RE HONGKEW HOLDINGS LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

-----------------

----------------------------------

INTERIM DECISION

----------------------------------

1. This is an application by Con-Pac Niaga Sdn Bhd, a Malaysian company, under the provisions of Section 47(1) of the Securities (Disclosure of Interests) Ordinance for payment out of the proceeds of sale of certain shares which were sold following an Order for sale made on the 23rd July 1996 by Mortimer J.

Background

2. Following a power struggle which had emerged in Hongkew Holdings Limited in 1991 and subsequent investigations by the company in 1992, the company requested the assistance of the Financial Secretary in December 1992. As a result on the 14 February 1993 the Financial Secretary appointed an inspector under Section 33 of the Securities (Disclosure of Interests) Ordinance. The inspector reported in June 1993. The report is a lengthy document dealing with a variety of different categories of shares. One of those categories related to registered holdings where the beneficial ownership was in doubt. Holdings in the names of 10 registered shareholders were placed in that category. The total number of shares involved in that category was more than 190 million out of a total issued share capital of 734 million shares. The report recommended that restrictions be placed on 127 million shares. This represented about 17.3% of the issued share capital. That was thus no small proportion of the issued share capital of Hongkew Holdings Limited. The recommendations in the report were accepted and restrictions were imposed.

3. The inspector's report in relation to the present applicant reveals that the applicant claimed to be the beneficial owner of some 6.5 million shares and that it had disposed of its interest in a further 29.5 million shares. The inspector had enquired of the applicant as to how it had acquired its shareholding and where the 6.5 million shares were currently held. He had further requested details of the disposal of the 29.5 million shares. After some delay, the applicant had replied that it had no records and therefore could not reply. From that the inspector concluded that the applicant did not have physical possession of the Hongkew shares and did not know the whereabouts thereof. Not surprisingly all 11.5 million Hongkew shares then standing in the name of the applicant were recommended to be made the subject of the restrictions.

4. For reasons which it is not necessary to go into other than to say that it was in order to enable a scheme for the rearrangement of the company to be implemented, an order was sought by the company for the sale of the shares the subject of the restrictions imposed.

5. As regards the present applicant, all the 11.5 million shares which were the subject of restrictions imposed were sought to be sold. The application was duly served outside the jurisdiction on the present applicant by leave of court.

6. Before the hearing of the application for sale the Financial Secretary lifted the restrictions in respect of some of the shares and a further affidavit was filed by the solicitor of the company indicating that in respect of some others of the shares the company sought to have the restrictions lifted. As a result the order made on the 23rd July was that some of the 11.5, million shares standing in the name of the applicant the subject of the original application would be sold and in respect of others the restrictions would be lifted. The shares which were sold were identified by certificate number of the share certificate.

The Application for payment out of the proceeds of sale

The Form of the application

7. By Summons dated the 26th April 1995 the Applicant sought payment out of the proceeds of 8,600,000 shares. That was a summons issued in M.P. 2523 of 1993. As was pointed out by the Court of Appeal in a similar situation in Killenny Ltd. & others v. Attorney-Gemral that application should have been made by originating summons: see Order 92 r.5(2) Rules of the Supreme Court. There was no pending cause or matter in M.P. 2523 of 1993 since those proceedings would have come to an end with the final order of Mortimer J. filed on the 23rd July 1993.

8. For the purposes of these proceedings I am prepared to treat this application as having been commenced by Originating Summons.

The order sought

9. As I have indicated by the summons the Applicant seeks payment out of the proceeds of 8,600,000 shares. The inspector's report dated the 28th May 1993 indicates at para 3.132 that by letter dated the 12th March 1993 the Applicant only claimed to be the owners of 6.5 million. The affirmation of Mr. Kumar, the grounding affirmation for this application, makes scant and passing reference to this. Reference is made to the request by the inspector in 1993 for information as to the location at which the 6.5 million shares were held. All that Mr. Kumar proffers by way explanation are the words "it should be 8,600,000 shares". It may well be that it should be 8,600,000 shares but at the moment that is not apparent. If the applicant is to satisfy the Court that it is beneficially interested in the shares such that the proceeds of sale should be paid out to it then it is necessary for it to explain the reason for the discrepancy between the quantity of shares which the Inspector's report indicates the applicant laid claim to in 1993 and that which it now lays claim to.

10. I note in passing that Mr. Kumar makes a similar comment in relation to the sales of shares. The discrepancy there is between 29,500,000 stated in the report as the number of shares sold by the applicant and the figure of 27,400,000 which is the figure Mr. Kuamar says it should be.

The form of the Order sought

11. If the applicant is to be paid the proceeds of sale of some only of the shares standing in its name in 1993 and ordered to be sold by Mortimer J. in 1993, it is vital that proper identification of the relevant shares is made.

12. In the summons the shares are not identified by number. That it seems to me must be wrong in principle. By definition there was doubt as to the ownership of the shares. That is why the shares standing in the name of the Applicant in 1993 were sold. The doubt as to ownership is hardly reduced by the existence of the difference between the figures of 11.5 million being the number of shares standing in the applicant's name in 1993, 6.5 million being the quantity mentioned in the inspector's report and the figure of 8.6 million being the amount claimed by the applicant to-day. It is most important for the order of the Court to specify to which of the shares sold by order of Mortimer J. the order for payment out relates.

Previous Orders for Payment out

13. A further reason why the form of Order is objectionable is that it appears from the Court file that in September 1994 application was made for the payment of the proceeds of sale of other shares ordered to be sold by Mortimer J. in the same order. That application was by companies who may be identified by the initials H.C.S.B and D.K.S.B. The form of order sought and granted was in similar form to the present application. As a result the proceeds of sale of 32,051,906 shares were paid to H.C.S.B. and of 6 million shares to D.K.S.B. The affirmation on behalf of H.C.S.B. makes reference to the company originally having 32,051,906 shares but a careful reading of it discloses that 500,000 were disposed of and certificates for 31,551,906 were said to be retained and available for inspection. There are a number of what appear to be typographical errors in the list of share certificates contained in the evidence filed in support of the application but at the end of the day it is not clear how the Order came to be made giving H.C.S.B. the proceeds of sale of the extra 500,000 shares. Such an error, if error it indeed be, would have been far less likely if the order had related to specific shares.

14. In the case of D.K.S.B. the position appears to be even worse. The supporting affirmation specifically refers to 5 million shares. One can see that if it were looked at a glance an error might occur because of the typographical layout whereby the grand total might be confused as being a sub-total. Here on the face of it the proceeds of sale of 1 million more shares were paid out than that claimant established entitlement to.

Authenticity of share certificates

15. In 1993 the Applicant stated that it could provide no information as to the location of the share certificates, even of the shares which it claimed to own. Now without any explanation share certificates are said to be available. It is true that the affirmation of Narenjar Kumar a/1 Appadurai has the bald statement "I apologise to this Honourable Court for not providing the aforesaid information set out in this Affirmation earlier to Mr. McMahon." That does not however assist the Court in coming to the conclusion that the share certificates which are tendered in this application are genuine.

16. In the light of the recent decision of the Court of Appeal in Killenny Ltd. & others v. Attorney-General there is no locus standi for the Attorney-General or anybody else for that matter to appear. There is nobody therefore who can assist the Court in even very basic checking of the Applicant's claim to entitlement to the proceeds. In a case like this where this is a doubt on the face of it as to what shares the Applicant's owned and the location of the certificates was, it would seem, not originally known to the Company but 2 year's after the Order the Applicant produces share certificates without a full explanation, then it cannot be said that these share certificates have come from proper custody or from where they would have been expected to be found. The history of previous applications by other parties does not inspire confidence.

17. It seems to me that a bare minimum is that the Applicant must produce prima facie evidence to establish that the share certificates which it produces are genuine. The Court is no position to be able to tell that from a mere perusal of certificates proffered for inspection at the hearing. The Applicant therefore, it seems to me, must prove that these share certificates, which are said in the evidence filed to be available for inspection by the Court at the hearing, are genuine.

18. It is not necessarily of assistance to lay down hard and fast rules as to how the proof should be established, but it would be surprising if a Court were satisfied that a claim to entitlement to the shares had been properly made out unless it were shown that the share certificates had come from proper custody and why they are available now but it was not possible to identify their location in 1993. It would also be appropriate to exhibit the original share certificates to an affidavit after having had them certified as genuine by the Registrar or the Company Secretary of the Company concerned. That certification could be on affidavit.

19. It seems to me that the share certificates should thereafter remain in Court unless there is good reason to the contrary in which case a specific order could be obtained.

Interest

20. The Applicant claims interest on the sums on Court. However by Rule 16(3) of the Supreme Court Suitors' Fund Rules:

21. The Order of Mortimer J. in July 1993 did not provide for interest. I have no reason to suppose that the Order was wrongly drawn up. There is nothing to indicate that the Judge should have acceded to a request for interest. The present Applicant had given the inspector appointed by the Financial Secretary scant assistance and indeed the answers or lack of them to the inspector's enquiries led to the making of the restrictions on the shares. The Applicant was named as a party to be served with a copy of the Notice of Motion and it was served with the proceedings out of the jurisdiction. There is every reason to believe that the applicant was aware of the Order sought and it allowed it to go by default. If the Applicant thought that interest should have been credited to the account it should have made representations to Mortimer J. It took 2 years for the Applicant to make any attempt to secure the proceeds of sale. If the order was made in any way per incuriam then the matter would have to be corrected by the Court of Appeal and not by this Court.

Further steps in these proceedings

22. I propose to give the applicant an opportunity to provide further evidence and renew its application for the proceeds of sale in a form whereby the order will set out the exact shares the proceeds of which are to be the subject of the order. When the applicant has had an opportunity of considering this interim decision the matter may be restored for further directions.