SECURITIES AND FUTURES COMMISSION v. CHESTERFIELD LTD. and Others

IN THE SUPREME COURT OF HONG KONG

MISCELLANEOUS PROCEEDINGS NO. 3504 OF 1994

___________

_______________

D E C I S I O N

_______________

1. This is a petition brought by the Securities and Futures Commission against 6 respondents. The 1st Respondent, Chesterfield Ltd. is the company involved but no order is sought directly against the 1st Respondent. The 2nd Respondent was a management company which undertook management services for the 1st Respondent. The 3rd to 6th Respondents have at various times been directors of the 1st Respondent and have been indirectly involved in management of some or all of its affairs.

2. Orders by consent had been made against the 2nd, 3rd and 6th Respondents and today the Petitioner seeks orders against the remaining 4th and 5th Respondents who have not appeared today and are not represented. The Orders which are sought are that the Respondents in question shall be restrained from advising on or managing the 1st Respondent's business or the business of any of its subsidiaries or otherwise intermeddling in the 1st Respondent's business, or the management of its affairs or in the business of any of these subsidiaries of the 1st Respondent or the management of any of their companies.

3. I do not intend to go into the facts of this case more than is necessary. Suffice it to say that the 1st Respondent is a company with seemingly a broad interest and a range of different activities. Turning to the specific facts which relate to the 4th Respondent, the 4th Respondent was the general manager of the 1st Respondent as from the 1st May 1993. He also had the title of adviser to the board of directors.

4. There are two series of events which form the subject of the petition in relation to the 4th Respondent. The first of the series are two public issues of shares of the 1st Respondent. In effect what happened was that funds were raised on the basis that they would be used for working capital and to reduce borrowings. They were substantial amounts. The first offering in October 1993 was for $67m. The second offering was in April of 1994 for $52m. The money in reality went straight to MKI Ltd. which was an associated company, if I may use the term, with the 1st Respondent. It was channelled to MKI Ltd. for use by that company to subscribe for shares of the 1st Respondent itself. In effect therefore the money really went round in a circle, was not being used for working capital, the full amount was not issued because part of the money raised by the offering was used to purchase shares of Chesterfield itself and whether that portion was being used to reduce borrowings is highly questionable. The aim of channelling the money to MKI Ltd. was to keep MKI's shareholding in the 1st Respondent above 20% so that MKI Ltd. would not have to revalue the shares of the 1st Respondent which it held. If the shareholding had dropped below 20%, MKI Ltd. would have had to value its shareholding in the 1st Respondent at market price and it would have thus showed a substantial loss as compared with its investment cost.

5. The second of the series of acts in relation to the 4th Respondent of which complaint is made is that in February of 1993 the 1st Respondent was caused to enter into transactions with companies which I would refer to as Buolo and Good Faith. These were companies which were said to be under the effective control of the 4th Respondent. As a result of those transactions the 1st Respondent was caused to enter into obligations to pay $130m for an investment in 8 blocks of flats, Fa Yuen Gardens, in the People's Republic of China. That investment has proved worthless. The value of that investment has now been written down to $1,000. In those circumstances, little more need be said about that transaction other than that it is a source of some surprise that questions relating to that transaction would come to their conclusion in this Court.

6. I turn then to the 5th Respondent. The 5th Respondent became a director of the 1st Respondent in September of 1994. The 5th Respondent, too, had a property company in the People's Republic which was under his control. This company was called the Zhongshan Fong Tat Property Development Company Ltd. There were 22 townhouses which that company was said to be in the course of developing and an agreement was reached in October of 1993 between a subsidiary of the 1st Respondent and the 5th Respondent's companies that the development would be transferred to, in effect, the 1st Respondent and its companies. The price for that was $35m. In circumstances which again raise grave suspicions because little or no enquiry appears to have been made, a greater sum than the amount which was initially due and payable under the contract was paid to the 5th Respondent's companies. Further investments were made again in the same direction and this time with respect to other matters, particularly in relation to a golf course. The net effect of what took place is again that the company paid out large sums of money, this time in the region of $62m and has had to write off that investment again to a fraction of what it was originally.

7. These proceedings are brought under the new provisions in the Securities and Futures Commission Ordinance. Under Section 37A(2), on a petition by the commission, if the Court is of the opinion that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of its members generally or of some part of the members, whether or not the conduct consists of an isolated act or a series of acts, the Court may, with a view to bringing an end to the matters complained of -

a) make an order restraining the commission of the act or conduct; and

d) make any other order it thinks fit, whether for regulating the conduct of the affairs in future, or for the purchase of the shares of any members of the company, etc.

8. The question therefore turns on whether the affairs of the listed company have been conducted in a manner unfairly prejudicial to the interests of its members or of part of the members.

9. What is conduct which is unfairly prejudicial? My attention has been drawn to some authorities in particular those which relate to other provisions in the Companies Ordinance and specifically to Re H.R. Harmer Ltd. [1958] 3 All E.R. 689 which is a decision which dealt with Section 210 of the Companies Act 1948. What was there were being construed was the word "oppressive". The Court of Appeal in that case came to the conclusion that the word "oppressive" in relation to the conduct of a company meant burdensome, harsh and wrongful. The judgment of Jenkins L.J. who reviewed a number of the previous authorities does not of course construe the words "unfairly prejudicial".

10. In my view, conduct which is unfairly prejudicial is conduct which results in harm to the members of the company or part of the membership in their capacity as members of the company. The harm is harm which could either have been avoided or ameliorated without harming the legitimate interests of others who were parties to the particular transaction.

11. It covers a range of conduct. At one end of the scale is fraud. At the other end of the scale the conduct can take the form of neglect or inaction on the part of those to whom the affairs of a company are entrusted. The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted. The directors of course cannot leave their duties to be performed by others.

12. As I have indicated the 4th and 5th Respondents have chosen not to appear today to contest these allegations which have been made nor have they been represented.

13. In my view the conduct of which the 4th and 5th Respondents have been accused is far closer to the higher end of the scale than it was to negligence or inadvertence. If there has not been deliberate fraud here there has been conduct which is so closely akin thereto that one might be forgiven for failing to notice the difference.

14. In my view on the facts which have been proved in this case, the Court has no alternative but to grant the orders which have been sought against the 4th and 5th Respondent.