CHENG KA YAN AND OTHERS v. GRAND XI INVESTMENTS PTE LTD AND OTHERS

HCA 1607/2022

[2023] HKCFI 1509

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1607 OF 2022

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BETWEEN

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D E C I S I O N

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1.  This is the application of the Plaintiffs by

(a) summons dated 4 April 2023 for leave to appeal (enclosing a draft Notice of Appeal (“NOA”)) from this Court’s Decision dated 31 March 2023 (“the Decision”) granting GT (the 4^th Defendant) an interlocutory injunction (“the Injunction Order”); and

(b) a further summons dated 13 April 2023 for (i) leave to amend the draft NOA; and (ii) an order that 3 additional terms (“the additional terms”) be added to the Injunction Order in the interim, pending the final determination of the Plaintiffs’ intended appeal.

2.  Reference should be made to the Decision for the background facts, the issues that arose for determination and the reasons stated that resulted in the Injunction Order. The nomenclature used in the Decision will be adopted in this Decision on the leave application.

3.  GT does not oppose the amendment to the draft NOA but opposes the other relief sought in the Plaintiffs’ summonses.

Applicable principles

4.  The relevant principles for granting leave to appeal are well-established. Leave to appeal under O. 59, r. 2B is not lightly granted[1]. There has to be a real chance of success to justify the granting of permission to appeal[2].

5.  While a reasonable prospect of success means an appeal with prospects that are more than ‘fanciful’ but which do not need to be shown to be ‘probable’, it is insufficient to show that the appeal is “merely arguable” and “not fanciful” for the court to be satisfied that it had a reasonable prospect of success: Hong Kong Civil Procedure 2023 §59/2A/4.

Ground 1: Serious issues to be tried/arguable defence

6.  At the heart of the Plaintiffs’ defence is the existence of RC’s Representation giving rise to a collateral agreement[3].

7.  Sub-paragraph (3) of Ground 1 asserts that there is a serious issue to be tried that “RC’s Representation was made, and the Oral Agreement (as defined §48 of Liu 2^nd) existed”. It then identified 7 matters that were said to support the Plaintiffs’ contention.

8.  The Plaintiffs’ submissions are premised on the existence of “the Oral Agreement” based on Liu’s evidence[4]. This Court’s approach (as should be evident from a proper reading of the Decision, in particular the analysis of the 2^nd line of defence (at §§49-66) under the subheading “(ii) RC’s Representation”) was to assess whether there was any credible evidence in support of “the Oral Agreement”, and concluded (at §§68 and 100) that there was not.

9.  The Plaintiffs criticized this Court for failing to have regard to the CFA’s observations in Bank of China v Fung Chin Kan (2002) 5 HKCFAR 515 at §§55 and 57 to the effect that the collateral agreement must be “objectively viewed” and the parties’ objective intention must be assessed “[o]n the totality of the evidence”.

10.  The thrust of the Plaintiffs’ submissions carried to their logical conclusion comes to this: once one party asserts, at the interlocutory stage, that there was an oral agreement between the parties, then, regardless of the evidence adduced in support, the matter must proceed to a full trial with the viva voce evidence. Those submissions were apparently based on the Plaintiffs’ reading of the Bank of China case. The necessary consequence of such a reading is that it precludes the Court from assessing whether the party asserting the existence of an oral agreement even reaches first base, that is to say, whether it has adduced credible evidence in support of such an agreement.

11.  I do not agree that the Bank of China case is authority for the proposition put forward by the Plaintiffs. At the interlocutory stage, the Court is not and cannot be precluded from evaluating and assessing objectively, whether there is credible evidence before the Court to support the Plaintiffs’ assertion.

12.  Having reviewed §§49-66 of the Decision, I stand by the reasons I have given for my conclusion.

13.  The Plaintiffs complain that in §67 of the Decision, the Court erred in relying on Linda Chan J’s observations in Re Pan Sutong.　 That authority was cited by GT at the hearing as to which the Plaintiffs did not comment.

14.  The remarks made in §67 were nothing more than an observation on the common features of the defence raised by Pan in a number of decided cases in which Pan was involved.

15.  The Court reached its conclusion (as to whether there was credible evidence to support the Oral Agreement) based on the evidence before the Court which it evaluated and analysed in §§49-66 of the Decision.

16.  The suggestion that the Court relied on the observations made by the judge in Re Pan Sutong in reaching its conclusion stems from an unwarranted misreading of the Decision.

17.  In my view, the Plaintiffs have failed to show that there is a serious issue to be tried. Ground 1 has no prospect of success.

Ground 1A: Grand Xi adequately compensated by damages

18.  The Plaintiffs submitted that as Grand XI is a fully secured creditor, any loss it suffers would be adequately compensated by damages and no injunction should issue.

19.  That submission was premised on the applicant for the injunction being Grand XI and not GT, that the application was “nominally taken out by GT (under the disputed control of the Receivers)”. On that basis, the Plaintiffs considered that the real protagonists in this case are GT and Grand XI, as the borrower and lender under the Facility Agreement.

20.  But unless and until the appointment of the Receivers is set aside or invalidated, the fact that the Plaintiffs dispute their appointment is neither here nor there. It is no reason to question the Receivers’ authority to act through GT.

21.  The Plaintiffs complain that this Court did not properly consider Grand XI’s position as the secured creditor and that the true position is that stated by Hoffmann J (as he then was) in Gomba Holdings UK Ltd and Others v Homan and Another [1986] 1 WLR 1301 at 1305C that although a receiver is “nominally the agent of the company, his primary duty is to realise the assets and interests of the debenture holder and his powers of management are really ancillary to that duty”.

22.  For my part, I cannot see that its effect is that Receivers are to be treated as synonymous with, or the alter ego of, the security holder, owing no independent duties (statutory or implied) to GT whose agents the Receivers in fact are.

23.  In Gomba, the bank exercised its right as mortgagee to appoint receivers of the assets of the plaintiffs, a group of companies. The court dealt principally with 2 motions: (a) a motion (motion 1) against the receivers requiring them to disclose full details of all disposals of assets made or proposed to be made; and (b) a motion (motion 3) by the plaintiffs to restrain the receivers from entering into any commitments to dispose of assets without giving the plaintiffs 5 days’ prior notice of their intention to do so[5].

24.  The dicta on which the Plaintiffs rely were made in the context of motion 1 for disclosure of information. That required consideration of the extent of the duty of the receiver of a company’s property to provide information to the directors during the currency of the receivership.

25.  Hoffmann J considered that a receiver’s duties as agent must depend upon the express or implied terms of the bargain between the debenture holder and the company under which he was appointed; he deduced certain principles from what the parties may be supposed to have contemplated as the commercial purpose of the power to appoint a receiver and manager; relevantly, that the receiver and manager should have the power to carry on a day-to-day process of realisation and management of the company’s property without interference from the board.

26.  In rejecting the plaintiffs' submission[6] that the directors have a continuing duty to exploit the assets of the company and that the receivers are therefore obliged to provide whatever information is necessary to enable the directors to carry out that duty, Hoffmann J stated (at 1307 D) as follows:

“I cannot accept that the Court of Appeal contemplated some kind of diarchy over all the company’s assets. This would be contrary to principle and wholly impractical. In my judgment the board has during the currency of the receivership no powers over the assets in the possession or control of the receiver.”

27.  The dicta upon which the Plaintiffs rely were made in the context of the Gomba plaintiffs seeking disclosure of information that was inimical to the interests of the debenture holder. It was in those circumstances that the interests of the security or debenture holder took precedence. Gomba is not authority for the proposition that the Receivers acting for and on behalf of GT do not owe it any duties.

28.  In my view, Ground 1A also is devoid of merit.

Ground 2: Balance of convenience

29.  The Plaintiffs submitted that this Court erred in failing to apply the proper approach as stated in Music Advance Limited v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041 at §12 (d)[7], namely, that the Court should take “whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong”.

30.  That involved assessing the relative risk of injustice if the Court should ultimately turn out to be wrong. It was said that the Court failed to engage in the assessment exercise and erroneously focused on whether the Plaintiffs or the Receivers should be in control of GT during the interim period.

31.  Suffice it to say that from the very outset the Plaintiffs’ stance was that the injunction application concerned “the fight for control over [GT]” pending the trial of this action.　 That stance was put at the forefront of the Plaintiffs’ written submissions.　 The Plaintiffs then went on to state that the balance of convenience was in favour of discharging the Injunction Order because of the Receivers’ alleged lack of experience and expertise in overseeing and managing first-hand sales of Hong Kong residential developments and the successful marketing of the same which would lead to a “substantial depletion of GT’s value”[8].

32.  At the hearing, the Plaintiffs submitted that if the Receivers were to take control of GT, “there would be substantial and irreparable risk of harm[9]”, reiterating the Receivers’ alleged lack of experience in managing first-hand sales of residential developments and expertise to market them properly, and repackaging the alleged “substantial depletion of GTs value” into the absence of incentive for the Receivers to maximize the sale price of the units as the value of the Development far exceeds what is owed to Grand XI.

33.  Further, notwithstanding the ‘admonition’ made in footnote 10[10] of the Decision (expressing strong disapproval of the manner in which a veiled allegation of an undervalued ‘share sale’ was sought to be made), far from taking heed, the Plaintiffs have seen fit to repeat it in this application.

34.  While the Plaintiffs have singled out a “share sale” as connoting a disposal of the Development at an undervalue, a share sale is but one method of realising real property. No evidence has been adduced that a disposal by way of a share sale would necessarily result in a sale at an undervalue.

35.  In fact, the matters relied on to support the substantial and irreparable risk of harm that this Court had allegedly failed to consider had been addressed in the Decision and rejected.

36.  In my view, there is also no merit in Ground 2 which has no prospect of success.

Ground 2A: Alternative orders

37.  Alternatively, the Plaintiffs seek a variation of the Injunction Order by including 3 additional terms (collectively “the additional terms”), namely, that:

(i) GT shall not approve the transfer of the ownership of its shares without leave of the Court;

(ii) if GT intends to dispose of any of its assets of value in excess of an aggregate value of HK $50 million, it shall obtain leave of the Court; and

(iii) nothing in the Order shall prevent the Plaintiffs from taking steps in furtherance of the refinancing of the Facility Agreement.

38.  GT opposes the variation for the following reasons. The 1^st and 2^nd additional terms that formed part of Harris J’s order were imposed in circumstances where GT’s Summons was served on the Plaintiffs on 6 December 2022 returnable for substantive argument 3 days later. As the Plaintiffs submitted that they did not have sufficient time to prepare their evidence in opposition, 1^st and 2^nd additional terms were imposed to hold the ring in the interim, until the Summons could be heard substantively.

39.  GT makes the obvious point that the circumstances now prevailing are very different. 　The considerations that led to the inclusion of the 1^st and 2^nd additional terms in the Harris J’s order have been spent.　 The Plaintiffs have filed affirmations, exhibited numerous documents in support, together with detailed written submissions but they have failed to demonstrate that there is a serious issue to be tried.

40.  The evidence of the Receivers shows that according to an appraiser’s valuation report dated 16 February 2023, the market value of the majority of the units range from HK $21 million to HK $52 million. 　If a $50 million cap is imposed, it would be impossible for GT to launch any effective sales program.

41.  It is instructive that in Gomba, a five-day delay to any proposed disposal of assets by the receivers was considered unacceptable when the receivers were given an unrestricted right under the security documents to sell at any time.

42.  It is evident that the 1^st and 2^nd additional terms sought would dramatically interfere with and constrain (if not emasculate) the powers of the Receivers.

43.  As to the 3^rd additional term, under the terms of the Injunction Order, inter alia, the Plaintiffs must not hold themselves out as directors of GT. 　

44.  If the Plaintiffs are given express authority to seek to refinance the debt, GT is apprehensive that the Plaintiffs could hold themselves out as directors of GT on the pretext that they are seeking to refinance the debt[11].　 It was said that it could well give rise to confusion and disruption rendering the injunction difficult to enforce.

45.  An express authorisation could be perceived to be clothing the Plaintiffs with a function normally performed by the board of directors. This could conceivably create a “diarchy” alluded to in Gomba[12] and which Hoffmann J considered to be “contrary to principle and wholly impractical” .

46.  In any event, it would not appear to be the Plaintiffs’ case that it cannot progress the refinancing exercise or that refinancing cannot take place without the 3^rd additional term.　 As the Receivers pointed out, the Plaintiffs had no difficulty proceeding with the proposed refinancing through Elite Ray[13] at a time when the Harris J’s order was in force.

47.  For those reasons, I see no valid basis for incorporating the additional terms into the Injunction Order.

Conclusion

48.  It will have become apparent that, for the reasons stated, the Plaintiffs’ application for leave to appeal must fail.

49.  Accordingly, the Summonses are dismissed with costs to GT, with certificate for counsel, such costs to be summarily assessed in Chambers.

50.  It is directed that (a) GT’s statement of costs be lodged within 14 days of this order; (b) the Plaintiffs’ statement of objections (limited to 3 pages) be lodged within 14 days thereafter; and (c) GT’s reply (limited to 2 pages) be lodged within 7 days thereafter.