SHIH-HUA INVESTMENT CO LTD v. ZHANG AIDONG AND OTHERS

CAMP 167/2022 & CACV 370/2023, [2023] HKCA 1304 (Heard together),

On Appeal From [2022] HKCFI 567

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 167 OF 2022

(ON INTENDED APPEAL FROM HCCW NO 198 OF 2016)

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 370 OF 2023

 (ON APPEAL FROM HCCW NO 198 OF 2016)

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JUDGMENT

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Hon G Lam JA (giving the Judgment of the Court):

Introduction

1.  The matter before this court came originally as an application[1] by the petitioner for leave to appeal from the order of Harris J made on 25 February 2022 (“Decision”)[2] that there be an inquiry as to damages for the loss suffered by the 1^st and 2^nd respondents and the 1^st and 2^nd interveners (“Respondents” and “Interveners”) as a result of the order of the court made on 19 January 2017 for the board of directors of Everglory Energy Ltd (“Everglory”) to be reconstituted. 

2.  This court directed a rolled-up hearing so that if leave was given, the hearing was to be treated as that of the appeal proper as well.  The parties had at the court’s invitation filed written consent for the appeal to be heard and determined by two Justices of Appeal pursuant to section 34B(4) of the High Court Ordinance (Cap 4). At the hearing, counsel for both sides submitted that leave was after all not required, and judgment was reserved.

3.  As we informed the parties by letter dated 14 November 2023, we concluded that leave to appeal was not required.  A notice of appeal has since been filed and served by the petitioner within the extended time.  We now give our judgment on the appeal. The issues arising include mainly whether Harris J erred in finding that the reconstitution order was wrongly granted and that there was a sufficient case of loss caused for an inquiry to be ordered, and in exercising the discretion to order an inquiry.

Background

4.  To put the matter in context it is necessary to set out the somewhat complicated history of the relevant proceedings. 

5.  Everglory was a company which traded in liquefied petroleum fuel, set up in 2012 between two shareholders, namely, Shih-Hua Investment Co, Ltd (“Shih-Hua”), the petitioner, and Motivi Point Consultant Ltd (“Motivi”), the 2^nd respondent, each holding 50% of the shares.  Shih-Hua was a company controlled by one Mr Zhong Jie, while Motivi was a company controlled by Mr Zhang Aidong (“Zhang”), the 1^st respondent.  Zhang and Shih-Hua were the two directors of Everglory until the order below dated 19 January 2017 reconstituting the board.

6.  Four years after Everglory was set up, the relationship between the shareholders turned sour.  Alleging that Zhang had misconducted the affairs of Everglory, Shih-Hua issued a petition on 20 June 2016 in HCCW 198/2016 (“Petition”) seeking an order, inter alia, that Motivi purchase Shih-Hua’s shares in Everglory or that Everglory be wound up.

7.  A raft of interlocutory skirmishes soon occurred.  On 20 July 2016, Anthony Chan J granted a validation order on the application of Everglory, but declined to hear an urgent application by Shih-Hua for the appointment of provisional liquidators for Everglory.  Shih-Hua then sought an urgent hearing before Harris J on the same day, but the judge after reading the papers also declined to deal with the application ex parte as he was not satisfied there was sufficient urgency, and gave directions for an inter partes application.  Harris J did, however, grant an injunction to supplement the validation order, limiting the payments that could be made by Everglory.

8.  Shih-Hua soon issued another urgent summons on 23 August 2016 seeking the appointment of provisional liquidators for Everglory.  When that summons came on for hearing on 29 August 2016, Harris J declined to deal with it on an urgent basis.  The matter was adjourned for Shih-Hua to consider reformulating its application.

9.  On 8 September 2016, Shih-Hua issued a summons for an order to reconstitute the board of Everglory. When it came on before the court on 12 September 2016, Shih-Hua sought the immediate determination of that application, which Harris J again refused on the ground that there was no sufficient urgency.  When the matter returned to court on 3 October 2016, Shih-Hua once again pressed for an immediate interim remedy, which Harris J declined to grant, but his Lordship allowed the application to be fixed for substantive argument on an early date.

10.  Notwithstanding the existence of the Petition and the pending interlocutory applications therein, on 14 October 2016, Shih-Hua commenced a common law derivative action in HCA 2682/2016 (“Action”) against 5 defendants, joining Everglory as the 6^th defendant, raising similar complaints to those in the Petition.  The 1^st, 3^rd and 4^th defendants in that Action were respectively Zhang, Everglory Petrochemical Ltd (“EPL”) (a company in Zhang’s camp), and Motivi.  Harris J subsequently found, in his decision to strike out the Action (see §13 below), that the Action had been issued by Shih-Hua in order to provide a platform for obtaining further ex parte interim relief.[3]  Such further interim relief consisted of an injunction obtained ex parte from Lok J on 25 October 2016 to restrain the defendants from dealing with the money to be received from Everglory’s customers, and another injunction obtained ex parte from DHCJ Kent Yee on 22 November 2016.

11.  The application for reconstitution of the board of Everglory was, together with other interlocutory applications, heard before Anthony Chan J on 4 – 5 January 2017.  Apart from Shih-Hua and the Respondents, two oil and gas companies, who were major creditors of Everglory (“Major Creditors”), also appeared by counsel, opposing the appointment of provisional liquidators but supporting the application to reconstitute the board.  The judge handed down his decision on 19 January 2017,[4] granting an order for the board of Everglory to be reconstituted (“Reconstitution Order”) by replacing Zhang and Shih-Hua, not with the candidates proposed by Shih-Hua, but with two accountants from the firm of Grant Thornton proposed by the Major Creditors, namely Mr David Bennett and Mr Barry Tong Piu (“New Directors” and “Reconstituted Board”).  The judge also granted an injunction restraining Zhang from exercising any director’s power.  There has not been any separate focus in the argument on this injunction either below or in this appeal, and we shall therefore treat it for present purposes as part of the Reconstitution Order.  The Reconstitution Order was made as an interim order in the Petition proceedings pending the determination of the Petition.  As is usual for such interlocutory orders, it was granted against Shih-Hua’s cross-undertaking as to damages (“Undertaking”) which was in these terms:

“ If the Court later finds that paragraph 1 and/or paragraph 2 of this Order has caused loss to the 1^st and/or 2^nd Respondents or any other party and decides that the 1^st and/or 2^nd Respondents or that other party should be compensated for the loss, the Petitioner will abide by any order which the Court may make as to damages.”[5]

Pursuant to a requirement for fortification of the Undertaking in the sum of HK$5 million, Shih-Hua subsequently paid US$646,000 into court. 

12.  With leave granted by the Court of Appeal on 3 March 2017 and an expedited hearing date offered (7 April 2017),[6] Zhang and Motivi lodged an appeal against the Reconstitution Order, but on 31 March 2017 they informed the Court of Appeal that they were satisfied with the New Directors’ performance and no longer wished to proceed with the appeal.  Accordingly, on 5 April 2017, the Court of Appeal dismissed the appeal.

13.  Meanwhile the 1^st, 3^rd and 4^th defendants in the Action (i.e. Zhang, EPL and Motivi) had applied to discharge the injunctions granted by Lok J and DHCJ Kent Yee and to strike out the Action.  These applications came on for hearing before Harris J on 25 – 26 July 2017, at the end of which his Lordship made an order granting the applications.  His reasons were handed down on 4 June 2018 (“Strike-out Decision”),[7] in which he strongly criticised Shih-Hua for forum shopping and failing to make material disclosures to the court.  In particular, at §§38 and 39 of the Strike-out Decision, Harris J said as follows in relation to the Reconstitution Order:

“ 38. It is necessary to consider how the Board has proceeded to deal with the Action after its reconstitution. Mr Bennett and Mr Tong were appointed on the basis that their fees for acting as directors would be paid by SH. As is clear from Mr Bennett’s email to Karen Luk of SH’s solicitors of 22 February 2017 SH did not, as it would appear Mr Bennett and Mr Tong expected, proceed after their appointment to promptly agree commercial terms with them. This remained the case in the middle of June according to an email from Alvan Liu to Mr Bennett and Mr Tong dated 16 June 2017, although SH had on 9 June 2017 finally made a contribution to their costs of US$150,000. It would appear the opposing creditors had also provided some finance intended, I get the impression from the correspondence, to fund restructuring efforts. The new Board was represented at the hearing before me by Mr Damien Whitehead of White & Case. Mr Whitehead took me to Mr Bennett’s email to Karen Luk of 27 June 2017 in which amongst other complaints directed at SH, Mr Bennett reminds Ms Luk that SH has still not provided the indemnity in respect of the new directors liabilities that it had undertaken to Anthony Chan J to provide. Mr Whitehead told me that the Board’s position is that the Company is insolvent and that as SH had not provided the funding Mr Bennett and Mr Tong had understood would be forthcoming when they were appointed, they had not been able properly to investigate the claims in the Action and did not intend to pursue them. SH has provided no explanation as to why it has not funded the conduct of the Action by the Board to date or proposed a scheme for doing so in the future.

39.    It would seem to me that SH has dealt with this matter in a disingenuous way.  It would appear that its application to reconstitute the Board was directed more to ousting Mr Zhang rather than putting in management that could take over the running of the Company’s affairs including the prosecution of the Action.  It appears that SH wishes to retain control of the Action, but in my view this is not an option for them having successfully reconstituted the Board.  In my view the prosecution of the Action by SH as a common law derivative action now clearly infringes the principles described in [33–35] above and [29–30] of the Statement of Claim are unsustainable.  The Action should, therefore, be struck out.”

14.  Shih-Hua lodged an appeal against the strike-out order (CACV 188/2017), and also applied, first to Harris J, and, after failing,[8] to the Court of Appeal (CAMP 76/2017), for leave to appeal against the order discharging the injunctions.

15.  On 25 June 2018, a creditor, Shell Eastern Trading (Pte) Ltd, presented a petition to wind up Everglory.[9]  Represented by the Reconstituted Board, Everglory did not contest the petition, and was consequently ordered by a Master to be wound up on 29 August 2018.  In fact, the Reconstituted Board had already indicated to the court on 28 November 2017 that it proposed to place Everglory in liquidation having regard to its insolvency.

16.  On 25 February 2019, the Court of Appeal rejected Shih-Hua’s application in CAMP 76/2017 for leave to appeal against Harris J’s decision discharging the interlocutory injunctions in the Action.[10]

17.  In around June 2019, HK$2.8 million out of the fortification monies paid into court was released with the Respondents’ consent.  On 3 July 2020, Shih-Hua issued a summons for the release of the remainder of the fortification monies.

18.  Shih-Hua’s appeal in CACV 188/2017 against the strike-out of the Action had remained pending. In December 2020, the Court of Appeal invited submissions on whether, given the winding up order, that appeal had become academic.  Having received written submissions, on 21 January 2021 the Court of Appeal gave its judgment[11] holding that the appeal should not be allowed to proceed since Everglory had been wound up and the liquidators had decided not to pursue the claims in the Action.  The appeal was accordingly dismissed.  The Court of Appeal’s decision contained the following passages which were subsequently relied upon by Harris J in his Decision:

“ 21.1. The crucial point is that whatever alleged claims there are in the Action, they are the Company’s (not SH’s) claims. In normal circumstances, it is for the board of directors of the Company to decide whether there is any substance in them, and even if there is substance, whether to pursue them or not. A board may properly decline to pursue claims if it thinks it is in the best interests (legal or financial) of the Company not to do so.

21.2. The CLDA was commenced by SH on the ground that the then board was not able or willing to protect the Company’s interests because ZAD was in control. But it transpired that even when independent professional persons (who were appointed to fulfil the duty to protect those interests) were placed in charge of the Company, they did not consider it appropriate to prosecute the claims in the Action.

21.3. In the case of the Reconstituted Board, its solicitor appeared before Harris J on 25- 26 July 2017, informing the court that as SH had not put it in funds, the Board was not in a position to continue with the Action[12]. That was a proper reason for the Board ’s decision not to pursue the claims in the Action. SH has not explained why it did not put the Company in funds so that the Board could investigate and pursue whatever claims it (the Board) considered the Company had. SH was apparently only prepared to expend funds to pursue the claims by itself, when the alleged claims are clearly claims belonging to the Company which was now in the hands of professional independent persons.

…

22. In the present case, it is significant that the Liquidators had said in their report that they do not intend to pursue the claims for 2 reasons: not only because of insufficient funds, but also as they have not been able to gather relevant information regarding the claims because the books and records of the Company are incomplete and allegedly false.

23. In other words, both sets of independent professionals controlling the Company at different times have decided not to pursue the claims in the Action. In this respect, it is important to note that the Liquidators are officers of the Court, and the reasons for their decision is not only financial, but also because of a lack of objective materials to substantiate the alleged claims. It is pertinent that SH has not complained that it has in fact provided sufficient materials to the Liquidators, but that the latter have refused, neglected or failed to appreciate the effect of such materials. If that were the case, SH could have applied to court under s.200(5) Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32, as a person aggrieved by an act or decision of liquidators. It has not done so.

24.  That being the case, the appeal should not be allowed just because SH, a contributory, wished to pursue it contrary to the Liquidators’ decision not to do so.  Even if the request in SH’s submissions is treated as an application by summons for the court to grant it leave to pursue the appeal (and presumably the Action, if successful), the Court would have refused it. As noted earlier, whatever alleged claims there were in the Action, they were the Company’s claims, not SH’s claims, and the Liquidators have decided, without challenge, that these claims are not objectively substantiated by reason of the lack of proper documentary evidence. For that reason, the court ‘acting as a filter against any totally wrong-headed action’ (Fargro p.374) would not have directed SH to pursue the Action for the Company.  To allow a contributory to pursue the appeal (and the Action), in the light of the Liquidators’ views that there is no sufficient and reliable documentary evidence in support, would be tantamount to permitting an abuse of process.”

19.  Meanwhile, on 19 November 2020, Zhang and Motivi, as the 1^st and 2^nd respondents in the Petition proceedings, and EPL and another company called Everglory (Macau) International Co., Ltd (“EMI”) as the intended 1^st and 2^nd interveners, had issued an application by summons for the court to determine whether Shih-Hua’s Undertaking should be enforced (“Enforcement Summons”).

The judge’s decision

20.  Following a hearing of the Enforcement Summons on 25 January 2022, Harris J issued his Decision on 25 February 2022 ordering an inquiry as to damages.  (It may be noted that, separately, in the Action, the 1^st to 4^th defendants there, as well as EMI and another associated company as interveners in the Action, had also applied for an inquiry as to damages based on Shih-Hua’s cross-undertakings given against the interlocutory injunctions it had obtained in the Action.  By decisions dated 30 April 2019 and 10 September 2021,[13] Harris J decided that those undertakings should be enforced and gave directions for an inquiry as to damages before a Master.)

21.  In his Decision on the Enforcement Summons, Harris J agreed with the Respondents and Interveners that they could apply for enforcement of the Undertaking even though the Petition had not gone on to a trial resulting in the determination of the allegations and cross-allegations made by the parties.[14] His Lordship noted that the determination required of him had two stages.  The first is whether or not the order in question was wrongly granted.  The second is whether it caused loss, though at this stage what was required was some evidence to show an arguable case that the Respondents and Interveners had sustained loss falling within the Undertaking.[15] 

22.  Harris J noted that contrary to his previous understanding, an accountants’ report prepared by Briscoe Wong Advisory Ltd relied on by the defendants for their application to strike out the Action had in fact also been placed before Anthony Chan J at the hearing for the Reconstitution Order.  Harris J noted that in the Strike-out Decision he had simply reached a different conclusion on certain factual matters common to both applications.[16]

23.  Harris J then set out the arguments of counsel for the Respondents and Interveners, including, in particular: (1) that having procured their appointment, Shih-Hua failed, without providing an explanation, to put the New Directors in funds to manage the affairs of the company and, in particular, to proceed with the claims in the Action; the reconstitution application was directed more to ousting Zhang rather than putting in management that could take over the running of the company’s affairs; if Anthony Chan J had been told this he would have been unlikely to have made the Reconstitution Order; (2) the evidence did not support Shih-Hua’s case that there had been diversion of Everglory’s assets by the Respondents; (3) the findings made by the Court of Appeal in dismissing the appeal[17] against the Strike-out Decision (including the lack of objective materials to substantiate the claims) show that the Reconstitution Order was unnecessary; (4) insofar as Shih-Hua argued that the Enforcement Summons could not properly proceed until the Reconstitution Order had been set aside or discharged, this was the substantive effect of the winding up order; and (5) insofar as Shih-Hua argued that the petition was academic, this was only because Shih-Hua had chosen not to prosecute it; the primary relief of a buy-out order could still be sought by Shih-Hua despite the winding up.

24.  After noting Shih-Hua’s response to those submissions, the judge said at §17:

“ … I would note that despite Mr Wong emphasising in his oral submissions (A) that at no stage has Shih-Hua explained why it had not funded the new Board as it had agreed and (B) Shih-Hua could prosecute the Petition and seek a buy-out order despite the winding up order, Mr Sherry did not address either issue. I infer that is because the answer would be unhelpful to Shih-Hua and support what I say in [39] of my decision. This in itself would suggest that the Reconstitution Order was improperly obtained.”

The paragraph 39 referred to in the quoted passage above is that in the judge’s Strike-out Decision (quoted above).

25.  In response to Shih-Hua’s submission that the Reconstituted Board was unable to take an informed view on what potential claims might be available due to the limited funds at their disposal and they had not been provided with a complete set of the company’s documents by the Respondents, Harris J said at §18 of the Decision that “presumably Shih-Hua was not inhibited in any way in providing such assistance as the new Board needed.”

26.  Harris J concluded in §19 of the Decision:

“ It seems to me that there is considerable force in Mr Wong’s argument. I think that I can properly conclude that on the evidence now before the court the Reconstitution Order was wrongly granted and was sought not for the reasons advanced, but as a tactical device.”

27.  On the question of loss, the judge disagreed with Shih-Hua’s submission that there was no evidence that the Respondents and Interveners had suffered loss.  In particular, he noted that the ledgers produced by the Respondents were evidence corroborating the Interveners’ case that Everglory had been advancing funds to them that supported their trading activities, but that the funding was terminated as a result of the Reconstitution Order.[18]

28.  In the result, Harris J ordered an inquiry as to damages, to take place at the same time as the inquiry already ordered in the Action.  Shih-Hua’s summons for release of the fortification monies was adjourned sine die pending the inquiry.

The appeal

29.  Shih-Hua’s application to Harris J for leave to appeal against the Decision was dismissed by consent on 16 May 2022.  By summons dated 25 May 2022, Shih-Hua applied to this court for leave to appeal.  As mentioned above, however, Mr Sherry submitted at the hearing that the Decision is a “final judgment” applying the “application test” (see Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd (2003) 6 HKCFAR 222), with the result that leave to appeal is not required.  For his part, Mr Wong agreed with this submission.

30.  We are inclined to agree that a decision whether to enforce an undertaking by ordering an inquiry as to damages is not an interlocutory order within the meaning of section 14AA of the High Court Ordinance.  Although an undertaking does not give rise to a cause of action as such, it enables a party to apply to the court for compensation.  In determining whether to order an inquiry, the court is not simply performing a screening function to exclude hopeless applications, but is required to make a substantive determination including whether the injunction was wrongly granted and whether in the exercise of the court’s discretion an inquiry should be ordered.  While the court does not determine at this stage whether loss was actually caused, its decision does, one way or the other, determine finally as between the parties those two questions which seem to us to be fundamental to the claim for compensation.  This, in our view, shows that the decision is a final one: Shell Hong Kong Ltd, at §31; Bright Shipping Ltd v Changhong Group (HK) Ltd [2019] 2 HKLRD 220, at §§9-11. Accordingly, leave to appeal was not required.  This court, constituted by two justices of appeal and with the parties’ prior written consent, has jurisdiction to determine the appeal: section 34B(4) of the High Court Ordinance.

The grounds of appeal

31.  Five grounds of appeal have been advanced.  They are, broadly stated, as follows:

(1)   Harris J’s decision that the Reconstitution Order was wrongly granted was based on improper inferences and presumptions and not in accordance with the evidence.

(2)   There was no new evidence to warrant Harris J’s decision that the Reconstitution Order was wrongly granted.

(3)   There is an inconsistency between the Decision and the Strike-out Decision.

(4)   An incorrect test was applied by the judge in considering whether the Respondents and Interveners had suffered loss.

(5)   The discretion to order an inquiry was not exercised judicially with regard to all the relevant circumstances.

32.  If successful, Shih-Hua seeks an order that Harris J’s order be set aside, the Enforcement Summons be dismissed and the remainder of the fortification monies be released to it.

Grounds 1 & 2 – Improper inferences and presumptions & no new evidence to warrant conclusion that the Reconstitution Order was wrongly granted

33.  We deal with Grounds 1 and 2 together, as they seem to us to be intertwined.  In short, Shih-Hua contends that the Reconstitution Order was correctly granted by Anthony Chan J in his decision dated 19 January 2017, and that Harris J’s finding that the Reconstitution Order was wrongly granted was erroneous.  Specifically, Shih-Hua submits that there was no new evidence to demonstrate that the Reconstitution Order was wrongly granted and that Harris J erred in making two inferences, relating to Shih-Hua’s failure to explain its non-provision of funds to the Reconstituted Board and to prosecute its Petition despite Everglory’s winding-up, and in making a presumption that Shih-Hua was not inhibited in any way in assisting the liquidators as needed. 

34.  The applicable principles for determining whether an injunction was “wrongly granted” and whether an inquiry as to damages ought to be ordered are not in dispute between the parties and may conveniently be taken from Potter LJ’s judgment in Yukong Line Ltd v Rendsburg Investments Corp & others [2001] 2 Lloyd’s Rep 113 at §32:

“ 32. Whereas the usual practice in respect of interlocutory injunctions is not to order an inquiry into damages on the cross-undertaking until the merits of the action have been finally decided at trial, in cases where a Mareva injunction is involved, a defendant or other party bound in respect of whom the injunction is discharged at any stage may seek, and be granted, an inquiry into damages on the basis that, regardless of the ultimate merits of the action, the injunction was ‘wrongly granted’. That term is in my view preferable to ‘improperly obtained’, because impropriety seems to me to carry connotations of improper conduct by the applicant, such as non-disclosure of material facts, whereas the term ‘wrongly granted’ covers the far wider circumstances in which the injunction may be discharged and an inquiry ordered. In respect of those wider circumstances it is necessary, for the purposes of the argument in this case, to distinguish between the position where the order is attacked on the grounds that the Court lacked jurisdiction to make it and the position where the Court makes an order within its jurisdiction but which is subsequently demonstrated or conceded to have been too wide in its scope or unjustified or inappropriate on the facts.”

35.  At §34, Potter LJ explained how the decision to enforce the undertaking should be made:

“ The question whether the undertaking should be enforced is a separate question from the question whether the injunction should be discharged. The order for an inquiry as to damages is discretionary, such discretion being exercised in accordance with equitable principles, taking into account all the circumstances of the case, but bearing in mind that, since the injunction should not have been obtained, prima facie the plaintiff ought to bear the loss …”

36.  In addition, it bears emphasis that whether an interim order was wrongly made is judged retrospectively, with the benefit of hindsight.  There is no need to demonstrate that the court’s original decision to grant the interim order was wrong or unjust when it was made: Smith Kline Beecham plc v Apotex Europe Ltd [2006] 1 WLR 872, §44; Abbey Forwarding Ltd (in liquidation) v Revenue and Customs Commissioners [2015] Bus LR 882, §87.  Nor is there any need to prove fault on the part of the party that obtained the interim order: Yukong Line, §33. 

37.  Mr Sherry emphasises that in making the Reconstitution Order, Anthony Chan J did find that Shih-Hua had demonstrated a good arguable case of unfair prejudice through the wrongdoing of Zhang and his associates to Everglory, that there was evidence to suggest that the Respondents were shutting out Shih-Hua from Everglory’s affairs and were trying to thwart independent investigation, that there was no evidence of Zhang’s ability to buy out Shih-Hua’s shares in Everglory, and that there would be an injustice if nothing was done by the court in the meantime.

38.  It should be noted that there was an argument raised in the appeal against the Reconstitution Order as to whether the court had jurisdiction to make it.  As noted above, that appeal was dismissed by consent.  For the purpose of this appeal, we shall assume (without deciding) that the court has power, in the course of proceedings for remedies for unfair prejudice and/or winding up on the just and equitable ground, to make an interlocutory order for reconstituting the board of directors of a company.  Even so, great caution must be exercised before such an order will be made which is exceptional in nature in that it imposes a director or even an entire board on a company.  As Anthony Chan J recognised (see §67 of his decision), an interim reconstitution order should only be granted in exceptional cases.  In Pringle v Callard [2008] 2 BCLC 505 at §33, it was said that “the court would be extraordinarily cautious before imposing a director on a company by way of an interim remedy”; see also MKGWH v RKSH [2011] 1 HKLRD 1048, §§53, 58-59, 63, per Yuen JA.

39.  We do not read his Decision as suggesting that Harris J went so far as to hold that there was no serious issue to be tried on the alleged wrongdoing to the company that formed the basis for an application for interim order.  Nevertheless, given the exceptional and drastic nature of the interim remedy sought, the court must be satisfied that it was in all the circumstances a proper order to be made.  In the present case, what in particular caused Harris J to have the misgivings he expressed was that there was a protracted dispute between Shih-Hua and the Reconstituted Board in relation to the funding and indemnity for the New Directors.  This was described by Harris J in §38 of his Strike-out Decision (quoted in §13 above).

40.  In applying to the court for the Reconstitution Order, Shih-Hua accepted that it had to provide indemnification for the New Directors.  This was reflected in Anthony Chan J’s decision:

“  80.    … Mr Chua [counsel for Shih-Hua] has informed the court that the replacement directors may require an indemnity for their service.  Mr Chua accepted that such indemnity will have to be provided by Shih-Hua. …”

There was however no provision in the Reconstitution Order dealing with the remuneration and disbursements of the New Directors or how they were to be funded.  This turned out to be a highly problematic omission.

41.  Following the grant of the Reconstitution Order, Shih-Hua never provided an indemnity to the Reconstituted Board.  There was a drawn-out debate on how the New Directors should be funded.  Disagreement arose quite early on.  On 8 February 2017, Grant Thornton Directorship Services Ltd (“GTDS”), a company associated with the New Directors, gave Shih-Hua’s solicitors, Alvin Liu & Partners (“ALP”), a draft letter of engagement of GTDS for their review, which included provisions for the invoicing and payment of GTDS’s fees and expenses.  On 14 February, ALP reverted with amendments that (1) sought to restrict the New Directors’ activities such that they could not devise and implement a restructuring or liquidation plan and strategy, and (2) requested that the New Directors first seek an indemnity from the Major Creditors before seeking it from Shih-Hua.  On 16 February, the New Directors told ALP that they “obviously cannot agree to” ALP’s amendments.  On 27 February, GTDS provided a revised draft letter of engagement, stating that it was not envisaged by the Reconstitution Order that the Major Creditors should bear responsibility for indemnifying the costs of the New Directors, and that should Shih-Hua not execute the letter, GTDS would assume that Shih-Hua would not provide the requested indemnity.  On 17 March, ALP wrote a 13-page letter to the New Directors, stating, inter alia, that the primary objective of their appointment was to be in control of the company to the exclusion of Zhang, and that they should not be concerned with “restructuring”.  On 21 March, the New Directors wrote back to defend the actions they had taken, stating it was simply not the case that the New Directors were appointed to represent the interests of Shih-Hua solely, and that due to the questionable solvency of the company, the New Directors had duties to creditors whose interests would rank above the shareholders’ in an insolvency.  The letter gave formal notification that the New Directors were calling on the indemnity that Shih-Hua told the court it would provide. On 30 March, ALP wrote to the New Directors, reiterating the points previously made.  On 3 April, the New Directors, via White & Case, solicitors for the company, wrote to ALP, stating that “the fundamental issue facing the Company at the moment is funding”, without which Everglory could not continue to trade, the New Directors could not properly consider the merits of Shih-Hua’s allegations against Zhang or undertake any required investigations, Everglory could not pursue any claims arising from those investigations, and its restructuring could not progress.  The New Directors proposed, “as a final endeavour to reach agreement”, that the parties stop considering the draft letter of engagement and that, instead, Shih-Hua simply execute a form of indemnity in terms of §80 of Anthony Chan J’s decision (quoted at §40 above).  On 5 April, Shih-Hua replied through ALP, without signing any indemnity, that the issues that required discussion “should not be over-simplified into a single issue of signing or not signing the indemnity”.  ALP also accused the New Directors of having “stepped into the shoes of the 1^st and 2^nd Respondents”.  David Bennett, one of the New Directors, said in a subsequent affidavit made in August 2018 that they did not consider there were any outstanding issues that should have impacted upon the provision of the indemnity and that, in their view, “Shih-Hua was simply obfuscating and delaying providing the Indemnity”.  When the New Directors considered applying to the court for directions pursuant to §80 of Anthony Chan J’s decision, Shih-Hua (through its representative Mr Zhong Jie) wrote to the New Directors on 24 April 2017 that such an application would be an “unreasonable act” and that if necessary, Shih-Hua would apply to remove the New Directors because of their “inadequate ability” and “unsatisfactory performance”.  Eventually, on about 9 June 2017, Shih-Hua provided funding in the amount of US$150,000 to the company, and funding in the same amount was provided by each of Motivi and the two Major Creditors.  But that was apparently insufficient in the scheme of things, and the New Directors, unable to facilitate a restructuring of the company, took the view that Everglory should be put into liquidation.  They wrote to the court on 28 November 2017, stating that they had no option but to wind up Everglory and that they intended to do so forthwith.

42.  It was against this background that Harris J said in his Decision at §17 that Mr Sherry did not address Mr Wong’s argument that Shih-Hua had not explained why it had not funded the New Directors as it had agreed, and inferred from it that the answer would be unhelpful to Shih-Hua.  Shih-Hua argued that the judge failed to properly take into consideration that it had provided funding in the sum of US$150,000. This argument is in our view without merit.  The judge knew and considered this fact.  In the Decision the judge referred to his Strike-out Decision which expressly referred to the funding provided by Shih-Hua.  More precisely, as set out in Mr Bennet’s affidavit, Shih-Hua provided US$100,000 as funding, with an additional US$50,000 reserved to pay for legal advice for Everglory (of which US$39,000 was paid out).  In total, Shih-Hua provided US$139,000.  A further US$450,000 had been provided by the other three stakeholders.  Those combined funds were largely expended on director fees and legal expenses (approximately US$400,000) and on legal advice from White & Case (approximately US$150,000).  According to Mr Bennett’s affidavit, the New Directors were “restricted in their efforts to fully pursue all potential lines of enquiry” due to a lack of funding.  He further said that they were “constrained on what work they could undertake by Shih-Hua’s failure to provide an indemnity it undertook to the Court that it would provide …  The New Directors have undertaken a significant amount of work for which they have not been remunerated …”.  Furthermore, Mr Bennett complained that despite the New Directors’ multiple requests for proof that Shih-Hua had sufficient assets in the event its indemnity needed to be called upon, Shih-Hua never provided this information to the New Directors.  In short, Shih-Hua only provided some limited funding in June 2017, which, even combined with funding from other stakeholders, was inadequate to enable the New Directors to carry out their tasks.  Despite requests from the New Directors, Shih-Hua never provided them with a written indemnity or information on the financial position of Shih-Hua.

43.  Whilst we may not ourselves have drawn an inference that Shih-Hua did not intend even initially to see that there were proper directors managing the company, what emerges clearly from the correspondence between the New Directors and Shih-Hua or its solicitors is that, having secured an order that ousted Zhang from management, Shih-Hua did not give any indemnity it told the court it would provide, it wanted the Major Creditors to give the primary indemnity for the New Directors, it wanted the New Directors to carry on without initial funding for a substantial period of time, and it did not in fact provide any funding until June 2017 and, even then, only in an amount which even in aggregate with the funding from other stakeholders was insufficient for the New Directors to carry on the work they considered appropriate. 

44.  It is unnecessary to decide whether the issues raised by Shih-Hua with the New Directors regarding their remuneration and expenses were genuine disagreements or excuses for not putting up funds.  The fact was that having excluded Zhang from management, Shih-Hua did not fund or provide an indemnity to the New Directors for carrying out what they independently considered to be the priorities.  This was within the scope of the problems pointed out by counsel for the Respondents and Interveners to Harris J in submitting that if Anthony Chan J were aware of this he would have been unlikely to have made the Reconstitution Order.  We do not think that Harris J can be faulted for accepting this and finding that the Reconstitution Order was wrongly granted.

45.  Shih-Hua also complained about Harris J’s observation that it could prosecute the Petition and seek a buy-out order despite the winding-up of Everglory.  Mr Sherry submitted that the Petition was not proceeded with after Everglory was wound up because it had become academic and Shih-Hua did not favour a buy-out order.  The short answer to this complaint is that, as submitted by Mr Wong, the point arose in a different context and not as a ground for saying that the Reconstitution Order was wrongly granted. At the hearing before Harris J, it was submitted by Shih-Hua that because the Petition had become academic by reason of the winding up, it could no longer be determined that the Reconstitution Order was wrongly granted or the court should not determine the issue, and an inquiry as to damages should therefore not be ordered.  In response, the Respondents and Interveners contended that Shih-Hua’s submission was erroneous in law, but also made the additional point that the Petition was only academic because Shih-Hua chose not to pursue the buy-out relief which was still open to it, and that Shih-Hua’s choice not to proceed was not a good reason for the court not to determine whether the Reconstitution Order was wrongly granted.

46.  Finally, Mr Sherry argued that Shih-Hua had done everything it could to assist the liquidators with their investigation and duty to obtain Everglory’s books and records, but was hampered by the Respondents in this exercise.  He argued that Harris J was wrong in presuming that Shih-Hua “was not inhibited in any way in providing such assistance as the new Board needed”.[19] We do not consider that this contention assists Shih-Hua.  As the Court of Appeal observed in dismissing Shih-Hua’s appeal against the Strike-out Decision (see the passages quoted in §18 above), the fact is that even with the appointment of the New Directors, and the appointment of liquidators after the winding up, these office-holders had concluded there was a lack of objective materials to substantiate the allegations and claims raised by Shih-Hua.  As Mr Wong submitted, and as we read the Decision, Harris J did not suggest that Shih-Hua had failed to assist those office-holders and withheld information from them.  On the contrary, the judge presumed that Shih-Hua would give them what information it had to support its allegations against the Respondents.  According to the liquidators’ (Duff & Phelps) report, Shih-Hua had informed the liquidators that it was not in a position to provide the complete books and records of the company as it had been excluded from the affairs of Everglory since mid-January 2014.  But even so, the objective fact was that, as the judge recorded, “the liquidators do not appear to have been provided with any information from which they felt able to support the claims made by Shih-Hua”.  The fact that the two sets of independent professionals would both find there was insufficient material to substantiate Shih-Hua’s allegations was obviously not in the evidence before Anthony Chan J.  It seems to us plain that, with the benefit of hindsight, a major and primary purpose for the Reconstitution Order simply could not be achieved in the circumstances as they transpired.  Neither the New Directors nor the liquidators were able to form a view that the allegations made in the Petition were substantiated, and in the end, Shih-Hua itself chose not to prosecute the Petition and seek to establish the allegations therein for its claim for a buy-out.  This supports the argument raised by the Respondents before the judge (as recorded in the Decision at §16(3)) that the Reconstitution Order was unnecessary.

47.  For the above reasons, Grounds 1 and 2 fail.

Ground 3 – Inconsistency between the Decision and the Strike-out Decision

48.  Shih-Hua submits the Decision and the Strike-out Decision are mutually inconsistent because the Strike-out Decision was determined on the basis that the Reconstitution Order was properly granted.  In particular, Mr Sherry pointed out that in deciding to discharge the interlocutory injunctions, Harris J said that the appointment of the New Directors made him more confident in reaching the conclusion that the evidence did not show that unless restrained, Zhang would divert future payments from Everglory.[20]

49.  We do not find any merit in this point.  First, one of the main reasons for the Action to be struck out was that the company was no longer in the control of the alleged wrongdoer.  By the time of the Decision, this reason would be available even if the Reconstitution Order was set aside, because the company had been wound up (since 29 August 2018) and independent liquidators had been appointed. Secondly, as we read Harris J’s reasoning in the Strike-out Decision, his Lordship would, irrespective of the existence of the New Directors, have discharged the interlocutory injunctions and refused to re-grant them because of the “serious material non-disclosure” on Shih-Hua’s part which “arose not from inadvertence, but was intentional” and the abusive nature of Shih-Hua’s ex parte applications for those injunctions.[21] The Respondents did not therefore gain an advantage in that regard which would not have enured to them but for the existence of the Reconstitution Order.  Thirdly, the question whether the Reconstitution Order was wrongly granted did not depend on whether it was relied on in the Strike-out Decision but involved looking at all the facts and circumstances with the benefit of hindsight.  Fourthly, Harris J decided that the Reconstitution Order was wrongly granted in part because, as it turned out, neither the New Directors nor the liquidators found there was “any information from which they felt able to support the claims made by Shih-Hua.”[22]  This is entirely consistent with the view the judge took in the Strike-out Decision.  Accordingly, Ground 3 also fails.

Ground 4 – Legal test and credibility of evidence regarding loss

50.  The first point raised in this ground is that the judge applied an incorrect legal test on the question of loss.  Referring to §20 of the Decision, it is said that the judge, in using the words “evidence that suggests a sufficient possibility of loss”, applied a standard which is lower than what the law requires.

51.  We do not find any merit in this point.  The judge did not simply ask whether there was a possibility of loss.  The relevant sentence in §20 reads: “All that is required at this stage is evidence that suggests a sufficient possibility of loss having been caused as to justify an inquiry and that it is unlikely to prove a futile waste of the parties’ and the court’s resources.”  As to what is sufficient to justify an inquiry, the judge had stated earlier at §13:

“ … At the present stage of the process what is required is that the Respondents and the Interveners adduce some evidence to show an arguable case that they have sustained loss falling within the undertaking. The court should not allow a protracted argument on whether the suggested loss will be recoverable. The court is concerned to determine whether there is evidence which demonstrates that an inquiry will serve some purpose and would not be an exercise in futility.” (footnotes omitted)

52.  This is not substantially different from what Shih-Hua submits to be the correct standard based on Komal Patel & others v Chris Au & others (HCA 183/2014; 4 August 2014), where Zervos J said at §23:

“ An inquiry as to damages should not be awarded unless there is at least some reasonably arguable case that the injunction has caused the injuncted party some loss or damage for which compensation ought to be paid. This will necessitate the injuncted party adducing credible evidence that he has suffered loss as the result of the making of the order. As stated by Potter LJ in Yukong Line at para 35:

‘ So far as evidence of loss is concerned, upon an application for an inquiry, the applicant must adduce some credible evidence that he has suffered loss as the result of the making of the order.  The court will not order any inquiry if it appears to be pointless to do so because the intended claim for damage is plainly unsustainable.  That may be because it is clear that the order is no more than the factual context for loss which would have been suffered regardless of the granting of the order, or it may equally be clear that the damage is too remote.  However, at the stage of exercising its discretion whether to order an inquiry, the Court does not ordinarily hear protracted argument on whether the suggested loss will be recoverable.  If the defendant shows that he has suffered loss which was prima facie or arguably caused by the order, then the evidential burden of any contention that the relevant loss would have been suffered regardless of the making of the order in practice passes to the defendant and an inquiry will be ordered: see for instance Financiera Armhouse SA v Shiblaq; Tharros Shipping Co Ltd v Bias Shipping Ltd [1994] 1 Lloyd’s Rep 577.’ ”

53.  In fact, in §13 of the Decision, Harris J referred to Gee on Commercial Injunctions (7^th ed), §§11-037 & 11-041, which in turn referred to Yukong Line and stated that on an application for an inquiry the applicant should adduce “some evidence to show an arguable case that he has sustained loss falling within the undertaking”.  We are not impressed by Shih-Hua’s argument that criticises the judge for not expressly referring to “credible” evidence of loss “arguably caused” by the order.  Viewing the matter in substance, it is in our judgment not reasonably arguable that the judge had applied an erroneous standard.

54.  At the stage of exercising its discretion whether to order an inquiry the court does not hear protracted argument on whether the suggested loss is recoverable.  The court need only be satisfied there was credible evidence that the party in question had suffered loss which was prima facie or arguably caused by the order.  Thereafter it is a matter to be resolved at an inquiry.  Thus the judge stated:

“ 20. … Part of the claim that concerns the Interveners is the alleged loss of profit from the reselling of ethylene and propylene, the 1^st Intervener being unable to proceed with its deals with Strong Hero and Trust Bridge to purchase the same from them following the termination of funding by the Company to the 1^st Intervener. Shih-Hua takes issue with this claim contending that no such funding arrangement had been agreed by the Company and the 1^st Intervener or, if I understand Shih-Hua’s case correctly, in the alternative any such agreement was not properly authorised by the Board.

21.    The Respondents have ledgers produced by F.S. Li & Co., (a firm of accountants) in 2016, which show that the Company advanced significant sums to both the Interveners during 2016 and received payments from them. The ledger ends with an advance to the 1^st Intervener dated 26 June 2016 of US$9,746,578.65.  The total debits and credits for the period shown in the ledgers (which commences with an advance to the 2^nd Intervener of US$520,000 on 6 January 2016) is US$122,826,766.81 and US$145,926,161.82 respectively showing a net amount owed to the Company of US$304,673.12.  Cleary the Company was advancing considerable amounts to the Interveners until Shih-Hua took action, which brought it to a halt.  I am not concerned to determine whether or not either the advances were properly authorised, the consequences if they were not or whether there were any other profitable transactions of which the Interveners were prevented concluding because of the impact of the Reconstitution Order.  That is a matter for a Master.  The position is the same in respect of the other objections raised by Shih-Hua.  They may need to be addressed before a Master and Shih-Hua may prevail on some or all of them.  That is not a matter for me to determine.”

55.  The next point raised in this ground is that, even if Harris J did apply the correct legal test, the ledgers relied upon by the Respondents and Interveners did not constitute credible evidence for a reasonably arguable case on loss.  In particular Mr Sherry criticised the judge’s conclusion in three respects: (1) the bookkeeper’s affirmation which exhibited the ledgers did not explain the funding arrangement alleged by the Respondents and Interveners; (2) the ledgers showing the “advance” of US$9,746,578.65 by Everglory to the 1^st Intervener on 26 June 2016 referred to an “invoice”, which is inconsistent with a funding arrangement as alleged; and (3) the ledgers showed a net amount of US$304,673.12 owed by Everglory to the 1^st Intervener and another entity, not an amount owed to Everglory as the judge stated. 

56.  We do not accept that these points are sufficient to impugn the Judge’s finding of an arguable case on the facts.  None of them was raised below.  In any event, as to (1), there was evidence in the affirmations filed on behalf of the Respondents and Interveners to explain that the ledgers supported the existence of the funding arrangement.  Shih-Hua said that the explanation was ex post facto but the judge was entitled to accept it as sufficient at this stage.  As to (2), there were clearly multiple entries of inter-company transfers which may reflect a funding arrangement.  The mere existence of an entry marked by “inv” is not in our view sufficient to render the alleged arrangement incredible.  As to (3), it is true that the Decision wrongly stated that US$304,673.12 was “owed to” Everglory instead of “owed from”, but it does not affect the fact that there were sums flowing both ways, which may reflect a funding arrangement.  Overall, these points raised by Shih-Hua are in our view insufficient to overturn the judge’s finding as to the sufficiency and credibility of the evidence for the purpose of allowing the matter to proceed to the inquiry stage.  Accordingly, this ground of appeal fails.

Ground 5 – Discretion to order inquiry

57.  Shih-Hua accepts that Harris J’s decision to order an inquiry was an exercise of the court’s discretion.  Generally, an appellate court will not interfere with a judge’s exercise of discretion except where the established, special grounds are shown, such as that the judge has misunderstood the law or the evidence or the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which reasonable disagreement is possible: Cheung Kam Wah v Cheung Hon Wah & Ors [2005] 1 HKC 136 at §17.

58.  Shih-Hua raises three points to impugn the judge’s exercise of his discretion.  It is submitted that Harris J failed to (1) address or consider the findings and reasoning of Anthony Chan J which led him to make the Reconstitution Order; (2) appreciate that the Reconstitution Order was supported by the Major Creditors; and (3) address or consider Shih-Hua’s submissions that the Respondents had already agreed to a partial release of HK$2.8 million out of the fortification monies, which contradicted their present position seeking to enforce the Undertaking.

59.  We do not accept these contentions. To begin with, it should be remembered that it is not incumbent upon a judge in giving judgment to refer to each and every piece of evidence or argument before him: Allied Ever Holdings Ltd v Li Shu Chung [2021] HKCA 577, §§7.4 and 8.2.  Furthermore, in this case Harris J had the advantage of having dealt with the case before and come to certain conclusions in the Strike-out Decision, as a result of which the Decision was briefer than it might otherwise have been.  We do not think there is any basis for saying that Harris J failed to consider the findings and reasoning of Anthony Chan J or the fact that the Major Creditors supported the reconstitution application.  It is plain from the Decision (especially §§7 & 16) that Harris J was well aware of the views of Anthony Chan J, which formed a main plank of Shih-Hua’s submissions.  As Harris J put it in §7, he had “simply reached a different conclusion [from that of Anthony Chan J] on some of the factual matters common to both applications”.  The Strike-out Decision, which clearly was at the forefront of the judge’s mind when he issued the Decision, also recorded that the New Directors were nominated by the Major Creditors.[23] Furthermore, Harris J’s decision to order an inquiry was not in the nature of an appeal against Anthony Chan J’s decision, but a determination with the benefit of the knowledge of all subsequent events.  Having considered the totality of the evidence and materials including the decision of Anthony Chan J, Harris J came to the view the injunction was wrongly granted.  There is no reviewable error in this respect in Harris J’s exercise of discretion.

60.  As to the Respondents’ earlier agreement to the partial release of the fortification monies, this was a matter relied upon by Shih-Hua before Harris J in support of its argument that there was no credible evidence of loss.[24] Contrary to Shih-Hua’s submissions, the judge found that there was sufficient evidential basis on loss caused for the matter to proceed further.  At the end, the judge directed that Shih-Hua’s summons for the release of the remaining fortification monies be adjourned sine die until after the inquiry as to damages.  We do not think the Respondents’ consent to the partial release provided a compelling reason not to order an inquiry.

61.  This ground of appeal therefore also fails. 

Conclusion

62.  For the above reasons, we are not satisfied that any ground has been made out for us to overturn the Decision.  Shih-Hua’s appeal is accordingly dismissed.  For the avoidance of doubt, the summons for leave to appeal in CAMP 167/2022 is also dismissed.  There will be an order nisi that Shih-Hua do pay the costs of the Respondents and Interveners, with a certificate for two counsel.