INTERNATIONAL CAPITAL NETWORK HOLDINGS LTD. v. CAPITAL ACE HOLDINGS LTD. AND ANOTHER

HCA 1842/2002 & HCA 2066/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1842 OF 2002

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(Consolidated pursuant to the Order of the
Deputy High Court Judge Woolley dated 7 June 2002)

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D E C I S I O N

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Introduction

1. An injunction order was granted on 15 May 2002 on the plaintiff's ex parte application in the following terms:-

"The 1st and 2nd Defendants must not hold, or purport to hold, an extraordinary general meeting of the Plaintiff as requisitioned by them on 10th April 2002 and announced in the HK-iMail on 8th May 2002, either on 23rd May 2002 or any other day, until further order of the Court".

This is the plaintiff's application to continue that order until judgment in this action or further order. On the other hand, the defendants seek to have the ex parte order discharged. They contend further that no fresh order in the same (or similar) terms should be granted in the plaintiff's favour.

Background

2. The relevant background of this action has been succinctly set out in the judgments of Carlson DJ dated 5 August 2002 and Yuen JA dated 9 August 2002. I will only set out the outline necessary for the understanding of this decision.

3. The plaintiff ("ICN Holdings") is a company registered in the Cayman Islands. It has been listed on the GEM (Growth Enterprise Market) of the Hong Kong Stock Exchange ("HKSE") since 30 November 2001. At the time of listing, ICN Holdings' shares were held in the following manner. First, 39.46% were held by one International Capital Network Investor Limited ("ICN Investor"). There is no dispute ICN Investor is beneficially owned and controlled by Hui Chuen Kin Daniel ("Hui" or "Daniel Hui") and Lui Bing Kin Michael ("Lui" or "Michael Lui"). Secondly, according to ICN Holdings (this is denied by the defendants), 35.54% were held by the defendants' camp:-

(a) 24.33% were held by one International Technology Capital Limited ("International Technology"), a company beneficially owned and controlled by a Ms Chu Oi Wan Cecilia ("Cecilia Chu" or "Ms Chu");

(b) 3.36% were held by D2 (Wise Express Assets Limited ("Wise Express")), a company beneficially owned and controlled by a Ms Leung Yuk Kit ("Mona Leung" or "Ms Leung");

(c) 7.85% were held by D1 (Capital Ace Holdings Limited ("Capital Ace")), a company beneficially owned and controlled by one Digital World Holdings Limited ("Digital World").

Digital World's chairman is Chan Tak Hung ("Teddy Chan" or "Chan"). ICN Holdings' case is that Ms Chu, Ms Leung and Chan are the associates of one Cheung Chi Shing Kenneth ("Kenneth Cheung" or "Cheung") or have been acting under Cheung's control or direction.

4. Thus, according to ICN Holdings, 75% (35.54%+ 39.46%) of its shares were held by the above two sides at the time of listing. The remaining 25% were held by the investing public. Further, ICN Holdings' present board of directors consists of Hui, Lui and 2 independent non-executive directors.

5. Part of ICN Holdings' case relevant to this action is that Cheung's "camp" (which used to hold totally 35.54% of its shares) has acquired and, by 28 March 2002, held about 43.63% of ICN Holdings' shares. ICN Holdings claims herein that its shares have been acquired in breach of Rule 26 of the Takeover Code of the HKSE and s. 26A of the Securities and Futures Commission Ordinance (Cap. 24).

6. The relevant parts of Article 72 of ICN Holdings' articles of association provides:-

"The Board may, whenever it thinks fit, convene an extraordinary general meeting. General meetings shall also be convened on the written requisition of any two or more members of the Company deposited at the principal office of the Company in Hong Kong ... If the Board does not within 21 days from the date of deposit of the requisition proceed duly to convene the meeting, the requisitionist(s) themselves ... may convene the general meeting in the same manner ... ".

On 10 April 2002, the defendants deposited a requisition with ICN Holdings for convening an extraordinary general meeting ("EGM") within 21 days thereof to consider and approve the proposed resolutions set out therein. In the course of the legal proceedings (set out below), it became apparent that others have sided with the defendants in asking for such a general meeting. The defendants and their supporters have been called the requisitionists in the legal proceedings because of their support for the above requisition. The term "requisitionists" will be used herein to refer to the defendants and, depending on the context, may or may not include their supporters.

7. On the other hand, ICN Holdings' board resolved that the EGM be held on 2 December 2002 and notice to such effect was given on 29 April 2002. The requisitionists did not desist and published a newspaper announcement on 8 May 2002 to convene the EGM on 23 May 2002. That last move resulted ultimately in several sets of legal proceedings.

8. Up to now, 3 sets of legal proceedings have been commenced:-

(1) ICN Holdings commenced this action on 15 May 2002 naming Capital Ace and Wise Express as the defendants;

(2) Capital Ace and Wise Express commenced HCA No. 2066 of 2002 ("2066/02") on 30 May 2002 naming ICN Holdings, Hui, Lui, and the other 2 directors of ICN Holdings, Lo Wing Yan William and Wong Wai Ho, as the 5 defendants therein;

(3) on 9 August 2002, International Technology, a company said to be controlled by Ms Chu, took out a petition for ICN Holdings to be wound up.

9. Further to (1) above, on 15 May 2002, ICN Holdings applied for and obtained the above-mentioned ex parte order. On the other hand, further to (2) above (that is, commencing 2066/02), the requisitionists applied for and obtained another injunction order restraining ICN Holdings from issuing any shares, options or other securities convertible into equity securities, save with the approval of the shareholders in general meetings. The defendant directors in 2066/02 were restrained by that order from procuring or effecting the issue of such securities.

10. For completeness, I should mention that the defendants in 2066/02 (that is, ICN Holdings and the other 4 defendants) succeeded in having the 30 May 2002 order discharged on 5 August 2002. The above-mentioned winding-up petition was taken out several days later. Further, on 9 August 2002, Yuen JA ordered the discharge order to be stayed pending the requisitionists' appeal against the discharge. The appeal has been scheduled for hearing on 30 August 2002.

The Issues in this Application

11. The applicable legal principles are undisputed. The minimum first threshold which ICN Holdings has to surmount is to establish there is a serious question to be tried on its claim. The interlocutory relief sought in this application may have the practical effect of disposing of the whole action, in that the EGM convened by the requisitionists would have to be aborted by virtue of the ex parte order. The continuation of that order may well mean the EGM will not be held earlier than 2 December 2002. For this reason, the test referred to in NWL Ltd v Woods [1979] 1 WLR 1294, 1306 is applicable. In short, a heavier burden should be placed on ICN Holdings: in such a case the strength or otherwise of the claimant's case (which is higher than the threshold of a serious question to be tried) must be brought into the balance in weighing the risk of injustice to either party by the grant or refusal of the injunction sought.

12. Secondly, ICN Holdings has a duty to make full and frank disclosure to the court at the ex parte application and a failure to do so usually results in the ex parte order being discharge, with or without a fresh order being granted.

13. Finally, the court has to consider whether the balance of convenience lies in granting or refusing the interlocutory injunction order.

Serious Question to be Tried / Merits of the Claim

14. Irrespective of the proper test applicable to this application, no submission has been made by the requisitionists regarding this aspect. They are correct not to do so in view of the evidence adduced by ICN Holdings. I find that ICN Holdings has established this aspect of its application. It is strictly unnecessary to set out the evidence regarding this aspect but, since it may be relevant to the issues raised under the heading "Cross Undertaking as to Damages", I will mention it briefly in the paragraphs below.

15. ICN Holdings' case has been summed up at paras. 13 and 14 of the skeleton argument for use in this application:-

"It is the Company's case that Kenneth Cheung's group ... has set out to acquire and, on the information presently available, appears to have acquired, voting control of the Company by stealth and that in acquiring such control the group appears to have acted in breach of the Hong Kong Code of Takeovers and of s. 26A Securities and Futures Commission Ordinance.

It is also the Company's case that in fixing the date of the EGM on 2nd December 2002, the Board properly took into account the fact that time was required to complete the investigation into the breach of the Takeover Code and s. 26A of the Securities and Futures Commission Ordinance ... For the meeting to be held before the investigation is completed would not be in the interests of the Company or its shareholders, including in particular the public shareholders, who should be entitled to the benefit of the mandatory offer obligations, or at least to be informed that they have been improperly deprived of that benefit, before they would decide whether and how to vote at the EGM ...".

16. Evidence adduced by the ICN Holdings in support of its case that its shares have been acquired by stealth includes the following. First, Ms Leung, Ms Chu and Chan were known to have a close relationship with Cheung. Ms Leung used to share office with Cheung. She was described by some to be Cheung's "personal assistant". Chan was observed not to have acted independently when making decisions for Digital World but listened to Cheung. Ms Chu was introduced to Cheung to handle his personal business.

17. Secondly, pre-listing events show such association between Cheung and those individuals. A computer disk was found by ICN Holdings in Ms Chu's former office. On the disk was marked "K Cheung I" in Ms Chu's hand-writing. Among the documents stored in the disk were 2 draft declarations of trust showing that Ms Chu was holding shares in International Technology as nominee and Ms Leung was also holding shares in a Three Cheers Limited (a company which held shares in ICN Group's former group holding company before restructuring) as nominee. ICN Holdings contends that the beneficiary referred to in those documents was Cheung, because of (a) the marking on the disk and (b) other supportive documents. ICN Holdings also obtained documents which show that Chan was a nominee of the shares in Digital World. ICN Holdings drew attention to the fact that the above was not positively traversed by the requisitionists in evidence.

18. Thirdly, post-listing events also support ICN Holdings' case. Ms Chu, although apparently the holder of 24.33% of the shares, did not attend the listing ceremony or listing celebration and took no interest in the affairs of ICN Holdings. Companies and individuals believed to be associated with Cheung acquired substantial quantities of ICN Holdings' shares since December 2001. Ms Leung expressly admitted in this action that the requisitionists are seeking to obtain the control of the board of ICN Holdings. The reasons put forward by the requisitionists for doing so are the mismanagement of ICN Holdings by the present management and the alleged intention of Hui to issue ICN Holdings' shares at a low price.

19. Based on the above, ICN Holdings contends that the requisitionists breached Rule 26(1)(d) of the Takeover Code in failing to make a mandatory offer to the other shareholders. Further, ICN Holdings alleges that the defendants and International Technology appear together to control more than 35% of the voting power of ICN Holdings. That being the case, each of them shall not become a substantial shareholder of a registered person which is a corporation unless the Securities and Futures Commission has approved them to do so: s. 26A(1), Securities and Futures Commission Ordinance. Further, under s. 26A(9), a contravention of s. 26A(1) is a criminal offence. ICN Holdings submits that International Capital Network Limited ("ICN Ltd"), a wholly owned subsidiary of ICN Holdings, is a registered person within the meaning of s. 26A(1), because ICN Ltd is registered as an investment adviser under the Securities Ordinance.

Material Non-Disclosure

20. Counsel for the requisitionists identifies six items of material non-disclosure. In short, I disagree with the requisitionists' argument.

21. The first matter said to be material non-disclosure is that ICN Holdings failed to inform the ex parte judge of the existence of an option scheme whereby ICN Holdings could issue options to its employees, up to a maximum of 10% of its issued share capital. The requisitionists further contend that the options issued can be converted into shares which are not subject to any further regulation or scrutiny by the authorities. I agree with ICN Holdings' argument that this matter is only of peripheral significance to its claim herein (which is about the requisitionists' attempt to take over the board by stealth).

22. The second matter of alleged non-disclosure is that the date of the EGM fixed by ICN Holdings (2 December 2002) falls on the first business day after the period of prohibition on the disposal of shares expires. I agree with ICN Holdings that this allegation is factually not established. Hui's affirmation dated 14 May 2002 has expressly referred to (a) the date of expiration of the prohibition (30 November 2002) and (b) the date of the EGM (2 December 2002): paras. 29 and 41 thereof. The relationship between the expiration of the prohibition period and the date of the EGM should have been obvious to the ex parte judge.

23. Thirdly, the requisitionists contend that their reasons for objecting to the EGM being held on 2 December 2002 have not been fairly presented to the ex parte judge. They allege that ICN Holdings merely stated in Hui's affirmation dated 14 May 2002 that the requisitionists considered it unreasonable for ICN Holdings to postpone the EGM to 2 December 2002. The requisitionists' letter dated 2 May 2002, however, accused ICN Holdings of putting forward the purported investigations as an excuse for delaying the EGM. They also stated therein that ICN Holdings lacked the necessary investigation power and such work should be undertaken by the HKSE and/or the Securities and Futures Commission.

24. Fourthly, it is alleged that Hui misled the ex parte judge into believing that the relationship between Cheung and him deteriorated after Cheung made the unwarranted demand in December 2001. This matter is of some importance because Hui claimed that the deterioration in their relationship was caused by Cheung's unwarranted demand. Since it is now admitted that Cheung and Hui attended several social gatherings together after that date, the requisitionists complain Hui should have disclosed those social occasions at the ex parte stage. However, Hui's second affirmation only admits he and Cheung attended the social occasions together but Hui still denies that the relationship between him and Cheung was good. I do not find any proper basis for concluding that Hui has misled the court, or any material non-disclosure.

25. Fifthly, ICN Holdings is said to have failed to disclose that Hui also dealt in ICN Holdings' shares. This is an important matter because the shares allegedly purchased by Cheung could have been purchased by Hui. I accept the submission of ICN Holdings that, although no affidavit evidence has been filed to this effect, ICN Holdings does not accept the alleged share dealings by Hui to be true. Counsel informed me Hui in fact denies this allegation. There is no room for any non-disclosure when the allegedly undisclosed matter has been denied.

26. Finally, ICN Holdings is accused of not having expressly informed the ex parte judge that the 15 May 2002 order would have the effect of permanently preventing the EGM from being held before the expiration of the prohibition period. But again this must have been obvious to the ex parte judge. The making of the 15 May 2002 order, coupled with the EGM having been fixed by ICN Holdings to be on 2 December 2002, would most probably mean there would not be any EGM before 30 May 2002.

Balance of Convenience

27. In the written skeleton submissions, the requisitionists argue that the balance of convenience is against the continuation of the ex parte order, primarily because the purpose of ICN Holdings in delaying the date of the EGM has been achieved. Any new date for holding an EGM will most likely be not much earlier (if not later) than 2 December 2002.

28. That may be so, but if the ex parte order is not continued, it is possible the requisitionists may insist on holding the EGM on some other date(s). First, as stated above, whether the requisitionists can insist on holding an EGM on those other date(s) is a matter in dispute. The holding of any EGM by ICN Holdings when the requisitionists' voting rights at that meeting are uncertain will likely result in chaos at the EGM. The relief sought in this application is not one which can be adequately compensated by way of damages.

29. For the above reasons, I agree with ICN Holdings the balance of convenience is in favour of continuing the ex parte order.

Undertaking as to Damages

30. Just as the court cannot compel an individual to become a plaintiff, it has no power to compel an applicant asking for an interlocutory injunction order to give any undertaking, including an undertaking as to damages. However, since at least the middle of the nineteenth century, it has become a common practice for such applicants to offer an undertaking as to damages when applying for an interlocutory injunction: Hong Kong Civil Procedure 2002, para. 29/1/9 (p. 477) and para. 29/1/21 (pp. 480-1); Spry: The Principles of Equitable Remedies (2001) 6th Ed., p. 482. And although the court cannot compel an applicant to give an undertaking, it can refuse to grant an injunction unless he does so: Hong Kong Civil Procedure 2002, para. 29/1/21 (p. 481). In an exceptional case, such a practice will not be followed, for example, where a plaintiff is impecunious, or of limited means, and thus unable to give a credible undertaking: Hong Kong Civil Procedure 2002, para. 29/1/23; Spry, p. 483. At the end, whether an undertaking is required as a condition turns on the essential justice of the case: Hong Kong Civil Procedure 2002, para. 29/1/23 citing Allen v Jambo Holdings Ltd [1980] 1 WLR 1252.

31. The rationale behind requiring such an undertaking is this. When an injunction order is granted at an interlocutory stage of the proceedings, it is often not possible or appropriate for the court to determine the merits of the applicant's claim. The object of the interlocutory injunction is to protect the applicant against injury for violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty (on the merits of his claim) were resolved in his favour at trial. But the applicant's need for protection must be weighed against the corresponding need of the respondent to be protected against injury resulting from his having been prevented from exercising his own legal rights. While the respondent may not always be adequately protected by the applicant's undertaking (and hence the need for the court to weigh the "balance of convenience"), the undertaking would at least enable him to obtain compensation by way of damages in case it is found that the interlocutory order was wrongly obtained by the applicant.

32. In the present case, ICN Holdings, being the only plaintiff in this action, has given an undertaking as to damages in Schedule 2 of the ex parte order dated 15 May 2002. It was in the following terms:-

"If the Court later finds that this Order has caused loss to the Defendants or any other party and decides that the Defendants or that other party should be compensated for that loss, the Plaintiff will comply with any Order the Court may make".

33. If ICN Holdings were not a listed company but a private company, the dispute between the present board and Cheung's "camp" may properly be considered a shareholders' dispute. Legal proceedings relating to disputes of this kind are usually commenced by shareholders in their own names. Although the company in question is often named as one of the defendants, it usually plays no active part in the proceedings and is often excused from appearing. The real opponents in such litigation are the rivalry shareholders.

34. In this action, ICN Holdings is a listed company and, for that reason, has been able to pray in aid of the Takeover Code and statutory provisions relating to listed securities to bring its claim. A question arises as to whether this action is a genuine "company's action", as opposed to a "shareholders' action". In the latter case, a further question arises as to whether it is appropriate for the company, rather than the shareholders who are really involved in the dispute, to give an undertaking as to damages. In the context of this application, Hui and Lui would have been the proper individuals to give such an undertaking.

35. Counsel for ICN Holdings does not argue that the court has no jurisdiction to make it a condition that a non-party should give an undertaking as to damages. It has been decided that the court can require an undertaking to be given by someone other than the applicant in appropriate cases: Spry, p. 485. Counsel rather submits that to require an undertaking from individuals standing behind a company when the company is the only plaintiff (applicant) will lay down a dangerous precedent and is unfair to the individuals concerned.

36. If it is appropriate for a personal undertaking to be given, consideration would need to be given to the form of the undertaking. This aspect has not been discussed in this application because Hui and Lui have declined to offer an undertaking. If it had been necessary to consider the form of the undertaking, the following would have been proposed for the parties' consideration:-

"If the Court later finds that this Order has caused loss (including costs incurred in this action and this application, whether by the Plaintiff or the Defendants) to the Defendants or any other party (including the Plaintiff's shareholders other than Hui and Lui) and decides that the Defendants or that other party should be compensated for that loss, Hui and Lui will comply with any Order the Court may make" (emphasis supplied).

37. Several matters ought to be mentioned before setting out how this aspect should be determined:-

(a) this point was first raised by the court. Although this was not raised by the requisitionists earlier, they support the point at the hearing of this application;

(b) because this point was not raised before the hearing of 27 August 2002, I thought it fair to raise it with the parties at the earliest opportunity so that proper consideration could be given to it. For that reason, I raised the point shortly after the hearing commenced. It appears from the way the point was dealt with that the parties had sufficient time to consider and deal with the point;

(c) there is a long line of authorities, and by now it must be regarded as trite law, that a company is a separate and independent entity than the individuals standing behind it, whether they be shareholders or directors. For this reason, when a company is the plaintiff, generally the undertaking as to damages should be given by the company and, save in special cases, the undertaking should not be required from either the shareholders or the directors.

38. Point (c) above should be elaborated. If in fact a "shareholders' action" has been dressed up as a "company's action", it will be rare that this will be expressly admitted. Therefore, there will usually be a need to determine if the interlocutory application is related to an action which is more properly regarded as a "shareholders' action". Because the court is dealing with the matter at an interlocutory stage, usually no definitive conclusion on this matter can be satisfactorily reached, save where, for example, the claim is so obviously bad that it is liable to be struck out under the rules of court or inherent jurisdiction. Accordingly, it is necessary to ascertain what the proper test is for determining this matter.

39. Because of point (c) above, namely, it is now settled that a company is a separate and independent entity in law, merely that there is a "serious question to be tried" as to whether the action is more properly to be regarded as a "shareholders' action" is insufficient. The applicable test may be called "a good arguable case", or "a strong prima facie case" or other similar names, but ultimately it depends on an assessment of the circumstances of the case, taking into account everything known to the court and the parties to the action, and bearing in mind the settled principle that a company is a separate and independent entity and that only in special cases should an undertaking as to damages be required from individuals behind the company. The phrase "everything known to the court and the parties to the action" should not be limited to the evidence, but also other matters such as the pleadings (if any) and the way in which the proceedings have been conducted, or the way the case was presented to the court earlier.

40. Having said so, it must be remembered, on the other hand, that an undertaking as to damages can only be invoked when the injunction order is discharged, set aside or refused. Even then, in appropriate cases, it may still be possible for the individual who has given the undertaking to show that he should not be held liable for it.

41. In his reply submissions made at the second day of the hearing (28 August 2002), counsel for ICN Holdings argued that this action is a "company action". Seven reasons were given in support:-

(1) there is compelling and unanswered evidence that the requisitionists sought to acquire voting control by stealth and (at least prima facie) have breached the Takeover Code and committed criminal offence. On the other hand, no such allegation has been made against Hui or Lui;

(2) the requisitionists are prima facie now in a controlling position regarding voting rights and they admitted they sought the EGM to take over the control of the board;

(3) ICN Holdings has been vested with the power to investigate by statute (s. 18, Securities (Disclosure of Interests) Ordinance (Cap. 396)) and has been doing nothing more than exercising such a power. Whether the requisitionists ought to have made a mandatory offer is a matter which can benefit the shareholders generally;

(4) the reason why the requisitionists wanted to control ICN Holdings' board, and why ICN Holdings wanted to prevent this, may be related to the unwarranted demand of Cheung for the sum of $18 million. Although this has been denied by Cheung, it provided a proper basis for ICN Holdings to commence this action;

(5) the board's decision to commence this action was approved by the 2 independent, non-executive directors;

(6) the requisitionists have recently taken out a petition for ICN Holdings to be wound-up. It is likely that because the requisitionists could not achieve their aim, they wanted to bring down ICN Holdings;

(7) there is no or insufficient evidence of bad faith on the part of Hui and Lui, as reflected by the judgment of Carlson DJ.

42. In relation to point (4) above, this was disclosed by Hui in his affirmation dated 14 May 2002 placed before the ex parte judge. Para. 18 thereof reads:-

"On 3rd December 2001, i.e. only the second trading day after the listing ... the Plaintiff's share price dropped ... I found such a fall of 15% in so short a time very unusual, and wondered if someone was orchestrating a massive selling of the Plaintiff's shares ... [Cheung] came to see me on that day after lunch. To my astonishment, he asked me to cause the Plaintiff to pay him HK$18,000,000.00, alternatively to effect payment of this sum to third parties or companies according to his instructions. He said that the Plaintiff would have obtained net proceeds from the listing in the region of HK$38,000,000.00, and that he should be given his 'fair share' ... I found his suggestion absurd and I told him so. I further told him that I would not agree to giving him any money which belonged to the Plaintiff, as this would be tantamount to stealing money from the company. He became very unhappy and thereafter, our relationship deteriorated ...".

Para. 20 thereof says:-

"On 4th December 2001, I met with the Plaintiff company's solicitor ... to discuss means to protect the Plaintiff and its assets, particularly the sum of HK$40,000,000.00 which the Plaintiff company had received ... Later on I instructed [the solicitors] to form a new company in the British Virgin Islands in the name of [ICN Finance]. ICN Finance ... has a total issued and paid-up share capital of HK$40,000,000.00 divided into 40,000,000 shares ... 20,000,000 shares are held directly by the Plaintiff, and the remaining 20,000,000 shares are held by me on trust for the Plaintiff ...".

43. Mona Leung responded to this as follows:-

"... I am very alarmed to learn from Mr Hui's Affirmation that the sum of HK$40,000,000.00 belonging to the Plaintiff has been moved to a company called [ICN Finance] set up by Mr Hui. I cannot understand why this sum ... moved from the Plaintiff into another company and HK$20,000,000.00 worth of shares in [ICN Finance] have to be held by Mr Hui as trustee for the Plaintiff. The arrangement does not make any commercial sense" (para. 25, Ms Leung's affirmation dated 29 May 2002).

Cheung also responded to this at para. 19 of his affirmation dated 29 May 2002:-

"... This is completely untrue. This allegation, together with the remainder of paragraph 18 of Mr Hui's Affirmation, is complete fiction. I never asked Mr Hui to give me any money which belongs to the Plaintiff. As Mr Hui is an educated man and a professional with over 10 years' experience in the corporate finance field, I would expect him to report to the police immediately if ever such an outrageous demand were made. Only a fool would have asked Mr Hui to hand over HK$18,000,000 of the Plaintiff's money. This is money that belongs to a public company in Hong Kong and Mr Hui would be in no position to comply with such a request ... ".

44. This matter was referred to in the judgment of Carlson DJ dated 5 August 2002 as the requisitionists' complaint of:-

"[unusual] and unjustified transfers of funds of the company, principally the transfer of $40 million to the personal control of Mr Hui for the alleged purpose of 'protecting' the funds".

ICN Holdings' counsel said that the learned Deputy Judge erred in concluding this as one of the matters giving rising to a "gradual breakdown of trust and confidence between [the board] and the other founders of the company". But whether he so erred is not relevant to the matters which need to be considered in this application.

45. Counsel for ICN Holdings argues that Hui's allegation if proven reflects adversely on the integrity of Cheung's "camp". Further, counsel argues the allegation was supported by the conduct of Cheung's "camp", such as, acquiring ICN Holdings' shares by stealth and in breach of the Takeover Code and the criminal law. Even if the last-mentioned matters are supportive of ICN Holdings' case that its assets need to be protected from Cheung's "camp", I do not find that it is more likely than not Hui's allegation will be accepted by the trial judge. I rather find that this is a matter over which there are cross-allegations made by the parties. Whereas the alleged unwarranted demand by Cheung was purely verbal (and has been denied), the objective fact that $40 million has been removed from ICN Holdings has been admitted by Hui. It is possible that the trial judge may need to hear Hui's explanation as to how this could protect the sum from being tampered with.

46. Once point (4) above has been shown to be nothing more than a triable issue, I do not find the other points can substantially improve ICN Holdings' position. Point (1) above (evidence which suggests that there was a breach of the Takeover Code and the criminal law) is needed by ICN Holdings to establish its claim, without which ICN Holdings lacks a proper ground for commencing this action. Point (3) above (power vested in ICN Holdings to investigate) falls within the same category. Point (5) above (the independent non-executive directors' approval of the board's decision to sue) has to be weighed against things like whether the directors are truly independent and what information they were given when their approval was obtained. Point (6) above (the winding-up petition) was originally described at para. 12 of the skeleton argument of ICN Holdings as:-

"... plainly a tactical move made after the Defendants' defeat before Deputy Judge Carlson".

That observation must be correct because if the requisitionists had really wanted to bring down ICN Holdings, they need not bother with opposing this application.

47. For the above reasons, with respect, I disagree with the seven grounds put forth by counsel and reject them all. It is to be noted that point (4) above was not referred to at all in the skeleton submissions of leading counsel for ICN Holdings used at the ex parte application. In the Statement of Claim dated 4 July 2002, the alleged unwarranted demand was referred to at para. 26 under the heading "Events after Listing". At para. 41 of the Statement of Claim, ICN Holdings avers that:-

"By reason of the matters pleaded hereinabove, the Board had reasons to believe that [Cheung's] group, together with companies and associates under their control or direction (including the 1st and 2nd Defendants), had acted in breach of Rule 26 ...and ... Section 26A ... ".

This averment is in essence repeated at para. 56 thereof. The need to protect ICN Holdings' assets has (at least expressly) not been pleaded.

48. While skeleton submissions and pleadings are drafted by legal representatives and may not necessarily reflect client's real complaint, it is noted that the gist of ICN Holdings' case put forward before the ex parte judge and in the pleadings is the above-mentioned breaches of the Takeover Code and the criminal law by the requisitionists. The alleged unwarranted demand was referred to by way of background.

49. There are two matters which may reflect on the fides of ICN Holdings' board. First, the reason given by ICN Holdings for fixing the date of the EGM on 2 December 2002 is difficult to understand. ICN Holdings explained that that date was fixed so as to enable it to continue its investigation into the said breaches: para. 41, Hui's affirmation dated 14 May 2002; para. 9, ex parte skeleton submissions; para. 44, Statement of Claim. It is also said that ICN Holdings was entitled to take into account the circumstances surrounding the requisition and the grave harm and chaos of holding an EGM earlier: para. 18, ex parte skeleton submissions; para. 64, inter partes skeleton argument.

50. At the risk of over-simplification, s. 18 of Cap. 396 gives power to a company to serve notice requiring information to be given by individuals as to their interests in that company's shares. S. 24 of Cap. 396 also empowers the company to apply to court for an order subjecting the shares in question to restrictions. But that is all the powers of investigation given to the company by Cap. 396. Under s. 20, the company is under a duty to notify the HKSE and the Monetary Authority of information obtained as a result of s. 18 notices. Presumably, any investigation deemed necessary will then be taken up by the relevant authorities. The affidavit evidence of ICN Holdings stated that there has been on-going investigation by the authorities. Further, at the hearing of this application, counsel disclosed that the Securities and Futures Commission has apparently commenced investigation work and the individuals concerned had been interviewed.

51. So far as the threat to ICN Holdings' assets is concerned, it must have been ICN Holdings' case that the removal of the funds into another company's account was adequate to protect the funds.

52. In these circumstances, it is difficult to understand why ICN Holdings felt it necessary to decide that the date of the EGM should be about 7 months from the date of the notice of meeting (29 April 2002).

53. By reason of the above matters, while it is impossible and undesirable to determine if this action is truly a "shareholders' action", I conclude that the circumstances are such that it is appropriate to make it a condition that the ex parte order should only be continued if and when Hui and Lui give an undertaking in the terms (or similar terms) set out above.

54. I understand from counsel for ICN Holdings that specific instructions have been taken from these two gentlemen and they declined to do so. The only reason given was in gist that they do not consider it right to do so.

Conclusion

55. By reason of the refusal of Hui and Lui to give an undertaking as to damages when invited to do so, I find it appropriate to refuse to continue the ex parte order. The application of ICN Holdings is accordingly refused.

56. The consequence of the dismissal of this application may not be as dire as it may appear to be. Now that a petition for the winding-up of ICN Holdings has been taken out, appropriate directions or orders can be sought in the petition to deal with any differences between the two sides in the interim. For example, if necessary, a provisional liquidator may be appointed under s. 192, Companies Ordinance (Cap. 32).

57. I understand this application was originally scheduled to be heard in January 2003. Since this application has already been dealt with, the hearing dates in January 2003 should be vacated.

Costs

58. Judging from the arguments raised by the parties in the course of the hearing of this application, it is possible arguments will be raised as regards the costs of this application. For this reason, no costs order nisi will be made herein. This, however, does not mean the court is either encouraging or discouraging arguments regarding costs to be advanced. The parties are to decide for themselves if they consider the usual costs order should be adopted.