XCHRX AMPITTIA INC. v. B-TECH (HOLDINGS) LTD. AND OTHERS

HCA 338/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 338 OF 2001

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REASONS FOR DECISION

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1. On 16 February 2001, I made an order discharging an ex parte injunction ("the Injunction Order") granted by Pang J as varied by Suffiad J on 9 February 2001. These are the reasons for my decision.

2. The Plaintiff, Ampittia Inc., is a company incorporated in the British Virgin Islands. The 1st Defendant, B-Tech (Holdings) Limited was formerly known as Dong-Jun (Holdings) Limited. It is a company incorporated in Bermuda and its shares are listed for trading on the Hong Kong Stock Exchange. The 2nd Defendant, Coupeville Limited, is a company incorporated in the British Virgin Islands and a wholly owned subsidiary of the 1st Defendant. The 3rd Defendant, Easycom Limited, was a company incorporated in Hong Kong and a wholly owned subsidiary of the 2nd Defendant. The 3rd Defendant is the registered owner of a commercial property known as Levels 1-3 of Harvest Building with 50 car-parking spaces situate at No. 585 Longhua West Road, Xuhui District, Shanghai, China ("the Shanghai Property"). The key asset of the 3rd Defendant is its interest in the Shanghai Property. The Shanghai Property is leased for a term of five years at a total monthly rent of US$120,500.00 prior to 1 February 2001.

3. The 1st Defendant is the holding company in the Group and the Shanghai Property was acquired by the Group in March 2000 at a consideration of HK$88 million, of which HK$34 million was paid in cash and the remaining HK$54 million was settled by the issue and allotment of 450 million shares of the 1st Defendant at HK$0.12 per share. According to the public circular of the Group issued on 1 February 2001, the Group is "principally engaged in property development and investment as well as high value-added technology projects."

4. The 4th Defendant, Thing On Enterprises Limited, is a company incorporated in the British Virgin Islands and is owned by Wong Chung Tak, a businessman with extensive interest in business activities including diamond trading, securities and commodities dealings, property development and investment in Hong Kong, China and elsewhere. On 19 January 2001, the 1st and the 2nd Defendants accepted an offer of the 4th Defendant to purchase the entire issued share capital of the 3rd Defendant at HK$25 million, the effect of which is that the Shanghai Property would be disposed of by the Group. A formal agreement for sale and purchase dated 31 January 2001 was entered into by the 2nd Defendant as the vendor, the 1st Defendant as the covenantor and the 4th Defendant as the purchaser. This provided for a completion date on or before 19 February 2001.

5. The Injunction Order was hybrid in nature. It contained a Mareva Injunction restraining the 1st Defendant from disposing of or dealing with its assets, whether in Hong Kong or elsewhere, up to the value of HK$16 million. It also contained an interim injunction against all the Defendants to restrain disposal of the shares of the 3rd Defendant and/or the Shanghai Property other than at its market value and/or for not less than HK$110 million. It was provided in the exceptions to the Injunction Order that the order should cease to have effect if the 1st to 3rd Defendants would provide security by paying the sum of HK$16 million into court or make provision for security in that sum.

The summonses

6. On 5 February 2001, the Plaintiff issued its summons for continuation of the Injunction Order. As I understand from Mr Charles Sussex, SC, who appeared for the Plaintiff in this hearing and in the hearing before Suffiad J on 9 February 2001, the Plaintiff's summons was technically not before me because an order had been made by Suffiad J that the Injunction Order "shall remain in force until it is varied or discharged by a further order of the Court".

7. Thus, the summonses before me were the summons issued by the 1st to 3rd Defendants on 8 February 2001 seeking discharge, alternatively variation of the Injunction Order and the summons issued by the 4th Defendant on 13 February 2001 seeking discharge of the Injunction Order, alternatively further fortification of the Plaintiff's undertaking as to damages in the event that the Injunction Order should continue.

8. The basis of the application for discharge, as submitted by Mr Ronny Tong, SC on behalf of the 1st to 3rd Defendants and Mr Andrew Liao, SC on behalf of the 4th Defendant, may be summarised as follows:

(1) there is no risk of dissipation of assets and the Plaintiff is only interested in obtaining security or priority for its claim of HK$16 million; and

(2) there was material non-disclosure and/or misrepresentation by the Plaintiff at the ex parte stage when the Plaintiff applied for the Injunction Order.

The Plaintiff's claim

9. The Plaintiff's claim rests on two causes of action. The first is for repayment of a loan due under a loan agreement dated 18 July 2000 ("the Loan Agreement") entered into between the Plaintiff as the lender and the 1st Defendant as the borrower whereby the loan of HK$20 million was advanced to the 1st Defendant. The other cause of action is founded on Section 60 of the Conveyancing and Property Ordinance, Cap. 219 and it is alleged that the 1st to 3rd Defendants had conspired with the 4th Defendant to transfer the Shanghai Property to the 4th Defendant at a gross undervalue with the dishonest intent of defrauding the 1st Defendant's creditors, including the Plaintiff.

10. In respect of the claim for repayment of the loan, the loan was repayable on 18 October 2000 as provided in the Loan Agreement. The loan was secured by a first fixed charge on 90 million shares of Cupac Technology Limited ("the Cupac shares") registered in the name of the 1st Defendant's subsidiary, China Base Technology Limited ("China Base"). The share mortgage was executed by China Base in favour of the Plaintiff at the same time as the Loan Agreement. By a letter dated 15 September 2000, the Plaintiff notified the 1st Defendant and China Base that an event of default had occurred as the 1st Defendant had failed to settle two loans due on 29 August 2000 and 14 September 2000. No repayment of the loan was made to the Plaintiff on 18 October 2000. On 23 October 2000, the Plaintiff wrote to the escrow agent under the share mortgage requesting release of the share certificate and other relevant documents of the Cupac shares as the mortgage had become enforceable. On 11 January 2001, the Plaintiff's solicitors wrote to the 1st Defendant demanding repayment forthwith of the loan with interest in the total sum of HK$20,312,602.74. That demand was not met and the writ herein was issued against the 1st Defendant initially on 19 January 2001.

11. On 3 February 2001, the Plaintiff exercised its power of sale under the share mortgage and sold the Cupac shares by way of public tender for HK$5 million to Dragon Castle Group Limited ("Dragon Castle") and thereby reduced the 1st Defendant's total indebtedness to HK$15,312,602.74 including interest if the completion of the sale should take place. That was why the Injunction Order provided for a restraint of disposal of assets up to HK$16 million.

12. As for the claim that the sale and purchase agreement entered into with the 4th Defendant should be declared null and void under Section 60 of the Conveyancing and Property Ordinance, the Plaintiff's case is that the sale to the 4th Defendant at HK$25 million was at a gross undervalue in that (1) the Shanghai Property was acquired in early 2000 for HK$88 million; (2) as at 31 December 2000, the 1st Defendant ascribed to it an unaudited book value of HK$92.9 million; and (3) the Plaintiff has obtained two valuations that the market value of the Shanghai Property is in the range of HK$105 to 110 million. It was alleged that the financial position of the 1st Defendant is deteriorating and the 1st Defendant was unable to pay its debts in January 2001 in the sum of at least HK$40.5 million. It was pleaded in the Statement of Claim that the 4th Defendant knew or should have known of the grave financial difficulties of the 1st to 3rd Defendants and that the Shanghai Property was the "only or only appreciable asset which the 1st Defendant's creditors could look to in order to achieve repayment of their debts." Thus, the circumstances were such that the purported sale of the entire issued share capital of the 3rd Defendant to the 4th Defendant would have the effect of defeating creditors of the 1st Defendant.

Good arguable case

13. For the Mareva injunction, the Plaintiff would have to satisfy the court that it has a good arguable case on its claim for repayment of the debt under the Loan Agreement.

14. The defence raised by the 1st to 3rd Defendants is that there was an oral agreement made between Eugene Chuang acting on behalf of the Plaintiff and Vincent Wong Chun Hung ("Vincent Wong"), the Chairman and Executive Director of the 1st Defendant, on or about 28 September 2000 whereby the repayment date under the Loan Agreement was extended from 18 October 2000 to 17 April 2001. It was alleged that consideration was provided for the variation in that the 1st Defendant had paid HK$872,916.65 to the Plaintiff pursuant to a debit note issued by the Plaintiff dated 27 November 2000. This amount was for accrued interest of the loan from 19 July 2000 to 18 October 2000 at prime rate plus 2% p.a. (which was the rate of interest provided in the Loan Agreement) and from 19 October 2000 to 27 November 2000 at prime rate plus 3.5% p.a. It was argued that in the debit note, the Plaintiff had only demanded payment of interest and not the principal sum and this showed that the parties had agreed to extend the repayment date. Further, there would not have been a demand for interest at the rate of 3.5% p.a. over prime rate as from 19 October 2000 and the 1st Defendant would not have made payment unless there was a subsequent agreement between the parties to vary the Loan Agreement.

15. The Plaintiff's answer was that Eugene Chuang had no authority whatsoever to enter into any agreement with the 1st Defendant to vary the Loan Agreement. The Plaintiff also relied on Clause 15.3 of the Loan Agreement which was to the effect that any agreement or waiver of the agreement should only be effective if made in writing and signed by or on behalf of the Plaintiff. The Plaintiff did not sign the 1st Defendant's letter dated 28 September 2000 in which the Plaintiff was asked to acknowledge and confirm the alleged agreement to extend the repayment date. As for the debit note requiring the 1st Defendant to pay interest at 3.5% p.a. over prime rate after 18 October 2000, the Plaintiff's case was that this was imposed by the Plaintiff on the 1st Defendant unilaterally and was not the subject of any agreement between them.

16. It was also alleged by the 1st Defendant that it has a counterclaim arising out of the Plaintiff's exercise of its power of sale of the Cupac shares. The 1st Defendant claims that the Plaintiff had acted in breach of its duty as a mortgagee and that the shares were sold at a gross undervalue. It was alleged that damages recoverable are likely to exceed the Plaintiff's claim of HK$16 million. In answer to this, Mr Sussex pointed out that any loss allegedly suffered must have been suffered by the mortgagor China Base and not by the 1st Defendant. Further, the share mortgage contained a provision to the effect that the mortgagor should not have any right to claim against the Plaintiff in respect of any loss arising out of any sale pursuant to the mortgage, however such loss might have been caused except for wilful default.

17. I do not propose to embark on an analysis of the merits of the respective cases of the parties here. I would only say that I have considered the positions of the Plaintiff and of the 1st Defendant and I am satisfied on the material presented to me that the Plaintiff has established a good arguable case in respect of its claim for repayment of the debt under the Loan Agreement.

Serious issue to be tried

18. The defence raised here is that Section 60 of the Conveyancing and Property Ordinance is not applicable as there was no intent to defraud creditors. My attention was drawn to the following matters by Mr Tong and Mr Liao:

(1) In the public circular issued by the 1st Defendant on 1 February 2001, it was stated clearly that the purpose of selling the Shanghai Property through the sale of the entire issued share capital in the 3rd Defendant was to "improve the liquidity position and with a view to reducing the indebtedness of the Group" and upon successful completion of the sale and the placement of new shares up to 3,421,222,949 shares at an issued price of HK$0.01 per share (being the other subject covered by the public circular), it is expected that "net proceeds of approximately HK$58 million will be raised by [the 1st Defendant], which shall be sufficient to settle the liabilities of the Group referred to above". The liabilities of the Group as referred to included the Plaintiff's loan in the principal sum of HK$20 million.

(2) It was stated in the public circular that the purchaser (i.e. the 4th Defendant) is "independent of and not connected with the substantial shareholders, chief executive and directors of [the 1st Defendant] or any of its subsidiaries or an associate or any of them".

(3) The unaudited book value of the Shanghai Property of HK$92.9 million as at 31 December 2000 was stated in the public circular. It was also stated that the consideration of HK$25 million was determined "after arm's length negotiations between the parties, taking into account the finance situation of the [1st Defendant] and the limited time to conclude the transaction." It went on to say that the board of directors is of the opinion that the consideration is "fair and reasonable" so far as the interests of the 1st Defendant and its shareholders are concerned, "having considered a number of demands for repayment as mentioned above and the fact that the offer by [the 4th Defendant] is the only offer available for consideration." It was stated that the net proceeds of sale of approximately HK$25 million "will be applied to settle the outstanding liabilities of the Group."

(4) Thus, it would appear from the above that the sale of the Shanghai Property to the 4th Defendant was on a forced sale basis. Further, contrary to the Plaintiff's suspicion, which was not substantiated, the 4th Defendant has no apparent connection with the 1st to 3rd Defendants.

(5) There was evidence from Vincent Wong of the 1st Defendant and Wong Chung Tak of the 4th Defendant as to their negotiations on the price of the Shanghai Property.

(6) The valuation reports obtained by the Plaintiff were on the basis of open market value and did not take into account the sale to the 4th Defendant was for all intents and purposes a forced sale.

(7) The valuation report obtained by the 4th Defendant from Chesterton Petty gave an open market value of the Shanghai Property as in February 2001 at HK$48 million and a forced sale value (or Estimated Restricted Realisation Price; "ERRP") in the range of 50-60% of the open market value. Thus, the consideration paid by the 4th Defendant at HK$25 million was in line with the ERRP, in the opinion of Chesterton Petty. It was further pointed out that unlike the valuation reports obtained by the Plaintiff, the report of Chesterton Petty was detailed and gave an analysis of the property market in Shanghai.

19. In answer to the above, Mr Sussex made the following submissions:

(1) The valuation of Chesterton Petty giving an open market value of HK$48 million is out of line with all the other valuations given by other surveyors at various stages. I was asked to note the purchase price of the Shanghai Property in March 2000 at HK$88 million even though only HK$34 million of this was paid in cash. Apart from the unaudited book value of the property at HK$92.9 million and the recent valuations from two surveyors at HK$110 million, there was a valuation from a third valuer Debenham Tie Leung in February 2000 (at the time when the Shanghai Property was acquired by the Group) in which the property was valued at HK$105 million.

(2) The price for which the Shanghai Property is to be sold to the 4th Defendant should be viewed in the context of the rental receivable from the property, which was US$120,500.00 a month. Under the sale and purchase agreement with the 4th Defendant, the purchase price of HK$25 million would be reduced to HK$20 million in the event that the 3rd Defendant should fail to persuade the tenant of the property to increase the monthly rental to RMB1 million with effect from 1 March 2001. At a price of HK$20 million, the 4th Defendant would be getting a rate of return of 56% p.a.

(3) There was no evidence that the 1st Defendant had considered or taken any steps towards raising money on the security of the Shanghai Property.

(4) There was no obvious explanation as to why an agreement was concluded by the 3rd Defendant with the tenant on 19 January 2001 (which was the same date when the 4th Defendant's offer to purchase the entire issued share capital of the 3rd Defendant was accepted) whereby the 3rd Defendant as landlord had agreed to reduce the amount of the rent in exchange for early payments of rental. The effect of this agreement concluded by the 3rd Defendant was apparently to reduce the consideration payable by the 4th Defendant under the sale and purchase agreement from HK$25 million to HK$20 million as mentioned above.

20. I was referred by Mr Sussex to Lloyds Bank Ltd v. Marcan [1973] 1 WLR 1387, a case concerned with Section 172 of the Law of Property Act 1925, the equivalent of Section 60 of Cap. 219. The relevant dicta may be given as follows:

"If [the debtor] disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor." (at 1390H per Russell LJ)

"Both under the Statute of Elizabeth I and under section 172 of the Law of Property Act 1925 it is clear from the words of the enactment that fraud has to be established before a transaction can be avoided. In my opinion, fraud involves dishonesty and I cannot go with Pennycuick V.-C. in his observation [1973] 1 WLR 339, 344 that the word 'defraud' in section 172 'is not intended to be confined to cases of fraud in the ordinary modern sense of the word, i.e. as involving actual deceit or dishonesty.' It is clear enough that deceit is not a necessary element, but in my view dishonest intention is, at any rate when the conveyance is for consideration.....

Other cases make it clear that if the conveyance is voluntary it is easier to infer a dishonest intention than when it is made for consideration or even that no dishonest intention need then be established: see Freeman v. Pope (1870) 5 Ch. App. 538, Ideal Bedding Co. Ltd v. Holland [1907] 2 Ch. 157, In re Eichholz, decd. [1959] 1 Ch. 708. It does, however, appear that a conveyance for good consideration will be regarded as fraudulent if made with the deliberate intention of hindering creditors and for the benefit of the debtor himself rather than as a bona fide family arrangement or an arrangement which merely prefers one set of creditors to another set. To that effect was In re Fasey [1923] 2 Ch. 1, decided by a very strong Court of Appeal (Lord Sterndale M.R., Warrington and Atkin L.JJ.)." (at 1392 B-E, per Cairns L.J.)

21. In Freeman v. Pope (1870) L.R. 5 Ch. 538, Lord Hatherley, L.C. had this to say about the intent to defraud creditors in the statute of 13 Eliz. c. 5 (which was replaced by section 172 of the Law of Property Act 1925):

"But it is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the Judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the statute." (at 541; emphasis supplied)

22. For the Plaintiff to establish an intent on the part of the 1st to 3rd Defendants to delay, hinder or defraud creditors, the whole of the circumstances surrounding the transaction with the 4th Defendant would have to be looked at. Given the conflicting expert opinion on the valuation of the Shanghai Property and the explanation provided by the Defendants as to how the negotiations were conducted and a deal was arrived at, these disputes can only be resolved at trial when the evidence on each side has been tested in cross-examination. I am satisfied on the evidence adduced that there is a serious issue to be tried on the Plaintiff's claim that the transaction with the 4th Defendant should be set aside under Section 60 of the Conveyancing and Property Ordinance.

Risk of dissipation of assets

23. The case presented to the court at the ex parte stage, as stated in the 1st affirmation of the Plaintiff's executive director, Kenneth Chan Chak Kai ("Kenneth Chan"), was that the Shanghai Property is the "major, if not the sole, tangible asset of the 1st Defendant" and as the valuation reports adduced by the Plaintiff showed that the price at which the property was sold to the 4th Defendant is at a gross undervalue, the inference must be that the disposal was made so as to defeat the enforcement of the Plaintiff's claim and the anticipated judgment against the 1st Defendant and render the same nugatory. The court's attention was specifically drawn to the fact that in the annual report and audited accounts of the 1st Defendant for the year ended 31 March 2000, the 1st Defendant's consolidated loss was HK$456.2 million and that the chairman's statement revealed that "most of the Group's loss-making businesses and highly debt-riding [sic] assets had been disposed of". It was represented to the court that in about January 2001, the situation turned "critical" when the 1st Defendant's state of financial health "took a dramatic turn for the worse" and that the Hong Kong Exchange and Clearing Ltd had suspended trading in the 1st Defendant's stocks on 15 January 2001 although trading had resumed on 2 February 2001.

24. Mr Tong submitted that the above picture painted in the 1st affirmation of Kenneth Chan was misleading in a number of material aspects. Although the annual report of the 1st Defendant for the year ended 31 March 2000 was exhibited to the 1st affirmation of Kenneth Chan, the court's attention had not been drawn to a number of material matters in the financial statement. It is pertinent to note that the annual report, which was prepared up to March 2000, was before the Loan Agreement was entered into between the Plaintiff and the 1st Defendant in July 2000. Although the Group's audited consolidated loss for the year ended March 2000 was HK$456.2 million (as singled out for mention in the 1st affirmation of Kenneth Chan), this should be compared with the attributable loss of the Group the year before which stood at HK$904.5 million. As stated in the annual report, the strategy adopted by the Group was to dispose of a substantial portion of its property developments in the mainland in early 2000 and it was in that context that the statement quoted above that "most of the Group's loss-making businesses and highly debt-riding assets had been disposed of" was made in the chairman's statement. The following matters in the annual report should also be noted:

(1) The consolidated balance sheet revealed that total assets less current liabilities were HK$446,867,000.00 and that share capital and reserves amounted to HK$182,268,000.00.

(2) The post balance sheet events showed that the liquidity position of the Group was much improved with the completion of the disposal of substantial property developments in the mainland. The difference in the liquidity position was shown in the summary of the condensed pro forma adjusted consolidated net assets as at 31 March 2000, based on the audited consolidated net assets of the Group at the same date and adjusted as if the completion of the disposal of property developments had taken place at that date. I set out the relevant figures in table form as follows:

	Audited consolidated net assets HK$'000	Pro forma adjusted consolidated net assets HK$'000
Non-current assets	1,732,228	374,104
Current assets	590,900	102,580
Current liabilities	(1,876,261)	(10,381)
Net current assets/(liabilities)	(1,285,361)	92,199
Non-current liabilities	(264,599)	(264,599)
	182,268	201,704
	========	========

(3) Also stated in the post balance sheet events was that on 28 July 2000, the Shenzhen Arbitration Committee issued a final judgment in favour of the Group in arbitration proceedings commenced against a mainland developer. The developer was ordered to return to the Group the deposit of HK$70 million with interest and reimburse the Group for damages suffered and expenses incurred. The directors expressed the opinion that the total amount to be recovered from the developer was estimated to be approximately HK$96 million.

25. The Group had published an interim report dated 28 December 2000 which was not placed before the court at the ex parte hearing. The interim report contained the consolidated statement of profit and loss for the 6-month period ended 30 September 2000 and the consolidated balance sheet as at 30 September 2000. I set out in table form the relevant figures:

CONSOLIDATED STATEMENT OF PROFIT AND LOSS

CONSOLIDATED BALANCE SHEET

26. It would appear from the above figures that as at 30 September 2000, there was a marked improvement in the financial condition of the Group. Of particular relevance are the figure for the unaudited net asset value of HK$298,914,000.00 and the fact that the total assets exceeded the current liabilities by HK$570,210,000.00.

27. There was a further update on the financial situation of the 1st Defendant in the public circular issued on 1 February 2001 but this was not mentioned in the 1st affirmation of Kenneth Chan and it did not appear to have been brought to the attention of the court at the ex parte stage. On page 3 of the public circular, it was stated that in January 2001, the 1st Defendant had received letters before actions from solicitors representing certain creditors demanding repayment of loans in the total principal amount of HK$40.5 million. This was followed by two paragraphs which read as follows:

"As at 30 September, 2000, the [1st Defendant] had an unaudited net asset value of approximately HK$298.9 million. Subsequently, the [1st Defendant] placed 2,000,000,000 new shares of the [1st Defendant] at HK$0.015 each to raise net proceeds of approximately HK$29.3 million and acquired 22% of PiLink International Limited for HK$75,599,755 which was settled by way of issue of 4,319,986,000 new Shares at HK$0.0175 each as disclosed in the [1st Defendant's] circular dated 19 October 2000. Other than this, the [1st Defendant] is not aware of any material changes in its financial position since the despatch of the 2000 interim report.

In view of the demands for repayment as mentioned above, the [1st Defendant] entered into the Placing Agreement and the Property Agreement [i.e. the agreement with the 4th Defendant] on 19 January, 2001 to raise funds to improve the liquidity position and with a view to reducing the indebtedness of the Group. Upon successful completion of the Placing in full and the Disposal [i.e. the disposal of the entire issued share capital of the 3rd Defendant], it is expected that net proceeds of approximately HK$58 million will be raised by the [1st Defendant], which shall be sufficient to settle the liabilities of the Group referred to above."

28. The public circular also set out the "remaining key assets of the Group" after completion of the transaction with the 4th Defendant and these key assets comprise interest in the following assets, companies or joint ventures:

(1) a residential property complex in Guangzhou of which the 1st Defendant holds a "30% associated interest" (this is referred to as the "Guangzhou Property" in the affirmations and it is in dispute whether this interest is "commercially valueless" due to the existence of a construction loan at HK$245 million, according to the figures of the 1st Defendant);

(2) a joint venture engaging in the development, sales, leasing and distribution of lottery related hardware and operating systems in the mainland;

(3) a joint venture engaging in the production of organic fertilizers in the mainland;

(4) a company engaging in the distribution of international pre-paid telephone calling cards, the provision of video conferencing, Internet access and unified messaging services;

(5) a company holding interest in several companies providing online Chinese medicine and health care content, consultation and trading of medical related products; and

(6) a company developing and providing Internet enabling technology solutions and applications and offering Internet professional services.

29. In addition, the public circular made reference to an earlier circular in August 2000 in relation to an acquisition by the 1st Defendant of a commercial building in North Point and it was stated that the acquisition would be completed on or before 5 February 2001.

30. On the evidence presented to me, I am inclined to agree with Mr Tong that whilst the 1st Defendant may be experiencing liquidity problems, it has not been shown that the Plaintiff's interest as a creditor is being prejudiced by the sale of the Shanghai Property to the 4th Defendant or that the 1st Defendant was dissipating an asset to evade payment to the Plaintiff. I think there is substance in Mr Liao's submission that the objective of the Plaintiff in obtaining the Injunction Order was to obtain security or priority in respect of its claim for HK$16 million. To use the words of Lord Oliver in Brady v. Brady [1989] 1 AC 755 at 773F, the proposed transfer to the 4th Defendant, even if gratuitous (which it is not), "would merely reduce the amount available for distribution to the shareholders and would not have imperilled the interests of creditors". It should also be noted that in selling the entire issued share capital of the 3rd Defendant, the 1st Defendant would be exchanging an income yielding fixed asset for liquid cash. There is no evidence to suggest that such cash would not be applied to satisfy the demands of the 1st Defendant's creditors, contrary to the avowed intention of the 1st Defendant in the public circular, or that the cash would be spirited away to the Plaintiff's prejudice.

31. Looking at the financial position of the 1st Defendant and the Group on the available evidence, even if the proceeds of the Shanghai Property would not be utilised to discharge the Plaintiff's claim, I am unable to come to the view that any judgment obtained by the Plaintiff would not be met by the 1st Defendant if it is called upon to do so. It might be that the 1st Defendant would find it less easy to discharge its indebtedness to the Plaintiff in that situation, but that does not mean that there would be no assets from which the debt of HK$16 million could be discharged, given that the 1st Defendant had an unaudited net asset value of approximately HK$298.9 million as at the interim report in September 2000 and there are no material changes in its financial position save as stated in the public circular in February 2001.

32. I should also point out that the sale of the entire issued share capital of the 3rd Defendant to the 4th Defendant at a price significantly lower than the audited book value of the Shanghai Property was addressed in the public circular which contained the following statements:

"Subject to audit, the [1st Defendant] will incur a consolidated net loss of approximately HK$65.3 million (or approximately HK$70.3 million if the consideration is reduced to HK$20,000,000) and a reduction of consolidated net asset value of the same amount as a result of completion of the Property Agreement [i.e. the agreement with the 4th Defendant]. Having considered the financial situation of [1st Defendant], the Board is of the view that despite the negative effect on the consolidated net loss and net asset value, the Disposal [i.e. to the 4th Defendant] is in the interest of [the 1st Defendant] and its shareholders."

33. The question before me is not whether the proposed sale to the 4th Defendant is an ill-advised business deal. The question I am concerned with is whether the Plaintiff's rights as a potential creditor would be prejudiced by the proposed sale without an interlocutory injunction. Mr Sussex submitted that if the sale to the 4th Defendant were to go through, this would mean that there would be HK$70 million less in the assets of the 1st Defendant to satisfy its creditors and this would mean prejudice to the Plaintiff. He submitted that the 1st Defendant is insolvent in the sense that it is unable to pay its debts as they fall due. In my view, a distinction should be drawn between the situation in which a company is suffering from serious liquidity problems and the situation where the debtor company would have no assets to discharge its liabilities if the disposal of the remaining or major asset is not restrained by an interlocutory injunction. In the former situation, it would be tantamount to giving an unsecured creditor security or priority in respect of his claim if an interlocutory injunction of the kind as sought is granted. That is not the proper purpose of the injunction. The proper remedy for an unsecured creditor in this situation is to present a petition to wind up the debtor company on the ground of insolvency rather than to apply for a Mareva or some other kind of interlocutory injunction. On the evidence before me, I am of the view that there are assets in the 1st Defendant to satisfy the Plaintiff's claim of HK$16 million and that it would not be appropriate to grant an interlocutory injunction that would interfere with the conduct of a bona fide business. For this reason, the Injunction Order should be discharged.

Material non-disclosure

34. I turn to consider the other ground for discharge relied on by the Defendants, which is material non-disclosure. I remind myself of the relevant propositions:

(1) On the question of materiality, the court is not concerned with whether the matters disclosed would, if they had been disclosed, have caused it to refuse to grant the ex parte order. The test is whether the court should have these matters in the weighing scales.

(2) It is not a sufficient answer to an allegation of non-disclosure for applicant to say that the relevant information is contained in an exhibit, though not referred to in the body of the affidavit. The applicant must identify the crucial points for and against him, and not simply rely on the mere exhibiting of numerous documents.

(3) The applicant must make proper enquiries before making the application. The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such enquiries. The extent of the enquiries which will be held to be proper, and therefore necessary, depend on all the circumstances of the case.

(4) If material non-disclosure is established the court will be astute to ensure that an applicant who obtains an ex parte injunction without full disclosure is deprived of any advantage he may have derived by that breach of duty.

(5) Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper enquiries and to give careful consideration to the case he presented.

(6) It is not for every omission that the injunction will be automatically discharged. The court has a discretion to continue the injunction or to make a new one.

35. See Standard Chartered Securities Ltd v. Lai Arthur [1993] 1 HKC 375 at 379G-382G, 387C-389E)

36. Mr Tong and Mr Liao have taken a number of points on material non-disclosure or material misrepresentation or failure to make reasonable and proper enquiries. I do not propose to deal with each of them.

No reference to possible defence

37. The complaint here made on behalf of the 1st to 3rd Defendants was that the Plaintiff had failed to disclose a possible defence of these Defendants to the Plaintiff's claim under the Loan Agreement, being the oral agreement for extension of the repayment date which I have mentioned earlier. I am unable to see any substance in this complaint. The Plaintiff's position was that its executive director Kenneth Chan had no knowledge of the alleged oral agreement between the 1st Defendant and Eugene Chuang, who was alleged to be the Plaintiff's agent but the allegation of agency is denied by the Plaintiff. The possible defence was simply not anticipated by the Plaintiff, nor could the Plaintiff be criticised for not making any enquiries with Eugene Chuang.

Relationship between Plaintiff and China United

38. It was alleged by the 1st to 3rd Defendants that the Plaintiff is closely associated with China United Holdings Ltd ("China United"), a company incorporated in Bermuda and the shares of which are listed on the Hong Kong Stock Exchange. China United is a significant minority shareholder of the 1st Defendant and it had made a general offer for all the shares of the 1st Defendant on 19 January 2001 at an offer price of HK$0.003 per share (which was 30% of the price for the placement of new shares by the 1st Defendant on the same date). That offer was withdrawn by China United on 23 January 2001. On 29 January 2001, the 1st Defendant received a joint letter from China United and another shareholder Power Ocean Ltd requisitioning a special general meeting for the purpose of considering the setting of a maximum number on directors of the 1st Defendant and for appointment of four persons as directors of the 1st Defendant. It was submitted that the application for an injunction by the Plaintiff was probably a means to harass the 1st Defendant and to force the 1st Defendant to accede to the terms of China United.

39. The evidence relied on by the 1st to 3rd Defendants to support the allegation that there was a close connection or association between the Plaintiff and China United is somewhat circumstantial. I was referred to the two valuation reports adduced by the Plaintiff in the application and I was asked to note that one report was commissioned by China United whereas the other report was commissioned by Power Ocean Ltd. Further, from the report of a private investigator engaged by the Plaintiff, it would appear that the legal advice from China United's solicitors dated 6 February 2001 was supplied by the Plaintiff to the private investigator.

40. On the available evidence, I am not prepared to draw the inference of close association between Plaintiff and China United or that the application for an injunction was made with the alleged ulterior motive.

The Shanghai Property being the sole tangible asset

41. I find that material non-disclosure was made out in that the court at the ex parte stage was given the impression that the Shanghai Property was most likely to be the only asset of the 1st Defendant that could be utilised to satisfy its creditors. I do not propose to go over the figures in the annual report as in March 2000, the interim report as in September 2000 and the various statements in the public circular which I have already set out. It is not sufficient to exhibit to the Plaintiff's affirmation the annual report without drawing the attention of the Court to relevant figures that I have mentioned. Worse, to say that the 3rd Defendant had reported consolidated loss for the year ended March 2000 at HK$456.2 million without more simply gave a lopsided picture of the 1st Defendant's financial position, which is a highly material factor in the granting of the injunction and must be put in the weighing scales. On this ground also, the Injunction Order should be discharged.

42. Other criticisms were made by Mr Tong and Mr Liao regarding the failure to draw to the attention of the Court various statements in the public circular concerning the sale of the shares in the 3rd Defendant to the 4th Defendant, and the fact that the suspension of trading in the 1st Defendant's shares on 15 January 2001 was at the 1st Defendant's request because of the placement of new shares, not because of its critical financial situation as the 1st affirmation of Kenneth Chan had sought to suggest. I think these are valid criticisms but they are of lesser importance. If they were the only matters complained of, I might not have ordered that the Injunction Order should be discharged.

Sale of the Cupac shares

43. The complaint here was that although the 1st affirmation of Kenneth Chan did mention the sale of the Cupac shares at HK$5 million for the purpose of explaining why the Plaintiff's claim was reduced from HK$20 million plus interest to around HK$16 million, no mention was made of the unaudited financial statements of Cupac as at 30 November 2000 which revealed a net asset value of HK$408,589,837.39. It was argued that as the Cupac shares constituted some 20% of the shareholding of Cupac, the Cupac shares must be worth more than HK$5 million and that the Plaintiff's sale of these shares was at an undervalue. I accept the Plaintiff's submission that the significance of the alleged value of the Cupac shares was not reasonably within the anticipation of the Plaintiff at the time the ex parte application was made. Further, I am not persuaded that the sale of the Cupac shares is a matter that should be put in the weighing scales when considering whether the Injunction Order should have been granted.

The orders

44. For the above reasons, I made an order discharging the Injunction Order granted by Pang J on 3 February 2001 as varied by Suffiad J on 9 February 2001. I have initially ordered that the order of discharge was not to take effect until after 17 February 2001 1.00 p.m., in view of an ex parte application for a similar injunction by China United which was to be heard on 17 February 2001 at 9.30 a.m. That hearing did not take place as the Plaintiff informed me subsequently that an appeal would be lodged against my order for discharge and upon the undertaking of the Plaintiff to file a notice of appeal by 19 February 2001 4.00 p.m., I have ordered that the order for discharge of the Injunction Order be stayed pending the determination of the Plaintiff's appeal.

45. I have made the following orders in addition:

(1) The costs of the summons of the 1st to 3rd Defendants be awarded to these Defendants to be taxed if not agreed, including the costs of the hearing on 9 February 2001, with certificate for two counsel.

(2) The costs of the 4th Defendant's summons be to the 4th Defendant, to be taxed if not agreed, including the costs of the hearing on 9 February 2001, with certificate for two counsel.

(3) There be liberty to the Defendants to apply on an inquiry as to damages they may have suffered by the granting of the Injunction Order on 3 February 2001.

(4) There be liberty to apply generally.