FB MAITREYA FUND (IN OFFICIAL LIQUIDATION) v. YIU TSZ NGAR

HCA 1163/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1163 OF 2015

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D E C I S I O N

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1.  This is an application by the plaintiff for summary judgment against its former director. The question that I have to decide is whether the director has raised any defence to the plaintiff’s claims for misappropriation of assets that should be allowed to go to trial.

Background

2.  The plaintiff is a Cayman Islands exempted company in liquidation there.  It was set up to be a fund for indirect investment in the shares of Facebook Inc.  The plaintiff itself had 2 classes of shares: “participating shares” which were made available for subscription by investors, and “management shares” which were held by the plaintiff’s Investment Manager, namely, Maitreya Investment Management Limited (“MIML”), a BVI company.

3.  Pursuant to the invitation in a Private Placement Memorandum dated 8 January 2010 issued by the plaintiff, three investors, namely, a company called Sharp Gain and two individuals called Mr Liu Shi Yang and Mr Chiu Sing Yee respectively (“the Investors”), invested and subscribed for shares in the plaintiff.  Each of them subscribed for 50,000 participating shares at between US$48 and US$50 per share, which were later multiplied by a 5-for-1 share split.  Together they held (and presumably still hold) all the participating shares of and in the plaintiff.  The structure was that each participating share was intended to be equivalent to investment in one Facebook share.

4.  The defendant was the sole director of the plaintiff as well as the principal of MIML.

5.  The plaintiff held 100% of the shares of another company called FBI Investments V, LLC (“the US Fund”).  The US Fund in turn held a company called DST which was the entity that directly invested in and held the Facebook shares acquired.

6.  Facebook shares were first offered to the public on NASDAQ on 18 May 2012.  There were subsequent disputes between the defendant and the Investors about the lock-up period during which the Facebook shares acquired indirectly by the plaintiff had to be kept before being sold on the market.  In June and July 2013 three agreements were entered into between the Investors respectively on the one hand and the plaintiff and/or the defendant on the other, for the purpose of resolving the immediate disputes between them.  A main issue on this application is the effect of these agreements on the plaintiff’s claims against the defendant.

7.  It appears that those agreements were not fully complied with or performed.  As a result, the Investors lost all confidence in the defendant and, in November 2013, applied for the plaintiff to be wound up in Cayman Islands.  An order was made by the Grand Court of the Cayman Islands on 15 November 2013 for the appointment of provisional liquidators and on 13 February 2014 for the winding-up of the plaintiff.  The plaintiff is now controlled by its liquidators.

The plaintiff’s claims

8.  As pleaded, there are essentially 4 claims in this action:

(1)  that the defendant wrongfully procured the transfer of approximately US$7.2 million from the plaintiff to MIML for management fees;

(2)  that the defendant procured the transfer of the sum of US$1,102,106.35, first from the plaintiff to MIML, and then to the defendant;

(3)  that the defendant procured the transfer of 266,813 Facebook shares from the plaintiff to herself, caused the shares to be sold and the proceeds of US$5,011,078.39 to be paid to herself; and

(4)  that the defendant procured the 131,720 Facebook shares held by the plaintiff to be sold and the proceeds of US$3,128,201.26 to be paid to herself.

9.  The appropriations and transfers of these assets are not the centre of the debate.  They are not denied, but merely “not admitted”, by the defendant.  On the basis of the documentary evidence I am satisfied of the following.

10.  First, a total of US$7.2 million was paid out, in 3 tranches of US$2.5 million on 6 September 2010, US$1.5 million on 22 September 2010 and US$3.2 million on 13 May 2011 respectively, from the plaintiff’s account at Standard Chartered Bank to MIML.  The payments were for management fees prepaid to MIML on account of two new investments for Facebook shares.  No further Facebook shares were however acquired in the end for these two additional investors and their subscription monies were returned to them. In these circumstances I accept that no management fees were in fact due to MIML and the payment to MIML was prima facie wrongful.

11.  Secondly, on 15 August 2012, the defendant caused the sum of US$1,120,106.35 to be transferred from the plaintiff’s account at Morgan Stanley to MIML’s account at Morgan Stanley.  On 20 August 2012, the same sum was transferred to the defendant’s own account at Standard Chartered Bank.

12.  Thirdly, on 18 September 2012, the US Fund by way of distribution transferred 266,813 Facebook shares to the plaintiff’s account at Morgan Stanley.  On 19 September 2012, those shares were transferred to the defendant’s account at Morgan Stanley and subsequently sold for US$5,011,078.39.

13.  Fourthly, on 31 May 2013, the US Fund, again by way of distribution, transferred 131,720 Facebook shares to the plaintiff’s account at Morgan Stanley.  On 3 June 2013, those shares were sold for US$3,139,243.24.  The money went into the defendant’s bank account.

14.  I am further satisfied that as between the plaintiff and the defendant, these are corporate assets and unless justified specifically, the appropriations constituted misapplication of the plaintiff’s assets by its sole director, for which she would be liable: see eg Bishopsgate Investment Management Ltd v Maxwell [1993] BCC 120, 140, 143.

The defences raised

15.  The defendant has raised 4 matters in defence: (1) that MIML was entitled to investment manager’s fees and she was entitled to director’s fees; (2) that by reason of the three “settlement agreements” entered into with the Investors respectively, the plaintiff’s claim cannot be maintained; (3) that one of the Investors, Mr Chiu, has brought proceedings in Singapore and should not be allowed to bring the present action indirectly through the plaintiff’s liquidators; and (4) that the proper defendant in relation to the first two misappropriations was MIML, not the defendant.  I shall deal with these defences below in turn.

(1)  Fees entitlement

16.  The Private Placement Memorandum set out MIML’s entitlement to “management fees” and “performance fees”.  Management fees represent the difference between the Subscription Price (paid by the Investors) and the purchase price of the Facebook shares (at which the shares were acquired indirectly for the plaintiff).  Performance fees are calculated at 20% of the net profits, ie the difference between the purchase price of the Facebook shares and their sale price.  Since the plaintiff has not advanced any argument that MIML should not be entitled to any fees, there is in my view a triable issue that the payments to MIML were justified insofar as they represented fees payable to MIML in respect of the Investors’ investment.

17.  An “administration fee” was also mentioned which was charged at 2% of the subscription price.  It was payable by the Investors to the plaintiff, not to MIML, but it was meant to represent the operating costs of the Fund.  On that basis I think a triable issue exists also with respect to this amount.

18.  The defendant has also pointed to provisions in the Articles of Association of the plaintiff on directors’ fees.  However there was nothing about directors’ fees in the Private Placement Memorandum.  Nor has the defendant produced any resolution or document showing that certain amounts had been fixed as her director’s fees or that the amounts appropriated in question represented her director’s fees.  In my judgment she has failed to raise any triable defence in this regard.

19.  Mr Darton for the plaintiff has produced a schedule setting out the various relevant figures and the amounts of administration, management and performance fees that could arguably be payable on this basis, totalling US$5,422,138.52.  Mr Yip has not raised any query on the numbers. Accordingly I consider that there is a triable defence to the tune of US$5,422,138.52.

(2)  Settlement agreements

20.  The defendant relies on 3 “settlement” agreements with the Investors as a defence.

(a)  The agreement with Sharp Gain

21.  First, the plaintiff and Sharp Gain entered into an agreement on 7 June 2013.  It provided for the plaintiff to make an interest-free loan of HK$17 million to Sharp Gain, to be repayable only when money is distributed by the plaintiff to Sharp Gain pursuant to the Private Placement Memorandum, at which point the distribution to Sharp Gain would be reduced by HK$17 million for settlement of the loan.

22.  Effectively therefore the agreement was for an advance to be made to Sharp Gain on account of its entitlement under the Fund. I fail to see how it can be said to be an agreement settling the defendant’s obligations and liabilities, if any, to the plaintiff.  Furthermore, first, the defendant was not a party to the agreement.  Secondly, clause 3.1 expressly provided for Sharp Gain to reserve all its rights under the Subscription Agreement and the Private Placement Memorandum.  Thirdly, clause 8.4 is an entire agreement clause that excludes any previous proposals, representations, warranties etc.

(b)  The agreement with Mr Liu

23.  The plaintiff, the defendant and Mr Liu entered into an agreement on 12 July 2013.  The background as recited in the agreement was that Mr Liu alleged that the defendant had failed to redeem the participating shares after the expiration of the lock-up period and failed to provide any statement to Mr Liu.  Mr Liu had demanded for the return of the proceeds from redemption of the Facebook shares and for the provision of statements. 

24.  The agreement was for the purpose of resolving “all and any claims and disputes whether as stated in the Demand Letters or arising out of or in connection with the [Private Placement Memorandum] and Subscription Agreement, which Liu might have against the [plaintiff] and/or [the defendant]”.

25.  The agreement provided for payment by the plaintiff in 3 instalments of a total sum of money to Mr Liu, with interest, less a performance fee calculated at 10% of the net profits.  The payment was stated to be consideration for Mr Liu agreeing with the plaintiff and the defendant not to take action against them in relation to the claims described in §24 above and the Subscription Agreement and the Private Placement Memorandum.

26.  The defendant asserted that the agreement with Mr Liu had been fully performed but this is contrary to what the correspondence between the defendant and Mr Liu’s solicitors prior to the appointment of provisional liquidators indicated.

27.  Assuming Mr Liu had been fully paid under this agreement, I can see an argument that he should be prevented from making any further claim against the company or the defendant.  It does not seem to me, however, that this agreement has the effect of precluding the plaintiff from claiming against the defendant for misappropriation of its assets.  The agreement does not expressly so provide.  Nor was the question of misappropriation by the defendant raised by Mr Liu or recited in the agreement as background.

(c)  The agreement with Mr Chiu

28.  On 23 July 2013 Mr Chiu and the defendant entered into a settlement agreement to resolve the issue of delay in the early redemption of his shares and in payment to him.  The defendant agreed to pay Mr Chiu a total sum of US$3,464,500 by nine instalments up to March 2014. In consideration, Mr Chiu agreed to forbear from taking actions against the plaintiff and the defendant.  Upon full payment, Mr Chiu was to assign to the defendant all his rights under the Fund and in respect of his participating shares.

29.  The evidence shows, however, that the defendant had only paid Mr Chiu the first two instalments and part of the third instalment under the settlement agreement, which resulted in Mr Chiu bringing an action for the balance and obtaining judgment in default against the defendant in Singapore.

30.  It seems to me self-evident that the defendant’s settlement agreement with Mr Chiu does not constitute a defence to the plaintiff’s claim against the defendant in the present action.

(d)  Overall discussions of settlement agreements

31.  For the reasons above I do not think that any one of these three agreements is in itself a defence to the plaintiff’s claims.

32.  Mr Yip for the defendant argued that by these agreements, the Investors, who are holders of all the participating shares in the plaintiff, had in effect ratified the acts and matters complained of by the plaintiff in this action and that their agreement was an arguable defence that should go to trial.  I do not accept this submission.  As Mr Darton pointed out, the participating shares were non-voting shares which did not carry any right to vote at any general meeting of the plaintiff.  Further, for there to be unanimous shareholders’ consent binding on the plaintiff company, it has to be shown that the shareholders agreed to the same thing.  As explained above, each of the three agreements had a different structure and contained very different provisions.  In particular, the agreement with Sharp Gain expressly provided for reservation of rights under the Private Placement Memorandum and Subscription Agreement; the agreement with Mr Chiu provided for the defendant to step into his shoes.  In any event, there is nothing to suggest that the Investors were aware of the defendant’s misappropriations in question at the time when they entered into those agreements.

33.  The defendant also contended that the existence of these three agreements means that the Investors’ application to the Cayman Islands court for the appointment of provisional liquidators and for winding up had been made in bad faith.  Mr Yip accepted however that he had no evidence to say that the agreements were not disclosed to the Cayman Islands court.  In any event, it seems to me that any complaint in that respect is a matter to be raised in Cayman Islands (if at all) and does not amount to a defence in the present action.

34.  I should mention that it did occur to me that if and to the extent that some or all of the Investors had already been paid any money under these agreements, it might produce a windfall for them if the plaintiff was permitted to recover its claims in full herein and to distribute such recovery to the Investors.  Mr Darton assured me however that, as officers of the Cayman Islands court, the liquidators would ensure that the Investors would not recover more than their entitlement under the Private Placement Memorandum.  Ultimately it seems to me that this is a matter to be resolved in the plaintiff’s liquidation rather than in these proceedings, in the light of concrete information of what the defendant or others have paid the Investors under those agreements.

(3)  Singapore action

35.  The defendant pointed out that Mr Chiu had instituted legal proceedings against her in Singapore and obtained default judgment for approximately HK$24 million and queried whether it would be just to allow him to pursue her indirectly through the present action.

36.  I do not think this raises any arguable defence.  The nature of the present action is quite separate from Mr Chiu’s claim.  Further, Mr Chiu’s action in Singapore was an action on the settlement agreement for the outstanding instalments of the settlement sum.  If the defendant paid Mr Chiu in full, then as stated above she would be entitled to an assignment of Mr Chiu’s rights under the Fund, which might well possibly act as a set-off against the plaintiff’s claims herein.  As things stand, however, there is nothing to show that Mr Chiu’s entitlement under the settlement agreement has been paid in full either voluntarily by the defendant or by execution of the Singapore judgment.

(4)  MIML as proper defendant

37.  Mr Yip for the defendant submitted that in the case of the first two misappropriations, ie the amounts of US$7.2 million and US$1,120,106.35, since the money was paid to MIML, that company rather than the defendant herein was the proper defendant to the claim.

38.  In my view, it may be true that plaintiff has a claim also against MIML, but this does not detract from the fact that the payments out to MIML were misapplication of the company’s assets procured by the defendant for which she is prima facie liable.

Disposition

39.  I give the plaintiff leave to correct the following typographical errors:

(1)  in §28(d) and §29(b) and Prayer §(2) of the statement of claim, amending the figure of US$1,102,106.35 to US$1,120,106.35;

(2)  in the summons, amending the figure of US$16,441,385.97 to US$16,459,385.97.

40.  For the above reasons, I order summary judgment to be entered for the plaintiff in the sum of US$11,037,247.45 (being the sum of US$16,459,385.97 as claimed in the summons as amended, less the arguable fees entitlement in the sum of US$5,422,138.52), together with interest thereon at the rate of prime rate plus 1% per annum from 26 May 2015 to the date hereof.

41.  There will be an order nisi that the defendant do pay the plaintiff the costs of the summons to be taxed if not agreed.