KIM SIE JOONG AND ANOTHER v. NG CHEUK NGON AND OTHERS

HCA 552/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 552 OF 2002

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J U D G M E N T

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1. This is an application by the 1st plaintiff, Kim Sie Joong, for an order that the 1st defendant, Ng Cheuk Ngon, be committed for contempt of court for breach of an undertaking he gave to the court as part of a consent order on 22 February 2002.

2. The background to this dispute is that the 1st and 2nd plaintiffs are minority shareholders of the 4th defendant, Billion Market Ltd, each holding 10% of the shares. Until 12 November 2001, the 1st defendant, and the respondent herein, Ng Cheuk Ngon, also held 10% of the shares, but on that date a meeting of directors purported to approve the transfer to him of a further 30%. That decision is in dispute. Also in dispute is a purported appointment of two further directors by a shareholders' meeting on the same date, in addition to the former four which included Mr Kim and Mr Ng. The plaintiffs claim that Mr Ng is in de facto control of the company.

3. The only purpose of the company is to redevelop an old industrial site in the city of Chang Sha, Hunan Province, for which they formed a joint venture with a PRC company, the joint venture company being Hunan Rich City Real Estate Development Company Ltd (Rich City), which was incorporated in the PRC on 5 June 1993. Billion Market Ltd owns 77% of Rich City and the PRC partner 23%. Initially the project was successful, but in recent years appears to have run into problems which caused financial difficulties. At the same time there also appears to have arisen differences between the parties who were instrumental in setting up the business. I do not need to concern myself here with the nature of the problems nor the differences except to refer to the principal complaint of the plaintiffs in these proceedings, which is as to an agreement apparently entered into on 21 April 2001 between Rich City and the 1st defendant, Mr Ng. Under this agreement, Rich City effectively sold to Mr Ng its remaining assets, being the unsold properties in the development, for RMB33 million, payment being by way of discharge of Mr Ng's loans to Rich City of a similar amount. There were also other provisions by way of Mr Ng discharging a loan to the bank secured by mortgage and outstanding charges payable to local government entities, which had been reduced from some RMB20 million to RMB7,150,000, through some arrangement which is not entirely clear.

4. In this action, the plaintiffs seek, inter alia, to have that agreement declared null and void, and, fearing that the properties the subject of the agreement may be disposed of, and the proceeds dissipated, before this matter could come to trial, sought an injunction to prevent any sales taking place. At the hearing of that application, on 22 February 2002, the parties agreed on a consent order to adjourn the application upon a number of undertakings being given by Mr Ng with the intention of preserving the status quo. These included filing an affidavit as to any transactions relating to the properties since April 2001, causing any proceeds of such sales, or any further sales to be paid into a separate bank account, to be opened within 14 days of the order, and not to deal with, or withdraw any money from, that account, except for the purpose of discharging existing mortgage debts, construction charges and reasonable business expenses, and to supply by fax copies of statements of that account within 7 days of receipt thereof. There followed the undertaking, breach of which is alleged here, in the following terms:

"(f) to afford upon 7 days' notice the Plaintiffs access to inspect the original of the banking records of the said separate bank account and the original documentation in respect of the said mortgage debt and construction charges."

5. In the Statement filed herein pursuant to Order 52, Rule 2, the applicant sets out the breaches which are claimed of that undertaking. These are that, following notice being given in accordance with it, he went to Chang Sha and visited the offices of Rich City on 24 April 2002, but no documents were shown to him at all. He again visited the offices on 29 April, and was told by a Mr Yang that he had spoken to the respondent on the telephone who had told him not to allow Mr Kim to inspect any documents, and nothing was shown again.

6. The evidence here shows that, on 12 April 2002, the plaintiffs' solicitors wrote to the 1st defendant's solicitors, referring to the undertakings, asking for copies of the of the records of opening the separate bank account and relevant statements, and giving notice that their clients will visit the office of Rich City in the week commencing 22 April "to inspect the documents and records". On 24 April the 1st defendant's solicitors wrote to say that their client had made the arrangements for the plaintiffs to inspect the documents. Meanwhile Mr Kim had already travelled to Chang Sha and visited the office of Rich City on the same day, 24 April, having made an appointment the previous day. What happened there is disputed by the parties. Mr Kim met Mr Yang, who appears to be a manager, although he did not appear to be absolutely clear as to his position himself, and says that he told Mr Yang that he had come to find out the financial situation of the company, and information as to how many properties were sold and how many not sold. He admits that he did not ask for any particular documents. He says that he was taken to a room where there were financial documents on a table and a member of the staff working, but was told by Mr Yang that he needed time to prepare the documents and would inform him when they were ready. He left without being shown any documents at all.

7. Mr Kim went on to say that the next visit was on 29 April, having arranged it over the telephone the previous day, and on this occasion he was accompanied by two auditors. He again said the purpose of his visit was to investigate the trading and financial situation of the company and to see how many units remained unsold. They had a discussion about the company and then went to lunch together. This appears to have been a very social affair, with Mr Kim and Mr Yang sharing a bottle of wine, after which Mr Kim returned to his hotel for a rest. Later he again returned to the offices but was not shown any documents as Mr Yang said that Liu Fei, a Chinese director, would not allow it. He admitted in evidence that Mr Yang had not been able to contact the respondent, and that the Order 52 statement in that respect was wrong.

8. The evidence of Mr Yang was that he had spoken to the respondent on 16 April and had been told to show Mr Kim the bank account, documents relating to the construction costs and the mortgage with the China Construction Bank, and explain the charges payable to government departments. He located these prior to his visit and had them ready to show him. He says that he did show him the documents that he had, but Mr Kim flipped through them very quickly and seemed to show little interest in them. On 29 April he agrees that Mr Kim asked for documents as to the general trading and financial situation of the company and to investigate how much it had in the way of assets. He felt that this was outside the scope of what he had been asked to give him by the respondent, which had already been provided on 24 April, and in any event such financial materials were kept by Liu Fei and he had to liaise with him. He tried to do so but was unable to, so they went off for lunch together. Afterwards he says he spoke to both Liu and a Mr Zeng, who also had some records, who declined to cooperate. Mr Kim and the two auditors left without seeing the documents they had asked for.

9. The questions before me here now are: were the documents requested those covered by the undertaking?; and were they disclosed to Mr Kim in accordance with that undertaking?

10. I have to start with the wording of the undertaking itself. I have to say immediately that it might have been more happily worded. While the reference to the original of the banking records of the separate bank account is clear enough, what the parties intended by "the original documentation in respect of the said mortgage debt and construction charges" is far from clear. It is now claimed by the applicant that this meant documentary evidence of the present balance outstanding on each, and documents showing payments made in reduction of them. If that is right, why did it not say so? It would not have needed a lengthy and difficult drafting exercise to have done this. As it is, I find the scope of the undertaking in this clause to be vague in the extreme.

11. I then look at what Mr Kim requested, to see if that comes within it. On his own admission he says he had come to find out the financial situation of the company and to see what properties had been sold. This cannot by any stretch of the imagination be covered by the undertaking, particularly as he admits that he did not even ask for any particular documents. It is clear from this that he wanted an overall survey of the financial position of the company, and to see evidence of any sales since the disputed agreement in April 2001. He also admitted that he believed the order of the court including the undertaking entitled him to ask for these, including the accounts, permits to sell the properties and sale and purchase agreements. This was not then a visit entirely within the scope of the undertaking. If it was, it would have been very easy to ask to see the documents only in relation to the mortgage and construction costs, but instead, he clearly intended to demand a wide ranging overview of the company's financial situation. This is not what the undertaking intended.

12. That this was his intention is even more clear from the undisputed evidence of his visit on 29 April. Not only does he admit that he again asked for evidence of the financial situation of the company, but brought with him two accountants/auditors to help. They also agree, in a statement I have some reservations about in view of the fact that it is not under oath and they were not, in spite of a request, produced for cross-examination, that what was requested was accounts, although they also said they asked for proof of loans.

13. The situation therefore was that, far from asking for those documents covered by the undertaking, Mr Kim set out to try to see as much as he could of the company records and accounts, and, while those might have included documents he was entitled to, went far beyond what was envisaged. I can imagine therefore Mr Yang, a manager who had been given instructions as to what should be produced, and faced with a prohibition from the local director against revealing more, being placed in a very difficult position. In spite of this, he says that he did produce a large number of documents on the first visit, and that these covered what he was told to show Mr Kim.

14. I have to say that, as to the events on the 24 April, I prefer the evidence of Mr Yang to that of Mr Kim. Mr Kim admits that there were documents on the table on that visit, and does not say that he was prevented from examining them, had he wished to then. Further, it is clear that a number of those Mr Yang says he showed dated from a time when Mr Kim himself was involved in running Rich City, and would have been familiar with. This lends credence to Mr Yang's account of him showing little interest in them. I do not, however, have to go that far. This is an application for committal, and I am accordingly obliged to apply the criminal standard of proof, namely beyond reasonable doubt. On this basis, I cannot be sure that it is Mr Kim who is telling the truth as to these events, in the light of all the evidence. I am satisfied therefore that some documents were shown to him, albeit less than he requested, but, as I have already observed, he was asking for more than he was entitled to.

15. The next question then is whether those documents did fall within the scope of the undertaking. The first, and most easily dealt with, is that relating to the bank account. It was clearly envisaged by the consent order that a new bank account would be opened after the date of the hearing on 22 February 2002. The account opening document exhibited by Mr Yang, and which he says he showed to Mr Kim, is in respect of an account opened on 19 February, three days earlier. Mr Yang's explanation for this is that, when told a separate account had to be set up, he pointed out that they already had one, just opened and not used, which had actually been opened for other reasons, and it seemed sensible to use this. After all, the intention was to have a separate account, the date of opening it could not have been critical. I can see the sense of this. However, Mr Yau for the applicant says, why are there no statements? Again, the explanation given is that this is a savings account, that there have been no transactions and no deposits, and there have therefore been no statements or deposit records. However odd this appears to those used to the banking procedures in Hong Kong, I am unable to say that it is so unlikely that it must be untrue, and, in the absence of any other evidence, have to accept it. The evidence before me certainly is that there have been no sales of any of the properties, and therefore nothing to deposit.

16. As to the mortgage debt and construction charges, Mr Yang again produces copies of the documents he says he showed to Mr Kim. These are principally the original mortgage agreements, with which Mr Kim would be familiar as they were entered into during his time, a statement dated 1 January 2002 from the bank as to the mortgage, showing a loan balance of RMB6,900,000.00 and interest of RMB367,953.42, and a table of local government charges to a total of RMB20,660,383.65 with an endorsement approving a reduction to 35%, or RMB7,150,000.00. The respondent has given evidence that he had been paying RMB100,000.00 a month to the bank in respect of the mortgage, and had paid RMB5,000,000.00 towards the construction charges. Mr Yau points out that it would be reasonable to expect some documentary evidence of these payments, even if only to reflect a reduction in the mortgage loan, which still showed the original sum borrowed. The respondent, Mr Ng, had explanations for both matters. As to the mortgage, he said that his payments had only gone towards interest and had not reduced the principal. That may be so, but I would nevertheless expect there to be an account from the bank showing such payments, and how they had been applied. As to the construction charges, he said that he had paid the RMB 5 million to an agent who handled it on his behalf, and he had no documentary record of it. Again, even if this were true, there must be evidence of the remittance to the agent.

17. As to these last matters, there are many questions left unanswered by Mr Ng, and I have no doubt that they need to be investigated thoroughly in the course of these proceedings. It also follows that there are indeed documents connected with the mortgages and the construction costs, at least as to any payments made, which have not been disclosed. But does this mean that the respondent is in breach of the undertaking? I return to what I have said above about the wording of this undertaking. It refers to original documentation in respect of the mortgage debt and construction charges, and, on one interpretation, this is what Mr Kim got. He had the original mortgage documents and the original list of construction costs. The undertaking said nothing about current liabilities nor about payments made by the respondent.

18. I am well aware that this is an application for committal. To found such an application, which is a very serious matter for the respondent, involving as it does a threat of imprisonment, not only must the undertaking, breach of which is alleged, be absolutely clear, but it must also be clear beyond doubt that he has been in breach of it. While there are many unsatisfactory aspects of the way the respondent has approached his obligations, I find that I am unable to say that there has been such a clear breach of the undertaking, as claimed in the statement, by which I must be bound, to say that he is guilty of contempt of court at all, and certainly not to the extent that he should be liable to committal.

19. For these reasons I find that there is no merit in this application which will accordingly be dismissed. There will also be an order nisi that the applicant pays the costs of this application to the respondent, to be taxed.