EMPEROR SECURITIES LTD v. SMI INVESTMENT (HK) LTD AND OTHERS

HCA 32/2019

[2020] HKCFI 129

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 32 OF 2019

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DECISION

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Application

1.  The Plaintiff, Emperor Securities Limited, by way of summons dated 1 November 2019 (the “Summons”), applied for:

(1)  An order appointing interim receivers over 829,185,517 shares in SMI Culture & Travel Group Holdings Limited (the “Subject Shares” and “SMI Culture” respectively) currently held and owned by SMI Investment (HK) Limited (“SMI HK), the 1^st Defendant but charged to the Plaintiff by way of a Share and Deposit Charge dated 8 September 2016 (the “Share Charge”), with powers limited to the terms as set out in Annex I of the Summons;

(2)  Alternatively, SMI HK be restrained from dealing with or encumbering the Subject Shares.

Material Facts

2.  In essence, the Plaintiff’s case is as follows:

(1)  The Plaintiff extended a term loan and a margin facility to SMI HK. SMI HK’s indebtedness is secured by, inter alia, (i) the guarantee provided by its listed parent SMI Holdings (stock code: 198) and a personal guarantee by Qin Hui, the ultimate controller of the SMI entities and (ii) the Share Charge over the Subject Shares, being a 63.01% shareholding in SMI Culture (stock code: 2366).

(2)  Despite the Plaintiff’s repeated demands for payment, SMI HK, SMI Holdings and Qin Hui had defaulted in their repayment obligations. As of 30 September 2019, the total outstanding indebtedness runs up to HK$311,007,154.61.

(3)  SMI HK is a HK$1 company. Further, SMI Holdings and Qin Hui have been in state of financial turmoil, which is also confirmed by documents recently disclosed by SMI HK pursuant to a disclosure order made by this Court, such as the unaudited results of 2018. The Plaintiff has legitimate concern that it is very likely that the only security of any real value which could be applied towards satisfying the debt is the Subject Shares. As such, preserving the value of the Subject Shares is highly crucial to protecting the Plaintiff’s interests as a secured creditor.

(4)  To the surprise of the Plaintiff, in mid-September 2019, SMI Culture announced two unusual transactions whereby it is proposed that SMI Culture will purchase cinema businesses from SMI Holdings (i.e. its ultimate parent entity and one of the guarantors) and Poly Culture Group Corporation Limited (“Poly Culture”) for around HK$10 billion and HK$3 billion respectively (“the Intended Transactions”). The Plaintiff is very concerned that the Intended Transactions would drastically dilute the Subject Shares from 63.01% to a meagre 1.25% in SMI Culture, destroying the value of the Plaintiff’s key security.

(5)  The Plaintiff concerns that the Intended Transactions, in essence, would transfer value within the failing SMI group (from SMI Culture to SMI Holdings) at the expense of the existing shareholders of SMI Culture, by the issuance of an unusually large number of new shares. This, in and of itself, evinces a clear intention by those in charge of the SMI entities to act in complete disregard of the terms of the Share Charge.

(6)  As such, the Plaintiff’s security interest in the Subject Shares is in jeopardy, and there is imminent and pressing need for interim receivers to be appointed to preserve the value of the Subject Shares. This includes, but is not limited to, allowing independent, court-appointed receivers to consider the terms of the proposed transactions and, if considered necessary, to exercise the various rights attached to the Subject Shares in relation to the Intended Transactions, rather than leaving this crucial and important matter in the hands of SMI HK, who had repeatedly flouted its obligations under the Share Charge in flagrant disregard of the Plaintiff’s interest as a creditor.

3.  As at 30 September 2019, the total principal and interest due from SMI HK to the Plaintiff, under both a loan agreement dated 8 September 2016 (the “Loan Agreement”) and the margin facility under a securities margin account with the Plaintiff, was HK$233,937,278.72 and HK$77,069,875.89 respectively.

4.  Prior to the commencement of these proceedings, despite repeated demands, SMI HK never disputed its indebtedness under the margin account and have failed to fully repay the indebtedness, save that partial repayments totalling HK$182,005,371.17 was made between 2 August 2017 and 7 September 2018.

5.  On 4 September and 13 September 2019, SMI HK delivered 9 cheques totalling HK$19,000,000 to the Plaintiff but they were all dishonoured.

6.  On 6 December 2019, Mr Kenneth Jack Shang filed his first affirmation and for the first time put forward the defence that:

(1)  Over the years, there have been a large number of transactions, including the grant of loan and credit facilities, between the SMI group of companies (and Mr Qin) and the Emperor group of companies.

(2)  Insofar as loan and credit facilities are concerned, loan funds and proceeds were regularly remitted by paying agents (i.e. not the lender) to receiving agents (i.e. not the borrower). This practice led to operational and accounting difficulties and confusion concerning the outstanding amounts under each loan or facility granted by the Emperor entities to the SMI entities or Mr Qin. The Emperor lenders have also made accounting errors, including recording certain payments to SMI entities as loan proceeds advanced under wrong loans or credit facilities, and failing to accurately record repayments made by the SMI companies and Mr Qin.

(3)  The SMI group of companies has made at least HK$717 million in payments to the Emperor group of companies, which far exceed the total liabilities incurred by the SMI group (incurring the liabilities under the facilities which form the subject matter of this Action.).

(4)  Despite requests, the Emperor group has refused to provide the SMI group with statements showing the historical transactions culminating in the outstanding balances under each loan or credit facility, with clear explanations of how each payment made by the SMI group was accounted.

7.  I am of the view that the above defence, on the existing evidence and on proper analysis, cannot stand. First, there is no such general concept in law that a group of companies exists as a single economic entity. Each company has a separate legal entity albeit that it belongs to a group of companies.  Secondly, the burden rests on the Defendants to adduce evidence to demonstrate which of the debts due to the Plaintiff has been settled by their paying and/or receiving agents. No such evidence has been adduced by the Defendants. 

8.  In any event, Mr Chen for the Defendants fairly accepted that at the very least there are serious issues to be tried. I agree with Ms Lam SC for the Plaintiff that, on the existing evidence, the Plaintiff has an overwhelming case.

9.  Further, I also accept Ms Lam SC’s submission that SMI HK has disregarded its other obligations under the Share Charge and the Loan Agreement. SMI HK and Qin Hui have ignored the Plaintiff’s demands, whether communicated verbally to Qin Hui or through the letter issued by the Plaintiff’s solicitors dated 29 March 2019, for:

(1)  SMI HK to procure the appointment of a person nominated by the Plaintiff to be a non-executive director to SMI Culture, in exercise of the Plaintiff’s rights under Clause 6.9 of the Share Charge, or at least a consultant to be appointed to SMI Culture, so that the Plaintiff could have a better picture of the financial position of SMI Culture; and

(2)  SMI HK to procure or give the Plaintiff access to selected books and records of SMI Holdings, SMI Culture and SMI HK, in exercise of the Plaintiff’s rights under Clause 12.1(9) of the Loan Agreement.

10.  Relevantly, I also accept that while the Defendants claimed that the poor performance of SMI Holdings is merely part of a normal business cycle, as a matter of fact, SMI Holdings is on the brink of insolvency and it has not been able to repay the Defendants’ indebtedness under the Loan Agreement and the margin facility due since 2017 and 2018 respectively. In particular:

(1)  The trading of SMI Holdings’ shares has been suspended since September 2018;

(2)  According to its last available annual report for the year 2017, SMI Holdings suffered a loss of HK$266,520,000 in that year, and its current liabilities at the time exceeded its current assets by HK$3,050,152,000;

(3)  Its financial situation has further deteriorated thereafter – the unaudited accounts for the year 2018 recently provided by SMI HK revealed that SMI Holdings’ loss has increased tenfold to about HK$2.7 billion in 2018;

(4)  SMI Holdings has also been embroiled in winding up proceedings since April 2019;

(5)  There are also concerns as to whether SMI Holdings can continue to operate its business. In particular, in September 2019, SMI Holdings announced that it was short of working capital to support its business operations, and the operations of 135 out of 336 cinemas in the Mainland have been suspended;

(6)  The management of SMI Holdings appears to be unstable. Even though it is not uncommon for a board member of a listed company to resign for personal reasons, I agree that the situation of SMI Holdings was quite extraordinary as it involved collective resignation of various executive directors, including its chairman. Presently, its board comprises (i) no chairman, (ii) two executive directors who are new to SMI Holdings; (iii) three INEDs and two NEDs. I agree that this inevitably affects SMI Holdings’ operations, as was partially acknowledged in SMI Holdings’ announcement dated 14 September 2018.

11.  Qin Hui, the ultimate controller of the SMI entities, is also entangled in multiple legal proceedings against him for repayment of substantial debts, and is subject to a 5-year “cold-shoulder order” imposed by the Chinese Securities Regulatory Commission in August 2018.

12.  The financial performance of SMI Culture is also declining:

(1)  SMI Culture’s performance continued to decline as it recorded a substantial loss of around HK$497 million for 2018 and an interim loss of around HK$47.6 million for the first six months of 2019 (compared to a profit of around HK$2 million for the same period in 2018).

(2)  In the latest 2018 annual report, the auditors opined that there were material uncertainties as to whether SMI Culture could continue as a going concern, which partly depends on whether SMI Holdings could achieve its debt settlement plans.

13.  Against the above background, the Plaintiff is seriously concerned that the Subject Shares are the only source of any apparent value to satisfy the debt owed by SMI HK, as SMI Holdings and Qin Hui are likely unable to honour their respective guarantee obligations. It is for this very reason that, understandably, the Plaintiff is keen to safeguard the value of the Subject Shares. In particular, there is a risk that the value of the Subject Shares might be wiped out by reason of the Intended Transactions announced by SMI Culture on 11 September 2019.

14.  On 11 September 2019, SMI Culture announced that it had entered into two memoranda of understanding respectively with (i) SMI Holdings and (ii) Poly Culture to acquire Mainland cinema businesses at the total consideration of around HK$13,000,000,000 to be settled by SMI Culture issuing consideration shares tentatively set at around HK$0.2 per share.

15.  Ms Lam SC for the Plaintiff submitted that the alleged commercial rationale of the Intended Transactions is highly suspicious. While the Plaintiff and the public shareholders of SMI Culture would be the obvious victims with the interests in SMI Culture shares drastically diluted to negligible value, SMI Holdings would stand to be the key beneficiary:

(1)  The Intended Transactions would entail the issuance of 65,000,000,000 new shares (there are presently 1,316,009,349 share s only), thereby drastically diluting the Subject Shares from 63.01% to a meagre 1.25% shareholding in SMI Culture and wholly destroying its value. Needless to say, the shareholding of public shareholders would be diluted to negligible value, and SMI Culture would likely lose its public float.

(2)  The transaction appears to be a restructuring exercise whereby SMI Holdings would hold the cinema businesses indirectly through SMI Culture instead, at the significant expense of the Plaintiff and public shareholders of SMI Culture.

(3)  The alleged diversification of the income stream of SMI Culture, enhancement of shareholder value and creation of effective scale effects are unconvincing. Ms Lam SC for the Plaintiff submitted that it is unclear how SMI Culture could more effectively operate such cinema businesses with only HK$0.2 million in cash and no prior experience when SMI Holdings itself struggled to even keep these cinemas in operation, and almost half of the cinemas to be acquired had already suspended its operations.

16.  By a letter dated 25 October 2019, the Plaintiff demanded SMI HK to explain the details of the Intended Transactions and why the Plaintiff’s prior consent was not sought, which was reissued to SMI HK’s relocated address on 28 October 2019. There was never a substantive response from SMI HK until the Defendants filed the first affirmation of Mr Kenneth Jack Shang on 6 December 2019.

Applicable Legal Principles

17.  The general legal principles are quite well established. In Chen Hongqing v Mi Jingtian & Ors, unreported, HCMP 962/2017, 27 June 2017, M Chan J. at §§46-49 said:

“46. In the case of Chime Corporation Ltd HCMP 4146/2001, 25 June 2003, Kwan J (as she then was) pointed out (at paras 39 and 40 of her judgment) that the power to appoint receivers under s21L is a discretionary power to be exercised flexibly on a similar basis to that of an interlocutory injunction, and that the principles in American Cyanamid apply. The court has to assess and balance the following matters:

(a) if there is a serious question to be tried;

(b) the alleged risks of dissipation of assets;

(c) the current protective regime and its efficacy; and

(d) the risk of damage to (in this case) the Defendants and ACC if the appointment of receivership is made, and whether they can be adequately compensated by a cross undertaking in damages.

47. In Re Zealot & Co Ltd [2008] 1 HKLRD 386, the court further took into consideration factors such as whether there is jeopardy to assets, whether some form of interim protection was required to preserve the status quo, whether some other less invasive form of protection would suffice as an alternative to the appointment of a receiver and of course the balance of convenience.

48. The ultimate and fundamental principle, in deciding whether to grant any interlocutory injunctive or other interim relief, is that the court should take whichever course which appears to carry “the lower risk of injustice if it should turn out that it is wrong” (Music Advance Ltd v Incorporated Owners of Argyle Centre Phase 1 [2010] 2 HKLRD 1041).

49. I have already concluded that there is a serious question to be tried, that Chen has equitable proprietary interest in the Shares under the Pledge Agreement, or as an equitable chargee of the Shares. Consideration will be given to the other matters referred to in Chime Corporation Ltd and in Re Zealot & Co Ltd as being relevant, in so far as they are in issue in this case.”

18.  In the event of default where money is due, one of the remedies available for a chargee including an equitable chargee is the appointment of receiver. In Top One International (China) Property Group Co Ltd & Anor v Top One Property Group Ltd & Ors, unreported, HCA 1244/2009, 16 October 2009 at §73, Poon J (as he then was) said:

“An equitable mortgagee or chargee is entitled to the appointment of a receiver provided that the court is satisfied of his equitable right. The applicant has to make out a prima facie case of an equitable mortgage or charge, prove that the money was due thereon, and bring an action to enforce the security: see Picarda, The Law Relating to Receivers, Managers and Administrators, 4^th edn, at p.380; Sykes, The Law of Securities, 5^th edn, pp.192-199; Gough, Company Charges, 2^nd edn, pp. 28-30.”

19.  The court has discretion to appoint a receiver to protect secured assets when the same are in jeopardy. (See Chen Hongqing v Mi Jingtian & Ors (supra) at §40 per M Chan J.)

20.  Jeopardy to assets can take the form of a potential dilution of shareholding, and whether the dilution of shareholding can be adequately compensated by damages depends on the circumstances of each case. In Employees for whom Zhang Caikui is holding shares in China Shanshui Investment Co Ltd v Zhang Caikui [2017] 5 HKLRD 240, Godfrey Lam J. at §31 said:

“31. Mr Jat submitted that it has not been shown that damages would be an inadequate remedy for the plaintiffs. He submitted that damage suffered by way of dilution of one’s shareholding in a company can be compensated by damages: Leung Pik Wa v Poh Po Lian (unrep., HCA 681/2011, [2011] HKEC 1182, 4 July 2011) at [36]-[39]. But this depends on the circumstances. CSI’s shareholding in Shanshui Cement has been reduced to 25.09%. Any further dilution would remove CSI’s ability to block a special resolution, a loss which would be difficult to quantify in monetary terms….”

21.  Damages may not be an adequate remedy for the loss of a controlling stake in a listed company. In Hengshi International Investments Ltd v Bayspring International Ltd, unreported, HCMP 1916/2015, 18 December 2015, Au-Yeung J at §86 said:

“86. For the cause of action in breach of contract, damages may be adequate remedy. The shares are publicly traded on the Hong Kong Stock Exchange and there would be no difficulty in getting replacement shares or assessing the plaintiff’s loss. However, it is arguable that further unlawful disposal of the plaintiff’s HMI shares would adversely affect the plaintiff’s controlling interest in HMI, in which case, damages may not be an adequate remedy.”

Analysis – Applying the Law to the Facts

22.  I have heard the parties’ respective submissions, in particular, Mr Chen’s very able and comprehensive submissions.  However, I have come to the view that this is a very clear case to appoint an interim receiver over the Subject Shares in order to protect its value. First and foremost, I am of the view that the issuance of the very large quantity of new shares, thus diluting the Subject Shares from 63.01% to 1.25% shareholding in SMI Culture, without the consent of the Plaintiff, is a breach of the Share Charge. Paragraph 4.1(16)(b) of the Share Charge provides:

“4.1 The Chargor hereby covenants with the Lender that so long as part of the Secured Obligations remains outstanding, it will:

(16) procure that except as required by this Charge or the Loan Agreement or in the ordinary course of business, the Company will not carry out any of the following actions and no resolution of the board of directors of the Company or of its general meeting shall be passed to carry out the same unless the consent of the Lender is obtained:

(b) the creation or issue or agree to issue of any shares in the Company or the grant or agree to grant of any options over or right to acquire or subscribe any shares or the uncalled capital of the Company or the issue of any warrant, debentures, securities or other obligations convertible into shares in the Company or enter into any agreement to do any of the same.”

23.  Mr Chen for the Defendants submitted that the issuance of 65,000,000,000 new shares is in the ordinary course of business of SMI Culture. He submitted that first, SMI Culture is a listed company and therefore issuance of new shares to acquire assets is in the ordinary course of its business. Secondly, to acquire cinemas from SMI Holdings is a vertical integration of SMI Culture’s business. I do not accept these submissions.  First, whilst SMI Culture is a listed company and therefore it can issue new shares to acquire assets, this does not make it its ordinary course of business.  Secondly, whilst it may be true that the proposed acquisition of cinemas is a vertical integration of SMI Culture’s businesses, an issuance of shares at over 50 times of its present market capitalization can hardly be said to be an ordinary business transaction by any standard.  SMI Culture does not in its normal course of business enlarge its capital base by 50 times. This is, by any standard, an extraordinary move. I am of the view that Clause 4.1.16(b) is designed to protect lenders against such massive dilution of their securities without their consent.

24.  This Court is particularly concerned that there was no substantive response to the Plaintiff’s letter dated 25 October 2019 which was reissued on 28 October 2019 from the Plaintiff to demand SMI HK to explain the details of the Intended Transactions and why the Plaintiff’s prior consent was not sought. Instead, the Defendants proceeded with the Intended Transaction in disregard of SMI HK’s contractual obligations under the Share Charge.

25.  Ms Lam SC for the Plaintiff submitted that this conduct evinces a blatant intention to deal with the Subject Shares in a manner detrimental and directly contrary to the interests of the Plaintiff as a chargee. This intention is in turn indicative of a wider intention to dissipate the Subject Shares. I am of the view that such complete disregard of the interests of the Plaintiff does not inspire confidence in the existing management of SMI HK and SMI Culture. The Plaintiff is perfectly justified to be concerned that the Subject Shares are in jeopardy.

26.  Secondly, Mr Chen for the Defendants submitted that in determining whether the Subject Shares are in jeopardy, the pertinent issue is whether their monetary value is in jeopardy such that there is a risk of prejudice to the Plaintiff’s security interests as a chargee to recover payment. The reduction of the shareholding percentage from 63.01% to 1.25% does not in and of itself inform the value of the Subject Shares. One must also ascertain the net asset value of SMI Culture. A smaller shareholding of a more valuable company might be worth more than a larger shareholding of a less valuable company.

27.  Mr Chen for the Defendants further submitted that the Plaintiff’s analysis fixates on the reduction of shareholding percentage but has singularly failed to pay any regard to the net asset value of SMI Culture after the completion of the Intended Transactions.

(1)  Assuming the Mainland cinema business to be acquired by SMI Culture has a value equivalent to the consideration payable by SMI Culture (i.e. HK$13 billion, a reasonable assumption since there is no suggestion or evidence that the Intended Transactions are otherwise than bona fide), SMI Culture would receive HK$13 billion in assets as a result of the Intended Transactions.

(2)  A 1.25% shareholding in SMI Culture with the additional HK$13 billion in assets is worth HK$165.2 million, which is more than a 63.01% shareholding in SMI Culture without such assets which is worth HK$135.9 million.

(3)  In such circumstances, quite apart from the value of the Subject Shares being “wholly destroyed”, the completion of the Intended Transaction would enhance the value of the Subject Shares.

28.  I am of the view that the Defendants’ analysis is faulted in a number of ways. First, it fails to take into account the value of the controlling stake as represented by a 63.01% shareholding in a listed company. The massive dilution would have inevitably destroyed such value. It is no answer for Mr Chen for the Defendants to submit that the Plaintiff is not making a proprietary claim over the Subject Shares, the fact remains that the Plaintiff has a security over the Subject Shares which carries with it an important attribute and value, namely, a controlling interest in SMI Culture.

29.  Secondly and importantly, Mr Chen for the Defendants fairly accepted that there is no independent professional valuation report comparing the value of a 63.01% controlling interest in SMI Culture and a 1.25 % interest in SMI Culture after the completion of the Intended Transactions. Ms Lam SC for the Plaintiff submitted that the report prepared by Poly Culture, SMI Holdings and SMI Culture in August 2019 (the “Joint Report”) is a self-serving document.

30.  Ms Lam SC for the Plaintiff further submitted that the Joint Report suffered from a number of serious defects:

(1)  The most glaring defect of the Joint Report is the valuation of SMI’s Holdings’ business, which is based on the earnings of SMI Holdings’ best performing 280 cinemas in 2016 and 2017 of about HK$795 million per annum. Such valuation is skewed in that it fails to take into account the huge losses suffered by SMI Holdings from 2017 to 2019 when (i) the annual loss of SMI Holdings has increased tenfold from about HK$267 million in 2017 to about HK$2.7 billion in 2018; and (ii) the operation of over 100 cinemas had to be suspended due to insufficient funding.

(2)  As such, it appears that SMI Culture is entering into a deal with SMI Holdings to its great disadvantage, by purchasing a failing business at an exceedingly high price. The public shareholders of SMI Culture as well as the Plaintiff stand to be the obvious victims as their shareholdings will be diluted to a negligible percentage.

(3)  Secondly, the views contained in the Joint Report are clearly skewed, as the financial troubles and significant operational losses suffered by SMI Holdings are conspicuously omitted.

(4)  Thirdly, the Joint Report also contained significant calculation errors. It misstated the valuation of SMI Culture to be HK$1.32 billion, when in reality the valuation of SMI Culture should have been HK$103 million with a total number of about 1.32 billion issued shares.

(5)  Fourthly, despite the alleged independence of Poly Culture, the fact remains that (i) the valuation of Poly Film is not supported by any independent professional valuer, (ii) SMI Culture’s acquisition of SMI Holdings’ equity interest in Chengdu Runyun, which is worth HK$10 billion out of the total transaction value of HK$13 billion, is a connected transaction which must be treated with great circumspection. It is noted that Poly Culture has not filed any evidence in support of the Defendants’ position in these proceedings.

31.  This Court is not in a position to resolve the issue of valuation at this stage. However, I am of the view that the Plaintiff, as a commercial lender, has raised legitimate and genuine concerns which have to be addressed by evidence including expert evidence in due course. It is clear to this Court that, prima facie, the Plaintiff’s security interest in the Subject Shares will be jeopardised by the Intended Transactions. The Defendants have not adduced cogent evidence to show that the value of the Subject Shares (including its controlling attribute) will be preserved by the Intended Transaction which is, by itself, a breach of Clause 4.1.16(b) of the Share Charge.

32.  Mr Chen for the Defendants submitted that the Plaintiff does not assert that the Intended Transactions are not bona fide, a very serious allegation as it necessarily impugns the conduct and motives of most of SMI Culture’s board of directors. Absent any direct evidence, an inference of mala fide can be drawn only where such inference is compelling. (See Kwok Hiu Kwan v Convoy Global Holdings Ltd, unreported, HCMP 900/2018, 26 June 2018 at §15 per Harris J.

33.  It is trite that the court will generally not second-guess the correctness of bona fide commercial decisions of a board of directors (see Fountain II Ltd v Ping An Securities Group (Holdings) Ltd, unreported, HCMP 1866/2019, 25 October 2019 at §41 per Recorder Manzoni SC). There is nothing before the Court to suggest that the Intended Transactions are otherwise than bona fide.

34.  There is no dispute about the general proposition that generally the Court will not second-guess the correctness of bona fide commercial decisions of a board of directors. Judges do not leave court rooms and enter into board rooms so to speak. However, it does not mean that secured lenders, like the Plaintiff, cannot come to court to seek judicial intervention to protect the value of their securities if there are real risks of dissipation or jeopardy. These are two different concepts. This is particularly so when such bona fide commercial decision is a breach of a borrower’s contractual obligations vis-à-vis its secured lenders.

35.  The Plaintiff’s real concern is that unless a receiver is appointed, the Intended Transaction would eventually require the approval of SMI Culture’s shareholders, and it is virtually certain that SMI HK would take all requisite steps it can to support the Intended Transactions. The approval will jeopardise the value of the Subject Shares, at the very least the controlling interest will be gone, and constitutes a breach of Clause 14.1.(16)(b) of the Share Charge. I am of the view that, on the existing evidence, such concern is justified.

36.  Ms Lam SC for the Plaintiff submitted that if the Subject Shares are left in the hands of SMI HK, there is a real risk that the Plaintiff’s security interest in a controlling stake in SMI Culture will be jeopardised:    

(1)  It is undeniable that the Plaintiff would suffer irreparable damage from losing its security interest in a controlling stake of a listed company, which is highly valuable in and of itself and cannot be adequately compensated by damages (see Hengshi International Investments Ltd v Bayspring International Ltd (supra) at §86 per Au Yeung J.)

(2)  This is particularly so when the Subject Shares might be the only assets from which the Plaintiff could extract value to satisfy the debt.

37.  Ms Lam for the Plaintiff also submitted that in the circumstances, there is a pressing need for receivers to take over the Subject Shares. Where receivers are appointed over a block of shares, the receivers, acting independently of the parties and under the supervision of the Court, could see how best to exercise the rights attached to the relevant blocks of shares and act in a manner that is necessary to safeguard that investment. (See Employees for whom Zhang Caikui is holding shares in China Shanshui Investment Co Ltd v Zhang Caikui (supra) at §33 per Godfrey Lam J, cited in Chen Hongqing v Mi Jingtian & Ors (supra) at §61 per M Chan J.)

38.  Mr Chen for the Defendants submitted that the Plaintiff should resort to other protective measures under the Share Charge and an interim injunction restraining SMI HK from dealing with the Subject Shares is a less intrusive remedy. This is particularly so because in the context of an appointment of receivers over shares in a company, the outside world might not be able to distinguish between receivers on the grounds of insolvency and receivers appointed for other reasons. In Re Company A & Ors v Company D & Ors, unreported, HCCT 31/2018, 3 October 2018, M Chan J at §2 said:

“2.  Receivership orders may well be the “flavor of the season”, as evidenced by the recent increase in the number of applications made to the court for such orders, but one must not lose sight of the fact that they are generally “draconian” and “invasive” by nature, and should not be easily granted in the absence of solid evidence of the risk of dissipation, or that the application is otherwise justified on clear facts – particularly when there is a less intrusive remedy available.”

39.  Ms Lam SC for the Plaintiff, on the other hand, submitted that on the facts of the present case, interim receivers would be in the best position to see how to safeguard the Subject Shares in the interim, including how to exercise the various rights (including voting rights) attached to the Subject Shares for important matters concerning SMI Culture such as the approval of the Intended Transactions.

40.  In contrast, it would be highly undesirable for a 63.01% block of shares in a listed company to be put in limbo and precluded from expressing its views or otherwise exercising the relevant rights attached thereto on important matters concerning SMI Culture through the shareholder decision-making mechanisms, when such matters would in turn have a significant impact on the value of the Subject Shares themselves.

Balance of Convenience and Exercise of Judicial Discretion

41.  Having considered the issue of alternative remedy carefully, on balance, I am of the view that an interim receiver should be appointed over the Subject Shares. First, although the Intended Transaction is what triggered the present application and is the major concern of the Plaintiff, this Court is also concerned that SMI HK has seen fit to breach the terms of the Share Charge rather blatantly. This includes a clear breach of Clause 4.1.16(b) of the Share Charge and the refusal to accede to the Plaintiff’s exercise of its rights under Clause 6.9 of the Share Charge.

42.  Further, SMI HK has also breached Clause 12(9) of the Loan Agreement by refusing to procure or provide access to all the books and records of the Security Parties (as defined under the Loan Agreement) to the Plaintiff.

43.  Secondly, although the Defendants have offered some explanations, the fact remains that various executive directors of SMI Holdings including its chairman have collectively resigned. The financial position of SMI Holdings, SMI HK and SMI Culture is precarious. Over 100 cinemas of SMI Holdings have been suspended from operation.

44.  Thirdly, the Plaintiff has legitimate concerns that it could not resort to other contractual remedies under the Share Charge as the direct registration of the Subject Shares under its name would trigger an obligation to make a general offer, the difficult or impossibility of selling a controlling stake in SMI Culture without a substantial discount and if it were to exercise voting powers attached to the Subject Shares, it might trigger an obligation to consolidate the Plaintiff’s accounts with SMI Holding’s unhealthy accounts.

45.  Fourthly, I agree that, given the existing financial position and the management of SMI Holdings, SMI Culture and SMI HK, a simple injunction to restrain SMI HK, whether by itself, its servant or agents or otherwise howsoever, from taking any steps to cause or procure the transfer, charge or assignment of the Subject Shares or from otherwise encumbering or dealing with the Subject Shares (save for, in the event Receivers are appointed, complying with the requests of the Receivers) is inadequate to protect the security interest of the Plaintiff.

46.  Fifthly, Mr Chen for the Defendants submitted that the appointment of receivers will carry a stigma which will seriously affect the Defendants’ business operations. Ms Lam SC for the Plaintiff submitted that in addition to the relatively restricted powers to be given to the interim receiver, there is also relative little stigma which may be attached to SMI Culture, since the interim receiver is to be appointed over SMI HK’s shareholding in SMI Culture and not over the assets and business of SMI Culture itself. This is a material distinction which can be clarified by SMI Culture by way of public announcement to avoid confusion by the public.

47.  In fact, under Clause 6.9 of the Share Charge, the Plaintiff is entitled to have all the directors of SMI Culture be removed and SMI Culture has an obligation to procure the appointment of the directors nominated by the Plaintiff to its board.

48.  At the end of the day, the Court has to balance the Defendants’ concern about stigma against the Plaintiff’s right to protect its security. This Court is very concerned about a deliberate breach of Clause 4.1.16(b), Clause 6.9 of the Share Charge and Clause 12(9) of the Loan Agreement, the risk of dissipation of the controlling value of the Subject Shares, the worsening financial position of SMI HK, SMI Holdings and SMI Culture and the lack of proper corporate governance which, on the facts of the present case, posts a risk to the assets of the Defendants.

49.  Sixthly, I agree with Ms Lam SC for the Plaintiff that given the financial position of the Defendants, the importance of the Subject Shares as the only assets which the Plaintiff might extract value to satisfy its debt and the controlling stake represented by the Subject Shares, damages are clearly an inadequate remedy for the Plaintiff.

50.  Seventhly, the Plaintiff is willing to provide the usual undertaking as to damages although Ms Lam SC for the Plaintiff submitted that it is doubtful whether SMI HK would suffer any significant damages due to the appointment of interim receiver to preserve the value of the Subject Shares, bearing in mind that the same would have resulted from the exercise of the Plaintiff’s contractual powers but for the impracticalities faced by the Plaintiff.

51.  Eighthly, I also agree with Ms Lam SC that it would not be desirable for a 63.01% block of shares in a listed company to be put in limbo and precluded from expressing its views or otherwise exercising the relevant rights attached thereto on important matters concerning SMI Culture through the shareholder decision-making mechanisms, when such matters would in turn have a significant impact on the value of the Subject Shares.

Disposition

52.  For all the reasons stated above, I make an order in terms of paragraphs 1 to 3 of the Summons.

53.  I also make a cost order nisi that the Plaintiff is to have the costs of and incidental to the present application to be taxed forthwith, on a party to party basis, if not agreed by the parties with a certificate for two counsel.  This cost order nisi would be made absolute unless the parties apply to vary the same within 14 days from the date hereof.

54.  Finally, it remains for me to thank Ms Lam SC and Ms Chan for the Plaintiff and Mr Chen for the Defendants for their able and helpful assistance.