LEUNG PIK WA v. POH PO LIAN AND ANOTHER

HCA681/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 681 OF 2011

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BETWEEN

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J U D G M E N T

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1.  This is an application by Madam Leung Pik-wa seeking either the appointment of receivers over some 3.2 billion shares in CY Foundation Group Limited (CYF) or, alternatively, an injunction restraining the registered shareholder of those shares, Luck Continent Limited, from exercising votes in respect of those shares for the purposes of considering an ordinary resolution at a Special General Meeting of the company to be held tomorrow morning at 10 o'clock.

2.  The resolution in question relates to the proposed granting of a general mandate to the company’s board of directors to allot, issue and deal with additional shares of the company up to 20 per cent of the aggregate nominal amount of its issued share capital as at the date of the Special General Meeting.

3.  CYF has been the subject of hotly contested section 168A proceedings before me in March and April this year.  In those proceedings, Dato Poh Po Lian, who said then (and maintains now) that he was the beneficial owner of Luck Continent, the holder of some 46 per cent of the shares in CYF, caused Luck Continent to bring section 168A proceedings against Mr Theodore Cheng, the Chairman of CYF, Madam Leonora Yung, the holder of some 25.1 per cent of the shares in CYF and various other companies connected with them who, together with Madam Yung, held the shareholding in CYF on the Respondent’s side.

4.  In those proceedings, the primary relief sought was an order that the Articles of Association of the company should be amended so as to permit the removal of directors on a simple majority vote rather than by a special resolution, as is currently provided for by Article 86(4) of the company’s Articles of Association.  Judgment in that action has been reserved and will be handed down in due course.

5.  However, in the meantime, there were also proceedings in Bermuda which resulted in Dato Poh’s camp effectively obtaining control of the company despite a series of obstacles having been put in their way in their efforts to obtain an Annual General Meeting of the company to be convened and held at which they could exercise their voting rights to appoint new directors for the company, thereby replacing the majority of the board who were due to retire by rotation.

6.  In the event, following various proceedings in the courts of Bermuda, a general meeting was held and the Bermudan courts directed that the votes of Luck Continent should be counted for the purpose of that General Meeting, with the result that Dato Poh was able to cause persons whom he had nominated to be voted onto the board of CYF.

7.  During the trial of the section 168A proceedings, Madam Leung, the Plaintiff in these proceedings, caused her solicitors, Messrs Deacons, to write to the solicitors for the Respondents in those proceedings indicating that she claimed to be entitled, as the Administratrix of the estate of her late son, Mr Kenny Nam, whose name featured in the 168A proceedings, to be the beneficial owner of the shares in CYF held by Luck Continent.  It was on that basis that Luck Continent’s shares were originally discounted from the calculation of votes at the Annual General Meeting, a decision on the part of the Chairman that was overturned by the Bermuda courts.

8.  Since the section 168A proceedings came to an end, Madam Leung has taken out these proceedings in which she seeks declarations that the shares held by Luck Continent in CYF are, in fact, beneficially the assets of the estate of her late son, Mr Nam.  Those proceedings were commenced in May this year and will progress in the normal way. 

9.  However, on 9 June this year, CYF announced that, as a result of investigations that had taken place since the installation of the new board of directors, the new board had discovered that the financial position of the company was much more precarious than had previously been thought.  It appeared that, while at one stage about a year ago it appeared to have cash balances of about HK$100 million to its credit, those had been depleted to a very large extent and now stood at no more than about HK$10 million.  This gave rise to concerns on the part of the board as to the company’s financial position, particularly taken in conjunction with the fact that it had been advised that it might be necessary to make provisions against some of what had been thought to be its more significant and valuable assets.

10.  With this is mind, the board proposed that it should seek to take steps to obtain a lifting of the suspension of trading in the company’s shares which had been imposed at the end of August 2010 when the then chairman, Mr Theodore Cheng, was arrested by the ICAC in connection with a property transaction involving the company.

11.  The Listing Division of the Stock Exchange had indicated on a number of occasions that in order for the listing to be resumed, a number of steps would have to be taken, one of which appeared to be the need to have Article 86(4) of the company’s Articles of Association amended so as to bring it into line with the provisions of the Companies Ordinance in Hong Kong, which enables directors to be removed by a simple majority resolution rather than the special resolution that is now required under the articles as they stand.  With that in mind, the directors convened the Special General Meeting that is to be held tomorrow morning, to consider a number of items of business.  The first item of business, which is not one with which this application is concerned, is a proposal to pass a special resolution to amend article 86(4). 

12.  However, the second item of business proposed to be transacted at the meeting by way of an ordinary resolution is what has led to the application today:  that is a proposal that the board should be granted a general mandate to issue new shares in the company in an amount of up to 20 per cent of the existing issued share capital of the company.  The form of general mandate that is sought appears to be in the standard form that is used by many listed companies in Hong Kong.  It is, in that respect, in no way unusual.

13.  The board has explained its thinking behind the proposal to obtain this general mandate from the shareholders.  This can be summarised as follows:  in order for CYF to be re-listed, quite apart from having its constitution changed in a way that is hoped to be effected by the special resolution, resolution (1), it is also anticipated that it will be necessary for CYF to demonstrate to the Stock Exchange that it has sufficient financial strength to be able to carry on normal operations for at least six months to one year.  This requires it to have adequate working capital in order to do this, and this is required before it can be expected that the Stock Exchange will agree to a resumption of trading in the company’s shares.

14.  It is the company’s position, as evidenced in an affirmation which has been put before me for the purposes of today’s hearing by one of the independent directors of the company, Mr Balakrishnan Narayanan, that the purpose of this general mandate is to enable the directors to raise funds when the opportunity arises to enable the company to be best placed to seek a resumption of trading in its shares; a matter which, in the directors’ opinion and which would appear to be the case, would be in the best interests of all shareholders of the company.

15.  Madam Leung, however, appears to be concerned that the proposal that has been put forward by the directors has been put forward by them at the instigation of Mr Poh and that the effect of the grant of the general mandate may be to lead to a situation in which her interests in CYF, qua administratrix of her son’s estate, and assuming that her claim to the 46 per cent shareholding held by Luck Continent is a good one, may be prejudiced.  She puts that prejudice in two ways:  first; she says there will inevitably be a dilution in the voting power of her shares, in that her shareholding will be diluted from 46 per cent to some lower percentage.  If the general mandate is exercised to the maximum extent possible, the dilution would bring her shareholding down to about 38 per cent, a drop of somewhat in excess of 8 per cent of the total issued share capital in the company.

16.  The second aspect in which it is said that there may be damage to her interests, is that it may be the case, since no indication has as yet been given as to the terms on which any such allotment may take place, that the allotment will have the effect of resulting in a diminution in each shareholder’s economic interest in the company by reducing the net asset value per share below that at which it currently stands.

17.  In the circumstances, Madam Leung caused the solicitors acting for her to write to the solicitors for Dato Poh and Luck Continent to inquire as to whether they would be prepared to refrain from voting at the meeting in question.  No such assurance being given, this application was brought by way of an inter partes summons issued, I think, last Tuesday.  Owing to the urgency of the matter, in particular, the fact that the meeting is to be held at 10 o'clock tomorrow morning, I gave directions for a very truncated procedural and evidential timetable to enable a hearing to take place before me this morning.

18.  In support of the application, Madam Leung filed two affirmations in which she set out her case.  In response, Dato Poh has filed a fairly substantial affirmation of slightly just over 50 pages which, given the time pressure under which it was prepared, could only be completed sometime last night.  It was lodged with the court early this morning and served on the other side at about the same time.

19.  There has been no opportunity in the time available for Madam Leung to respond to the matters raised by Mr Poh in his affirmation.  I should add, perhaps, that the affirmation of Mr Poh is in fact a draft affirmation as there has not been time for him to swear it or make it since he is currently not in Hong Kong and is, I believe, in either Singapore or Malaysia.  However, an undertaking has been given that the affirmation will be affirmed as soon as possible and the affirmed version will be filed at court in the near future.

20.  For the purposes of this application, Mr Tong SC, who appeared for Madam Leung, submitted that the application was a fairly straightforward one, in that, on his case there was clearly a serious question to be tried as to whether or not Madam Leung was entitled to be regarded as the beneficial owner of the shares currently registered in the name of Luck Continent.  In those circumstances, given that detriment might well ensue to the value of her shareholding as a result of any exercise of the general mandate if one were granted to the board of directors at tomorrow’s meeting, it would be appropriate to hold the position, either by appointing receivers over the shares, who could exercise their own independent judgment as to how to vote at tomorrow’s meeting or, alternatively, by restraining the defendants from voting the Luck Continent shareholding in favour of the resolution proposed as resolution No. 2 at tomorrow’s meeting.

21.  Madam Leung says that her case as to the estate’s beneficial ownership of the shares is quite straightforward.  She suggests that when Luck Continent acquired its shareholding in CYF it did so with funds provided by Kenny Nam through a company that was beneficially owned by him, called Sino Gain Limited.  She relies on three cheques that were drawn by Sino Gain Limited in the total amount of some HK$75 million as representing the funds with which Luck Continent was enabled to acquire its shareholding in CYF.

22.  She goes on to say that at a meeting in Hong Kong towards the end of 2007, at a time when Mr Nam was seriously ill, he informed Madam Leung in the presence of Dato Poh, Mr Theodore Cheng and one or two other persons, that he was the beneficial owner of the shares in CYF held by Luck Continent and that he wished those shares on his death, which he obviously anticipated would occur in the not too distant future, should be used as to 50 per cent for charitable purposes and 50 per cent for the benefit of his family, in particular Madam Leung and his siblings.  Madam Leung says that Dato Poh acknowledged this and undertook that this would be done.  She says that following Mr Nam’s death she, on a number of occasions, approached Dato Poh to ask him about the position in relation to the Luck Continent shareholding and also on a few occasions asked him to take steps to have it transferred to her or to someone for the benefit of Mr Nam’s estate.

23.  She says that more recently, it would seem in about March this year, she discovered three documents that she says provide substantial support for her case.  These were a blank form of resignation of the director of Luck Continent, signed by Dato Poh, a blank share transfer form in respect of the issued shares in Luck Continent, also signed by Dato Poh, and a blank resolution of Luck Continent’s board of directors, also signed by Dato Poh, which was left blank in all material respects so as to enable whoever had it to fill in the details of the transferee of the shares and the resignation and appointment of the new director so as to acquire control of Luck Continent and thereby its shareholding in CYF.

24.  Madam Leung says that these documents, which are documents that are not uncommonly provided by a nominee to the person for whom he is nominee in respect of the shareholdings in the companies, are clear evidence of Mr Nam’s beneficial ownership of Luck Continent and, through it, the shares in CYF.

25.  This version of events is hotly contested by Dato Poh in the affirmation which he has filed.  In it, Dato Poh puts forward evidence that suggests, quite strongly, that the case put forward by Madam Leung is one that is open to serious question; in particular, Dato Poh says, and exhibits documents to show, that the purchase of the shareholding and acquisition of Luck Continent’s shareholding in CYF was funded not by any of the Sino Gain cheques that are relied upon by Madam Leung, but by loan financing that was obtained in different amounts to the total value of the cheques (in fact, a much smaller amount) obtained from a company called Emperor Securities, such financing having been obtained by Luck Continent itself, albeit perhaps with the assistance of Mr Kenny Nam.

26.  Dato Poh explains that although the documents that bear his signature, the three blank documents that I have referred to, are genuine documents and were signed by him, he says that these were signed in circumstances in which they were required as part of the terms of the share charge which were executed by Luck Continent in favour of Emperor Securities at the time that it entered into the financing arrangements for its acquisition of the shareholding in CYF.

27.  Dato Poh says that on that indebtedness being repaid, Emperor Securities returned the blank documents to Luck Continent and, at that time as he was on good terms with Mr Nam whom he trusted and who was acting as his financial adviser in various respects, he left the documents with Mr Nam to take care of them, never imagining that they would be put to the use that they have been for the purposes of these proceedings.

28.  Dato Poh also has exhibited certain recordings of a telephone conversation between himself and Madam Leung that took place on 27 December 2010, in which Madam Leung professes to be acting as a go between or middleman for Mr Cheng in an attempt to persuade Dato Poh to resolve his differences with Mr Cheng by agreeing to a proposal that Mr Cheng had made to buy out Dato Poh’s Luck Continent shareholding in CYF for the sum of somewhere between HK$150 million to HK$180 million, depending on the particular offer and time in question.  At the time of the telephone conversation, I think the offer was at about HK$150 million.

29.  Dato Poh says, and Mr Sussex submits, with some force, that that conversation is wholly inconsistent with any genuine belief in a beneficial interest in the shares on the part of Madam Leung qua administratrix.  He says that if Madam Leung had genuinely believed that she was, as her son’s administratrix, entitled to beneficial ownership of the CYF shares, there could be no conceivable reason why she would have proposed to Dato Poh that he should settle his differences with Mr Cheng on terms that would involve him giving up the shareholding, which, on her present case, was not his, in exchange for a very large sum of money which he would, on the face of it, be entitled to keep for himself.

30.  Mr Sussex also submits, with force, that the same may be said of the position of Mr Theodore Cheng.  It will be remembered that Mr Cheng is said to have been present at the meeting at which Mr Nam declared that he was the beneficial owner of the shares and his declaration was assented to by Dato Poh.  If that were the position and if Mr Cheng were indeed present at that meeting and the statements made by Mr Nam were indeed made at that meeting, there would be little conceivable reason for Mr Cheng to be offering to buy out Dato Poh and paying him the sum of $150 million for the Luck Continent’s shareholding in CYF.

31.  On that basis, among other matters which Mr Sussex also relies on, but principally on the basis of those two matters, Mr Sussex suggests that the case that is now put forward by Madam Leung must be regarded as a fabrication, perhaps at the instigation of Mr Cheng and Madam Yung, but he does not perhaps need to go quite that far.  It would suffice for him to say that the evidence that has been put before the court is such as to cast such serious doubt on the viability or bona fides of the case as being advanced as to beneficial ownership by Madam Leung, that the court should not hesitate to say that there is no serious question to be tried in these proceedings; that being the first step in considering whether or not a receiver should be appointed or injunctive relief granted.

32.  Although I would accept that the evidence that Mr Sussex has referred to would appear to be very powerful evidence in support of Dato Poh’s position, I think I must also bear in mind that because of the shortness of time before this application has come on for hearing, it has not been possible for Madam Leung to respond to the matters that have been raised. 

33.  Although Mr Tong ventured in his reply submissions a very brief answer to that point by reference to the fact that Madam Leung has deposed in the context of another application that she was not aware of the documents that she now relies on, that is to say the three blank documents signed by Dato Poh, until as late as March this year, it seems to me that that does not go far enough to answer the points made by Mr Sussex, in that, on Madam Leung’s own case it was not in March 2011 that she discovered the documentation and was thereby brought to an awareness of the fact that her son’s estate might have a claim on the CYF shares held by Luck Continent.  On the contrary, her case is, as pleaded and as verified by her in her statement of truth, that she was brought to awareness of this at the meeting in Hong Kong some three years earlier when her son informed everyone present that he was the beneficial owner of the shares in CYF held by Luck Continent.

34.  In those circumstances, it seems to me that the court must have real doubts as to the genuineness of the case that is being put forward by Madam Leung.  However, I do bear in mind that at this stage Madam Leung has not had an opportunity to explain her position and has not had the opportunity to put forward any explanation for why, in the light of her case as to having known of the position since 2007, why she put herself in a position where she appeared to be acting as a go between with a view to settling the differences between Dato Poh and Mr Cheng on terms that appeared to acknowledge Dato Poh’s ownership of the CYF shares and on terms that involved the payment to Dato Poh of substantial sums of money.

35.  I do not say that no such explanation could be provided but it has not as yet been provided.  But as I have said, because it has not been possible for Madam Leung to respond to the allegations made by Dato Poh in his evidence filed this morning, it seems to me that, on balance, I should take the view that there remains a serious question to be tried bearing in mind the relatively low threshold that that test imports for the purposes of proceedings of this nature.

36.  On that basis, it seems to me that I must go on to consider where the balance of convenience lies in this case.  The principles are basically the same, whether one is considering the appointment of receivers or the granting of an interlocutory injunction.  They are the well known American Cyanamid principles which have been applied in many cases.  Basically, what the court asks itself is:  first, whether, if no injunction is granted, damages would be an adequate remedy for the Plaintiff; secondly, if the answer to that question is yes, that will be an end of the matter.

37.  In the context of answering that question, however, the court will consider both questions of the inherent possibility of quantifying the damages in at least a rough and ready sort of way, and the question of whether or not the defendant would be in a position to meet an order for damages if one were to be made at the end of the day.

38.  If, considering those two aspects of the matter the court is satisfied that damages would not be a sufficient remedy for the Plaintiff, the court goes on to consider, thirdly, whether or not damages would be a sufficient remedy for the respondent.  If, considering the matter from the point of view of both the aspects that I have mentioned just now the court is of the view that damages would not be an adequate remedy for the Defendant either, then the court will generally refuse the injunction on the grounds that the status quo should be maintained.  Alternatively, the court could go on to consider the question of balance of convenience generally, although in this situation where the balance is fairly even, the court will generally lean towards preserving the status quo and leaving matters as they stand prior to the application being brought.

39.  Turning, therefore, to those questions, it seems to me that Mr Sussex is, I think, right in saying that so far as the position of the Plaintiffs is concerned, it would be, in principle, possible to quantify the damages to which he would be entitled in the event that there is a dilution of her shareholding in the company.  This is because it is possible to work out the maximum dilution that arises in the event that the proposed general mandate is exercised to the fullest extent possible.  As I have indicated earlier, the result would be that the shareholding of Luck Continent would be reduced by slightly over 8 per cent, expressed as a percentage of the total issued share capital in CYF.

40.  On the basis of the last transacted price prior to the suspension of trading in the shares, CYF had a market capitalisation of some HK$380 million, although it may be open to question as to whether that remains its current value, given the fact that it appears that its cash reserves had been depleted and some of its assets may be subject to provisions being made to write them down in value.  But taking that, for present purposes, as a rough approximation of the value of the company, the value of an 8 per cent-odd stake would be somewhere in the range of HK$30 million to HK$35 million.

41.  Mr Poh says that he is well able to meet an obligation to pay that amount of money or to acquire shares to supply to Madam Leung in the event that it is held that she in fact is the beneficial owner of the Luck Continent stake in CYF, as he has substantial assets and wealth and substantial interests that could be turned into account in assets in Hong Kong, the Mainland, Malaysia and Singapore.

42.  Madam Leung suggests that Dato Poh may not be as well off as he professes himself to be, but there does not appear at this stage to be any credible evidence to suggest that that is the case.  Even if that were the case, it seems to me that it is significant that, in principle, Madam Leung could be compensated by an award of damages in the event that an injunction is not granted.

43.  However, again due to the tightness of the timetable which led up to this hearing, Dato Poh has not put forward, perhaps because he has not had time to do so, evidence to show that he has assets available to the tune of HK$30‑odd million, and I shall therefore go on to consider the position on the other side.

44.  It seems to me that from the point of view of Dato Poh, if he turns out to be the beneficial owner of the shares in CYF held by Luck Continent, it would be significantly more difficult, if not impossible, to quantify the value of what he would lose in the event that the general mandate is not passed and the company is left in a position where it is unable to raise funds in order to obtain a re-listing of the shares or in order to smooth the passage of a re-listing of the shares.

45.  In those circumstances, the value of the shares would be, to a very large extent, sterilised or locked up because it would be extremely difficult for them to be realised if that was desired.  This is not something that is readily capable of being quantified in monetary terms.  Quite apart from this, there is the risk which Dato Poh has pointed out and which has also been averted to by Mr Narayanan, that if the company is unable to raise funds when it needs them, it may find itself in a position in which it is driven to insolvency.  If that were to happen, the downside would be that the entire value of the company would be lost.  That, however, may result in a loss that perhaps may be capable of quantification on the same rough basis as I have indicated in relation to the losses that would ensue to Madam Leung if the injunction is not granted.

46.  When it comes to the question of whether or not Madam Leung is in a position to make good any damages that would be suffered by Dato Poh if he is ultimately successful, the position appears to be reasonably clear.  Although Madam Leung has offered, as she had to, a cross undertaking to compensate Dato Poh and Luck Continent in damages for any damage that they may suffer in the event that the injunction she seeks turns out to have been wrongly granted or that the receivers she seeks to have appointed turn out to have been wrongly appointed, it is quite clear from other evidence filed in these proceedings that Madam Leung does not have the wherewithal to make good any such undertaking for damages if she should be called upon to do so.

47.  On a number of occasions, in other affirmations filed by those acting for her in these proceedings, it has been stated that Madam Leung is of limited financial means.  That being the case, I do not think that it could possibly be said that Madam Leung would be in a position to meet any liability she might have under her cross undertaking in damages to the Defendants in this matter.

48.  It seems to me, on the basis of the authority, and in particular the observations of Ribeiro J, as he then was, in the I think Excel Noble case, that that in itself is probably a sufficient basis to refuse the injunction and receivership relief that is now sought.  But just in case it is not, I would also say that I would have come to the same view on the basis of the balance of convenience.

49.  It seems to me that when one considers the balance of convenience, one is entitled to take into account the fact that the damage to the value of the shareholding held by Luck Continent in the event that the company is unable to raise funds if it needs to do so, is something that would be to the detriment of both Madam Leung and Dato Poh whoever ultimately is found to be entitled to the shareholding in question.

50.  It also seems to me that it is far from clear that there will necessarily be a dilution of the economic value of the shares in the event that the general mandate is exercised, whether in whole or in part.  Whether or not that is the case depends on the terms on which the new shares are issued, bearing in mind the terms of the general mandate, which require the new shares to be issued at not less than 20 per cent discount to the last traded price of the company’s shares on the Stock Exchange.  Bearing in mind also the fact that the company’s financial position appears to have taken a distinct turn for the worse in the course of the last six to 12 months, I am far from convinced that the outcome of any issue of new shares would necessarily be to cause a reduction in the value of the shareholding of any individual shareholder.  It also seems to me that, in principle, in a situation where the company may require such further financing in order to survive and in order to go forward and to have its listing resumed, if that proves possible, it would be in the interests of all shareholders that this should be permitted to go forward.

51.  The one matter that had given me some pause for thought is Mr Sussex’s very frank acceptance that he could not say that there was any particular pressing need for the vote to be taken tomorrow, at least in respect of the general mandate.  That, I think, was a fair concession and although at one point it crossed my mind that it might be possible to allow the parties to put in some further evidence so as to perhaps reinforce the views that I have expressed as to whether or not there is in fact a serious question to be tried or whether or not Dato Poh is in fact good for some HK$30-odd million, I have come to the view at the end of the day that even if no such evidence were to be filed, one would be left in the position that one is in today.  And if such evidence were to be filed, it would simply, assuming such evidence to be filed on behalf of Madam Leung, establish that there was a possible answer to the criticisms made by Mr Sussex. 

52.  There would still remain a serious question to be tried and so far as the possible evidence to be filed by Dato Poh were concerned, if that showed that he were good for the money, while that might provide a simpler basis, or a more readily ascertainable basis for declining relief, it seems to be that, nonetheless, if one goes on to consider the position of Madam Leung’s ability to meet any undertaking as to damages that she gives and the questions of balance of convenience which I have discussed a few moments ago, it seems to me that the outcome would have been the same .

53.  I would, in any event, have been disinclined to appoint receivers over the shares in question if the only issue were really whether or not a vote should be taken tomorrow.  It seems to me that it would probably have sufficed for an injunction to have been granted to prevent the shares being voted, leaving it to the company to decide whether or not, in those circumstances, it wished to press on with a resolution to tomorrow or to postpone it to a later date.  But for the reasons I have given, I do not think that it would be appropriate to grant even that limited form of injunction in the present case and I therefore dismiss this application.