CHONG MING YIU v. LAU HON

HCA1067/2005
                                                                                   & HCMP1355/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1067 OF 2005

----------------------

----------------------

AND

MISCELLANEOUS PROCEEDINGS NO. 1355 OF 2005

---------------------

---------------------

BETWEEN

----------------------

(Consolidated pursuant to the Order of
Deputy High Court Judge Poon dated 11 January 2006)

------------------------------------------------------

REASONS  FOR  DECISION

 ------------------------------------------------------

INTRODUCTION

1. Before the court are two sets of proceedings commenced by Mr Chong Ming Yiu (“Mr Chong”) :

(1)     HCA1067/2005 (“the Action”), commenced on 6 June 2005, against Mr Lau Hon (“Mr Lau”) for, inter alia, an injunction restraining him from acting in breach of Clause 2.5 of an agreement dated 24 April 2004 made amongst Mr Chong, Mr Lau, Mr Lam Yik Ching (“Mr Lam”) and Mr Liu Huanwen (“Mr Liu”) (“the Agreement”); and

(2)     HCMP2327/2005 (“the Petition”), commenced on 28 June 2005, against Mr Lau, Mr Liu and Hong Kong China One (Group) Investment Limited (“the Company”), as the 1^st, 2^nd and 3^rd respondents respectively, pursuant to section 168A of the Companies Ordinance, Cap.32 for, inter alia, an injunction restraining Mr Lau and Mr Liu from implementing any of the resolutions purportedly passed at the extraordinary general meeting of the Company on 13 June 2005 (“the EGM”) and an order for buying out.

2. Mr Chong took out 3 applications (“the Applications” collectively) :

(1)     by summons dated 6 June 2005 in the Action for an interim injunction to restrain Mr Lau from acting in breach of Clause 2.5 of the Agreement (“the 1^st Injunction Application”) by, inter alia, proceeding with the EGM;

(2)     by summons dated 28 June 2005 in the Petition for an interim injunction to restrain Mr Lau and Mr Liu from implementing or executing the resolutions passed at the EGM (“the 2^nd Injunction Application”); and

(3)     by summons dated 28 June 2005 in the Action for an order that the Action and the Petition be consolidated (“the Consolidation Application”).

3. On 11 January 2006, after hearing counsel, I dismissed the Injunction Applications, reserved the question of costs to be dealt with here and allowed the Consolidation Application with consequential directions including costs.  I have indicated that I would give the reasons for my decision in writing, which I now do.

BACKGROUND

4. Underlying both the Action and the Petition is in essence a shareholders’ dispute relating to the Company.  In the affidavit evidence filed in connection with the Applications, numerous allegations and cross-allegations have been made.  For present purposes, it is not necessary to dwell on these allegations.  It will be sufficient to briefly state the background circumstances pertinent to the Applications as follows.

(A)     The Company

5. The Company was incorporated in June 2003 (under another name) with an authorized nominal share capital of HK$100,000,000 divided into 100,000,000 shares of HK$1 each.  The Company was first acquired by Mr Chong, Mr Lam and Mr Liu on 26 June 2005.  The three of them was each allotted 13,000,000 shares and appointed a director of the Company.  Mr Chong was further appointed as the chairman.

(B)     The JV Company

6. The Company holds 80% shareholding in a Sino-foreign joint venture company called Wu Xi Merchants City Limited (“the JV Company”) incorporated on 29 August 2003 in the Mainland, pursuant to a joint venture agreement entered into in June 2003 by the Company with Wu Xi City City Investment Development Head Company (owned by the Wu Xi City government) (“the JV Agreement”).  The JV Company operates a joint venture project relating to a real property development in Wu Xi, Jiangsu Province in the Mainland.

7. Mr Chong, Mr Lam and Mr Liu were appointed as the directors of the JV Company.  Mr Chong was further appointed as the legal representative and chairman of the JV Company.

(C)    Mr Lau becoming a shareholder

8. Pursuant to the JV Agreement, the Company had to inject into the JV Company as capital a total sum of US$41.48 million.  Difficulty in raising the capital injection ensued.  Mr Lau was then approached.  In the end, Mr Lau agreed to participate and the parties entered into the Agreement on 28 April 2004.  The board of the Company also passed a resolution to implement the agreement on the same date.  As a result, the Company’s shareholding was held as follows :

Shareholder	Number of Shares	% of shareholding
Mr Chong	16,666,667	16.67%
Mr Lam	16,666,667	16.67%
Mr Liu	16,666,666	16.66%
Mr Lau	50,000,000	50.00%

Distribution of the Company’s shares remains the same as above to date.

9. Mr Lau was also appointed a director of the Company.  He subsequently made a total capital contribution of US$37 million.

(D)    Mr Chong’s case

10. It is Mr Chong’s case that he was the one who brought about the joint venture with the Mainland partners.  There were agreements amongst the shareholders of the Company or alternatively it was his legitimate expectation that he would be entitled to participate in the affairs of both the Company and the JV Company.  Further, Mr Lau was admitted as a shareholder on the express agreement and/or understanding that he would not actively participate in or control the affairs of the Company and the JV Company.

11. I shall come back to Mr Chong’s case in greater detail below.

(E)     Board meeting on 23 May 2005

12. Disputes then arose, which prompted Mr Lau’s camp to remove Mr Chong from the management of the JV Company.

13. By a notice dated 18 May 2005 signed by Mr Liu, a board meeting was called for the purpose of :

(1)     appointing Mr Lau as the chairman of the board of the Company;

(2)     appointing Mr Liu as the managing director of the Company;

(3)     changing the mandate concerning signatories of the Company’s bank accounts so that Mr Lau and Mr Liu would be the signatories; and

(4)     appointing Mr Lau, Mr Liu and Mr Lam as the Company’s representatives to the JV Company.

14. The proposed resolutions, if passed, would have, inter alia, the effect of excluding Mr Chong from the management of the JV Company.  Mr Chong therefore complained that Mr Lau and Mr Liu had acted in breach of the agreements as to his participation in the management and affairs of the Company and the JV Company as aforesaid in paragraph 10 above.

15. At the board meeting on 23 May 2005, no resolution was passed because there was equality of votes on each of the proposed resolutions in the said notice.

(F)     Calling the EGM

16. Mr Liu then issued a notice dated 23 May 2005 to call for an extraordinary general meeting of the Company on 13 June 2005.  The notice of the proposed EGM was to consider :

(1)     the composition of the board of the Company; and

(2)     the major management and operation policies of the Company.

17. Mr Chong thought that the agenda for the EGM was rather vague.  He then sought clarifications from Mr Lau and Mr Liu as to the exact resolutions to be passed at the EGM but to no avail.

(G)    Commencing the Action

18. Alarmed, Mr Chong commenced the Action on 6 June 2005.  On the same date, it took out the 1^st Injunction Application, which was returnable before Reyes J on 10 June 2005.

19. In the affirmation filed on 9 June 2005 opposing the 1^st Injunction Application, Mr Chong said that the notice of the EGM was to appoint him and Mr Liu as the chairman and managing director of the Company respectively.

20. At the hearing on 10 June 2005, after hearing counsel, Reyes J refused to grant an interim injunction pending the determination of the 1^st Injunction Application, which he adjourned to 30 June 2005 for hearing.

(H)    The EGM and the subsequent board meeting

21. The EGM duly went ahead on 13 June 2005.  At the EGM, the following resolutions (“the Resolutions”) were passed :

(1)     appointing Mr Lau as the chairman of the Company;

(2)     appointing Mr Liu as the managing director of the Company;

(3)     changing the signatories of the Company’s bank accounts from any two of Mr Chong, Mr Liu and Mr Lam to the joint signatories of Mr Lau and Mr Liu; and

(4)    replacing the current 3 directors of the JV Company nominated by the Company, that is, Mr Chong, Mr Liu and Mr Lam, by Mr Lau, Mr Liu and Mr Lam.

22. At a board meeting of the Company held on 19 June 2005, approval was given to the appointment of Mr Lau as a director of the JV Company in Mr Chong’s place.

23. Mr Chong complained, inter alia, that the effect of the Resolutions and the above board resolution was to exclude him from the management of the JV Company, contrary to the parties’ agreement as described in paragraph 10 above.

(I)      Commencing the Petition and thereafter

24. Accordingly, on 28 June 2005, Mr Chong commenced the Petition and took out the 2^nd Injunction Application and the Consolidation Application.  They were all returnable on 30 June 2005. 

25. On 30 June 2005, Sakhrani J adjourned all the Applications to be heard together with the Petition with directions given.  At the first hearing of the Petition on 26 July 2005, Barma J gave further directions for the hearing of the Applications and adjourned them for argument.

THE INJUNCTION APPLICATIONS

26. I now turn to the Injunction Applications.

27. Counsel for both parties has made a number of points in their submissions.  For present purposes, I do not propose to deal with each of them.  Suffice it to say that I have already considered them all carefully.  I will only address the points that are, in my view, sufficient to dispose of the Injunction Applications.

28. The 1^st Injunction Application has to a large extent been overtaken by event.  Its principal aim was to stop the holding of the EGM on 13 June 2005 but failed when Reyes J refused to grant an interim injunction on 6 June 2005.  And the EGM proceeded as scheduled.  Accordingly, Mr Yuen, SC, appearing for Mr Chong, is not pursuing the Application relating to the EGM.  What remains of the 1^st Injunction Application seeks to restrain Mr Lau from voting in favour of any resolution or causing or procuring any resolution to be passed at any directors’ meeting or shareholders’ meeting of the Company which will constitute a breach of Clause 2.5 of the Agreement.  This can be conveniently considered and determined together with the 2^nd Injunction Application.

(A)     The proper approach

29. In dealing with an application for interim injunction, the court applies the principles established in American Cyanamid Co. v. Ehticon Ltd [1975] AC 396.  In short :

(1)     The court first considers if the plaintiff needs to demonstrate that there is a serious question to be tried on his claim.

(2)     If yes, the court next consider whether, if the plaintiff were to succeed at the trial, it could be adequately be compensated by an award of damages in respect of any loss which he might suffer by reason of the defendant continuing to act unrestrained pending the trial.  If damages would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted.

(3)     If damages would not be an adequate remedy, the court should then consider whether, if the injunction were granted, the defendant would be adequately compensated under the plaintiff’s undertaking as to damages.  If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.

(4)     If the court is in doubt as to the adequacy of the respective remedies of damages, then the court considers where the balance of convenience lies, this involving a discretionary assessment of the effects of granting or withholding interlocutory relief, the court seeking to preserve the status quo.

See Wah Nam Holdings Co Ltd v Excel Noble Developent Ltd [2003] 3 HKC 118, per Riberio J (as he then was) at p.125.

30. The same principles apply by analogy where the application for injunction is made in a section 168A petition : see S.H. Goo, Minority Shareholders’ Protection, p.109.

31. Mr Barlow, appearing for Mr Lau and Mr Liu, does not dispute these general principles.  However, he argues that the permanent injunctions sought in both the Action and the Petition appear to be the substantive relief sought.  Granting the interim injunctions will finally dispose of the proceedings.  As Mr Chong fails to show that Mr Lau and Mr Liu have no real chance of succeeding at trial, the Injunction Applications must fail : Mak Chi Sing v. A & A Commodities Ltd [1983] HKLR 403.

32. Mr Yuen submits that Mak Chi Sing is inapplicable.  There, the injunction sought is a mandatory injunction for the grant of a guarantee.  If allowed, the mandatory injunction would finally dispose of the disputes.  Here, the injunctions that Mr Chong sought, if granted, would only suspend the effect of the Resolutions and prevent Mr Lau and Mr Liu from breaching Clause 2.5 of the Agreement.  If they were to win at trial, the state of affairs is reversible.

33. I agree with Mr Yuen and rule that the American Cyanamid approach applies.

(B)     A serious question to be tried

34. Following the American Cyanamid approach, I first consider if Mr Chong has established a serious question to be tried on his claims.

35. I have already set out the gist of Mr Chong’s case in paragraph 10 above.  In the Petition, Mr Chong described his case in greater detail thus :

“1^st Shareholders Agreement

8.    At a meeting on 29^th November 203, an agreement was reached between the Petitioner, the 2^nd Respondent and Lam with respect to their respective roles in the Company and how it would be run.  Amongst other matters, it was agreed that :

(1)   the Petitioner would be responsible for representing the Company in relation to outside parties and the major work of the Company;

(2)   the 2^nd Respondent was to have responsibility for managing the Company’s day to day affairs and liaison with the joint venture partner;

(3)   Lam’s main responsibility was liaison with Golden Eagle on the raising of finance; and

(4)   the Petitioner, the 2^nd Respondent and Lam would conduct the affairs of the Company on the basis of ‘三位一體’, i.e. ‘thee acting as one’.

9.    It was further agreed between the Petitioner, the 2^nd Respondent and Lam about the time the Company was acquired by them that once the JV Company was incorporated, each of them would be nominated as the Company’s representative to taken up the 3 directorships allotted to the Company under the JV Agreement and the memorandum and articles of association of the JV Company.  Pursuant to this, the Petitioner, the 2^nd Respondent and Lam were duly appointed as the JV Company’s directors on its incorporation on 29^th August 2003.  At the same time, the Petitioner was appointed as the Legal Representative of the JC Company giving him the authority to act on its behalf.  The Petitioner was also appointed as the Chairman of the JV Company in recognition of the leading role played by him in concluding the JV Agreement.

10.  By reason of the agreements summarised in paragraphs 8 and 9 above (collectively the ‘1^st Agreement’), it was the Petitioner’s right or alternatively his legitimate expectation that he would be entitled to participate in the affairs and management of both the Company and the JV Company.

R1 Becoming Shareholder of the Company

11.   By reason of the fact that Golden Eagle was unable to provide or procure funding for the Company, an alternative source of the necessary funding had to be found.  Eventually, the possible sources of the necessary funding were narrowed down to 3 parties, including the 1^st Respondent who was introduced o the Company by the 2^nd Respondent.  Of these 3 parties, only the 1^st Respondent agreed not to take an active role in the management of the Company or the JV Company in the event that he was selected to become a shareholder of the Company (‘2^nd Agreement’).  The 2^nd Agreement was recorded in the notes of meeting between the Petitioner, the 2^nd Respondent and Lam on 23^rd April 2004 and was orally confirmed by the 1^st Respondent during negotiations in about April 2004 as well as on the signing of the written agreement dated 28^th April 2004 (i.e. the 3^rd Agreement referred to below).  It was on this basis and not otherwise that the Petitioner, the 2^nd Respondent and Lam made an offer to the 1^st Respondent to become a shareholder of the Company in about April 2004 on the terms and conditions as contained in the 3^rd Agreement referred to below, which offer he accepted, even though the amount he agreed to invest, US$37 million, was less than that offered by the party introduced by me, i.e. Zhejiang Wong Lak Holdings.

12.  Pursuant to the aforesaid and by a resolution passed by the Company’s board of directors (‘Board’) on 28^th April 2004, it was resolved by the Petitioner, the 2^nd Respondent and Lam that the remaining 61,000,000 shares of the Company should be allotted as follows :

...

14.  In addition to the 2^nd Agreement, the terms on which the said allotments were made were contained in or evidenced by an agreement in writing dated 28^th April 2004 between the Petitioner, the 2^nd Respondent and Lam as the original shareholders of the Company (referred to therein collectively as party A) and the 1^st Respondent as a new shareholder (referred to therein as party B (‘3^rd Agreement’).

…

16.  The 1^st Respondent’s obligations under the 3^rd Agreement also include, inter alia, the following :

…

(2)   Clause 2.5: which provides, inter alia, that only the 1^st Respondent shall be made a director of the Company and the JV Company (‘the Directorship Limitation Clause’), which he duly was subsequent to the 3^rd Agreement’s being entered into, and to preserve the prevailing management structure of the JV Company.

17.  As is clear from the 2^nd and 3^rd Agreements, the 1^st Respondent was invited to be a shareholder of the Company because he was in a position to provide the necessary funding and agreed not to take an active role in the management of the Company or the JV Company.  It was never the parties’ intention that the 1^st Respondent would be actively involved in the management of the Company or the JV Company.  Had it been otherwise, the consideration payable by the 1^st Respondent would have been much more.  Clause 2.5 of the 3^rd Agreement was inserted and agreed by all parties so as to reflect the 2^nd Agreement by ensuring that the 1^st Respondent would not have any control over the management of the Company or the JV Company despite his 50% shareholding in the former.”

36. Mr Chong therefore complained that excluding him from the management of the JV Company constituted a breach of the 3 shareholders agreements and in particular Clause 2.5 of the Agreement.

37. In my view, on the evidence before me, Mr Chong has raised a serious question to be tried on the 3 Agreements, the effect of Clause 2.5 of the Agreement, and the breach the Agreements and Clause 2.5 by excluding him from the management of the JV Company.  Hence there is a serious question to be tried of his claims in both the Action and the Petition.

38. Mr Barlow contends that Mr Chong has not been able to demonstrate a serious question to be tried for his claims in either the Action or the Petition.  I have already carefully considered all his submissions.  But I am unable to agree with him.  I do not think it is desirable for me to go further and explain why I disagree with Mr Barlow.  For it is very likely that at the trial, similar arguments as that raised by Mr Barlow here will be advanced to counter Mr Chong’s claims.  I do not want to preempt the trial judge’s evaluation of these arguments.

(C)    Adequacy of damages

39. I now turn to adequacy of damages.

40. Mr Yuen submits that damages is not an adequate remedy to Mr Chong while no loss can be identified by Mr Lau and Mr Liu if the injunctions sought are granted.

41. In my view, given the current state of relationship between the two camps, even if Mr Chong eventually succeeds at the trial, it is rather unlikely that the court will grant the permanent injunctions sought, thereby effectively forcing two unwilling camps to continue to jointly run the Company and through the Company, the JV Company.  It is likely to be a recipe of further disputes and possible legal actions.  The court may be more inclined to make a buy out order with a consequential direction that the shares of the Company are to be evaluated on the basis that the breach committed by Mr Lau’s camp had not taken place.  On the evidence before me, Mr Lau is a man of substance.  He would be in a position to buy Mr Chong out.  In other words, monetary compensation in the form of a buy out order would be an adequate remedy to Mr Chong if he succeeds at the trial.

42. On this ground alone, the Injunction Applications have to be refused.

(D)    Balance of convenience

43. Even if I were wrong on the adequacy of damages, I am of the view that the balance of convenience tilts against the granting of the injunctions.

44. First, if Mr Chong were to return to the board of the JV Company, given the current state of the parties’ relationship, it is likely that further disputes will arise.  It may have the effect of bringing the operation of the JV Company into chaos or even a standstill, which is clearly not beneficial to the interests of the JV Company and the Company as well.

45. Second, status quo should be preserved.  Status quo is the state of affairs existing during the period immediately preceding the issue of the writ claiming the permanent injunction or if there be unreasonable delay between the issue of the writ and the motion for an interlocutory injunction, the period immediately preceding the motion : see Garden Cottage Foods Ltd v. Milk Marketing Board [1984] 1 AC 130, per Lord Diplock at p.140B-D.

46. For present purposes, I look at the state of the affairs immediately preceding in the commencement of the Petition.  By then, Mr Chong had already been removed from the management of the JV Company.  To preserve the status quo, the injunctions sought, which would have the effect of allowing Mr Chong to stay on the board of the JV Company, should not be granted.

(E)     Conclusion

47. For the above reasons, I refused the Injunction Applications.

(F)     Costs

48. I have invited counsel to make submissions on costs, which they did.  But they have also asked me to reserve my ruling to be dealt with here and make an order nisi so that if necessary, they can address the matter further.  This is a sensible approach and I adopted it.  

49. The usual practice is that the successful defendant will be granted his costs in the cause : see Hong Kong Civil Procedure 2006, Vol.1, para.29/1/44, at p.523.  However, Mr Barlow argues that Mr Lau and Mr Liu should have their costs forthwith because it is unlikely that the matters will be proceeded with.  Mr Yuen disagrees and says that Mr Chong will definitely pursue his claims. 

50. An order for a party’s costs to be “in the cause” is made because the court has not investigated the merits and considers that it would not be fair for him to recover those costs unless he succeeded at the trial.  But the fact that the merits have not been investigated, or not fully investigated, does not necessarily mean that the court cannot dispose finally of interlocutory costs.  The question cannot be settled by reference to practice : it must be answered on the facts of the individual case : Kickers International SA v. Paul Kettle Agencies Ltd [1990] FSR 436, per Hoffmann J (as he then was) at p.438.

51. Here, I refused the Injunction Applications primarily on the ground that monetary compensation in the form of a buy out order would be an adequate remedy at trial.  This justifies a departure from the usual practice and Mr Lau and Mr Liu should have their costs of the Injunction Applications.

52. The next question is whether the costs of Mr Lau and Mr Liu should be paid forthwith.  As I have ruled that there is a serious question to be tried on Mr Chong’s claims, it may be unfair to order immediate payment of their costs now.  For as a result of the trial, Mr Chong may become entitled to set off an award for costs in his favour.

53. For these reasons, I will make an order nisi that the costs of the 1^st Injunction Application be to Mr Lau in any event, to be taxed if not agreed; and that the costs of the 2^nd Injunction Application be to Mr Lau and Mr Liu in any event, to be taxed if not agreed.

THE CONSOLIDATION APPLICATION

54. The Consolidation Application is less controversial.

55. Mr Barlow argues that there is no merit in Mr Chong’s claims, and hence nothing to consolidate meaningfully.

56. I have already ruled that Mr Chong has established a serious question to be tried on his claims.  And the essential facts underlying the Action and the Petition are to a large extent just the same.  The two sets of proceedings should be consolidated.  I thus allowed the Application and gave consequential directions including costs.