PETER CHEUNG & CO., SOLICITORS (a firm) v. PERFECT DIRECT LTD AND ANOTHER

HCMP 2493/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2493 OF 2012

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D E C I S I O N

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Introduction

1. This is an appeal against the master’s order dated 15 March 2016 whereby the master ordered the release of certain convertible notes (and transfer documents) (“the subject CNs”) by the applicant (a solicitors firm), the stakeholder of the subject CNs.  This appeal arose from an originating summons in the nature of an interpleader application.

Background

2. The background leading to this appeal is set out in the applicant’s affidavit, and can be summarized as follows.  It is substantially undisputed.

3. The 1^st claimant (“Perfect Direct”) was a shareholder of one Bright International Group Ltd (“Bright Int’l”), and held certain convertible notes of Bright Int’l (“Perfect Direct’s CNs”).

4. The 2^nd claimant (“Mr Yu”) was the legal owner of $83 million of the convertible notes of Bright Int’l (“Yu’s CNs”).

5. In June 2010, Perfect Direct and a Mr Deng requested Mr Yu to convert Yu’s CNs into the shares of Bright Int’l.  In return, Perfect Direct and Mr Deng entered into a guarantee agreement on 13 July 2010 with Mr Yu whereby they were to guarantee Bright Int’l’s share price should stay at or above a certain level (“the 2010 guarantee agreement”).

6. Yu’s CNs were accordingly converted into some 138 million shares on 28 June 2010 (“the converted shares”).  The 2010 guarantee agreement provided in effect that the converted shares should worth a market value of $150 million (that is, a market price of $1.0844 per share) at the expiration of 10 months (“the guaranteed share price”).

7. Perfect Direct also agreed to charge part of Perfect Direct’s CNs (namely, the subject CNs) as security for the above guarantee.  Perfect Direct and Mr Yu (and the applicant) entered into a stakeholder agreement on 20 July 2010 whereby the subject CNs were to be stakeheld by the applicant for the purpose of the 2010 guarantee agreement.  If Perfect Direct should fail to perform the 2010 guarantee agreement, Mr Yu was entitled to serve a notice on the applicant for the immediate release of the subject CNs to Mr Yu.

8. The market price of Bright Int’l’s shares fell below the guaranteed share price.  Consequently, Mr Yu requested the applicant to release the subject CNs.  However, Perfect Direct asked the applicant not to do so.

9. Acting in accordance with the 2010 guarantee agreement, the parties commenced an arbitration in Shanghai.  The arbitration tribunal issued an award in November 2013 regarding the subject CNs essentially in Mr Yu’s favour (“the said award”). No application has been taken out by Perfect Direct to set aside, or to appeal against, the said award.

10. Mr Yu applied for, and was granted, an enforcement order in June 2014 for leave to enforce the said award (HCCT 24/2014).  Perfect Direct has not applied to set aside the enforcement order either.

11. Despite the above, Perfect Direct instructed the applicant not to release the subject CNs to Mr Yu.

12. Pursuant to the master’s order of 15 March 2016 (para 1 above), the applicant released the subject CNs to Mr Yu, but Perfect Direct has still not released the related transfer documents to Mr Yu.

This appeal

13. The main contention of Perfect Direct is that the master erred in refusing to stay or adjourn this proceeding.  The ground put forth in support of the stay, or adjournment, is essentially as follows.

14. In gist, Perfect Direct asserts that Yu’s CNs (which became the converted shares) were never paid for by Mr Yu; and hence, Mr Yu has been holding Yu’s CNs (and later the converted shares) only on trust for Perfect Direct.  The 2010 guarantee agreement was made under duress; Mr Yu threatened to depress the share price of Bright Int’l by massive sale of the same.  Further, Perfect Direct suspects that Mr Yu conspired with one of its former directors to defraud Perfect Direct of its assets.  In this connection, Perfect Direct has commenced an action against Mr Yu in Hong Kong (HCA 115/2013) (“Perfect Direct’s action”).

15. Perfect Direct contends in this appeal (as it contended at the hearing before the master) that this proceeding (which, as stated above, is in the nature of an interpleader application) ought to await the final outcome of Perfect Direct’s action, which can determine the equitable title of the subject CNs.

16. On the other hand, Mr Yu opposes this appeal, arguing that Perfect Direct’s action is nothing much more than an attempt to re-litigate what has already been determined by the arbitration tribunal.

17. Perfect Direct’s counter-argument is that the equitable title of the subject CNs has not been considered by the arbitration tribunal, and therefore Perfect Direct’s action is not covered by the doctrine of res judicata.  Some of the reasons put forth in support of such counter-argument are:

(a)  the said award only ruled that Mr Yu should be entitled to have the subject CNs, and to the first right to compensation after disposing of the same; it did not order the release of the subject CNs;

(b)  because of Perfect Direct’s action, it would be unjust to order the release of the subject CNs immediately; or else Perfect Direct (and others) would be severely prejudiced;

(c)  staying, or adjourning, this proceeding would not significantly prejudice Mr Yu because the trading of the shares of Bright Int’l had been suspended since May 2014.

18. A perusal of the arbitration tribunal’s nearly 50-page long written decision shows that:

(1)  the alleged non-payment of share price;

(2)  the alleged misdeed of Mr Yu (fraudulent acts when Perfect Direct appeared before the arbitration tribunal (but duress when Perfect Direct opposes this proceeding)),

were specifically mentioned therein.  They have been put forth by Perfect Direct, and considered by the arbitration tribunal.

19. For this reason and the reasons given in para 20 below, I agree with Mr Yu (and disagree with Perfect Direct) that the validity of the 2010 guarantee agreement was one of the issues determined by the arbitration tribunal.

20. What Perfect Direct is in truth seeking to argue here is that the arbitration tribunal has not specifically dealt with the allegations put forth in Perfect Direct’s action.  However, that argument has to be put in proper context:

(a)  the arbitration tribunal was faced with Mr Yu’s claim based on the 2010 guarantee agreement.  Perfect Direct’s factual allegations (non-payment and fraudulent acts), put forth by way of defence to that claim, were considered and rejected as being unsatisfactory evidence in support of the defence;

(b)  the arbitration tribunal did not specifically deal with Perfect Direct’s assertion of being the subject CN’s beneficial owner because there was no need for the arbitration tribunal to make such finding (except to the extent referred to in sub-para (a) above);

(c)  the arbitration tribunal did not specifically deal with Perfect Direct’s assertion of entering into the 2010 guarantee agreement by reason of duress simply because no such assertion was advanced at the time (cp para 14 and 18(2) above) (see also sub-para (a) above).

21. Perfect Direct’s counter-argument summarized in para 17(a) above is nothing more than semantics and one which has no substance.

22. Insofar as Perfect Direct may be arguing that the master has erred in the exercise of her discretion (para 13, 15 and 17(b) and (c) above), the master has not misunderstood the parties’ case, and has properly considered and evaluated the various factors.  In fact, I agree with the manner in which the discretion should be exercisedand would have concluded in the same way: Hong Kong Civil Procedure 2016, Vol 1, para 58/1/2 (see also para 19 above).

23. Perfect Direct’s claim that it would be severely prejudiced by the master’s decision is incomprehensible.  Although the subject CNs have been released to Mr Yu, on Perfect Direct’s own case, the trading of Bright Int’l’s shares has been suspended up to now (see also para 17(c) above). Consequently, it is highly unlikely Mr Yu would be able to adversely manipulate the share price even if he had wanted to (leaving aside whether he has the incentive to do so bearing in mind the subject CNs are the only security he may call upon to cover any loss he may suffer by the drop in Bright Int’l’s share price).

Conclusion

24. To conclude, this appeal is dismissed.

Other matters

25. 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 order

26. The parties agree to the usual rule that costs should follow the event.  There will accordingly be a costs order that the costs of this appeal are to be paid by Perfect Direct to Mr Yu. 

27. The basis for assessing the costs is in dispute.  For this reason:

(a)  Mr Yu be at liberty to lodge with court and serve written submissions concerning the basis for assessing costs within 7 days from today;

(b)  Perfect Direct be at liberty to lodge with court and serve written submissions in response within 7 days thereafter.