GAO HAI YIN AND ANOTHER v. KEENEYE HOLDINGS LTD AND OTHERS

HCA 1315/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1315 OF 2009

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D E C I S I O N

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Introduction

1.  This is the application of:-

(a)     the plaintiffs to continue the ex parte orders made respectively on 25 June 2009 and 2 July 2009;

(b)    the defendants (except the 5th defendant) to discharge the said orders.

The 25 June order appointed an interim receiver and manager to act in the name of the 5^th defendant (“Bai Jun”) in HCA 1987/2005 (“HCA 1987/05”).  The 2 July order in effect extended his power to also act in Bai Jun’s name in the mainland proceedings (defined in para. 4 below and para. 12 of the court of appeal judgment quoted therein) and in this action, and to collect get in and receive debts and other assets property or effects and to manage and continue Bai Jun’s business.

2.  The bases of the defendants’ application are:-

(1)     the evidence adduced shows there is no serious question to be tried;

(2)     the plaintiffs have failed to make full and frank disclosure of material facts and/or have misled the court.

Background

3.  It is necessary to briefly mention the background (especially parts of the proceedings in HCA 1987/05) in order to understand why this application came about.

4.  The relevant background has helpfully been summarized in the court of appeal’s judgment dated 24 November 2008.  It is quoted below for convenience:-

“4.     Clarigain [Clarigain Enterprises Ltd.] holds 50% of the shares in Zhong Xin [Zhong Xin Ore-Material Holding Co. Ltd.].  The other shareholder is Angola Group Holdings Limited (“Angola”).  There is a joint venture agreement dated 1 December 2004 but signed on 21 December 2004 (“the joint venture agreement”) under which in return for a 50% interest in Zhong Xin, Angola agreed to provide the equivalent in USD of RMB 50 million to Zhong Xin.  An important dispute between Clarigain and Angola is over the nature of the RMB 50 million to be provided.  According to Clarigain, the RMB 50 million was capital.  According to Angola, they were only obliged to provide finance to the extent of RMB 50 million.  This is not the occasion to decide which version is correct.  For the purpose of the appeal, we cannot and do not make any finding of fact.

5.      The persons behind Angola are Zhao Bing (“Zhao”) and Ng Chi Kong (“Ng”) and those behind Clarigain are Xie Her Ping (“Xie”) and his wife Madam Gao Hai Yan (“Gao”).

6.      Xie and Madam Gao held the entire shareholdings in Zhong Xin on trust for Bai Jun [Bai Jun Tian Cheng Ltd.].  They were appointed by Bai Jun to act as directors of Zhong Xin.  Since about 30 December 2004 and pursuant to the joint venture agreement, 50% of the shareholdings in Zhong Xin were transferred to Angola, and Zhao and Ng were appointed by Angola to act as directors of Zhong Xin.  Xie and Gao, and, Zhao and Ng, are the only directors.  It is common ground that there is a deadlock.

7.      The joint venture agreement envisaged the established a sino-foreign joint venture company in the Shaanxi Province, namely, Yulin Changlebao Mining Corporation Limited (“CLB”).

8.      There is a sino-foreign joint venture agreement dated 12 December 2004 (“the CLB JV contract”) made between 榆林巿榆陽區常樂工貿有限責任公司 (“the Yulin company”) and Zhong Xin.  Under the CLB JV contract, the parties agreed to invest a total of RMB 71 million into CLB, of which the Yulin company was to contribute RMB 21.3 million for 30% of the capital, and Zhong Xin RMB 49.7 million for a 70% share.  Zhong Xin’s share of RMB 49.7 million was to be contributed by 3 instalments.  The 1st instalment being RMB 20 million payable upon the registration of CLB, the 2nd instalment to be provided after the establishment of CLB, and the remaining RMB 9.7 million to be provided two years after the establishment of CLB.  According to the applicants, the 1st instalment was due to be provided by 18 January 2005, the 2nd instalment 18 January 2006, and the 3rd 18 January 2007.

9.      Under clause 2.2 of the joint venture agreement, Angola was to provide the equivalent of RMB 20 million to Zhong Xin for the 1st instalment payment under the CLB JV contract. Although the joint venture agreement was not explicit about when the remainder of the RMB 50 million was to be paid, presumably they were to be provided in time for the payments under the CLB JV contract.  To cut a long story short, the 1st instalment was provided to Zhong Xin, but by way of a loan from Achieve Goal Holdings Limited (“Achieve Goal”).  This is the subject of Achieve Goal’s claim in the present action against Zhong Xin.

10.    We will not go into the detail regarding Achieve Goal’s claim nor the counterclaim which it has spawned in relation to the provision of the RMB 20 million.  Sufficient to state that in the applicants’ counterclaim, for example para. 29A(d), they have complained that because of the failure by Angola to provide any further finance for the 2nd and 3rd instalments:

‘By 1st and 2nd February 2008, Bai Jun injected US$ 4,172,590 (equivalent to RMB 29,567,600) into CLB as injection in respect of the 2nd and 3rd Capital Instalments in satisfaction of the balance capital of CLB to be injected by Zhong Xin pursuant to the CLB JV Contract.’

11.    Para. 29A(e) of the counterclaim went on to claim, inter alia, that pursuant to clause 4.3 of the JV agreement, which provided that:

「若甲方（Angola）未能按期支付合资公司注册资本金余额，将由乙方（Bai Jun）出资补上，甲方在中信矿业公司（Zhong Xin）的股份则按比例相应降低。」

Angola was holding 59.49% of the 50% of the shareholdings in Zhong Xin on trust for Bai Jun.

12.    The legitimacy of the payment of the 2nd and 3rd instalments by Bai Jun to CLB is the subject of dispute in the mainland.  The Yulin company has started proceedings in July 2008 in the陝西省榆林巿中級人民法院 (“the mainland proceedings”), with Zhong Xin as the 1st defendant, Bai Jun the 2nd defendant, where the Yulin company claimed that the capital contribution in the sum of USD 3,560,000 made by Bai Jun in the name of Zhong Xin was invalid and that the Yulin company had the right to acquire 42% of Zhong Xin’s shares.

13.    Briefly stated, in the mainland proceedings, the Yulin company alleged that Angola had never given up its right （Angola公司從來沒有放棄其出資權利）nor authorise Bai Jun to provide capital on behalf of Zhong Xin.  It was also alleged that because Madam Gao had not given to CLB the外匯登記證, the 2nd and 3rd instalments had never been paid into the account of CLB and they were never available to CLB.  Furthermore, because of the failure to provide the 2nd and 3rd instalments, Zhong Xin had already lost its right to provide the capital, and that the Yulin company had a right of pre-emption under certain mainland legislation as follows:

「… 根据《公司法》第199条、第200条的规定，原告要求法院判决百浚天成的出资为虚假出资，出资无效，同时确认中信矿业违约出资、转让出资的情况下，原告根据《公司法》第72条之规定，享有股东的优先购买权。原告为此诉之法院，请法院依法受理，公正判决。」

14.    Not surprisingly, Bai Jun wishes to contest the Yulin company’s claim.  Angola has also been made a party to the mainland proceedings.  There is a deadlock over what role Zhong Xin should play.  Also, as will be seen, because of the deadlock, Zhong Xin was not in a position to instruct lawyers to defend its interests, should it be proper to do so.

15.    That there is a deadlock in Zhong Xin is common ground.  The applicants have also alleged that Angola has sided with the Yulin company in trying to obtain control of CLB” (CACV 324/2008).

The business of CLB is in brief to engage in coal mine operations in the Mainland.

5.  The court of appeal appointed interim receivers in effect to “hold the ring” as regards the affairs of Zhong Xin.  Further, in November 2008, the first instance court in Shaanxi decided the mainland proceedings in favour of Bai Jun (and against the Yulin company).  The Yulin company has lodged an appeal which is pending hearing and determination by the higher courts in Shaanxi.

6.  It is common ground the plaintiffs are husband and wife and they were detained in the Mainland from late May to mid-November 2008 (a period of about 5-1/2 months) for their alleged involvement in the assault of, and injuries sustained by, a Mr Zhang of the Yulin company in May 2008.

7.  It is also common ground documents were signed by or for the plaintiffs.  These documents include a power of attorney, a share transfer agreement (“the Transfer Agreement”), a memorandum supplemental to the Transfer Agreement, a supplemental share transfer agreement (“the Supp Transfer Agreement”) (the Transfer Agreement and the Supp Transfer Agreement are collectively “the Agreements”) and documents for the transfer of shares owned by the plaintiffs in Bai Jun (in effect the holding company of Clarigain) (“the plaintiffs’ shares in Bai Jun”) to a Mr Liu Jian Shen (“Liu”), who was in control of the 1^st and 2^nd defendants (respectively “Keeneye” and “New Purple”) (the last-mentioned documents are collectively “the share transfer documents”).

8.  The plaintiffs commenced this action in June 2009 against various defendants seeking the relief set out in the general indorsement to the writ.  The relief sought is in short:-

(a)     declaration orders to the effect the Agreements, and the share transfer documents, are null and void and of no legal effect;

(b)    a declaration order that the plaintiffs are the legal and beneficial owners of the Bai Jun shares;

(c)     a declaration that any board resolution purportedly transferring the plaintiffs’ shares in Bai Jun is null and void and of no legal effect,

and other related injunctive and restitutionary remedies.

9.  It should be noted that there is no claim for relief against the defendants for breach of the Agreements (the significance of this will be elaborated below).

Serious Question to be Tried

10.  In view of the relief sought in this action, it is apparent the plaintiffs do not regard the Agreement (or indeed the transfer of the plaintiffs’ shares in Bai Jun) to be binding on them.

11.  The basis for this stance has not been made entirely clear in the plaintiffs’ affirmation in support of the ex parte application on 25 June 2009.  But the paragraphs in Gao’s affirmation dated 19 June 2009 below give some hint:-

“On 20 May 2008, Xie and I were suddenly arrested … we were detained for six months” (para. 26);

“On or around 30 June 2008 … I wrote to Liu asking for his help” (para. 32);

“Wang [Wang Li] on behalf of Liu then told our family members … Liu could not be able to secure our release unless he had a connection with the coal mining project, which meant that Xie and I had first to transfer our interest in the project to him” (para. 34);

“Xie gave in and signed the power of attorney on or around 10 July 2008 …

I have been advised by my PRC legal advisers that the share transfer under this power of attorney is in fact invalid … because [it] failed to specify … which company’s shares were to be transferred … ” (para. 35 and 36);

“Bao [Xie’s son-in-law] signed [the Transfer Agreement] …

[The Supp Transfer Agreement was also] signed by Bao purportedly on our behalf … ” (para. 38 and 39);

“… Xie and I, however, had no knowledge of the existence or content of [the Agreements] until after our eventual release on 12 November 2008” (para. 42);

“In desperation and grasping for the hope of release because of what Wang and Liu had said and because of their promises … [of]protecting our interest in Zhongxin and the JV, I signed [the share transfer documents] …” (para. 45);

“Xie and I were eventually released … I understand the reasons for our release were that: (a) … [the] victims did not sustain serious injuries; (b) our family members borrowed RMB6 million from Liu and paid this huge amount of compensation to the purported victims; and (c) we had been detained for six months and should be released according to PRC laws … ” (para. 48);

“I have been advised by our legal advisers … that on the possible grounds of duress, lack of authority, and misrepresentation, we are entitled to dispute and rescind the Agreements … Furthermore, none of Liu, Keeneye, and New Purple has ever paid Xie or me any consideration for the shares” (para. 50).

(emphasis supplied)

12.  The serious questions which ought to be tried in this action have also been summarized in the plaintiffs’ skeleton arguments for use at the 25 June hearing:-

(1)     no payment by Liu for the plaintiffs’ shares in Bai Jun;

(2)     neither Bao nor the plaintiffs’ family members have authority to sign the Agreements;

(3)     Liu misrepresented his ability to secure the plaintiffs’ release;

(4)     the plaintiffs were acting under duress because of their arrest and detention.

They were repeated in their skeleton arguments for use at the hearing on 20 July 2009.

13.  Although it has not been expressly so stated, the plaintiffs’ primary case must be that the Agreements were never meant to be a genuine agreement for the transfer of the plaintiffs’ shares in Bai Jun, but merely an arrangement or a device to enable Liu to procure their release.

14.  Liu’s non-payment of the plaintiffs’ shares in Bai Jun must be put forth as further evidence of the above.

15.  The plaintiffs’ alternative case regarding the validity of the Agreements appears to be that they were signed by a purported attorney, namely, Bao, without the plaintiffs’ knowledge or comment.  Bao’s lack of authority is also said to have resulted from a power of attorney which is invalid according to Mainland law.

16.  The defence contends that the contemporaneous documents show that the plaintiffs’ case (be it the primary or alternative case) cannot have merits.

17.  Reliance is placed on the payment provisions in the Agreements as well as some of the documents written by Gao after the plaintiffs’ release.  They are as follows:-

“三方同意在約定的轉讓款支付條件成就後支付合同轉讓款” (clause 1-2, the Transfer Agreement);

“轉讓價款另行協商。協商不一致，以［原告人］在公司經營過程中的實際出資金額為股權轉讓價款” (emphasis supplied) (clause 1-3, the Transfer Agreement);

“尊敬的劉總 … 此次劫難雖芰盡了苦難，但也因禍得福，使我們雙方能提前進入合作的實質階段 … 因此我們希望您的公司能盡快進入角色，掌握局面 … 為了使您及王總能全面掌握企業情況，并能順利接管，我們需要就企業的基本情況角閣下做出全面而具體的陳述，同時也希望盡快見面商談如何完善此次股權轉讓協議的法律手續問題” (emphasis supplied) (Gao’s letter dated 14 December 2008);

“尊敬的劉總 … 為了鞏固半年來我們之間的合作成果，確保此次股權轉讓的有效性，不留或減少各種遺留問題，且前急需資金解決以下問題 … 以上費用總計約6000萬元。此費用作為預支式借支款額將在日後雙方商定的轉讓款總額中抵扣 … ” (emphasis supplied) (Gao’s letter dated 22 December 2008);

“尊敬的劉總 … 雖然我們同意將股份和公司轉給您的公司，但由於時間和條件所限，當時很難使有關文件做的一一符合法律的規定和要求 … 由於近日我的姐妹多次告知我，王李先生 … 要離職了 … 為此，特來函請求，希望於近日安排您合適的時間以面談此次轉讓及相關問題 … ” (emphasis supplied) (Gao’s letter dated 15 May 2009).

18.  The above correspondence was exhibited to Gao’s affirmation dated 16 July 2009.  Gao said therein Liu refused to negotiate the share price with the plaintiffs, and Liu in fact indicated in February 2009 he did not wish to pay the plaintiffs anything (para. 28 to 30, Gao’s said affirmation).

19.  Having considered the above documents, I agree with the defence contention the plaintiffs’ case is unbelievable and I reject it.

20.  The plaintiffs could not have been acting under duress after their release in mid-November 2008.  Moreover, the plaintiffs do not allege that duress was placed upon them by the defence.

21.  The public security bureau in the Mainland has issued a statement of non-prosecution dated 21 November 2008.  Page 1 of this document has been exhibited to Gao’s affirmation dated 19 June 2008 (this exhibit also forms one of the subject-matters of the defence complaint of non-disclosure).  It can be inferred the plaintiffs became aware of its content since about late-November 2008.

22.  In addition, in view of Gao’s statements in her two affirmations (quoted below), it is doubtful if the share transfer was caused by any misrepresentation.  Gao said:-

“Although released from detention, Xie and I are still recovering from the six-month ordeal.  Xie’s health deteriorated and was hospitalized in both Mainland China and Hong Kong for a period of time.  Frankly, our will was broken.  We were ready to exit the coal mining project – and Yulin City.” (para. 55, Gao’s affirmation dated 19 June 2009);

“… as I had said in my first Affirmation, Xie and I wanted to exit the coal mining project and leave Yulin behind.  So I wrote to Liu urging him to discuss with us on the price of the shares.” (para. 27, Gao’s affirmation dated 16 July 2009).

23.  With the above in mind, I do not find the plaintiffs’ case of misrepresentation to have substance.  In fact, it is unclear if the misrepresentation referred to in Gao’s affirmation concerned Liu’s ability to secure their release, or whether it concerned Liu’s “promises … [of] protecting [the plaintiffs’] interest in Zhongxin and the JV” (see para. 45 thereof quoted in para. 11 above).  Despite the case put forth in the plaintiffs’ skeleton arguments (see para. 12(3) above), Gao’s affirmation rather suggests it was the latter.

24.  The plaintiffs’ case relating to the lack of authority has no merit either.  As the defence correctly points out, the power of attorney in fact consists of a whole set of documents (exhibited as “WL-6” to Wang Li’s affirmation dated 9 July 2009) instead of just one single document.  The defence has also adduced evidence from an expert on Mainland law regarding the legal validity of the Agreements and the transfer of the plaintiffs’ shares in Bai Jun.  In any event, because of the matters set out in para. 16 to 19 above, this part of the plaintiffs’ case is a red-herring.

25.  In any event, as stated above, the plaintiffs do not allege the defence breached the Agreements.  In addition, it is not alleged that the plaintiffs have treated the Agreements as having been terminated by repudiation.

26.  In view of the matters set out above, I agree with the defence that the only reasonable inference is that the Agreements and the transfer of the plaintiffs’ shares in Bai Jun are valid and binding.

27.  Consequently, the plaintiffs’ legal entitlement should lie with the share price of, rather than with the shares in, Bai Jun.

28.  Finally, the plaintiffs’ complaint of non-payment is denied by the defence.  The defence contends that it is ready, willing and able to make payment in accordance with the Agreements; it was the plaintiffs who failed to discuss the matter.

29.  There is therefore no valid ground on which the ex parte orders can rest.  Accordingly, they should be, and are, discharged.

Material Non-Disclosure / Misleading the Court

30.  Having reached the conclusion above, it is strictly unnecessary to consider this aspect.  I shall do so for completeness.

31.  The matters set out in para. 16 to 26 above are also relied upon as matters of material non-disclosure.  Other matters of material non-disclosure are:-

(a)     the board resolution dated 21 July 2008 with Xie’s hand-written signature contradicts the assertion in Gao’s affirmation dated 19 June 2008 to the effect Xie did not agree to the share transfer and the documents were affixed with his signature stamp behind his back;

(b)    the lack of emphasis that the plaintiffs were at the material time legally represented in Hong Kong and the Mainland.  The Hong Kong lawyers advised them regarding the share transfer specifically whereas the Mainland lawyers drafted the related legal documents;

(c)     the fact that a total of RMB13 million has been provided by Keeneye and New Purple to the plaintiffs.

32.  There is no need to go into the details, suffice it to say I agree with the defence complaint in this regard.

33.  To conclude, further to the conclusion reached under the heading “Serious Question to be Tried”, this is a case where my discretion should be exercised in discharging the ex parte orders without ordering a re-grant.

Other Matters

34.  The parties in this action and those in HCA 1987/05 agree some of the matters of concern in both actions overlap.

35.  Further, there is a pending application in HCA 1987/05 seeking to stay the action, alternatively, to adjourn the trial thereof (which was scheduled to commence on 22 July 2009).  In gist, it is argued in that application that a settlement agreement has been entered into between Bai Jun and Angola to settle all the claims between them.  Mr Wang Li supposedly signed on behalf of Bai Jun in the settlement agreement.  The genuineness and validity of the settlement agreement is disputed in HCA 1987/05.

36.  The conclusions reached in this decision may be relevant to the dispute in that application.

37.  In view of the above, it is appropriate to also circulate this judgment to the parties in HCA 1987/05.

Costs Order Nisi

38.  There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of the applications (including any reserved costs) be paid by the plaintiffs to the defendants to be taxed if not agreed.