NG CHI SUM AND ANOTHER v. FULL ART INTERNATIONAL LTD AND OTHERS

HCA138/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 138 OF 2009

----------------------

----------------------

-------------------------------------------------

REASONS FOR DECISION ON COSTS

------------------------------------------------

1. By an ex parte order made on 23 January 2006 Deputy Judge Au granted the 1^st plaintiff (“P1”) an injunction restraining the intended 3^rd defendant (“TEL”) (whether by itself, its directors, officers, employees, servants, agents or otherwise howsoever) from implementing or otherwise carrying into effect the resolution of TEL’s Board of Directors dated 14 January 2009 until the return date.  By the said resolution it was resolved, inter alia, that P1’s employment as general manager of TEL be summarily terminated with immediate effect and that P1 should immediately resign as director of TEL (“the resolution”).

2. P1’s inter partes summons for a continuation of the ex parte order until judgment or further order was returnable on 30 January 2009.  By consent the return date was adjourned until 6 February 2009.  The defendants gave notice to P1’s solicitors that they would be applying to discharge the ex parte order on the ground of material non-disclosure and that they would also be opposing the continuation of the ex parte order.

3. The matter came before Chu J on the adjourned return date of 6 February 2009.  The application to discharge and the application to continue the ex parte order was adjourned to 25 February 2009.  Directions were given by Chu J as to the filing of evidence and skeleton submissions.  She ordered that the defendants do file and serve their evidence by 10 February 2009 and that P1 file his evidence in reply on or before 20 February 2009.  Chu J also ordered that pending the determination of the summons to continue, the ex parte order be continued “save that [TEL] be at liberty to consider and pass by board resolution the appointment of a Deputy General Manager with such power and duties as its Board of Directors shall decide”.

4. In accordance with the directions given by Chu J the defendants filed and served their affirmations with voluminous exhibits in support of the application to discharge and in opposition to the summons to continue the ex parte order on 10 February 2009.  By the 2^nd affirmation of Luo Ken Yi (“Luo”) the defendants filed and served a further affirmation out of time on 17 February 2009.

5. By paragraph 35 of the 2^nd affirmation of Luo an undertaking was given that the Board of TEL would pass a resolution in writing and take such other necessary steps to authorize P1 to act on behalf of TEL in collecting the receivables of TEL subject to the proviso that before P1 is to commit TEL to any agreement with third parties in respect of such receivables, P1 would have to obtain the written consent of the Board of TEL (“the undertaking”).

6. In view of the undertaking P1 was no longer seeking to continue the ex parte order.  P1 did not file his evidence in reply.

7. Mr Ronny Wong SC, together with Mr Lee, for the defendants, confirmed that he was giving the undertaking to the court on behalf of TEL.

8. On the undertaking given by counsel for TEL, I discharged the ex parte order and dismissed P1’s summons to continue the ex parte order.  This was not disputed.

9. The only issue between the parties was the question of costs.

10. After hearing arguments on the question of costs, I ordered that the costs of the application to discharge the ex parte order and the costs of P1’s summons dated 29 January 2009 including the hearings on 6 and 25 February 2009 be costs to the defendants such costs to be taxed and paid forthwith with certificate for two counsel.  I indicated at the time that reasons in writing would be given later.  I now do so.

11. Mr Peter Ng SC, with Ms Lau, for P1, submitted that the appropriate order for costs was either costs in the cause or defendants’ costs in the cause.

12. Mr Wong submitted that in the application for ex parte relief there was material non-disclosure on the part of P1 and that the court would have discharged the ex parte order on this ground.  In the circumstances it was submitted that the costs should be costs to the defendants to be taxed and paid forthwith.

13. It is not disputed that in an application for an interlocutory injunction normally an order of either costs in the cause or the successful party’s costs in the cause would be appropriate.  However if there are special circumstances or where the unsuccessful party has acted improperly or is some way to be penalized a different order may be made (King Fung Vacuum Ltd & others v. Toto Toys Ltd. & others [2006] 2 HKLRD 785 at 794).

14. The law is well settled.  Where a party seeks an ex parte injunction he must act in the utmost good faith and disclose to the court all matters which are material to be taken into account by the court in deciding whether or not to grant relief.

15. The material facts are those which it is material for the judge to know in dealing with the application.  Materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers (Brink’s Mat Ltd v Elcombe and others [1988] 1 WLR 1350 at 1356).

16. All matters which are relevant to the “weighing operation” that the court has to make in deciding whether or not to grant the order must be disclosed (Thermax Ltd v Schott Industrial Glass Ltd [1981] FSR 289 at 298).

17. The duty of full and frank disclosure includes disclosure to the court of matters which are or may be adverse to the applicant.  The duty to disclose applies to matters known to the applicant or his agents or matters which they would have known, had they made all the inquiries which should reasonably have been made prior to the application.  The applicant has a duty to make sure as far as he can that the full story is before the court (para. 9.002 Gee on Commercial Injunctions 5th Edn).

18. It is not sufficient to merely exhibit voluminous exhibits and expect the ex parte judge to consider the same in detail.  It is the duty of the legal advisers to point out to the judge hearing the application any points which are to the applicant’s disadvantage (Richcombe Investment Ltd v Tin Fung & Another [2001] 2 HKC 115 at 121).

19. Any contractual provision which is relevant for the court’s consideration should be drawn to the court’s attention and it will not usually be sufficient to simply exhibit the entire contract (para. 9.003 Gee).

20. It seems to me that if there had been material non-disclosure when P1 applied for the ex parte order which would justify a discharge of the ex parte order then, in my view, the court may in the exercise of its discretion make an order for immediate payment of costs to the defendants.  The question to consider is whether there has been material non-disclosure.

21. Briefly, the background facts are that P1 was the founder of TEL and its business for over 20 years was in the construction of curtain wall and roofing systems.  The 2^nd plaintiff (“P2”) is his wife.

22. CAE is a company incorporated in the USA.  Full Art is a wholly owned subsidiary of CAE.  In 2007 the shares of CAE were listed and traded in the American Stock Exchange.  Since June 2008 shares of CAE have been listed and traded on NASDAQ.

23. The business of CAE is in, inter alia, the design, engineering and installation of high-end specialty curtain wall systems and roofing systems.

24. By a stock purchase agreement dated 6 November 2007 (“the SPA”) P1 and P2 sold all the shares in TEL to the 2^nd defendant (“Full Art”) for US$11,654,566.  50% of this sum was paid in cash and 50% was paid for by 703,778 shares in the 3^rd defendant (“CAE”) with 30% of the shares to be held in escrow by an escrow agent to be released at stages after the first and second anniversaries of the SPA.

25. By the writ and endorsement of claim issued on 16 January 2009 P1 and P2 claim, inter alia :

(1) a declaration that the SPA has been rescinded and/or avoided;

(2) alternatively, a declaration that P1 and P2 have accepted Full Art and CAE’s wrongful repudiation of the SPA and that the SPA has been lawfully terminated by P1 and P2;

(3) an order that Full Art and CAE do transfer back to P1 and P2 or their nominees all the shares in TEL which had been transferred by P1 and P2 to Full Art and CAE pursuant to the SPA;

(4) damages for fraudulent and/or reckless and/or negligent misrepresentation;

(5) damages for wrongful repudiation and/or breaches of the SPA;

(6) a declaration that P1 and P2’s interest and/or equity in the  business operation described as the Dubai branch of TEL is not covered by or sold under the SPA.

26. By the draft amended endorsement of claim P1 and P2 sought to add TEL as the 3^rd defendant claiming a declaration that the resolution was unlawful, null and void and claiming an injunction to prevent TEL from implementing or carrying into effect the resolution.

27. P1’s ex parte application before Deputy Judge Au was supported by P1’s affirmation dated 23 January 2009 with over 350 pages of exhibits.

28. It is important to see what was put forward in support of the application.  When dealing with the SPA at paragraph 8 of his affirmation P1 said that :

“From April to November 2007 Luo had variously represented to me concerning how financially sound CAE and Full Art were, the high profitability of their subsidiaries, as well as the promising prospects of CAE.  I was also told that the profit margin of CAE was approx. 26% as filed by it with the SEC.  I asked him many times to look at the financial documents but he said that I should trust him.  Besides, he told me all the financial data was assessable on the official website of CAE and prepared in compliance with the legal requirements of the SEC.”

29. He then produced a copy of CAE’s annual report dated 17 April 2007.

30. At paragraph 9 of his affirmation P1 said :

“ In reliance of the representation of Luo, the 2^nd plaintiff and I entered into a Stock Purchase Agreement with Full Art and CAE for the sale of our entire shareholding in TEL to Full Art on or about 6^th November 2007 (“the SPA”).  There is now produced and shown to me exhibit marked “NCS-4” copy of the SPA.”

31. P1 dealt with his claim based on rescission of the SPA at paragraphs 15 to 19 of his affirmation.

32. He said at paragraph 17 that by 16 October 2008 he discovered that “the rosy picture presented to me by Luo prior to the SPA was completely misleading and inaccurate”.

33. At paragraphs 18 and 19 he said :

“ 18.    When [P2] and I agreed to sell TEL to Full Art in return for CAE common shares as part of the purchase price valued at US$8.28 per share, I was led by Luo to believe that CAE was highly profitable and financially healthy.  The overstated profitability of CAE means that the value of CAE common shares were substantially less than that used in the SPA for calculating the purchase price.

19. Should [P2] and I had known the true financial status of CAE, we would not have entered into the SPA.  By a letter sent by our solicitors, Messrs. Donald Yap, Cheng & Kong, Solicitors to Full Art and CAE on 11^th December 2008, we have rescinded the SPA on the ground of Full Art/CAE’s misrepresentation and also terminated the SPA on the ground of Full Art’s wrongful repudiation, more particularly set out in the letter and below.  There is now produced and shown to me exhibit marked “NCS-7” copy of the said letter dated 11^th December 2008.”

34. At paragraph 20 P1 dealt with the plaintiff’s claim based on wrongful repudiation of the SPA which repudiation was, according to P1, accepted by P1 and P2.  At paragraph 20 he said :

“ 20.    Pursuant to clause cl. 2.03(c) (ii) of SPA, on 6^th November 2008 i.e. the first anniversary of the date of the Closing, Full Art should cause CAE to direct its transfer agent to reissue certificates to me and my wife representing 2/3 of the original number of CAE common shares held in escrow by the Escrow Agent.  By an email sent by BG dated 26^th October 2008 to me, CAE stated that it would not release the escrow shares as theyhad serious worries about the potential shortfall on the collection of account receivables.  According to Clause 3.01 (dd) of the SPA, the only representation made was that the receivables were fully collectible within 24 months following the date of Closing i.e. 6^th November 2009.  There was no reason for Full Art/CAE to hold up the release of the escrow shares to us when the deadline for collection of the receivables was still more than a year away.  In my view, BG’s electronic mail amounted to a serious breach on the part of the 1^st and 2^nd Defendants thereby evincing their intention not to be bound the SPA.  This act of repudiation was accepted by the 2^nd Plaintiff and me, as stated in our solicitors’ letter of 11^th December 2008.  There is now produced and shown to me exhibit marked “NCS-8” copy of the said electronic mail from BG.”

35. There can be no doubt that the impression given to the judge dealing with the ex parte application that it was P1’s case that the SPA has been rescinded or that the SPA has been terminated on the ground of wrongful repudiation which had been accepted by P1 and P2.  As a result of this, P1’s case was that all the shares in TEL which had been transferred by P1 and P2 should be transferred back to P1 and P2.

36. At paragraph 21 of his affirmation P1 also relied on an agreement made at a meeting on 15 December 2008 whereby on his case an agreement was reached to settle the disputes relating to the SPA.  He said that in essence Full Art had agreed to retransfer all the TEL shares to P1 and P2 on the terms as set out at paragraph 21 (“the settlement agreement”).

37. P1 then dealt with his claim for wrongful dismissal and wrongful removal as a director of TEL at paragraphs 24 to 33 of his affirmation.

38. Mr Ng emphasized that the ex parte relief was sought and granted only on the basis of P1’s claim for wrongful dismissal and wrongful removal as a director of TEL and not on the claims based on rescission or repudiation of the SPA or the settlement agreement.  It was submitted that in the circumstances the matters complained of as being material non-disclosure were not material as they were not relevant to the application and the order made.  I am unable to accept Mr Ng’s submission.

39. It is abundantly clear that P1’s case as set out in his affirmation and which was presented to the ex parte judge was that Luo had made certain representations to P1 as set out at paragraph 8 of his affirmation which, I would observe, are vague and unparticularised allegations.  What is important is that it was said at paragraph 9 that P1 and P2 entered into the SPA “in reliance on the representation of Luo”.  The complaint was that in October 2008 P1 discovered that the rosy picture presented by Luo prior to the SPA was “completely misleading and inaccurate” (paragraph 17 of P1’s affirmation) and that had P1 and P2 known of the true financial status of CAE they would not have entered into the SPA (paragraph 19 of P1’s affirmation).  This was put forward as the ground for rescission namely, for misrepresentation.  The impression given to the court by his affirmation was that prior to the SPA P1 had not looked into or verified the financial position of CAE and was therefore misled by Luo’s misrepresentations.

40. P1’s case as presented to the ex parte judge by paragraph 20 of P1’s affirmation was also that there had been a repudiation of the SPA as by an email sent on 26 October 2008 CAE stated that it would not release the escrow shares as they had serious worries about the potential shortfall on the collection of account receivables.  Under the SPA P1 and P2 had warranted that the receivables of TEL were fully collectible within 24 months of the closing of the SPA i.e. 6 November 2009.  P1’s case was that the refusal to release the escrow shares was an act of repudiation which was accepted by P1 and P2.

41. P1 also relied on the settlement agreement at paragraph 21 of his affirmation.  By the letter dated 17 January 2009 from P1’s solicitors to Luo, P1 was alleging that in breach of the settlement agreement Luo as Chairman of TEL wrongfully passed the resolution and thus wrongfully dismissed P1 as the general manager of TEL and wrongly removed him as a director.

42. What is important is that under the SPA by cl. 3.01(aa) P1 and P2 acknowledged that they had the opportunity to conduct their own independent investigation of Full Art and CAE.  They acknowledged also that they and their representatives had been provided the opportunity to ask questions of and receive answers from the directors of Full Art concerning the business of Full Art and CAE and that they had access to sufficient information to understand the merits and associated risks.

43. More importantly, by cl. 4.01(a) of the SPA P1 and P2 acknowledged that the decision to acquire the CAE shares was taken by them “solely” in reliance upon the information contained in the SPA and such other written information supplied by an authorized representative of CAE as P1 or P2 may have requested.  P1 and P2 also acknowledged that all documents, records and books pertaining to the investment had been made available for inspection by them and their lawyers and accountants.  P1 and P2 acknowledged also that they were not relying on “any oral information furnished by CAE or any other person in connection with its investment decision” and that no such oral information has been furnished to them.  This was an acknowledgment by P1 and P2 that they were not relying on any oral representation to enter into the SPA.

44. In my view both cls. 3.01(aa) and 4.01(a) were highly relevant to P1’s case as presented before the ex parte judge.  They are provisions in the contract which are adverse to P1’s case based on misrepresentation.  I have no doubt that these provisions should have been drawn to the judge’s attention.  They were not.  The affirmation of P1 refers to certain clauses of the SPA but these particular clauses were neither referred to in the affirmation nor at the ex parte hearing.  It is no answer to say that they are not relevant to the claim for wrongful dismissal and removal as a director and therefore not relevant to the order made by the judge.

45. The causes of action based on rescission, repudiation, breach of settlement agreement and wrongful dismissal and removal as a director are all related.  They are all relied on and referred to in the affirmation in support.  The complaint was that by their conduct Full Art and CAE had no intention of giving control of TEL back to P1 and P2 (paragraph 32 of P1’s affirmation) and the status quo should be preserved pending the full performance of the settlement agreement (paragraph 23 of P1’s affirmation). 

46. It seems to me that on this ground alone I would have discharged the ex parte order as the full picture was not given to the court.  The impression given to the court was that the SPA had been rescinded on the ground of misrepresentation.  Not drawing cls. 3.01(aa) and 4.01(a) of the SPA to the court’s attention would have, in my view, left the court with a misleading and wrong impression.  A failure to draw these contractual provisions to the court constitutes, in my view, a serious and material non-disclosure which would justify the court in discharging the order.

47. P1’s case was also that until the resolution he was the one managing TEL and “generally ensuring the smooth and timely completion of all projects.  I am well versed with the business operations of TEL and its financials” (paragraph 34 of his affirmation).

48. P1 also said that it would appear that Full Art and CAE are “cash-strapped and needed the funds of TEL to keep their operations running” (paragraph 37 of his affirmation).  And at paragraph 39 he said that unless he remained a director of TEL, TEL’s business was in real jeopardy and the loss he and P2 would suffer if TEL’s business falters in the meantime would be immeasurable.  He gave the impression that Full Art and CAE were cash-strapped and that it was TEL that was keeping their operations going.

49. It is clear from the payroll records of TEL for the period from January 2007 to December 2008 (exhibit LKY-37 to Luo’s 2^nd affirmation) that the number of staff from TEL had increased from some 10 odd staff in November 2007 to almost 50 in December 2008.  Also, on the evidence it is clear that in 2007 TEL did on occasions delay payment of staff wages.  It appears that TEL was, as Luo said, in financial difficulty before the SPA. 

50. It is evident from the documents exhibited as LKY-38, LKY-39 and LKY-40 to Luo’s 2^nd affirmation that substantial advances of about HK$19 million were made by the CAE group to TEL both before and after the SPA.  These are matters which, in my view, ought to have been disclosed to the judge at the ex parte stage.  Instead, the clear impression given to the judge was a wrong one namely, that TEL was the one financing CAE instead of the other way round.  In my view this also constituted serious and material non-disclosure on the part of P1 which would have justified a discharge of the order.

51. As I have said, P1 also relied on the settlement agreement in his supporting affirmation.  This was an agreement said to have been made at a meeting on 15 December 2008 on the terms set out at paragraph 21 of his affirmation.  However, what was not disclosed to the court was an email from P1 to Bert Grisel sent on 31 December 2008 (Exhibit AJG-14 to the 2^nd affirmation of Albert Jan Grisel) where in the final paragraph P1 said :

“  Along with the a.m. progress, considering the need to ascertain the [TEL] account for the purpose of establishing a “buy back” agreement (being an option discussed with CAE on 15^th Dec) as alternative to my previous demand raised on 11^th Dec, I have called up a meeting yesterday in [TEL’s] office with the auditor, Messrs. Lau, Yim, Chiu & Co., wherein I have requested an audit to start off quickly and in parallel with own preparations…………………………..”

52. Mr Wong submitted that by that email P1 was himself saying that the “buy back” was only one of the options discussed on 15 December 2008 and for the purpose of “establishing” a “buy back agreement” the accounts of TEL had to be ascertained.  That being so, it was submitted that this email was adverse to the P1’s case that a settlement agreement had been made on 15 December 2008 and should have been disclosed to the judge.  Mr Ng submitted that this email was not inconsistent with P1’s case that there was a settlement agreement made on 15 December 2008.

53. In my view the email of 31 December 2008 from P1 to Grisel may have been adverse to the case of P1 that there was the settlement agreement which had been agreed at the meeting on 15 December 2008.  This clearly should have been brought to the judge’s attention but it was not.  This was another instance of material non-disclosure.

54. Although there were more instances of material non-disclosure relied on by the defendants it is not necessary for me to deal with all of these.  The above non-disclosures are, in my view, sufficiently serious justifying a discharge of the ex parte order.  The court’s power to discharge where the duty of full and frank disclosure on an ex parte application has not been observed is salutary and necessary for the court’s protection (per Li CJ (as he now is) in Mattel Inc v Tonka Corp. [1991] 2 HKC 411 at 430).

55. For the above reasons I made the order for costs as set out at paragraph 10 above.