NG PIT HAK AND OTHERS v. REGISTRAR OF COMPANIES, HONG KONG AND ANOTHER

HCMP428/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.428 OF 2009

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J U D G M E N T

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1. On 3 June 2005, Sinolink Group Limited (“the Company”) was struck off the Companies Register, pursuant to section 291 of the Companies Ordinance, Cap.32, by reason of its failure to file annual returns.  The 1^st, 2^nd and 4^th applicants, who were members of the Company, have applied to court, pursuant to section 291(7), for the Company to be restored to the Register.  The Registrar of Companies, who is the 1^st respondent, has no objection to the present application and proposed certain terms to be included in the Court Order, were the court to be minded to grant the relief claimed.  Those terms included orders directing the 1^st, 2^nd and 4^th applicants to file outstanding returns, to update the address of the Company’s registered office and to update the Company’s register of directors and secretary.  The 2^nd respondent, who was also a member of the Company, resisted the application.

2. The applicants asked for the Company to be restored on the ground that the Company has valid claims against the 2^nd respondent, in particular, claims arising from loss of benefits, from an hydropower station project in China, which ought to have accrued to the Company, and from losses suffered by the Company on account of the use of the Company’s funds by the 2^nd respondent to carry out unauthorised stock trading activities.  In the course of the hearing before me, Mr Alex Lai, who appeared on behalf of the applicants, advanced a further reason to restore the Company, namely, to enable the applicants to recommence a derivative action against the 2^nd respondent, which the applicants had sought to do in HCA2359/2008.  That action had been struck out by Master S.Kwang on 12 May 2009 on the ground that the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461 only applied when a company still existed and did not apply in the present case where the Company had been dissolved.

THE PRINCIPLES

3. The principles governing an application to restore the company under section 291(7) of the Companies Ordinance are fairly well established.

4. Section 291(7) provides :

“(7)   If a company or any member or creditor thereof feels aggrieved by the company having been struck off the register, the court on an application made by the company or member or creditor before the expiration of 20 years from the publication in the Gazette of the notice aforesaid may, if satisfied that the company was at the time of the striking off carrying on business or in operation, or otherwise that it is just that the company be restored to the register, order the name of the company to be restored to the register, and upon an office copy of the order being delivered to the Registrar for registration the company shall be deemed to have continued in existence as if its name had not been struck off; and the court may by the order give such direction and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off.”

5. An applicant, as a member of a company, qualifies as an aggrieved party if the refusal of the application to restore the company results in a loss to the applicant, whether direct or indirect.

6. There are three grounds upon which a court may order restoration : if satisfied that the company (a) was at the time of the striking off carrying on business or (b) was at the time of the striking off in operation or (c) otherwise that it was just that the company be restored to the register.

7. The normal exercise of discretion would be to allow restoration.  It would be an excessive penalty for the court to refuse restoration in the case of a company which has been struck off because of its failure to file annual returns, particularly if there is an offer to make good the omissions.  Exercising the discretion against restoration would be the exception and the burden would be on the party opposing the restoration to persuade the court to take this course.

8. In the present case, the application was made on the ground that it was just that the company be restored to the register.  The parties agreed that the correct test for me to apply is “whether or not the company has more than a shadowy prospect of establishing anything of value”, for its members if it were to be restored to the register, which was the test applied by Tang J, (as he then was), in Easewin Properties Ltd v Registrar of Companies (No.2) [2004] 4 HKC 547, following the dictum of Hoffmann LJ, as he then was, in Re Forte’s (Manufacturing) Ltd; Stanhope Pension Trust Ltd v Registrar of Companies [1994] BCC 84.

9. Neuberger J, (as he then was), in Re Blenheim Leisure (Restaurants) Ltd (No.2) [2000] BCC 821 explained how the court should approach and deal with these applications.  Neuberger J said :

“So far as the third gateway, justness, is concerned, it seems to me that it can sensibly and, indeed, should sensibly be considered along with the general discretion.

I have found it very difficult, when considering the various points that Mr Freedman has raised (particularly when taken together), to decide whether it is really the case that BLR only has a shadowy prospect – to use the words of Hoffmann LJ in Re Forte’s (Manufacturing) Ltd. Stanhope Pension Trust Ltd v Registrar of Companies [1994] BCC 84 – of establishing anything of value or whether its prospect are rather better.

In this connection, it seems to me important to remember that this is an application to restore a company, which is meant to be a comparatively quick exercise – see the observations of Tuckey LJ in the Court of Appeal.  The registrar of companies is a necessary party and it is undesirable that he is required to appear on long hearings.  It is not normally the appropriate occasion for considering in any detail or in any depth the prospects of the relevant company establishing anything of value, even where that is the only reason put forward for the restoration.  As with any general rule there may be exceptions and it seems to me appropriate to examine the prospects in a little detail, (a) where it contended, and it appears that there is real force in the contention, that the company has no real prospect of establishing anything of value for its members if it is restored, and/or (b) where there is a real and justified competing interest to that of the company or its members to be taken into account.  This is, I accept, one of those exceptional cases.  Even in such cases, however, it is normally wrong to consider the prospects of the company or its members establishing anything of value in great detail.”

I agree with these observations and now turn to consider the prospects of the Company in some, if not in great, detail.

THE COMPANY’S POTENTIAL CLAIMS

The background of the case as appears from the documents

10. On 13 July 1996, a Joint Venture Agreement had been entered into by a company called Sino Link Resources Limited (“SRHK”), a company incorporated in Hong Kong in 1983 and having as its directors and shareholders at the time of the Joint Venture Agreement, the 1^st applicant’s brother and one, Joseph Hin Kei Tsang.  The 1^st applicant was a director of SRHK at the material time.  The Joint Venture Agreement was between SRHK and Sichuan Wujing Electricity (Group) Company Limited (“Sichuan Wujing Electricity”).  The parties to the Agreement agreed to form a joint venture company known as Sinolink (Qianjiang) Power Enterprises Company Limited (“Sinolink (Qianjiang) Power”).  The asset of the joint venture company was a hydropower station located in Qianjiang County about 400 km away from Chongqing in Sichuan Province.  The power station was under construction and expected to be completed before October 1997.  On the terms of the Joint Venture Agreement, SRHK was to contribute some RMB350 million into the project.

11. According to the 1^st applicant, the 1^st to 4^th applicants and the 2^nd respondent intended to invest into the project and a company previously known as Unison Overseas Limited was acquired as their corporate vehicle to participate in this joint venture.  Its name was changed to Sinolink Group Limited (“the Company”) on 20 August 1996.  The 1^st, 2^nd and 4^th applicants have been shareholders and directors of the Company since then.  The 3^rd applicant has been a shareholder and director since then but ceased to be a director in 1998.  The 3^rd applicant ceased to participate in these proceedings on 30 July 2009 when he served a Notice of Discontinuance.  The 2^nd respondent has been a shareholder and director since then but ceased to be a director from August 1999.

12. Sometime before 7 October 1996, another company incorporated in the British Virgin Islands was acquired and renamed Sino Resources Limited (“SRBVI”).  On 7 October 1996, the registered shareholders of SRBVI were the 1^st applicant and the 2^nd respondent, each holding one share.

13. On 7 November 1996, the Chinese Government granted an approval certificate in respect of the joint venture company, Sinolink (Qianjiang) Power.  The certificate stated that the investors in the company were Sichuan Wujiang Electricity and “Sino Resources Limited”, a company described in the certificate as being registered in Hong Kong.  This was clearly a reference to SRHK, and not to SRBVI.  The amount of the investment by SRHK into the joint venture was shown to be RMB1.167 billion, which was substantially higher than the amount recorded in the Joint Venture Agreement of 13 July 1996.

14. About a week afterwards, on 15 November 1996, the Corporate Finance Division of Ernst & Young, Hong Kong issued a general invitation to purchase shares in “Sinolink Group Limited” which intended to sell up to 95% of the issued share capital of SRBVI which was its wholly owned subsidiary.  Contrary to the terms of the approval certificate referred to above, the invitation to purchase described SRBVI as holding a 77.8% interest in the PRC joint venture company, Sinolink (Qianjiang) Power, a sino-foreign equity joint venture formed in 1996 between SRBVI and Sichuan Wujiang Electricity.  It described the asset of the joint venture as the hydropower station located in Qianjiang County, the construction of which was expected to be entirely completed before October 1997.

15. On 16 December 1996, a BVI company known as Coveside Agents Limited was acquired and had its name changed to Sinolink Group Limited (“SLGBVI”).  It had two shareholders, each holding one share, namely, the 1^st applicant and the 2^nd respondent.  On 22 July 1999, the 1^st applicant transferred his share in the company to the 2^nd respondent who then became the sole shareholder of SLGBVI.

16. Also on 16 December 1996, the shareholding of the 1^st applicant and the 2^nd respondent in SRBVI was transferred to SLGBVI.  Accordingly, SRBVI became a 100% subsidiary of SLGBVI as from that date.

17. On 3 January 1997, a Letter of Intent was signed by Guangdong Credit Limited and “Sinolink Group Limited”.  The Letter of Intent referred to the fact that SRBVI was a company registered in the British Virgin Islands and a wholly-owned subsidiary of the “Sinolink Group Limited”.  In the light of the foregoing, it would appear that the Letter of Intent was executed by SLGBVI, and not by the Company.  The document recorded SLGBVI’s intent to sell 80% of SLGBVI’s shareholding in SRBVI to Guangdong Credit Limited at a net price of USD47 million.  This was followed by a Deed of Undertaking executed in Hong Kong on 27 January 1997 between SLGBVI and Electric Assets Limited, another BVI company.  The Deed recorded the “facts” that SRBVI, which was wholly owned by SLGBVI, held 77.8% interest in the joint venture company, Sinolink (Qianjiang) Power, and that SLGBVI agreed to sell to Electric Assets Limited 80% of the shares of SRBVI.  By the Deed, SLGBVI irrevocably guaranteed to Electric Assets Limited the due and punctual performance by SLGBVI, for and on behalf of SRBVI, of all the obligations of SRBVI under the Joint Venture Contract including, but not limited to, the obligation to make capital contributions to the joint venture company in accordance with the schedule set out therein (which recorded the obligation to make various payments from RMB50 million to RMB80 million on various dates from 15 February 1997 to 8 August 1998, totalling RMB350 million).

18. Subsequently, in July 1997, 80% of the shares in SRBVI was transferred to Electric Assets Limited and 20% remained in the holding of SLGBVI.  Also, some time in July 1997, a Shareholder’s Agreement was entered into between SLGBVI, Electric Assets Limited and SRBVI.  The Agreement recorded the fact that SLGBVI was the registered owner of 20 shares, that Electric Assets Limited was the registered owner of 80 shares in SRBVI, and that they desired to combine their interests to establish a joint venture through the medium of SRBVI for the purpose of promoting SRBVI’s interest in Sinolink (Qianjiang) Power’s business in the ownership and operation of the hydropower station in Qianjiang.

19. On 22 July 1999, the 1^st applicant and the 2^nd respondent entered into a written agreement whereby, from that date, the 1^st applicant’s 50% shareholding in SLGBVI (and indirect shareholding of 10% in SRBVI) would be unconditionally transferred to the 2^nd respondent, the profits and debts of the two companies arising thereafter would only accrue to the 2^nd respondent, and the 1^st applicant would have no liability in that regard.  In another document entitled “Declaration”, dated 3 January 2000 and signed by the 1^st applicant and the 2^nd respondent, it was recorded that it had been resolved by the Board of Directors that the 1^st applicant “shall be of no liability on the matters raised from the shareholdings, profit and loss” of” SLGBVI and SRBVI, and that the 2^nd respondent shall “undertake the full liabilities”.

20. Between January 2001 to January 2002, the following amounts were deposited to SLGBVI’s bank account with the Standard Chartered Bank in Hong Kong on the following dates :

	Date	Amount
1.	23/01/2001	USD4,470,000.00
2.	03/07/2001	USD4,825,477.93
3.	25/01/2002	USD425,815.47
4.	04/04/2001	HKD14,999,800.00

21. The bank accounts evidencing these deposits showed that the amounts in US Dollars were deposited by Sinolink (Qianjiang) Power and that the amount in HK Dollars was a remittance received from Chongqing.

The parties’ respective cases

(a)   The Company’s interest in the Joint Venture

22. The 1^st applicant asserted that the payments into SLGBVI’s bank account with the Standard Chartered Bank in Hong Kong was part of the consideration for the sale and purchase of 80% of the shares in SRBVI and he complained that these amounts were withdrawn from the bank account of SLGBVI without his knowledge.  The applicants’ case was that the 1^st to 4^th applicants and the 2^nd respondent agreed to invest in the joint venture project, the subject of the Joint Venture Agreement between SRHK and Sichuan Wujiang Electricity, and to use the corporate vehicle of the Company to do so.  The general invitation dated 15 November 1996 to purchase shares issued by the Corporate Finance Division of Ernst & Young, Hong Kong correctly described the Company, and not SLGBVI, as owning 100% of the issued share capital of SRBVI.  SRBVI was acquired on 7 October 1996 and used as the operating arm of the Company.  On 15 November 1996, SLGBVI had not yet come into existence.  The applicants asserted that any benefits arising from the project should accrue to the Company instead of being diverted to SLGBVI.  They asserted that the subsequent use of a BVI company bearing the same name as the Company was a tax avoidance arrangement, and that the Company and not SLGBVI was the true investor in the joint venture project.

23. According to the applicants, the original Joint Venture Agreement was undoubtedly signed by SRHK.  Although the 2^nd respondent was given leave specifically to comment on the matter, he never properly explained why SRBVI later came into the picture and took over the role of SRHK.  The applicants’ case was that the exercise was undertaken for the purposes of tax avoidance and that the same tax avoidance technique was applied between the Company and SLGBVI, and SRHK and SRBVI.  The applicant also pointed to the following matters as showing that the Company was the true investor in the joint venture project :

(a)  The general invitation to purchase shares issued by the Corporate Division of Ernst &Young on 15 November 1996 clearly referred to the Company, as SLGBVI only came into being on 19 December 1996;

(b) the address used by SLGBVI in the Shareholder’s Agreement was the same as the registered address of the Company; and

(c) the Project Manager of the Company, Mr Yu Man Tong, made an affirmation on 21 July 2009 deposing to the fact that he was the Project Manager of the hydropower station in Chongqing, Sichuan from 1996 to 1999.  As Project Manager, he was responsible for overseeing the project and was active in the day-to-day operations of the project.  He confirmed that the Company was the founding company behind the project and was actively involved in the operation of the joint venture business from the very beginning.

24. Although it was the 2^nd respondent’s case that the Company was never involved in the joint venture project and had been formed to trade in Chinese herbal medicines and in helicopters, the applicants made the point that no documents had been produced by the 2^nd respondent to substantiate this claim and to demonstrate that the Company was indeed engaged in the business of trading in Chinese herbal medicines and helicopters.  As the 2^nd respondent was a director of the Company until 1999, he was in a good position to produce such documents, if they existed.

25. For these reasons, the applicants submitted that the claims of the Company were genuine and substantial and not shadowy.

26. In response, Mr Timon Shum for the 2^nd respondent relied on the terms of the Letter of Intent, the Deed of Undertaking and the Shareholders’ Agreement.  These documents, which had been signed by the 1^st applicant, clearly showed that the true investor was SLGBVI.  Accordingly the 1^st applicant was all along aware that it was SLGBVI, and not the Company, that was involved in the hydropower station project.  He also relied on the affirmation of Chen Mao Qi, Chairman of Guangdong Credit Limited, who asserted that they all along dealt with SLGBVI and did not deal with the Company.  Further, the extract of the Balance Sheet of the Company as at 30 September 1997 did not show any assets in relation to the hydropower station project.

27. Mr Shum submitted that the 1^st applicant took great pains to withdraw from the project to protect himself against liability, as can be demonstrated from the written agreement dated 22 July 1999 and the declaration dated 3 January 2000.  However, on learning that SRBVI had secured a massive arbitral award in its favour at the end of 2000, the 1^st applicant regretted his withdrawal and started to make unwarranted demands, resulting in a the 2^nd respondent reporting the matter to the police in September 2001.  The 2^nd applicant also stated an action, HCA773/2005, against the 2^nd respondent which was discontinued, resulting in an award of costs in favour of the 2^nd respondent.  The 2^nd respondent also reported the 4^th applicant to the police in September 2008 for making an unwarranted demand.

28. Mr Shum also submitted that there was an inconsistency in the applicants’ case as the 1^st applicant had accepted, in paragraph 14 of his first affirmation on pp.26-7 of the Bundles, that the Joint Venture Agreement was between SRBVI and Sichuan Wujing Electricity.  However, I find that it is difficult to draw any conclusions based on the contents of this paragraph, given the obvious mistaken statement in that paragraph that the Joint Venture Agreement was dated 27 October 1996 when, in fact, it was dated 13 July 1996.  Mr Shum also pointed to the inconsistency between the claims of the applicants, as originally presented in HCA2359/2008 (alleging that the 2^nd respondent had wrongfully withdrawn RMB100 million from the Company’s profits from the hydropower station project) and their current claims that the 2^nd respondent owed RMB125 million to the Company being the proceeds of the sale of 80% of its shareholding in SRBVI.  Mr Shum concluded his submissions by asserting that the applicants were abusing the judicial process by bringing bogus claims, which were clearly contradicted by the documents, and that they had failed to satisfy even the low threshold of establishing more than a shadowy chance of success.

(b)   Unauthorised stock trading

29. The applicants also pressed the Company’s claims against the 2^nd respondent for loss and damage arising from the 2^nd respondent’s unauthorised use of the Company’s funds for stock trading.  The applicants pointed to the handwritten records (at p.382 and 395 of the Bundles) showing the withdrawal of over HK$15.74 million by way of a cheque payment to Sun Chung Kong Securities, another payment of over HK$14.6 million to Empress Securities Limited and recorded as a loan to the 2^nd respondent, and another payment of HK$10 million recorded as an investment by the 2^nd respondent and the 1^st applicant in shares.  The record on p.383 gave the date “13 July 1997” as the date of the payments of the sums of HK$17.4 million and HK$10 million.  The applicants made the further point that the 2^nd respondent only made a bare denial to these allegations, and that he did not deny that he was involved in trading in shares, only denying that he had to account for such stock trading.

30. Mr Shum was hard pressed to come up with any cogent submission to account for these handwritten entries, asserting that the handwritten notes only showed money coming in and going out of the account of the Company and did not prove that the 2^nd respondent was engaged in unauthorised share trading.  He also submitted that the 2^nd respondent was only a 20% shareholder in the Company and could not have traded in shares without the approval of the Board.

(c)   Derivative action not possible without the Company being restored

31. Finally, the applicants made the point that, in any event, the Company ought to be restored to enable the applicants to recommence a derivative action, which Master Kwang had prevented them from pursuing on the ground that the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461 only applied when a company still existed and did not apply in the present case where the Company had been dissolved.  The 2^nd respondent accepted the validity of this submission but contended that the Company ought not to be restored if the intended derivative action only had a shadowy prospect of success.

Analysis

32. As conceded by Mr Shum, it is a question of fact whether the true investor in the hydropower station project was the Company or SLGBVI.  I am certainly not able to determine that question on the affidavit evidence.  However, I have to decide whether the applicants’ contention that the Company was the true investor is so shadowy that I have to reject the present application.

33. The way the case was presented for the applicants left a lot to be desired.  I was not impressed by the conduct of the 1^st applicant who deserted what appeared to be a sinking ship only to re-surface when SRBVI had secured a massive arbitral award in its favour at the end of 2000.  The best way to identify the investor is to identify the source of funds used for the investment.  However, I have not seen any evidence of any investment by the 1^st 2^nd or 4^th applicant or by the Company in the hydropower station project.

34. On the other hand the 2^nd respondent has not adduced any evidence to explain the substitution of SRHK and the Company with SRBVI and SLGBVI : was there an assignment or novation of the Joint Venture Agreement of 13 July 1996?  The Joint Venture Agreement of 13 July 1996 was clearly executed by SRHK and the general invitation to purchase shares issued by the Corporate Division of Ernst &Young on 15 November 1996 clearly referred to the Company and not to SLGBVI, which only came into being on 19 December 1996.

35. I have come to the view that this is a case which is cloaked in shadows and that the shadows appear to be evenly spread over the applicants’ case as well as the 2^nd respondents’ case.

36. If anything, the applicants appear to be on stronger ground in respect of the claim for unauthorised stock trading.  The documents show that over HKS40 million was paid out of the Company’s account, of which HK$10 million was paid to the 1^st applicant and 2^nd respondent to invest in stocks and the rest paid to stockbrokers.  The boot is clearly on the 2^nd respondent’s foot to justify these payments and he has not done so.  His bare denials and bald assertions do not impress me and certainly do not persuade me to take the exceptional course of refusing an order for restoration.

37. Having carefully considered the matter, I have come to the firm view that I should allow the Company to be restored to pursue these claims and, if advised so to do, to enable the applicants to recommence a derivative action against the 2^nd respondent.

38. I wish to emphasize that my observations are not meant to impact upon or fetter the court entertaining subsequent proceedings in this matter where, no doubt, the court would ensure that it received all relevant evidence on material issues as well as properly translated documents which were sadly lacking in the papers presented to me.

Limitations

39. Although the applicants originally sought a direction from me, on the authority of In re Donald Kenyon Ltd [1956] 1 WLR 1397, to stop time running for the purposes of the Limitations Ordinance during the period the Company was dissolved, they were prepared to accept a general liberty to apply to the Court to stop time running for the purposes of the Limitations Ordinance in the event a limitations defence was taken in subsequent proceedings.  The 2^nd respondent indicated that he did not object to general liberty being given to apply to the Court to stop time running during the period the Company had been dissolved, if the Court were minded to order restoration of the Company.

Conclusion

40. For these reasons, I am prepared to accede to the application to restore the Company and I make the orders annexed hereto.

41. I have received a revised statement of costs from the solicitors of the 1^st, 2^nd and 4^th applicants.  I am not prepared to make a summary assessment of the costs, as there appear to be substantial grounds for disputing the sums claimed for costs that cannot be dealt with summarily.

Order

(1) the name of the company “SINO LINK GROUP LIMITED (中貫集團有限公司)” (C.R. No.551277) (the “Company”) be restored to the register of the Companies Registry;

(2) the 1^st, 2^nd and 4^th applicants shall deliver a sealed copy of the order for restoration (the “Order”) within 7 days from the date of the Order to the Registrar of Companies for registration;

(3) the 1^st, 2^nd and 4^th applicants shall cause the Company to change its Chinese name and file with the Registrar of Companies a “Notification of Change of Company Name (Form NC2)” within 14 days from the date of the Order;

(4) the 1^st, 2^nd and 4^th applicants shall file with the Registrar of Companies all the outstanding annual returns of the Company (including the annual returns for the years of 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009) and pay the appropriate registration fees (including late registration fees) pursuant to the Eighth Schedule of the Companies Ordinance, Cap.32 within 14 days from the date of the Order;

(5) the 1^st, 2^nd and 4^th applicants shall cause the Company to update the address of its registered office and within 14 days from the date of the Order file with the Registrar of Companies a “Notification of situation of registered office (Form R1)” in accordance with section 92 of the Companies Ordinance, Cap.32;

(6) the 1^st, 2^nd and 4^th applicants shall cause the Company to update its register of directors and secretary and file with the Registrar of Companies a “Notification of change of secretary and directors (Appointment/Cessation) (Form D2A)” and/or a “Notification of change of particulars of secretary and director (Form D2B)” (as the case may be) within 14 days from the date of the Order in accordance with section 158(4) of the Companies Ordinance, Cap.32;

(7) the 1^st, 2^nd and 4^th applicants shall pay the costs of the Registrar of Companies in the sum of HK$5,000.00 within 14 days of the date of this Order, being the agreed costs and disbursements of the Registrar of Companies in lieu of taxation;

(8) liberty is hereby granted to the 1^st, 2^nd and 4^th applicants to apply to the Court, in the event a limitations defence is taken in subsequent proceedings, to stop time running for the purposes of the Limitations Ordinance during the period the Company was dissolved; and

(9) the 2^nd respondent shall pay the costs of the proceedings to the 1^st 2^nd and 4^th applicants, to be taxed and paid forthwith, if not agreed.