MANDARIN RESOURCES CORPORATION LTD v. GRAND CHINA LTD

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J U D G M E N T

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Cons, V.P., delivered the judgment of the Court:

1. This is an appeal against the decision of Godfrey, J., by which he set aside an order of Master Chan giving leave to defend and entered instead judgment for the Plaintiff in the sum of $6,968,705 with interest.

2. In view of the conclusion to which we have come, we think it desirable to say as little of the matters in dispute as possible. But it is necessary to set out something of the background, so that the reasons for our conclusion may be understood.

3. In 1985 the Defendant (Grand China Limited or "GCL") was a wholly owned subsidiary of the plaintiff (Mandarin Resources Corporation Limited or "Mandarin''). It traded, by way of various subsidiary companies of its own, in printing and packaging. Mandarin is a company listed on the Stock Exchange of Hong Kong. In October 1985 Mandarin agreed (by the "Acquisition Agreement") to transfer its entire shareholding in GCL to Grand China Resources Limited ("GCRL"), then known as Target Resources Limited, a company listed on the Vancouver stock Exchange, in exchange for shares to be issued in GCRL and an undertaking to pay or procure the payment of the inter-company indebtedness of GCL to Mandarin, indicated therein as $795,306. At the time of the Acquisition Agreement trading in the shares of GCRL had been suspended.

4. The date originally agreed for completion of the transfer was the 30th January, 1986. In fact completion did not take place until the 20th or 21st November, by which time the suspension of trading in GCRL shares had been lifted and the Mandarin was able to complete a sale of the shares it had received in pursuance of the Acquisition Agreement. That sale, the Chulan Agreement, had been made towards the end of August and was effectively to a Mr. Ronald NG Wai Choi who thus acquired, and still retains, a controlling interest in the company.

5. In the meantime GCRL had floated a public issue on the Vancouver Stock Exchange. To that end it had prepared and issued in May a Statement of Material Facts, a document similar to the prospectus required in this jurisdiction. It contained the kind of information one would expect and in particular repeated an undertaking given by Mandarin to both the Vancouver Stock Exchange and GCRL with regard to the circumstances in which it would not insist upon repayment of the inter-company indebtedness.

6. Despite the rosy future portrayed by the Statement of Material Facts GCL appears to have been running into financial difficulties. To illustrate what are said on the one hand to have been significant losses at various periods between October 1985 and and November 1986, and on the other, a very profitable investment, our attention has been drawn to a number of accounts and financial evidence, which at times has been confusing and difficult to understand without the benefit of expert assistance. But this much is clear, that as at the 31st May, 1986 the unaudited accounts of GCL showed a loss of just over $5 million, which was reflected in a Loan Agreement made between Mandarin, GCL and GCRL in July of that year and repeated on the 19th November by which, and by way of compensation for the loss, the inter-company indebtedness indicated by the Acquisition Agreement was reduce. But at the same time the Loan Agreement made significant changes in the liability for repayment. Still further changes were made in a Supplementary Loan Agreement, also on the 19th November, made between Mandarin and GCL alone.

7. This action of Mandarin against GCL is upon these two Loan Agreements. The defence, taken from the formal defence filed in the action, is that

"The said Agreements are part and parcel of a scheme put together by Mr. Stone whereby the interest of the Defendant and of GCRL were knowingly subordinated to those of the Plaintiff."

8. It is accepted that Mr. Stone was at all material times the Managing Director of Mandarin, a Director of GCL, and a Director and President of GCRL. He is said to have acted in these capacities at all times on behalf of Mandarin, and occasionally for himself, thus making Mandarin equally liable for his breaches of fiduciary duty to the latter two companies which in effect amounted to fraud.

9. With every respect to the pleader of the formal defence, the particulars of that fraud are not all that easy to discover. But what we take to be the case put forward can best be examined in three stages. First there was the initial scheme, hatched certainly before October 1985. This would seem to comprise inflating the value of GCL by the purchase of a subsidary at an excessive price; obtaining GCRL shares in exchange for shares in GCL, both Mandarin and Mr. Stone having already purchased other shares in GCRL; and selling the GCRL shares then at a handsome profit. (An allegation that the figure for inter-indebtedness was not bona fide has not been pursue.)

10. The second stage concerns the lifting of the suspension on trading in the GCRL shares. To achieve this, and at the same time to stimulate the market and thus increase the price of the shares and the profits to Mr. Stone and Mandarin, Mr. Stone, and through him Mandarin, are said to nave misled the Vancouver Stock Exchange by false information as to the terms for repayment of the inter-company indebtedness and by concealing from the Exchange that Mandarin shares in GCL were at the time pledged as security to the bank, that GCL was at that time running at a loss, and that there would be difficulties in the recovery outside China of RMB profits made by one of its subsidiaries therein.

11. The third stage refers to the two Loan Agreements, and in particular the Supplementary Loan Agreement, the existence of which, together with suggested losses of GCL subsequent to the 31st May, 1986, was said not to have been disclosed to Mr. Ng in the course of the Chulan Agreement.

12. The judge below was hot impressed by the suggestion of fraud. He felt it was not advanced as a bona fide defence, and that there was no credible evidence at all to support it.

13. We would agree with his conclusion so far as it relates to what we have referred to as the initial scheme. We find nothing to substantiate that there ever was a scheme as such, let alone that it was fraudulent. But with respect to the judge he overlooked, or rather treated as irrelevant, matters at a later stage which, if unexplained, may well be taken to indicate fraudulent conduct thereafter. We have in mind in particular a letter of the 1st August, 1986 which seems to show that, despite professional advice which could perhaps have been more strongly worded, Mandarin was deliberately practising deceit upon the Vancouver Stock Exchange, and through the Exchange the investing public, with regard to the repayment terms. The same view might well be taken with regard to the losses made up to the 31st May. Then there is the alleged non-disclosure to Mr. Ng of the Supplementary Loan Agreement, and perhaps of the losses of GCL subsequent to the 31st May. It has to be accepted that these factors do not relate directly to GCL, which is technically a legal entity separate from GCRL. But in point of fact it is a wholly owned subsidiary and what affects GCL must necessarily affect GCRL. In addition, there is the suggestion that Mr. Stone, to the knowledge of Mandarin, acted in breach of his fiduciary duties as Director of GCL when executing the Supplementary Loan Agreement, knowing that by then GCL had been excused of its direct liability for the inter-company indebtedness and had nothing to gain by taking it up again.

14. The judge observed that if there had been evidence to support a scheme to deceive the investing public he would have dismissed the appeal, as possibly affording a ground of defence. We are concerned, as he was, with the apparent calm with which Mr. Ng had accepted the situation, as he must eventually nave discovered it, yet did nothing until process was actually commenced. Nevertheless we think the judge's approach was correct. In order to succeed in the action mandarin will have to rely, inter alia, on the Loan Agreement which may be tainted by fraud. In that circumstance we feel that the judge was plainly wrong to enter summary judgment. No doubt before trial those advising GCL will seek leave to recast its defence, and Mandarin may equally wish to amend the Statement of Claim, having regard to the points raised in support of the proposed amendment to the supplementary Notice of Appeal, which in the circumstances we decline to allow. We do not think it then necessary to deal with questions raised on the assignment ant reassignment of the rights under the Loan Agreement to Hill Samuel, save to observe, lest time be wasted on this question elsewhere, that we are not persuaded that the Writ was, or is, in the circumstances a nullity. We also find it unnecessary to deal with all the numerous grounds contained in the Supplementary Notice of Appeal and we formally dismiss the application to strike out many of them.

15. For these reasons tire appeal is allowed, the judgment below set aside and leave given to defend. We understand from Mr. Thomas that no objection is taken to the leave's being continued subject to the condition imposed by Master Chan in his order of the 23rd February (Bundle 1, part II, page 4), namely to pay into Court "a sum representing the balance of the Plaintiff's claim in excess of the amount or money already paid into Court by the Defendant in relation to the Mareva injunction dated 4th and 14th October, 1988 plus interest accrued" to the date thereof, and we so order. We shall be pleased to be or counsel as to costs and any consequential orders that may be thought necessary.