ABLE SUCCESS ASIA LTD v. CHINA PACKAGING GROUP COMPANY LTD AND OTHERS

HCMP 1091/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1091 OF 2014

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D E C I S I O N

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Introduction

1. This is an urgent application for an interlocutory injunction restraining a listed company from proceeding with an open offer of shares to its existing shareholders.

2. The company, which is the 1^st defendant in these proceedings, is China Packaging Group Company Limited (“China Packaging”), a company incorporated in the Cayman Islands and registered in Hong Kong under Part XI of the repealed Companies Ordinance (Cap 32).  Its shares have been listed on the main board of the stock exchange of Hong Kong with the stock code 572.  As at the date of the announcement of the open offer, China Packaging has an issued share capital divided into 2,021,325,332 equal ordinary shares of HK$0.001 each.

3. The plaintiff, Able Success Asia Limited (“Able Success”), itself a company incorporated in the British Virgin Islands, is the majority shareholder of the company, holding 1,097,209,604 shares.  By an originating summons dated 2 May 2014, Able Success applies for a permanent injunction to restrain the conduct in question, namely, the open offer of shares, under ss. 728-729 of the Companies Ordinance (Cap 622) (which are substantially the same as s 350B of Cap 32) on the ground that it constitutes or would constitute a breach of directors’ fiduciary duty and duty of care and skill to China Packaging.  By a summons taken out on 5 May 2014, Able Success seeks an interim injunction in the same terms pending the trial of the originating summons or further order.

4. The open offer of shares was announced to the public on 22 April 2014.  According to the expected timetable as stated in the announcement, the prospectus including the acceptance form would be despatched to shareholders on 14 May and the offer would be open for acceptance until 28 May.  The summons first came before me on 9 May, last Friday.  On Able Success’s application for time to deal with the evidence filed by China Packaging, I adjourned the summons to today.

Factual background

5. China Packaging headed a group which had carried on business in the manufacture and sale of tinplate can packaging.

6. Mr He Jianghong (“Mr He”), using Able Success as a corporate vehicle and apparently with financing from Kingston Financial Group Limited, acquired a controlling interest in China Packaging in November 2012. Able Success has since been the majority shareholder holding more than 50% of the issued shares.  After the acquisition, Mr He and his associate, Mr Zhang Zhantao (“Mr Zhang”) became the only two executive directors of China Packaging, with Mr He being the chairman of the board of directors.

7. In addition, China Packaging had and still has three independent non-executive directors, namely, Mr Siu Siu Ling Robert, Mr Tam Tak Wah and Mr Chan Yee Por Simon.  They have been joined as the 6^th to 8^th defendants.

8. According to the evidence filed on behalf of Able Success, Mr He wanted to strengthen the shareholder base by procuring Guangdong Materials Group (HK) Co Ltd (“GMHK”), a large logistics enterprise in the Mainland, to become a strategic investor in China Packaging.  By a non-binding memorandum of understanding dated 26 July 2013 entered into between Able Success and GMHK, GMHK confirmed its intention to acquire from Mr He certain shares held by Able Success in China Packaging.

9. There is no dispute that on 15 August 2013, Able Success entered into a facility agreement with Skyway Securities Investment Limited (“Skyway”) for a loan of HK$100 million, and that the loan (subject to an amount retained as interest) was drawn down in full and used by Able Success in settling the amounts owed to Kingston Financial Group Limited.  Skyway is a company incorporated in Hong Kong and licensed to engage in Type 1 (dealing in securities) and Type 4 (advising in securities) regulated activities under the Securities and Futures Ordinance (Cap 571).

10. At that time China Packaging had a total of 1,010,662,666 issued shares, of which Able Success held 670,131,644 shares.  As security for the loan, Able Success executed a share charge dated 15 August 2013 whereby it charged 497,077,960 shares it held in China Packaging in favour of Skyway.

11. On 16 October 2013, Able Success disposed of 70,000,000 shares in China Packaging, reducing its shareholding to 600,131,644 shares, representing approximately a 59.38% stake.

12. On 25 October 2013, China Packaging resolved at an extraordinary general meeting to issue one bonus share for every one existing share, by capitalising the credit in the share premium account.  This appears to have been implemented in early November 2013.  As a result, the number of shares held by Able Success increased to 1,200,263,288 shares out of a total of 2,021,325,332 issued shares of China Packaging.  It is possible, though it is not for me to decide that question now, that since the share charge in favour of Skyway covered accretions to the charged shares, after the bonus issue the number of shares charged in favour of Skyway became 994,155,920.

13. There is some evidence that on 31 October 2013, Mr He, purportedly acting on behalf of China Packaging, executed two guarantees in favour of GMHK for the debts owed by two Mainland trading companies to the tune of RMB 137.7 million and 506 million respectively.  These two trading companies and the debts are apparently wholly unconnected with China Packaging.  The other directors had apparently no knowledge of these guarantees.  This has since resulted in litigation against the company which I mention below.

14. Also on 31 October 2013, Able Success pledged 779,730,133 shares it held in China Packaging to Guangdong Hangxing Trading Co Ltd, a wholly-owned subsidiary of GMHK.  It is unclear how this pledge could have been effected, given that 497,077,960 or even 994,155,920 of the shares held by Able Success had been charged to Skyway.

15. Things went awry for Mr He after this point. From 5 November 2013 onwards, apparently for reasons unrelated to his role in China Packaging, Mr He has been detained in the Mainland for criminal investigation.  As of today he is still remanded in custody at a detention centre in Guangzhou, though no charge has formally been laid against him.  There is no evidence of when Mr He will be likely to be released.  According to the evidence filed by Able Success, Mr He does not expect to be released soon.

16. On 13 November 2013, Able Success’s holding in China Packaging was reduced to 1,097,209,604 shares, or 54.28%.

17. Litigation was soon commenced in Hong Kong against Mr He and Able Success (and against China Packaging in one case) on three fronts.

18. First, on 25 November 2013, two creditors of Able Success, namely, Guangdong Hongchang Import & Export Co Ltd (“Hongchang”) and Ease Faith Ltd (“Ease Faith”), commenced an action (HCA 2292/2013) against it claiming outstanding sums due under certain service agreements amounting to over RMB 31 million less HK$4.5 million which was the subject matter of another action (HCA 2101/2013) brought by Ease Faith against Able Success based on a dishonoured cheque for that amount.  On the same day, Hongchang and Ease Faith obtained a Mareva injunction by virtue of which Able Success must not:

“in any way dispose of, mortgage, assign, charge or otherwise deal with or diminish the value of any of his assets, which are within Hong Kong, … up to the value of RMB 31,929,155.05 or its Hong Kong equivalent less HK$4,500,000.00 as claimed in HCA 2101/2013 … including … the property known as shares in [China Packaging] …”

19. On 9 December 2013 and 17 February 2014, Ease Faith and Hongchang obtained final judgment against Able Success in HCA 2101/2013 and HCA 2292/2013 respectively.  On the strength of the judgments they have obtained charging orders nisi, on 20 January 2014 and 7 March 2014 respectively, on all the 1,097,209,604 shares in China Packaging registered in the name of Able Success.

20. Secondly, on 5 December 2013, GMHK issued solicitors’ letters to China Packaging demanding payment of the sums of RMB 137.7 million and 506 million under the two guarantees mentioned above.  This was followed by the issue of a writ of summons (HCA 81/2014) in Hong Kong on 14 January 2014 whereby GMHK claims against China Packaging for the sums of RMB 137.7 million and 506 million.  Mr He and Able Success are also sued in this action as co-defendants on the basis of the guarantees that they are said to have respectively executed in favour of GMHK for the same debts.

21. Thirdly, on 16 December 2013, Skyway commenced an action (HCA 2456/2013) against Able Success and against Mr He as guarantor for recovery of the principal and interest of the loan.

22. On 28 January 2014, the board of directors of China Packaging announced that Mr He had been temporarily suspended from his position as chairman of the board and executive director with effect from 27 January 2014, and that two individuals, namely, Mr Siu Yun Fat and Mr Lau Fai Lawrence had been appointed as executive directors with effect from 28 January 2014.  It was disclosed in the announcement that Mr Siu had since 2011 served as the financial controller of Skyway.

23. On 29 January 2014, Skyway entered default judgment in HCA 2456/2013 against Able Success and Mr He for payment of the sum of HK$100 million together with interest.  To date, no attempt has been made to set aside this judgment.

24. On 12 February 2014, Skyway commenced proceedings by originating summons in HCMP 323/2014 against Able Success for an order that the 1,030,875,919 shares in China Packaging, said to be registered in Able Success’s name and charged to Skyway, be sold and the proceeds thereof be used to settle the default judgment obtained by Skyway.  In those proceedings Skyway joined Hongchang and Ease Faith as 2^nd and 3^rd defendants respectively seeking against them an order that the Mareva injunction granted in their favour in HCA 2292/2013 be varied so as to exclude the relevant shares.

25. The originating summons in HCMP 323/2014 came on for hearing on 21 March 2014.  Hongchang and Ease Faith appeared and opposed Skyway’s application.  As a result, the originating summons was adjourned.  It has now been fixed for hearing on 23 July 2014 with one day reserved.

26. Meanwhile, on 5 March 2014, Guangdong Hangxing Trading Co Ltd, the subsidiary of GMHK I have already mentioned, gave notice that Able Success had assigned to it a debt of HK$10 million owed by China Packaging to Able Success.

27. On 6 March 2014, Mr Zhang apparently voluntarily agreed to a suspension of his duties as executive director of China Packaging.

28. In March 2014, China Packaging decided to place 169,000,000 shares at HK$0.105 each through Get Nice Securities Ltd (“Get Nice”) as the placing agent with placees who were said to be independent third parties.  The placements were completed on 10 April 2014.  As a result, Able Success’s percentage stake in China Packaging was reduced to 50.09%.

29. On 22 April 2014, the board of directors of China Packaging resolved that the company would make an open offer of shares, underwritten by Get Nice, and a public announcement was made, as follows:

(1)  China Packaging would offer to issue not less than 1,095,162,666 and not more than 1,096,112,353 new shares to existing qualifying shareholders on the basis of one new share offered for every two existing shares held.  All shareholders registered as such as at the Record Date (13 May 2014) qualify for that offer (except those overseas shareholders to whom the directors decide not to make the offer because of foreign legal or regulatory restrictions).

(2)  The new shares would be offered at HK$0.04 each.

(3)  Shareholders are not entitled to apply for excess shares offered.  Any shares offered but not taken up by qualifying shareholders will be underwritten by the underwriter.

(4)  The last day of dealing in the shares on a cum-entitlement basis is 2 May.  Thereafter (ie from 5 May onwards), the shares will be dealt in on an ex-entitlement basis.

30. It was also stated in the announcement that, as the open offer would not increase the issued share capital or the market capitalisation of China Packaging by more than 50% within the 12-month period immediately preceding the announcement, and as the open offer was fully underwritten by the underwriter who is not a director, chief executive or substantial shareholder of China Packaging (or an associate of any of them), the open offer is not subject to shareholders’ approval under the Listing Rules.

The plaintiff’s allegation

31. Against this background, Able Success alleges that the open offer of shares would be a breach of the duties of the directors of China Packaging in that (i) they failed to protect the interests of China Packaging by causing it to issue a substantial number of new shares at a grossly depressed value; and (ii) they did not act bona fide in the interests of the company but instead acted for improper purposes, viz. to dilute Able Success’s shareholding in China Packaging and to enable Skyway or its associates including the underwriter, Get Nice, to acquire controlling interests in China Packaging at a grossly depressed price.

32. Able Success contends that, because the open offer would be a wrongful act, it ought to be prevented by an injunction granted by the court in exercise of the power under ss 728-729 of the Companies Ordinance (Cap 622).

33. These sections relevantly provide:

Section 728

“(1) Section 729 applies if, in relation to a company—

(a) a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(i) a contravention of this Ordinance;

(ii) a default relating to a contravention of this Ordinance; or

(iii) a breach specified in subsection (4); or

(b) a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Ordinance to do.

…

(4) The breach specified for the purposes of subsection (1)(a)(iii) or (2)(a)(iii) is—

(a) a breach of the person’s fiduciary duties owed to the company in any capacity other than as a director of the company;

(b) a breach of the person’s fiduciary or other duties as a director of the company owed to the company; or

(c)  a breach of the company’s articles.”

Section 729

“(1) The Court may, on application by a member or creditor of the company whose interests have been, are or would be affected by the conduct or by the refusal or failure, do any or all of the following—

(a) grant an injunction, on the terms that the Court thinks fit—

(i) in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii) in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

(b) order the person to pay damages to any other person;

(c) declare any contract to be void or voidable to the extent specified in the order.

…

(5)  To avoid doubt, a person is not entitled to recover, by way of damages under subsection (1)(b) or (2)(b), any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law.”

The issues on this interim application

34. The principles guiding the exercise of the court’s discretion whether to grant an interlocutory injunction are not in dispute.  They have been explained by Lord Hoffmann in National Commercial Bank Jamaica v Olint Corporation [2009] 1 WLR 1405:

“16.  … The purpose of such an injunction is to improve the chances of the court being able to do justice after a determination of the merits at the trial.  At the interlocutory stage, the court must therefore assess whether granting or withholding an injunction is more likely to produce a just result. …

17. In practice, however, it is often hard to tell whether either damages or the cross-undertaking will be an adequate remedy and the court has to engage in trying to predict whether granting or withholding an injunction is more or less likely to cause irremediable prejudice (and to what extent) if it turns out that the injunction should not have been granted or withheld, as the case may be.  The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other.  This is an assessment in which, as Lord Diplock said in the American Cyanamid case [1975] AC 396, 408:

‘It would be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relative weight to be attached to them.’

18. Among the matters which the court may take into account are the prejudice which the plaintiff may suffer if no injunction is granted or the defendant may suffer if it is; the likelihood of such prejudice actually occurring; the extent to which it may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the injunction will turn out to have been wrongly granted or withheld, that is to say, the court’s opinion of the relative strength of the parties’ cases.”

35. This is of course not the trial of the claim in the action, but an application for interlocutory injunction.  But Mr Ronny Tong SC, appearing for China Packaging, submits and Miss Linda Chan SC, appearing for Able Success, accepts that the interim relief sought, if granted, would for all practical purposes finally determine the fate of the open offer and thus the outcome of Able Success’s claim brought by the originating summons.  In such a case, it is well established by the cases that the court is entitled, indeed obliged, not to act only on a serious triable issue being shown, but to examine the merits more closely and take account of the parties’ respective prospects of success: Cayne v Global Natural Resources plc [1984] 1 All ER 225, at 236b-f; Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §43; Lansing Linde Ltd v Kerr [1991] 1 WLR 251, 258.  In the last of these cases, Staughton LJ said that while “some assessment” of the plaintiff’s prospects of success is required, it is for the judge to control its extent (p. 258C, expressly concurred in by Butler-Sloss LJ at p. 270B).  This is the basis on which I approach the present application.

36. Although there is an allegation in the papers that the open offer should not be allowed to proceed because the appointment of the directors was invalid, Miss Chan SC, rightly, in my view, did not press this point.  Initially, Able Success contended that the power to appoint directors was vested in the company in general meeting, and no relevant general meeting had been held.  But Art 112 of the Articles of Association of China Packaging empowers the directors at any time to appoint any person as a director either to fill a casual vacancy or as an additional director.  The appointment of Mr Siu and Mr Lau was decided by Mr Zhang Zhantao and the three independent non-executive directors pursuant to that article.

37. Then, secondly, it is said that the appointments were invalid because no notice of the board meeting was given to Mr He, contrary to Art 134 of the Articles.  But Art 134 clearly stipulates that no notice need be given to any director for the time being absent from the territory in which the head office of the company is situated, namely, Hong Kong.  Mr He, on the evidence, was in custody in Guangzhou in January 2014.  Furthermore, the evidence shows that relevant emails were sent to Mr and Mrs He prior to the meeting, even though they were not sent 14 days before the date of the meeting.

38. Thirdly, it is said, presumably against Mr Zhang and the three independent non-executive directors, that the appointment of Mr Siu and Mr Lau was made for an improper purpose, namely, “to pass control of the company to Skyway’s nominees and associates” and, as such, in breach of the existing directors’ fiduciary duties.  I do not see any evidential basis for this allegation at all.  There is no reason offered why Mr Zhang and the three independent non-executive directors should favour Skyway and pass control of the company to it.  Although Mr Siu was also Skyway’s financial controller at the time, there is no evidence that Mr Lau was in any way connected with Skyway.

39. The real thrust of Able Success’s case is that the open offer was approved by the board (consisting, for this purpose, of Mr Siu, Mr Lau and the three independent non-executive directors) in breach of duty to China Packaging.  In particular, it is said they have acted for improper purposes, namely, to dilute Able Success’s shareholding and “to enable Skyway and/or its associates including Get Nice to acquire controlling interests in the Company at a substantially depressed price”. 

40. In support of this allegation Miss Chan SC makes five main points:

(1)  that the public announcement was misleading in a number of respects;

(2)  that the open offer would be made at a gross undervalue and would lead to substantial financial loss to China Packaging and Able Success;

(3)  that there is no need for an injection of funds, whether in the amount proposed to be raised by the open offer or at all;

(4)  that the real purpose of the open offer was to dilute Able Success’s shareholding in China Packaging, as the directors were well aware that Able Success would not be able to subscribe for the new shares; and

(5)  that the open offer and the underwriting agreement were made by the directors to benefit Get Nice and its associates, at the expense of China Packaging and Able Success.

41. A fundamental problem with this theory however is that while Able Success in its evidence and submissions repeatedly asserts there was a scheme to give a “controlling interest” to Skyway and its associates (see Li Ling’s first affirmation §§5, 15, 49, 57, 58; plaintiff’s skeleton §§6.2, 46, 51.4), on analysis there is no evidence that the open offer would have this effect even if Able Success does not subscribe.  The open offer is to be made on a “one new share for two existing shares” basis.  It follows that Able Success’s entitlement would be a maximum of 548,604,802 new shares.  This would amount to approximately 16.68% of the enlarged issued capital of 3,288,337,059 shares after the open offer was implemented (assuming the subscription rights attaching to share options were fully exercised).  Able Success would still be registered holder of 1,097,209,604 existing shares, or approximately 33.37% of the issued capital.  It follows that the fundamental premise of the Plaintiff’s case, that the open offer would allow Get Nice or its associates to obtain a controlling stake in the company, is fallacious.  Mr Li Ling’s first affirmation proceeded upon the assumption that if the plaintiff does not subscribe, Get Nice would underwrite 1,095,162,666 shares.  That assumption is now accepted to be erroneous.

42. Miss Chan then says Get Nice might still get a controlling interest if shareholders other than the plaintiff also fail to subscribe.  In my view there is no basis for that suggestion.  The shares traded at the range of around $0.08 and $0.09 each after the open offer was announced.  There is no reason to suppose that shareholders would not be attracted by the offer price of HK$0.04.

43. For his part, Mr Lawrence Li, who acts for the 2^nd and 3^rd defendants but supports the plaintiff’s position, puts forward certain scenarios whereby the shares unsubscribed for by the plaintiff and underwritten by Get Nice could be combined with the shares indisputably charged to Skyway to produce a controlling interest.  In my judgment that is an invitation to go into the realm of the speculative and the hypothetical, which I decline.

44. Miss Chan SC submits that even without alleging the purpose to pass a controlling interest to Get Nice, there is still the allegation of the purpose to dilute the plaintiff’s shareholding.  But it seems to me that while such dilution would be result of the open offer if the plaintiff does not subscribe, it is a quantum leap to say that it is the purpose of the directors.

45. The plaintiff’s theory is premised on its inability to subscribe for shares in the open offer, and on the directors’ knowledge of such inability.  Four reasons have been put forward.  First, it is said that Mr He is in detention in Guangzhou.  I do not see why that necessarily prevents Able Success from subscribing for shares.  It appears that Mr He has been able to procure Able Success to launch the present proceedings, give instructions to his agents and lawyers, and pay for the litigation.

46. Secondly, reliance is placed on the Mareva injunction obtained by Hongchang and Ease Faith in HCA 2292/2013 against Able Success “dealing with” the shares held in China Packaging as an obstacle to subscription for the open offer.  Leaving aside the question whether subscribing for new shares in the open offer would be “dealing with” the existing shares as such, if there is any doubt, it is open to Able Success to apply for a variation of the injunction to allow the subscription.  Given that Hongchang and Ease Faith are opposed to any dilution of Able Success’s shareholding, they may well support that variation.

47. Thirdly, it is said that Able Success would breach certain provisions of the facility agreement with Skyway if it subscribes for the shares.  This is counter-intuitive.  It is in the interest of Skyway as a creditor secured on the existing shares for those shares not to be diluted, and for the debtor to subscribe (and pay) for new shares which can then form part of the security as an accretion.  It is not obvious to me there would be a breach of the provisions and it is plain that Able Success has not attempted to ascertain the position of Skyway at all in this respect.  According to clause 16.1(4) of the share charge, it appears that the decision whether or not to subscribe for the open offer, so far as the shares charged to Skyway are concerned, lies with Skyway.  Having failed to take the simple expedient of writing to Skyway, Able Success is trying to ask the court to presume that Skyway would say “no” to subscription, on the ground of the serious allegation that it is in collusion with Get Nice.  I am unable to accept that contention.

48. Fourthly, Able Success seeks to rely on a sentence in Mr Ronny Tong SC’s initial skeleton that Skyway should be a co-plaintiff in the claim and that without it, Able Success lacks locus.  But despite the share charge, Able Success remains the registered shareholder.  As a matter of law (assuming Cayman Islands law to be the same as Hong Kong law), a company takes no notice of the interests behind the register.  So far as China Packaging is concerned, as is now accepted by Mr Tong, Able Success is entitled to subscribe for the open offer in its name. How the decision to subscribe is arrived at and how the shares allotted and issued to Able Success would be affected by the share charge are matters that are not China Packaging’s concern.

49. The result is that there is no evidence of any real legal impediment that prevents Able Success from taking up the open offer.  Still less is there any basis for saying that the directors, particularly the independent non-executive directors, were “well aware” that Able Success would not be able to subscribe for the new shares.  The uncontradicted evidence is that Mrs He approached the directors and asked about the procedure for subscribing for shares pursuant to the open offer, leading them to believe that Able Success would opt to take up the open offer.

50. Then there is the allegation that China Packaging had no need to raise further funds after the placements in March 2014.  Much has been made of the statement in the financial results announcement of China Packaging for the year ended 31 December 2013, in the section headed “Liquidity, Financial Resources and Funding after Deconsolidation”, that the board believes that “the Group will have sufficient working capital to sustain its operations”.  But, to complete the picture, one must look also at the accounts as a whole.

51. It must in particular be borne in mind that the audit opinion on the accounts of the company drew attention to the going concern basis.  Thus the auditor stated under “Emphasis of Matter”:

“As mentioned in Note 2 to the consolidated financial statements, the Group incurred a loss attributable to owners of the Company of approximately RMB49,955,000 for the year ended 31 December 2013, and as of that date, the Group had net current liabilities and net liabilities of approximately RMB2,718,000 and RMB2,122,000, respectively. These conditions, along with other matters as set forth in Note 2, indicate the existence of material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities in the normal course of business. The consolidated financial statements have been prepared by the Directors on a going concern basis, the appropriateness of which is dependent on the Group’s ability to obtain sufficient future funding to meet its financial requirements.”

52. Further, note 2 to the accounts, after referring to the deconsolidation of two subsidiaries, stated, under the heading “Going concern”:

“In order to improve the Group’s operating and financial position, the Directors have been implementing various operating and financial measures as following:

1) Based on the advice from the Company’s legal adviser, as the Company did not authorise any person to enter into the Alleged Guarantees on behalf of the Company and was not aware of the existence of the same beforehand, the legal adviser advised that there is highly likely to succeed in the Company’s Defence and the court would find the Alleged Guarantees void and unenforceable;

2) As explained in Note 37(f), in March 2014, the Group has obtained new loan facilities in aggregated of HKD45 million from independent third parties;

3) As explained in Note 37(b), on 14 March 2014, the Company entered into a placing agreement to place up to 169,000,000 placing shares at the placing price of HKD0.105 (the “Proposed Placing"). The net proceeds from this placing is approximately HKD17.5 million;

4) The Directors are considering various alternatives to strengthen the capital base of the Company through various fund raising exercises, including but not limited to, private additional placement, open offer or rights issue of new shares of the Company;

5) The Directors continue to take action to tighten cost controls over various operating expenses, with an aim to attaining profitable and positive cash flow generated from operations; and

6) The Directors continue to focus on trading business with an aim to attaining profitable and positive cash flow generated from operations.

In the opinion of the Directors, if the above measures and arrangements (the “Proposed Plans”) completed successfully, the Group would be able to generate sufficient funds to meet its future working capital requirements and financial obligations when they fall due. Accordingly, the Directors consider that it is appropriate to prepare the consolidated financial statements of the Company on a going concern basis.

The applicability of the going concern basis depends on the outcomes of the Proposed Plans, which the eventual outcome is uncertain, and the Group’s ability to generate sufficient funds to meet its future working capital requirements and financial obligations when they fall due. The consolidated financial statements do not include any adjustments for possible failure of the Proposed Plans and the continuance of the Group as a going concern. …”

53. Examined as a whole, the annual report is not at all inconsistent with the explanation of the directors in these proceedings that there is a need to raise funds that has led to the open offer. 

54. The intended use of the funds to be raised by the open offer is stated in the announcement of the open offer as follows:

“… The net proceeds to be raised by the Company from the Open Offer will amount to approximately HK$42.0 million (after expenses). The Group intends to apply the net proceeds from the Open Offer as to (i) approximately HK$15.0 million as a reserve for the repayment of the current liabilities as and when due; (ii) approximately HK$10.0 million for trading business in Hong Kong for health product, (iii) approximately HK$10.0.million for the establishment of a wholly-owned subsidiary in the PRC for trading business of metal and other raw materials; and (iv) approximately HK$7.0 million for general working capital of the Group and the future investments opportunities of the Group if suitable activities are identified.”

55. The first affirmation of Mr Li Ling, a PRC lawyer, filed by Able Success, asserts that China Packaging did not have experience in health product business which was nothing but an excuse to justify the open offer.  As with so much else in that affirmation, this is baseless speculation and overlooks the fact that the operations of the company were becoming very thin.  It should be noted that shortly before the financial results were announced on 31 March 2014, in light of the deconsolidation of subsidiaries, the Stock Exchange had already made enquiry with the company about the level of its operations for the purpose of justifying its listing status under rule 13.24 of the Listing Rules.  It is not suggested that the concern was groundless.  All that Able Success says now is that delisting is a long process that would not be lightly initiated.  But I think the directors are duty-bound not to wait until the eve of delisting to improve a listed company’s capital base and operations.

56. Mr Li Ling also asserts that the deconsolidation of the two subsidiaries had no proper basis.  What happened is that on 25 March 2014, the board of directors of China Packaging resolved that, due to the continued absence of Mr He, the group no longer had the power to govern the financial and operating policies of two operating subsidiaries.  Upon the advice of the auditors, it was decided to deconsolidate those subsidiaries from the consolidated financial statements of the group for the year 2013.  The matter was explained in the notes to the accounts in the annual report.

57. Mr Li Ling says deconsolidation was improper, on the ground that Mr He considers that the two subsidiaries had a good working relationship with the company.  He then asserts that the deconsolidation was no more than a tactic used by the board to create a misleading impression that the group was in need of fund.  But it would not at all be surprising that the “good working relationship” disappeared as Mr He was remanded in custody. Moreover, given the directors could not obtain access to the books and records of those subsidiaries, consolidated accounts could not be prepared.  The deconsolidation was decided with the advice of auditors.  In the ultimate analysis, there is nothing but suspicion and speculation to gainsay what the directors have stated in the public announcement.

58. Able Success also submits that China Packaging had the use of a loan facility of HK$45 million.  But drawing down a loan does not improve the balance sheet, nor does it add value to the company for the purpose of rule 13.24 of the Listing Rules, not to mention that interest has to be paid at the rate of 12% per annum.

59. The allegation that, having regard to the offer price, the directors would breach their duty of care by proceeding with the open offer is also, in my view, without substance.  The point being made is that the price at which the shares are to be offered, ie HK$0.04 per share, is too low.  That price represents a 70% discount to the closing price of HK$0.135 per share on 17 April 2014, being the last trading day of the shares before the open offer was announced.  However, the price has to be seen in the context of the offer being an open offer of shares pari passu to existing shareholders.  In this respect the open offer resembles a rights issue.  They differ in that the rights to subscribe for shares in a rights issue are often transferable and are indeed often traded as nil-paid rights on the stock exchange, whereas the open offer here cannot be traded or sold on by the shareholders.

60. Shares in a company are not assets of the company as such.  Rather, they represent bundles of rights against the company: Borland’s Trustee v Steel [1901] 1 Ch 279 at 288.  To speak of the directors “giving away the company’s assets” when the company issues shares at below market prices is not quite accurate. 

61. The price of such a pari passu offer of shares is a matter for the management of the company.  The fact that the price of such an issue is significantly below the market price is not unheard of. The fact that a company issued or offered to issue shares to existing shareholders in proportion to their shareholding at below the trading price does not of itself suggest any breach of fiduciary duty.  Indeed, China Packaging, while Mr He was still at the helm, issued bonus shares in October 2013.

62. The heart of Able Success’s case is, as I see it, the allegation that in resolving to make the open offer, the directors were acting for an improper purpose.  It is said that they acted with a view to diluting Able Success’s shareholding and enabling Get Nice as the underwriter of the open offer to obtain a controlling interest in China Packaging.

63. There is no direct evidence from the plaintiff to prove such purpose.  The court may of course at trial make findings of fact as a matter of inference.  Whether such inference is to be drawn is a matter for the trial judge.  But still Able Success must at this stage establish by evidence – not by assertion and speculation – at least a serious issue, or to such higher threshold as may be appropriate given that the grant of interim relief may be determinative of the overall outcome, that the directors are acting for an improper purpose. 

64. On the part of the directors, two of them, Mr Siu and Mr Tam, have filed evidence on behalf of themselves and others, denying any such improper purpose.  That evidence, if accepted, will destroy the inference the plaintiff wishes the court to draw. But of course the mere fact that they have directly deposed to the absence of any improper purpose does not make it incontrovertible: Cayne v Global Natural Resources plc [1984] 1 All ER 225, 230c-e.  The court has to look at the matter objectively in the way Lord Wilberforce suggested in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 832, 835.

65. Able Success says that Mr Siu, who until 1 April 2014 was also the financial controller of Skyway, had a conflict of interests and can be presumed to have acted for an improper purpose.  I do not think this is right but, more importantly, what is the basis for saying that the other four directors have any reason to favour Skyway?  In my view, there is none. Two of the three independent directors were appointed before Mr He came into China Packaging and the other one was, presumably, recruited by Mr He himself.  They are respectively senior professional accountants and a solicitor of the High Court.  Mr Lau is also a professional accountant, and a director of other listed companies.  There is no evidence whatsoever that he has any connection with Skyway, or has any reason to act otherwise than in accordance with his duties to China Packaging.  The directors have reached a unanimous conclusion on the open offer and have in these proceedings re-affirmed their commercial judgment.

66. In my view Mr Li Ling’s assertions in his affirmations seek to pile suspicion upon speculation.  It follows from what I have already said that in my view, on the evidence, the plaintiff’s claim does not have such prospects as to warrant the grant of an interlocutory injunction now which in the circumstances of this case is likely to be finally determinative of the outcome of the proceedings.  That is sufficient for disposing of this application.

67. But even if the plaintiff passes the first hurdle, I would still have refused to grant the injunction.  First, on Able Success’s own case, s 729 of the Ordinance applies so that there is a power to order damages.  As Mr Tong SC pointed out, the court has accepted that it is possible to quantify the damages to which a plaintiff is entitled for a claim for dilution of his shareholding in a public company: Leung Pik Wa v Poh Po Lian (HCA 681/2011, 4 July 2011).  The first affirmation of Li Ling states that damages would not be adequate as it would be difficult for the plaintiff to regain controlling interests.  However, that statement is based on an erroneous calculation of the number of shares that Get Nice would obtain from the plaintiff’s entitlement and the erroneous assertion that the underwriter would thereby obtain a controlling interest in the company.

68. As to the damage that may be suffered by the company, it seems to me real and irreparable damage is more likely to be suffered if the open offer fell through with the result that funds are not raised for new business and the company’s listing status is put in jeopardy, than if the open offer is allowed to proceed.  As I have said, it is a misconception to say that the company’s assets are being given away at an undervalue via the open offer.  The pricing of an open offer, or for that matter a rights issue, is a complex matter involving commercial judgment and market evaluation.  One cannot simply take the closing price the day before, or the placement price in the previous month, as a yardstick, and assert that the offer price, in comparison, is so low as to lie beyond the boundaries of tenable management decision.  For one thing, the placement in March 2014 was agreed before the final results announcement and gave new investors a significant stake in the company whereas the open offer is a pari passu offer to existing shareholders.  There is no basis for the plaintiff to assert that the company would “certainly” be able to make an open offer of shares later at a “much higher price” than HK$0.04 per share.  In the absence of admissible expert evidence on that issue, it is not evident that the company will suffer loss from the open offer.

69. In this connection, as has been pointed out by Mr Tong SC, an undertaking as to damages is glaringly missing from the materials put forward by the plaintiff.  Miss Chan SC maintains in her submissions that there is no basis to require an undertaking because the open offer was being put forward in breach of fiduciary duty and therefore voidable.  But that is the plaintiff’s allegation.  The undertaking is to cater for the situation where the plaintiff’s case fails.

70. I am entitled also to take into account the interests of public investors who traded shares in China Packaging on a cum-entitlement basis up to 2 May 2014, particularly given that although the open offer was announced on 22 April, Able Success did not issue proceedings, or give notice of any objection, until 2 May, and did not take out the present interlocutory summons until 5 May.  They would be prejudiced and left without recourse if the injunction is granted.

71. In short, I am also firmly of the view that on the evidence before me, refusing the injunction sought carries the lower risk of injustice if I should turn out to be wrong.

The 2^nd and 3^rd defendants

72. Able Success has joined Hongchang and Ease Faith as 2^nd and 3^rd defendants respectively to the present proceedings.  They have no relation to China Packaging.  They were joined on the basis that their interests in the shares held by Able Success in China Packaging would be adversely affected by the open offer.  But the 2^nd and 3^rd defendants are not shareholders as such.  All that they have obtained is a charging order coveringthose shares, making them equitable chargees.  So far as these proceedings are concerned, their commercial interests are completely aligned with those of Able Success.  In these circumstances I do not think there is sufficient justification for their joinder in these proceedings.  Able Success and the 2^nd and 3^rd defendants try to draw support from the fact that Skyway has itself joined Hongchang and Ease Faith in HCMP 323 of 2014.  But that is a different case – a case in which a prior incumbrancer (Skyway) is seeking an order for sale of the asset which is not only covered by the Mareva injunction but also the charging orders obtained by Hongchang and Ease Faith.

73. In conclusion, the plaintiff’s summons for interlocutory injunction falls to be dismissed.

[Submissions on Costs]

74. The 1^st defendant’s and the 4^th to 8^th defendants’ costs are to be paid by the plaintiff forthwith, but limited to one set of costs.  There will be no order as to the 2^nd and 3^rd defendants’ costs.