TRANSOCEAN MARITIME GROUP HOLDINGS (HK) CO LTD AND OTHERS v. TRANSOCEAN MARITIME GROUP HOLDINGS CO LTD AND OTHERS

HCA 2169/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2169 OF 2011

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D E C I S I O N

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Background

1. Many allegations and counter-allegations have been made by the parties in this action against each other, but at the heart of the matter, this is a dispute between the 3rd plaintiff Mr Wu Jun (“WJ”) and the 3rd and 4th defendants Ms Jiang Yan and Mr Liu Qiang (respectively “JY”and “LQ”) for control of the business carried on by a company in Shanghai named 考麥科船舶技術(上海)有限公司 (“Shanghai Company”). The Shanghai Company is held through a structure involving two BVI companies, namely the 1st plaintiff (“TMG”) and the 2nd plaintiff (“KMT”). The dispute has led to 6 sets of proceedings instituted respectively in the BVI, Shanghai and Hong Kong, a Mareva injunction granted ex parte on 21 December 2011 by the court in this action, and 5 pending summonses which were issued by the parties for determination. Numerous affidavits have been filed and documents making up 14 bundles have been exhibited.

2. In the Hong Kong action, the plaintiffs seek from the defendants US$79,751.95 and HK$2,855,264.85 as money which had been transferred from the bank accounts of TMG and KMT in Hong Kong; a declaration that the transfer of the shares in the Shanghai Company to the 2nd defendant (“New KMT”) is invalid or void; and an injunction to restrain New KMT and the 1st defendant (“New TMG”) from disposing of or dealing with the Shanghai Company and its assets in Shanghai.

3. On 21 December 2011, the Hong Kong court granted, on an ex parte basis, a Mareva injunction and ancillary disclosure orders against all the defendants named in this action. In issue is whether these orders should be continued, or discharged.

4. It is not disputed that prior to March 2011, WJ, JY and LQ held respectively 33%, 34% and 33% of the issued shares of TMG. TMG, a BVI company, held 90% of the issued shares of KMT, also a BVI company. The 5th defendant Cai Ruifeng (“Cai”) and 6th defendant Tao Jianyuan (“Tao”) held 5% each of the issued shares of KMT. KMT in turn held 100% of the equity interest of the Shanghai Company.

5. It is also not disputed that prior to March 2011, the board of directors of TMG was made up by WJ, JY and LQ, whereas WJ, JY, LQ, Cai and Tao constituted the board of KMT. The executive director and registered legal representative of the Shanghai Company was JY. The only assets of TMG and KMT are their bank accounts in Hong Kong and their direct and indirect shareholding in the Shanghai Company. Other than their shareholding in the Shanghai Company, TMG and KMT have no other business activity. The Shanghai Company carries on business in Shanghai, of producing designs and drawings used in the production of ships.

6. There was an obvious fall out between WJ and LQ by the end of 2010. WJ claims that by March 2011, he had been in discussion with JY for JY to sell her 34% shareholding in TMG to WJ, so that WJ will have the majority interest in and control of TMG. He claims that agreement was reached with JY on 21 March 2011, for WJ to buy out JY’s shares in TMG for RMB 3 million (“Agreement”). According to WJ, an instrument of transfer was signed by JY and himself on the night of 21 March 2011 in respect of JY’s sale of all her shares to WJ (“Transfer”). The sum of RMB 3 million was immediately remitted by WJ to JY’s bank account the same night.

7. It is WJ’s case that the next day, on 22 March 2011, a meeting of the directors of TMG was held, to approve: (1) JY’s Transfer of shares to WJ; (2) JY’s resignation as a director of TMG; and (3) the appointment of WJ’s wife (“Wife”) as director. WJ claims that the Transfer was entered in the share register of TMG “on or about 22 March 2007”, and that all procedures for the Transfer of JY’s 34% shareholding in TMG were completed.

8. WJ claims that on the same day on which the meeting of TMG took place on 22 March 2011, a shareholder’s meeting of KMT was also held, at which WJ, claiming to act on behalf of TMG, appointed 3 of his nominees to be the additional directors of KMT. A meeting of the board of directors of KMT then followed, whereby WJ and his 3 nominees accepted JY’s resignation as a director of KMT, and WJ was appointed as the executive director of the Shanghai Company in place of JY.

9. It is WJ’s case that under pressure from LQ, JY reneged on the Agreement and refused to acknowledge her resignation as a director of TMG and KMT and her Transfer of shares to WJ. He claims that JY and LQ further proceeded to wrest control of the Shanghai Company out of his hands, prevented WJ’s access to the office of the Shanghai Company, revoked his authority to operate the bank accounts of TMG and KMT in Hong Kong, and wrongfully transferred funds from the TMG and KMT accounts to the accounts of JY and LQ. JY and LQ further procured companies to be set up in Hong Kong with names virtually identical to those of TMG and KMT, namely Transocean Maritime Group Holdings Co Ltd (ie New TMG) and KMTC Holding (HK) Co Limited (ie New KMT), and transferred funds to these companies from the accounts of TMG and KMT in Hong Kong. The total funds said to have been so transferred from TMG and KMT to the defendants were US $79,751.95 and HK$2,855,464.85.

10. WJ further alleges that without his knowledge or consent, on 16 September 2011, the defendants procured documents to be signed, by Cai on behalf of KMT and Tao on behalf of New KMT, to transfer all KMT’s shares in the Shanghai Company to New KMT for a purported price of RMB 5,848,180.46(“Shanghai Transfer”). According to WJ, no money was ever paid to KMT for the Shanghai Transfer.

11. On JY’s part, she claims that the Agreement she made with WJ on 22 March 2011 was only conditional. WJ had agreed with her not to oust the senior management and not to alter the technical team of the Shanghai Company within one year, but according to JY, WJ had acted in breach of these conditions by seeking to dismiss LQ on the day following the Agreement. JY claims that she had already informed WJ on 22 March 2011 that she would not sell her shares to him, and that on 24 March 2011, she and WJ had mutually agreed not to proceed with the Transfer.

12. It is claimed by JY and LQ that the board resolutions relied upon by WJ and which were claimed to have been passed on 22 March 2011 are void and ineffective, for lack of proper notice to LQ as the director entitled to receive notice of the directors’ meeting. LQ, Cai and Tao also claim that they never received notice of the purported meeting of the shareholders of KMT held on 22 March 2011 for the appointment of additional directors and the acceptance of JY’s resignation as director.  According to JY, a meeting of WJ, JY, LQ, Cai and Tao who comprised the shareholders of KMT was convened and held on 7 April 2011. WJ’s proposal for his purchase of JY’s and LQ’s shares in TMG was discussed, but no agreement could be reached, and WJ left the meeting. According to JY, a resolution of the shareholders of KMT was passed after WJ’s departure, to remove him as a director of KMT. According to JY, the sum of RMB 3 million which WJ had transferred to JY for her shares in TMG was returned to WJ on 10 April 2011.

13. In July 2011, WJ engaged his BVI lawyers (“Maples”) to act as the registered agent of TMG and KMT in the BVI in place of their former agents. On 30 September 2011, WJ caused TMG to allot 150,000 new shares to himself (“Allotment”), thereby constituting himself the holder of 91.75% of the shares of TMG. Maples issued certificates in November 2011 as the registered agent of TMG and KMT, stating that WJ and the Wife were the only 2 directors of TMG, and that WJ was the sole director of KMT. WJ and the Wife passed a resolution of the directors of TMG to appoint WJ as its representative in the shareholders’ meeting of KMT of 8 November 2011, at which meeting all directors of KMT except WJ were removed from the board.

14. In April and May 2011, each camp took steps to file documents in Shanghai to seek recognition of its representative, namely WJ and JY respectively, as the legal representative of the Shanghai Company and to secure control of the operations of the Shanghai Company. The defendants claim that WJ forged JY’s signature on a document prepared for the purpose of applying to the Shanghai Administration of Industry and Commerce (“Shanghai Administration”) for a new seal to be made for the Shanghai Company. This is denied by WJ. The defendants also claimed that between April and June 2011, WJ transferred money from the Shanghai Company’s bank account to his own account and for his own use, in a sum of RMB 3.6 million.

15. The defendants admit that as a result of WJ’s attempts to oust them from TMG, KMT and the Shanghai Company, they effected “self-help measures”, but sought to justify their actions as steps which were required “to protect the interests of the companies”. The self-help measures included changing the authorized signatories for the bank accounts of TMG and KMT in Hong Kong, transferring moneys out of the accounts of TMG and KMT to bank accounts of JY, LQ and New TMG (which was controlled by the defendants), and transferring the shares in the Shanghai Company from KMT to New KMT which they set up.

16. Further, between 18 October 2011 and 13 December 2011, the defendants initiated 3 sets of proceedings in the BVI, including JY’s filing of a Stop Notice in respect of her 34% shareholding in TMG. The 1^st BVI Action was brought by JY against WJ and TMG, to seek declarations from the BVI court as to (inter alia) the shareholding of TMG and that the change of registered agent to Maples was unlawful. The 2^nd BVI Action was instituted by JY, LQ, Cai and Tao against KMT and WJ, for declarations that they were the only directors of KMT and that the change of registered agent to Maples was unlawful. The 3^rd BVI Action (brought later in February 2012) was commenced by JY and LQ against TMG and WJ, for an order to set aside the appointment of the Wife as a director of TMG, an order to reinstate LQ as director, a declaration that the resolutions passed by the board and shareholders in the absence of the defendants were of no effect, an order to set aside the Allotment of shares in TMG on 30 September 2011, and an order for WJ to be bought out as a shareholder.

17. Against this background, WJ applied for and obtained on 21 December 2011 a Mareva injunction to restrain the defendants from dealing with and disposing of their assets and the shares of the Shanghai Company, nor to diminish the value of the Shanghai Company. On 6 January 2012, the defendants applied to set aside the ex parte injunction and disclosure orders on 21 December 2011, as well as the order granted for leave to serve the Writ issued in these proceedings on JY, LQ, Cai and Tao outside Hong Kong. They further applied to stay these proceedings in Hong Kong.

Should leave to serve out of the jurisdiction be set aside?

(1)Whether the action was authorized by TMG and KMT

18. The defendants argued that this action brought by WJ in the name of TMG and KMT against them has not been properly authorized.  This depends on the merits of WJ’s claim as the majority shareholder of TMG by reason of the Transfer of JY’s shares to him on 22 March 2011, and whether JY and LQ have been validly removed as directors. In these regards, and according to the decision of the House of Lords in Seaconsar Far East Ltd v Bank Markazi [1994] 1 AC 438, the plaintiffs only have to show that there is a serious issue to be tried in that there is a substantial question of fact or law or both, arising on the facts disclosed by the affidavits, which the plaintiffs bona fide desire to have tried. Such test was applied by the Court of Appeal in Wo Fung Paper Making Factory Ltd v Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346.

19. In respect of TMG, the defendants claim that the resolution passed at its purported board meeting held on 22 March 2011, whereby the Wife was appointed as a director of TMG and the resignation of JY as a director and the Transfer of shares from JY to WJ were approved, is invalid, since no notice of the meeting had been given to JY and LQ, and neither of them had in fact attended any meeting on 22 March 2011. The defendants also claim that the Transfer had not been properly entered on TMG’s electronic register, which is its original register of members according to Articles 2.6 and 8.12 of TMG’s Articles of Association.

20. In respect of KMT, the defendants claim that the shareholders’ resolution dated 19 April 2001, which was purportedly signed by WJ on behalf of TMG (appointing the Wife and 7 other nominees as directors), was invalid as the resolution was never circulated to Cai and Tao, the 2 remaining shareholders of KMT. Notice to them as shareholders is required under Article 7.21 of KMT’s Articles of Association. The defendants further claim that there was no valid board resolution of TMG to authorize WJ’s signature of the purported shareholders’ resolution of KMT on TMG’s behalf. For the same reasons, it is claimed that the purported minutes of the shareholders’ meeting of KMT on 8 November 2011, whereby all directors except WJ were removed, are invalid.

21. Expert evidence has been adduced on matters of BVI law. Under s 41 of the Business Companies Act 2004 (“Act”), the register of members of a company may be in such form as the directors of the company may approve. Under ss 42 (1) and (2) of the Act, the entry of the name of a person in the register of members as a holder of a share in the company is prima facie evidence that legal title in the share vests in that person. By virtue of s 54 (8) of the Act, the transfer of a registered share is effective when the name of the transferee is entered in the register of members.

22. According to the expert evidence of Mr. Bickley, the plaintiffs’ expert, a company is required under the Act to register a transfer of shares when presented with a transfer form, and a transferee of a share becomes a shareholder when the register of members of the company is updated to reflect him as the holder of the shares. According to Mr. Bickley, neither the Act nor the memorandum and articles of TMG specifically require a resolution of directors to approve a transfer of shares in the company, and the board has no power under the memorandum and articles of TMG to decline to register the Transfer from JY to WJ, as the shares in question were credited as fully paid.

23. On the evidence filed, WJ was registered as the holder of the 17,000 shares transferred from JY on 22 March 2011. The register of members produced by WJ is stated to be the original register and bears the Common Seal of KMG.

24. I accept the evidence of Mr. Bickley, that once registered as a holder of the majority of the shares in TMG, WJ was entitled to pass resolutions to appoint and remove directors of TMG, and to ratify any possible unauthorized actions of any director which result from technical deficiencies in his or her appointment, as a result of inquorate meetings or otherwise. Further, since WJ controlled the board of TMG by ownership of the majority of its shares, he controlled the board of KMT and had the authority, in his capacity as director of TMG and KMT, to initiate proceedings on behalf of these companies against the defendants.

25. Whether the original register of members relied upon by WJ can be proved to have been improperly produced or re-created (as the defendants suggest) will have to await trial, when the witnesses can be cross-examined. Similarly, questions of whether the Agreement made between WJ and JY on 21 March 2011 was conditional (as JY claims), whether it was agreed that JY would give notice of the meetings on 22 March 2011 to LQ, and whether there was a subsequent agreement not to proceed with the Transfer, are all for cross-examination and determination at trial. At this stage, I am satisfied that there is a serious issue to be tried on the plaintiffs’ right to commence these proceedings on their claims of misappropriation of the assets of TMG and KMT.

(2) Whether the claims fall within Order 11 rule 1

26. The plaintiffs have to show that they have a good arguable case that their claim is within one of the Order 11 gateways for service outside Hong Kong(Seaconsar Far East Ltd v Bank Markazi [1994] 1 AC 438). When there are disputes of fact, the practice of the court is to look primarily at the plaintiff’s case and not to attempt to try disputes of fact on affidavit. However, the court should reach a provisional conclusion, based on its analysis of the weight of the evidence, including the inherent probabilities of the claim, the detail and precision of the claim and the evidence in respect of it, whether it is a bare claim or one supported by independent evidence (paragraph 11/1/8 Hong Kong Civil Procedure 2012).

27. Apart from New KMT being a Hong Kong company, the plaintiffs rely for their claims against the other defendants upon Order 11 rule 1 (b), (c), (f) and (p). It is claimed that TMG and KMT have funds in their bank accounts in Hong Kong, which are claimed to have been wrongfully transferred and removed by the defendants to the accounts of JY, LQ and New TMG, the former being in breach of their fiduciary duties as directors of TMG and KMT. Whether the money transferred had been properly used for the legitimate purposes of TMG and KMT and for the operations of the Shanghai Company, as the defendants claim, will be matters for investigation at trial. I am satisfied that there is a good arguable case that TMG and KMT have claims against the defendants for an order to restrain them from further wrongful dealings in their funds in Hong Kong, or for their breach of fiduciary duty or trust arising out of their dealings in and transfer of the funds of TMG and KMT in Hong Kong, within rule 1 (b) (f) and/or (p).

28. In relation to WJ, the claims he made in the Indorsement of Claim and affirmations put before the ex parte judge on 21 December 2011 are on the basis of interference with his economic interests as shareholder, director and legal representative of TMG, KMT and the Shanghai Company respectively. WJ relies on the defendants’ wrongful transfer of the funds in the accounts of TMG and KMT, as well as the defendants’ acts of setting up New KMT in Hong Kong, with a name virtually identical to that of KMT, for effecting the Shanghai Transfer and receiving the funds of TMG and KMT.  There are arguably unlawful acts in Hong Kong which can support WJ’s case for unlawful interference.

(3)Whether Hong Kong the appropriate forum

29. Where a plaintiff asks for the exercise of the Court’s discretion in its favour by granting leave to serve process on a defendant out of the jurisdiction, the question whether leave will be given, or will be set aside upon application by the defendant, will depend upon the plaintiff showing Hong Kong to be the most appropriate forum for the trial (paragraph 12-003 Dicey Morris & Collins, The Conflict of Laws 14^th edition). The burden of proof to establish this is on the plaintiffs in this case (Spiliada Maritime Corp v Consulex Ltd [1987] AC 460). It is not sufficient for the plaintiffs to suggest that there is no appropriate forum elsewhere “by a process of negative evaluation” of some other forum (Daewoo Hong Kong Ltd v Mana Maritime Inc [1997] HKLRD 1264).

30. There is no dispute that the appropriate forum is one with which the action had the most real and substantial connection, and the court looks at factors to show where a trial of the action can most appropriately be conducted.

31. In this case, I am not satisfied that the plaintiffs have been able to show that Hong Kong is clearly and distinctly the most appropriate forum for the trial of the action. The dispute has very little connection with Hong Kong. WJ, JY, LQ, Cai and Tao who are the material witnesses for trial are all resident in China. The Shanghai Company was set up and registered in Shanghai. Its business is operated in and from Shanghai. It has no office or staff in Hong Kong.

32. Questions of whether WJ, JY, LQ, Cai and Tao had acted in breach of their fiduciary duties as directors of TMG and KMT are governed by BVI law. TMG and KMT are incorporated under the laws of BVI, and the BVI courts are best suited to decide on questions as to the control and extent of the powers of management of TMG and KMT, and where and how the registers of members of TMG and KMT should be kept and updated. Counsel for the defendants highlights the fact that the law of the place of incorporation of TMG and KMT governs the right of a person to bring a derivative action for alleged wrongs done to the companies, and the right of shareholders to sue on behalf of the companies. Counsel points out that in these respects, BVI law differs from Hong Kong law in that it does not allow multiple derivative actions.

33. It has been argued that the Hong Kong court is capable of dealing with either BVI or PRC laws under expert evidence. As the court emphasized in Rambas Marketing Co LLC v Chow Kam Fai David [2001] 3 HKC 250 at 255C:

“In cases where substantial and difficult issues of foreign law are involved, the court may well be compelled to stay the proceedings where there is an appreciable risk that justice will not be done. This risk may in certain circumstances be attributable to factors such as expense, but in the usual case would arise where the court was somehow concerned with the possibility that it might reach a wrong conclusion on an important aspect of foreign law… The courts in Hong Kong (particularly the Commercial Court and the Admiralty Court), and given the international identity and nature of the type of commercial litigation and litigants here, are often accustomed to dealing with aspects of foreign law. It does not therefore follow at all once it is shown that issues of foreign law arise, that this will necessarily be a powerful, much less a decisive, factor in favor of a stay. On the other hand, however, it is unrealistic not to acknowledge the fact that complicated issues of foreign law may arise with which the Hong Kong courts will not feel itself confident to deal. It is all a matter of degree.”

34. At the time of the commencement of these Hong Kong proceedings, 2 separate actions were already on foot in the BVI in addition to JY’s Stop Notice. These BVI proceedings seek the determination of the status of JY as a member in respect of her 34% holding in TMG, and the status of WJ, JY, LQ, Cai and Tao as directors of KMT, as well as for WJ’s shares in TMG to be bought out by JY and LQ. Counsel for the defendants points out that s 168A of the Companies Ordinance of the laws of Hong Kong is not applicable to TMG and KMT, as they are not registered in Hong Kong. Apart from that, the BVI proceedings deal with matters which are the exact focus of the dispute between the parties in this action.

35. The agreement for the Shanghai Transfer, in respect of which the plaintiffs seek relief or to seek aside, was signed in Shanghai and governed by PRC law. It is registered with the Shanghai Authority. Questions of the validity and binding effect of the Shanghai Transfer will be governed by PRC law. Evidence for the valuation of the assets of the Shanghai Company will be obtained in Shanghai. Issues as to whether LQ, Cai and Tao were in breach of their duties owed to TMG and KMT when they procured the Shanghai Transfer are governed by the laws of the place of incorporation of the companies, namely BVI laws.

36. In these modern times, particularly in view of the evidence on the business activities of WJ and JY outside China, I doubt that it can be said in earnest that it would not be possible or convenient for WJ, JY and the other key witnesses to travel to BVI for trial of any proceedings there.

37. Having considered all the above circumstances, I cannot see how the Hong Kong Court can be said to be clearly and distinctly the most appropriate forum for determination of the real and substantial issues to be dealt with at trial of this action.

38. In relation to New KMT’s application for stay, I am satisfied that it has discharged its burden of showing that both BVI and Shanghai are clearly more appropriate than Hong Kong as a forum for the trial of the issues, being: the existence, terms and effect of the Agreement; the validity of the various resolutions of TMG and KMT; the propriety of the transfer of moneys from TMG and KMT to New KMT; the validity of the Shanghai Transfer; and whether JY, LQ, Cai and Tao were in breach of duties as directors. The proper law of the place of incorporation of TMG, theproper law of the agreement for the Shanghai Transfer, the locus of the alleged contractual breach and damage, the availability of witnesses and documentary material, all point to trial in either Shanghai or BVI. As Stone J pointed out in Xinjiang Xingmei Oil-Pipeline Company Ltd v China Petroleum & Chemical Corporation HCCL 6/2004 when referring to construction of contractual provisions under foreign law (in that case PRC law), “plainly no court applying another system of law can perform this function as surely as the ‘home’ court”.  Stone J also referred to the passage in Dicey, Morris & Collins 14^th ed p 476 fn 10, which is relied upon by counsel for the defendants:

“If there are 2 such fora, both more appropriate than England, a stay may be granted: there is no requirement that one be more appropriate than the other.”

39. As Hong Kong is not the more appropriate forum, the action against New KMT should be stayed.

Should the Mareva injunction be set aside?

40. The defendants rely on various grounds to claim that the ex parte Mareva injunction should be set aside. Having considered the evidence, I accept that the plaintiffs were in breach of their duty to make full and frank disclosure of facts which were material for the ex parte judge to know, to enable him to exercise his discretion properly. It is clear that the correct test for materiality is as set out in Wardle Fabrics Ltd v G Myristics Ltd 1984 FSR 263 (and applied in Citibank NA v Express Ship Management Services Ltd [1987] HKLR 1184): It is not simply whether, if the non-disclosure had not occurred, the ex parte judge would nevertheless have made the order, but whether the facts not disclosed, being relevant, should have been put in the scales.

41. It is clear from the evidence that there is a dispute between the parties on the Agreement: whether the Transfer made pursuant to the Agreement had been put into effect, or whether the Agreement had been cancelled by further mutual agreement. WJ’s claim is that the Agreement and the Transfer had been “completed by 22 March 2011” (paragraph 27 of WJ’s first affirmation made on 21 December 2011). On his case, the Transfer was entered into TMG’s register, and all the statutory records of TMG and KMT had been passed to him. In paragraph 29 of his affirmation of 21 December 2011, WJ claims that “on or about 22 March 2011, the (Transfer) of shares was entered into (TMG’s) register”.

42. According to WJ, he had sent his staff to deliver copies of all the documents relating to the Transfer and changes in directorship of KMT and TMG to the registered agent of TMG in Shanghai (“Richful”) “on or about 23 March 2011”, together with an updated copy of the register of members. WJ claims that Ms Lei of Richful (“Lei”) informed WJ’s staff that “all procedures have been duly completed”. According to WJ, Lei also informed him that he should keep the original of the documents and the registers of TMG and KMT.

43. According to Lei, what actually happened was that on 23 March 2011, one Ms Shi acting on behalf of WJ brought to her documents on the Transfer and the change of directors of TMG and KMT, and asked her to process these documents. Lei claims that she found that JY’s signature on the Transfer was not witnessed, and on making inquiries with JY on the telephone, Lei was informed by JY that she did not intend to transfer her shares to WJ and that she had not attended the board meetings as stated in the minutes of TMG and KMT. According to Lei, she refused the request to process the documents, and so informed Ms Shi.

44. Lei’s evidence is in fact supported by the letter issued by WJ’s own solicitors on 12 July 2011, which referred to Lei’s “refusal” to file the documents presented to her on 23 March 2011, and also referred to the filing as being “instrumental” to the completion of the Transfer. The claim made in the letter of 12 July 2011 from WJ’s solicitors contradicts the claim made in WJ’s affirmation to support his application for the ex parte Mareva injunction on 21 December 2011.

45. On WJ’s own admission in his solicitors’ letter of 12 July 2011, the Transfer was not completed on 23 March 2011. If any distinction is to be drawn between Lei’s refusal to file the updated copy of the register produced by WJ, and Lei’s refusal to enter the Transfer into the register of members, then the distinction should have been made clear in the ex parte application.  Counsel for the defendants referred to in paragraphs 53 and 54 of WJ’s affirmation, to argue that Lei’s “refusal” had been adequately disclosed.  There, WJ referred to his correspondence with Richful on 20 and 27 April 2011, and set out Richful’s refusal to “update” the company records.  To say the least, WJ’s affirmation of 21 December 2011 was misleading as to whether the Transfer was in fact duly entered into the register of members on 22 March 2011. It was in any event inaccurate for WJ to state that Lei had on 23 March 2011 represented that all procedures had been duly completed in relation to the Transfer. The fact of whether the Transfer was duly entered in the register is clearly relevant to the weighing of WJ’s claim as the majority shareholder of TMG pursuant to the Transfer, and whether damage was sustained by him in such capacity as a result of the allegedly wrongful acts of the defendants.

46. In relation to WJ’s claim made in his ex parte application as the holder of 91.75% of the issued share capital of TMG, WJ had disclosed that this was as a result of the combined effect of the Transfer and the Allotment of 150,000 new shares which WJ had caused TMG to allot to himself on 30 September 2011, after WJ had appointed Maples as the new registered agent of TMG and secured control of TMG. The Allotment was apparently made for the purpose of diluting the shareholding of the other holders of TMG, and also to take advantage of Article 7.5 of the articles of Association of TMG enabling shareholders holding at least 90% of the shares to waive notice of a shareholders’ meeting.

47. What WJ failed to disclose in his ex parte application was that the Allotment was for the issue of the 150,000 new shares to himself at US $0.01 per share. The only asset of TMG is its shares in KMT, and the only asset of KMT is its shareholding of the Shanghai Company. It is WJ’s own case that the shares of the Shanghai Company are worth at least RMB 17 million, on its net asset value. On this basis, the Allotment to WJ for US $1,500 is at a gross undervalue. The defendants claim that the Allotment is tantamount to fraud on the other shareholders of TMG. According to WJ, he did not come to know about the Shanghai Transfer until November 2011, so the loss of TMG’s “crown jewel” is no answer to the Allotment for US$1,500 in September 2011.

48. Further, WJ had complained of transfers of moneys made by the defendants from the bank accounts of TMG and KMT between July 2011 and November 2011. However, according to the defendants’ evidence, WJ failed to disclose that between April 2011 and June 2011, during the time when WJ had obtained the control of the Shanghai Company, he had likewise made transfers or withdrawals of at least RMB 3.6 million from the funds of the Shanghai Company, to his own account or for his own personal use. WJ has since sought to justify part of these withdrawals as salary payments made on behalf of the Shanghai Company totalling RMB 1.9 million, and others as payments made “in the ordinary course of business for the Shanghai Company”. The alleged payments of salary are contradicted by documents produced by the defendants, which show that the salary of employees of the Shanghai Company had been paid by the defendants since at least 1 May 2011. Even on the evidence produced by WJ, the withdrawals he made include a loan to himself, reimbursement of his unparticularised expenses, and unparticularised “travel expenses” of WJ’s solicitors in the sum of RMB 100,000. The alleged salary payment of RMB 1.9 million is only evidenced to the extent of RMB 172,750.31, at most.

49. On the evidence so far filed, it would appear that WJ’s withdrawals of moneys from the accounts of the Shanghai Company would need to be properly justified, and it lies ill in his mouth to complain of unauthorized withdrawals of moneys made by the defendants from the accounts of TMG and KMT, when he had himself made use of the Shanghai Company’s funds in the same indiscriminate manner, and had failed to make this known to the ex parte judge.

50. The defendants have referred to other facts which they say are material and have been withheld from the court on 21 December 2012. They point out that whilst the plaintiffs rely on their claim that US$79,751.95 and HK$2,855,474.85 had been withdrawn from the accounts of TMG and KMT by the defendants, the plaintiffs failed to disclose that as the bank statements relied upon by the plaintiffs themselves show, monies had also been deposited by the defendants into the same accounts over the same period. After giving credit to these deposits, the defendants claim that the net amounts withdrawn are US$32,809.77 and HK$1,285,129.06.

51. The plaintiffs say that most if not all of the matters relied upon by the defendants as non-disclosure are disputed facts which cannot or should not be resolved at this stage. However, it is trite, and can hardly be disputed, that a party who comes to the court for equitable and discretionary relief must come with clean hands. The non-disclosure of WJ’s withdrawals from and personal use made of the funds of the Shanghai Company, and of the material fact of Richful’s refusal to process the Transfer on 23 March 2011 (which is apparent from WJ’s own case), and the fact that the Allotment was either not paid for by WJ or at a gross undervalue (which has not been disputed in WJ’s evidence) are in my judgment sufficient to lead to a discharge of the ex parte Mareva and disclosure orders made on 21 December 2011.

Should a fresh Mareva injunction be granted?

52. I am not satisfied with the explanation given by the defendants that they had only employed “self-help” measures as a last resort. Although the agreement for the Shanghai Transfer was only signed on 16 September 2011, they had taken steps as early as 31 May 2011 to set up New KMT which was eventually to take up the shares in the Shanghai Company. As counsel for the plaintiffs pointed out, by 16 September 2011, it was no longer necessary for the shares in the Shanghai Company to be transferred from KMT to New KMT, since the defendants had managed by 30 May 2011 to change the legal representative of the Shanghai Company from WJ to JY, and had resumed control of the office and operations of the Shanghai Company. No payment was ever made for the Shanghai Transfer.

53. Nevertheless, the defendants are prepared to undertake to the court not to dispose of the shares of the Shanghai Company (which are the assets covered by the Mareva injunction), pending resolution of the dispute on the ownership of TMG and KMT in the BVI. I bear in mind the defendants’ argument that the essential dispute between the parties is whether, as a result of the Agreement being held to be valid and subsisting, WJ’s claim is 33%, or 67%, of TMG, and that LQ in any event had 33% interest in TMG. The heart of the present dispute is accordingly over JY’s 34% interests in the shares and assets of the companies concerned. On this basis, even if I was prepared to grant an injunction in aid of any foreign proceedings to be commenced, I agree that with the undertaking from the defendants, the balance of convenience is not in favor of granting a new injunction to restrain the defendants from disposing of their assets in Hong Kong and from disposing of the shares of the Shanghai Company.

54. The ancillary disclosure orders fall away with the discharge of the Mareva injunction and I am not prepared to grant any further disclosure orders.

Conclusion

55. I make the following orders:

(1)  the ex parte injunction and disclosure orders granted on 21 December 2007 are discharged, with costs to the defendants;

(2)  the order granting leave for service of the Writ on New TMG, JY, LQ, Cai and Tao out of Hong Kong is discharged, with costs to the defendants;

(3)  the proceedings against New KMT are stayed;

(4)  the plaintiffs’ summons dated 27 February 2012 for disclosure is dismissed, with costs to the defendants;

(5)  no order is made on the defendants’ summons dated 3 April 2002 for fortification.

56. The costs orders include certificate for 2 counsel.