CHINA VERED FINANCIAL HOLDING CORPORATION LTD (formerly known as CHINA MINSHENG FINANCIAL HOLDING CORPORATION LTD) v. CENTRAL CHINA DRAGON GROWTH FUND SPC AND ANOTHER

HCA 1505/2023

[2023] HKCFI 2727

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1505 OF 2023

__________________

__________________

____________________

DECISION

____________________

1.  This is the 2^nd return date of the summons taken out by the Plaintiff (“P” or “China Vered”) on 19 September 2023. The Summons has attached thereto a draft order (the “Draft Order”). The Draft Order has a number of paragraphs. We are concerned with §3. P seeks thereby a mandatory injunction against the defendants (“D1” or the “Fund”, “D2” or “CCAM” and collectively “Ds”) that they“be directed to take all necessary steps to vote against the Scheme at the Scheme Meeting as to no less than 80% of the value of the BDH Bonds”. On 22 September 2023, Recorder Rachel Lam SC gave parties a condensed schedule for the filing of evidence, and adjourned that paragraph to 13 October 2023 before the Summons Judge – hence this hearing before this Court.

2.  As put by Mr Li, the background of the present case is “somewhat lengthy”.  That may be a mild way of putting in.  Despite the relative youth of the action, the hearing bundles have already amassed some 2500 pages[1].

3.  The following represent only the core of the background facts.

4.  The application concerns the BDH Bonds issued by China Beidahuang Industry Group Holdings Limited (“BDH”).  P and CCAM were co-investors of those bonds.  CCAM is an intermediary licensed by the Securities and Futures Commission.  Due to governance reasons which we are not concerned with, CCAM could only invest via a specific fund.  CCAM hence set up a segregated portfolio (the “Sub-Fund”) under D1 (itself a fund).  The contractual documents comprise a Private Placement Memorandum dated 8 December 2016 (“PPM”), an Appendix to the PPM dated 14 August 2017 (“Appendix”), the Memorandum and Articles of the Fund (the “Articles”), and the subscription form for the Participating Shares (collectively the “Contractual Documentation”).

5.  Pursuant to the same, P invested HK$120 million in the Sub-Fund in return for 80% of the Participating Shares.  D2 invested through nominees HK$30 million in return for 20%.  The Sub-Fund subscribed for HK$150 million of BDH Bonds.  CCAM holds the single Management Share, which is the only share with a vote, and acts as the fund manager of the Sub-Fund.

6.  Since 28 August 2018, BDH has defaulted.

7.  P’s position is that it wants a distribution of the BDH Bonds and does not consent to the further extension of the term of the Sub-Fund.  There is the other hand on the table a scheme of arrangement proposed by BDH (the “Scheme”). P says that according to its calculations, its interest would be better advanced by a distribution. 

8.  BDH has since commenced HCMP 397/2023 for the propounding of the Scheme (the “Scheme Proceedings”).  On 18 August 2023, the Company Judge Linda Chan J granted leave for BDH to convene a meeting under the Scheme (the “Scheme Meeting”) for the purpose of considering and, if deemed fit, approving the same.  A further hearing for the purpose of sanctioning the Scheme has been scheduled on 29 November 2023. 

9.  Whilst no date for the Scheme Meeting has been fixed, it may be imminent given the November hearing date.

10.  By §3 of the Draft Order, P seeks in gist a mandatory injunction directing D2 to vote against the Scheme at the Scheme Meeting.

11.  On the principles applicable to the grant of mandatory injunctions, I have been cited Music Advance Ltd v IO of Argyle Centre Phase I [2010] 2 HKLRD 1041 and Wu Wei v Liu Yi Ping (HCA 1452/2004, 30 January 2009). I respectfully agree with Deputy Judge Lisa Wong SC (as her Ladyship then was) that the need to show a high degree of assurance is linked to the issue of which course being of the lower risk of injustice.  I further respectfully agree with the observations made by Chow J (as His Lordship then was) in BMC Global Ltd v Tor Asia Credit Master Fund LP (HCA 2392/2016, 14 October 2016) (a) at §39, that if the interlocutory injunction would have the practical effect of finally disposing of the claim for an injunction, being a substantive claim in the action[2], the court is entitled to have a higher regard to the merits of the plaintiff’s case so far as relevant to that particular claim, and (b) at §42, that the grant of an injunction by the court is always a serious matter that must be fully justified, and that the court should not grant an injunction merely because it may be said that the defendant would suffer no prejudice.  The absence of prejudice is only one factor in the overall assessment of the balance of convenience.

12.  In relation to the procedural aspects of the propounding and sanctioning of a scheme of arrangement, the observations of Lord Millett NPJ in Re UDL Argos Engineering & Heavy Industries Co Ltd (2001) 4 HKCFAR 358 at §12 should be noted, that:

“As Chadwick LJ observed in Re Hawk Insurance Co Ltd [2001] EWCA Civ 241 at p.242, there are three stages in the process by which a Scheme of Arrangement between a company and its creditors or a class of its creditors may become binding on dissentients. First, there must be an application to the Court for an order that one or more meetings of the creditors be summoned. The application is made by the company ex parte. Secondly, the proposals must be put to the meeting or meetings, considered and approved by a majority in number representing 75% in value of the claims of those present and voting in person or by proxy. Thirdly, if (but only if) they are approved by the requisite majority, then the Court may sanction them, though it is not bound to do so.”

13.  On the function of the court during the sanction stage, I refer to the observations of Harris J in Re Mongolian Mining Corp [2018] 5 HKLRD 48 at §13, that:

“The function of the court at the hearing of a petition to sanction a scheme is to consider —

(a) whether the scheme is for a permissible purpose;

(b) whether creditors who were called on to vote as a single class had sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting;

(c) whether the meeting was duly convened in accordance with the court’s directions;

(d) whether creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;

(e) whether the necessary statutory majorities have been obtained;

and

(f) whether the court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the scheme.”

14.  For the following reasons, I refuse P’s application under §3 of the Draft Order:

(a)  As summarized above,CCAM is the manager of the Sub-Fund.  It holds the only Management Share which carries any voting rights;

(b)  I have considered the Contractual Documentation.  I accept Mr Maurellet’s submissions that contractually, P has no right to participate in the management of the Sub-Fund.  I point in particular to the following terms and matters:

(i)    The definition of “Shareholder” or “Investor” in the PPM, being:

“a person who is registered on the register of members of the Fund as the holder of one or more Participating Shares, unless the context otherwise requires;”

(ii)   P is hence a Shareholder;

(iii)  The following terms under the section of Risk Factors, that:

“Shareholders Will Not Participate in Management

A Shareholder has no right to participate in the management of the Fund and its Segregated Portfolios or in the conduct of its business.  There exists broad discretion to expand, revise, or contract the Fund’s investment activities and operations without the consent of the Shareholders.  Any decision to engage in a new activity could result in the exposure of the Fund’s capital to additional risks that may be substantial.”

(iv)  Under Article 1(a) of the Articles, voting right is attached to the Management Share;

(c)  P’s primary argument in response is that the term of the Sub-Fund had expired, that the Fund was in breach by extending the term beyond the contractually permitted 2 years, and hence was in further breach by failing to redeem the Participating Shares as required by the terms of the Contractual Documentation;

(d)  In support Mr Li points to the following terms in the Contractual Documentation:

“The [Sub-Fund] is a closed-end fund and has a term of one (1) year from the Initial Closing Date[3], which may be extended for a further one (1) year period as determined by the Directors upon the recommendation of the Manager (the ‘Term’)” (the “Term Clause”)[4];

“… Subject to any early redemption by the Fund, all the Participating Shares will be redeemed by the Directors as soon as practicable after the end of the Term (as extended as the case may be)” (the “Redemption Clause”)[5]; and

“[T]he Board shall have the power to divide in specie the whole or any part of the assets of the Company and appropriate such assets in satisfaction or part satisfaction of the Redemption Price”[6].

(e)  But in addition to the above, there are further the following terms which Mr Maurellet relies on:

(i)   Immediately following the Term Clause the following paragraph (also under the heading of “TERM AND TERMINATION OF SEGREGATED PORTFOLIO”, that:

“If not terminated earlier under the circumstances set out in the Private Placement Memorandum, the Segregated Portfolio will be terminated by resolution of the Directors after the end of the Term (as extended as the case may be), after redemption of all the Class E Participating Shares and Class F Participating Shares.”

(ii)  Under the heading of “REDEMPTION”, inter alia the following paragraph (the “Extension Clause”):

“The Directors in consultation with the Manager may delay the redemption and extend the Term: (i) if circumstances exist as a result of which in the opinion of the Manager, it is not reasonably practicable for the Fund to redeem the Participating Shares or (ii) if circumstances exist as a result of which in the opinion of the Manager, redemption of the Participating Shares would be materially prejudicial to Shareholders.”

(f)  In my view, the effect of the Extension Clause is quite clear.  The term “the Term” (in capital “T”) is used therein.  That same term is defined by the Term Clause, which includes both the initial year and the further year which the Directors may extend to upon the Manager’s recommendation.  When the Extension Clause talks about “delay the redemption and extend the Term” (again in capital “T”), it quite clearly means the Directors’ power to, upon existence of the stipulated circumstances, extend the Term beyond the 1^st and 2^nd year;

(g)  I have considered Mr Li’s submissions in this regard. Interpreting the Directors’ power to extend as above does not render the Term Clause otiose. The Extension Clause provides for the scenario where the stipulated circumstances exist,whic hthe Term Clause does not address.  The Sub-Fund being a close fund does not in my view affect the clear wording of those clauses.  I do not accept Mr Li’s contention that the Directors have no powers to extend the Term beyond 2 years, or that they require the Shareholders’ consent in doing so;

(h)  According to the evidence, the Term of the Sub-Fund has been extended, and, subject to the validity of P’s contentions, still subsisting.  Various notices of extension have been sent[7];

(i)  In the light of the evidence, P’s contentions are in the alternative, that either the Term expired upon the expiry of the 2^nd year after the inception of the Sub-Fund, or that[8]:

“Even if the Fund / CCAM allege for some kind of acquiescence (which is denied), the Term clearly expired no later than 20.8.2023 by reason that (i) on 25.7.2023, China Vered expressly indicated that it would not accept any further extension of the Sub-Fund; and (ii) the Term could not therefore be further extended once any alleged remainder of the Term expired on 20.8.2023.”

(j)  But if on the interpretation of the Contractual Documentation discussed above, the Directors/Manager did not require P’s consent before deciding on any extension, P’s alternative contention also falls away;

(k)  For the above reasons, there is great force in Mr Maurellet’s submissions that P has no role in the management of the Sub-Fund, and hence has no status in dictating how the voting rights attached to the Management Share are to be exercised;

(l)  A main theme of Mr Li’s submission is that Ds have no economic interest or reason for not voting as requested, so that justice requires the injunction being sought to be granted, even if P has failed to establish any high degree of assurance required;

(m)  The matter has to be looked at in the context.  As Mr Maurellet pointed out in the course of the hearing, by §3 of the Draft Order, P is not seeking distribution of its 80% in specie.  If the above interpretation of the Contractual Documentation is correct, P simply has no case for any injunction. It has agreed and subscribed to a contractual regime which dis-entitles it to participate in the management of the Sub-Fund.  That is a regime which is binding on it if still subsisting;

(n)  On the evidence before me, I am not satisfied that P has established on merits any higher degree of assurance that it is entitled to the injunction sought.  In fact, on the evidence, I am prepared to go further and find that P has failed to establish any good arguable case on its entitlement to the injunction being sought;

(o)  In any event, the alleged lack of economic interest in Ds’ part is in my view neither here nor there.  It is not unusual for a trustee or manager of a fund to have no economic interest in the assets of the funds (save for professional fees, which may or may not be payable out of the funds’ assets). That does not by itself gives the fund-holders, or Shareholders in the present case, any managerial power or power to direct the manager on how voting rights should be exercised;

(p)  I further repeat the observations of Chow J in BMC Global, that the court should not grant an injunction merely because it may be said that the defendant would suffer no prejudice;

(q)  Further and any event, as Mr Maurellet has pointed out, granting the injunction being sought will in all likelihood result in the Scheme being vetoed, so that it would not even reach the sanction stage.  This is a factor which I can take into account, if necessary on balance of convenience.

(r)  That in fact leads to a further point.  I respectfully repeat the observations of Lord Millett NPJ in Re UDL cited above. Even if the Scheme is approved during the Scheme Meeting, it will still have to be sanctioned by the Court.  I have considered the versions of returns comparison (as between a liquidation scenario and a Scheme scenario) which parties have put forward[9]. In the course of the hearing, Mr Li accepted that those competing versions of returns comparison are relevant and can be considered during the sanction hearing.  Mr Maurellet has taken this Court to the evidence showing P’s stance and allegations that P would recover “significantly more in the liquidation scenario”, and how it says the Scheme is commercially unsound.  If the positions were as stark as those put forward by P, the “intelligent and honest man” test as explained by Harris J in Re Mongolian Mining Corp may not be passed, leading to the Scheme not being sanctioned by the Court.  I accept Mr Maurellet’s submissions that on P’s own case, P has failed to establish any irreparable harm even if the injunction is refused;

(s)  Mr Li then seeks to rely on the alleged prejudice on P’s part in losing the opportunity to have its voice heard if D2 is not directed to vote according to its will.  But the position becomes circular, in the sense that if D2 has the contractual power to extend the Term beyond 2 years without P’s consent, so that the Sub-Fund is still subsisting, P will have no contractual power to dictate on how D2 is to exercise the voting right attached to the Management Share;

(t)  The matters discussed above are in my view sufficient for this Court in the exercise of its discretion to refuse the application;

(u)  There is further the point of delay.  In so far as P seeking to rely on any alleged breach on D2’s part in extending the Term of the Sub-Fund beyond the contractually permitted 2 years, that alleged breach took place some 4 years ago;

(v)  On the question of the Scheme, BDH on 2 April 2023 issued a public announcement announcing a proposed restructuring, that:

“On 29 March 2023, the Company and the Investor entered into the legally binding Term Sheet in connection with the Proposed Restructuring. Pursuant to the Term Sheet, the Company will conduct the Proposed Restructuring which involves (i) the Subscription and (ii) the Creditors’ Scheme between the Company and the Scheme Creditors (including the Scheme Share Issue). The completion of the Proposed Restructuring is subject to the satisfaction (or waiver, as the case may be) of the Conditions Precedent.”

(w)  Mr Li has taken the Court to the correspondence P had with D2 between June and August 2023.  He complains that D2 has been using equivocal language, so that P only took out the Summons after D2’s last reply of 25 August 2023;

(x)  In context, P should by latest in early April become aware of the proposed restructuring.  The Term Sheet was said to be legally binding.  P saw fit to only engage D2 on correspondence.  P further saw fit to write a long letter dated 11 July 2023 to the Securities and Futures Commission complaining against D2.  I accept Mr Maurellet’s submissions that what could and should have been done was for P to have issued an ultimatum, and in the absence of any satisfactory answer, make the application.  The delay has resulted in a compressed timetable for all parties, and does not sit well with P’s present contention of urgency;

(y)  If necessary, I would also have refused the application on delay.

15.  For the above reasons, I refuse the application.  I am not satisfied that any grant of the mandatory injunction being sought represents a course bearing the lower risk of injustice, or that justice requires it to be granted; I am in fact of the view that the reverse is true.  In fact, as said above, I would be prepared to go further and find that P has failed to establish any good arguable case on its entitlement to the injunction being sought.  

16.  There are quite a lot of other detailed and factual allegations that parties have put forward.  Serious allegations of bad motives or bad faith have been made.  They are all facts sensitive.  This is not the stage for them to be resolved.  Nor should that be done on affirmations, particularly when Ds have only been offered very condensed time to prepare their case in opposition.  But based on the matters discussed above, I am of the view that there are sufficient grounds, independent of those allegations, upon which the application for §3 of the Draft Order ought to be dismissed, and I so order.