LIU LIGUANG v. DECADE TECHNOLOGY LTD AND ANOTHER

HCMP 1941/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1941 OF 2011

(ON AN INTENDED APPEAL FROM HCCW NO. 463 OF 2010)

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DECISION

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The application

1.  This is the petitioner’s application for leave to appeal against the decision of Reyes J on 22 September 2011. The judge refused to grant the interlocutory injunctions sought by the petitioner, having given ex tempore reasons. At the conclusion of the hearing and on his own motion, he refused leave to the petitioner to appeal to the Court of Appeal insofar as any such application was to be made.

The background

2.  The relevant background matters may be stated shortly as follows.

3.  The petitioner, Liu Liguang, holds 30% of the issued shares in the subject company, Decade Technology Ltd (“the Company”). The 2^nd respondent, Great Master Technology Ltd (“Great Master”), holds the other 70%. The Company was incorporated in the British Virgin Islands. Its only valuable asset is its wholly owned subsidiary, Champway (China) Ltd, which, in turn, has a wholly owned subsidiary, Asia Dekor (Huizhou) Woods Company Ltd (“AD Huizhou”).  AD Huizhou derives all its revenue from the business of its factory in Huizhou, which manufactures wood works for sale in the PRC and overseas.

4.  Pursuant to a sale and purchase agreement made in October 2004, 70% of the issued shares of the Company were sold to Great Master, which was an indirect wholly owned subsidiary of Asia Dekor Holdings Ltd. In February 2005, the petitioner, Great Master and the Company entered into a shareholders’ agreement by which they set out the terms and conditions on which the business of the Company and the group were to be conducted.

5.  As a result of a sale and purchase agreement made in November 2007, by which Asia Timber Products Co Ltd (“Asia Timber”) acquired the entire issued share capital of the immediate holding company of Great Master, there was a change in control of Great Master in March 2008. The petitioner claimed he has since been wrongfully excluded from the management of the Company and the group by Asia Timber.

6.  The petition for winding up the Company was presented on 15 November 2010 pursuant to section 327(3)(c) of the Companies Ordinance, Cap 32. The only remedy sought is an order for winding up, on the just and equitable ground. Alternative relief under section 168A is not applicable, as the Company does not have a place of business in Hong Kong and is not a “non-Hong Kong” company as defined by section 332.

7.  In the petition, it was alleged that notwithstanding provisions in the sale and purchase agreement on the obligation of the petitioner and Great Master to supply working capital in proportion to their shareholdings, and notwithstanding the provisions of the shareholders’ agreement, there was an oral agreement subsequent to the sale and purchase agreement between the petitioner and Great Master (referred to as the “Basic Agreement”) by which those provisions were varied. Instead, the petitioner was to use his effort and connections to secure a continuous supply of wood for the factory of AD Huizhou, Great Master was to finance the balance of the registered capital of AD Huizhou in the form of a loan to the Company, and AD Huizhou was to finance the balance of the capital required for the construction of its factory and all the working capital through borrowing from banks using the factory as security.

8.  The petition set out a number of complaints of unfair and improper conduct against Great Master. For present purpose, it is necessary to mention only two of them.

9.  The first related to a series of loan arrangements (“the Onshore Facilities Agreement”) which AD Huizhou and a number of affiliates of Great Master entered into in December 2009 as borrowers of RMB 280 million, by which all the assets of AD Huizhou were encumbered as security. It was alleged that in so doing, the nominees of Great Master on the board of AD Huizhou (“Great Master’s Nominees”) had acted in breach of their fiduciary duties and in breach of the mutual understanding and expectation that the business and affairs of the group should be managed jointly by the petitioner and Great Master in all major decisions.

10.  The second matter (which was added to the petition by the amendments allowed by Reyes J on 22 September 2011) related to a multilateral entrustment loan agreement (“the Entrustment Loan Agreement”) entered into in March 2009 by AD Huizhou with Citibank Shanghai branch and four affiliates of Great Master including Asia Dekor (Heyuan) Woods Co Ltd (“Heyuan”). Pursuant to the Entrustment Loan Agreement, Great Master’s Nominees procured AD Huizhou to advance an aggregate of RMB 90,772,079.02 to Heyuan as at 31 December 2010. The loan was on an unsecured basis and carried an interest rate substantially lower than the commercial lending rate. The petitioner and his nominee on the board of AD Huizhou were not informed of or consulted about the Entrustment Loan Agreement or the loan to Heyuan.

The application for interlocutory injunctions

11.  The petitioner applied by summons for interlocutory injunctions on 25 May 2011. Reyes J dismissed the entire summons. The petitioner sought to reverse his decision only in respect of paragraphs (2) and (4) of the summons. 

12.  In paragraph (2), the petitioner sought a mandatory injunction ordering Great Master to procure repayment of RMB 90,772,079.02 and any other amounts which it had caused AD Huizhou to pay itself, its associate companies or affiliates and which have not been authorised by the petitioner, and to pay such amount, together with compound interest at 2% above prime lending rate with monthly rests, into a designated bank account opened in the name of AD Huizhou within 14 days.

13.  In paragraph (4), the petitioner sought a prohibitory interim injunction to restrain Great Master from causing AD Huizhou to make any loans or payments to Great Master, its associate companies or affiliates save with the written consent of the petitioner or an order of the court.

The grounds of appeal

14.  In essence, Miss Linda Chan, SC submitted that the judge had failed to have regard to the fact that the petitioner has a very strong case in respect of his complaint about the unauthorised loan of RMB 90,772,079.02. The loan was made without obtaining proper authorisation in accordance with the articles of association of AD Huizhou and is void and without legal effect. It is in breach of the provisions of the shareholders’ agreement which provided that the business of the Company and AD Huizhou shall be managed in accordance with the directions and subject to the control of the Company’s board of directors. The loan had not been considered or approved by the board of directors of the Company or of AD Huizhou. Great Master’s Nominees were plainly in breach of their fiduciary duties. The terms upon which the loan was made was detrimental to the interests of AD Huizhou and the Company in that it was unsecured, with no fixed term of repayment and at an interest rate substantially lower than the commercial lending rate. Great Master did not raise any defence to this in its evidence filed in opposition to the petitioner’s summons and there is no proper basis to hold that Great Master might have a defence of “set-off” insofar as it had advanced shareholders’ loans to the Company.

The exercise of the discretion by the judge

15.  The judge took the view that the evidence before him is not all one way. Although Great Master did not raise any defence to the loan to Heyuan in its evidence filed, the judge had ascertained from Great Master’s counsel, Mr Jeremy Bartlett, that the defence relied on for this complaint (which had not at that time been included in the petition) would be on the same lines as pleaded in the Points of Defence. The defence was that AD Huizhou, as a part of the Asia Timber group of companies, was operated together with other related PRC-based subsidiaries of the Asia Timber group for the purpose of maximizing synergistic benefits, including the management of financial affairs, marketing, purchasing, logistics and human resources. The financial resources of all the companies in that group had been pooled together so they would be available to every member in the group. The loan facilities obtained are available to AD Huizhou on the same terms and conditions as the other related PRC-based subsidiaries of the Asia Timber group, and the security provided is not limited to AD Huizhou, the loan facilities are secured by all of the related PRC-based subsidiaries of the Asia Timber group.

16.  On that basis, at any given time, one company might have to give assistance to others, but there was ultimately a benefit as that company could expect to receive assistance from others in a time of need, not to mention that more efficient management could be achieved. For the purpose of the application, the judge did not accept that a central treasury supply of finance which could be used to assist every member in the group in the conduct of its business was necessarily not of benefit to AD Huizhou. He said the issue would require further investigation at trial.

17.  The judge also accepted the submission of Mr Bartlett of a set-off. The loan to Heyuan of RMB 90,772,079.02 (equivalent to US$14.2 million) was about the same as the amount which Great Master had loaned to the Company, which was between US$14.1 million to US$20.2 million. So even if Great Master was liable to return the unauthorised loan, this could be set off against the shareholder’s loan.

18.  As for the credit facility of RMB 280 million under the Onshore Facilities Agreement, the judge declined to take this into account as a misappropriation in relation to a potential set-off as, on the evidence before him, the loan arrangement was for the good of the group as a whole.

19.  The judge declined to exercise his discretion to grant the interim injunctions on the balance of convenience. The effect of the mandatory injunction is to undo the transaction entered into and would interfere in the running of not just AD Huizhou, but the business of the group as a whole, including AD Huizhou.

If leave to appeal should be granted

20.  The principles on granting leave to appeal are well established. Pursuant to section 14AA(4) of the High Court Ordinance, Cap 4, leave can be granted if the court is satisfied that (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal should be heard. Reasonable prospects of success involve the notion that the prospects of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable” (SMSE v. KL [2009] 4 HKLRD 125 para 17). As the leave requirement was introduced largely to address satellite litigation on interlocutory matters which almost invariably gives rise to major delay and expense, so for the court to be satisfied that the appeal does have “reasonable prospects of success”, merely showing that the appeal is “arguable” and “not fanciful” would not be sufficient (Ho Yuen Ki Winnie & Anr v. Ho Hung Sun Stanley & Anr, HCMP 1009/2009, 24 August 2009, para 16).

21.  The intended appeal is against the exercise of the discretion of the judge. In accordance with established principles, the appellate court may not exercise an independent discretion of its own; it ought to defer to the judge’s exercise of his discretion and must not interfere with it merely because it would have exercised the discretion differently. The judge’s exercise of the discretion may be set aside for one or more of these reasons: where it was based on a misunderstanding of the law or of the evidence, or where although there was no erroneous assumption of law or fact, the decision to grant or refuse the injunction is so aberrant that no reasonable judge mindful of his duty to act judicially could have reached it. It is only after the exercise of discretion is set aside for one or other of those reasons that the appellate court becomes entitled to exercise an original discretion of its own (Hadmor Productions Ltd. v. Hamilton [1983] 1 AC 191 at 220B to E).

22.  I am not persuaded in this instance that the threshold test for granting leave to appeal has been satisfied. It has not been shown there are reasonable prospects of success for the appellate court to set aside the exercise of discretion by the judge and to exercise its own discretion. It is apparent from the transcript that the judge was alive to the matters of law and evidence relied on by Miss Chan in the injunction application. Mr Bartlett has further clarified to this court that at the hearing below, the judge had asked Great Master to locate evidence linking the loan of RMB 90,772,079.02 to Heyuan with the Entrustment Loan Agreement. Great Master was not able to identify the relevant materials in the voluminous evidence before the court in the available time. Mr Bartlett is now able to show on the evidence filed that the loan to Heyuan was indeed part of the transaction under the Entrustment Loan Agreement. He submitted this further strengthened his position that the injunction application was rightly refused.

23.  I am inclined to agree with the judge that at this interlocutory stage, the evidence is not all one way pointing to misfeasance committed by Great Master’s Nominees. Mandatory injunctions carry a higher risk of injustice and the court must take extra care in weighing the balance of convenience. I have reservations if the petitioner has demonstrated to the court the “high degree of assurance” in relation to the strength of merits in his case for a mandatory injunction and that it would be demonstrated at trial that the injunction is rightly granted. I am not persuaded there are reasonable prospects of success to make out a case for the injunctions sought, the effect of which would appear to be a gross interference in the business of the Company.  

24.  Apart from the discretionary aspect, Mr Bartlett also queried whether there is any basis to grant the interim injunctions sought as a matter of jurisdiction and principle. This was raised before the judge who declined to express any view on this as he regarded this as a “technical” point and preferred to consider the application on its merits and the balance of convenience in the exercise of his discretion.

25.  In short, Mr Bartlett submitted that the petition is brought under section 327(3)(c) and that being the case, the only remedy the court may grant on this petition is to make an order to wind up the Company. Unlike a petition under section 168A, the court does not have power to make orders for compensation or restitution and the like to deal with unfairly prejudicial conduct. He cited Re Victorious Run Ltd [2010] 3 HKLRD 473 in which Barma J held that a petition brought under this provision should be struck out and dismissed as against two respondents as there was no basis for seeking declaratory relief against them in respect of the invalidity of arrangements relating to the sale by a shareholder of its interest in the company and of the invalidity of the appointment of one of the respondents as representative in a hotel project of the company’s subsidiary, and for an order for discovery relating to the transfer of the shareholder’s interest in the company. There was nothing in section 327 to suggest that it was concerned with anything other than the making of a winding-up order in respect of the company concerned and even if there might be some incidental or ancillary orders that could be made on such a winding-up petition, the declarations and order for discovery sought could not sensibly be said to be incidental or ancillary to the winding up of the company (paras 16 to 25).

26.  Mr Bartlett invoked the general principle that the nature of an interlocutory injunction is such that “unless it is in support of some sustainable further remedy it was wrong in principle and must be set aside” (Attorney General v. Blake [2001] 1 AC 268 at 296E, per Lord Hobhouse; see also Spry on The Principles of Equitable Remedies, 8^th ed, pages 451 to 452). As it appeared there would be no right to the grant of a final injunction at the hearing of the winding-up petition after trial, he submitted there would be no basis for the grant of an interlocutory injunction.

27.  Miss Chan submitted that Re Victorious Run Ltd is not directly relevant as the case was not concerned with the power to grant an injunction in winding-up proceedings, and so the judge did not consider section 21L(1) of Cap 4 which provides that “the Court of First Instance may by order (whether interlocutory or final) grant an injunction … in all cases in which it appears to the Court of First Instance to be just or convenient to do so.” She contended that the power to grant interlocutory and final injunctions in section 21L(1) of Cap 4 could co-exist with the power to wind up a company in section 327(3)(c) of Cap 32.

28.  Miss Chan made further submissions in writing on this point after the hearing and Mr Bartlett has responded to this in writing.

29.  Miss Chan referred the court to the cases cited in footnote 25 at page 185 of Gee on Commercial Injunctions, 5^th ed, in support of a statement in the text that section 37(1) of the Supreme Court Act 1981 in the UK [equivalent to section 21L(1) of our legislation] confers on the High Court a jurisdiction which can be exercised in the context of winding-up proceedings and that in principle, Mareva or Anton Piller relief can be granted in aid of that jurisdiction. Those cases cited by the author include Re Cayman Capital Trust Company [1988-89] CILR 444 (a decision of Harre J of the Grand Court of the Cayman Islands, concerned with the power of a liquidator to seek a Mareva injunction after the making of a winding-up order based on the possibility that he might bring a misfeasance summons) and Walter Developments Pty Ltd v. Roberts (1995) 16 ACSR 280 (a decision of the Supreme Court of Western Australia, in which the point of jurisdiction was raised but not resolved as the appeal court concluded that the judge had wrongly exercised the discretion to grant an interlocutory injunction in a winding-up petition).

30.  I do not propose to discuss these further authorities referred to by Miss Chan, as it is not necessary to form a definite view on this point for present purpose. I am prepared to say the point whether the court does have jurisdiction to grant an interlocutory injunction in a winding-up petition presented under section 327(3)(c) is a matter that admits of  serious argument. However, the judge did not rely on this to refuse the interlocutory injunctions sought. It is only if an appeal against his decision is allowed to proceed that Great Master would raise this point as an additional ground to support the judge’s decision in a respondent’s notice.

31.  For the above reasons, I dismiss this application for leave to appeal with costs to Great Master, to be assessed on a gross sum basis. For this purpose, I would direct Great Master to lodge its skeleton bill within seven days hereof and leave is given to the petitioner to respond in writing within seven days thereafter.

32.  I have dealt with this application in a short oral hearing as the papers in the proceedings below are voluminous and no bundle was prepared for the Court of Appeal when the petitioner filed his summons in the present proceedings seeking leave to appeal. The core bundles eventually prepared for the use of this court took up three lever arch files. In future, when such an application is made, an applicant who is legally represented should at the same time provide a bundle to the Court of Appeal consisting of documents filed in the proceedings below that are essential for the disposal of his application for leave to appeal. A respondent who is legally represented should make inquiries whether any such bundle has been prepared by the applicant and, if not, provide this bundle when he files his statement of opposition.