CHINA INTERNATIONAL CAPITAL CORPORATION HONG KONG SECURITIES LTD v. ZHANG JIE

HCA 2249/2016

[2018] HKCFI 285

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2249 OF 2016

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D E C I S I O N

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Introduction

1.  The present application was made by Marvel Skill Holding Limited (“Marvel Skill”) to intervene in this action, and for leave to vary a Mareva injunction order made ex parte and subsequently continued.

2.  The application was opposed by P, and D remained neutral.

Background

3.  D had maintained a margin account with P for his share trading, and had deposited various securities with P for his margin trading, including shares in a publicly listed company which I will refer to as Tech Pro. 

4.  On 27 June 2016, P issued a margin call notice to D for about HK$52.4m, and at the request of D the margin call deadline was extended several times.  On 28 July 2016, there was a report issued by a short seller having a short position in the stock of Tech Pro accusing Tech Pro of fraud, and although an announcement was made by Tech Pro denying the same, the market reacted negatively.  In the afternoon of 28 July 2016, P started to liquidate all securities still held in D’s margin trading account, using the net proceeds to repay the indebtedness to P, but leaving a shortfall.  On 29 July 2016, P issued a default notice to D seeking repayment of the shortfall.

5.  P obtained an ex parte Mareva injunction on 30 August 2016 against D’s assets up to the value of HK$22,533,762.14 (“Sum”) and issued the writ herein the following day.  The ex parte Mareva injunction was continued in September 2016 by this Court and later varied by consent by DHCJ Paul Lam SC on 24 March 2017 to, amongst other things, cover D’s worldwide assets up to the value of the Sum, plus a disclosure order against D (“Mareva Injunction”).

6.  D filed a defence and counterclaim in November 2016, essentially alleging P was in breach of duty, by failing to sell D’s shares at the same time as another of P’s customers, Mr Peng Rongwu, and/or by selling Mr Peng’s shares in Tech Pro prior to D’s shares, resulting in D suffering losses.  The complaint was that the share price had dropped significantly after or as a result of P’s earlier sale of Mr Peng’s shares in Tech Pro.

7.  On 29 September 2017, P obtained summary judgment against D and D’s defence and counterclaim was struck out (“Summary Judgment”). 

8.  Mr Peng Rongwu is obviously acquainted with D. Mr Peng is a director of Marvel Skill, the present applicant, and had made an affirmation on behalf of Marvel Skill in the present application.

9.  Marvel Skill is a wholly owned subsidiary of a listed company Kingbo Strike Limited (Stock Code :1421) (“Kingbo”). Briefly, Marvel Skill had entered into an agreement with a company called Eternal Green Group Limited (“Vendor”) on 11 May 2016 (“Agreement”), pursuant to which Marvel Skill was to acquire 60% of a company (“Target Company”) for HK$450m, and D was the guarantor of the transaction[1].  Under the terms of the Agreement, amongst other things, the Vendor undertook to assist the Target Company to reorganize two subsidiaries owned by the Target Company.

10.  According to the public announcement made by Kingbo on 11 May 2016 in relation to the Agreement, the Vendor is a BVI company and D was said to own 60% equity interest in the Vendor.

11.  As part of the terms of the Agreement, Kingbo had issued (i) new share certificates for 43m shares in Kingbo to the Vendor or its nominee (“New Share Certificates”) and (ii) a promissory note for HK$34m to be issued to the Vendor or its nominee (“Promissory Note”). There were also “Profit Guarantee” provisions in the Agreement.

12.  As a security for the performance of the obligations of the Vendor under the Profit Guarantee provisions, the New Share Certificates and the Promissory Note were to be held in escrow by an escrow agent pending review of the profit amount at the end of the Profit Guarantee period (“Escrow Documents”). 

13.  On 25 May 2016, D signed on behalf of the Vendor a letter of instructions, notifying Marvel Skill that the Vendor had appointed D as nominee for the issue of the New Share Certificates and the Promissory Note (“Instruction Letter”)[2]. 

14.  The Agreement was said to be completed on 27 May 2016[3]. The maturity date of the Promissory Note was to be one year after the date of issue of the Promissory Note.

15.  The parties to the Agreement subsequently entered into a supplemental agreement dated 13 April 2017 (“Supplemental Agreement”)[4]. As seen in the Supplemental Agreement, the Vendor was to procure the sale of the two subsidiaries of the Target Company to a third party and that the entire consideration was to be paid to Marvel Skill, and pursuant thereto, there were amendments to the terms of the Agreement, in particular to the “Profit Guarantee” provisions.

16.  The profit met the guaranteed minimum and it is Marvel Skill’s case that it is contractually bound to procure the escrow agent to release the Promissory Note and the New Share Certificates of the 43m shares to D.

17.  Marvel Skill issued a summons on 13 November 2017 for leave to intervene, and for the Mareva Injunction to be varied in the following manner:

(i) Marvel Skill do pay the Sum into Court forthwith;

(ii) Marvel Skill be at liberty to pay D forthwith a sum of HK$11,466,237, namely HK$34m less the Sum;

(iii) Marvel Skill be at liberty to procure the escrow agent to release the New Share Certificates for the 43m shares of Kingbo to D forthwith.

18.  P ‘s position was that the Promissory Note and the New Share Certificates or 43m shares were covered by the terms of the Mareva Injunction.  

19.  The Mareva Injunction was served on Kingbo and Marvel Skill became aware of the same.  Marvel Skill said it had been advised not to release the Promissory Note and the Share Certificates to D as that might assist D to dispose of or dissipate his assets in breach of the Mareva Injunction if D chose do so.  Marvel Skill’s case was however that the sum payable to D would well exceed the Sum and that Marvel Skill did not wish to delay in discharging its contractual obligations under the Agreement. 

20.  When the application came before this Court, it was listed on an urgent basis on Friday 17 November 2017, being the “Summons Day” for 15 minutes. 

21.  P was represented by its solicitor Ms Alison Scott while Marvel Skill was represented by its solicitor Mr Jacky Cheung. Although D was said to be neutral, he instructed Counsel Mr Eric Chung to appear on his behalf.

22.  In her written submissions, Ms Scott had submitted that there was no urgency in the application and that the application should be adjourned for argument.  She informed the Court that D was appealing against the Summary Judgment and his appeal was fixed for a hearing on 18 January 2018.  She further indicated to the Court that P was intending to apply to vary the terms of the Mareva Injunction so as to make provision for its legal costs and interest, since according to P, the contractual interest on the judgment sum had accrued to some HK$2m by then, and legal costs incurred by P was over HK$2.

23.  To resolve the matter in so far as Marvel Skill was concerned, there was a preliminary suggestion at the hearing that pending any further argument, the Escrow Documents could be deposited into Court.  This was acceptable to P, but although time was given to Marvel Skill and D to consider, in the end, the parties maintained their original stance.

24.  This Court did not make any immediate order that day, and reserved the decision.

25.  It would appear thereafter on 11 January 2018, P issued a summons to vary the Mareva Injunction to include contractual interest and legal costs.  Further, D’s application for leave to appeal against the Summary Judgment was subsequently dismissed on 18 January 2018 with reasons handed down on 22 January 2018.

26.  Due to these subsequent events, an opportunity was given to the parties to make further submissions, but they declined.  Since the above matters took place after the hearing, they are not relevant for the purpose of this decision.

Discussion

27.  As pointed out by Ms Scott in her submissions, the main ground for Marvel Skill in making the application was that it had to comply with its contractual obligations under the Agreement and/or the Supplemental Agreement.  Under Clause 10.4 of the Agreement, if the Profit Guarantee met, the Vendor and Marvel Skill were to jointly procure the escrow agent to release the Escrow Documents to the Vendor.  As pointed out by Ms Scott, the Agreement and/or the Supplemental Agreement did not attach any penalties for failure to release the Escrow Documents. 

28.  The audited accounts which would trigger release of the Escrow Documents were available in August 2017.  It was only after the Summary Judgement that on 26 October 2017, the sole director of Vendor, namely D, passed a resolution authorising its solicitors Messrs Raymond Chan, Kenneth Yuen & Co (“RCKY & Co”) to hold the 43m shares (“Resolution”)[5].  Although the provisions in the Agreement were referred to in that resolution, it would appear that the authorisation was only in relation to the New Share Certificates and not the Promissory Note/HK$34m.

29.  Then there were two letters of authorisation also of the same date, 26 October 2017, signed by D in his personal name, authorising RCKY & Co to receive and to pay the Sum into Court upon the same being received from Kingbo[6]. On 26 October 2017, RCKY & Co sent a letter to Kingbo stating that they were acting for D and enclosing those letters from D and requesting Kingbo to send them a cheque for the Sum[7].

30.  Apart from passing the Resolution, and those letters sent by D as mentioned above, there was no evidence that there was any action taken by the Vendor to demand the release of the Escrow Documents.

31.  So far as D was concerned, he had stated in his affirmation/s that both the amount of HK$34m/or Promissory Note and also the 43m shares evidenced by the New Share Certificates were all held by D as trustee for other beneficiaries.  Thus his case was that he had no beneficial interest in the same, and was only a trustee.

32.  D was not the Vendor under the Agreement and/or the Supplemental Agreement.  In fact, in his affirmation of 16 December 2016, he had said the sole shareholder of the Vendor is a company called Hong Kong Mingxuan Co Limited, and that D was holding the shares in Hong Kong Mingxuan Co Limited on trust on behalf of others and that he had no beneficial interest in Vendor.

33.  The order that Marvel Skill was seeking was that after paying into Court the Sum, the balance to be paid to D forthwith, and also the New Share Certificates were to be released to D forthwith.  However, the contractual obligations under the Agreement and/or the Supplemental Agreement which Marvel Skill said it had, and if any, would be towards the Vendor.  The Vendor is not a party in the present application.

34.  Ms Scott indicated at the hearing there was no need to adjourn Marvel Skill’s application for further argument, and she stood by her submission that the application was not urgent, and she asked that Marvel Skill’s application be dismissed.

35.  Mr Cheung did not really reply to all those matters raised by Ms Scott.

Conclusion

36.  Having considered all the circumstances of the case, I accept the submissions of Ms Scott, and I find there was clearly no urgency in the application and the application should be dismissed.

37.  Marvel Skill sought costs of this application to be on an indemnity basis.  Mr Cheung argued that Marvel Skill was an innocent third party affected by the Mareva Injunction. 

38.  As mentioned earlier, at the hearing, there was a suggestion for Marvel Skill to deposit all the Escrow Documents into Court, if all it wanted to do was to be relieved of its contractual obligations.  This was however not accepted by Marvel Skill.

39.  Although Marvel Skill said it was an innocent party, it had not succeeded in its application for all those reasons set out earlier, nor was it prepared to deposit all the Escrow Documents into Court.  I do not see why it should be entitled to costs, let alone on indemnity basis. Ms Scott did not seek costs in her skeleton submissions, and in fact changed her position and decided not to seek an adjournment. 

40.  Having considered all the circumstances of this case, I make no order as to costs as between all the parties.