GUANGDONG HONGCHANG IMPORT & EXPORT CO. LTD. AND ANOTHER v. ABLE SUCCESS ASIA LTD

HCA 2292/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2292 OF 2013

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D E C I S I O N

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Introduction

1. The principal relief sought by the plaintiff in this amended originating summons (HCMP 323/2014) is that the shares of a China Packaging Group Co Ltd (respectively “China Packaging” and “the charged shares”), being the subject of a charge granted by the 1^st defendant (“Able Success”) in favour of the plaintiff (“Skyway”), should be sold, with the sale being conducted by Skyway.  The charge was underlined by a term loan of $100 million lent by Skyway to Able Success in 2013.  There is no dispute Able Success has defaulted in payment.

2. The following parties appeared at the hearing:

(a)  Skyway, being Able Success’s creditor and now applying for the sale of the charged shares;

(b)  Able Success, which has defaulted in repaying the loan owed to Skyway (as well as to the other parties below), and which is the registered owner of the charged shares;

(c)  the 2^nd defendant, Guangdong Hongchang Import & Export Co Ltd (“Guangdong Hongchang”), and the 3^rd defendant, Ease Faith Ltd (“Ease Faith”) (collectively “Guangdong Hongchang/Ease Faith”), (which describe themselves as “trade financiers”) being Able Success’s judgment creditors (final judgments having been entered in December 2013 and February 2014).  Relying on the judgments, they have obtained charging orders on all China Packaging shares registered in Able Success’s name;

(d)  the 4^th defendant, Guangdong Hangxing Trading Co Ltd (“Guangdong Hangxing”), being the chargee in whose favour a substantial number of China Packaging shares of Able Success have been charged as security for a debt of about RMB198 million (“the Guangdong Hangxing charge”).  The Guangdong Hangxing charge is accepted to be subject to Skyway’s first charge.

(leave to join as the 4^th defendant was given in Guangdong Hangxing’s favour during the hearing)

3. Towards the end of the hearing, the parties attempted (unsuccessfully) to agree on who should have conduct, and the manner, of sale of the charged shares.  In this connection, Skyway and Guangdong Hangxing share the same stance (Skyway should sell the charged shares in the open market) while Able Success, joined by Guangdong Hongchang/Ease Faith, opines that the sale should be given to an independent party (probably an investment bank) and to be sold through private bids.

4. There is also a dispute as to what the charged shares should constitute, a bonus share issue having been announced by China Packaging earlier after the Skyway charge was created.

5. Ancillary to the above, it is necessary to consider varying the Mareva injunction granted in favour of Guangdong Hongchang/Ease Faith (against Able Success) (in HCA 2292/2013) to enable the said sale to take place.

Relevant legal principles

6. The relevant legal principles are largely undisputed.  They include the following.

7. The priority of competing charges is normally determined by reference of the time of creation of the charges (that is, the first in time prevails).

8. A chargee (mortgagee) has a duty to act bona fide (as against the chargor and the subsequent encumbrancers), and not to exercise its right to possess for ulterior motive.

9. It is usual for the chargor to be given the conduct of sale of the charged property because the chargor has the most interest to obtain the best price thereon.  Alternatively, for the same reason, where the proceeds of sale are likely to be sufficient to discharge the charged debts (and where there are more than one charge), conduct of sale should be given to the chargee last in priority.

The case of Skyway (and Guangdong Hangxing)

10. Skyway argues that it should have conduct of sale of the charged shares (as stated above, Guangdong Hangxing agrees with Skyway about this).

11. Besides other points of objection to conduct of sale being given to other parties (including independent parties, as proposed by Able Success and Guangdong Hongchang/Ease Faith), Skyway contends that the sale would likely be delayed by Able Success and/or Guangdong Hongchang/Ease Faith.

12. Despite the last-minute affirmation filed on Able Success’s behalf (to which Skyway takes no objection so as to avoid an adjournment, but expressly not admitting the truth of its contents), where a deponent with no professed expertise on the topic asserts the “market value” of China Packaging’s “listed shell” (that is, the listed status of China Packaging), Skyway submits that there is no reliable evidence that the net assets of China Packaging, or the market value of the charged shares, would be sufficient to pay off the debt owed to Skyway (let alone the debts owed to Able Success’s other creditors).

13. Consequently, Skyway says that the proceeds to be obtained from sale of the charged shares are unlikely to be sufficient to discharge Able Success’s debt owed to Skyway.  At the very least, there is no reliable evidence to the contrary.

14. It is apparent that Guangdong Hongchang/Ease Faith strangely align their case with that of Able Success in this application.  Reliance is also placed by Skyway on the court’s observation in Able Success Asia Ltd v China Packaging Group Co Ltd and Others HCMP 1091/2014 (15 May 2014) where a similar phenomenon was seen:

“Able Success has joined [Guangdong Hongchang/Ease Faith] … on the basis that their interests in [the charged shares] would be adversely affected by the open offer. … All that [Guangdong Hongchang/Ease Faith] have obtained is a charging order covering those shares, making them equitable chargees. So far as these proceedings are concerned, their commercial interests are completely aligned with those of Able Success … ” (para 72 thereof).

(“HCMP 1091”). HCMP 1091 was Able Success’s urgent application for an injunction to restrain China Packaging from proceeding with an open offer of shares to its existing shareholders.  The court refused to join Guangdong Hongchang, or to grant an injunction.

15. Finally, Skyway denies the allegation jointly made by Able Success and Guangdong Hongchang/Ease Faith that Skyway acts with an ulterior motive; that is, Skyway has been trying to take control of China Packaging.  To substantiate that denial, Skyway undertakes not to take part directly or indirectly in the purchase of the charged shares.

The case of Guangdong Hongchang/East Faith (and Able Success)

16. Guangdong Hongchang/Ease Faith’s primary stance is that this application should be dismissed because:

“… Skyway [is not merely trying to enforce a security for the debt due, but] is seeking to obtain or assist others to obtain control of China Packaging as a listing shell. Its application is tainted with ulterior motive” (para 1.5, skeleton submissions of Guangdong Hongchang/Ease Faith).

(“the bad faith ground”)

17. Their alternative stance is that:

“Skyway does not actually have a charge over all of the [shares of China Packaging. In particular, the charged shares should not include the bonus share issue announced by China Packaging in October 2013]” (para 1.6, skeleton submissions of Guangdong Hongchang/Ease Faith).

(“the bonus shares ground”)

Merits of this application and the grounds of objection

18. Skyway has a simple answer to the bad faith ground, it undertakes not to directly or indirectly purchase the charged shares when they are put on sale in accordance with any court enabling them to be sold.  This should be a sufficient answer.

19. But because detailed submissions have been put forth on behalf of Guangdong Hongchang/Ease Faith, the bad faith ground will be further discussed below for completeness, and out of courtesy for counsel.

20. Skyway is said to have attempted to obtain control of China Packaging by the following means (after Skyway has given enforcement notices in December 2013 pursuant to the loan documents; default judgment was entered in Skyway’s favour in January 2014).

21. First, in January 2014, China Packaging’s chairman, one Mr He, was removed, and two new executive directors (one of whom was Skyway’s financial controller, Mr Siu) were appointed; they became the majority of China Packaging’s board.

22. Secondly, China Packaging announced a share placement in March 2014, the effect of which would be to dilute its shares. The placement was completed in April 2014.

23. Thirdly, China Packaging announced an open offer of new shares to existing shareholders at a substantially discounted price. The effect of this was to dilute Able Success’s stake in China Packaging. Skyway refused Able Success’s request for Skyway to support Able Success to subscribe for the new shares offered.

24. The appointment of the new executive directors (para 21 above) allegedly for an improper purpose was rejected in HCMP 1091:

“I do not see any evidential basis for this allegation at all. There is no reason offered why Mr Zhang and the three independent non-executive directors should favour Skyway and pass control of the company to it. Although Mr Siu was also Skyway’s financial controller at the time, there is no evidence that Mr Lau was in any way connected with Skyway” (para 38 thereof).

25. The alleged share dilution by way of the share placement (para 22 above) is nothing much more than a red-herring.  As at November 2013, Able Success held some 54.28% of China Packaging’s shares (para 16, HCMP 1091 decision).  Even after the share placement, its percentage stake was still 50.09% (para 28, HCMP 1091 decision).  There was a reduction of about 4.2% share holding; but Able Success still held slightly more than half of China Packaging’s shares.

26. The open offer summarized in para 23 above have also rejected in HCMP 1091:

“[Able Success contended] … the open offer was approved by the board … in breach of duty to China Packaging. In particular, it is said they have acted for improper purposes, namely, to dilute Able Success’s shareholding and ‘to enable Skyway and/or its associates including Get Nice to acquire controlling interests in the Company at a substantially depressed price’ … ” (para 39 thereof);

“… on analysis there is no evidence that the open offer would have this effect even if Able Success does not subscribe. The open offer is to be made on a ‘one new share for two existing shares’ basis. It follows that Able Success’s entitlement would be a maximum of 548,604,802 new shares. This would amount to approximately 16.68% of the enlarged issued capital of 3,288,337,059 shares after the open offer was implemented (assuming the subscription rights attaching to share options were fully exercised). Able Success would still be registered holder of 1,097,209,604 existing shares, or approximately 33.37% of the issued capital. It follows that the fundamental premise of the Plaintiff’s case, that the open offer would allow Get Nice or its associates to obtain a controlling stake in the company, is fallacious … ” (para 41 thereof);

“[Guangdong Hongchang/Ease Faith] [put] forward certain scenarios whereby the shares unsubscribed for by the plaintiff and underwritten by Get Nice could be combined with the shares indisputably charged to Skyway to produce a controlling interest. In my judgment that is an invitation to go into the realm of the speculative and the hypothetical, which I decline” (para 43 thereof);

“[after setting out the various matters raised, and rejecting them] The result is that there is no evidence of any real legal impediment that prevents Able Success from taking up the open offer. Still less is there any basis for saying that the directors, particularly the independent non-executive directors, were ‘well aware’ that Able Success would not be able to subscribe for the new shares. The uncontradicted evidence is that Mrs He approached the directors and asked about the procedure for subscribing for shares pursuant to the open offer, leading them to believe that Able Success would opt to take up the open offer” (para 49 thereof).

27. I agree with the court’s analysis in HCMP 1091 (especially the passages quoted above).  Neither Able Success nor Guangdong Hongchang/Ease Faith has put forth any further argument which justifies a departure from that analysis.

28. Guangdong Hongchang/Ease Faith also rely on Skyway’s earlier vote at China Packaging’s general meeting (in June 2014) as evidence of Skyway’s attempt to gain control.  But as Skyway correctly points out, its right to vote was properly based on clause 5, Charge agreement dated 15 August 2013.

29. By reason of the above matters, I find that the bad faith ground has no merit.

30. Nor does the bonus shares ground have merit either.  In this connection, I agree with Skyway’s reliance on the following clause in the loan documents:

“‘Charged Securities’ means all those rights, title and interests of [Able Success] in … Shares beneficially owned by [Able Success] including but not limited to … all accretions, allotments offers, rights … whatsoever at any time accruing, made, offered or arising in respect thereof; and … all stocks, shares, securities … accruing or offered at any time … ” (clause 1.1, Charge agreement dated 15 August 2013).

Further, clause 2.1 thereof stipulated in effect that the charged shares (as defined above) were by way of a continuing security.  By virtue of these clauses, the bonus shares should become part of the charged shares.

Who should have conduct of the sale?

31. The potential candidates for conducting the sale of the charged shares are:

(a)  Skyway;

(b)  Able Success;

(c)  Guangdong Hongchang/Ease Faith.

Guangdong Hangxing is agreeable to the conduct of sale being given to Skyway.

32. The factors which weigh against Able Success being given that task are:

(1)  it is clearly insolvent;

(2)  its former chairman, who is accepted to be in control of it in the past, was incarcerated in the Mainland;

(3)  it appears to be non-operating, or at least not operating normally.

33. It is Guangdong Hongchang/Ease Faith’s case that they are the more natural candidates for conducting the sale.  The grounds for so contending appear to be:

(a)  Skyway has not been acting in good faith (that is, the bad faith ground);

(b)  Skyway acted oppressively in seeking to wind up Able Success when the value of the charged shares should exceed the debt;

(c)  Skyway will only take care of its own interest if it conducts the sale

(para 4.1 to 4.4, Guangdong Hongchang/Ease Faith’s skeleton submissions).

34. I agree with Skyway that there is no reliable evidence regarding the value of the charged shares.  In the affirmation filed on behalf of Able Success (para 12 above), the deponent asserts that merely the majority control of a listed company (such as China Packaging) should be worth about $450 million.  However, the source of such information was casually put as information from the deponent’s “friends in Hong Kong who had corporate finance experience”.  This kind of information is too unreliable for evidential weight to be attached to it.

35. The other source of the value of the charged shares is the skeleton submissions of Guangdong Hongchang/Ease Faith where counsel summarized the latest closing price of China Packaging stocks at the exchange.  However, (as the parties have accepted) China Packaging stocks are in the nature of “penny stocks”, which are known for their great price volatility.  For this reason, it is unsafe to use the latest closing price to assess the likely worth of the charged shares.

36. The total amount now due from Able Success to Skyway is in excess of $100 million (including the interest payable thereon); the updated amount is said to be about $118 million in total.

37. Guangdong Hongchang/Ease Faith have inexplicably been “in tandem with” Able Success (similar to what happened at the time of the HCMP 1091 decision (see para 14 above)).  It is hard to understand why such should be so even if Guangdong Hongchang/Ease Faith had been correct in saying that Skyway is not acting entirely properly in selling the charged shares.

38. As one of Able Success’s creditors, Guangdong Hongchang/Ease Faith ought only be concerned with its debt being repaid.  From that perspective, it is only necessary for them to seek the conduct of the sale (in which case, they only need to adduce evidence to support their competitive claim for the same).  There would be little need to go into the more vexed issue of Skyway’s bona fides, with a view to seeking the complete dismissal of Skyway’s application to sell the charged shares.

39. However, I am prepared to err in Guangdong Hongchang/Ease Faith’s favour and hold that their approach might have been caused by their common distrust of Skyway (albeit I conclude that the distrust is unfounded), rather than the lack of good faith.

40. Having said so, however, I conclude that this is a proper case for the conduct of the sale to be given to Skyway, rather than Guangdong Hongchang/Ease Faith.  This is because it was apparent the case of Guangdong Hongchang/Ease Faith was premised mainly on Skyway’s alleged improper motive of attempting to obtain control of China Packaging (see para 16 above), an allegation earlier rejected in HCMP 1091, and now also rejected in this application.

41. It follows that Guangdong Hongchang/Ease Faith’s claim that Skyway’s self-interest is to “rush any sale of [the charged shares] and hasten Able Success’s demise” is not substantiated.

(para 4.1 (5), Guangdong Hongchang/Ease Faith’s skeleton submissions)

42. The value of the charged shares is unsupported by reliable evidence.  Finally, I agree with Skyway the use of independent brokers/bankers will likely be inefficient (both time-wise and money-wise).

43. In relation to para 33(b) above, similar to Skyway’s right to vote (para 28 above), it is Skyway’s contractual right to seek to wind up Able Success by way of enforcing the judgment.

Conclusion

44. There will be an order in terms of para (1) to (5) and (7) of the amended originating summons.  Skyway has indicated during the hearing the sale would be effected by way of sale in the market.

Other matters

45. Able Success applied for an adjournment of this application so as to deal with it adequately.  I refused the application indicating reasons would be given later.  They are as follows.

46. Despite Able Success’s complaint of inadequate notice of this application, a 10-page or so affirmation has been filed on its behalf.  It is important to note the following:

(1)  nowhere in the affirmation is Able Success’s indebtedness, or Skyway’s right to enforce the charge, disputed;

(2)  insofar as the affirmation puts forth an alleged injustice and inequity for an order of sale to be made, the same is in essence a repetition of (a) the allegations made by Guangdong Hongchang/Ease Faith in this application, and (b) the allegations made by both Able Success and Guangdong Hongchang/East Faith in HCMP 1091 (the decision on which was dated as far back as 15 May 2014).

In view of the above (especially sub-para (2) above), I consider any claim that Able Success still needed more time to adduce proper evidence is unmeritorious.

47. Able Success’s skeleton submissions say that it is possible the value of the charged shares may exceed the debt owed to Skyway.  Strangely this argument has not been raised in HCMP 1091 as evidence of Skyway’s lack of good faith (that is, Skyway insisted on retaining control of the charged shares, when it could have simply sold off the charged shares and obtained satisfaction of its debt).  I therefore conclude that this is not a genuine point.

48. The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs

49. The parties are at liberty to lodge with court and serve written submissions in relation to costs as follows:

(a)  Skyway and Guangdong Hangxing are at liberty to do so within 14 days hereof;

(b)  Able Success and Guangdong Hongchang/Ease Faith are at liberty to do so within 14 days thereafter.