FOUNTAIN II LTD v. PING AN SECURITIES (HOLDINGS) LTD AND OTHERS

HCMP 1866/2019

[2019] HKCFI 3013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1866 OF 2019

_________

_________

_________

______________

JUDGMENT

______________

1.  This is an application for an injunction by the petitioner seeking the following relief: an order that the 1^st respondent (“the company”), whether by itself or its servants or agents or otherwise howsoever, and the 2^nd to 7^th respondents whether by themselves, their servants or agents or otherwise howsoever, must not cause the 1^st respondent to take any steps to carry out, proceed with, implement and/or perform any other acts in respect of the 1^st respondent’s proposed rights issue as set out in the 1^st respondent’s announcement dated 11 October 2019 and/or any other change(s) to the issued share capital of the company.

2.  The matter is somewhat urgent in that clearly it is seeking to prevent a rights issue which has now been announced to the public by way of an announcement dated 11 October 2019.  The timetable for that has also been announced and clearly this is a matter which must be resolved quickly.

3.  I have had the enormous benefit of a full day of argument from the parties, together with various detailed written submissions and something like 10 bundles of documents.  Given the urgency — in this respect I have been told by Mr Wong SC for the 1^st, 2^nd, 4^th, 5^th and 6^th respondents that a decision is required by Monday, 28 October 2019 — it seems to me appropriate to deliver an ex tempore judgment today rather than to take time to perfect it during the course of the next few days.

4.  The matter arises in this way.  The petitioner is an affiliate company of Haitong International Securities Company Limited (“Haitong”),and it is therefore considered to be part of the Haitong Group, which is a company listed on the Hong Kong Stock Exchange with net current assets of more than $6.3 billion as at 30 June 2019.

5.  The 7^th respondent (“Well Up”) is a shareholder of Ping An Securities Group (Holdings) Limited, and it borrowed money from Haitong based upon the security of a share pledge.  Something in the order of HK$1.5 billion was lent and currently Well Up is the owner of 55.8% of the company’s shares.  Something in the region of HK$230 million is owed by Well Up to Haitong and there has been an event of default under the loan.  It is suggested by Haitong that Well Up is insolvent and that therefore Haitong has exercised any rights that it had under the security and that the economic interest in the company now is vested in Haitong.

6.  Haitong’s case is that the management of the company is seeking to dilute what it says is its economic interest because it says that the management wishes to entrench itself within the company and make it impossible for Haitong to seek to remove them.  In this context,Haitong refers to various loans which were made by the company in 2018, which the company has recently announced in fact were major transactions and therefore required (but did not obtain) shareholder approval.  The implication, although it is not expressly stated, is that these were improper and the management wishes to remove the ability of Haitong to dislodge the existing management.

7.  The rights issue which was announced on 11 October 2019, is a two-for-one rights issue and Haitong suggests that this has kept it below the level at which shareholder approval is required.  That is clearly right and the company has shown me the Listing Rules, and in particular chapter 7, rule 7.19A, which demonstrates that if a rights issue would increase either the number of shares issued or the market capitalisation by more than 50%, then it is conditional upon minority shareholder approval.  The point made by Haitong is that by sticking to a 50% or a two-for-one rights issue, the company has thereby avoided the need for shareholder approval.  Although, as Mr Wong points out, it could only be minority shareholder approval in any event, and even if Haitong were considered to be a shareholder for this purpose, it would hold 55.8%, so its approval would not be required.

8.  The effect of the rights issue, if it were to go ahead and if Haitong were not to exercise any rights that it may be able to exercise under that issue, is that Haitong would be diluted from 55.8% to approximately 37% of the shareholding.  That would remove their controlling interest, although as Mr Hui for the 3^rd and 7^th respondents has pointed out, as a matter of practice it may not completely remove their ability to control the company because 37% is still a significant shareholding.

9.  The evidence is that between February and July or August 2019 discussions between management and Haitong and/or Well Up have occurred in which the parties have attempted to locate buyers for the 55% stake held by Well Up. That has not, as it happens, materialised, but one of the points that is made by Mr Maurellet SC on behalf of Haitong is that one effect, and indeed he says this is one of the improper purposes which is being perpetrated, is that if the rights issue reduces the stake from 55.8% down to 37%, it is likely to depress the price that may be available from a purchaser because the controlling stake would be less and therefore the control premium would be lower.

10.  As indicated, on 11 October 2019 two announcements were made.  The first was in relation to the granting of various loans in 2018 which were in fact major transactions.  They required shareholder approval, but shareholder approval was not obtained.  The second announcement was for the rights issue.  The reasons for the rights issue are identified in the announcement as follows:

“ The net proceeds (after deducting all relevant expenses) from the Rights Issue are estimated to be HK$123.9 million to HK$142.8 million. The net price per Rights Share will be approximately HK$0.048 per Rights Share.The Company intends to apply the net proceeds from the Rights Issue (i) as to approximately HK$100 million for repayment of the convertible bond in the principal amount of HK$100 million due in February 2020; and (ii) the remaining amount of the net proceeds for working capital of the Group, including but not limited to the development and expansion of the financial services business. In the event that some or all of the convertible bond as mentioned above are being converted or extended prior to repayment, the Company intends to use the unused net proceeds as working capital for its financial services business.”

11.  Mr Maurellet, for Haitong, says that there is no suggestion or evidence that, but for the rights issue, the company will be insolvent.  He says that this is relevant to his allegation of improper purpose.  He says that the audited accounts do not suggest the company in insolvent and indeed there is evidence contained in WeChat messages that the parties were intending to extend the convertible bonds.

12.  I have looked at that evidence and it is correct that there does appear to be some suggestion that the bonds would in fact be extended.  That extension was subject to the approval of the Organization Department of the Shanghai Municipal Committee and indeed was required to be documented and no doubt signed by the relevant parties.  As it happens, such approval and documentation has not, as at today, materialised.

13.  On 17 October 2019, Haitong exercised its rights under the security document to transfer 40,000 shares in the company to the petitioner.  Haitong informs the court that it intends to nominate the petitioner to take up all of the 55% of charged shares and that will trigger a general offer requirement under the Listing Rules.  However, in the meantime, it says that Well Up has no financial ability to subscribe for the new shares and the effect is therefore to dilute from 55.8% to 37.2%.  That will also, Haitong says, have the effect of frustrating the petitioner’s intended general offer of all of the shares for the company.

14.  The petitioner, who holds the 40,000 shares, says that there is a serious issue to be tried; that the directors of the company, by implementing the proposed rights issue, have breached their duties to act for a proper purpose, to take into account the relevant considerations and to ensure that the company’s compliance and regulatory requirements have been complied with.  It has issued a petition on 21 October 2019 in which it contends that the board of the company is conducting or has been conducting the affairs of the company in a manner that is in breach of:

 (1) fiduciary duty; or

 (2) the non-fiduciary duties owed by the directors; or

 (3) the shareholders’ legitimate expectations; and

 (4) in a manner which is unfairly prejudicial to the interests of the petitioner as well as all other shareholders, including public investors, who have bought shares in the company.

15.  The essence of the unfair prejudice surrounds the rights issue that I have referred to.

The petitioner’s contentions

16.  The petitioner makes several points.  It says that the improper purpose which it relies upon is that the management seeks to entrench itself rather than act in the best interests of the company and the shareholders, and that it is acting in concert with a potential purchaser to reduce the controlling stake that Haitong contends that Haitong has.  The management is therefore acting in breach of fiduciary duty and, under sections 728 and 729 of the Companies Ordinance, the petitioner is entitled to relief.

17.  Insofar as the dealings with the potential buyer are concerned,the petitioner refers to a meeting held at CITIC Tower between various members of the board and a Mr Michael Lam, the managing director of a company known as Amasse Capital, in which apparently a potential buyer for the 55.8% shares was introduced.  During August, it became clear that due diligence on the company was being carried out by Amasse Capital and C&T Legal LLP on behalf of the potential buyer.  According to the affirmation of Tsui Cheung-on, who is a director of the parent company of Fountain II Limited, the petitioner, that due diligence was due to be completed around the middle of September and in fact appears to have been completed on 24 September 2019.  This is relevant because according to a board meeting of 25 September 2019 in which the rights issue was approved by the board, Amasse Capital Limited and C&T Legal LLP were both apparently appointed as advisors to the company on 25 September 2019.

18.  The board meeting also introduces the further limb of the unfair prejudice petition, and that is what Mr Maurellet has described as the Wednesbury principle, reliant upon the decision of Barma J (as he then was) in Passport Special Opportunities Master Fund LP & Another v eSun Holdings Ltd & Others HCA 2722/2008 (8 June 2011), and in particular paragraphs 147 – 149 thereof.  The essence of the proposition advanced is that a petitioner can impeach a decision of a board, and also by implication stop a decision from being made if it is about to be made contrary to the principle, if the board has failed to take into account relevant factors or is taking into account irrelevant factors when making the decision.

19.  Mr Maurellet says that the board meeting demonstrates that the board has failed to take into account the dilutive effect of the rights issue and therefore, given that is, he says, a relevant factor, it has acted in breach of the duty.  It has also inadequately dealt with the possibility of obtaining loan financing rather than equity.  In this context, it is relevant to set out the reasons identified by the board for the rights issue:

“ As set out in the Company’s Interim Report dated 29 August 2019 (the ‘interim report’), the Company has an indebtedness consisting of convertible bonds in an aggregate principal amount of $100 million due on 26 February 2020. Given the interim results in the Interim Report, the directors noted the Company was running short of funding and working capital to fulfil its financial needs. Further, according to the Interim Report, the directors noted that the financial cost of the Company was high and the possibility of obtaining loan financing at a reasonable cost would be low, the directors had considered that, amongst others, a placement of shares of the Company in the market might be practicable after the reduction of par value of the shares of the Company, but concluded that the rights issue would be the fairest option to all existing shareholders of the Company. After due and careful consideration, and taking into account all circumstances relating to the financial position of the Group, the directors believed that it would be in the interest of the Company and its shareholders to enlarge the capital base and to strengthen the financial position of the Group through the implementation of the rights issue.”

20.  Mr Maurellet identifies that there is, at the very least, a good arguable case which satisfies the first test.  He says damages are not an adequate remedy, not least because damages against the directors would be a hollow remedy given the lack of any evidence of their financial standing.  In terms of the balance of convenience, he relies upon the normal route of what is the road of least injustice. He says that Haitong is well able to honour any undertaking it may give in damages.  He has also said that it is happy to become the lender of last resort and to lend money to the company to repay the convertible bonds in the event that either they are not extended or the bondholder seeks to issue a winding up against the company.  The detail of that undertaking would have to be worked out to the extent that it is relevant.

21.  He says that although this injunction is likely in fact to resolve the unfair petition proceedings, it is not the case that he has to demonstrate that he is likely to succeed.  The test is not as high as that.  He says that the chances of success are just one of the factors that needs to be taken into account.  Therefore, he says, this is really just a balance of convenience exercise taking into account all the relevant factors,and he strongly relies upon the proposition that the respondents are not good for any damages that may be awarded against them.

22.  In terms of locus, because that is challenged by the respondents,he says that there can be no doubt that the petitioner is the owner of 40,000 shares and therefore has locus to bring these proceedings.  He says that once that locus is established, then it is permissible to take into account the interests of Haitong as the economic owner of 55% of the shares when one is considering the balance of convenience.  He does not seek to suggest that the interests of Haitong should be taken into account when assessing unfairness.  In that context, he relies upon Artan Investments Ltd v The Bank of East Asia Ltd HCMP 125/2015, in particular at paragraphs 2, 79 and 80.

The respondents’ contentions

23.  The first contention of Mr Wong is that the petitioner has, in fact, no locus.  He says this is an unfair prejudice petition.  The petitioner is Fountain II Limited and the petitioner owns only 40,000 shares, which is a tiny percentage of the total shares of the company, which is something over 5 billion.  Therefore, all of the allegations as to prejudice arising from the proposition that the petitioner is the 55% shareholder are misplaced and simply wrong.  He says it is not permissible to go beyond the four corners of the petition, so in terms of assessing unfair prejudice I am only entitled to look at any unfair prejudice against Fountain II and not any wider.

24.  He said it is not permissible to take into account any prejudice against Haitong at the balance of convenience stage because what one needs to look at is whether the interests of the petitioner itself have been unfairly prejudiced and whether the petitioner itself as the owner of only 40,000 shares is entitled to the relief which it seeks.

25.  Mr Wong comments that the reason that Haitong has not taken up the shares is because it does not wish to trigger the mandatory general offer.

26.  Insofar as the share charge deed is concerned, he points out that the petitioner is not a party to it and when one looks at the only clause which seems to give any rights to Haitong, which is clause 9.2, all it provides is that the lender or its nominee may exercise, in the name of the chargor and without any further consent or authority on the part of the chargor, any voting rights and any powers or rights which may be exercised by the legal or beneficial owner of any security assets, any person who is the holder of any security assets or otherwise.

27.  In other words, all that Haitong gets is not any type of beneficial interest but simply the right to exercise the voting and other powers or rights which would otherwise be chargeable.  Therefore, he says that the interests of Haitong are being misrepresented in the way that the petitioner makes its case.  He says that it would always have been open to them to try, and indeed on 22 October 2019 Haitong did, try to requisition a special meeting of the board and obtain resolutions through the ordinary democratic process of the company.  Everything which they wish to do can be done within the four corners of ordinary corporate governance and it is inappropriate for the court to interfere in the way that they are seeking to do so.

28.  Mr Wong also says that not only does the behaviour which is complained of need to be prejudicial, but it also needs to be unfair.  The board has decided to undertake a rights issue, but that in itself is not unfair.  Indeed, on the face of the board meeting itself, the board considers that rights issue to be in the interests of all shareholders.  It is always open to Well Up or Haitong, or indeed the petitioner, to exercise their rights under the rights issue and that would result in no dilution of their shareholding.  He says that Haitong has not even sought to demonstrate why the rights issue is unfair.

29.  In this context, Mr Wong has taken me in some detail through the history of the way in which the rights issue was generated.  The convertible bonds are due on 26 February 2020.  As far back as June 2019, it is clear that the board was recognising that there were some financial constraints on the Group as a whole.  The interim report for the period ended 30 June 2019, which I have seen, shows that there are some constraints on the general working capital.  And at a board meeting on 6 June 2019, financing for a particular project was discussed and it was discussed that they needed something in the range of $150 million, which was only available through bonds running at an interest of 14%.  In fact, even at 14% it appears to have been possible only to obtain some $12 million of financing by those bonds and I have seen the subscription agreements which demonstrate that.

30.  As early as June 2019, it is clear that the board were considering a capital reorganisation, no doubt due to the financial difficulties or constraints that it was experiencing.  I have seen a board meeting of 6 June 2019 demonstrating, at point 4, a proposed capital reorganisation in which the par value of the shares was to be reduced, and I am told that this was essentially so as to facilitate something of the nature of the rights issue which in fact occurred.

31.  The board meeting in July discusses it further, as does the board meeting on 22 August 2019.  And by 22 August 2019, it is clear that the capital reorganisation by the reduction of the par value of the shares had in fact been approved by the shareholders.  Haitong caused Well Up to attend the meeting for this purpose and they voted to go ahead with the reduction in par value.  The poll result, which I have seen, demonstrates that 99.57% of those that voted did so in favour of the reduction in par value and that can only be, through a function of mathematics, by the inclusion of the shares held by Well Up.  It is significant that at that time Haitong could not call the loan on Well Up.

32.  In all the circumstances, Mr Wong says that the court should not consider this matter; there are no sufficient rights vested in the petitioner.  In particular, he relies upon the fact that the petitioner obtained the shares with full knowledge of what has happened and he refers to the case of Kingboard Chemical Holding set al v Annuity & Life Reassurance Ltd et al in the Bermuda Court of Appeal, Appeal No 24 of 2015, and in particular, paragraph 91 of that decision.  He says that this makes it clear that prior knowledge is effectively a bar to recovery for unfair prejudice for things that were previously known.

33.  In relation to the balance of convenience, Mr Wong says that there will not necessarily be a reduction and that in all the circumstances it is inappropriate for the court to grant the injunction.

34.  Mr Hui, on behalf of the 3^rd and 7^th respondents, adopts the submissions of the company and adds one or two points of his own, which I shall refer to in my analysis.

Analysis

35.  First of all, locus.  I accept that 40,000 shares are enough to create locus of the petitioner to bring an unfair prejudice petition.  I do not accept that the mere fact that only 40,000 shares are held cannot make behaviour which is inappropriate and improper incapable of being complained about.  If behaviour is improper, it seems to me that it is unfairly prejudicial to a holder of one share just as much as it is unfairly prejudicial to the holder of 50%, or indeed 60% of the shares.  Therefore, I accept that the holding of the number of shares is not in itself a bar.

36.  However,I do accept that I am bound by the four corners of the petition and I cannot, when assessing the question of unfairness, consider the economic effect that it may have on anybody other than the holder of 40,000 shares.  I cannot therefore take into account the economic effect on 55.8% and the dilution on 55.8% down to 37%, when considering the question of unfairness.  That is a different point to the one that Mr Maurellet is making because he says that I should take that into account when considering the balance of convenience to which I shall come to below.  Therefore, I accept prima facie there is sufficient locus.

37.  I do not accept that prior knowledge of breaches is in fact a bar to recovery under an unfair prejudice petition.  At the very least, it is arguable that it is not a bar.  Although, on my reading of the authorities,as a matter of law, it is not.  The Bermudan case, which Mr Wong refers to, I do not read as creating an absolute bar.  In my view, what the judge is there saying, which is in accordance with the position adopted by the House of Lords, is that it is a highly relevant question to whether the conduct should be considered to be unfair, but it does not create a bar to the petition.  Therefore, as a matter of locus, I do not accept that prior knowledge precludes this petition.

38.  Therefore, in all the circumstances it seems to me that there is proper locus to bring the petition and the points which are made seem to me to be ones which are capable of being made and I should not be ignoring them other than on their merit.

39.  I also note that Haitong’s security interest is limited in the way that Mr Wong has identified by virtue of clause 9.2 of the share pledge.  That is clearly relevant because it must mean and support the proposition that I am not entitled to look at the economic effect on Haitong when considering the question of unfairness.  If I am satisfied that there is otherwise unfairly prejudicial conduct against the petitioner (and for this purpose ignoring the position of Haitong) when considering the balance of convenience as to whether to grant an injunction, the position of Haitong may come in at that stage.

40.  I note that the petition is wrong in this regard because at paragraphs 61 and 64, it refers to the petitioner’s shareholding being diluted from 55.8% down to 37.2%.  That cannot be right as the petitioner does not hold that amount of shares in the first place.

Is the conduct complained of unfair or improper?

41.  I find it difficult to accept that the conduct complained of is indeed unfair or improper.  I am very conscious of the general propositions of law that the court should be very slow to interfere in the internal affairs of a company.  The principles are summarised by Mr Wong in paragraph 40 of his skeleton argument:

 (1) It is a well-established principle of company law that the court will generally not second-guess the correctness of bona fide commercial decisions of the board: Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 at 832; Passport Special Opportunities Master Fund LP v eSun Holdings Ltd [2011] 4 HKC 62 at §150.

 (2) The allegation that the Proposed Rights Issues was not bona fide is a very serious one; it necessarily impugns the conduct and motives of most of the Board: Kwok Hiu Kwan v Convoy Global Holdings Limited [2018] HKCFI 1729 at § 15 per Harris J.

 (3) Where more than one purpose for the exercise of a power can be identified, a decision can only be set aside where the dominant or primary purpose was improper: Wootliff v Rushton-Turner [2018] 1 BCLC 479 at §110.

 (4) Fountain II’s burden is to be discharged by “evidence, not by assertion and speculation”: Able Success Asia Ltd v China Packaging Group Company Ltd (HCMP 1091/2014, 15 May 2014) per G Lam J at §63.

 (5) The fact that it might be arguable that an inference may be drawn from primary facts does not necessarily dictate that the petitioner has established an arguable case (and a fortiori, is likely to succeed at trial): SCIC Limited and Anor. v Tomei International (Holdings) Limited & Ors. (HCA 11427/1995, 21 November 1995) per Rogers J (as he then was) at §38.

42.  I also add reference to Giant Crystal Limited v Energy International Investments Holdings Limited HCMP 1903/2015, decision of Au Yeung J dated 31 August 2015, at paragraph 52, where she stated that:

“ Once it is shown that a company does need funds, it is a matter for its management and its commercial decision on whether those funds should be raised by way of placement or other methods. The Court should not interfere with bona fide management decisions and substitute its own opinion for that of the management: Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811, per Yuen J (as she then was) at §73.”

43.  It appears to me that the evidence which Mr Wong has identified, which demonstrates that a capital reorganisation was on the cards with this company from at least June 2019, together with the board minutes and the overall financial position of the company, make it difficult to reach the inevitable conclusion that I am being asked to reach, that this is unfair or improper conduct.

44.  In this context, it is correct to say that the court requires evidence and not mere speculation.  Although the evidence will almost inevitably not be hard evidence in the sense of documents identifying distinctly or directly a desire to be unfair or a desire to be improper, courts are well experienced in assessing primary facts and drawing inferences as to secondary facts from those primary facts.

45.  Here in my view, the primary facts simply do not exist to support the drawing of the inferences that Mr Maurellet asks me to do.  It is, with the greatest respect, merely speculation.  The one part which causes some concern is the engagement of Amasse Capital Limited and C&T Legal, the very day after the due diligence of the potential purchaser was apparently completed.  That is somewhat surprising and I am not immune to the possibility that companies do indeed operate closely with various alternative parties and I accept that it is possible that there is something not entirely correct which has gone on.

46.  However, at this stage I do not believe that the evidence is sufficient to allow me to draw the quite serious inference which I am being asked to draw that the directors have been acting improperly.  It requires particularly cogent evidence when the injunction which is being sought would finally dispose of the matter.  I accept that the final disposal is just one of the factors in the balance, but I do believe that cogent evidence is necessary.  On this basis, I do not believe that a good arguable case has been demonstrated to the necessary and sufficient standard.

47.  Insofar as the Wednesbury principle of directors’ liability is concerned, the evidence of the board meeting alone is also not sufficient to show that this is an arguable point on the facts.  The petitioner says that no thought was given to the dilutive effect, but I am not sure that is correct because the board expressly identified that they considered the rights issue to be in the interests of all shareholders.  I doubt very much that the evidence which is relied upon supports the inference which is to be drawn.  But again, I stress that I am only deciding this on the basis of a good arguable case for the purposes of issuing an injunction and based upon the evidence currently available.  That is nothing to the point as to whether ultimately these propositions will be capable of being made good at trial if the matter goes any further.

48.  However, even if I was prepared to accept that the petitioner has demonstrated a good arguable case, I would have to say that given that this injunction is likely to resolve the matter entirely, the strength of that good arguable case is something which I would have to take into account as well.  So even if I were wrong, and if I had held that the evidence does support the propositions, in my view it would only just get over the bar and having only just got over the bar it would probably not support the issue of an injunction in this case.

49.  However, there is another reason why I refuse the injunction and that is because I am not satisfied that the balance of convenience is in favour of granting it.  As I have said, the court is very slow to interfere with the decisions of a company.  The evidence suggests that the rights issue has long been on the cards.  I accept that sensible boards of directors need to look relatively far into the future and assess the financial condition of companies in the future and to take steps at a sufficiently early stage to avoid prejudice at a later stage.  This step appears to have started way back in June 2019.  It was also started apparently to the knowledge of Well Up because of the capital reorganisation that I have already referred to.

50.  Further, it seems to me that the remedy against the potential prejudice which the petitioner is contending for, or indeed which Haitong is contending for, lies or lay in Haitong’s own hands in at least two respects.  First of all, it could have caused Well Up to remove the directors at an early stage.  I am aware that it wrote a letter on 22 October 2019 and that has been rejected by the company.  But it seems to me that it would have been possible to take steps to instigate the removal of the directors, if that was indeed its real purpose, at an earlier stage.  And indeed it is still able to take those steps, although it is correct that those steps may not now be able to prevent the rights issue.

51.  But secondly, Haitong, through Well Up, could always subscribe to the rights issue.  If it does, there is no impediment of the nature which it now relies upon.  Its shares will not be diluted.  I accept that it may be less commercially attractive to Haitong to subscribe to shares than it would be to lend and create debt, but on the other side of that particular coin it is also correct that for a company which is in some financial difficulty and which already has reasonably significant amounts of debt, equity funding rather than debt funding is more attractive.  Therefore, it seems to me that the position of the company is a reasonable one that it would wish a rights issue rather than further debt and Haitong is able to protect its position by subscribing to that rights issue.

52.  I am also very conscious of the potential risk to the company in the event that the rights issue does not proceed.  On the face of it, there is a debt of $100 million which needs to be repaid on 26 February 2020.  That is not far away.  It is of course possible that that debt can be negotiated or extended or rolled over, but that is all simply something which is possible rather than inevitable.  There is a risk to the company and if it does not pay on convertible bonds in the event that no successfully negotiated solution materialises, then the company will become insolvent or at least may become insolvent and go into liquidation.

53.  I have seen a cash flow forecast which was provided to the Hong Kong Stock Exchange, which demonstrates that by December 2019 the company is going to have a negative cash flow of HK$44 million, and I have also seen a letter dated 17 October 2019 to the former solicitors of Haitong, which identifies that the Group will run out of cash in December 2019 if the proposed rights issue is not be completed as planned.  I have no reason to presume that those two documents are in any sense false and it seems to me that the risk to the company without the rights issue is significant.  It is correct, of course, that the company could have raised this money in different ways or at least may have been able to have raised this money in different ways.  However, that is nothing to the point because the court will not second-guess the decisions of the board as to the correct way to do it.

54.  I also bear in mind that the remaining 45% of shareholders appear to be small shareholders with not a single one holding more than 5% of the company. Given that the company is listed on the Hong Kong Stock Exchange and I have seen at least some listing of the various shareholders, many of them appear to be individuals, and I must take into account it seems to me, at the balance of convenience stage, what their position is.  I think it would be inappropriate for the court to interfere in the management of a company in such a way that runs the risk of the company becoming insolvent and thereby causing prejudice to those individual shareholders.

55.  I am conscious that, really at my own instigation, Haitong has offered an undertaking to lend to the company sufficient money to pay the convertible bond in certain circumstances.  But as Mr Wong has pointed out, that undertaking may not in fact be any good because Haitong is a connected party and the undertaking, and the loan Haitong offers by it, may create a situation where there is a breach of the Listing Rules.  Therefore, it seems to me that at the moment, and based on the current state of play, I cannot take that point any further.

56.  I recognise Haitong’s point that if they are right on their facts, which they may or may not be, the directors may not have sufficient resources to be able to pay.  It is not yet clear to me what loss or damage Haitong may in fact suffer.  If it does not subscribe to the rights issue, it seems that any loss that it will have suffered will probably be caused by that decision rather than by the decision of the directors.  However, leaving that point aside, I accept that there may be some possibility of losses suffered by Haitong in the event that the directors have indeed acted improperly.  It is correct that there is no evidence of the ability of the directors to repay that and that is something that I bear in mind.  However, in my view it does not tip the balance of convenience in favour of Haitong.

57.  I also note that Haitong is only a creditor of Well Up.  It is not even a creditor of the company.  It is not a shareholder of the company and it has, in fact, no interest in the shares other than the ability to cause them to vote.  I am told that there are guarantees, both corporate and personal, to ensure that Haitong gets paid so that even if its economic interest is affected, then it has alternative routes by which it can seek recovery of its economic loss.  I accept that this may not diminish the entitlement to relief, however, it is certainly relevant when assessing the balance of convenience.

58.  I note, but do not take into account, the various WeChat messages that Mr Hui showed to me, which he suggests seem to indicate that Haitong is not actually interested in its own economic interest, but is more interested, and was prepared, to accept the shares originally but only if it becomes the underwriter.  I do not take that matter into account.

59.  In all the circumstances, and I apologise for the lateness of the hour, but in all the circumstances I refuse the relief which is sought, and it seems to me costs must follow the event, with certificate to two counsel.

60.  The costs of the hearing before Madam Justice Mimmie Chan are to follow the event.