LIAO CHEN TOH v. LOYAL INTERNATIONAL ENTERPRISES CO LTD

HCA 2302/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2302 OF 2014

____________

(by original action)

(by counterclaim)

____________

____________

DECISION
____________

Introduction

1.  This is an application of Success House Industrial Limited (“D2”), New Success House Industries Limited (“D3”) and Loyal Investment Limited (“D4”) (collectively “the relevant defendants”) by their summons dated 4 August 2015 (“the Summons”) for certain interlocutory relief against Mr Liao Chen Toh (“LCT”), their former common director.

2.  The Summons contains a long list of obligations running into several pages sought to be imposed on LCT by the relevant defendants. Both Mr William Wong SC (with Mr Lam) for the relevant defendants and Mr Anson Wong SC (with Mr Lo and Mr Kok) for LCT in their written submissions have provided a good categorization of such obligations. Basically there are three categories:

(1) Return of all corporate items, accounting documents and confidential corporate commercial information belonging to the relevant defendants (“Return Obligations”);

(2) Removal of LCT and others as signatories of the bank accounts of the relevant defendants (“Removal Obligations”); and

(3) Explanation by way of affirmations about certain allegedly suspicious transactions undertaken by LCT on behalf of the relevant defendants as their director (“Explanation Obligations”).

3.  Mr William Wong submits that the relevant defendants have a strong case against LCT and in respect of this application, their case is even unanswerable on the basis of the three board resolutions passed by the relevant defendants to, among other matters, impose such obligations on LCT when he was still in the boards on 18 March 2015 (“the March Resolutions”) and the three shareholders’ resolution to, among other matters, remove LCT as a director of each of the relevant defendants on 9 April 2015 (“the Removal Resolutions”). Lastly, the relevant defendants rely on their board resolutions to remove LCT as the bank signatory of their accounts passed on 26 April 2015 (“the Bank Signatory Resolutions”).

Background facts

4.  This is litigation on a grand scale and the factual matrix in this case is rather complicated. There are a number of allegations of the relevant defendants made against LCT in respect of his dealings of their assets and properties when he was their directors though it was LCT who first commenced these proceedings. For the purpose of the Summons, however thankful I am for Mr William Wong’s thorough explanation and analysis by way of written submission, I do not find it necessary to set out all the background facts and the allegations and cross-allegations in great detail. The following summary would suffice for the understanding of this decision.

5.  The main protagonists in this action are from one Taiwanese family. LCT on the one side and Madam Laio Hwang-Hsiang (“LHH”) and Mr Liao Wen Toh (“LWT”) on the other. Both LCT and LWT are the sons of LHH and one late Mr Liao Yo-Chang (“LYC”). LYC passed away on 12 June 2010.

6.  LYC founded a very successful business in the manufacture of expandable polystyrene (“EPS”) through his group of companies known as the Loyal Group in the mid 1970s. EPS foam is an essential daily commodities and the Loyal Group is said to be the largest EPS manufacturer in the world.

7.  The Loyal Group consists of Loyal International Enterprises Co. Ltd. (“D1”), a BVI company and the relevant defendants. All the relevant defendants were incorporated in Hong Kong prior to the incorporation of D1 and they are investment holding companies holding shares or equity interests in wholly foreign owned enterprises (“WFOES”) in Mainland China. Such WFOES hold facilitates in the Mainland for the manufacture and production of chemicals, petrochemicals and plastics.

8.  The following WFOES in which D2 had 100% interest are of relevance to this application: (1) Panjin Long Guang Engineering Plastics Co. Ltd (“Panjin Ltd”), (2) Jiangyin Xinshu Engineering Plastics Co., Ltd (“Jiangyin Xinshu Ltd”), (3) Loyal (Tianjin) International Trading Co., Ltd (“Loyal Tianjin Ltd”), (4) Xinjiang Long-Qiao Engineering Plastics Co., Ltd (“Xinjiang LQ Ltd”), (5) Ningbo Xin-Long-Xin Chemical Industrial Co., Ltd (“Ningbo XLX Ltd”) and (6) Ningbo Chang-Qiao Engineering Plastics Co., Ltd (“Ningbo CQ Ltd”).

9.  Further, in respect of Jiangyin Long-Chi Ltd (“Jiangyin LC Ltd”) which is another WFOE of the Loyal Group, D2 held 14.04% interest and D3 held 1.96% interest.  

10.  To facilitate cash transfer for the purpose of the Loyal Group, the relevant defendants had bank accounts in Hong Kong in their own names. On the other hand, certain local bank accounts are held in the name of either LYC, LCT or LWT for the Loyal Group.

11.  In 2006, a board (“the Board”) was set up for the corporate governance of the Loyal Group and it consisted of six members. I note that LCT contends that it was merely a consultative committee. The Board comprised LYC, LCT, LWT, Liao Ming Che (“LMC”) who is the nephew of LYC, Hong Chieh Wen (“HCW”) and Huang Wen Ping.

12.  LYC was the chairman of the Board. According to an announcement of the Board dated 18 June 2010 (“the Announcement”) signed by, among other persons, LCT was appointed by the Board to replace LYC on 13 June 2010 so as to maintain the status quo of the Loyal Group in the wake of the demise of LYC.

13.  Prior to 30 December 2009, in D2, LYC held 70% of the shares, LCT held 20% and the remaining 10% shares were held by one Chan Tang Chi. For D3 and D4, each of LYC and LCT held 50% shares in each of these companies.

14.  D1 was incorporated on 24 July 2008 with a view to an initial public offering of the Loyal Group at the Hong Kong Stock Exchange. Each of LCT and LWT were allotted 40% of the shares in D1 with the remaining 20% of the shares being allotted to LYC. LYC was initially the sole director of D1.

15.  On 30 December 2009, all the issued shares in the relevant defendants including those held by LCT (“LCT’s Shares”) were transferred to D1. According to LCT, no consideration was given for this transfer.

16.  Soon after LYC passed away intestate, differences between the two camps about the administration of the estate of LYC and the operation of the Loyal Group surfaced. On 11 August 2011, LHH obtained a grant of letters of administration ad colligenda bona in respect of the BVI estate of LYC. LCT applied to the BVI court to challenge the grant but in vain. Eventually, LHH obtained a full grant by an order of the BVI court dated 24 January 2014.

17.  LHH, as the administrator of the BVI estate of LYC, distributed the shares of LYC in D1 among LCT, LWT and she herself. As a result, she became the owner of 6.67% shares in D1 and each of LCT and LWT 46.6% (40+6.6%).      

18.  Both LHH and LWT embarked on investigation into the operational and financial status of the companies under the Loyal Group including D1, D2, D3, D4 and all the WFOES. They discovered a number of dubious transactions whereby the assets of the relevant defendants were dissipated by LCT without their knowledge and consent.

19.  Briefly stated, such transactions include (1) the purported sale of D2’s 100% shareholding in Panjin Ltd to Loyal International Trading Ltd (“LIT”) in consideration of RMB 50 million, (2) the purported sale of D2’s 100% shareholding in Jiangyin Xinshu to LIT in consideration of RMB 134 million, (3) the purported sale of D2’s 100% shareholding in Loyal Tianjin Ltd to Loyal (HK) International Ltd in consideration of RMB 15 million, (4) the purported sale of D2’s 100% shareholding in Xinjiang LQ Ltd to LIT in consideration of RMB 135 million, (5) the purported sale of D2’s 14.04% shareholding and D3’s 1.96% in Jiangyin LC Ltd to Loyal (HK) International Ltd in consideration of RMB 9.126 million and RMB1.274 million respectively, (6) the purported sale of D2’s 100% shareholding in Ningbo XLX Ltd to Loyal (HK) International Ltd in consideration of RMB 25 million and (7) the purported sale of D2’s 100% shareholding in Ningbo CQ Ltd to Loyal (HK) International Ltd in consideration of RMB 20 million (collectively “the Purported Sale Transactions”).

20.  In relation to the Purported Sale Transactions, the complaints of LHH and LWT are that the shares of the WFOES were sold at a gross undervalue and that, as admitted by LCT, both LIT and Loyal (HK) International Ltd are in fact under his sole ownership and control.

21.  I am aware that all the Purported Sale Transactions are included only in the latest version of their Defence and Counterclaim which this court has just granted the relevant defendants leave to be filed. 

22.  Further, LHH and LWT found out that from 3 July 2012 to 12 October 2012, LCT caused to be made two dubious transfer of funds out of the accounts of D2 and D4 (collectively “the Dubious Transfers”) transferred from the account of D2 to an account of Silver State Entreprise Limited (“Silver State”) in the total sum of USD 87.26 million. Another dubious transfer was found to be made from D4 to Xing Long Guang Plastics Co., Ltd. (“XLG Plastics”) in the sum of USD 2.8 million on 24 January 2013 in the absence of any notice or consent of LHH and LWT albeit they had already been appointed as directors of D4.

23.  It is not in dispute that Silver State is under the sole control of LCT.

24.  Lastly, LHH and LWT found out that from 2011 to 2013 the relevant defendants extended a number of loans in substantial amount (“the Suspicious Loans”) without any supporting documents. The Suspicious Loans were made when LCT was in control of the relevant defendants. The loanees of the Suspicious Loans include mainly XLG Plastics and Panjin Ltd.    

25.  LCT brought this action to seek a declaration that D1 holds the LCT’s Shares on trust for him on the simple basis that the transfer of the LCT’s Shares was merely a gratuitous transfer without any intention to transfer of his beneficial interest therein.

26.  The relevant defendants have made a counterclaim against LCT based on the Purported Sale Transactions, the Dubious Transfers and the Suspicious Loans caused by LCT apparently in breach of his fiduciary duties as directors of the relevant defendants. The defendants also rely on the March Resolutions, the Removal Resolution and the Bank Signatory Resolution (collectively “the Three Resolutions”).

27.  I note that the defendants re-amended their pleadings after the issue of the Summons. Indeed at the hearing they sought leave to file and serve their Re-re-amended pleadings and their application was allowed by consent with costs to LCT. LCT has yet to file any pleadings in response to the allegations contained in the defence’s pleadings.

28.  To resist this application, LCT has filed his affirmations and caused HCW, one of the six members of the Board and General Manager of XLG Plastics, to file his affirmation in support.

29.  It is remarkable that LCT does not seriously challenge the validity of the Three Resolutions. His major difference from LHH and LWT is that the Loyal Group was actually co-founded by LYC and him. LYC and he set up the relevant defendants were set up by LYC and him as paper companies without any genuine commercial operations in Hong Kong or elsewhere. LYC and LCT used them as their investment vehicles only. LCT further claims that he alone provided all the financial contribution to the WFOES and accordingly to PRC law, he was and is the sole beneficial owner of the WFOES. The relevant defendants merely held their beneficial interests on trust for him as his nominees.

30.  Consistent with this contention, LCT maintains that he was at liberty to deal with the assets of D1 and the relevant defendants including the interests in the WFOES.

31.  Alarmingly, LCT admits that despite all the formal documentations including share transfer agreements, the Purported Sale Transactions were mere bogus sales and in truth were only a part of his restructuring of the companies owned by him. He even confirmed on oath that no actual considerations were provided for the share transfers in respect of Panjin Ltd, Jiangyin Ltd. and Loyal Tianjin Ltd.. He asserted that the purported transfer prices in these transactions were merely for tax purposes in the PRC and there was no money changing hands.   

32.  LCT alleged that the transfer of all the issued shares in the relevant defendants to D1 was for strategic reasons. He contends that he remains to be the sole beneficial owner of the WFOES after the transfer.

33.  Given all these allegations, LCT thinks he can explain away all the Purported Sale Transactions, the Dubious Transfers and the Suspicious Loans. His case is that he only dealt with his own properties within the companies owned by him in the context of PRC law. 

Relevant legal principles

34.  There is no dispute about the well-settled legal principles. The guiding principles expounded in American Cyanamid remain applicable.

35.  Given the voluminous evidence, both factual and expert, filed by the parties[1], it is pertinent to take heed of the established principle that this court is warned against conducting a mini-trial on affidavits making factual findings and resolving difficult questions of law.

36.  On the balance of convenience, the relative strength of the parties’ cases is a highly relevant factor: Series 5 Software Ltd v Philip Clarke [1995] FSR 273 at 286.

37.  Mr Anson Wong highlights to this court that what the relevant defendants are asking in the Summons are in fact included in the final reliefs claimed by them in their counterclaim. He goes on to submit that for an application effectively for final and mandatory relief, the court will not exercise its discretion to grant the interim relief unless it feels a high degree of assurance that at trial, it would be shown that the injunction was rightly granted. It remains a question of balancing the risk of injustice to the parties as a result of the grant and the withholding of such interim relief: Choi Chi Wai v Hong Kong Agricultural Special Zone Ltd, unreported, HCA126/2013, 14.4.2014 at §42.

38.  In this regard, Cheung CJHC said this in Lai Hoi Ping v Persons Occupying, unreported, HCMP 2975-2976/2014, 15.11.2014 (at §10):

“There are undoubtedly authorities which say that in cases where the grant or refusal of an injunction would in effect dispose of an action finally the court will have more regard to the prospect of success. But it should be firmly borne in mind that this higher regard to the merits of the case is but one factor in the consideration of the balance of convenience.”

39.  The Chief Judge continued to indicate that one must have regard to the particular circumstances in each case in assessing the overall justice in the balancing exercise and not just the strength of the parties’ respective case.

Discussion

40.  Whilst Mr William Wong seeks to argue that the defendants’ counterclaim has a high chance of success, Mr Anson Wong does not pitch the case of LCT so high and reminds that this court should not attempt to resolve difficult factual disputes and legal questions especially when PRC law is engaged. He does not argue that there is no serious question to be tried at all. I agree with Mr Anson Wong and that is the reason why I would not go into great detail about the allegations of the parties and attempt to resolve their differences in the applicable PRC law.

41.  It is plain to me that the defendants have sufficiently shown that there are indeed serious questions to be tried. They have made a number of serious allegations against LCT which are prime facie supported by documents. LCT’s claim of his sole beneficial ownership of the relevant defendants and the WFOES and his explanations about the Purported Sale Transactions, the Dubious Transfers and the Suspicious Loans have to be properly tested at trial. At this stage, I am unable to conclude that his case must be rejected.

42.  However, in light of the following matters by way of examples, I am of the view that his case is fraught with difficulties.

43.  As rightly pointed out by Mr William Wong, when LCT started this action, the pleaded case of LCT was and still is that he was not the 100% beneficial owner of the relevant defendants and he merely claims beneficial ownership in respect of the LCT’s Shares held by D1. Nor had he ever claimed any beneficial ownership of the WFOES before he filed his affirmations.

44.  No matter how highly he thinks of himself about his contribution to the success of the Loyal Group, LCT could hardly be heard to suggest that LYC had no interest in the companies in the Loyal Group whatsoever.

45.  However dismissive LCT is about the functions of the Board, the documents including the Announcement speak for themselves and do not lend support to his allegations that the relevant defendants are merely paper companies entirely at his disposal and the Loyal group was under his sole control.

46.  Moreover, LCT’s allegation of his sole injection of capital into the WFOES appear to be a bare assertion without documentary support. It is indeed questionable in light of the non-controversial evidence adduced by the parties. 

47.  This court also bears in mind the apparent validity of the Three Resolutions.    

48.  Having satisfied that there are serious questions to be tried, I proceed to examine the adequacy of damages and the balance of convenience in relation to each of the three Obligations taking into account, among other matters, my preliminary view of the strength of LCT’s case.

Return Obligations

49.  For all the corporate items and accounting documents of the relevant defendants, the parties have come to certain agreements in light of the confirmation given by LCT in his affirmations. I only deal with the controversial part of the Return Obligations.

50.  The starting point is that LCT should return to the relevant defendants all the accounting documents and the confidential information contained in tangible forms such as documents and computer files of the relevant defendants. The relevant defendants are in any event the legal owner of such properties and LCT should have no right to retain them particularly in light of the March Resolution and the Removal Resolution.

51.  LCT does not suggest and cannot be heard to suggest any hardship he would suffer if he is ordered to return such matters to the relevant defendants. I accept that the submission of Mr William Wong that the relevant defendants of course require such properties for their operations and damages cannot be an adequate remedy. Even if I accept that there is a triable issue as to whether they are in fact paper companies without genuine business activities, their directors should require such properties to fulfill their legal duties.   

52.  Mr Anson Wong seeks to argue that the relevant defendants have no legal right to have access to any of the information of the WFOES even if they are the beneficial owner of the WFOES. According to PRC law, WFOES is the legal owner of their own properties and not their parent companies.

53.  I cannot accept his submission. It is clear that the relevant defendants are asking for the return of their own properties including confidential information contained in tangible forms belonging to them. Even if such properties involve any dealings with the WFOES, it does not turn them into the properties of the WFOES or their joint properties. I am of the view that the relevant defendants as a matter of principles should be entitled to the return of all their properties presently kept in the possession, custody and power of LCT or his agents.

54.  That said, given the alleged lack of the audited accounts and the management accounts in contravention of the Companies Ordinance in LCT’s 3^rd affirmation Mr William Wong indicates that the relevant defendants, though being skeptical, would not insist on their production. Nor do they insist on the production of a list of bank accounts under the names of the relevant defendants. This disposes of the entire paragraph 2(a) of the Summons and paragraph 2(b) in part. 

55.  For the reasons given above, I accept that the relevant defendants should be entitled to LCT’s compliance with the remaining part of paragraph 2(b) of the Summons relating to the specimens of chops and/or signatories of each of the bank accounts of the relevant defendants and the account statements from 12 June 2010 onwards.

56.  By the same token, I have little hesitation in coming to the conclusion that the relevant defendants are entitled to the return of those properties set out in paragraph 3 of the Summons (save paragraph 3(a) which is no longer pursued) despite the additional arguments raised by LCT.

57.  First, I am unable to accept the truth in his contention that all of the corporate information relating to their global investments is in the public domain, e.g. the online PRC company registry system. The contention is in any event a red herring. Even if it is, LCT having ceased to be a director of any of the relevant defendants has no right to deny possession of the relevant defendant of their properties and should make immediate return.

58.  For those matters set out in paragraphs 3(c) to (h) of the Summons, Mr Anson Wong relies on the assertion of LCT made in his 3^rd affirmation that such information is not in existence and so cannot be returned. It is argued that this should be enough to stop the relevant defendants from pressing any further.

59.  I am unimpressed by his bold assertion. It contains nothing more than a single sentence of bare denial. I agree with Mr William Wong that, on the evidence, evening accepting that the relevant defendants are merely paper companies holding the beneficial interest in the WFOES on his behalf, those documents sought to be returned should prima facie exist to perform their basic functions. Further, in light of the Purported Sale Transaction and LCT’s own admission of certain transactions between the relevant defendants and some of the FWOES, it is difficult to accept the bold assertion without any explanation and sufficient disclosure has already been made.

60.  In the premises, I allow the foregoing Return Obligations to be imposed on LCT. LCT should be allowed 28 days to comply with the same.

Removal Obligations

61.  I should first add that by the Removal Resolutions, LWT was appointed the sole signatory of the bank accounts of the relevant defendants.

62.  I would have thought that there should be no dispute that the boards of the relevant defendants are entitled to make arrangements of the signatories of their bank accounts including their appointment and their removal by way of resolutions. The Removal Resolutions were passed and clearly LCT should cease to be the signatory. However, LCT has ceased to be a director of the relevant defendants. The question is whether he can still now be ordered to assist the relevant defendants in the removal procedure.

63.  Mr William Wong argues that the Removal Resolutions imposed upon LCT a person fiduciary duty to comply with the same, citing Addstead v Liddan Pty Ltd (1997) 25 ACSR 175 at 195 to support his contention. This Australian authority however dealt with a rather different situation and I have little problem with the proposition expounded therein that a director cannot avoid a finding of a breach of fiduciary duties owed to a company by bailing out of the directorship. Such a director is still liable to make restitution for his breach of fiduciary duties.

64.  Here, the relevant defendants effectively ask this court to order LCT to make amend for his alleged breach of his fiduciary duty in not complying with the Removal Resolutions. Giving this matter my anxious consideration, I accept that at least it is arguable that in the circumstances of this case, LCT was so in breach and given his role he should be ordered to make his reasonable endeavour to assist the relevant defendants to effect the change of signatories in their bank accounts.   

65.  Mr Anson Wong is quick to point out that it is the evidence of the relevant defendants that the applications of D2 and D3 for change of signatory of the bank accounts with the Bank of China Hong Kong (“BOCHK”) were refused in the absence of the consent from all beneficial owners controlling more than 10% of interests in D2 and D3.

66.  He goes on to submit that the relevant defendants should be estopped from maintaining that the consent of LCT having more than 10% interests in D2 and D3 is not a requirement for change of signatory.

67.  I fail to see any substance in this submission. To start with, even assuming that there is such a requirement, it is only a contractual term agreed between the relevant defendants and the BOCHK and it cannot possibly deprive their boards of the legal right to pass a resolution to change the signatories of their bank accounts. Nor can it confer a shareholder, who personally may not even be a party to the contract between the banks and the relevant defendants, an unquestionable right to refuse to give his consent to perform the resolution. The directors should make their best endeavor to procure all the necessary consents to carry out the resolution under those circumstances.

68.  Mr Anson Wong submits that as a matter of law LCT is plainly entitled to exercise his right as D2 and D3’s shareholder to veto any attempt to change the bank signatories. He submits that as a shareholder this is his property right. On the basis that LCT is not the sole shareholder of D2 and D3, I cannot accept his submission.

69.  On the other hand, I have read the relevant passage in the affirmation of LWT. He was merely informed by the company secretary of D1 of the reasons for refusal to change signatories by the BOCHK. The actual legal basis of the refusal is still elusive and LWT could not be taken to have accepted as a matter of fact that there was such a requirement.

70.  Mr Anson Wong further relies on a document of the BOCHK which is said to contain expressly a requirement that consent from principal shareholders (who can exercise 10% or more of the voting rights of the company or its parent company) should be obtained for any change of signatories. Relevance aside, after reading the document myself, which provides local limited companies some guidelines for opening an account with the BOCHK, I am not convinced that there is such a requirement at all. It merely requires at least two directors or the sole director, principal shareholders (those who can exercise or control the exercise or control the exercise of 10% or more of the voting rights of the company or its parent company) and all authorized signatures must be present at the bank for account opening. This requirement is plainly a far cry from the requirement for changing signatories.

71.  In the premises, I agree that LCT should be ordered to fulfill the Removal Obligations. He should be allowed 21 days to comply with the same. I am also satisfied that LCT should be ordered to make an affirmation pursuant to paragraph 5 of the Summons to confirm his compliance with the Return and the Removal Obligations within 14 days thereafter.

Explanation Obligations

72.  Now I come to paragraph 6 of the Summons. It relates to the Purported Sale Transactions concerning Panjin Ltd, Jiangyin Ltd and Loyal Tianjin Ltd and the Suspicious Loans.

73.  Mr William Wong, quite rightly in my view, no longer pursues the explanation obligations. I do not find it appropriate at this stage to order LCT to make an affirmation to explain his case in respect of the Purported Sale Transactions and the Suspicious Loans, though LCT has already done so in his affirmations.

74.  As regards those documents and information contained in tangible forms relating to those Purported Sale Transactions and the Suspicious Loans belonging to any of the relevant defendants, I am satisfied that they do exist in the absence of credible contrary evidence and for the reasons given above, LCT should be ordered to return to the relevant defendants within 28 days from the date hereof. Likewise, LCT should have 14 days thereafter to make an affirmation pursuant to paragraph 7 of the Summons.

75.  I do not accept Mr Anson Wong’s submission that it is premature for the relevant defendants to ask for discovery when the pleadings have not yet been closed. LCT has no legal right to retain such documents in the first place and they belong to the relevant defendants. Their return to their rightful owners cannot be equated with the ordinary discovery process in general litigation.

76.  Whilst the relevant defendants genuinely require such documents and/or information for their investigation and recovery process, I see little hardship that LCT would suffer as a result of their return.

Conclusion and Orders

77.  For the reasons given, I find the majority of the requests of the relevant defendants to be justified. The relevant defendants may work on the draft order attaching to their Reply Written Submissions and revise the same in light of my decision for my approval.

78.  It appears to me to be an appropriate case that costs should be in the cause and given the factual complexity a certificate for two counsel should be granted. I so order on a nisi basis.

79.  Lastly, I thank all counsel on both sides for their industry and helpful submissions.  

[1]LCT’s 5^th Affirmation was admitted by consent. On the other hand, the relevant defendants sought leave to file out of time their expert report on PRC law by way of a joint opinion of Professor Luo Pei Xin and Mr Zhan Rui. This court granted leave sought with the consent of LCT.