s articles of association in support of her contention.  In particular, article 16 of chapter 5 of Longford’s articles of association provides that board meetings of the company are to be convened and chaired by the chairman of the board of directors.  Leong argues that since she was the chairman of the board of directors of Longford but neither convened nor chaired the board meeting held on 26 September 2014, the meeting was invalid.

26. In answer to this contention, Mr William Wong SC (for New Media) points out that article 16 of chapter 5 of Longford’s articles of association further provides that the vice‑chairman or other directors may convene and chair board meetings if the chairman is unable or does not perform her duties.  Mr Wong submits that Leong’s conduct of “changing” the bank mandate which had earlier been agreed to by her and other directors shows clearly that she did not and would not be willing to perform her duties as chairman of Longford in relation to the board meeting held on 26 September 2014.  Accordingly, the other directors were entitled, under the articles of association of Longford, to convene and hold the board meeting on 26 September 2014, and the Resolution was validly passed and binding on Leong.  In support of this argument, New Media relies on a legal opinion on PRC law issued by Boss & Young dated 23 October 2014.

27. For the purpose of the present application, I do not have to finally resolve the issue of the validity of the Resolution under PRC law.  It seems to me clear that there is at least a serious issue to be tried that the Resolution is valid and binding on Leong.  This view is, I understand, accepted by Leong’s counsel (see paragraph 57 of Mr Johnny Mok SC’s written skeleton submissions dated 27 October 2014).

Adequacy of damages and balance of convenience

28. In a sense, it may be said that New Media or Longford’s potential loss which may be caused by a refusal to grant the interlocutory injunction sought would be the money in the Longford ICBC Capital Account and therefore damages would be an adequate remedy.  However, if Leong is given unrestricted and unfettered control over the Longford ICBC Capital Account and the funds in that account are dissipated by Leong, this could seriously affect Longford’s business causing loss which may be difficult to quantify.

29. On the other hand, it is difficult to see what significant loss or prejudice Leong would suffer as a result of the granting of the interlocutory injunction sought by New Media.

30. Mr Mok argues that the interlocutory injunction sought, if granted, would have the effect of deciding the substantive case because it is in the same terms as the relief sought in the statement of claim.  Also, it is mandatory in nature because it positively requires Leong to act in accordance with the Resolution.  Hence, Mr Mok says that before granting the interlocutory injunction, I must find an overwhelming balance on the merits in New Media’s favour, and refers me to Hong Kong Civil Procedure 2014, paragraph 29/1/18.

31. It should be borne in mind, however, that this higher regard to the merits of the case is but one factor in the consideration of the balance of convenience: see the recent decision of the Court of Appeal in Lai Hoi Ping and Another v Persons Occupying Portions of Nathan Road and Others, HCMP 2975/2014 (15 November 2014), paragraphs 10 and 11 per Cheung CJHC.

32. In the present case, I consider the following matters clearly show that the balance of convenience favours the granting of some interim relief to New Media:

(1) the Resolution, giving effect to the Longford Account Protocol, promotes good corporate governance and provides a degree of check‑and‑balance between the joint venture partners;

(2) this check‑and‑balance is particularly important in view of the substantial disputes now existing between Leong on the one hand and the Lams on the other;

(3) the interlocutory injunction will not prevent or impede the use of funds in Longford’s other bank account (ie the Basic Account with ICBC) in the ordinary course of its business;

(4) further, HFA has given an undertaking to pay all legitimate business expenses in the ordinary course of business as they fell due of New Media and its subsidiaries upon presentation of invoices or relevant documents, and I have been told by Mr Maurellet (counsel for HFA) that HFA is prepared to continue to give this undertaking; and

(5) as earlier observed, it does not seem to me that Leong would suffer any significant loss or prejudice as a result of the implementation of the Resolution.

33. In the course of the hearing, Mr Wong made it clear that his client would be content with a continuation of the earlier order granted by me on 26 September 2014 and would not press for the more stringent form of injunction as set out in the summons, thus meeting the concern raised by Mr Mok referred to in paragraph 30 above.

34. In all the circumstances, I consider it just and appropriate to grant an order in the same terms as paragraph 1 of the order made by me on 26 September 2014 in HCMP 2336/2014 (save that the words “or any further arrangement as subsequently determined by a resolution of the board of directors of the Defendant” should be omitted) upon HFA’s undertaking as set out in that order.

Disposition

35. For the above reasons, I grant an interlocutory injunction as indicated in paragraph 34 above.

36. The parties are agreed that the question of costs and a number of applications in other related proceedings should be dealt with in a further hearing.

37. Lastly, I wish to thank counsel for their helpful assistance rendered the court.