MACAU FIRST UNIVERSAL INTERNATIONL LTD v. DING XIAOHONG AND OTHERS

CACV 193/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 193 OF 2011

(on appeal from HCA No. 992 of 2010)

____________

________________________

J U D G M E N T

________________________

Hon Yuen JA (giving the Judgment of the Court):

1. This is an appeal from an order of Deputy Judge Auyeung given on 10 March 2011 appointing receivers and managers of the assets and properties of two companies, namely Macau First Universal International Limited (“MF”) and Hong Kong First Mainland Company Limited (“HKF”). MF is incorporated in Macau. HKF is incorporated in Hong Kong.

2. The appellants are Ding Gang (“DG”) and MF.  The respondents are DG’s brother Ding Yu (“DY”), their sister Ding Xiao Hung (“DXH”) and HKF.  

Background

3. For some time prior to 19 May 2010, MF has held all the shares of HKF.  HKF in turn held all the shares of a PRC company called Shanghai Bading Property Development Co Ltd  (“SB”). 

4. SB was the developer of a first-class commercial building in Pudong, Shanghai called Citigroup Tower (“the Tower”)which was completed in 2005.  Apart from 8 floors sold to Citigroup and 6 floors sold to other buyers, SB owns the rest of the Tower.  SB’s “legal representative” (法人) is Yu Xiaan (“YXA”).  He is related to the Dings, his mother being their half-sister. 

5. The Tower is managed by a PRC company called Shanghai Citigroup Tower Management Co. (“the Management Company”) which is owned by SB and a Hong Kong company owned by MF.

6. HKF also holds an office unit in Lippo Centre, Hong Kong.  Another unit is held by a wholly-owned subsidiary of MF.

Parties’ claim to be sole beneficial owner

7. In these proceedings, DG and DY each claims to be the sole beneficial owner of MF and HKF, and through these companies, SB.  Each of them has filed lengthy affirmations (supported by affirmations from other persons) claiming how he had succeeded in various businesses over more two decades, culminating in the development of the Tower. Virtually every aspect of these affirmations has been hotly disputed.  It is clear that the court cannot and should not at this stage attempt to determine which of these two stories is true. 

8. However it is important to note that this is not a dispute between two shareholders over the control of the companies, but a dispute as to who is the sole beneficial owner of the companies. And it is common ground that these are valuable companies which are able to pay their debts, so that creditors do not pose a problem.  Therefore, on either party’s case, he was and is entitled to do as he pleased with the companies, not being answerable to the other party, or in reality, to the companies.

9. DXH on the other hand does not claim any beneficial ownership of the shares of any of the companies.  In a document called “ 赠与合同” dated 7 February 2004 and notarized on 19 March 2004 (“DXH Gift Agreement”), DXH acknowledged that the shares she held in MF (among other things) belonged to DG.  However in an affirmation filed on 24 January 2011, DXH says that as she trusted DG, she had signed the “DXH Gift Agreement” without reading the contents.  She says the shares she held in MF belonged, not to DG, but to DY.      

Events in May-June 2010

10. As stated earlier, for some time prior to 19 May 2010, MF held all the shares of HKF.  MF’s registered shareholders were DG (as to 99%) and DXH (as to 1%).  DG and DXH were also the only two directors of MF.  

11. On 19 May 2010 however, DXH (acting on DY’s instructions) caused MF to sell all its HKF shares to DY and herself (as to 95% and 5% respectively) for a purported aggregate consideration of $5m.  It is not clear whether any money was actually received by MF, but in any event the stated consideration would appear to be a gross under-value, as SB’s net book value is alleged to be more than RMB228m.

12. Subsequently, on 3 June 2010, HKF (by then under the control of DY and DXH) resolved to remove YXA and to appoint DY in his place as SB’s legal representative.  (As events transpired, this application was rejected on 9 January 2012 by the Shanghai Administration of Industry and Commerce by reason of the litigation in Hong Kong over the shareholding of HKF). 

13. After DY’s attempt to remove YXA as SB’s legal representative, on 11 June 2010 DY went to SB’s office at night and took away a safe holding certain company seals, including the only set of official company seals (公章) and one set of the finance seals (财务印章) of SB.  Some seals of the Management Company were also taken away.  As will be discussed later in this judgment, seals are important in the conduct of business in the PRC. There is evidence that companies there designate a specific seal for use at a specific bank at the time accounts are opened, and it is the seal that the bank verifies before processing transactions for those accounts. 

14. Returning to the events of June 2010, the next morning (12 June 2010), the staff of SB reported the removal of the safe containing the seals to DG and to the police.  According to DG, it was only then that he discovered the transfer of MF’s HKF shares to DY and DXH, as well as the attempt to remove YXA as SB’s legal representative. 

15. On 17 June 2010, SB commenced civil proceedings against DY in the Pudong Court for recovery of the seals. 

Proceedings commenced in Hong Kong

16. DG also caused MF to commence proceedings in Hong Kong against DY, DXH and HKF, asserting (among other things) that MF’s transfer of HKF shares to DY and DXH was null and void, and that DXH acted in breach of fiduciary duty to MF in effecting the transfer.  Since then, DY has also issued a counterclaim against DG and MF.   

Injunction Order (2/7/2010) 

17. On 2 July 2010, MF obtained from Au J an ex parte injunction against DY, DXH and HKF (“the Injunction Order”). In the Injunction Order,

(1)  DY and DXH were restrained from dealing with the HKF shares registered in their respective names and from causing HKF to do the following acts. 

(2)  HKF was restrained (subject to exceptions stated in the Injunction Order) from:

(i) issuing or allotting any new shares;

(ii) registering any transfer of shares;

(iii) taking any steps to remove or replace YXA as SB’s legal representative;

(iv)   dealing with any of its assets.

We will be referring later in this Judgment to the order at (iii), i.e. the order restraining HKF from removing YXA as SB’s legal representative.

18. Undertakings for the Injunction Order were given by MF and DG.  As noted earlier MF has a wholly-owned subsidiary which holds an office unit in Lippo Centre, Hong Kong.  DG owns two unencumbered residential units in Hong Kong and also asserts that he has other assets.

19. The return date of the summons was 9 July 2010.

20. On 6 July 2010, MF issued a summons for continuation of the Injunction Order, for a variation of the Injunction Order to cover the unit in Lippo Centre held by HKF, and for an order that HKF disclose its assets. 

Consent Order (9/7/2010)

21. However on 9 July 2010, after negotiations between the parties’ respective solicitors, the parties presented a Consent Order before Suffiad J.  It is common ground that the Consent Order had been drafted, revised and agreed between the parties’ respective counsel.

22. In the Consent Order,

(1) DY and DXH undertook not to deal with the HKF shares registered in their respective names and not to cause HKF to breach its undertakings

(this undertaking took the place of the Injunction Order made against them);

(2) HKF undertook not to:

(i) issue or allot any new shares;

(ii) register any transfer of shares; and

(iii) deal with any of its assets

(this undertaking took the place of part of the Injunction Order made against them);

(3)   MF and DG (although not yet a party) gave cross-undertakings not to deal with the assets of HKF and of SB “other than in the ordinary course of business ... and for fair market value or consideration”.

All these undertakings were expressed to be “until final disposal of this action or further order of the Court”. 

23. It is notable that apart from the undertakings given above, the Consent Order stated:

“BY CONSENT IT IS ORDERED that:-

(1) Without prejudice to any acts done by [HKF] prior to actual receipt of the Injunction Order, [HKF] shall not remove or replace and/or take any further steps to remove or replace YXA as the legal representative of [SB].

(2) No order be made on [MF’s] summons filed on 6^th July 2010.

(3) [Costs be in the cause of the action]; and

(4) There be liberty to apply”.

(Emphasis added).

24. In other words, the injunctions against DY, DXH and HKF were lifted in exchange for their undertakings and their agreement to the order made by consent that HKF “shall not remove or replaceand/or take any further steps to remove or replace YXA as the legal representative of SB”.

25. Of course MF and DG also gave cross-undertakings.  We note that there was no order that these cross-undertakings must be fortified.  Indeed, as noted by the judge, DY has not alleged that DG would not have the means to meet an award of damages (para. 81).

Receivership Order (10/3/2011)

26. However, 3 months later on 19 October 2010, DY applied to the court to appoint receivers and managers of the assets and properties of MF and HKF on the grounds (among others) that there was a real risk of dissipation of assets. 

27. The application was heard by the learned judge in February 2011.  The main allegations made by DY were that:

(1)   notwithstanding the undertakings given by DG and MF, the 5^th floor of the Tower had been offered for sale by SB between October 2010 and January 2011;

(2)   after the Consent Order, SB had failed to pay rents from the Tower into the designated interest account of the mortgagee bank (Huaxia Bank);

(3)   accounting irregularities were found in relation to SB (eg salaries and credit card payments for the benefit of DG’s connections; delay in reporting car parking fees; cash card payments booked as other services; curtain wall advertisement receipts booked elsewhere);

(4)   there were certain transactions in 2006 in which some companies took over some other companies’ alleged liabilities and paid the purported creditor companies, which were then de-registered.

28. On 10 March 2011 the judge gave an order appointing Ernst and Young receivers and managers of the assets and properties of MF and HKF (“the Receivership Order”). 

Receivers’ attempt to replace YXA as legal representative

29. The receivers then executed a resolution together with DY and DHX seeking to replace YXA as SB’s legal representative but this has not been approved by the authorities.  In the present state of evidence, we cannot and should not determine as a matter of PRC law whether this failure to obtain approval was due to substantive or procedural reasons. However we cannot ignore the fact that up to now, the Receivers have not been able to gain control of SB under PRC law. 

Leave to appeal Receivership Order (23/9/2011)

30. In the meantime, DG and MF applied for leave to appeal the Receivership Order.  On 7 April 2011 the judge refused leave.  In the same judgment she also refused to stay, vary or clarify the Receivership Order.

31. On 23 September 2011 this court, differently constituted (Cheung and Yuen JJA), gave leave to appeal the Receivership Order made by the judge on 10 March 2011. 

Appeal

-   Exercise of discretion

32. The Receivership Order was made in the exercise of the judge’s discretion and it is well-established that an appellate court would not lightly interfere with such an order.  However if it is shown that the judge had failed to take a relevant matter into account, then this court is bound to re-consider the matter afresh.

33. Mr Tong SC for DG has pointed out that the judge had failed to consider that the parties had agreed in the Consent Order that DY and DXH should “not take any further steps to remove or replace” YXA as SB’s legal representative, and yet in applying for the appointment of receivers and in executing the resolution with the receivers, they did exactly that.

34. Mr Tong SC referred this court to authorities on the contractual effect of a consent order, whether it be a final order or an interlocutory one (Leung Yee and anor v Ng Yiu Ming and anor [2001] 1 HKLRD 309, 321).  He argued that all the circumstances, objectively construed, pointed towards a contractual compromise to preserve the status quo in a specific way.  The parties had through their solicitors gone through a process of negotiations, and the Consent Order had gone through various drafts.  The result was that, of the 4 injunction orders made against DY’s camp by Au J, the parties were content that 3 injunctions would be uplifted and replaced by undertakings, but the injunction order against taking steps to remove or replace YXA survived as an order of the Court.  Further, whilst the 3 undertakings were explicitly stated to be “until ... further order of the Court”, there was no such qualification to the surviving order.

35. Mr Chan SC for DY argued that the Court always remains in control of its interlocutory orders.  Thus a court can always release a party from his undertakings to the court, and even though an undertaking may not have been expressed to be limited in duration, it may fairly be assumed to be so.  Mr Chan SC also relied on the fact that leading counsel for DG at the hearing before the judge (not Mr Tong SC) did not argue that the Consent Order had a binding contractual effect.

36. Mr Tong SC’s arguments are persuasive but it is not necessary for us to determine finally whether the Consent Order had a binding contractual effect.  On any view, the judge should have had regard to the fact that the Receivers would expect to take over the position of SB’s legal representative.  In opposition to the application, DG had said in his 3^rd affirmation:

“Appointment of receiver/manager into MF and HKF, the holding companies of SB, would necessarily lead to a change in the legal representative and the management of SB, as that is the very step that the receiver must take to exercise control over the most valuable asset of the holding companies, namely the Citigroup Tower” (para. 460).

Before exercising her discretion, the judge should therefore have taken into account the fact that the parties had agreed that although 3 of Au J’s injunctions could be uplifted and replaced by undertakings, what was explicitly maintained as a court order was the injunction that “[HKF] shall not remove or replace and/or take any further steps to remove or replace YXA as the legal representative of [SB]”. 

37. However it would appear from the judgment of 10 March 2011 that the judge had mistakenly thought that by consent, the entire ex parte order had simply been continued by Suffiad J (para. 8). Perhaps it was because of this misapprehension that the judge failed to consider the relevant fact that YXA’s position as SB’s legal representative had been singled out for confirmation by the parties under the Consent Order.  In any event, whatever the reason, that factor was missing from the judge’s discussion in the judgment.  Under the established principles we have discussed above, it is therefore necessary for this court to re-consider the matter afresh.

-   Accounting irregularities

38. First, allegations were made by DY (through SB’s former tax agent Wu Bei) that she had noticed accounting irregularities in SB when she was its tax agent.  Mr Chan SC did not press this issue, in our view correctly, because of the evidence adduced in opposition to Wu’s allegations of delay in reporting car parking fees, the booking of cash card payments as other services, and the booking of curtain wall advertisement receipts.  In any event, there is no evidence to show that it was DG or YXA who gave instructions as to how certain items should be booked in the knowledge that the booking would be false.  Further, it is not shown what loss has been suffered by SB as a result of these alleged irregularities, and DY has not shown that DG’s undertaking would not be adequate to cover such loss.

39. As for the allegation regarding salaries and credit card payments for the benefit of DG’s connections, DG’s short answer is that he is and was the sole beneficial owner of MF, HKF and through them, SB.  As such, he was entitled to deal with these companies’ funds as he wished, as it is not disputed that these companies are solvent.  Of course DY’s case is that it is he and not DG who is the sole beneficial owner of these companies, but that is a dispute that can only be resolved after trial.  Until then it seems to us that all these alleged irregularities (which apparently have been occurring during Miss Wu’s tenure as SB’s tax agent for some 4-5 years) do not justify the appointment of receivers now.

-   The 4 impugned transactions

40. The same considerations apply to what have been called the “4 impugned transactions”. These are transactions in 2006 in which some companies took over some other companies’ alleged liabilities and paid the purported creditor companies, which were then de-registered. 

41. Again DG’s short answer is that as he is and was the sole beneficial owner of MF, HKF and SB, he is and was entitled to transfer funds between companies that belonged to himself.  As we indicated earlier, the present case must be distinguished from one where the parties are both shareholders/directors of a company, who both have a stake in the company and who are jockeying for its control.  In the latter case, any transfer of the company’s funds by a shareholder/director to another company belonging to himself would be viewed with concern.  But given DG’s claim to be the sole beneficial owner, there is no question of malfeasance if his claim is accepted at trial.  Therefore we cannot see how the 4 impugned transactions would add anything to the application for receivership now, 6 years after the transactions had taken place, and when it has not been shown that DG’s undertaking is not sufficient to cover the damages if DY succeeds at trial.

-   Receivers a last resort

42. It is well-established law that the appointment of receivers is a remedy of last resort.  As the judge rightly said (and Mr Chan SC has not challenged this), the appointment of receivers would only be justified if “notwithstanding the considerable protection the DG Undertakings already afforded, there nonetheless was an imminent danger of loss or dissipation of the assets if a receiver was not appointed” (para. 46). 

43. DY has therefore sought to show that notwithstanding DG’s undertaking (for which fortification was not required), DG has, after the Consent Order, sought to undermine the status quo effected by that Order.  In this respect, DY has made 2 main allegations:

(1)   that DG has offered the 5/F of the Tower for sale;

(2)   that SB has not paid rents from the Tower into the designated interest account of the Huaxia Bank. 

-   Offer to sell 5/F

44. We start with DG’s confirmation in his 1^st affirmation filed on 2 July 2010 (prior to the Consent Order) that “any sale or disposition of the ‘Citigroup Tower’ by SB is not something in the ordinary course of business and is therefore prohibited by our undertakings offered to this Court”. 

45. However in the Consent Order itself, DG’s undertaking was not to deal with the assets of HKF and SB “other than in the ordinary course of those companies holding such assets and for fair market value or consideration”.  Further, there was a “saving” provision whereby all the parties were permitted to carry out acts or dealings if the other side gives prior written consent.

46. DY relied essentially on 4 pieces of evidence:

(1)   in October 2010, Zhou Jie 周洁 (the daughter of a family friend 周建明 Zhou Jian Ming) told him that she had seen an advertisement for the sale of the 5/F when she happened to google the Tower;

(2)   on 8 November 2010, there was an article in 上海商報 (Shanghai Commercial Report) which said that the whole of the 5/F and half of the 7/F were being offered for sale at RMB120,000 per sq. m.;

(3)   on 13 January 2011, investigators instructed by DY met 徐天华 (Xu Tian Hua) of 德佑地产经纪有限公司 (De You Estate Agency), who said that the whole of the 5/F was for sale, and if acquired through the purchase of shares of the vendor company, the price would be reduced to RMB90,000 per sq.m.;

(4)   on 19 January 2011, investigators posing as agents of a Japanese company met Lilian Shen Yu Lin 沈玉莲, SB’s assistant rental manager, and after a discussion with her which was partly video-recorded, received a “proposal” from her 2 days later. 

We will consider each of these pieces of evidence in turn.

47. First, in respect of para. 46(1), Miss Zhou has since retracted her statement.  She has said in a declaration made on 3 March 2011 and an affirmation made on 8 September 2011 that she was asked by DY to say to his solicitor (Miss Yeung) that she had googled the Tower.  However she had not in fact done so, as she had no interest in it.  That was why when Miss Yeung asked her the price at which the property was being offered, she was unable to even give a “ballpark” figure.

48. After Miss Zhou’s retraction, other affirmations have been filed on DY’s behalf to the effect that her father Zhou Jian Ming has been given employment by SB.  However these claims have been denied in Zhou Jian Ming’s affirmation. 

49. The upshot of all these allegations and counter-allegations is that the value of Miss Zhou’s statement to Miss Yeung to prove that DG has caused SB to offer the 5/F for sale is extremely limited.

50. In respect of para. 46(2), on 22 February 2011 DG’s lawyers contacted刘娟 (Liu Juan) who was the reporter responsible for the article in Shanghai Commercial Report. Liu said that she had obtained the information from a website www.001ce.com.  She said she met Xu who told her that the 5/F had been acquired from the developer and was owned by 民營 (a private enterprise) from Jiangsu.  Xu also said that even though the owner of the 5/F had not given any indication, the property could be acquired through purchasing the shares of the vendor company, in which event the price would be RMB100,000 per sq.m. 

51. Of course the 5/F was owned by SB, not a private enterprise from Jiangsu.  Further, since SB did not own the 5/F only, the proposal that the property could be acquired through purchasing the shares of the owner meant that the proposal simply could not have referred to a floor owned by SB.  Further, according to Liu, Xu did not take her to view the 5/F but only the 7/F (which was one of the 6 floors which SB had sold to purchasers after the development). 

52. It is clear from the above that the information given to Liu was incorrect, and that she had failed to verify it before publishing it. 

53. In respect of para. 46(3), on 23 February 2011 DG’s lawyers met Xu who denied that he had been authorised to offer the 5/F for sale.  He also denied that he said that the floor belonged to a private enterprise from Jiangsu.  This is in direct contradiction to what Liu had said.  The unreliability of the evidence is obvious.

54. Finally as to para. 46(4), according to Miss Shen’s evidence, she had no instructions to offer the 5/F, or indeed any floor, of the Tower for sale.  She explained that, as per the video recording, she had proposed that the Japanese company should rent the premises, but she was also interested in knowing what price the Japanese company would counter-offer, as a means of assessing what was the market view of the value of the Tower units.  To accommodate the agents, she agreed to provide a proposal, but on the express understanding that the company seal would not appear on it. 

55. She also pointed to the fact that the video recording was not complete.  She emphasized that she prefaced her statement by saying that there was no rush to sell as there was no need for cash (19:34), that if the company wanted to sell, there would be a sales department whereas there was none, only a rentals department (20:00), and that she told the purported agents that the crux of the matter lay with her boss, who was not in want of money, and she did not know if he wanted to sell or not, such that even if she gave them a proposal, if her boss did not wish to sell, the proposal would be of no use at all.  

56. It is clear in our view that the 4 pieces of evidence discussed above were inherently unreliable.  They fell far short of showing that there was an attempt by DG to undermine the status quo by preparing to sell the 5/F of the Tower.  We also accept Mr Tong’s argument that at worst, these were only preliminary steps towards a sale, and if an offer of purchase at the quoted price was received (far above the comparables quoted in the Shanghai Commercial Report), the Consent Order contained provisions under which DG could have sought DY’s consent to the sale, which would have been far above the “fair market value or consideration” contemplated in the Order.  In our view, the risk of dissipation shown in the evidence was well below that required to call for receivers to be appointed.  

- Non-payment of rents to designated account

57. Finally there is the non-payment of the rents from the Tower into the designated interest account of the Huaxia Bank. 

58. SB had taken out 2 loans with the Huaxia Bank.  The arrangement was that rents from the Tower would be paid into account “3737" to service the interest, and repayment of the principal would be done through account “4835".

59. On 7 January 2011, 朱轻舟(Zhu Qing Zhou) a vice-manager of a branch of the Huaxia Bank met with DY’s solicitors.  The matter was further pursued on 14 January 2011.  On 21 January 2011 and 26 January 2011, Zhu signed 2 letters which stated that the rents from the Tower had not been put in place.  He also said he had not been able to contact DG for 2 months.  On this basis, DY claimed that DG had dissipated the rents.   

60. However it would be noted that these letters did not contain the Bank’s letterhead or its seal. Further on 31 January 2011, Zhu stated that those letters only contained his “personal views”.  More importantly, the Huaxia Bank has never sent a letter of demand for repayment on the basis of an event of default. 

61. Further YXA, SB’s legal representative, has explained that as SB’s seals had been taken by DY, it was not possible for him (YXA) to operate the “3737" account, and to avoid DY taking control of the rents paid into that account, the tenants were asked to pay the rents into other accounts held by SB with other banks including the Bank of Shanghai. Money was then transferred from SB’s account at the Bank of Shanghai to the Huaxia Bank.  In a letter dated 10 February 2011, the Huaxia Bank confirmed that money was received for payment of principal in December 2010 and for payment of interest in September and December 2010.  In an agreement dated 7 September 2011, the Bank accepted that the rents from the Tower could not be deposited into the account designated for receipt of interest because of the problem with possession of the seals. 

62. In the light of these explanations, the evidence does not indicate a real risk of dissipation such that receivers were required to be appointed.  

Order

63. In the circumstances, in the fresh exercise of our discretion, we do not consider that the evidence calls for the application of the remedy of last resort, especially in the light of what the judge has called the considerable protection given by DG’s undertakings (for which no fortification has ever been sought, and when DY has never claimed that DG did not have the means to meet an award of damages). 

64. Accordingly we would allow the appeal, set aside the Receivership Order, and the parties having agreed that the costs of the appeal would follow the event, we would order that the respondents to the appeal pay the costs of the appeal to the appellants with an order nisi that there be certificate for two counsel. As the parties have not made submissions regarding the costs of the Receivership Order hearing before the judge, we will give a costs order nisi that the applicants for that Order pay the costs of the application.