SERENE INTERNATIONA LTD AND OTHERS v. WINSWAY INC. AND OTHERS

HCMP 3216/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3216 OF 2004

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D E C I S I O N

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1.  This is an application for an interlocutory injunction taken out by the three petitioners in a petition for relief under Section 168A of the Companies Ordinance, Cap. 32.  I will first introduce the parties.

2.  The three petitioners are owned and controlled by Hui Nei Na (“Hui”), her husband Cheung Sek Ki Kenneth (“Cheung”), and Liu Qing respectively.  Together they hold 31% of the shares in the subject company, Hong Kong Century Property Development Limited (“the Company”).

3.  The 1^st respondent, Winsway Inc., is the largest shareholder in the Company, owning 43% of the shares.  The 1^st respondent is owned by the 3^rd respondent, Chen Shenan.  The other major shareholder is the 5^th respondent, Peng Yi Cheng.  He is the brother-in-law of the 3^rd respondent, holding 17% of the shares.  The 4^th respondent, Chan Tim Shing, would still appear to hold 80,000 shares in the Company through his nominee, Plupart International Limited (“Plupart”), although he has agreed to sell all the shares held by Plupart to the 5^th respondent.  The 2^nd respondent, Jiang Hainan, holds 1% of the shares in the Company.  The 6^th respondent is the Company.

4.  The only asset of the Company is its 90% equity interest in a joint venture in the Mainland, which I will call in short “Liuzhou Century”.   Its name in Chinese is 柳州世紀龍地房地產開發有限公司.  Liuzhou Century is the developer of a large commercial and residential complex (“the Development”) in Liuzhou, Guangxi Province, China.

5.  Until May 2004, there were 6 directors of the Company.  They were Lee Fui Ying, the 3^rd respondent, the 4^th respondent, Hui, Cheung and Liu Qing.  The reliefs sought in the petitioners’ summons taken out on 29 December 2004 are as follows:

(1) the respondents be restrained from acting on, implementing or carrying into effect a board resolution of the Company on 7 July 2004 (“the Removal Resolution”), whether within or outside Hong Kong, the effect of which was to remove Hui and Cheung as directors of Liuzhou Century and be replaced by the 5th respondent and the 2nd respondent, and to remove Hui as the chairman of the board of directors of Liuzhou Century and its legal representative and her positions be replaced by the 5th respondent;

(2) the respondents be restrained from alleging or making any representation within or outside Hong Kong that the Removal Resolution was valid, effective or lawful; and

(3) the respondents to forthwith procure or cause to be withdrawn an application made by Liuzhou Century to the State Administration of Commerce and Industrial Bureau (“SACIB”) on 4 August 2004 to effect a change of the directors and legal representative of Liuzhou Century as per the Removal Resolution.

6.  It is not in dispute that this court should apply the principles in American Cyanamid Co v Ethicon Ltd [1975] AC 396.

7.  As the third of the interlocutory injunctions sought is of a mandatory nature, I accept that the petitioners’ case, at least insofar as the complaint of unfair prejudice relates to the interlocutory relief sought, would have to be made out to a higher standard of proof than was required for a prohibitory injunction and that “the court must feel a high degree of assurance that at the trial it will appear the injunction was rightly granted” (Shepherd Homes Ltd v Sandham [1971] Ch 340 at 351G, per Megarry J).

8.  Much evidence has been filed on both sides, each advancing seemingly reasonable explanations to the allegations made by the other.  I do not propose to be drawn in the factual disputes, as it is no part of my function in this application to resolve them.  Nor should I form a provisional view on disputed questions of fact.  Where I have weighed the relative strength of the case of each side to form a view if the petitioners have a strong prima facie case for the purpose of considering if mandatory interlocutory relief should be granted, this is to be done against facts on the available evidence as to which there can be no credible dispute.

9.  A number of complaints are made in the petition of oppressive and unfairly prejudicial conduct by the majority shareholders, apart from the Removal Resolution and the application to SACIB.  They are as follows:

(1) In May 2004, the respondents caused Liuzhou Century to enter into a lease agreement with a Chinese entity that I will call in short “Shin Ju”.  Its name in Chinese is 柳州市龍地銀座百貨有限公司.  By the lease agreement, the department store building of the Development and other parts of the commercial complex were leased to Shin Ju for five years at RMB10 per square metre.  The Petitioners allege this was at a gross under value, and that Shin Ju is owned by the nominees of the 3^rd respondent.

(2) In May 2004, the respondents caused Liuzhou Century to make an advance payment of bonus of RMB2.5 million to an entity that I will call in short “Anching”.  Its name in Chinese is柳州市安青房地產開發有限公司.  Anching is the Chinese partner holding 10% equity interest in Liuzhou Century, and two of its shareholders are the 3^rd respondent’s wife, Peng Lianching and his brother.

(3) In May or June 2004, the respondents caused Liuzhou Century to enter into a management agreement with an entity that I will call in short “Jin He Wan”.  Its name in Chinese is柳州市金河灣物業管理有限公司.  By the management agreement, Jin He Wan was engaged to manage all buildings and facilities in the Development for two years.  The petitioners allege that Ji He Wan is beneficially owned by the 3^rd respondent and his associates.

(4) Between March and April 2004, the 3^rd respondent caused RMB6.8 million in a bank account in Hui’s name, held as the nominee of Liuzhou Century, to be transferred to an account in the name of Lo Kwai Chung, who is the chief accountant of Liuzhou Century.

10.  The respondents have filed evidence in reply to each of these allegations.  I do not propose to set out their answers in detail.  The respondents have also made counter allegations against the petitioners, which I will not enumerate, to which the petitioners have responded in the affirmations filed.  I would limit myself to making one comment.  Insofar as Hui has said in one of her affirmations, as a ground for making this application, that it would appear from the allegations in the petition that the respondents are persons of low standards of commercial morality and to allow them in complete control of Liuzhou Century would cause irreparable damage to Liuzhou Century and thus to the Company, I cannot come to the view on the available evidence that the respondents are persons of low commercial morality.

11.  As regards the above four complaints of unfair prejudice, on the available evidence, I am of the view that there is a serious question to be tried in the sense that these complaints are not frivolous or vexatious.

12.  I turn to consider the petitioners’ complaint regarding the Removal Resolution and the application to SACIB.  For these allegations, I do need to be satisfied that the petitioners have a strong prima facie case.

13.  The petitioners’ case that the Removal Resolution was invalid and unlawful may be summarised in this way:

(1) On 14 April 2004, the 1^st respondent and Plupart requisitioned an extraordinary general meeting of the Company to consider the re-appointment of directors of the Company.  An extraordinary general meeting was convened on 12 May 2004 but adjourned to 17 May 2004 due to insufficient notice.  Miss Linda Chan, who appeared for the petitioners, submitted that no extraordinary general meeting was held on 17 May 2004.

(2) The board resolution of the Company dated 17 May 2004 appointing the 2^nd respondent as the alternate director to Jiang Shui Sheng, the 3^rd respondent as the alternate director to Peng Yi Zhong, Yap Siew Lan and Cheng Hong Xu, and the 5^th respondent as the alternate director to the 4^th respondent and Chen Shen Chun was invalid, as the persons who purported to appoint alternate directors had never been appointed directors of the Company and no instrument in writing regarding the purported appointment of alternate directors was served at the registered office as required by article 128(f) of the articles of association.

(3) As the board resolution in (2) was invalid, the Removal Resolution passed by the 3^rd respondent, the 5^th respondent and the 2^nd respondent, insofar as this was also purportedly passed by them as the alternate directors of various individuals, was likewise invalid, as the board meeting was attended by only one director that was properly appointed, namely the 3^rd respondent.  The Removal Resolution was also invalid as this was in breach of the resolution passed at the first shareholders’ meeting on 22 May 2003, and recorded in paragraph 3 of the minutes, that any major changes in the “personnel management” of Liuzhou Century must be discussed and passed by all the shareholders before implementation.  The relevant wording in Chinese in the minutes was “重大人事調整”.  I note that the characters for “director” or “chairman of the board of directors” were not used in this part of the minutes.

(4) On 2 August 2004, the 5^th respondent, the 2^nd respondent and Peng Lianching passed a board resolution of Liuzhou Century to confirm that the board of Liuzhou Century was constituted by them and that the 5^th respondent was appointed the chairman of the board and its legal representative (“the Appointment Resolution”).  The petitioners contend that the Appointment Resolution was invalid, as the Removal Resolution was invalid.

(5) On 2 August 2004, an extraordinary general meeting of the Company was held for the purpose of confirming the Removal Resolution.  Notwithstanding the respondents all voted in favour of this resolution (69%) and the petitioners voted against (31%), the petitioners contend that no resolution was passed as this was not unanimous, again relying on paragraph 3 in the minutes of the first shareholders’ meeting.

(6) As the Removal Resolution and Appointment Resolution were invalid, the application to SACIB should be withdrawn.  The petitioners allege that the seal of Liuzhou Century was stolen from the custody of Hui and stamped on the application form.

(7) For good measure, the petitioners have obtained a legal opinion of a lawyer in the Mainland to say that unless and until the board of the Company has appointed other representatives as the directors of Liuzhou Century, Hui and Cheung should continue to act as such.

14.  I fail to see the relevance of the legal opinion of the Mainland lawyer.

15.  The respondents’ case  to refute the allegation of invalidity of the various resolutions is founded mostly on the documents adduced, and may be summarised as follows:

(1) Under the letter appointing Hui and Cheung as the directors of Liuzhou Century, their term of office was for three years commencing January 2002, and would have expired any way on a date in January 2005, in accordance with article 19 of the articles of association of Liuzhou Century.

(2) Under clause 3(ii)(k) of the co-operation agreement dated 27 December 2001 (“the Co-operation Agreement”) made by all the shareholders before they set up the Company to invest in Liuzhou Century, it was provided that during the time when Liuzhou Century is operating the business of the Development, the chairman of the board of directors of Liuzhou Century and hence its legal representative was to be appointed by the 3^rd respondent.

(3) Regarding the extraordinary general meeting adjourned from 12 May 2004 to 17 May 2004, the written consent of all six shareholders including the three petitioners was produced.  This recorded their consent to attend and vote at the extraordinary general meting on 17 May 2004, notwithstanding notice shorter than that required under Cap. 32 was given.  Accordingly, the extraordinary general meeting was held on 17 May 2004.

(4) At the extraordinary general meeting on 17 May 2004, a members’ resolution was passed unanimously, including the three petitioners, appointing seven persons as directors of the Company with immediate effect.  They were Jiang Shui Sheng, the 2^nd respondent, Chen Shen Chun, Peng Yi Zhong, the 5^th respondent, Yap Siew Lan and Cheng Hong Xu.

(5) Also on 17 May 2004, a board resolution was passed, signed by all the directors, including Hui and Cheung, acknowledging that notice was received regarding the appointment of alternate directors and agreeing to make the appointment of alternate directors.  Letters of authorisation of the five individuals appointing alternate directors were produced, three were dated 17 May 2004, the other two were undated.

(6) On 7 July 2004, the Removal Resolution was passed with the requisite quorum of directors as the alternate directors were validly appointed.

(7) On 7 July 2004, on behalf of the Company, Lee Fui Ying and the 4th respondent signed a letter appointing the 5^th respondent as a director and chairman of the board of directors of Liuzhou Century for a three-year term.

(8) At the extraordinary general meeting of the Company on 2 August 2004, the Removal Resolution was passed by a majority of 69% of the votes in favour, notwithstanding the petitioners had voted against.  Thus the resolution was passed by no less than two-thirds of the shareholders, as required by clause 2 in the Co-operation Agreement.

(9) The Appointment Resolution passed by the board of directors of Liuzhou Century on 2 August 2004 was valid, as there was sufficient quorum in that the three directors present were validly appointed.

16.  On the basis of the above, I am unable to form the view that the petitioners have a strong prima facie case on the complaints regarding the Removal Resolution and the application to SACIB.  I have serious reservations about Miss Chan’s submission that clause 3(ii)(k) of the Co-operation Agreement was superseded or varied by clause 3 of the minutes in the first shareholders’ meeting on 22 May 2003.  The petitioners admitted that they signed the resolutions on 17 May 2004 and had raised no objection, as they were involved in negotiations to sell their shares in the Company and thought they would be leaving the Company soon.  They only terminated the negotiations in July 2004, round about the time of the Removal Resolution.

17.  I go on to consider the balance of convenience, notwithstanding my views that the petitioners’ case relevant to the reliefs sought in this application is not sufficiently strong for a mandatory injunction.  I am inclined  to think that the balance of convenience is not in favour of the petitioners for these reasons:

(1) The term of Hui and Cheung as directors of Liuzhou Century would have expired any way in January 2005.  To grant an injunction thereby in effect reinstating them by allowing them to continue to act as directors of Liuzhou Century is to alter the status quo.

(2) To date, the application to SACIB has not been processed due to Hui’s intervention and complaints lodged with various Mainland authorities.  The effect of this, and there is no dispute about it, is that Liuzhou Century cannot operate without a business licence for want of a legal representative.  The last certificate of legal representative issued to Hui was in June 2003 for a year, and this should have been renewed in June 2004.  This was not done.  Hui claimed that Liuzhou Century had not prepared an annual audit so she could not have applied for a renewal of the certificate of legal representative.  Be that as it may, a notice was published in Liuzhou Daily in October 2004 suspending Liuzhou Century’s business licence.  Liuzhou Century has been unable to operate the business of the Development, to sell or lease units in the Development.  Complaints have been received from purchasers of units in the Development for failure to complete the transactions. Loss would be occasioned to Liuzhou Century and the Company as a result of granting the injunction. I have serious doubts whether the respondents would be sufficiently compensated in damages, bearing in mind the difficulty of quantifying such loss, or if the petitioners are in a position to pay such damages.

(3) If the injunction is refused, the respondents would retain control over Liuzhou Century.  They may or may not succeed in obtaining the appointment of legal representative.  Any loss and damage suffered by the petitioners would be compensated in that any further harm done to the Company or Liuzhou Century would be taken into account in assessing the fair price at which the petitioners should be bought out.  The exercise of assessing such loss is not so difficult that could not be attempted, and there is nothing to suggest that the respondents would not be in a position to pay.  I also bear in mind that it is the respondents’ case, on the evidence filed by them in these proceedings, that any profits made by Shin Ju and Jin He Wan in respect of the lease agreement and the management agreement would have to be accounted for to Liuzhou Century and the Company.  It is contended by the respondents that the Company ultimately holds a beneficial interest in Shin Ju and Jin He Wan through its equity interest in Liuzhou Century, even though the declarations of trust produced by the respondents are disputed by the petitioners.

18.  For the above reasons, I refuse the petitioners’ application for various interlocutory injunctions.

19.  As for the costs of this application, Miss Chan submitted that an appropriate order should be the respondents’ costs in the cause, so that the respondents would only get the costs of the application today if they were to succeed ultimately at the hearing of the petition.  Counsel for various respondents all submitted that they should have costs of the application in any event.  I am inclined to agree with the respondents.  I have ruled against the petitioners both on the basis that the petitioners have failed to make out a sufficiently strong case for mandatory injunction and on the balance of convenience, I see no reason why costs should not follow the event in this instance.

20.  I make an order that the petitioners should pay the costs of all the respondents who have participated in this application in any event.