TAM WING YUEN AND OTHERS v. SIBERIAN MINING GROUP CO LTD AND OTHERS

HCCW 392/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 392 OF 2015

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REASONS FOR DECISION

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1.  This is an application by the 2nd, 6th, 10th, 14th, 16th, 17th and 20th-25th respondents (“the Respondents”) to strike out the petition for winding up of the 1st respondent filed by the three petitioners on 17 December 2015 and amended by them on 11 May 2016. The 1st and 2nd petitioners are no longer in the picture as Harris J has made consent orders on 11 November 2016 allowing them to withdraw their claims herein against the Respondents and allowing the Respondents to withdraw this application to strike out as against them. The amended petition is only prosecuted by the 3rd petitioner Mr Charles Zhi. Mr Zhi is opposing the application to strike out.

2.  The summons to strike out was filed on 8 March 2016 before the petition was amended.  In the absence of objection from Mr Zhi, I granted leave at the beginning of the hearing for the summons to be amended so that it is addressed to the amended petition. 

3.  I have allowed the application to strike out at the end of the hearing.  I give my reasons now.

Background

4.  The following is taken from the amended petition and the affirmation of the 20th respondent, Mr Hong Sang Joon filed on 8 March 2016.  Mr Hong is a current director of the 1st respondent, Siberian Mining Group Company Ltd. (“the Company”).

5.  The Company (formerly known as Rontex International Holdings Ltd) is a company incorporated under the Companies Law of Cayman Islands and limited by shares. It is a registered non-Hong Kong company within meaning of section 326(2) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32.  It can be wound up under s. 327 of the ordinance.  On 8 November 2002, it was listed on the main board of the Hong Kong Stock Exchange (the “Stock Exchange”).  Its shares are traded on the Stock Exchange.  The main business operations of the Company and its subsidiaries are coal mining, and mineral resources and commodities trading.

6.  The 2nd respondent (“Grandvest”) is a wholly owned subsidiary of the Company. 

7.  Grandvest has entered into an agreement dated 31 October 2008 (“the Acquisition Agreement”) with the 3rd respondent (“Cordia”) to acquire from Cordia 90% of the shareholding in one Langfeld Enterprises Limited (“Langfeld”).  Langfeld at that time held 70% of the shares in a Russian company called LLC Shakhta Lapichevskaya (“LLC Shakhta”).

8.  LLC Shakhta had a mining licence for “lot 1” of the Lapichevskaya coalmine (the “Mine”) in Russia.  It subsequently also acquired the mining license for “lot 1 extension” and “lot 2” of the Mine.  Hence, the Company became in control of “lot 1, lot 1 extension and lot 2” of the Mine through its 90% shares in Langfeld which controls LLC Shakhta.

9.  Payments to Cordia in respect of the mining licences of lot 1, lot 1 extension and lot 2 of the Mine were made in three convertible notes (“CN”) issued by the Company to Cordia: 

(1)  The 1st CN of US$253,000,000 was issued on 25 May 2009. 

(2)  The 2nd CN of US$32,000,000 was issued in late 2010. 

(3)  The 3rd CN could only be issued upon the fulfilment of two conditions as stipulated in the Acquisition Agreement. 

10.  Under the Acquisition Agreement, the 3rd CN was to be issued on the third business day following the date on which the last of two conditions referred to below was satisfied (or such other date as Grandvest and Cordia shall agree in writing but in any event should not be later than one calendar year after the signing of the said agreement).  The two conditions are (1) LLC Shakhta obtaining the mining licence for lot 2 of the Mine; and (2) a technical report issued by a technical expert acceptable to Grandvest and Cordia confirming the proved and probable coal reserves of lot of the Mine being not less than 12,000,000 tonnes.

11.  The Company engaged some experts to assist it with the fulfilment of the two conditions.  They included SRK Consulting (Russia) Limited (“SRK”) of the SRK Group, Vigers Appraisal & Consulting Limited (“Vigers”) and HASS Natural Resources Limited (“HASS”).

12.  The Company issued a circular issued on 31 December 2008 (“the VSA Circular”).  The VSA Circular was based on a technical report produced by SRK dated 29 October 2008 and a valuation report produced by Vigers dated 30 October 2008 which allegedly confirmed the proved and probable coal reserves of lot 2 of the Mine to be 14,190,000 tonnes. 

13.  Pursuant to the VSA Circular, the Company on 16 January 2009 held an EGM of the shareholders which approved, confirmed and ratified the Acquisition Agreement and the transactions contemplated thereunder including the issue of the three CNs to Cordia.

14.  On 1 November 2010, LLC Shakhta obtained a mining licence for lot 1 extension and lot 2 of the Mine.  Condition (1) was satisfied.

15.  For condition (2), Grandvest and Cordia chose HASS as the technical expert.  HASS issued a technical report on 27 March 2013 (“the HASS Report”) which confirmed the proved and probable coal reserves of lot 2 of the Mine to be 14,190,000 tonnes.  

16.  As a result, the Company considered that the two conditions had been fulfilled.  It issued the 3rd CN on 3 April 2013 to Cordia (3 April 2013 was the third business day after 27 March 2013 because of the intervening Easter holidays).  The amount of the 3rd CN was based on an agreed formula which resulted in the sum of US$443,070,000.

The amended petition

17.  The amended petition referred to various rules of the Listing Rules of the Stock Exchange.  It then referred to the 6th-25th respondents as the current and former directors of the Company and alleged that they had breached the rules.

18.  The amended petition also alleged that the Acquisition Agreement was not negotiated at arm’s length and not in the best interest of the Company. 

19.  It then alleged that the technical report produced by SRK dated 29 October 2008 and valuation report produced by Vigers dated 30 October 2008 were inaccurate.  The VSA Circular relied on, among other things, these two reports.  The 6th to 13th respondents (the then directors of the Company) had made representations in the VSA Circular to the shareholders of the Company that the consideration payable under the Acquisition Agreement was approximately equal to or less than the value of the Mine as reflected in the 90% shareholding in Langfeld.  Since the two reports were inaccurate, the amended petition says that the representations were false and were made in breach of the Listing Rules. 

20.  The amended petition also alleged that the HASS Report that was for satisfaction of the second condition for issuance of the 3rd CN had fundamental flaws.  It further alleged that the Company, Grandvest and their directors could not have and were not satisfied with the report as a technical report for the purpose of issuance of the 3rd CN.  Therefore, the issuance of the 3rd CN was wrongful.  The Company and its group on a consolidated basis were rendered insolvent to the extent of HK$2,314,334,000.00 and HK$1,017,792,000.00 respectively in audited net liabilities.  The Company and its group have since been insolvent.

21.  The amended petition then referred to certain criminal investigations by some Korean law enforcement agencies and alleged that the Company had suppressed such investigations.  But as pointed out by Mr Hong in his affirmation, the Company was not named in the alleged indictments and the Korean agencies had not contacted the Company for investigation or assistance.  The Company also claimed that it did not know that some of those being investigated had been on its board. 

22.  Finally, the amended petition referred to some figures extracted from the audited accounts in the annual reports of the Company and alleged that substantial cash had been siphoned away from the Company. 

23.  These allegations have been summarized by Mr Kwok, counsel for the Respondents to three broad grounds of complaint as follows:

(1)  he Company (and its directors) had breached the Listing Rules and the Securities and Futures Ordinance (amended petition §§7-10, 20-23, 66-72, 86-95).

(2)  he acquisition of the Mine by the Acquisition Agreement was “not negotiated at arms’ length, not in best interests of the Company and for improper purpose” and the 3rd CN was wrongly issued in 2013 on the strength of “the HASS Technical Report (which contained fundamental flaws)” (amended petition §§46-65 & 73-85). 

(3)  he Company has “disproportionately large amounts of net cash outflow purportedly used in operating activities” (amended petition §§96-100).

24.  Mr Hong has filed two affirmations on 8 March and 6 July 2016 to set out the facts relied on by the Respondents to rebut the allegations in the amended petition.  For the purpose of this application to strike out, I do not think it necessary for me to go into these facts. 

The striking summons

25.  The grounds of the striking summons are:

(1)  he petitioners are not entitled to present the amended petition against the 1st respondent;

(2)  he petitioners have not demonstrated why a winding up order against the 1st respondent should be made in Hong Kong or why this is a proper case for the court to exercise its jurisdiction to make a winding up order against the 1st respondent;

(3)  viable alternative forms of relief are available to the petitioners, including a sale of the petitioners’ shareholding in the 1st respondent on the Stock Exchange, or a referral of their allegations and complaints to the Stock Exchange and/or the Securities and Futures Commission (”SFC”);

(4)  alternatively, the petition discloses no reasonable cause of action, is scandalous, frivolous or vexatious, or is otherwise an abuse of process of the court.

26.  Mr Kwok rephrased these grounds in his written submissions to as follows:

(1)  he amended petition has failed to identify why the court should exercise its jurisdiction over a foreign company.

(2)  here is viable alternative relief available.

(3)  he complaints in the amended petition do not raise valid grounds for a just and equitable winding up.

(4)  he other Respondents are improperly joined.

Why should the court exercise jurisdiction to wind up a foreign company?

27.  Mr Kwok submitted that the jurisdiction to wind up a company is an exorbitant one and generally the proper jurisdiction to seek a winding up is in the place of incorporation.  He referred to Re Chun Yip Holdings Ltd (HCCW 463/2012, 23 March 2015) per Harris J at §§29-30 and 34:

“29.  In the case of a petition to wind up a company incorporated in another jurisdiction another matter has to be expressly addressed in the petition.  Section 327 of the Companies Ordinance, Cap. 32, gives the Court a jurisdiction, which is discretionary, to wind up a company incorporated outside Hong Kong, referred to in the Ordinance as an “unregistered company”.  I will discuss how this jurisdiction is exercised in the next section of this judgment.  In short the Court will only, subject to limited exceptions, exercise the jurisdiction if it is demonstrated that the following criteria are met:

(1)  here is a substantial connection between the company and Hong Kong;

(2)  here is a reasonable possibility of a winding-up order benefiting those applying for it;

(3)  here is a person within the jurisdiction with sufficient economic interest in the liquidation of the company to justify a winding up in Hong Kong.

30.  It is, therefore, necessary for a petition to state that these three criteria are satisfied and set out with sufficient particularity the matters relied on to prove the assertion and to enable a respondent to understand the case he has to meet and also for a court reading a petition to understand the grounds upon which it is said it should exercise its discretion. 

...

34.  The Court’s power to order a winding up is discretionary.[1]  It is well established that the jurisdiction is an exorbitant one.  Hong Kong private international law recognises that generally the proper jurisdiction in which to seek a winding-up order of a company is that of its incorporation: Re Yung Kee Holdings Ltd [2]. The Court will, however, make winding up orders in the case of applications under both sub‑sections (3)(b) (insolvency) and (c) (just and equitable) if three criteria I referred to in paragraph 29 are satisfied.”

28.  The amended petition did not say that there was a reasonable possibility of a winding-up order benefiting those applying for it or that there was any person within the jurisdiction with sufficient economic interest in the liquidation of the company to justify a winding up in Hong Kong.  The requirements set forth by Harris J in §29 of Re Chun Yip Holdings have not been satisfied. 

29.  Though Mr Zhi said in his written submissions that he would benefit more by having the Company wound up then selling his shares of the Company in the Stock Exchange, this is not stated in the amended petition and is insufficient.  In any event, the amended petition alleged that the Company and its group are insolvent to the extent of HK$2,314,334,000.00 and HK$1,017,792,000.00 respectively in audited net liabilities.  If the Company and its group are insolvent, I cannot see how Mr Zhi can benefit from its winding up.  This is also not a creditors’ petition or a petition on the ground of insolvency.  Mr Zhi has repeatedly said that he is seeking a winding up on the just and equitable ground. 

30.  In the premises, I hold that Mr Zhi has failed to show why this court should exercise jurisdiction to wind up the Company.

Are there viable alternative relief?

31.  Mr Kwok referred to Re Chun Yip Holdings again.  Harris J said at §28 “a court will not order a winding up of a company if there is another viable alternative form of relief”.

32.  Mr Kwok further referred to Re Trocadero Ltd [1988] 2 HKLR 443 at 447E-G where Jones J dismissed a petition because the petitioner was unreasonable in presenting it when he had a perfectly good alternative remedy open to him.

33.  Section 180(1A) of the Companies Winding-up and Miscellaneous Provisions) Ordinance also provides that:

“(1A)  Where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.”

34.  Mr Kwok also referred to Alessi v The Original Australian Art Company Pty Ltd (1989) 7 ACLC 595 per Young J at 598 (left column)

“and it is unreasonable to wind up a company on the stock exchange on a just and equitable ground because one can just go out into the stock exchange and sell one’s shares for a fair value”

35.  Mr Zhi only purchased on 9 October 2014 his 290,000 shares of the Company’s current total of 616,047,763 shares (or about 0.047% of the shares of the Company).  That was long after the EGM on 16 January 2009 in which the shareholders of the Company approved, confirmed and ratified the Acquisition Agreement and the transactions contemplated thereunder including the issue of the three CNs to Cordia.  That was also many months after the issuance of the 3rd CN on 3 April 2013.  He admitted at the hearing that before he bought his shares, he was fully aware of the alleged irregularities which he relied on in the amended petition.  He had also assisted others in prosecuting legal proceedings against the Company on the basis of these alleged irregularities before he became a shareholder.

36.  He said in written submissions that he would benefit more by winding up the Company then selling his shares in the Stock Exchange.  I have already pointed out that this point should be in the amended petition.  I have also commented on his contradictory positions as he pleaded in the amended petition that the Company and its group are insolvent.  He added orally at the hearing that when he bought the shares, he regarded that he could sort out these irregularities and hence benefit himself.  But judging from what he did in the past few years which I will refer to in greater detail below, I can only conclude that he bought the shares to get himself qualified as a contributory of the Company and hence eligible to bring proceedings against it. He has not given any proper reason for him to acquire his shares just for the purpose of suing the Company.

37.  In the premises, I hold that Mr Zhi is unreasonable in trying to wind up the Company instead of selling his shares on the Stock Exchange.

Has Mr Zhi got valid grounds for a just and equitable winding up?

38.  For the allegations of breaches of the Listing Rules by the Company and its directors and former directors, Mr Kwok submitted that these are matters for the Stock Exchange and/or SFC (see ss. 3-6 of the Securities and Futures Ordinance;Cap. 571; Stock Exchange of Hong Kong Ltd v New World Development Co Ltd (2006) 9 HKCFAR 234, 244 at §§5-9 by Ribeiro PJ.)  This must be correct. 

39.  In fact, Mr Zhi has already made numerous complaints to both the Stock Exchange and SFC ([B2/386-445] and [B4/771-779]). Mr Kwok further submitted that if there is merit in the complaints, then it is for the regulators to investigate and pursue.[3]  It is not the function of the Court to try and conduct its investigation.  Mr Zhi also has 2 pending judicial reviews and 3 pending writ actions against the regulators.

40.  Regarding Mr. Zhi’s complaint about the Company acquiring the licences of lot 1, lot 1 extension and lot 2 of the Mine, this is a stale complaint as the acquisition had taken place long before hebecame a shareholder of the Company.  If he was unhappy with that transaction, he should not have become a shareholder.  I have already disbelieved his assertion that he bought the shares with a view to profiting himself by resolving the irregularities.  In any event, he can sell his shares at any time.

41.  Furthermore, Mr Zhi has pursued this complaint on many previous legal proceedings including a contributory’s winding up petition in HCCW 180/2015.  All the proceedings were struck out, dismissed or discontinued. They culminated in a vexatious litigant order made by G. Lam J with Mr Zhi’s consent in HCPM 443/2015 (29 June 2016).  The 14 previous sets of proceedings made the same complaints and are summarised in the appendix to the judgment by G. Lam J in HCMP 443/2015 [B4/716-718 & 720]. 

42.  I would also refer to §§3 to 6 and 11 to 12 of the judgment of G Lam J in HCMP 443/2015:

“3.  SMG had in October 2008 entered into an agreement to purchase a mine in Russia called the Lapichevskaya Mine from a company called Cordia Global Limited (“Cordia”). The consideration for the purchase was in the form of three tranches of convertible notes (“CN”) issued by SMG to Cordia as follows:

(1)  First CN of US$253,000,000 issued on 25 May 2009;

(2)  Second CN of US$32,000,000 issued in late 2010; and

(3)  Third CN of US$443,070,000 issued on 3 April 2013.

4.  Issuance of the Third CN was subjected to 2 conditions:

(1)  a mining licence for Lot 2 of the mine being obtained; and

(2)  “a technical report issued by a technical expert acceptable to the Purchaser and Vendor confirming the proofed and probably coal reserves of lot 2 of the Target Mine being not less than 12,000,000 tons”.

5.  From April 2013 onwards Mr Zhi and others have instituted a number of legal actions in relation to SMG. Most of them involve other parties as defendants in addition to SMG. It is the acquisition of the Lapichevskaya Mine and the issuance of the CNs that form the basis of the bulk of the relevant legal proceedings taken out by Mr Zhi. Among other things, it has been alleged that the technical report produced by HASS Natural Resources Limited (“HASS”) and signed by one Herman Tso, which was used to fulfil the second of the conditions for the Third CN, was “false”. In order to commence or continue these proceedings, Mr Zhi had acquired 290,000 shares (about 0.06% of the issued capital) in SMG on 9 October 2014.

6.  Many of these actions overlap or are simply repetitive of and needlessly duplicate one another. In the actions brought by Mr Zhi as plaintiff he has acted as a litigant in person. In the actions in which Mr Zhi was not the plaintiff himself, he played an active role and often represented or purported to represent the plaintiff in court hearings.

...

11.  A table prepared by SMG’s legal representatives setting out the details of the above actions are appended, in an edited form, to this judgment. The actions very broadly fall into the following categories (though this is by no means a complete summary of the nature of the various actions and claims):

(1)  Actions seeking to undermine or rescind the CNs issued to Cordia with respect to the acquisition of the Lapichevskaya Mine in 2008. These claims had been pursued in Cases 4, 6, 7, 8, 11, 12, 13, 14, 15, 16, 17, 18, 20 & 21 above.

(2)  Actions alleging that Mr Choi Sungmin (alleged to be the sole shareholder and director of Cordia) owes Mr Hyon Hi Hun (father-in-law of Mr Zhi) HK$5,600,000 in unpaid loans, that Mr Choi had caused Cordia to assign or pledge a promissory note no. 7 of US$2,000,000 issued by SMG to Cordia as collateral for that loan, and that SMG is therefore liable to Mr Hyon under the promissory note for US$2,000,000 or else for damages on the basis that the promissory note is a “false instrument”. These claims have been brought in the name of Mr Hyon but prosecuted by Mr Zhi (see Cases 5 & 9) or in the name of Mr Zhi himself (see Cases 7, 8 & 10).

(3)  Actions alleging that Cordia (or Mr Choi Sungmin) is liable to Moon Kyung Hyun (believed to be Mr Zhi’s wife or ex‑wife) for breach of an agreement described as the “Grant Letter” (in which Cordia had allegedly agreed to grant US$7,400,000 in CNs to Ms Moon) as well as a subsequent “Settlement Agreement” between Cordia and Mr Zhi or Ms Moon to settle the alleged breach of the Grant Letter. These claims have been made in Cases 7, 8, 10, 13 & 15. In Case 15, Mr Zhi’s son (Chi Dong Eun) is co-plaintiff with Mr Zhi.

(4)  Actions alleging a breach of an oral agreement between Mr Kim Young Jun with Mr Zhi whereby Mr Kim Young Jun would: (1) guarantee that Mr Zhi receive the funds owed by Mr Choi Sungmin and/or Cordia; (2) allocate 20% of his profits to Mr Zhi; (3) cancel the Third CN. These claims have been pursued in Cases 10, 13 & 15.

(5)  Actions concerning a loan of US$7.55 million from Pioneer Centre Limited to SMG. See Cases 17 & 18.

12.  I am satisfied, as Mr Zhi himself accepted, that to bring such numerous repetitive actions and applications against SMG, among others, is vexatious.” 

43.  The current proceedings are thus res judicata in so far as they attack the HASS report and the 3rd CN and should be struck out as an abuse of process (see Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 at 589H-591B per Lord Kilbrandon; White Book 2017 at page 426 (§18/9/1) and page 467 (§18/19/19).

44.  The last complaint is the siphoning off of cash from the Company.  The figures pleaded in the amended petition came from the Company’s auditedaccounts which are available to the public.  Mr Kowk submitted that there is no allegation of bad faith in the amended petition.  The Court would thus not interfere with the way accounts are prepared (see Devlin v Slough Estates Ltd [1983] BCLC 497 at headnote (also 503h-504c) per Dillon J).  I agree with Mr Kwok.

45.  In addition to the reasons given above for striking out the amended petition, the amended petition also discloses no reasonable cause of action, is scandalous, frivolous or vexatious, or is otherwise an abuse of process of the Court.  In the light of my analyses above, I am satisfied that the amended petition should be struck out pursuant to Order 18, rule 19 of the Rules of the High Court; Cap 4A, rule 210 of the Companies (Winding-up) Rules; Cap. 32H and the inherent jurisdiction of the Court. 

Improper joinder of the respondents other than the 1st respondent

46.  Mr Kowk submitted that this is not a shareholder’s dispute; nor is it an unfair prejudice petition.  It is just a winding up petition and the only order sought is for winding up of the Company.  No relief is sought against the other Respondents.  Hence, the other respondents have been improperly joined and the amended petition should be struck out as against them.  I agree with Mr Kwok.

47.  Mr Zhi however submitted in written submissions that he may rely on s. 724 of the Companies Ordinance; Cap. 622.  Ss. 724(1) and 725(1)(a) and (2) provide:

“724. (1) The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by a member of a company, it considers that—

(a) the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member); or

(b) an actual or proposed act or omission of the company (including one done or made on behalf of the company) is or would be so prejudicial.

725.  (1) The Court may—

(a) for the purposes of section 724(1), make any order that it thinks fit for giving relief in respect of the matter mentioned in section 724(1)(a) or

b); and

...

(2)  Without limiting subsection (1), the Court—

(a)  may make any or all of the following orders—

(i) an order—

(A) restraining the continuance of the conduct of the company’s affairs in the manner mentioned in section 724(1)(a) or (2)(a);

(B) restraining the doing of the act mentioned in section 724(1)(b) or (2)(b); or

(C) requiring the doing of an act that, as mentioned in section 724(1)(b) or (2)(b), the company has omitted, or has proposed to omit, to do;

(ii) an order that proceedings that the Court thinks fit be brought in the company’s name against any person, and on any terms, that the Court so orders;

(iii) an order appointing a receiver or manager of either or both of the following—

(A) the company’s property, or any part of the property;

(B) the company’s business, or any part of the business;

(iv) any other order that the Court thinks fit, whether—

(A) for regulating the conduct of the company’s affairs in future;

(B) for the purchase of the shares of any member of the company by another member of the company;

(C) for the purchase of the shares of any member of the company by the company and the reduction accordingly of the company’s capital; or

(D) for any other purpose; and

(b) may order the company or any other person to pay any damages, and any interest on those damages, that the Court thinks fit to a member of the company whose interests have been unfairly prejudiced by the conduct of the company’s affairs or by the act or omission.”

48.  If the amended petition can survive this striking application, Mr Zhi may consider re-amending it to rely on s. 724 of the Companies Ordinance; Cap. 622 as against the other respondents.  But the amended petition cannot survive this attack, there is therefore no point in allowing him to re-amend the amended petition to plead to s. 724. 

Order

49.  In the premises, I struck out the amended petition in so far as the Respondents are concerned. 

Costs order

50.  Since the amended petition is a re-run of Mr Zhi’s previous claims against the 1^st respondent, it is an abuse of the process of the court.  I have therefore made a costs order that Mr Zhi should pay the costs of these proceedings including the summons to strike out to the Respondents on an indemnity basis to be taxed by me summarily.