HONG KONG CENTURY PROPERTY DEVELOPMENT LTD v. HUI NEI NA AND OTHERS

HCA 1314/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1314 OF 2006

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D E C I S I O N

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1.  I have before me a summons for the continuation of an ex parte injunction and an application for its discharge.

2.  This decision I give should be read with my earlier decision in dismissing an application for an interlocutory injunction in a petition under section 168A of the Companies Ordinance, Cap. 32 in HCMP No. 3216 of 2004 on 20 April 2005.  I have in that decision set out the background and the matters in dispute at some length.  I do not propose to repeat them here.  I will use the same abbreviations as in the previous decision.  I will call the Company in Hong Kong, Hong Kong Century Property Development Limited, “the Company”.  The joint venture company in the PRC in which the Company holds its 90% interest is called “Liuzhou Century”.  The property developed by Liuzhou Century in the Five Star Street, Liuzhou City is called “the Development”.

3.  I will first give an account of the relevant events after the decision in chronological order.

4.  After the decision was given in April 2005, no action had apparently been taken by either side to proceed with the petition.

5.  In mid 2005, the tax bureau of Liuzhou City (“the tax bureau”) started to investigate an allegation of under-reporting of tax by Liuzhou Century.  Since March 2005, Chen Shenan (“Chen”) has not returned to Liuzhou for fear of being apprehended and detained.  His brother-in-law Peng Yi Cheng (“Peng”) was investigated and he too left Liuzhou on about 23 June 2005 and has not since returned.

6.  The public security bureau of Liuzhou City (“the public security”) has issued warrants of arrest for Chen, Peng, Chen’s wife and others.

7.  Hui Nei Na (“Madam Hui”) said she first discovered the tax liability of Liuzhou Century on 23 June 2005, when the public security seized all financial documents and accounts of Liuzhou Century.

8.  Madam Hui and her husband Cheung Sek Kei (“Cheung”) went back to Liuzhou in July 2005 and they resumed control of Liuzhou Century, notwithstanding the dispute in HCMP No. 3216 of 2004 that they had been removed from their positions in that company by Chen’s camp.

9.  In or about October 2005, Chen transferred his shareholding in the Company held through Winsway Corporation (“Winsway”) to Seaco Properties Limited, which is owned by Hui Sung Sat (“Hui”).  Nothing is known about the circumstances of this transfer or the actual consideration paid by Hui to Chen for Chen’s considerable stake in the Company.  I note the suggestion made by Madam Hui’s camp that Hui is probably just a nominee or puppet of Chen.  It is not necessary for present purpose to come to any view about this.

10.  On 13 March 2006, a notice was received from the relevant government authority in the PRC that Liuzhou Century owes land use fees in the sum of RMB9,476,980.00.

11.  On 15 March 2006, the tax bureau completed its investigation of Liuzhou Century.  It gave its decision on 19 June 2006 and determined the tax liability of Liuzhou Century at RMB30,086,285.46.  Of this amount, the tax bureau decided that RMB29,632,200.11 should be paid by Liuzhou Century as penalty within 15 days of service of the decision.

12.  Madam Hui and Cheung decided to sell some of the units in the Development to pay the tax liability of Liuzhou Century and the land use fees.  On 19 April 2006,  Liuzhou Century entered into an agency agreement with Greatlink Property Consultant Company Limited to sell some of the units.  In April and May 2006, they tried to sell the units in the Development by advertising in the newspapers, putting up street advertisement and by text message on mobile phones.  Despite these efforts, only 1 unit was sold by the end of July 2006.

13.  On 20 June 2006, Hui through Winsway, commenced this action (HCA No. 1314 of 2006) which was at that time a derivative action against Madam Hui, Cheung, Liu Qing, the 3 companies owned by each of these 3 individuals through which they held shares in the Company, Liuzhou Century and the Company.  So there are 8 defendants in all.  This action is merely a repetition of the complaints and allegations made by Chen and his camp in HCMP No. 3216 of 2004.

14.  At the outset of the hearing today, I made an order to substitute the Company as the plaintiff in the High Court Action in the place of Winsway.

15.  On 2 August 2006, a notice of payment was issued by the tax bureau to Liuzhou Century in accordance with the Tax Collection Law of the PRC.  By this notice, Liuzhou Century was required to pay RMB30,086,285.46 by 16 August 2006.  If payment was not made by that day, a further penalty would be imposed.  It was also stated that an aggrieved party may apply to the tax bureau for administrative review within 60 days of receipt of the notice, or bring proceedings in court within 3 months of receipt of the notice.  I note in the relevant legislation that the tax bureau has power to impose additional penalty if payment of tax is not made within time and it has power to sell the tax payer’s assets by compulsory public auction and apply the proceeds of sale to pay the tax due.

16.  On 8 August 2006, Liuzhou Century made a request in writing to the public security to sell its assets by public auction to discharge its tax liability, the land use fees and various fines and surcharges.

17.  On 9 August 2006, the public security issued a notice stating that the public auction of the assets of Liuzhou Century at its request would be conducted under the supervision of the public security, that the proceeds of sale would first be used to discharge the tax liability and other amounts owed to the government, and that the use of any surplus would be monitored by the public security.

18.  On 16 August 2006, an agreement was made between Liuzhou Century and an auctioneer for the sale of certain units in the Development that took up about 14% of the total area at a total reserve price of RMB92,560,000.00.  Under the agreement, the auctioneer is not permitted to sell below the reserve price.

19.  Meanwhile on 12 August 2006, Winsway issued a notice to convene an extraordinary general meeting of the Company on 31 August 2006 to consider various resolutions to remove Madam Hui, Cheung and others as directors of the Company with immediate effect, to appoint Hui and another as directors of the Company with immediate effect, to confirm the removal of Madam Hui as chairman of the board of directors and the legal representative of Liuzhou Century, and to appoint Hui as the chairman of the board of directors and the legal representative of Liuzhou Century with immediate effect.

20.  On 17 August 2006, Hui read a notice of the public auction of the Development to be held on 26 and 27 August 2006.  Hui through Winsway applied for and obtained an ex parte injunction on 24 August 2006 before Chu J.  By the injunction, Madam Hui, Cheung and Liu Qing were restrained from acting on behalf of Liuzhou Century for the purpose of dealing with the Development whether by public auction or otherwise, including the giving of instructions to the auctioneer for this purpose.

21.  This application for an ex parte injunction was made on the allegation of Hui that he was informed by the auctioneer that the entire Development was to be sold at a reserve price of RMB200 million, which was less than 50% of the market value, on the pretext that the proceeds of sale would be used to pay tax, when the authorities in Liuzhou had not completed the investigation into the allegations of tax evasion and that no decision had been made.  Hui produced an opinion from an accountant in the PRC that there was no evasion of tax on the part of Liuzhou Century.  He asked the court to infer that the only reason for the sale of the entire assets of Liuzhou Century and thus of the Company was that Madam Hui and Cheung had intended to abscond with the proceeds to Canada as they are Canadian residents.  If the injunction were not granted, any judgment obtained against them in the High Court Action would be rendered futile.  The injunction was needed to preserve the status quo.  There was urgency as the public auction was to take place on 26 and 27 August 2006.

22.  Armed with a sealed copy of the injunction, Hui went to Liuzhou on 24 August 2006, and called on the auctioneer on 26 August 2006 to serve on him the injunction.  Hui was taken to the office of the public security and interrogated for the tax evasion of Liuzhou Century for over 7 hours.

23.  On 25 August 2006, Winsway issued an inter partes summons for the continuation of the injunction.

24.  On 28 August 2006, the public security issued a notice stating that Liuzhou Century had only paid RMB 2 million towards its tax liability and the balance was outstanding.  The public security noted the injunction granted by the Hong Kong court on 24 August 2006 and stated that in order to avoid unnecessary conflict, it had decided to postpone the public auction to 2 September 2006.

25.  Another notice was issued on 28 August 2006, this time by the tax bureau.  By this notice, which recited the relevant provision of the Tax Collection Law in the PRC, Liuzhou Century was required to provide to the bureau within 3 days of receipt of the notice details of all its accounts with banks and financial institutions.  I understand this was a measure taken by the tax bureau for the purpose of freezing the bank accounts of the tax payer to collect unpaid tax.

26.  On 31 August 2006, Madam Hui, Cheung and Liu Qing issued a summons to discharge the ex parte injunction.

27.  On the same day, an extraordinary general meeting of the Company was held.  Two public security officers went with the shareholders in Madam Hui’s camp to attend this meeting.  Hui called the police and the public security officers were asked to leave.  The meeting was adjourned until further notice.

28.  On 1 September 2006, Deputy Judge Saunders (as he then was) ordered that the ex parte injunction be continued until the hearing of the inter partes summons for continuation of the injunction on 22 September 2006.  He ordered Madam Hui, Cheung and Liu Qing to inform Winsway in writing and confirm on affidavit the details of any part of the Development they intended to sell or dispose of on behalf of Liuzhou Century.

29.  On 9 September 2006, Madam Hui filed a further affirmation in support of her application for discharge and gave an account of what had happened to the auction after the injunction was granted.  Madam Hui and Cheung flew to Liuzhou immediately in the hope of stopping the auction on 2 September 2006.  They contacted a Mr Wang, who is a representative of Anching Liuzhou Real Estate Development Company Limited, the PRC partner of Liuzhou Century in the Development.  Mr  Wang refused to stop the auction.  Madam Hui and Cheung flew back to Hong Kong on the same day.  They did not take any other action to stop the auction.  To comply with the order on 1 September 2006 to provide information, they wrote to the auctioneer to seek information on 7 September 2006.

30.  In a subsequent affirmation of Cheung, he stated that after the auction had taken place on 2 September 2006, the auctioneer informed Madam Hui that two units were sold and requested her to sign the necessary papers to effect the transfer but she refused to do so.  Up to present there is still no transfer of the 2 properties sold in the auction on 2 September 2006.

31.  At the hearing before the summons judge Deputy Judge Carlson on 22 September 2006, he made an order for the continuation of the ex parte injunction until the substantive determination of the summons for continuation and the summons for discharge.  He ordered that the sales proceeds and rental income should be deposited into the bank accounts in the name of Liuzhou Century and that Madam Hui, Cheung and Liu Qing should provide bank statements to Winsway every two weeks and that they may, out of the proceeds, discharge reasonable utility charges, expenses for repair and maintenance, and pay reasonable salaries to the employees of Liuzhou Century.  Further, Madam Hui, Cheung and Liu Qing were ordered to provide to Winsway an account of every sale and lease in the Development, with supporting documents, from 24 August 2006, and details of all payments and outgoings as well as the whereabouts of the proceeds by the public auction held on 2 September 2006.

32.  On 26 September 2006, through the arrangement of the public security, another auctioneer was found to conduct further public auctions.

33.  On 28 September 2006, there was a criminal trial before the Liuzhou City District People’s Court of Liuzhou Century, its accountant and another related company.  Madam Hui and the lawyers she instructed for Liuzhou Century took part in the trial.  The defence they raised was rejected by the court.

34.  On 26 October 2006, Liuzhou Century was convicted of tax evasion and fined RMB54,645,273.00, to be paid within 1 month or else there would be enforcement action according to law.  This fine was over and above what the tax bureau had ordered Liuzhou Century to pay in the sum of RMB30 million odd.  Madam Hui was prohibited from leaving the country until the tax liability, the land use fees, surcharge and fines have been paid to the tax bureau and the public security.

35.  On 28 October 2006, a notice was issued by the tax bureau that Madam Hui was prohibited from leaving the country.  There was a renewed notification of the tax bureau to the same effect on 5 December 2006.  Madam Hui is still in Liuzhou at present.

36.  Other public auctions of the Development were scheduled to be held on 11, 15, 18 and 21 October 2006.  The solicitors for Winsway wrote to the solicitors for Madam Hui asking the individuals restrained by the injunction to stop the further public auctions and to provide information according to the order made on 22 September 2006.  There was no response.

37.  On 16 November 2006, Hui lodged an appeal on behalf of Liuzhou Century against its criminal conviction for tax evasion.

38.  On 28 November 2006, Hui on behalf of the Company and Liuzhou Century filed an action with the Liuzhou City District People’s Court against the State Administration of Commence and Industrial Bureau alleging neglect of public duty to process his application for registration as the legal representative of Liuzhou Century.

39.  A statement was issued by the new auctioneer on 13 December 2006, setting out in a schedule the 86 units of the Development that have been sold with the price of each and the total amount of sales price at RMB133,001,000.00.  According to the statement, the auctioneer has to that date received sale proceeds of RMB41,626,600.00.  The balance of the sale proceeds would be raised by the purchasers with mortgage loans from the banks.  Of the proceeds received, the auctioneer has transferred RMB25,850,800.00, to two designated accounts in the name of Liuzhou Century.  According to an affirmation filed by Cheung, these designated accounts are under the control of the public security.

40.  The reason why the auctioneer has retained part of the proceeds is because after the judgment was given against Liuzhou Century on 26 October 2006, the court has issued a charge on all the properties of Liuzhou Century on 10 November 2006.  The banks were notified of the charge on 20 and 30 November 2006, so the auctioneer would only transfer the balance of the proceeds to the designated bank accounts once a unit is freed from the charge with the leave of the court.

41.  According to Cheung, the total liability of Liuzhou Century for tax, surcharge and other fines is now over RMB120 million.  There is a surcharge on the fine at the rate of 3% per day.  So the daily surcharge is over RMB900,000.00. 

42.  Having set out the relevant events in some detail, I am of the firm view that the injunction should not be continued.

43.  No purpose would be served by continuing the injunction, as the sales of such part of the Development as sufficient to discharge the liabilities of Liuzhou Century to various government authorities had already taken place.  This court does not act in vain.  I am certainly not prepared to infer that the sales by auction were not conducted under the supervision of the public security, as alleged by Hui.  I am not prepared to treat the various notices apparently issued by the public security and the tax bureau as issued without authority and that these documents are a sham.

44.  If there is complaint that the sales by auction were irregular, or should be impugned, or that the decision of the tax bureau was erroneous, invalid or unlawful, the proper avenue for redress is not in this court, but in the courts in the PRC.  I note that Hui has in fact brought proceedings in the PRC in November 2006 on behalf of Liuzhou Century, notwithstanding that his dispute with Madam Hui as to who is to be the legal representative of that company has not been resolved.

45.  There is no cogent evidence to indicate that the proceeds to be realised from the public auctions would not come under the control of the authorities and would not be applied to settle the tax and other penalties payable by Liuzhou Century.  The injunction would only serve to obstruct the authorities in the PRC from recovering tax.  As I have mentioned, there is provision under the Tax Collection Law that the tax bureau has power to sell the assets of a tax payer to settle unpaid tax by compulsory auction.  This reason alone is sufficient for the discharge of the injunction.

46.  There is no or no sufficient evidence to back up the allegation that it was the intention of Madam Hui and Cheung to sell the Development, not for the purpose of paying tax but to abscond to Canada with the proceeds.  There is nothing to support the allegation that the sales by public auction were of the entire Development, not just part of the Development as sufficient to discharge the liabilities of Liuzhou Century to the government authorities.

47.  I do not know whether Madam Hui would be allowed to leave the country with the discharge of the injunction.  This to my mind is a subsidiary consideration.  Whether she would be allowed to leave will be dealt with according to the laws of the PRC.

48.  As for the complaint of Hui that Madam Hui has not provided information according to the Order made on 22 September 2006, this has been addressed to some extent by the information provided belatedly this morning to the Company’s solicitors.  I understand that a summary of the rental income and monthly expenses for the months of September to November 2006 with supporting documents have now been provided.  I do not know the reason for the delay, this may or may not be due to the fact that Madam Hui is prohibited from leaving the country.  As for the material non-disclosure alleged by counsel for Madam Hui, I would not rely on this as a ground for discharging the injunction, as there is nothing on the evidence to suggest or allow the court to infer that the matters which have not be disclosed (as I have set out in some detail earlier) were within the knowledge of Hui when he applied for an injunction ex parte.

49.  For the above reasons, I make an order that the ex parte injunction on 24 August 2006 and the orders made on 22 September 2006 (paragraphs 1 to 5 thereof) for the purpose of continuing the same be discharged.  I dismiss the summons issued by Winsway on 25 August 2006 for a continuation of the injunction.

50.  As I am of the view that it is not justified for Winsway and the Company to come to this court for an interlocutory injunction, there is no reason why costs in the application should not follow the event.  I am not prepared to the divide up the costs into two parts as submitted by counsel for the Company, that is the costs before the day on which the decision was made by the bureau as to the tax liability of Liuzhou Century and the costs after that day.  The public auction proposed to be carried out in August 2006 was not done in secrecy.  As mentioned earlier, publicity had been given of the intention of Liuzhou Century to dispose of the units in the Development since April or May 2006.  Since June 2006, Hui had been making his moves by commencing the High Court Action and by his attempt to convene an extraordinary general meeting of the Company.  No reason has been suggested as to why he had not communicated with Madam Hui and her camp before he applied for an injunction on 24 August 2006 to halt the public auction.  Whether the decision had been made by the tax bureau as at the day when he applied for the ex parte injunction is not in my view material.

51.  I order the costs incurred by Madam Hui, Cheung and Liu Qing in resisting the application for continuation of the injunction and in support of their application for the discharge, including the costs reserved on 1 and 22 September 2006, be paid by the Company to these defendants in any event.