CON PAC NIAGA SDN BHD v. HONGKEW HOLDING LTD

HCMP2523/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2523 OF 1993

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D E C I S I O N

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1.  This is an application by Con-Pac Niaga Sdn Bhd, a Malaysian company, seeking an order that certain funds in court which represent the balance of the proceeds of sale of some 109,159,978 shares in a company called Hongkew Holdings Limited should be paid to it as being the owner of 8.6 million of the shares which were sold. The application was first made by a summons dated 26 April 1995 which was heard by Mr Justice Rogers, as he then was, in 1996.

2.  At that hearing, Mr Justice Rogers was not entirely satisfied with the evidence that was placed before him in an attempt to establish the Applicant’s ownership of the shares in question.  Although he was not satisfied with the evidence, he did not dismiss the application. Instead, he adjourned it sine die, giving the Applicant the opportunity to put forward further evidence in support of its application and restore it as and when it saw fit to do so.

3.  At the time, the Applicant did not have much by way of further evidence, and I am told in the evidence in support of the application that has now been restored before me, that at that time, given the absence of any further material that the Applicant could put before the court, the Applicant took the view that it was not worthwhile to expend further funds on trying to pursue the matter.

4.  However, at some point during 2010, the Applicant was informed that the funds standing in court, having been there for a very considerable time, would be disposed of by transferring them to the general reserves of the Hong Kong Government.  This prompted the Applicant to make one last attempt to establish its ownership over the shares, and it is for that reason that the application before me has been restored.

5.  The background which explains why the funds are standing in court is fairly complicated, but can, I think, be relatively briefly summarised.  In about 1992, Hongkew Holdings Limited, which was a company that was listed on one of the Hong Kong Stock Exchanges at that time, was gripped by a power struggle between various factions of its shareholders.

6.  It seems that there was some doubt on the part of the company as to who was in fact beneficially entitled to certain shares that had been issued in the company, and in those circumstances, the company enlisted the aid of the then Financial Secretary and persuaded the Financial Secretary to order an investigation by an inspector pursuant to the Securities (Disclosure of Interest) Ordinance that was then in effect.  That Ordinance has now been repealed, but in the form that it then stood, the Ordinance empowered the Financial Secretary to appoint an inspector for the purpose of investigating into various matters, including the beneficial ownership of shares in listed companies in Hong Kong.

7.  The Financial Secretary appointed Mr McMahon as an inspector, and Mr McMahon conducted an investigation and compiled a report.  In the report, Mr McMahon identified some 127 million‑odd shares in Hongkew Holdings Limited in respect of which there were doubts as to the beneficial ownership.  Included in these shares were a total of 11.51 million shares that were, according to the records of the company, held by the Applicant.  Mr McMahon made inquiries by sending letters to the Applicant asking for it to confirm its shareholding in the company and to provide evidence of its beneficial ownership of such shares.

8.  At that time, the Applicant may not have taken the matter as seriously as it could have done, since it appears to have made some fairly cursory investigations and informed the inspector that it owned some 6.5 million shares, having originally owned some 36 million shares which had been issued by it to the company being the consideration for a transaction which the company had entered into with the Applicant.  The Applicant’s then representatives, being members of its management, indicated that the bulk of the shares so acquired had been sold on the open market, but that it still had 6.5 million shares.  It was, however, unable, or at any rate failed at that point, to provide any further evidence to the inspector, and the inspector in the end expressed the view that he could not be satisfied with the material that he had been provided with, and therefore, along with the rest of the 127 million‑odd shares, he recommended to the Financial Secretary that a restriction order should be placed on those shares to prevent them from being dealt with in any way.

9.  In the result, such a restriction order was made by the court.  This, however, had an unfortunate side effect in that thereafter, Hongkew was the subject of a restructuring in which a new investor came in to take over the company and make use of its listed status.  As part of that restructuring, the arrangement was that the investor should acquire the entire issued share capital of Hongkew.

10.  The problem was that as 127‑odd million shares were subject to a restriction order, it was not possible for those shares to be transferred to the investor.  This problem was eventually overcome by the making of an application to the court – to Mr Justice Mortimer, as he then was – for an order lifting the restrictions on a substantial portion of the 127 million‑odd shares that were subject of the restriction order.

11.  In the event, the restriction order was lifted in respect of 109,129,978 shares, but expressly for the limited purpose of having those shares sold to the investor at the stated price under the restructuring scheme, with the proceeds of sale being paid into court to await any claims that might be made in respect of such proceeds by the persons who were the beneficial owners of the shares.

12.  Subsequent to the sale, some three shareholders who claimed to be beneficially interested in some 40.5 million of the shares that had been sold came forward and made applications to be paid their proportion of the proceeds attributable to their shareholding which had been sold.  These applications came before Mr Justice Yam, who made orders of the sort that were asked for.

13.  So far as the present Applicants are concerned, as I have said, they applied in 1995 for similar orders.  However, in their evidence in support of the application, they indicated that they were in fact the owners of 8.6 million shares, and suggested that the balance of the 36 million shares which they had been issued had been sold.  They also indicated that the original share certificates had been located and had been transferred to Messrs Deacons, who were then representing them, for the purpose of the application for payment out.

14.  In the event, Mr Justice Rogers was concerned with the various apparent discrepancies between what had been stated to the inspector and what was being stated in the evidence before him.  In particular he was concerned that the Applicant had not given any explanation for the discrepancy between what Mr McMahon, the inspector, was told as to the number of shares that were held by the Applicant in that that was a discrepancy between 6.5 million and 8.6 million, being the amounts of which Mr McMahon was told and the amount in respect of which a claim was made before Mr Justice Rogers.

15.  Secondly, he was concerned that there had been no attempt to identify the shares by their certificate numbers in the application before him.  He was concerned also that there was no explanation for why share certificates were not produced to the inspector but were now available, and he was further concerned that he could not tell from an inspection of the share certificates whether or not they were genuine.

16.  There was, however, evidence before Mr Justice Rogers which may or may not have been brought specifically to his attention to the effect that the company itself, Hongkew Holdings, had indicated that it did not seek to oppose the application, and secondly, there was also evidence of correspondence with the Attorney-General, who had expressed some concerns as to whether or not the share certificates being produced were genuine, but was offered an opportunity to inspect the share certificates and given certain further explanations which resulted in the Attorney‑General, like the company, deciding not to oppose the application.

17.  Before me there is now a further affirmation that has been made by an employee of the company.  However, the deponent did not have any personal knowledge of the matters at the time that the first application was made, although he did take steps to cause solicitors to be instructed to actually inspect the physical share certificates that were in Deacons’ possession.

18.  The result of that inspection is evidence that the solicitor concerned has confirmed that the share certificate numbers of the share certificates held by Deacons match with the share certificate numbers mentioned in the original evidence filed before Mr Justice Rogers and also now mentioned again in the evidence filed before me.  So far as the authenticity of the certificates is concerned, a difficulty has arisen in that the share registrars of Hongkew at the time are no longer in existence, and it had therefore not been possible to approach them to ask them to confirm the authenticity of the certificates.  However, the certificates do bear the numbers stated in the inspector’s report, and those numbers must have been taken from the records of Hongkew itself, since the inspector did not have access to the physical share certificates at the time of his report.

19.  The share certificate numbers therefore match exactly, and it has also been possible to obtain from Deacons confirmation that they obtained the shares from the agents of the Applicant in April or May 1995, which is shortly before the application that was heard by Mr Justice Rogers was initiated.

20.  Apart from that, the shareholders of the Applicant and its present directors are unfortunately unable to explain the discrepancy between the information provided to the inspector and the information contained in this application.  It was perhaps unfortunate that this was not done when the application was first made, but given the lapse of time, the inability now to recollect the reasons for that difference are, I think, understandable.

21.  I think it is also worth noting that in the 15-odd years since the application was made before Mr Justice Rogers and adjourned by him, no other party has sought to come forward to claim to be entitled to the proceeds of sale of the 8.6 million shares that the Applicant says were owned by it.

22.  In those circumstances, it does seem to me that it would be appropriate for the court to find that the Applicant was indeed the owner of 8.6 million shares bearing the certificate numbers mentioned in the evidence which correspond with the certificate numbers for the shares that were sold pursuant to the order of Mr Justice Mortimer.  They do not represent the whole of the shares for which certificate numbers of certificates bearing the name of the Applicant were sold, because, as I have noted, some 11.51 million shares that were, according to the company’s records, registered in the ownership of the Applicant were sold, whereas the Applicant has only been able to find physical certificates for some 8.6 million shares.  The reason for this discrepancy is not entirely clear, but it may be that some of the shares that the Applicant sold on the market may not have been presented for transfer and registration by the company, with the result that there may be a mismatch between the records of the company at the time and the actual shareholding retained by the Applicant.

23.  But be that as it may, I am satisfied, on the evidence that is before me, that the Applicant in fact is to be regarded as the beneficial owner of the 8.6 million shares that are the subject of this application, and I therefore will make an order substantially in terms of the summons.

24.  The summons had to undergo some amendment since it was first issued, first to correct an error in the number of shares that were stated to be sold.  The number of shares in the original form of the summons, that number was stated to be 127-odd million shares, which was the number of shares placed under the restriction order rather than the 109‑odd million shares that were actually sold.

25.  The Applicant also does not seek now any order for its costs to be paid out of the proceeds of sale, although it does seek an order that it should be entitled not just to its proportionate part of the proceeds of sale, but also its proportionate part of the interest that has accrued on the proceeds of sale during the time that the funds have been standing in court.  The ability to claim such accrued interest is provided for by section 47(2) of the now repealed Securities Disclosure of Interest Ordinance, and I therefore am prepared to make an order that the Applicant should have the appropriate proportion of the proceeds of sale, together with the interest accrued thereon, paid out of court in its favour.

26.  The only other matter that I should note is that Miss Ip has helpfully pointed out that there is a further error in the form of the proposed order in the summons in that for the purpose of calculating the proportion, the numerator and denominator of the appropriate fraction had been reversed.

27.  I will give leave to amend the summons so that it appears in the form set out with the amendments appearing in the application of 30 June 2011, subject to the further change that the proportion that is stated at the end of the schedule should be amended to state that the proportion is to be arrived at by dividing the number 8.6 million, being the number of shares formerly held by the Applicant in Hongkew Holdings Limited, by 109,129,978, being the number of shares in Hongkew Holdings Limited that were ordered to be sold pursuant to section 46(4) of the Ordinance.