HONG DA DEVELOPMENT & INVESTMENT HOLDING CO LTD v. CHINA AOYUAN PROPERTY GROUP LTD AND OTHERS

HCA 1377/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1377 OF 2011

____________

______________

J U D G M E N T

______________

A. INTRODUCTION

1.  This is an application by the Plaintiff for interlocutory injunction.

2.  The Plaintiff, Hong Da Development & Investment Holding Co Ltd (“Hong Da”), is a company incorporated in Hong Kong and wholly owned by one Mr Wang Zhi Cai (“Mr Wang”).

3.  The 1st Defendant, China Aoyuan Property Group Ltd (“Aoyuan Property”), is a company whose shares are listed on the Main Board of the Stock Exchange of Hong Kong.  The 4th Defendant, China Aoyuan International Development Ltd (“Aoyuan International”), is a subsidiary of Aoyuan Property.

4.  Hong Da held and Aoyuan International held and still holds 47.31% and 52.69% respectively of the issued share capital in the 5th Defendant, Century Profit Zone Investments Ltd (“Century Profit”).  Century Profit in turn holds 96.8% of the shareholding in an equity joint venture company established in Mainland China called Beijing Yaohui Real Estate Co Ltd (“Beijing Yaohui”), with the remaining 3.2% being held by Beijing Wangfu Century Development Co Ltd (“Wangfu”), which is also a company controlled by Mr Wang.  Beijing Yaohui is the owner and developer of a property under development in the Central Business District of Beijing.  I shall refer to this ongoing development as the project.

5.  The 2nd Defendant, Zhen Fu Ltd (“Zhen Fu”), and the 3rd Defendant, Soar Wealth Ltd (“Soar Wealth”), both incorporated in the British Virgin Islands, are also indirect wholly-owned subsidiaries of Aoyuan Property.

6.  The 6th Defendants are two individuals from RSM Nelson Wheeler Corporate Advisory Ltd.  They were appointed by Soar Wealth, acting for Zhen Fu, as joint and several receivers and managers of the shares held by Hong Da in Century Profit, and are being sued by Hong Da in that capacity.  I shall refer to them as the receivers.

7.  The 7th Defendant, Dynamic Bloom Ltd (“Dynamic”), a company incorporated in the British Virgin Islands, is the corporate vehicle used by the receivers to hold the assets under receivership.

B. THE FACTUAL BACKGROUND

(1) The project before the involvement of Aoyuan Property

8.  There is no dispute that in around 2000, Mr Wang, through his connections, obtained the right to develop certain land in Beijing into a commercial and residential complex.  Beijing Yaohui was the vehicle used to hold and manage the project.  Originally Beijing Yaohui was wholly owned by Wangfu, which was a company owned by Mr Wang and his associates.

9.  In about 2004 or 2005, a state-owned enterprise, called in short Beijing Capital, invested in the project and became the owner of 62% of the shareholding in Beijing Yaohui, with the remaining 38% being held by Wangfu.  The arrangement was that Beijing Capital would be responsible for financing the project by way of shareholder’s loans.  Indeed, by March 2008, Beijing Capital had advanced slightly over Rmb 1 billion to Beijing Yaohui.

10.  In about late 2007, Mr Wang decided to part company with Beijing Capital and to turn the project into a sino-foreign joint venture.  In April 2008, it was agreed between them that Century Profit, a Hong Kong company set up by Mr Wang, would purchase Beijing Capital’s shares in Beijing Yaohui at the price of Rmb 458.7 million, and would also procure the repayment of Beijing Capital’s shareholder’s loans of around Rmb 1 billion.

11.  As part of the exercise of becoming a sino-foreign joint venture, it was necessary to increase the registered capital of Beijing Yaohui.  Century Profit and Beijing Capital agreed that the registered capital of Beijing Yaohui would be increased from Rmb 50 million to Rmb 600 million, with Century Profit being responsible to bear the increase in capital of Rmb 550 million. 

12.  Mr Wang’s original plan was to buy out Beijing Capital with financial assistance from Merrill Lynch and indeed secured initial funding from Merrill Lynch in the sum of US$60 million.  However, because of financial difficulties arising from the global economic crisis in the latter part of 2008, Merrill Lynch was unable to provide funding for the financial needs of Century Profit in the buy-out of Beijing Capital.  A supplemental agreement was eventually entered into with Beijing Capital, whereby the deadline for the payment of the price for its 62% shareholding was extended to 31 July 2009.  The deadline for the repayment of the shareholder’s loan was extended to 31 December 2009, with the possibility of a further extension of three months to 31 March 2010 during which, however, interest would run at 20% above the prevailing rate of the People’s Bank of China.

(2) The circumstances in which Aoyuan Property became involved

13.  In the first half of 2009, Aoyuan Property was introduced to Mr Wang as a potential investor in the project.  Whether Aoyuan Property was very keen to invest in the project (as Mr Wang says) or, rather, Mr Wang was very anxious to secure Aoyuan Property as an investor (as Aoyuan Property says), is immaterial for present purposes. 

14.  Mr Wang says that, in the course of the negotiations, Mr Guo Zi Wen, a director and the Chairman of the board of Aoyuan Property, repeatedly told him and assured him that Aoyuan Property had over Rmb 3 billion in the bank and would be able to fund the continuation of the project.

15.  The negotiations were fruitful and it is common ground that on 6 July 2009, a number of agreements were entered into among the parties.

16.  The form of the investment agreed upon was that Aoyuan International would first purchase 41.33% of the issued share capital of Century Profit at the price of Rmb 370 million and subscribe for convertible notes issued by Hong Da with the right to acquire a further 11.36% of the issued share capital of Century Profit for a consideration of Rmb 296 million.  This right to acquire further shares was duly exercised by Aoyuan International in September 2010, as a result of which the relative shareholding of Aoyuan International and Hong Da in Century Profit became 52.69% and 47.31% respectively.

17.  As envisaged by and pursuant to the requirement of the sale and purchase agreement, the parties including Aoyuan Property, Aoyuan International, Mr Wang, Hong Da and Century Profit entered into three different versions of shareholders’ agreement on 6 July 2009.  These have been referred to as the original shareholders agreement, the first amended shareholders agreement and the second amended shareholders agreement. 

18.  The original shareholders agreement was intended to take effect upon the completion of the sale and purchase agreement, which took place on 28 July 2009.  The first amended shareholders agreement was intended to take effect upon Aoyuan Property granting a loan of Rmb 110 million to Century Profit and another loan of Rmb 130 million to Hong Da, which appears to have taken place also in July 2009.  The second amended shareholders agreement was intended to take effect upon Aoyuan International’s exercise of the right under the convertible notes to acquire an additional 11.36% shareholding interest in Century Profit, which as mentioned above occurred in September 2010.

19.  Pursuant to clause 6.1 of the original shareholders agreement, Aoyuan International granted a loan of Rmb 460 million to Century Profit.  This was for the purpose of enabling Century Profit to pay the price of Rmb 458.7 million to Beijing Capital for the acquisition of its 62% interest in Beijing Yaohui.

20.  On 22 July 2009, as envisaged in clauses 6.2 and 6.3 of the first amended shareholders agreement, Aoyuan International granted a further loan of Rmb 110 million to Century Profit.  This was for the purpose of contributing towards the increase in the registered capital of Beijing Yaohui referred to in paragraph 11 above.

21.  Separately, Aoyuan International granted a loan of Rmb 130 million to Hong Da which went towards the funds required to discharge the loan of US$60 million from Merrill Lynch.

(3) The ICBC loan

22.  There is no dispute that in late 2009, Aoyuan International approached Industrial and Commercial Bank of China for a loan for the project, resulting eventually in an agreement dated 9 December 2009 for a loan in the sum of HK$670 million between Industrial and Commercial Bank of China (Asia) Ltd (as facility agent and security agent for the lenders) and Century Profit as borrower.  I shall refer to the loan as the ICBC loan and the agreement as the ICBC loan agreement.

23.  There is however a dispute about the purpose of the loan.  As mentioned above, by 31 December 2009, Century Profit and Beijing Yaohui had to repay about Rmb 1 billion to Beijing Capital.  Aoyuan Property contends that the ICBC loan was obtained for the purpose of making repayment to Beijing Capital.  Because of foreign exchange control regulations in the Mainland, the loan proceeds, being offshore funds, could not be used directly to settle Beijing Capital’s loan.  Accordingly, the funds were first injected into Beijing Yaohui as registered capital, so that Beijing Yaohui could then use the funds to repay Beijing Capital.

24.  Hong Da disagrees, contending that the loan was borrowed for the purpose of the increase of capital of Beijing Yaohui, and pointing to clause 3.1 of the ICBC loan agreement which states that the loan may only be used for, inter alia, funding the equity contribution to be made by Century Profit for the increase of the registered capital of Beijing Yaohui to Rmb 600 million.

25.  The significance of this dispute is that, if what was required was funding for making repayment of Beijing Capital’s loan, then the relevant provision in the first amended shareholders agreement in relation to such funding is clause 6.4 (which is set out in paragraph 93 below).

26.  Conversely, if funding was required to increase the registered capital of Beijing Yaohui, then it is clause 6.1 which is the relevant provision (which is also set out in paragraph 93 below).

27.  This is not a matter that can be resolved at this stage.  I proceed on the basis that it is at least arguable that purpose of the ICBC loan was, as Hong Da suggests, to fund the increase of the registered capital of Beijing Yaohui.

28.  There is no dispute that the lenders required the following to be provided as security for the ICBC loan: (1) a share mortgage by Aoyuan International over its 52.69% shareholding in Century Profit; (2) a share mortgage by Hong Da over its 47.31% shareholding in Century Profit; (3) a guarantee provided by Aoyuan Property; (4) a share pledge by Century Profit of its shareholding in Beijing Yaohui; and (5) an account charge by Century Profit in respect of its credit balances in certain specified bank accounts.

29.  The requirement of a mortgage of Hong Da’s shares in Century Profit was discussed at the board of directors’ meeting of Century Profit on 2 December 2009.  The minutes record that there was agreement in principle among the directors for Century Profit to enter into the ICBC loan, that Mr Guo was authorised to sign the loan documentation on behalf of Century Profit, and that Mr Wang agreed that Hong Da’s shares in Century Profit would be used as security for the ICBC loan, but Aoyuan Property should provide a counter-guarantee upon Hong Da executing such share mortgage.

30.  There is no dispute that eventually the securities required by the lenders were provided.  Equally there is no dispute as to what documents were eventually entered into between Century Profit and the providers of security on the one hand and the lenders on the other, and as to the validity and effect of those documents.

(4) The counter-guarantee and confirmation letter

31.  What is very much in dispute between the parties is the circumstances of the execution, and the continued validity and effect, of a document in Chinese called the counter-guarantee undertaking, which was signed by Mr Hu Da Wei, one of the directors of Aoyuan Property.  I shall refer to this document as the counter-guarantee.

32.  The terms of the counter-guarantee (as translated) are as follows:

“Whereas:

Century Profit Zone Investments Limited made an application to ICBC International Investment Management Limited for a term loan facility in an aggregate amount of HK$670 million. As the said financing is within the responsibility of China Aoyuan Property Group Limited, in cooperation of the said financing arrangement, Hong Da Development & Investment Co. Ltd. agrees to pledge all its shares in Century Profit Zone Investments Limited to ICBC International Investment Management Limited and execute the following relevant legal documents: [a list of documents are then set out]

In the premises, China Aoyuan Property Group Limited hereby undertakes to provide counter-guarantee against the liabilities to be borne by Hong Da Development & Investment Co. Ltd. under all the aforesaid legal documents including but not limited to its liabilities under the equity pledge. If Hong Da Development & Investment Co. Ltd. suffers any loss as a result of the mandatory enforcement against its shares or other loss, China Aoyuan Property Group Limited should compensate all the loss suffered by Hong Da Development & Investment Co. Ltd. arising therefrom.”

33.  The parties’ accounts of the events surrounding the preparation and signing of this document by Mr Hu are very different.  In essence, what Aoyuan Property contends is this. 

34.  Because of a deadline imposed by ICBC, all the loan documentation had to be executed and couriered to Hong Kong on or before 9 December 2009.  In the evening of 7 December, Mr Tan Yi, manager of Century Profit’s legal department, received further documents from Aoyuan Property’s solicitors in Hong Kong to be executed by Mr Wang.  Mr Tan forwarded the documents to Mr Liu Shoubao, Mr Wang’s PRC lawyer and adviser, for his review and approval.  Because Mr Liu had little time to review the documents, he suggested that if Mr Wang was to sign the documents, he would require a counter-guarantee from Aoyuan Property.  Mr Tan therefore prepared and sent a draft counter-guarantee to Mr Liu at 12:02 am on 8 December, which Mr Liu sent back to Mr Tan at 12:43 am with suggested amendments.  Mr Guo however refused to sign the document until after having taken legal advice and consulted the other directors of Aoyuan Property.  For his part, Mr Wang insisted that Mr Guo sign the counter-guarantee before he would execute the loan documents on behalf of Hong Da. 

35.  Mr Hu says he eventually reached an “interim consensus” with Mr Wang whereby pending Mr Guo’s signature, Mr Hu would sign the counter-guarantee and Mr Wang would sign the loan documents but without affixing the various company seals on them.  If at the end Mr Guo refused to agree to the counter-guarantee, then the documents signed by Mr Wang would be returned to him for destruction.  On this basis, Mr Wang signed the loan documents at about 2:40 am on 8 December. 

36.  On the same day, at about 1 pm, in a telephone conference among Mr Liu, Mr Hu, Mr Guo, Mr Tan and others, the parties agreed that instead of the counter-guarantee, Aoyuan Property would provide a confirmation letter to Hong Da.  This was prepared by Aoyuan Property’s solicitors in Chinese and signed by Mr Guo and Mr Wang that same afternoon after some amendments.  The confirmation letter (as translated) provides as follows:

“We, China Aoyuan Property Group Limited (hereinafter referred to as ‘Aoyuan Property’) and Hong Da Development & Investment Co. Ltd. (hereinafter referred to as ‘Hong Da’), as the direct or indirect holders of the shares in Century Profit Zone Investments Limited (hereinafter referred to as ‘Century Profit’), hereby agree that should Century Profit fail to make timely repayments to Industrial and Commercial Bank of China (Asia) Limited (hereinafter referred to as ‘ICBC (Asia)’) in accordance with the terms of the ‘ICBC loan Agreement’, which causes ICBC (Asia) to exercise its rights to appoint receivers and demand for repayment under the ‘ICBC loan Agreement’, Aoyuan Property shall procure ICBC (Asia) to enforce its rights and arrange for repayment of the indebtedness in the following order:

1. take over and sell the shares of Century Profit held by China Aoyuan International Development Limited;

2. demand Aoyuan Property to repay the outstanding amount of the indebtedness under the ‘ICBC loan Agreement’;

3. take over and sell the shares of Century Profit held by Hong Da.

Aoyuan Property agrees that, should Century Profit fail to make timely payments to ICBC (Asia) in accordance with the terms of the ‘ICBC loan Agreement’, it should be responsible for providing loans to Century Profit or assisting Century Profit in making other financing arrangements to enable Century Profit to repay the outstanding indebtedness under the ‘ICBC loan Agreement’, so as to avoid ICBC (Asia)’s mandatory enforcement against the shares pledge by Hong Da; and Hong Da agrees to provide corresponding cooperation in respect of such financing arrangement.

This Confirmation Letter shall take effect and terminate with the ‘ICBC loan Agreement’ and shall be governed by the laws of the Hong Kong Special Administrative Region of China.”

37.  After Mr Wang signed the confirmation letter, Mr Liu on his behalf affixed the company seals on the loan documents and passed them to Mr Tan at about 5:30 pm, who took the last flight from Beijing to Guangzhou on that day so that he could present the documents to ICBC on 9 December.

38.  On this basis, Aoyuan Property contends that the counter-guarantee was signed by Mr Hu pursuant to the interim consensus, was not intended to take effect until after approval by Mr Guo which approval was in the event not given, and was eventually superseded by the confirmation letter.

39.  Hong Da’s version of the circumstances leading to the execution of the two documents is very different.  According to Mr Wang and Mr Liu, in the evening of 7 December 2009, Mr Hu and Mr Tan went to Mr Wang’s office in Beijing to ask him to sign the loan documents on an urgent basis.  Mr Wang said he reminded them that as a condition for Hong Da’s agreement to mortgage its shares in Century Profit, Aoyuan Property had to provide a counter-guarantee to protect Hong Da, which Mr Hu and Mr Tan acknowledged.  Mr Wang then told them that the company seal of Hong Da was kept by the staff and could only be affixed to the documents on the next day. Nevertheless, Mr Hu and Mr Tan asked him to sign the documents first, to which Mr Wang agreed, though he would not put the seal on the documents until after he had been given satisfactory counter-guarantee document(s) for the protection of Hong Da.  Mr Wang says he did not see any draft counter-guarantee that evening and did not reach any “interim consensus” with Mr Hu.

40.  Mr Wang says that after midnight, on 8 December, Mr Liu rang him and reported to him about the draft counter-guarantee as prepared by Mr Tan and amended by Mr Liu.  He then went to sleep.  In the morning, he called Mr Liu and told him that the counter-guarantee alone was not sufficient protection for Hong Da, and asked him to seek further protection from Aoyuan Property.

41.  Mr Liu said he then called Mr Tan and a telephone conference was arranged, which took place at about 1 pm on 8 December.  He said the purpose of that conference was to discuss additional protection for Hong Da and that he did not agree, nor did he have authority to agree in the absence of Mr Wang, that the counter-guarantee was to be replaced by the confirmation letter.  That afternoon, Mr Wang signed on the confirmation letter, without ever intending that it should replace the counter-guarantee. Mr Hu later came to Mr Wang’s office and handed to him the counter-guarantee signed by Mr Hu and confirmed that the counter-guarantee had been approved by the board of directors of Aoyuan Property.  At that point Mr Wang directed his staff to affix Hong Da’s seal on to the security documents required for the ICBC loan.

42.  This dispute is plainly not one that I can resolve simply on the basis of the affirmations filed by the parties.  The competing versions will have to be tested at trial.

43.  It has been suggested on behalf of Aoyuan Property that the contemporaneous emails they have adduced are conclusive against Mr Wang’s version of events.  However, as pointed out by Mr Leong SC, the “interim consensus” referred to by Mr Hu in his affirmation was not mentioned in the emails.  Moreover, the emails exhibited by Mr Hu do not appear to be the complete chain of emails.  From the terms of those exhibited, it appears there were earlier internal emails circulating a draft counter-guarantee and there might well have been emails following Mr Guo’s comment that he did not agree to the counter-guarantee.

44.  Also, it requires explanation why the confirmation letter, which was drafted by Aoyuan Property’s solicitors, did not specifically provide that the counter-guarantee was cancelled or superseded, and why Mr Hu did not request for the return of the counter-guarantee which he signed, if it was agreed that it was superseded by the confirmation letter.

45.  Mr Ronny Tong SC, acting for Aoyuan Property, submits that it is plain from the contents of the two documents that the confirmation letter was intended to replace the counter-guarantee.  His argument is that under the confirmation letter, Aoyuan Property’s resources would have first to be exhausted before ICBC ever came to enforce against Hong Da’s shares.  If ICBC had to enforce its security over Hong Da’s shares, that means Aoyuan Property could not pay and so the promise by Aoyuan Property in the counter-guarantee to compensate Hong Da would be meaningless.

46.  I am unable to accept this submission.  First, the confirmation letter required Aoyuan Property to procure that ICBC follow the specified order when enforcing its security.  It did not however bind ICBC who was not a party to that document and who was entitled to choose which security to enforce first and which security to enforce last, or not at all. If Aoyuan Property failed to ensure that ICBC follow the stipulated order and the mortgage over Hong Da’s shares was enforced, the counter-guarantee would provide Hong Da with a ready claim for compensation, which was not expressly provided for in the confirmation letter.

47.  Secondly, even if there is some overlap between the protection afforded by the two documents, there was (on either side’s case) little opportunity for in-depth analysis in the circumstances in which these documents came into existence on 8 December 2009.  The parties might well have been prepared to take a belt and braces approach.  I do not find there to be such a compelling inference as is conclusive for present purposes that the parties intended one of the documents to supersede the other.

48.  For the same reasons, I do not accept Mr Tong’s submission that even if the parties had not in fact agreed that the counter-guarantee was to be replaced by the confirmation letter, as a matter of law the execution of the later document rendered ineffective the earlier document.

49.  I recognise that the Defendants have equally challenged the credibility of Mr Wang’s version by raising valid questions such as why the counter-guarantee was not mentioned by Hong Da or in its solicitors’ letters prior to these proceedings, and why the parties only agreed to cancel the confirmation letter in June 2011 (in circumstances which I shall describe below) if both documents were then valid and extant.  These points are not without force but they are, in my view, far from sufficient to show there is no factual issue in this respect.

(5) Breakdown of relationship

50.  After the ICBC loan was drawn down towards the end of 2009, the project continued.  Mr Wang continued to be Beijing Yaohui’s legal person representative.

51.  In April 2010, Aoyuan Property, through a subsidiary, extended a further loan to Beijing Yaohui in the sum of Rmb 283 million for the purpose of repaying the outstanding balance of the shareholder’s loan due to Beijing Capital.

52.  It appears that during 2010, for reasons that are in dispute, the working relationship between Hong Da and Aoyuan Property gradually turned sour.  Even so, on 27 September 2010, Aoyuan International exercised its rights under the exchangeable bonds and acquired further shares in Century Profit, after which the proportion of interests of Aoyuan International and Hong Da in Century Profit became 52.69% and 47.31% respectively.

53.  Also in late September 2010, Aoyuan Property discovered that Hong Da had, without the knowledge or consent of ICBC, created a second charge over its shares in Century Profit in favour of another creditor.  In fact, Hong Da granted a third charge over those shares in favour of a further creditor.  The creation of both of these charges seems to have been a breach of clause 4 of Hong Da’s share mortgage and, if not remedied, could potentially lead to an event of default under clause 19 of the ICBC loan agreement.

54.  By late 2010, the project had come to a deadlock.  According to Aoyuan Property, Mr Wang, who was the legal person representative of Beijing Yaohui, had wrongfully rejected proposals to sell the units in the development, with the result that after January 2010 there had been no sale of units and therefore no cashflow for the project.  Mr Wang says there has been no sale because of poor management, not because he is opposed to any sale.

55.  After Aoyuan International became the majority shareholder in Century Profit in September 2010 by conversion of the convertible notes, and despite that Aoyuan International thereby acquired the right under the shareholders’ agreement to appoint the legal person representative of Beijing Yaohui, Mr Wang refused to be replaced as such.  Mr Wang says he did this to protect the interests of Hong Da because he had discovered the transfer of the ICBC loan which I shall mention below.

56.  I cannot in this application resolve these disputes and allocate responsibility for the problems that have arisen.  The fact however remains that the project has come to a standstill.  Construction has stopped since November 2010.  The business operations of Beijing Yaohui have been disrupted.  No further sale has occurred since early 2010, nor is any further sale likely for as long as the present impasse continues.  There have apparently even been physical confrontations between the parties for control over the offices and exhibition space of Beijing Yaohui.  Beijing Yaohui is facing default in the obligation to deliver possession to the buyers of the small portion of units which were sold in early 2010.

(6) Unsuccessful attempt to sell to Xinlu

57.  Precisely why discussions began for Aoyuan Property to exit the project is in dispute, but it is common ground that since about late 2010, Aoyuan International and Mr Wang had started negotiations for the sale of the former’s 52.69% interest in Century Profit to a company called Xinlu Development Ltd (“Xinlu”).  Xinlu was apparently a corporate vehicle which in effect represented the interests of a third party investor that Mr Wang had managed to find to take over Aoyuan Property’s investment in the project. 

58.  In around May 2011, the parties appear to have reached consensus on the broad outlines of an agreement, which would involve Xinlu providing funds for Century Profit to repay the ICBC loan.  For this purpose, an application was made to ICBC to bring forward the repayment date of the loan from 9 December 2011 to 31 July 2011.  This was approved by ICBC on 18 May 2011.

59.  On 3 June 2011, Aoyuan Property, Aoyuan International, Xinlu, Hong Da, Mr Wang and Beijing Yaohui signed an agreement in escrow for the sale of Aoyuan International’s 52.69% interest in Century Profit to Xinlu.  The consideration was stated to be the Hong Kong dollar equivalent of Rmb 1,335 million if completion took place on or before 29 July 2011, or the Hong Kong dollar equivalent of Rmb 1,350 million if completion took place on 31 July 2011.

60.  It was originally intended that Xinlu would pay a deposit of Rmb 700 million on 3 June 2011 when the sale and purchase agreement was entered into, but it asked for a postponement of the payment date.  The parties agreed to extend the date to 23 June 2011, but on conditions.

61.  These conditions were reflected in an agreement called the sale and purchase confirmation dated 3 June 2011 between the same parties, whereby they acknowledged the sale and purchase agreement had been signed in escrow, and Xinlu agreed to pay a sum in Hong Kong dollar equivalent to Rmb 700 million by 23 June 2011 as deposit for the purchase.  In addition, it was agreed that if Xinlu should fail to pay the deposit by that date, two consequences would follow: first, Xinlu and Mr Wang would pay Rmb 20 million to Aoyuan International as compensation; secondly, two specified documents executed by, among others, Mr Wang and Hong Da, would take effect on 23 June 2011.  Of these two documents, the one material for present purposes is a deed of release of the confirmation letter (referred to in paragraph 36 above).  The deed, if and when it took effect, would release Aoyuan Property from all obligations and liabilities under the confirmation letter.

62.  There is no dispute that the third party investor was eventually unable to gather sufficient funds and Xinlu failed to pay the deposit by 23 June 2011 and that, as a result, the deed of release took effect, cancelling the confirmation letter.  Xinlu and Mr Wang paid Rmb 20 million to Aoyuan International as compensation.  The intended sale of Aoyuan International’s shares in Century Profit to Xinlu fell through.

(7) Transfer of the ICBC loan

63.  The failure of the Xinlu transaction meant that Aoyuan International and Mr Wang, via Hong Da, continued to be involved together in the project, even though their relationship had by then all but broken down.

64.  Meanwhile, the repayment date of the ICBC loan had been brought forward to 31 July 2011.  Moreover, there had been events of default under the ICBC loan agreement.  For example, interest on the ICBC loan for the period from 10 June to 9 December 2011 in the amount of HK$40.2 million and management fee in the amount of HK$10.2 million fell due on 10 June 2011 but was unpaid.  Further, Century Profit was supposed to register the pledge of its shares in Beijing Yaohui with a bureau in the Mainland by 10 July 2010 (later extended to 31 March 2011) but this had remained outstanding.  There were also the unauthorised second and third share charges created by Hong Da as referred to above which had not been discharged.

65.  According to Mr Wang, after the Xinlu transaction fell through, he tried to contact ICBC to discuss the ICBC loan but found out, in about late July 2011, that ICBC had been discussing with Aoyuan Property and, because of a confidentiality agreement, could not disclose anything to him.

66.  In fact, Zhen Fu, a subsidiary of Aoyuan Property, was in negotiation with ICBC concerning the acquisition of the loan from the lenders.  On 20 July 2011, Zhen Fu wrote to the lenders offering to acquire the loan.  The offer was guaranteed by Aoyuan Property.

67.  On 28 July, Zhen Fu obtained the formal transfer from the lenders of all the rights and interests relating to the ICBC loan, including all security interests, for a total consideration of HK$713,430,000 paid on the same date, which was slightly less than the full amount due on the loan including interest and charges.  On 29 July, Zhen Fu appointed Soar Wealth as its facility agent and security agent in respect of the loan.  On the same day, ICBC and Soar Wealth separately notified Century Profit that Zhen Fu was the new lender and Soar Wealth the new agent.

68.  Also on 29 July, Soar Wealth, as security agent and pursuant to the mortgage of Hong Da’s shares in Century Profit, appointed the 6^th Defendants herein as receivers and managers over such shares.  In exercise of their powers as such, the receivers thereupon took steps to have the shares transferred to Dynamic, an indirect wholly owned subsidiary of RSM Nelson Wheeler Corporate Advisory Ltd.

(8) The subsequent announcement and correspondence

69.  On 31 July, Aoyuan Property, as required by the listing rules of the Stock Exchange, made a public announcement of the acquisition of the loan by Zhen Fu and the enforcement of the mortgage over Hong Da’s shares in Century Profit.

70.  By a letter also dated 31 July, Messrs Stevenson Wong & Co, acting for Zhen Fu and Soar Wealth, notified Hong Da that Zhen Fu had become the lender and mortgagee in relation to the ICBC loan, that there were events of default under clause 6.1 of Hong Da’s share mortgage and clause 19 of the ICBC loan agreement, and that Zhen Fu had exercised its rights to appoint receivers to arrange for the sale of the mortgaged shares.  A letter was also issued by the same solicitors to Century Profit on the same date giving notice of these matters and stating that the outstanding amount under the loan including charges and costs was HK$745,300,000.

71.  By a letter to Mr Wang and Hong Da dated 1 August, Messrs Stevenson Wong & Co, acting for Aoyuan Property and Aoyuan International, set out a range of complaints about the conduct of Mr Wang and Hong Da in relation to the project and made a number of demands.

72.  On 3 August, Hong Da’s solicitors replied to Messrs Stevenson Wong & Co.  They complained that it was unreasonable for Zhen Fu to enforce against Hong Da’s shares in circumstances where no adequate time had been given to the borrower to arrange for repayment, and that it was also unreasonable and unfair to Hong Da as a minority shareholder for Zhen Fu to enforce only the mortgage of Hong Da’s shares.  The letter went on to state that Hong Da was prepared to pay the sum of HK$745,300,000 mentioned in Messrs Stevenson Wong & Co’s letter of 31 July 2011 subject to a reasonable time being specified for repayment and subject to certain conditions, including that Zhen Fu would hand over all the security rights in relation to the loan.

73.  In a letter to the receivers dated 4 August, Hong Da’s solicitors repeated what they stated in their letter to Messrs Stevenson Wong & Co dated 3 August, and asked the receivers, among other things, to withhold any action concerning Hong Da’s shares in Century Profit.

74.  On 8 August, Messrs Stevenson Wong & Co replied on behalf of Zhen Fu to Hong Da that after receipt of the outstanding amount, it would release Hong Da’s share mortgage. 

75.  On 9 August 2011, the receivers replied to Hong Da’s solicitors that they were not aware of any matter that cast doubt on the validity of their appointment and that they would continue to exercise their powers and discharge their duties under the share mortgage.

76.  The receivers proposed to sell the mortgaged shares by way of tender.  An invitation for expression of interest was published in newspapers on 9 August.

77.  On 11 August, Hong Da’s solicitors wrote to Messrs Stevenson Wong & Co to reiterate that Hong Da was prepared to pay the outstanding amount on condition, inter alia, that all the security rights would be transferred to Hong Da, including Aoyuan Property’s guarantee, the respective mortgages over Aoyuan International’s and Hong Da’s shares in Century Profit, and the pledge of Century Profit’s shares in Beijing Yaohui.

78.  By letter dated 15 August, Messrs Stevenson Wong & Co replied to Hong Da’s solicitors, stating, inter alia, that Hong Da was not entitled to impose conditions for repayment and that unless repayment was made to the receivers, they were entitled to act in exercise of the powers under the share mortgage.

C. THE WRIT AND APPLICATION FOR INJUNCTION

79.  On 15 August 2011, Hong Da caused to be issued a generally indorsed writ of summons against the 1^st to 6^th Defendants.  On the following day, Hong Da took out a summons for an interlocutory injunction to restrain, inter alia, disposition of Hong Da’s shares in Century Profit. 

80.  One of the undertakings offered by Hong Da in the summons was an undertaking (1) to issue a summons seeking relief under Order 14A of the Rules of the High Court by way of declaration that “upon the discharge by payment of the liabilities (if any) owed by [Hong Da] to [Zhen Fu] under the Share Mortgage …, the Defendants shall take all necessary steps to forthwith assign to [Hong Da] the debts owed by [Century Profit] under [the ICBC loan agreement] … and all the rights and benefits of the securities …” and (2) to pay into court within 14 days after issue of that summons the sum of HK$745,300,000 or such other sum as may be directed by the court.

81.  At an urgent hearing on 19 August 2011, the 1^st to 5^th Defendants gave undertakings, inter alia, not to deal with or dispose of Hong Da’s shares in Century Profit and Century Profit’s shares in Beijing Yaohui, until determination of Hong Da’s summons or further order.  Poon J granted an interim injunction in similar terms against the 6^th Defendants.  This summons represents the substantive application before me.  The undertaking offered by Hong Da in the summons mentioned in the preceding paragraph was however not actually given to the court and no Order 14A summons has been issued.

82.  On 30 August 2011, Hong Da took out another summons seeking to join Dynamic as the 7^th Defendant and for an injunction in similar terms against it.  This summons was heard before Yam J on 2 September 2011 who made an order joining Dynamic and granting the injunction sought.  The costs of that summons were reserved for determination with the main summons and therefore fall to be determined by me as well.  I shall deal with this issue of costs at the end of this judgment.

83.  The respective position of the parties on the main summons are as follows.  Hong Da seeks an injunction in the same terms as the undertakings given by the 1^st to 5^th Defendants to Poon J and as the injunction granted against the 6^th and 7^th Defendants, without pursuing other parts of the summons.  The 1^st, 4^th and 5^th Defendants, i.e. Aoyuan Property, Aoyuan International and Century Profit, represented by Mr Tong SC and Ms Lau before me, oppose any such injunction.  The 2^nd and 3^rd Defendants, i.e. Zhen Fu and Soar Wealth, represented by Mr Rimsky Yuen SC and Mr Law Man Chung, also oppose the grant of any injunction.  The receivers and Dynamic, represented by Ms Elaine Liu, take a neutral stance and agree to abide by the outcome.

D. PRINCIPLES GOVERNING INTERLOCUTORY INJUNCTION

84.  The principles governing the exercise of the powers of the court in relation to interlocutory injunction are well established in American Cyanamid Co v Ethicon Ltd [1975] AC 396 and numerous cases decided since.  These principles require me to have regard to whether there is any serious issue to be tried, the adequacy of damages for the parties and the balance of convenience.

E. THE EXISTENCE OF A SERIOUS ISSUE TO BE TRIED

85.  The first question I deal with is whether there is a serious question to be tried in relation to Hong Da’s claim and the reliefs sought.

86.  I remind myself that the test of serious issue to be tried is “not a very steep hurdle” (Re Billion Shipping Ltd [2003] 2 HKLRD 674 per Chu J at para 28) and that so long as there is a serious issue it matters not whether the court thinks that the plaintiff’s chances of success at trial are 90% or 20% (Alfred Dunhill Ltd v Sunoptic SA [1979] FSR 337 at 373 per Megaw LJ).

87.  It is not in dispute that in general, a creditor who has more than one security for his debt is entitled to choose which security to enforce.  China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536, 545 illustrates the application of this principle where the creditor has the benefit of a guarantee and a share mortgage. 

88.  In the case of Hong Da’s share mortgage, express provision reflecting this principle is made in clause 15.4 which provides:

“The Mortgagor waives any right it may have of first requiring any [lender] to proceed against or enforce any other rights or security or claim payment from any person before claiming from the Mortgagor under this Deed.”

89.  Indeed, Mr Leong has frankly accepted before me that if ICBC had remained the creditor and had sought to enforce Hong Da’s share mortgage for recovery of the full amount of the loan, he could have no complaint.  Hong Da’s complaint, therefore, lies not so much in the fact that its shares and its shares only are being enforced against for the full amount of the debt, but in what it says are special features which give rise to a number of causes of action against the Defendants.

90.  Mr Leong contends that the following causes of action arise on the facts of this case: (1) breach of contract; (2) breach of fiduciary duty; (3) breach of a mortgagee’s duty to act in good faith; (4) dishonest assistance; (5) knowing receipt; and (6) conspiracy to injure with unlawful means.  Apart from a mortgagee’s duty to act in good faith, these are also the bases of the claim pleaded in Hong Da’s Amended Statement of Claim in this action.  I shall deal with them in turn below.

91.  I should also mention at the outset that although there have been numerous declarations by Hong Da that it is prepared to pay the outstanding indebtedness, there is as yet no attempt by Hong Da to redeem the mortgage by tendering payment.  In particular, Hong Da does not base its present application on any intended redemption, though it contends that Zhen Fu’s non-acceptance of its offer to pay the debt is indicative of bad faith and ulterior motive – a matter that I deal with below in the context of Hong Da’s complaint about lack of good faith.

(1) Contractual duty

92.  Hong Da has identified three sources of contractual duties on the part of Aoyuan Property and Aoyuan International.

93.  First, it is said that an implied term arises under the first and second amended shareholders’ agreements that Aoyuan Property and/or Aoyuan International shall ensure that Century Profit have necessary funds at all times, and that they shall indemnify Hong Da against any loss suffered as a result of their failure to raise necessary funds for Century Profit.  I am unable to see how such an implied term can possibly arise.  The shareholders’ agreements (as translated) contain the following detailed provisions on funding:

“6.1 Aoyuan Property shall be responsible for arranging funds to meet Yaohui’s need for subsequent increase in its capital, and any expenses arising therefrom shall be borne by Party A and Party B in proportion to their interests in Yaohui.

6.2 Loans from Party A:

(a) The parties confirm that Party A has extended loans to the Company in the sums of RMB460 million and RMB110 million (in its Hong Kong Dollars equivalent) on DD MM 2009 and DD MM 2009 respectively with interest at the rate of 7% p.a.; the RMB110 million loan shall be used for the increase of Yaohui’s capital and, upon completion of relevant procedures for the increase in Yaohui’s capital, to be on-lent by Yaohui to Wangfu for a term of two years with interest at the rate of 7% p.a..

(b) The Company and the Guarantor confirm that the following matters have been completed in accordance with the “Original Shareholders Agreement”:

(i) The Company has paid the consideration in full to Beijing Capital on DD MM 2009 for the acquisition of 62% share in Yaohui, and has paid the sum of RMB110 million (in its foreign currency equivalent) to Yaohui on DD MM 2009 for the increase of Yaohui’s capital; and

(ii) On DD MM 2009, the Company has obtained the business registrations and relevant licences and completed the procedures with other government authorities in respect of the transfer of 62% share in Yaohui and the payment of Yaohui’s registered capital of RMB110 million.

6.3 On the date of signing this Agreement, the Company has obtained shareholders’ loans in the sum of HK$________, and the named shareholders in the left column of the following table are legal holders and beneficial owners of the respective shareholders’ loans in the right column:

Shareholder Shareholder loan (RMB) Percentage

Party A 570,000,000 100%

Party B 0 0%

0 100%

6.4 Loan from Beijing Capital:

(a) Party A and Party B agree that Party A in the name of Aoyuan Property and Wangfu shall jointly provide a “Letter of Guarantee” to Beijing Capital in order to release the “Equity Pledge of Yaohui”.

(b) Party A and Party B agree that if the Company and Wangfu are unable to provide sufficient funds to Yaohui for repayment of the loan from Beijing Capital or for operation of the Project, the management of Yaohui shall first accelerate the speed of the sale so as to obtain return of funds; if there is a need for further funds, the Company shall use its best endeavours to seek financing from banks; if it is necessary to borrow shareholders’ loans from shareholders, interest shall accrue on such shareholders’ loans at 15%.

6.5 Capital arrangements for initial construction works

As for the needs of the Project’s construction works, Party A shall be responsible for providing a shareholder’s loan to Yaohui to ensure that there shall be sufficient funds for resumption of the Project and for subsequent construction works, the amount of the said shareholder’s loan shall be around RMB320 million (subject to actual need of the Project’s construction works), which shall be ready and available for execution upon the management team appointed by Party A taking office in Yaohui, and be sufficient to maintain the construction works of the Project until the end of 2009. After the financings for the Project are in place, Yaohui shall by all suitable means repay the said shareholder’s loan provided by Party A together with the interest accrued thereon as soon as possible.

……

6.7 Save and except as specifically provided in Article 6 herein, the shareholders shall have no obligation to provide any funding to the Company (whether in the form of equity financing or debt financing) or to provide any form of guarantee, compensation, etc.

6.8 Subject to Article 7, should there be any cash flow generated by Yaohui from the Project which is distributable to its shareholders, the shareholders shall be entitled to share the said cash flow in proportion to their respective shareholding in the Company at the time, and shall also bear any corresponding risks in proportion to their respective shareholding in the Company.”

94.  Clause 6.7 expressly provides that both shareholders have no obligation to provide any funding or guarantee other than as specifically provided for in clause 6.  In the present context Hong Da does not rely on any specific provision of clause 6 but seeks to raise an implied term in the shareholders’ agreement.  In my view, such a term would fly in the face of clause 6.7 and is not one which can, even arguably, arise by implication.

95.  Moreover, assuming that obtaining the necessary funding in question, which eventually took the form of the ICBC loan, was the responsibility of Aoyuan Property and Aoyuan International, the parties duly came to specific agreement regarding their relationship which was embodied in the written agreements entered into in connection with the ICBC loan.  It is these documents that set out their relevant rights and obligations.

96.  Secondly, Hong Da relies on clause 14.1 of the ICBC loan agreement as giving rise to an “undertaking” on the part of Aoyuan Property to Hong Da “that Aoyuan Property would be responsible for all the loans owed by Century Profit to the lenders under the [ICBC loan agreement], and Aoyuan Property would indemnify Hong Da against any loss suffered by Hong Da as a result of Century Profit’s failure to repay any loan under the [ICBC loan agreement].”  Clause 14.1 provides:

“14.1 Guarantee and indemnity

The Guarantor [i.e. Aoyuan Property] irrevocably and unconditionally:

(a) guarantees to each Finance Party punctual performance by each other Transaction Obligator of all its obligations under the Finance Documents;

(b) undertakes with each Finance Party that, whenever another Transaction Obligor does not pay any amount when due under or in connection with any Finance Document, the Guarantor must immediately on demand by the Facility Agent pay that amount as if it were the principal obligor in respect of that amount; and

(c) agrees with each Finance Party that if any obligation guaranteed by its is or becomes unenforceable, invalid or illegal, it will, as an independent and primary obligation, indemnify that Finance Party immediately on demand against any cost, loss or liability it incurs as a result of a Transaction Obligor not paying any amount which would, but for such unenforceability, invalidity or illegality, have been payable by it under any Finance Document on the date when it would have been due. The amount payable by the Guarantor under this indemnity will not exceed the amount it would have had to pay under this Clause if the amount claimed had been recoverable on the basis of a guarantee.”

97.  This clause is a promise by Aoyuan Property to each “Finance Party”, which means a lender, the arranger, the facility agent and the security agent of the ICBC loan.  Hong Da is not one of the Finance Parties thus defined; indeed it is not a party to the ICBC loan agreement at all.  It is impossible to see how clause 14.1 gives rise to the undertaking alleged or indeed any undertaking or duty to Hong Da.

98.  The third basis identified for the contractual duty contended for is the counter-guarantee.  I have already concluded above that whether the counter-guarantee was replaced and superseded by the confirmation letter (as Aoyuan Property contends) or was merely supplemented by and co-existed with the confirmation letter (as Hong Da contends) cannot be resolved on the affirmations filed.  For the purpose of this application, therefore, I must proceed on the basis that the counter-guarantee has arguably remained extant throughout, notwithstanding the release of the confirmation letter in June 2011.

99.  Hong Da contends that the counter-guarantee gives rise to, inter alia, a duty on the part of Aoyuan Property not to do anything to harm Hong Da’s interest in Century Profit and in the project, and a duty to keep Hong Da’s interest intact in the event Century Profit defaults under the ICBC loan.

100.  The terms of the counter-guarantee are set out in paragraph 32 above.  It is a promise by Aoyuan Property to compensate Hong Da if it suffers any loss as a result of the enforcement against its shares in Century Profit.  It does not in terms contain the duties alleged by Hong Da. 

101.  Mr Leong contends that when properly construed against the commercial background, the protection afforded by the counter-guarantee must include the duties contended for.  According to him, this background includes the fact that the ICBC loan was borrowed to meet Aoyuan Property’s financing obligations under the shareholders agreements, that the counter-guarantee was part of the quid pro quo for Hong Da’s consent to mortgage its shares in Century Profit as security for the ICBC loan, and that Hong Da had no obligation to agree to grant such mortgage.

102.  Mr Leong urges me to take a purposive approach to construction and bear in mind the background, citing Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222 paras 20 and 31 and Intergulf Express HK Ltd v Delta Asia Credit Ltd (1997-98) 1 HKCFAR 240, 247B-D. 

103.  I readily accept the general principles enunciated in these cases.  Part of the background is the confirmation letter. On Hong Da’s own case, the confirmation letter was created after Mr Wang took the view that the counter-guarantee did not provide sufficient protection to Hong Da.  The confirmation letter specifically spelt out different and additional obligations on the part of Aoyuan Property which were akin to the duties now contended for, including an express term requiring Aoyuan Property to take steps to procure financing so as to avoid enforcement of Hong Da’s share mortgage.  If Mr Leong’s submission were correct, the confirmation letter would be otiose, and Hong Da would have had more comprehensive protection under the counter-guarantee, and such protection would have continued notwithstanding the release of the confirmation letter.  With respect, I do not accept this submission.

104.  Mr Leong further relies on two cases for the proposition that a promise to pay liquidated damages for a specified breach of contract can be interpreted as a promise not to commit that act, which can be restrained by injunction.

105.  In National Provincial Bank v Marshall (1888) 40 Ch D 112, the defendant, on entering the service of the plaintiff bank, executed a bond in a penal sum of £1,000.  One of the conditions of the bond was that the obligor should pay to the bank the sum of £1,000 “as liquidated damages” in case, within two years after leaving the bank’s employment, he should allow himself to be employed in any other bank within twenty miles.  The defendant resigned from the plaintiff bank and immediately entered the service of a rival bank in the same town.  The plaintiff claimed an injunction to restrain the defendant from such employment.  The Court of Appeal upheld the grant of injunction, even though the defendant had offered to pay the penal sum of £1,000.  Their reasoning was that the damages referred to in the bond were in respect of some violation of an agreement.  The purpose of the bond was that if the plaintiff should bring an action, it would not be embarrassed by having to prove actual damage, but should be entitled to recover £1,000 as liquidated damages.

106.  The present case is in my view wholly different because all that the counter-guarantee states is that Aoyuan Property should compensate Hong Da in respect of any loss arising from the mandatory enforcement against its shares.  There is no obligation in the counter-guarantee for Aoyuan Property to strive to prevent enforcement against Hong Da’s shares – that was an obligation found in the confirmation letter, which was ultimately cancelled by agreement.  Nor was there any term in the counter-guarantee making it a breach of contract on Aoyuan Property’s part, requiring the payment of damages, if Hong Da’s shares were enforced against by the mortgagee.

107.  For the same reasons the case of Bath and North East Somerset District Council v Mowlem plc [2004] BLR 153, relied upon by Mr Leong, does not assist Hong Da.  There the court granted the plaintiff an injunction notwithstanding there was a provision for liquidated damages in his favour.  Mance LJ said at para 15: “The agreement on liquidated and ascertained damages is not an agreed price to permit [the defendant] to [breach its contract], and it does not preclude the court granting any other relief that may be appropriate”.  In the present case, the counter-guarantee does not say Aoyuan Property is in breach of contract if the mortgagee enforces against Hong Da’s shares, but merely that Aoyuan Property has to indemnify Hong Da.

108.  Mr Leong has also urged me to avoid a construction that leads to absurdity, but, with respect, I do not see any such absurdity.  I conclude therefore that there is no serious issue to be tried for a claim for injunctive relief on the contractual basis.

(2) Fiduciary duty

109.  Hong Da also contends that in the circumstances that existed Aoyuan Property “and/or” Aoyuan International owed the same duties by way of fiduciary duties to Hong Da.  The pleaded basis was simply that the duties were in the form of undertakings given to Hong Da, who relied on them in entering into the shareholders agreements and in executing the security documents for the ICBC loan.

110.  In his oral submissions, Mr Leong highlighted the following elements of Hong Da’s case: first, Aoyuan Property was responsible for funding the project; secondly, Hong Da was not responsible for funding the project; thirdly, Hong Da nevertheless agreed to provide its shares in Century Profit as security for the ICBC loan; fourthly, Hong Da was given the counter-guarantee.  Inherent in this submission is the notion that there was no fiduciary relationship at the outset between the parties when the shareholders’ agreements were entered into and took effect, but that such a relationship arose at the time when the ICBC loan was entered into and when the counter-guarantee was given.

111.  While many cases concerning whether a fiduciary duty exists have been cited to me it is needless to refer to them all here.  The principles seem to me to be relatively settled although their application to the facts may give rise to difficulties in particular cases.  Thus in Bristol & West Building Society v Mothew [1998] Ch 1 at 18, Millett LJ (as he then was) stated:

“… a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”

112.  As Elias J observed in University of Nottingham v Fishel [2000] ICR 1462 at 1490, the obligation of loyalty, meaning the duty to act in the interests of another, is the fundamental feature which, at least in the context of the category of relationship of trust and confidence, marks out the relationship as a fiduciary one.

113.  Mr Leong submits that Aoyuan Property has agreed to subordinate its interests to those of Hong Da by virtue of the counter-guarantee and the confirmation letter.  I accept that the confirmation letter is in effect a kind of subordination agreement, whereby persons giving different securities for a loan agree among themselves against which security the creditor should first have recourse.  But this is subordination in a very different sense.  Aoyuan Property did not by that document agree generally to act in the interests of Hong Da, or subordinate its own general commercial interests to those of Hong Da.  In any event, the confirmation letter has been released by consent for consideration.

114.  In addition, Mr Leong submits that Hong Da has reposed trust and confidence in Aoyuan Property.  Of course Hong Da did find Aoyuan Property to be an acceptable party with whom to enter into commercial relationships via the shareholders agreements and subsequently the counter-guarantee and confirmation letter.  But I do not think it is arguable that the structure of their relationship is such that Hong Da reposed any more trust and confidence in Aoyuan Property than one party to a commercial contract reposes in the other party by agreeing to enter into the commercial relationship in the first place. 

115.  Mr Leong relies on United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 and Chirnside v Fay [2007] 1 NZLR 433 for the proposition that parties to a joint venture may owe fiduciary duties to each other.  That in itself is unexceptional.  A fiduciary relationship may be found in a joint venture where there is the necessary trust and confidence reposed by the participants in one another or where the joint venture is properly regarded as a partnership.  But this simply brings one back to the question whether there is such a relationship here.

116.  I am quite unable to see how some general duty of loyalty arose out of the arrangements for the ICBC loan such that Aoyuan Property became obliged to act in the interests of Hong Da.  The individuals involved were adults of full capacity.  The parties proceeded on an equal footing.  They bargained with each other.  They were legally represented.  At the end, although Hong Da was not obliged to mortgage its shares in Century Profit and nevertheless agreed to do so, Mr Wang sought and managed to secure, on his case, what he regarded as adequate protection under the counter-guarantee and the confirmation letter by way of written contract.  These were superimposed on the original relationship of co-shareholders, and on the relationship of co-surety in respect of the ICBC loan.  But there is no warrant for imposing on these an additional layer of duties of a fiduciary nature.

117.  Mr Leong submits that whether or not a fiduciary duty existed is a fact-sensitive matter, and not one that I ought to determine conclusively at this stage.  I am of course mindful that the issue here is simply whether there is a serious issue to be tried, but I do not accept that once the notion of fiduciary duty is bandied about a serious issue on that point necessarily emerges.  As strict as equity is in holding fiduciaries to the standards of loyalty, so also it is cautious not to strain its principles beyond their proper spheres by extending them to ordinary commercial transactions.

118.  I am not saying that fiduciary relationships can never arise out of commercial transactions, and I have not lost sight of the following observations of Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 99-100:

“There has been an understandable reluctance to subject commercial transactions to the equitable doctrine of constructive trust and constructive notice. But it is altogether too simplistic, if not superficial, to suggest that commercial transactions stand outside the fiduciary regime as though in some way commercial transactions do not lend themselves to the creation of a relationship in which one person comes under an obligation to act in the interests of another. The fact that in the great majority of commercial transactions the parties stand at arm’s length does not enable us to make a generalization that is universally true in relation to every commercial transaction. In truth, every such transaction must be examined on its merits with a view to ascertaining whether it manifests the characteristics of a fiduciary relationship.”

119.  But it seems to me that the following passage in the judgment of Dixon CJ, McTiernan and Fullagar JJ in Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 351, quoted by Wilson J in Hospital Products Ltd v United States Surgical Corporation, supra, at 119, aptly describes the relationship between Aoyuan Property and Hong Da:

“It cannot be suggested that the plaintiff and the defendant at any stage stood in any fiduciary relationship one to the other. The position is simply that businessmen – or business firms – were engaged in ordinary commercial transactions with each other, dealing with each other, as the saying goes, at arm’s length.”

120.  For these reasons I do not find there to be a serious issue in relation to breach of fiduciary duties either.

(3) Mortgagee’s duty to act in good faith

121.  In its counsel’s initial skeleton submissions, Hong Da further submits that a mortgagee’s powers must be exercised in good faith for the purpose of obtaining repayment of the debt and must not be exercised for an ulterior motive.  It was not then clear what the allegations actually were, but it emerged in the course of the hearing that Hong Da’s complaint is that Zhen Fu was exercising the security rights in bad faith in the sense of exercising them for a purpose other than obtaining repayment as creditor. In particular, Mr Leong says that Zhen Fu is seeking to sell Hong Da’s shares in Century Profit in order to “elbow out” Hong Da from the project.

122.  On behalf of Zhen Fu, Mr Yuen raises the objection that this is not an argument that is fairly open to Hong Da, because it is not pleaded.  In response, Mr Leong says that the ulterior motive has been pleaded in paragraphs 52 and 53 of the Amended Statement of Claim.  In my view, however, paragraph 52 merely seeks to set out the unlawful means for the purpose of the conspiracy plea, and paragraph 53 alleges dishonesty in the sense of knowledge of the existence of fiduciary duties.  They do not in any way raise the argument now relied upon.

123.  No amendment to its pleading has been proffered by Hong Da to add this ground.  Even at the close of the argument, this point remains unpleaded.  This is highly unsatisfactory.  As Ribeiro PJ said in Mak Shiu Tong v Yuen Kwok Ying (2004) 7 HKCFAR 228 at para 41, “[w]here a party invites the court to exercise a discretion on the basis of a case which differs from his pleaded case, the practice of the court has virtually invariably been to require the proposed amendment to be formulated so that everyone can properly see what the proposed new case is”.  It seems to me that this is all the more important where the allegation, as here, is bad faith and improper purposes.  I recognise that it is not uncommon for urgent applications for interlocutory injunction to be made and argued without pleadings, but the excuse of urgency does not apply here. 

124.  Nevertheless, in all the circumstances I consider that I should take this argument into account, having regard to the fact that this is an application for interlocutory injunction and not a trial, and at the same time bear in mind that Zhen Fu may not have had a full opportunity to deal with the point at least so far as the filing of affidavit evidence is concerned.

125.  As a general proposition, it does not seem to me to be in dispute that a mortgagee’s powers are to be exercised in good faith for the purpose of obtaining repayment of the debt.  Precisely what are and are not permissible purposes or motives is however in dispute.

126.  In this connection Mr Leong relies on the decision in Quennell v Maltby [1979] 1 WLR 318.  There the husband mortgaged a property to the bank, and within the mortgage was a covenant against the grant of any lease without the bank’s consent.  The husband nonetheless granted leases to tenants, who later became protected tenants under the Rent Acts.  To evict the tenants so that the house could be sold with vacant possession at a higher price, the husband went to the bank and asked the bank to evict them on the ground of a breach of the covenant in the mortgage. When the bank refused to do so, the wife stepped in and acquired the mortgage from the bank.  Then the wife, as mortgagee, commenced proceedings against the tenants seeking possession of the property on the basis that the leases were granted without the consent of the mortgagee and were therefore void.  The Court of Appeal held against her.

127.  As is evident, the case did not concern the exercise of a mortgagee’s power of sale as such.  Instead, it concerned proceedings brought by the wife, not against the mortgagor for repayment, but against the tenants for possession of the property, and it was the order for possession which the Court of Appeal set aside.  The decision was, if I may respectfully say so, not surprising having regard to the public policy needs to prevent circumvention of the statutory protection afforded to tenants.  As Lord Denning MR said at p.322F:

“So the objective is plain. It was not to enforce the security or to obtain repayment or anything of the kind. It was in order to get possession of the house and to overcome the protection of the Rent Acts.”

Bridge LJ said at p. 323E:

“… on the facts of this case it is as plain as a pikestaff that the purpose of the bringing of these proceedings via Mrs. Quennell is not for her own benefit to protect or enforce the security which she holds as the transferee of the legal charge but for the benefit of her husband as mortgagor to enable him to sell the property with the benefit of vacant possession. In substance she is suing as his agent.”

Templeman LJ said at p. 324E:

“In the present case it is clear from the facts and the evidence that the mortgagee, Mrs. Quennell, is not bona fide exercising her rights and powers for her own purposes as mortgagee but for the purpose of enabling the landlord mortgagor (her own husband) to repudiate his contractual obligations and defeat the statutory tenancy of the tenant which is binding on the landlord. Mrs. Quennell does not even pretend to be acting in her own interests as mortgagee. She brings this action to oblige her husband. In my judgment the court must therefore treat this action, although in form brought by a mortgagee, as an action brought for and on behalf of the landlord mortgagor.”

Because of peculiar circumstances there, the court treated the action as in truth an action by the mortgagor-landlord to evict the tenants. I do not consider that Quennell v Maltby, based as it was on facts which are very far from those of the present case, provides any assistance to Hong Da.

128.  Mr Leong also relies on Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295.  In that case, First City, as the holder of a second debenture, appointed receivers of a company’s assets.  Those receivers removed Pedersen, the principal shareholder and manager of the company.  Pedersen went to consult a person called Russell. Russell’s company, Downsview Nominees Ltd, then acquired the first debenture of the company from a bank and appointed Russell as receivers, not for the purpose of obtaining repayment of the debt, but in order to disrupt the receivership by receivers originally appointed by First City, to prevent the enforcement of the second debenture by First City, and to reinstate Pedersen as managing director of the company.  Upon his appointment Russell announced his intention to trade the company out of its difficulties.  First City then offered to purchase the first debenture from Downsview at a price equivalent to the amount outstanding on it, or to sell the second debenture to Downsview at a price equivalent to the amount outstanding on it.  This was refused by Downsview but the court eventually made an interlocutory order, apparently pursuant to First City’s right as a puisne encumbrancer to redeem a prior encumbrance, for Downsview to assign the first debenture to First City on terms.

129.  Upon the trial of the action against Downsview and Russell for damages for breach of duties, the trial judge made the following crucial finding about Russell:

“His intention in urgently acquiring the [first] debenture and accepting appointment as receiver was not for the purpose of enforcing the security under the [first] debenture but for the purpose of preventing the enforcement by the plaintiffs of the [second] debenture.” (see pp.309A)

This was emphasised by Lord Templeman (at p. 314E) as a finding that showed that the defendant in question did not exercise his powers for proper purposes. The facts show therefore that neither Downsview nor Russell was acting in any way to try to get repayment of the first debenture.

130.  On the other hand, where a mortgagee proposes to sell the assets, there are cases which suggest that the court does not inquire into the motive of the mortgagee in exercising the power of sale.  Thus in Nash v Eads (1880) 25 Sol Jo 95, Jessel MR said:

“The mortgagee was not a trustee of the power of sale for the mortgagor, and if he was entitled to exercise the power, the Court could not look into his motives for so doing. If he had a right to sell on June 1, and he then said, ‘The mortgagor is a member of an old county family, and I don’t wish to turn him out of his property, and will not sell it at present,’ and then on July 1 he said, ‘I have had a quarrel with the mortgagor, and he has insulted me; I will show him no more mercy, but will sell him up at once’ - if all this was proved, the Court could not restrain the mortgagee from exercising his power of sale, except on the terms of payment of the mortgage debt. The Court could not look at the mortgagee’s motives for exercising his power. Lord Eldon had never said anything of the kind which Vice-Chancellor Stuart supposed him to have said. The Vice-Chancellor was entirely mistaken, and must have been citing the judgments to which he referred from his recollection, without looking at the reports. Of course there were some limits to the powers of the mortgagee. He, like a pledgee, must conduct the sale properly, and must sell at a fair value, and he could not sell to himself. But he was not bound to abstain from selling because he was not in urgent want of his money, or because he had a spite against the mortgagor.”

131.  Similarly, in Belton v Bass, Ratcliffe and Gretton Ltd [1922] 2 Ch 449, the mortgagees of shares in a brewery wanted to confer an option on one of the directors of the brewery to acquire the shares at a future date.  They were advised that they had no power to grant such an option under the mortgage.  So they purported to exercise their power of sale as mortgagees of the shares to the director at a fair price, lending him the purchase money for that purpose. They also gave the director an option to call on them to buy back the shares at the original purchase price.  The director subsequently sold the shares at a profit.  The mortgagor applied to set aside the sale, claiming that the shares or their proceeds were subject to redemption.  It was argued (at p.464) “that the mortgagee exercised his power of sale with an indirect motive, not with the view of realizing his security, but with the object of conferring a benefit upon the defendant Garrard by giving him an option masquerading as a sale”.  Russell J said (at p.466), after referring to Nash v Eads, that:

“I am unable accordingly to inquire into the motives of the defendants Bass, or to hold that the sale is vitiated because they desired to confer a benefit on the purchaser by selling to him upon terms, which included a fair price.”

See also Colson v Williams (1889) 58 LJ Ch 539. These decisions were apparently not cited in Downsview Nominees Ltd v First City Corporation Ltd and as far as I know have not been disapproved.

132.  The authorities have been examined more recently by Lewison J in the decision of the English High Court in Meretz Investments NV v ACP Ltd [2007] Ch 197 at paragraphs 300 to 313 (a decision which was varied on appeal to the Court of Appeal but not in relation to this point: see [2008] Ch 244).  For present purposes it is sufficient to set out his conclusion at paragraph 314, which I gratefully and respectfully adopt:

“Drawing the threads together, it seems to me that none of the authorities to which I was referred gives unequivocal support to Mr Morgan’s submission that the mortgagee must have ‘purity of purpose’. On the contrary, Nash v. Eads and Belton v. Bass are inconsistent with it. So, too, is the statement in Fisher & Lightwood, Law of Mortgages, para 16.13. A dissection of a mortgagee’s motives is likely to be difficult in practice. Moreover, unlike statutory powers conferred for the public benefit, or trustees’ powers conferred for the benefit of beneficiaries (which were two analogies on which Mr Morgan relied) a mortgagee’s powers are conferred upon him for his own benefit. In such circumstances ‘purity of purpose’ may be difficult to achieve. The cases do support the proposition that a power of sale is improperly exercised if it is no part of the mortgagee’s purpose to recover the debt secured by the mortgage. Where, however, a mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage, then in my judgment his exercise of the power of sale will not be invalidated on that ground. In addition I consider that it is legitimate for a mortgagee to exercise his powers for the purpose of protecting his security.”

133.  It follows that for this cause of action, the question at this stage is whether it is arguable that it is no part of Zhen Fu’s purpose to recover the debt that is secured by Hong Da’s share mortgage.

134.  The most important indicator, Hong Da submits, of an ulterior motive on the part of Zhen Fu is its non-acceptance of Hong Da’s offer to take over the ICBC loan together with all the security rights upon payment of the amount due under that loan.  Some explanation of the background to this submission is necessary.

135.  The first mention of such offer came shortly after Hong Da received notice of the assignment of the ICBC loan, when, on 3 August 2011, its solicitors wrote to Zhen Fu’s solicitors stating that Hong Da was prepared to pay off the entire indebtedness under the ICBC loan provided that Zhen Fu transfer to Hong Da all the securities intact that had been granted for that loan.  This indication was repeated in Hong Da’s solicitors’ letter of 11 August 2011.

136.  This offer was rejected by Zhen Fu by its solicitors’ letter of 15 August 2011, which stated that Hong Da was not entitled to impose the conditions for repayment and expressed doubt about Hong Da’s intention and ability to repay having regard to the failure to pay the escrow money in the Xinlu transaction.

137.  In the inter partes summons for injunction taken out by Hong Da on 16 August 2011, Hong Da proposed to give an undertaking, as described in paragraph 80 above, to pay the sum of HK$745,300,000 into court following the issue of the Order 14A summons.  Incidentally the determination proposed to be sought refers confusingly to both the discharge and assignment of the ICBC loan.  In the event, however, the undertaking was not given and formed no part of the interim order granted by Poon J on 19 August 2011.

138.  This matter was not revived until the hearing before me, when Mr Leong in the course of his reply repeated that Hong Da was ready, willing and able to pay off the entire indebtedness provided that Zhen Fu agreed to transfer to Hong Da, upon such repayment, the benefit of all the securities in respect of the ICBC loan including in particular the guarantee given by Aoyuan Property and the mortgage granted by Aoyuan International over the shares it holds in Century Profit.

139.  In response to that “offer”, after the hearing, by its solicitors’ letter dated 28 October 2011, Zhen Fu invited Hong Da and Aoyuan International to settle the indebtedness due to it in proportion to their shareholding in Century Profit, indicating that once full repayment is received in that way, all the securities for the loan would be released.  It appears that Aoyuan Property and Aoyuan International indicated their acceptance of this proposal on 3 November 2011.

140.  Hong Da, however, did not accept this proposal. It repeated its offer made before.  Further correspondence ensued, in which the parties reiterated their respective positions and criticised the stance taken by the other side.  This correspondence, which was copied to the Court, only ended on 22 November 2011.

141.  Mr Tong and Mr Yuen both submit that there is nothing to stop Hong Da from paying the indebtedness in full, and it is open to Hong Da then to contend (without conceding Hong Da would actually be so entitled) that it is subrogated to the rights of Zhen Fu as creditor and security holder, either at common law or by virtue of section 15 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23).

142.  Indeed, it seems to me that Hong Da, having mortgaged its shares for the debt of Century Profit, can claim to be in the position of surety.  It may well be that as such it is entitled to the same remedies for indemnity, the same rights of subrogation and the same right to have security released upon the same grounds as in the case of a guarantor who pledges his credit rather than property.  Thus, for example, if the other securities for the ICBC loan had been released, arguably Hong Da’s share mortgage would also have been released by operation of law: see Smith v Wood [1929] 1 Ch 14, just as a guarantee would be treated as released if other securities were released without the consent of the guarantor: see China and South Sea Bank Ltd v Tan Soon Gin [1990] AC 536, 544-545.  Conversely, if the other securities for the ICBC loan are intact, then after having paid the debt, it would be open to Hong Da to claim contribution with the net result that the debt fell rateably on the securities, which, it seems to me, would be a result akin to Zhen Fu’s proposal of pro rata payment.  This however has not been the subject of argument before me and I need not come to any conclusive view about it.

143.  In my view, Hong Da is entitled to redeem the mortgage by tendering payment.  But in the circumstances it is not entitled merely to declare it is prepared to pay the debt and then draw the conclusion of bad faith from Zhen Fu’s non-acceptance of its “offer”. 

144.  As Hoffmann J (as he then was) said in Gomba Holdings UK Ltd v Homan [1986] 1 WLR 1301 at 1304F-G:

“The security documents give the receivers an unrestricted right to sell at any time. Until actual redemption or at least a valid tender of the redemption price, these powers continue to exist. The fact that the plaintiffs claim that they will shortly be able to redeem cannot give them a right in law to restrict the powers granted to the receivers.”

145.  Hong Da does not perhaps claim such a “right in law”, but it claims that non-acceptance of its “offer” demonstrates bad faith. Given the history of the matter, Zhen Fu is entitled to have legitimate concern about Hong Da’s genuine ability to pay the requisite sum of money and to say: show me the colour of your money.

146.  Such a stance in my opinion does not show that it was no part of Zhen Fu’s purpose to obtain repayment, or that its sole purpose was to “elbow out” Hong Da.  Had that been the purpose Zhen Fu would not have offered to release all the securities upon repayment of the debt by Hong Da and Aoyuan International in the proportion of their shareholding in Century Profit.  There is nothing to show that Zhen Fu would not accept repayment by Hong Da if and when that is tendered.  Mr Yuen at the hearing made it quite clear that Zhen Fu would welcome any payment to be made by Hong Da in discharge of the debt.  Nor do I think that Zhen Fu would be entitled to refuse to allow redemption by Hong Da.

147.  It seems to me that on any view, it cannot be said that no part of the purpose (in the sense of not so much the motive as the effect – the end in view) of Zhen Fu’s acts in enforcing Hong Da’s share mortgage is repayment of the indebtedness.  What the receivers were proposing to do was to advertise the sale of the shares and eventually sell them by tender.  This is very different from what the receiver appointed by the first debenture holder did in Downsview Nominees Ltd v First City Corporation Ltd, supra.

148.  Another circumstance relied upon by Hong Da in suggesting that Zhen Fu had an ulterior motive is that Zhen Fu has only sought to enforce Hong Da’s shareholder mortgage and not the other securities, such as the share mortgage given by Aoyuan International.  There is no dispute that under clause 14.6 of the ICBC loan agreement, the lender may refrain from enforcing any security or enforce the securities in such order as it sees fit. While Hong Da may have a grudge that only its shares are enforced against, it is not the duty of a creditor to enforce rateably against different securities.  The fact that Zhen Fu seeks repayment of the whole debt from the sale of Hong Da’s shares does not detract from the fact that the purpose is to seek repayment of the debt.  In any event, the offer by Zhen Fu for repayment to be made pro rata by the two shareholders of Century Profit to be followed by a release of all securities seems to me to dispose of this complaint.

149.  Further, Hong Da says that Zhen Fu did not demand repayment from Hong Da and did not give it any notice or time to make repayment, which shows that Zhen Fu was not really seeking repayment.  There are several problems with this contention.  First, although the wording of the various letters could have been clearer, Hong Da was under no doubt that repayment was being demanded.  In fact it complains in paragraph 52(e) of its Amended Statement of Claim that “Aoyuan Property caused or permitted Zhen Fu to repeatedly demand Hong Da to repay the entirety of the said loans”. Secondly, clause 6.3 of the share mortgage of Hong Da’s shares in Century Profit provides that the security agent may, without prior notice to Hong Da, sell or otherwise dispose of all or any part of the mortgaged shares.  That Zhen Fu can sell the shares at any time cannot really be in dispute: see Gomba Holdings UK Ltd v Homan [1986] 1 WLR 1301, 1304-1305.  Thirdly, there is nothing to show that Zhen Fu would not accept any repayment that Hong Da might wish to make, even now.  Notwithstanding that the process for sale by tender was set in motion, there was time for Hong Da to make payment if it had wished to do so.

150.  I conclude therefore that there is no substance in this unpleaded complaint.

(4) Dishonest assistance

151.  Hong Da also alleges that Zhen Fu, Soar Wealth, Aoyuan International and Century Profit have rendered dishonest assistance to Aoyuan Property in its breach of fiduciary duties to Hong Da and are therefore liable to account as constructive trustees on the basis of the principles explained in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

152.  Having regard to the conclusion I have reached above in relation to the existence of fiduciary duties, this head of complaint does not get off the ground.  However, if I had found that fiduciary duties existed on the part of and were breached by Aoyuan Property, I would have held that there were issues to be tried as to whether the other defendants were liable for dishonest assistance.  Mr Yuen’s main contention in this regard is that although there were several directors who were common to the three companies, there is no basis to impute the knowledge of Aoyuan Property to Zhen Fu and Soar Wealth in the absence of a duty on the part of the directors to communicate to Zhen Fu and Soar Wealth their knowledge acquired as directors of Aoyuan Property. 

153.  Mr Leong, however, relies on the “directing mind and will” doctrine and submits that a company is to be attributed the mind and will of the natural person or persons who manage and control its actions: El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 695.  He submits that for this purpose, Mr Guo and Mr Lam are to be treated as the directing mind and will of Zhen Fu and Soar Wealth and that their knowledge is to be treated as the knowledge of Zhen Fu and Soar Wealth.  In my view this contention is not so obviously untenable that I can dismiss it at this stage.  Whether or not it can be established will depend on the facts and evidence that emerge at trial.

154.  Likewise, whether any knowledge attributable to Zhen Fu and Soar Wealth is sufficient to show dishonesty on their part for the purpose of this head of complaint is an issue that cannot be resolved at this stage.

(5) Knowing receipt

155.  Hong Da alleges that Zhen Fu and Soar Wealth are liable in knowing receipt in relation to Hong Da’s shares in Century Profit, because of their knowledge of the breach of fiduciary duties of Aoyuan Property.  My views on this are the same as set out above in relation to dishonest assistance, and need not be repeated.

(6) Conspiracy to injure by unlawful means

156.  Finally, Hong Da alleges that Aoyuan Property, Aoyuan International, Zhen Fu, Soar Wealth and Century Profit together conspired to injure it by unlawful means.  The unlawful means alleged are the breaches of contractual and fiduciary duties.  It follows from my conclusion above that the conspiracy plea adds nothing and requires no separate treatment.

157.  Mr Yuen also submits in relation to conspiracy that the necessary knowledge for the purpose of a conspiracy is lacking on the part of Zhen Fu and Soar Wealth.  For the reasons expressed above, I do not rest my decision on this ground.

(7) Conclusion

158.  It follows that there is in my view no serious issue to be tried in relation to any injunctive relief to prevent the enforcement of the mortgage of Hong Da’s shares in Century Profit.  This is sufficient to dispose of the application before me.  Nevertheless, I would, as briefly as circumstances permit, express my views on the remaining questions.

F. ADEQUACY OF DAMAGES

159.  In American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 408, Lord Diplock said:

“… the governing principle is that the court should first consider whether if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage. If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff’s undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason on this ground to refuse an interlocutory injunction.”

160.  In Wong Chung Ming Development Fund Co Ltd v Profit Surplus Ltd [2009] 3 HKLRD 514 at paragraphs 21 to 22, Le Pichon JA emphasised that the key consideration is whether an award of damages would adequately compensate the party seeking an injunction.  The fact that damages may be assessed at common law for a particular head of loss in question does not necessarily mean that damages is an adequate remedy.

(1) The Plaintiff

161.  If the injunction is not granted, and the enforcement of the mortgage by way of the sale of Hong Da’s shares in Century Profit proceeds, then (assuming it does not purchase them itself) Hong Da will lose those shares and hence the interest in the project that they represent.

162.  On behalf of the 1^st to the 5^th defendants, Mr Tong and Mr Yuen both emphasise that the express terms of the counter-guarantee, the lynchpin of Hong Da’s case, provide for compensation to be paid to Hong Da in the event of enforcement of the share mortgage.  They contend that this shows that the parties themselves contemplate and acknowledge that Hong Da would be adequately indemnified by the payment of monetary compensation for the forced sale of its stake in the project.

163.  However, I do not think that acknowledgment of the availability of a monetary remedy is equivalent to acknowledgment of its adequacy.  The loss suffered would not be easy to assess, given the numerous imponderables about the future of the project.  In addition, there may also be damage to Mr Wang’s commercial goodwill and government connections, and loss of business opportunities arising out of the project, even though the evidence on this is thin.  In short, I would not have concluded that damages was a sufficient remedy for Hong Da.

(2) The Defendants

164.  The question whether if the defendants were to succeed at the trial, they would be adequately compensated under the plaintiff’s undertaking as to damages for the loss they would have suffered as a result of the injunction seems to me to have to be approached separately as regards Zhen Fu on the one hand and Aoyuan Property, Aoyuan International and Century Profit on the other.

165.  So far as Zhen Fu is concerned (and in this context Soar Wealth as its agent requires no separate treatment), its interests are as a creditor of Century Profit and holder of security including the share mortgage of Hong Da.  It has no separate interest in the outcome of the project over and above getting repayment of the debt it is owed.  Indeed I do not understand Mr Yuen to argue to the contrary.  What he submits however is that Hong Da may not be able to honour its undertaking as to damages.  Essentially, he invites the Court to require fortification of the undertaking on the ground that the value of the security will be put at risk.  I shall deal with this in a later section.

166.  Compared to the position of Zhen Fu, the position of Aoyuan Property, Aoyuan International and Century Profit is different.  For convenience I shall refer to Aoyuan Property and Aoyuan International together as Aoyuan below.

167.  What is sought to be enjoined is the enforcement of the share mortgage by the sale of Hong Da’s shares in Century Profit.  This would be a restraint of the exercise of the powers of Zhen Fu as mortgagee.  It is not dispute, however, that damage can be caused by an injunction to other defendants who are not directly enjoined and that the undertaking as to damages properly required of the applicant generally extends to cover such damage.

168.  The affidavit of Mr Lam Kam Tong filed on behalf of the defendants explains that it is estimated that an additional sum of Rmb 1 billion is required to complete the project, that construction had been suspended since November 2010 due, inter alia, to shortage of funds, that with an injunction being granted no party would be likely to inject any further funds, that China Merchants Bank, the financier of the construction of the project, might recall the loan it has made to Beijing Yaohui (which is already in default) and enforce the fixed charge it has over the land, if the injunction is granted, and that Aoyuan Property’s corporate reputation as a developer would be tarnished as the project would become an “abandoned development”.

169.  Against this, Mr Leong argues that these consequences would not be the result of the injunction.  In particular, he says that the concerns that have been expressed by China Merchants Bank are directed to the litigation between the parties, not to any injunction.  Reading the letter literally, that is of course true.  However, in all the circumstances, having regard to the deadlock faced by the project, I am satisfied that is a real risk that the consequences warned by Mr Lam may occur if the injunction is granted.  I do not say that those consequences are absolutely unavoidable: for example, it would presumably be open to Aoyuan Property to pay off the China Merchants Bank’s loan with its own funds, but I do not think that the duty to mitigate losses can extend this far.

170.  It seems to me that the events that may be caused by the injunction may result in losses to Aoyuan Property, Aoyuan International and Century Profit.  If the injunction turns out to have been wrongly granted such losses are unlikely to be adequately compensated by an award of damages.

G. BALANCE OF CONVENIENCE

171.  If my conclusions on triable issues above were different and I had had to consider the balance of convenience, I would have directed myself in accordance with the opinion of Lord Hoffmann in National Commercial Bank of Jamaica v Olint Corp [2009] 1 WLR 1405, where he said:

“[17] … The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. This is an assessment in which, as Lord Diplock said in the American Cyanamid case [1975] AC 396, 408:

‘It would be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relative weight to be attached to them.’

[18] Among the matters which the court may take into account are the prejudice which the plaintiff may suffer if no injunction is granted or the defendant may suffer if it is; the likelihood of such prejudice actually occurring; the extent to which it may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the injunction will turn out to have been wrongly granted or withheld, that is to say, the court's opinion of the relative strength of the parties’ cases.”

172.  I would have exercised my discretion against the grant of an injunction having regard in particular to my views on the relative strengths of Hong Da’s claims for injunctive relief, the fact that the project is deadlocked and in a standstill, the fact that Hong Da has contracted for compensation under the counter-guarantee, the relative dearth of evidence of likely damage to Hong Da other than loss of the shares, and the considerable extent to which Hong Da’s loss of shares can, even if not fully, be substantially compensated by damages.

H. PAYMENT INTO COURT

173.  On behalf of Zhen Fu and Soar Wealth, Mr Yuen submits that if an injunction is granted it should only be granted on the condition that Hong Da, the mortgagor, pays into Court the full amount of the indebtedness secured by the share mortgage.  The basis of this contention is, he submits, the general rule that interlocutory relief will only be granted to a mortgagor who seeks to restrain the mortgagee from exercising his power of sale of the property concerned if the amount secured is paid into court.

174.  That there is such a general rule is not in doubt.  There is a long line of authorities going back at least to Matthie v Edwards (1847) 16 LJ Ch 405.  Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4th ed), paragraph 3-080 explains the rule as an instance of one of equity’s maxims: he who seeks equity must do equity.

175.  Rigidly applied, however, the rule could work injustice, because by requiring a mortgagor to bring into Court the entire amount of the debt before he could obtain an interlocutory injunction to restrain the mortgagee from selling the property, it would in effect put such relief beyond his reach unless he had in store liquid assets at his disposal of a readily realisable value equivalent to the mortgage debt.  In circumstances where there are strong grounds to suppose that the proposed sale is wrongful, such as where it is being done at an obvious undervalue to a purchaser related to the mortgagee, to deny relief because the mortgagor could not come up with requisite surplus assets to pay into Court could be most unjust.

176.  But the rule is not an inflexible rule, as the Court of Appeal made clear in Wong Chun Loong Tony v Lam Kin Ming [1990] 1 HKC 188 at 192A.  What is not so clear is the scope of its application.

177.  In Wong Chun Loong Tony, the mortgagor had given notice of his intention to redeem the mortgaged shares, subject to the release of an option granted to the mortgagee to purchase some of the shares which the mortgagor contended was a clog on the equity of redemption. The judge granted an interlocutory injunction to restrain the sale, without imposing a condition for the payment of the entire amount of the debt into court.  The Court of Appeal held that there were circumstances which could reasonably lead the judge to conclude that the general rule ought to be displaced.  In particular, they considered that there was evidence based on the conduct of the mortgagee itself to show that there was no significant risk to the security for the amount outstanding.

178.  It has been said that the mortgagor need not bring the amount owed into court in order to restrain the mortgagee where it is disputed whether the power of sale is exercisable or where the mortgagee is not exercising his powers in good faith: Fisher & Lightwood’s Law of Mortgage (13th ed), paragraph 30.36; Croft & Johannsson, The Mortgagee’s Power of Sale (2nd ed), paragraph 11.6.  One of the authorities often cited for this proposition is Harvey v McWatters (1948) 49 SR (NSW) 173.  That case concerned the exercise of a power of sale under a bill of sale in respect of certain motor vehicles.  It is unclear from the report what the factual dispute precisely was.  What is reported is that on the mortgagor’s version of events, there had been no default under the bill of sale, whereas on the mortgagee’s version, there had been default.  On the scope of application of the general rule, Sugerman J said:

“The rule in question, or at any rate a somewhat similar rule, is often referred to as “the ordinary rule”. The designation is particularly apt as it seems to me to be a rule which may be said to apply only in the ordinary case. And the ordinary case is, I think, one in which there is no question that default has been made and the power of sale is exercisable, but the only dispute is about the amount due under the mortgage, or the mortgagor desires to challenge the mode in which the mortgagee proposes to exercise his power.” (p.174)

“The rule rests in part upon the absence in the mortgagee of any character of a trustee of his power to sell, and in part upon non-interference, except upon proper terms, with the exercise of an undoubted legal power. So far as concerns cases involving merely a dispute as to the amount due, the underlying reason appears to be simply this (and it is reasoning which is equally applicable whether the injunction sought is interlocutory or perpetual): - The mortgagee has a power of sale, a case has arisen for its exercise, and he is entitled to exercise it. He is entitled to exercise it whether the amount due is that which he claims, or is that which is claimed by the mortgagor. Why should he be restrained from exercising it merely because of a dispute about the amount due, which can be settled when an account is taken later? If the mortgagor wishes to have him restrained he may get this relief upon terms of bringing into Court the amount claimed by the mortgagee. The mortgagor is setting up an equitable (not contractual) right to redeem against the exercise of an undoubted legal power.” (p. 175)

“The considerations which arise where it is sought to restrain a mortgagee from exercising an undoubted legal power do not appear to arise where the existence of the power is itself the subject matter of the dispute. Rather does the matter seem to rest, and the reference to the mortgagee’s being put in safety and to its being an interlocutory application (see also per James L.J. (6)) seem to make it rest, upon the possible inadequacy of the ordinary undertaking as to damages in a suit as between mortgagor and mortgagee. For, if the interlocutory order should turn out to have been wrongly made, the mortgagee (proceeding under a power which, on the face of the mortgage, could have become exercisable) may not merely suffer some loss compensatable by damages, or lose some right in personam, but he may also lose wholly or partly the benefit of a security. The underlying principle, therefore, in such a case appears to be that of compensating the mortgagee by some security equivalent to that which is put in risk.” (p. 177)

179.  In Murad v National Provincial Bank Ltd (1966) EG 233, the digest of the judgment recorded Pennycuick J’s views as follows:

“Suppose there was a property worth 10,000 pounds in mortgage to secure 8,000 pounds, and suppose that the mortgagee threatened to sell that property to his own wife at a price of 1,000 pounds. Was it really the law that in such a case the mortgagor could not apply to the Court to restrain the sale without offering to redeem the mortgage and, indeed, bringing into Court the whole sum of 8,000 pounds? He (his Lordship) was not concerned to decide this point, but if that was the law, it seemed to him to be something of a travesty of justice.”

180.  In my view, the authorities support the conclusion that where the ground for seeking the injunction to restrain the mortgagee is that the mortgagee is acting in bad faith, the ordinary rule does not apply.  No case has been cited to me that shows that the rule applies even in such a situation.  Accordingly, had I found an arguable case of breach of the duty to act in good faith by Zhen Fu, or that an injunction should issue to restrain breaches of contract or of fiduciary duty on its part, I would not have held that Hong Da was required by this rule to pay into Court the entire amount secured by the mortgage.  I would have considered the question whether Hong Da should make payment into Court with reference to the need of compensating Zhen Fu for any part of the security that is put in risk.

181.  Whether payment by the mortgagor into court of the secured debt is itself a sufficient condition for injunction is a different question.  It seems clear that tender or payment into court by way of redemption could in itself be a ground for the issue of an injunction, for upon redemption the power to sell would not be exercisable at all: Duke v Robson [1973] 1 WLR 267.  However, as was made clear to me during the hearing, Hong Da is not seeking to redeem.  There is no payment of or even an offer to pay the amount owed into court.

I. FORTIFICATION OF THE PLAINTIFF’S CROSS-UNDERTAKING AS TO DAMAGES

182.  Had I decided to grant an injunction I would have required fortification of Hong Da’s undertaking as to damages.  In this section I shall briefly set out what amount of fortification I would have ordered. 

183.  In approaching this question I would have placed no weight on the letter from Standard Chartered Bank which stated that as of 12 August 2011, Hong Da had a credit balance of almost HK$760 million in the accounts held with the bank.  This provides no more than a snapshot of the closing balance of the accounts on a particular day without disclosing the source of funds or liabilities.  Despite justified criticisms made by the defendants of the inadequacy of this letter, Hong Da has not produced further information about the credit balance.

184.  On the evidence before me the only asset that Hong Da, a limited company with a paid up capital of only HK$10,000, has is the shares in Century Profit.  Apart from the mortgage securing the ICBC loan, the shares are subject in addition to a second and a third charge securing some HK$880 million of indebtedness in favour of third party creditors.  So far as Zhen Fu is concerned, however, I disregard the subsequent encumbrances since Zhen Fu has priority over them.

185.  The defendants have put before me a schedule showing the possible decrease in the gross and net value of the project, and a table summarising the book debts.  The estimated gross price on a forced sale of the project as at October 2011 is Rmb 3,182 million.  In broad terms the debts of Century Profit and Beijing Yaohui amount to Rmb 2,693 million.  This however includes Rmb 611 million representing the ICBC loan which needs to be excluded in the context of the assessment of Zhen Fu’s position.  On the basis of these figures, the value of the equity attributable to Hong Da’s 47.31% stake in Century Profit (excluding the ICBC loan) would be about Rmb 520 million.

186.  On behalf of Hong Da Mr Leong criticises the figures in the schedule.  Those figures are of course no more than estimates. The main elements of uncertainty there are the drop in value due to market conditions since June 2011 and the discount that may apply on a forced sale. The parties have referred me to numerous press articles giving forecast about economic conditions in Mainland China.  It seems to me that on any view there is a great deal of uncertainty.  There can be no exact science here and the figures given by the defendants do not seem to me to be beyond the range of reasonable estimates.  I also bear in mind that Zhen Fu, as a mortgagee, is entitled to have its security protected.

187.  The figure of Rmb 520 million mentioned above falls below the principal amount of the ICBC loan owing to Zhen Fu, not to mention the interest that would continue to accrue pending trial.  Had I been minded to continue the injunction sought by Hong Da, I would have required Hong Da to fortify its undertaking as to damages by a payment into court broadly covering the potential shortfall to meet the principal, future interest and expenses.

188.  In contrast, so far as Aoyuan Property, Aoyuan International and Century Profit are concerned, in assessing Hong Da’s ability to honour its undertaking as to damages, the fact that its shares in Century Profit are the subject of a second and a third charge for some HK$880 million is a material consideration.  This means that, in the scenario that matters, there would be little equity left in those shares which could be realised for the purpose of paying damages to these defendants.  I would therefore have ordered fortification of the undertaking.  On the basis of the schedule referred to above, Mr Tong says his clients’ loss could be as much as Rmb 696 million in the event of a forced sale of the project.  But the object here is not to give perfect and complete security.  Taking a broadbrush approach, I would have fixed the combined overall amount of fortification at HK$300 million.

J. CONCLUSION ON INJUNCTION

189.  Accordingly I order that the injunction be discharged.  The parties have asked me to fix a hearing for the purpose of handing down the judgment to be followed by argument consequential upon my ruling.  I accede to that request.  This judgment shall therefore be handed down on a date to be appointed following which I shall hear counsel on such consequential orders and directions as may be appropriate.

K. COSTS OF THE SUMMONS DATED 30 AUGUST 2011

190.  The final matter is the costs of the summons dated 30 August 2011 including the costs of the hearing of that summons on 2 September 2011, as referred to in paragraph 82 above.

191.  As it is, since I have decided to discharge the injunction, the costs of this ancillary summons should fall to be paid by the applicant i.e. Hong Da to the defendants.  If I had decided to continue the injunction, I would have treated

the costs of that summons in the same way as the costs of the main application, except that I would not have given any certificate for two counsel for the hearing on 2 September 2011, which seems to me to have been a relatively straightforward and indeed uncontentious proceeding.