CAO SHUHUI v. DACHENG GROUP HOLDINGS (HONG KONG) CO LTD AND ANOTHER

HCMP 587/2023

[2024] HKCFI 284

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 587 OF 2023

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BETWEEN

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DECISION

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INTRODUCTION

1.  This is the Plaintiff’s application to commence a statutory derivative action on behalf of the 1^st Defendant’s (the “Company”) against Mr Gao (“Mr Gao”) and one 河南仕商企业管理服务有限公司 (“Henan Shi Shang”) (the “Intended Statutory Derivative Action”). The complaint is that Mr Gao caused the Company to dispose of its only asset at an undervalue to Henan Shi Shang and still fails to cause the Company to receive the consideration of the undervalue sale.

2.  The Company is jointly owned by the Plaintiff and Mr Gao who were husband and wife until 3 September 2021.

3.  It is the Plaintiff’s case that after the divorce between Mr Gao and the Plaintiff, Mr Gao took the following actions:

(a) On 25 August 2023, Mr Gao removed the Plaintiff from the Company’s board of directors despite that the Company is a quasi-partnership between the Plaintiff and Mr Gao; and

(b) On 29 January 2023, Mr Gao sold the Company’s only asset, i.e., its 30% shares in one 河南盛源汽车服务有限公司 (“Henan Sheng Yuan”) (the “30% Shares”) to Henan Shi Shang which is owned by Mr Gao’s associates at an undervalue.

4.  However, the Company has never received the consideration of the sale.

5.  Instead, it is Mr Gao’s case that the Company had appointed one Gao Yuexin (“Gao YX”), a staff of Henan Wagontune Holding Group Limited (“Wagontune Holdings”) who is unrelated to the Company to “hold on” to the consideration (in the sum of RMB6.9 million equivalent to which the Plaintiff says is over 82 years or more than 985 times of Gao YX’s monthly salary) for the Company as Mr Gao claims that it is “not possible” to remit RMB out of the Mainland to the Company’s bank account with HSBC in Hong Kong (the “HSBC Bank Account”) and in any event he does not know the account number of the HSBC Bank Account.

6.  Mr Fong for the Plaintiff submitted that in the affirmation evidence of Mr Gao, no plan was disclosed for remitting the said consideration back to the Company’s HSBC Bank Account.

7.  More significantly, just 2 weeks after filing of his Affirmation where Mr Gao claimed that the owners of Henan Shi Shang are “strategic investors” and thus presumably took a long term view of its acquisition of the 30% Shares, further sold the 30% Shares to an unrelated company at the same consideration of RMB6.9 million equivalent.

8.  As a result of the sale of the 30% Shares, the Company now has no assets whatsoever (save for a few thousand Hong Kong dollars in its HSBC Bank Account).

MATERIAL FACTS

9.  On 3 September 2021, the second marriage between the Plaintiff and Mr Gao was dissolved officially.

10.  On 30 April 2023, Mr Gao married one Qi Jinyian in Hong Kong.

11.  The Plaintiff and Mr Gao jointly established and operated 河南万通控股集团 (the “Wagontune Group”) which is a leading auto company operating more than 10 Mercedes-Benz 4S dealership stores in Henan Province, China.

12.  In 2013, the Plaintiff and Mr Gao contemplated taking the Wagontune Group public on the Hong Kong Stock Exchange and incorporated the Company for that purpose.

13.  In terms of the Company’s shareholding, at all material times, Mr Gao holds 70% of the Company’s shares while the Plaintiff holds the remaining 30%. The Plaintiff’s case is that notwithstanding their lawyer’s advice for the Company to be held equally by the Plaintiff and Mr Gao, Mr Gao insisted on being the majority shareholder as he is the Chairman of the Wagontune Group and also the head of the family（一家之主）. However, irrespective of the shareholding, the Company is, in fact, a quasi-partnership between the Plaintiff and Mr Gao.

14.  In terms of the Company’s directorship, both the Plaintiff and Mr Gao were, at all material times, directors of the Company until the Plaintiff was removed from the board of directors of the Company by Mr Gao on 25 August 2022.

APPLICABLE LEGAL PRINCIPLES

15.  The applicable legal principles in this area of the law is well settled and not disputed.

16.  In Re F & S Express Ltd [2005] 4 HKLRD 743, Kwan J (as she then was) at 747C, §21 held that “the court ‘will not normally enter into the merits of the proposed derivative action to any great degree’” and “the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction”.

17.  Recently, the Court of Final Appeal in Soka Gakkai International of Hong Kong Ltd（香港國際創價學會有限公司）v Lam Kin Chung [2022] HKCFA 21 at §§8-10, the Court reiterated and confirmed that the threshold for “serious question to be tried” is a relatively low threshold.

18.  On the “prospect of success”, Peter Ng J held in Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 at 36, §8, that “[o]dds against success no longer defeat the plaintiff, unless they are so long that the plaintiff can have no expectation of success, but only a hope.”

19.  The learned authors of Company Law in Hong Kong: Practice and Procedure, 2023 at §8.040 stated that “the requirement for a serious question be tried will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance” and “[u]nless the draft statement of claim is demurrable or it can be demonstrated quickly that the proposed claim or claims are based on fundamental mistakes, the serious question criterion will be satisfied”.

ANALYSIS AND DETERMINATION

20.  In the draft Statement of Claim (the “SOC”), the Plaintiff claims:

(a) As against the 1^st Defendant, breach of his fiduciary duty towards the Company including, inter alia, selling the 30% Shares to Mr Gao at an undervalue.

(b) As against Mr Gao, dishonest assistance and/or knowing receipt.

(c) As against the 1^st Defendant and Mr Gao, unlawful means conspiracy for injuring the Company’s economic interests by agreeing to sell the 30% Shares to Mr Gao at an undervalue.

21.  As far as remedies are concerned, Mr Fong for the Plaintiff submitted that given that the 30% Shares was further disposed by Henan Shi Shang to a third party 中粤汇金（深圳）on 28 July 2023 (i.e., after the OS was issued on 17 April 2023), it is no longer possible for the Plaintiff to pursue prayer no. (5) against Mr Gao and prayer nos. (9), (10) and (11) against Henan Shi Shang. Thus, the Plaintiff confirms that she would not seek those prayers on behalf of the Company should leave be granted for the Plaintiff to commence the Intended Statutory Derivative Action by this Court.

22.  Having considered the evidence so far filed by the parties and the very detailed submissions by the parties, I am of the view that leave to commence the Intended Statutory Derivative Action against Mr Gao should be granted.

23.  First and foremost, whilst Mr Gao has adduced expert reports prepared by professional valuers to set out a case that the disposal of the 30% Shares was done at market value and it is nothing but a normal commercial transaction, the veracity of such expert reports are being challenged by the Plaintiff. This Court cannot at this stage dismiss the Plaintiff’s concerns about the expert reports.

24.  I accept Ms Ho for Mr Gao’s submission that the Court is not obliged to accept whatever evidence the plaintiff chooses to place before it without any critical thinking: Kwok Hiu Kwan v Convoy Global Holdings Limited & Ors [2021] HKCFI 814, at §§56-57, per Coleman J. That must be right. I also accept that an allegation that a transaction was not bona fide and entered into knowingly at an undervalue is a very serious one. The Court will draw inferences of fraud or serious misconduct only where such inferences are compelling. The conclusion must not be reached by conjecture. It must be plainly established from proven facts.

25.  In the context of a leave application for derivation action, it is necessary for the plaintiff to adduce affirmation evidence, which having regard to the above principles demonstrates that there are facts and matters capable of justifying the inference that the transaction was not entered into bona fide, but, rather, for an improper purpose and it was not in the company’s best interest: Kwok Hiu Kwan v Convoy Global Holdings Limited HCMP 900/2018 (unrep., 26 June 2018), §§15-17 (per Harris J).

26.  However, on the facts of the present case, first, as the Plaintiff’s valuer opined in its report on the valuation reports, 「评估报告未取得备案二维码，不符合行业管理规定」. The purpose of the「备案二维码」was explained by the Plaintiff’s valuer. In short, the absence of QR codes (which can be used to verify when Mr Gao’s valuer filed the same with 中国资产评估协会electronically (and whether it in fact did)) in the valuation reports means that there is no independent evidence as to whether the valuation reports were actually issued before the share transfer agreement (the “STA”) was entered into. This goes to the point as to whether the valuation reports were prepared ex post facto to justify the disposal. I am keenly aware of the fact that this is a serious allegation. But I also bear in mind that this is an application for leave to commence derivative action. I cannot on these facts strike out the Plaintiff’s claims. I also take into consideration that the Plaintiff on oath stated the market value to be 5 times more than that is stated in the STA. I am of the view that this is matter to be litigated.

27.  Mr Fong for the Plaintiff also submitted that the Plaintiff did flag up the absence of QR codes in the valuation reports in her 2^nd Affirmation, if there were actually QR codes in the valuation reports, Mr Gao could have sought leave to adduce the correct version like it did with Exhibit GJS-32 to rebut paragraph 71 of the Plaintiff’s 2^nd Affirmation. It is submitted that the fact that Mr Gao did not do so indicates that the valuation reports were prepared ex post facto to the sale of the 30% Shares to Henan Shi Shang. This Court needs not resolve this issue at this stage, but for the purpose of the present application, I am of the view that the Plaintiff has raised a serious issue to be tried.

28.  Further, the valuer instructed by the Plaintiff opined in its report on the Mr Gao’s valuation reports that the methodology adopted by Mr Gao’s Valuer is unreliable and the valuation reports clearly undervalued the 30% Shares:

「1、 评估报告仅采用资产基础法一种评估方法进行评估，不能全面、合理的体现长期股权投资等资产综合的获利能力，既不符合企业的实际情况，也不符合行业准则要求的从市场法、收益法、资产基础法中选取两种及以上方法进行适用性分析并评估的规定，可能会造成被评估单位的股东全部权益的评估价值被低估。

2、 … 评估报告未考虑长期股权投资对评估报告中披露采用的评估方法适用性，缺乏说服力。评估结果未考虑子公司投资多年累计形成的大额未分配利润、盈余公积等权益，同时也未考虑子公司未来良好盈利能力对评估结果的影响，造成低估长期股权资产评估价值，有失公允。

3、 对固定资产进行评估时，评估报告未遵循规定披露固定资产评估方法，也未对固定资产的存在状态进行确认，与审计报告不一致，造成固定资产评估价值被低估，有失公允」

29.  The Plaintiff’s PRC lawyer also opined that「从“河南盛源汽车服务有限公司 2022 年度审计报告”中的《现金流量表》可以看出，盛源公司 2022 年度投资活动现金流入金额为 135346132.45 元（约 13535 万元），占年度利润总额的比重极大… 盛源公司资产状况、盈利能力、潜在盈利能力均十分突出，盛源公司对外投资权益… 属于盛源公司资产。将这些因素排除在外来确定盛源公司净资产价值和股权转让对价，是不公允的」.

30.  Still further, Mr Fong also took the forensic point that Mr Gao has not tendered any contemporaneous document (e.g., email, WeChat messages) pertaining to the preparation of the valuation reports whatsoever (e.g., documents provided for, delivery of the report, settlement of the professional fee).

31.  Another forensic point relied upon by Mr Fong for the Plaintiff is the difference in signature of two versions of the STA. It is submitted that although it is Mr Gao’s case that these two signatures were signed on the same day, it is obvious that Wang Ping’s signatures on the two versions are different. Mr Fong further submitted that the stark contrast in the two strongly suggests that at the very least, one of the two signatures was not Wang Ping’s true signature and thus more than probable, one of the documents or both must be forged.

32.  The question of which signature of Wang Ping is genuine (and hence which STA is genuine and the effect of the same) requires further evidence and cannot be resolved at the leave stage. It is a matter for the trial Court of the Intended Statutory Derivative Action to decide.

33.  Ms Ho for Mr Gao relied on the audited financial statements of Henan Sheng Yuan prepared by registered accountants dated 4 May 2023. However, it is common knowledge that audited financial statements is only the starting point of any valuation exercise.

34.  Secondly, I am of the view that the Plaintiff has a prima facie case that there is no explanation as to the necessity to dispose the only asset of the Company. It is an agreed fact that on 29 January 2023, the Company entered into the STA with Henan Shi Shang, whereby the Company agreed to sell and Henan Shi Shang agreed to acquire the 30% Shares at a consideration of US$1,021,238 (equivalent to around RMB 6.9 million). It is not entirely clear as to why that is in the best interest of the Company. Mr Gao’s case is that the Company sold the 30% Shares to Henan Shi Shang, “as part of its strategy to boost the competitiveness of the Benz 4S Shops … [b]y inviting Mr. Wang JianGuo and Ms. Wang Ping to join the Wangotune Group as shareholders of Henan Sheng Yuan (through their company Henan Shishang)”.

35.  However, I agree with Mr Fong that if indeed that is the reason, there is not credible reason for Henan Shi Shang to dispose the 30% Shares to an unrelated company at the same consideration just 2 weeks after Wang Jianguo and Wang Ping filed their Affirmations and just 6 months after Henan Shi Shang acquired the 30% Shares from the Company in the first place.

36.  In any event, there is an issue to be explored on why it is in the best interest of the Company to dispose of its only asset and thus rendering the Company a shell company with no assets. To bring in strategic investors is perfectly legitimate but it is hard to fathom as to why it is in the best interest of the Company to dispose of its own asset.

37.  Thirdly, the Plaintiff has a legitimate concern that the consideration is still under the custody of Gao YX. It is not even clear as to whether the sales proceeds have been deposited with an interest bearing account or not.

38.  At the very least, the Plaintiff has adduced evidence to show that the allegation that Gao YX was tasked with “holding on” to the consideration to “avoid unnecessary tax consequence” is not to be believed. As the Plaintiff’s PRC lawyer opined in the PRC Legal Opinion,「既然已经完成了税务申报和缴纳，高建设 2023 年 7 月 12 日的誓词（非正式中译本）第 42 段所说述的避免“不必要的税务后果”的情况就完全没有事实依据，或与高月新的陈述相矛盾，该说法本身不成立」.

39.  The Plaintiff’s PRC lawyer further opined in the PRC Legal Opinion,「当高月新个人账户发生大额交易时，会增加其被税务稽查的风险，同时由于该交易与其自身关联性不高，其大额收入的解释一旦无法被税务机关认定为合理，我们不排除资金会被定性为个人收入的可能，而个人收入的税收标准将远远高于企业所得的税收标准，从而引发更大的税务风险」.

40.  Mr Fong for the Plaintiff also submitted that the evidence for “holding on” to the consideration tendered by Mr Gao is deficient which significantly weakens Mr Gao’s case theory and even renders the same unbelievable. Exhibit GJS-36 to Mr Gao only shows the bank balance of Gao XY’s bank account with Shanghai Pudong Development Bank (“SPD Bank Account”) as at 2 June 2023. Mr Fong submitted that given that Mr Gao’s Affirmation was executed on 12 July 2023, Mr Gao could have exhibited the bank balance of Gao XY’s Bank Account closer to the time (e.g., as at early July 2023). Hence, the only inference that can be drawn is that Gao YX’s SPD Bank Account no longer maintains such balance after 2 June 2023. Whilst I am not sure whether that is the only inference to be drawn, it does certainly raise issues to be addressed.

41.  For the sake of completeness, there is no need for this Court to accede to Mr Fong’s request that this Court should find that the evidence of Mr Gao is totally unbelievable at this stage. Suffice it to say that there are serious issues to be tried.

42.  For the above reasons, I am of the view that it is in the best interest of the Company to commence these proceedings against Mr Gao.

INTENDED CLAIMS AGAINST HENAN SHI SHANG

43.  As to the intended claims against Henan Shi Shang, I agree with Ms Ho for Mr Gao that Hong Kong Courts do not have jurisdiction over the intended claims against Henan Shi Shang.

44.  Clause 8.2.1 of the long version of the STA provides that any disputes and claims arising from or related to the long version of the STA and any issues concerning the interpretation, breach, termination or validity of the long version of the STA shall be resolved by negotiation between the parties. If the negotiation fails, the disputes shall be resolved by the People’s Court of the target company’s location (i.e. the Henan Province Xin Zheng City People’s Court, 河南省新鄭市人民法院) (“the Henan Court”) and subject to such Court’s jurisdiction. “任何因本協議而產生或與之有關的爭議，矛盾或索賠（各稱為“爭議”）或本協議的解釋，違約，終止或有效性均應首先通過雙方協商解決；協商不成的，由目標公司所在地人民法院管轄並依法裁權。”

45.  I am of the view that the exclusive jurisdiction clause in favour of the Henan Court in Clause 8.2.1 of the long version of the STA applies to the intended claims against Henan Shi Shang, as they are clearly claims arising from or related to the long version of the STA. This is confirmed by Mr. Gao’s Mainland legal expert in internal pages 8 to 9 of the Legal Expert Opinion (such opinion not being challenged by P’s legal expert opinion).

46.  I also agree that it is unlikely that the Hong Kong Court would grant leave for the Company to serve the writ on Henan Shi Shang out of jurisdiction as it cannot be shown that Hong Kong Court is distinctly and clearly the more appropriate forum to determine the intended claims: Order 11 rule 1 RHC (Cap 4A) and SPH v SA (2014) 17 HKCFAR 364:

(1) Clause 8.1 of the long version STA states that the governing law of the agreement is Chinese law.

(2) Clause 8.2.1 of the long version of the STA contains the exclusive jurisdiction clause in favour of the Henan Court.

(3) The subject matter of the STA and the long version of the STA is shares in a Henan Sheng Yuan, a Mainland company. The transfer of the Shares is to be registered in the Mainland and the language of both the STA and the long version of the STA is simplified Chinese: Johnston, the Conflict of Laws in Hong Kong (3^rd Edn) §5.009 at p.223 to 224.

(4) As far as the alleged tort of conspiracy is concerned, it is the pleaded case in the Draft SOC that the tort was committed in Mainland China.

(5) Henan Shi Shang is a Mainland company. The relevant witnesses on behalf of Henan Shi Shang (for example Mr. Wang Jian Guo and Ms. Wang Ping) all reside in the Mainland. Any expert witnesses (for example on valuation) will likely be located in the Mainland. Similarly, any documentary evidence regarding the transaction (insofar as not in digital form) will likely be located in the Mainland.

47.  Mr Fong for the Plaintiff submitted that the Plaintiff would not be pursing prayer nos. (5), (9), (10) and (11) in its draft SOC. The rest of the remedies sought by the Plaintiff against Henan Shi Shang are based on common law and has nothing to do with any STA at all. Thus, whether clause 8.2.1 of the long version of the STA is an “exclusive jurisdiction clause” is irrelevant.

48.  However, Clause 8.2.1. is drafted in very wide terms. A common law claim against Henan Shi Shang can be said to be related to the STA. Presently, this Court cannot assume the long version of the STA is a forged document and hence cannot be applied.

49.  Accordingly, no leave will be granted to commence proceedings against Henan Shi Shang in Hong Kong.

INDEMNIFICATION

50.  The Plaintiff also seeks indemnification of costs of the Intended Derivative Action. Mr Gao’s case is that the Company is impecunious which is true as it stands. However, Mr Fong submitted that it is Mr Gao’s own case that the consideration of RMB 6.9 million equivalent was held by Gao YX “on behalf of the Company” and such sum can be remitted back to the Company’s HSBC Bank Account anytime. This is on top of the dividend due to the Company from Henan Sheng Yuan in the sum of RMB 111,720,000 which Henan Shengyuan likewise have no difficulty in remitting to Hong Kong. In other words, the Company can certainly indemnify the Plaintiff’s costs in the present leave application and also the Intended Statutory Derivative Action.

51.  However, Ms Ho for Mr Gao submitted that with respect to the dividends declared by Henan Sheng Yuan but unpaid to the Company, as the Company has yet to fulfill the FOREX requirements, Henan Sheng Yuan is not permitted to pay the dividends out of the Mainland to the Company. The above is confirmed by Mr. Gao’s Mainland Legal Expert at internal pages 10 to 11 of the Legal Expert Opinion. In any event, on the Plaintiff’s case, the dividends are assets of Henan Sheng Yuan. Hence, this amount cannot be taken into account when considering the amount of funds available to the Company.

52.  As to the sum which is now held in the Mainland on behalf of the Company, there is also difficult for the funds to be remitted to Hong Kong due to the SAFE foreign exchange control requirements.

53.  It is an undisputable fact that, for whatever reasons, the Company presently does not have funds to finance the Intended Derivative Action. In such circumstances, I am of the view that the Court should defer the consideration of the indemnification of costs issue until the outcome of the derivative action is known: see Wong Ho Kwan v Hsin Kuang Restaurant (Holdings) Ltd [2020] HKCFI 1314 at §§87 to 89 per Linda Chan J. This is without prejudice to the Plaintiff’s right to take out a new application for indemnification if there are changes of circumstances, for instance, the Company becomes cash rich at certain stage.

DISPOSITION

54.  For all the above reasons, I make an order to grant leave to the Plaintiff to commence the Intended Derivative Action against Mr Gao.

55.  As far as costs is concerned, I make a costs order nisi that costs to follow the event and Mr Gao should pay the costs of and occasioned by the Plaintiff’s present application to the Plaintiff, on a party to party basis, if not agreed. This costs order nisi should be made absolute within 14 days from the date of this Decision unless an application is taken out to vary the same within the 14-day period.

56.  Finally, it remains for this Court to thank Mr Fong for the Plaintiff and Ms Ho and Ms Chan for Mr Gao for their very helpful assistance to this Court.