AESO HOLDING LTD AND OTHERS v. CHAN SIU CHUNG AND OTHERS

HCMP 1721/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1721 OF 2017

__________________________

__________________________

_______________

D E C I S I O N

_______________

Application

1.  By the originating summons in expedited form issued herein on 4 August 2017, the plaintiffs seek access to and inspection of all the corporate and accounting records and documents, in whatever forms (“Documents”), of the 1^st plaintiff (“Listco”) and the 3^rd plaintiff (“Aeso”).

2.  The plaintiffs so claim on the following bases:

(1) the 2^nd plaintiff Madam Zhang Qi (“Madam Zhang”) and the 4^th plaintiff Mr Chan Kin Wing (“Mr Chan”) as the respective directors of Listco and Aeso have rights under statute and common law to inspect the books, records and documents of these companies;

(2) Listco and Aeso are entitled to access their own respective documents and properties;

(3) the 1^st defendant Mr Chan Siu Chung (“Mr Jones Chan”) as director of Listco and Aeso is obliged to comply with the resolutions for the production of the Documents passed by Listco and Aeso’s boards of directors; and

(4) the 2^nd to 4^th defendants as Aeso’s employees should comply with the lawful and reasonable orders issued by Aeso’s board of directors. 

3.  It does not appear to be in dispute that:

(1) Mr Jones Chan, with or without the assistance of the other defendants, has control over the Documents to the exclusion of the plaintiffs.

(2) The board of directors of each of Listco and Aseo (the composition of which is, as shown below, in serious dispute) has passed resolutions, and issued letters, on various occasions requiring the production of the Documents by Mr Chan and, inter alia, the 2^nd to 4^th defendants.

(3) To date, neither Mr Chan nor any of the other defendants have provided any of the Documents or any information contained therein save for what Mr Chan has disclosed in the affirmation he filed in HCA 1737/2017 on 27 July 2017.

4.  The originating summons has been set down for hearing before Mr Justice Harris on 10 January 2018.

5.  Before the court now is the plaintiffs’ application by summons filed on 7 August 2017 for access to and inspection of the Documents listed in paragraphs 1(ii), (iii), (iv) and 2(ii), (iii) and (iv) of the originating summons or the bulk thereof.

6.  These documents are said to be required urgently for the following reasons:

(1) First, Listco has to file and serve evidence by 18 August 2017 in opposition to an application in HCMP 1647/2017 for the appointment of receivers over its only valuable asset, which application is due to be heard by Madam Justice Au-Yeung on 1 September 2017.  Listco requires the financial and operational information contained in the documents presently sought to ascertain and enhance (if need be) its financial position to deal with such application.

(2) Second, Madam Zhang and Mr Chan as the respective directors of Listco and Aeso require the financial and operational information contained in the documents presently sought to operate and manage Listco and Aeso’s business.

(3) Third, Listco has defaulted / will default on its obligations under the Growth Enterprise Market(“GEM”) Listing Rules to publish its audited financial report for the year ended 31 March 2017 (which has already become due since 30 June 2017) and quarterly report for the 3 months ended 30 June 2017 (which will be due by 15 August 2017).

Relevant background

7.  The dispute of which the matter at hand forms a part has in just over 2 months given rise to 6 sets of proceedings[1] involving one or more from the camp of Mr Liu Chang Kien (“Mr Liu”) (see paragraph 9 below) (to which Madam Zhang and Mr Chan belong) and Mr Jones Chan’s camp with allegations and cross-allegations (including those of fraud, conspiracy and collusion) flying around.  It is not necessary for me, and I do not propose, to go into the whole background.  What is material to my decision on the present application can be summarised as follows.

8.  Listco is a company incorporated in the Cayman Islands and listed on the GEM Board of Hong Kong Stock Exchange by way of private placement on 13 January 2017.

9.  At all material times, the majority shareholders of Listco are:

(1) Acropolis Limited (“Acropolis”), through which Mr Jones Chan holds 38.25% of the shares in Listco; and

(2) W&Q Investment Limited (“W&Q”), through which Mr Liu holds 36.75% of the shares in Listco.

10.  The remaining 25% shares in Listco are in the hands of placees in the listing exercise and members of the investing public.

11.  At the time of the listing of Listco, its board of directors included Mr Jones Chan as chairman and executive director, Mr Chiu as executive director and Madam Zhang, nominated by W&Q, as non-executive director.

12.  The single most valuable asset of Listco is the 1 share (representing the entire issued share capital) (“Aeschylus Share”) in a BVI company called Aeschylus Limited (“Aeschylus”). 

13.  Aeschylus, in turn, holds Aeso.  Aeso is a Hong Kong company carrying on the business of fitting-out and renovation, of which Mr Jones Chan was the founder.  Aeso is the sole operating arm and, therefore, the cash cow of the group of companies under Listco.

14.  Apart from being a director of Listco, subject to the matter to be set out in paragraphs 25 to 28 below, Mr Chan has at all material times been the sole director of each of Aeschylus and Aeso as well as the sole signatory of their bank accounts (as well as Listco’s accounts) and is, as such, the only person in control of Aeso’s business and assets including bank accounts. 

15.  On 13 April 2017, Listco received a requisition from 5 shareholders (“Requisitionists”) to hold an extraordinary general meeting to consider and, if deemed fit, to replace the entire board of directors of Listco.

16.  The EGM was convened on 12 June 2017 with the result that:

(1) save for Mr Chan, Madam Zhang and one Mr Law Wing Kit (also of Mr Liu’s camp), all the other existing directors were removed; and

(2) 3 new independent non-executive directors were appointed.

17.  In the meantime, in the run up to the EGM, trading in Listco’s shares has become suspended since the morning of 12 June 2017.  The trading halt was caused by the conflicting public announcements made by the 2 camps on 11 and 12 June 2017 about Listco, concerning the integrity of the listing process, the attempts made by each camp to remove the directors nominated by the other camp and to postpone/reinstate the EGM, etc. 

18.  On 26 June 2017, Acropolis and Mr Jones Chan issued a writ of summons in HCA 1496/2017 against, inter alia, W&Q, Mr Liu, Madam Zhang, some of the placees and Listco for, inter alia, declarations of invalidity of their acquisition of shares in Listco.  It is Acropolis and Mr Jones Chan’s case that most (if not all) of the placees in the listing exercise were Mr Liu’s nominees and that the listing of Listco was a conspiracy orchestrated by Mr Liu to turn Listco into a shell vehicle at the expense of Acropolis. 

19.  By HCA 1496/2017, Mr Jones Chan also challenges the validity of the EGM and the resolutions passed thereat (“Resolutions”). The gist of Mr Chan’s case is that Mr Liu had colluded with the Requisitionists to use the EGM to gain control over Listco.

20.  Mr Jones Chan has, on 26 June 2017, also taken out a summons for an interlocutory injunction to restrain the defendants therein from giving effect to the Resolutions (“HCA 1496/2017 Injunction Application”) which, if granted, would have the practical effect of reinstating the directors ousted at the EGM.  At the hearing on 30 June 2017, upon an undertaking not to remove Mr Jones Chan from the boards of directors of Listco, Asechylus and Aeso, Madam Justice Au Yeung refused to grant Mr Jones Chan any interim relief. 

21.  The plaintiffs have specifically drawn my attention to her Ladyship’s oral ruling (“Au Yeung J’s Ruling”) where she:

(1) though noting that there were serious issue to be tried (including whether the placee defendants in HCA 1496/2017 were truly independent as claimed at the time of listing or a web of investors acting in collusion with Mr Liu), observed:

“The Court is also vigilant idea of vetoing the decisions of shareholders or to impose directors on the board against the wishes of shareholders (see the case of Mission Capital v. Sinclair). This authority applies with all the more force in a situation where 97.7 per cent shareholders have voted.

The effect of the interim injunction, even for a few months would be to reintroduce into the company some directors, which the shareholders do not want.”

(2) further observed in response to the question whether Mr Jones Chan could stop changes from being made to the register of directors of Listco in the Cayman Islands:

“As I have said,between now and the next substantive hearing, we’re just talking about a few months, and as I have, on my own volition, raised the concern about the third parties being misled, I doubt whether the plaintiffs [i.e. Mr Jones Chan and Acropolis] can bar the other side from proceeding with that resolution without an injunction in place. Right? So I think that much I will say today.”

22.  The plaintiffs take Au-Yeung J’s refusal to grant interim relief to Mr Jones Chan to mean that unless the court sees fit to grant any injunction at the substantive hearing, Listco’s management should be vested in its board of directors as elected by the shareholders at the EGM.

23.  On the other hand, the defendants contend that the status quo existing on 30 June 2017 of which Au-Yeung J was aware and was trying to preserve was that:

(1) Mr Jones Chan was the founder of the group’s business and the only person who knew how to run it and was running it.

(2) He was the sole director of Aeschylus and Aeso.

(3) He was in full control of all the bank accounts of Listco and its subsidiaries. Her ladyship did not take up the invitation to make any order requiring the disclosure of a list of bank accounts by Mr Jones Chan or the addition of authorised signatories to the bank accounts.

24.  The substantive hearing of the HCA 1496/2017 Injunction Application is due to take place before Madam Justice Bebe Chu in about 10 days’ time on 21 August 2017.

25.  After the hearing before Au-Yeung J on 30 June 2017, on 5 July 2017, Listco as sole shareholder of Aeschylus resolved to appoint Listco and Madam Zhang as additional directors of Aeschylus with immediate effect, thereby outnumbering Mr Jones Chan on the board of Aeschylus. 

26.  In the meantime, the board of directors of Listco (with Mr Jones Chan either dissenting or refusing to vote) had also passed resolutions to change the authorised signatories and signing arrangements in respect of Listco’s bank accounts.

27.  As for Aeso, on 6 July 2017, Aeschylus as sole shareholder of Aeso resolved to appoint Mr Chan and one Mr Chan Kwing Shing as additional directors of Aeso with immediate effect, thereby outnumbering Mr Jones Chan on the board of Aeso. 

28.  On 7 July 2017, the board of directors of Aeso (with Mr Jones Chan in attendance but refusing to vote) resolved to effect changes to the authorised signatories and signing arrangements in respect of Aeso’s bank accounts.

29.  Without going into detail, it is sufficient to say that the resolved changes to the authorised signatories and signing arrangements in respect of Listco and Aeso’s bank accounts have so far not been implemented because Mr Jones Chan has made specific requests to the banks concerned not to effect such changes.

30.  At around the time of the above boardroom drama, i.e. in early July 2017, Listco’s board of directors (except Mr Jones Chan) discovered:

(1) that Mr Jones Chan has apparently executed a loan agreement (“Loan Agreement”) and a share charge (“Share Charge”) both dated 8 June 2017 in the name of Listco with Dragon Success (defined in footnote 1 above), a company owned and/or controlled by Mr Ho Hoi Ling (“Mr Ho”) who is a friend of Mr Jones Chan, whereby the Aeschylus Share was charged to Dragon Success in exchange for a facility of up to HK$50 million;

(2) that sums totalling HK$34,804,119.55 have apparently been drawn down in June 2017;

(3) that Mr Chan had further executed the documents necessary to transfer the Aeschylus Share to Dragon Success, which documents have been dated 7 July 2017.  

31.  It is the plaintiffs’ case that had the transfer of the Asechylus Share been completed, Listco would have been rendered a worthless shell.

32.  Such discovery was made by Listco’s board of directors upon receipt of Dragon Success’ demand for repayment of HK$34,804,119.55 on 3 July 2017.  This was followed shortly by the commencement of HCMP 1647/2017 by Dragon Success against Listco to enforce the Loan Agreement and the Share Charge.  On 21 July 2017, Dragon Success issued an inter parte Summons for an interlocutory injunction to restrain any changes to the composition of the board of directors of each of Listco, Aeschylus and Aeso. Listco is due to file and serve evidence in opposition by the end of August 2017.

33.  Dragon Success’ enforcement action has led Listco to take the offensive by commencing HCA 1737/2017 against Dragon Success, Mr Chan and Mr Cheung to dispute the genuineness of the said transaction with Dragon Success and applying for and obtaining therein, inter alia, ex parte preservation / Mareva injunction against Mr Chan and Mr Cheung (“1737/2017 Injunction”).  Subject to a revision of the upper ceiling, the 1737/2017 Injunction was continued by this court at the inter partes hearing on 28 July 2017 pending the substantive hearing which is yet to be fixed.

34.  Dragon Success has since stepped up its enforcement action against Listco by taking out an inter partes summons in HCMP 1647/2017 on 1 August 2017 for the appointment of receivers over the Aeschylus Share (“1647/2017 Receivership Application”) which, if successful, would effectively enable Dragon Success to take control of Aeso.  Reading Mr Ho’s supporting affirmation, the tenor of the application is that the value of the Aeschylus Share would be at risk in the absence of intervention, which concern has apparently been caused partly by Mr Jones Chan volunteering that Listco has cash flow problems.

35.  The 1647/2017 Receivership Application was preceded by Dragon Success’ solicitors’ letter dated 28 July 2017, demanding Listco to provide its financial information (“most updated balance sheet, income statement and cash flow statements”) to Dragon Success, failing which it would imminently make a receivership application (which it did), and stating that the application might be withdrawn if Listco should make a payment into court covering Dragon Success’ claim for repayment.

36.  As said earlier, the 1647/2017 Receivership Application is due to be heard by Au-Yeung J on 1 September 2017. Listco has been directed to file and serve evidence in opposition by 18 August 2017.

Principles governing the grant of interlocutory injunctions

37.  The starting point is Lord Diplock’s speech in American Cyanamid Co v Eithicon Ltd [1975] AC 396 (HL) at 407F-409D which, as explained by the Hong Kong Court of Appeal in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118, per Ribeiro JA (as he then was) at [28]-[32], requires the court to ask the following questions in deciding whether it is just or convenient to grant an interlocutory injunction:

(1) whether there is a “serious question to be tried” which means that the claim must not be frivolous or vexatious;

(2) if so, whether, if the plaintiff were to succeed in obtaining a permanent injunction at trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the defendant continuing to act unrestrained pending the trial;

(3) if not, whether the defendant would be adequately protected by the plaintiff’s cross-undertaking in damages should it be later found that the plaintiff should not have been granted an interlocutory injunction; and

(4) if there is doubt as to the adequacy of the respective remedies of damages, where the balance of convenience lies.

38.  On the test for the grant or refusal of an interlocutory injunction, the parties have highlighted 2 matters in the course of their submissions.

39.  First, the orders sought by the plaintiffs are mandatory in terms.  There is no dispute that the modern approach is not to get bogged down by the question whether or not an injunction should be classified as prohibitive or mandatory.  What matters is the practical consequence of the injunction sought.  The underlying principle is that the court should take “whichever course seems likely to cause the least irremediable prejudice to one party or the other”.  See National Commercial Bank Jamaica v Olint Corpn [2009] 1 WLR 1405 (PC) per Lord Hoffmann at [19]-[20], which has been cited with agreement in Hong Kong by Re Wako Giken (HK) Co Ltd [2010] 4 HKLRD 121 per Harris J at [22] and Shih-Hua Investment Co Ltd v. Zhang Aidong, HCCW 109/2016, unreported, 19 January 2017, per Anthony Chan J at [66].  See also Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041, decided before National Commercial Bank Jamaica, in which Ma J (as he then was) also held at [12(c)-(d)] that the law “makes no distinction between these two types of injunctions”, and that the court will “take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong”.

40.  Second, the documents sought in this application overlap with those sought in the originating summons to some extent.  In other words, the grant of the interlocutory injunctions sought in this application would effectively give to the plaintiffs the final injunctions they claim in the originating summons before the hearing before Harris J in January 2018, insofar as the common documents are concerned.  Mr Anson Wong SC (with him Mr Richard Yip and Ms Tara Liao), counsel for the plaintiffs, disputes this view because, he says, the plaintiffs could always return the documents obtained under this application should the plaintiffs not prevail at the end of the day.  With respect, Mr Wong SC is ignoring the reality that what he is seeking is not the pieces of paper described in the summons before me, but the information contained therein.  The passing of information cannot in reality be reserved.

41.  The proper approach to be adopted where an interlocutory injunction will, or will practically, have the effect of disposing of a substantive claim in the action has been comprehensively reviewed by Mr Justice Chow in BMC Global Limited v TOR Asia Credit Master Fung LP, HCA 2392/2016, unreported, 14 October 2016.   I adopted his Lordship’s summary and analysis at [35]-[39] in In re Mingyuan Medicare Development Limited, HCMP 1480/2016, unreported, 22 May 2017, at [86]. 

42.  In short, where the grant of an interlocutory injunction would in effect dispose of the action or part thereof finally, the court will have more regard to the plaintiff’s prospect of success or lack thereof, as a factor in the consideration of the balance of convenience. 

Discussion

43.  Mr Wong SC impresses upon me the great urgency with which I should deal with the plaintiffs’ application.  A necessary evil is that, in the short time available, I will not be able to explain my decision in the more comprehensive manner in which I would normally wish to approach matters before me.  However, it does not mean that I have not considered the whole body of evidence and submissions before me. 

44.  On this note, my decision is guided by the following considerations.

45.  I do not understand Mr Clifford Smith SC (with him Mr Kerby Lau), counsel for the defendants, to be disputing the legal principles upon which Mr Wong SC relies in paragraphs 39 to 48 of his skeleton argument dated 8 August 2017 to justify why each of the plaintiffs is entitled to the documents sought in the application before me.

46.  What the defendants question is the capacity asserted by Madam Zhang and Mr Chan, i.e. as the respective director of Listco and Aeso, and the validity of the actions flowing from their acting as such including the commencement of these proceedings and the making of the present application by Listco and Aeso.

47.  As submitted by Mr Smith SC, the capacity and/or authority to issue these proceedings and the present application are essentially premised upon (1) the Listco directors appointed by the Resolutions passed at the EGM and (2) the directors of Listco’s subsidiaries appointed by the Listco directors appointed at the EGM being properly and validly appointed. 

48.  This is one of the main issues in HCA 1496/2017.  On the materials made available to me, I am unable to say from either camp’s point of view whether merits have been demonstrated over and above the “serious issue to be tried” threshold.  That being the case, I repeat paragraphs 40 to 42 above.

49.  I am mindful of the plaintiffs’ point that, regardless of the ultimate merits in HCA 1496/2017, by refusing interim relief to Mr Jones Chan, Au-Yeung J intended that Listco’s management should in the meantime be vested in the board of directors elected by the shareholders at the EGM.

50.  On this, there is to my mind force in the defence submissions summarised in paragraph 23 above.  I am personally unable to discern from Au-Yeung J’s Ruling that by refusing interim relief she wished to disturb the status quo pending the substantive hearing of the 1496/2017 Injunction Application. 

51.  I have not overlooked the fact that Au-Yeung J was proceeding on the basis that Mr Jones Chan would not do anything to harm the business of Listco and its subsidiaries and that it is the plaintiffs’ case that events that have occurred / surfaced after the 30 June 2017 hearing show that such assumption may no longer be plausible.  I bear in mind the negative inferences that the plaintiffs have asked me to draw about Mr Jones Chan’s conduct especially in the transaction involving Dragon Success.

52.  There is, however, no need to second guess what Au-Yeung J had in mind or to assess the continuing validity or otherwise of the premises underlying her decision.  The 1496/2017 Injunction Application would come on for substantive hearing before Bebe Chu J on 21 August 2017.  As said by Mr Smith SC, the capacity and/or authority to represent Listco and, by necessary implication, Aeso before the final determination of HCA 1496/2017 would be dealt with.  With just 10 days intervening, I am reluctant to make any decision today that might conflict with her Ladyship’s views of the case.  As stated above, I am not sympathetic towards the argument that an executed order for the disclosure and inspection of documents could be reversed by a simple delivery back of the documents.  Nor do I think that no loss or damage could arise from such an order or the execution thereof.  Depending on the circumstances, the mere disclosure of documents to a party not entitled to the same could be harmful.

53.  For these reasons, save for the documents required for meetting the 1647/2017 Receivership Application (see the discussion below), I make the case management decision of adjourning the balance of the plaintiffs’ summons dated 7 August 2017 to Bebe Chu J on 21 August 2017.

54.  Unlike the documents required for the second and third purposes mentioned in paragraphs 6(2) and (3) above, the defence of the 1647/2017 Receivership Application cannot wait.  Regardless of which camp is eventually proven to be in the right, receivers should not be allowed to be appointed over the Asechylus Share, the single most value asset of Listco, by default.  On this, I do not have just the interests of the 2 camps to consider, but also those of members of the public who have invested in the shares of Listco.

55.  However, I am not persuaded by Mr Wong SC that Listco would for this purpose need all the documents sought in the present application.  At this stage, the intention is not to enable an audit of or other investigations into the accounts of the group.  The focus is the 1647/2017 Receivership Application.  To my mind, insofar as such application is claimed to have been prompted by a concern over the financial viability of Listco to repay the sums drawn down under the Loan Agreement, Listco could and should be able to ascertain the financial wellbeing or otherwise of Listco and therefore decide how best to meet such application with sight of the following:

(1) group balance sheet, failing which management accounts, made up to 31 July 2017;[2]

(2) group income statement made up to 31 July 2017;

(3) group cash flow statement made up to 31 July 2017;

(4) up to date balances of all bank accounts of Listco, Asechylus and Aeso; and

(5) a list of all outstanding accrued receivables and documents in support thereof such as completion certificates.

I pause to note that the first to third items are what Dragon Success asked for by their solicitors’ letter dated 28 July 2017 as being required to satisfy it as to the financial position of Listco.

56.  I hereby order the defendants to produce the documents listed in the preceding paragraph to the plaintiffs’ solicitors by no later than 10:30 am on 14 August 2017, in view of the imminence of the deadline for Listco to file and serve evidence in the 1647/2017 Receivership Application.

57.  For the avoidance of doubt, I so order upon the following undertakings by the plaintiffs as well as W&Q and Mr Liu:

(1) If the Court later finds that this order has caused loss to the defendants or to any other party and decides that the defendants or that other party should be compensated for that loss, they will comply with any order that the court may make.

(2) The plaintiffs will use or disclose the documents obtained under this order only for the purpose of dealing with the 1647/2017 Receivership Application and not otherwise.

(3) The plaintiffs will retain all the documents obtained under this order, whether originals or copies, and will return the same to such party or parties as the court may direct.

(4) In the event that the plaintiffs should use any contact information of third parties (i.e. persons or entities who are not parties to this action or directors or staff members of Listco and/or Aeso), the plaintiffs will only contact such persons or entities through their solicitors and the defendants’ solicitors should be simultaneously informed of such contacts.

58.  Further, Mr Jones Chan has in the past redacted the names and other particulars of suppliers and clients and the location of projects in the documents that he disclosed out of concern arising from incidences of harassment inflicted upon him and solicitors and counsel formerly acting for him in the dispute with Mr Liu’s camp.  Mr Jones Chan has expressed the firm view that Mr Liu’s camp was behind these incidents.  Mr Liu’s camp denies being involved at all.  The materials before the court do not enable a view to be taken either way, not even provisionally.  Having seen the evidence of these disturbing incidences, I can however understand Mr Jones Chan’s concern.  I anticipate that the last item of documents I order to be provided may contain information that Mr Jones Chan wishes to protect.  To save the parties from making another trip to the court on an urgent basis, I order that such documents to be disclosed without redaction but only to the solicitors and counsel acting for the plaintiffs in these proceedings subject to their undertakings not to divulge the particulars of suppliers, clients and projects to the plaintiffs, W&Q and Mr Liu, which I assume they would be willing to proffer.

59.  Save as ordered above, I adjourn the plaintiffs’ summons dated 7 August 2017 to Madam Justice Bebe Chu J on 21 August 2017.

60.  I reserve costs. 

61.  Lastly, out of abundance of caution, I also give liberty to apply.