SHIH RICK JU FENG AND OTHERS v. LO YUEH-LI AND OTHERS

HCA 1356/2021

[2022] HKCFI 1272

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1356 OF 2021

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D E C I S I O N

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A.  INTRODUCTION

1.  This interim injunction application features two families: the Shihs and the Hsiehs (“the Two Families”). Between them runs much bad blood, which has boiled over into corporate and other conflicts replete with claims of grave misconduct and criminal complaints.

2.  The focal conflict in this action concerns funds (“the Synergy Funds”) held by the 3^rd Defendant (“Synergy”), a wholly owned subsidiary of the 2^nd Defendant (“Alliance”). Members of the Two Families are the ultimate beneficial owners (“the Beneficiaries”) of the Synergy Funds. The 1^st Defendant undisputedly holds the Alliance shares as sole nominee shareholder for the Beneficiaries and is the sole director of both Alliance and Synergy. The 4^th and 5^th Defendants are the liquidators of Synergy, which is in voluntary liquidation. The 1^st Defendant’s decision to wind up Synergy on 30 August 2021 (“the Resolution”) was the immediate spark to this action, which launched by Writ on 7 September 2021.

3.  The Plaintiffs are from the Shih family. By a Summons filed together with their Writ they seek, pending the action’s final determination, to restrain:

(1)  the 1^st Defendant and Alliance from doing any act or taking any steps in the name of, on behalf of or in relation to Alliance or Synergy; and

(2)  the 4^th and 5^th Defendants from exercising any powers as liquidators of Synergy, including effecting any distribution out of Synergy.

(“the Interlocutory Injunctions”)

4.  The Summons first came up for hearing on 24 September 2021 before DHCJ Paul Lam SC, who granted an interim-interim injunction against the 4^th and 5^th Defendants but refused any interim-interim restraint against the 1^st Defendant and Alliance: see Reasons for Decision at §1, §12 and §22.

5.  At §2 of his Reasons for Decision, DCHJ Paul Lam SC identified the main background features for the purposes of considering interim relief. As succinctly summarised there:

“the Plaintiffs claim that a members’ resolution to wind up [Synergy] was void and invalid…the Plaintiffs claim that the 1^st Defendant is acting as trustee on behalf of the eight beneficiaries. [Synergy] is holding what the Plaintiffs described as the “Corporate Fund”, which must be used for certain agreed purposes…[and] that there are two camps of beneficiaries: one camp is represented by the Plaintiffs whereas the 1^st Defendant is associated with the other camp. [The Plaintiffs] claim that the 1^st Defendant may not act without the unanimous instructions and consent of the beneficiaries. However, the 1^st Defendant passed the Resolution without the consent of the Plaintiffs”.

6.  In reaching this Decision, I have also been much assisted by the written factual summaries (together with legal analysis) prepared by Mr William Wong SC and Mr John Hui for the Plaintiffs, and by Mr Paul Shieh SC and Ms Sara Tong for the 1^st and 2^nd Defendants. Leading counsel on both sides were also very helpful in their focused and responsive oral submissions at the hearing. I am grateful also for the assistance of Mr Tony Ko, who appeared for the 4^th and 5^th Defendants. The 4^th and 5^th Defendants take a neutral stance in respect of the Summons and the underlying substantive disputes between the Plaintiffs and the 1^st to 3^rd Defendants.

7.  There was no dispute between counsel on the principles governing interim injunctions. In particular, as applicants for interim injunctive relief the Plaintiffs must show: (1) a serious issue to be tried; (2) that if they succeed at trial, damages would be inadequate to compensate for loss caused by the refusal to grant the injunction; and (3) if there is doubt as to the adequacy of damages, that the balance of convenience favours the grant of an injunction, the Court’s ultimate concern here being to take the course with the least risk of injustice.

8.  As further accepted by all counsel at the hearing, the requirements for the grant of the Interlocutory Injunctions are cumulative, such that a failure to show the inadequacy of damages would itself be fatal to the application.

9.  I highlight this at the outset since, for the reasons set out below, the Plaintiffs are in my view unable to show that if they succeed at trial, damages would be inadequate to compensate for losses that would be caused by the refusal to grant the Interlocutory Injunctions. So despite the submissions forcefully advanced by their counsel, their application must fail.

B.  NO IRREPARABLE HARM

B1.  The Plaintiffs’ Stance

10.  There are five types of potential harm flagged by the Plaintiffs as being, in their submission, (1) harms that would flow from a refusal to grant the Interlocutory Injunctions; and (2) irreparable, in the sense of not being adequately compensable by damages. The harms in question have been conveniently summarised in the written submissions of Mr Shieh and Ms Tong. The summary is not itself contested, and for convenience I will adopt it here (including where appropriate the footnote references to the relevant affirmation evidence) with a few minor edits.

11.  First, the Plaintiffs contend (their Skeleton §83(a)) that winding up of Synergy would mean that it would cease to exist and the “substratum of [Synergy] will be destroyed” before it is able to fulfil its intended function to maintain the Synergy Funds for certain alleged joint purposes in respect of restructuring, listing and financing matters (“the Alleged Purposes”), and “the Beneficiaries will lose control over [Synergy] and the Corporate Fund in [Synergy’s] Account” (“Dissolution Harm”).[1]

12.  Second, the Plaintiffs suggest (their Skeleton §83(b), (d)) that the restructuring (“the Restructuring”) of the shareholding of a corporate group in which the Two Families are interested (“the UR Group”) (and the subsequent listing of the UR Group’s main operating entity in the PRC) would be hindered if Synergy is wound up, on the basis that the Synergy Funds were (say the Plaintiffs) meant to create a safety net to “meet any unexpected and urgent financial needs related to the Restructuring”, and that this safety net would be gone for good if the Hsieh family receive (and spend) their portion of the Synergy Funds before this action is determined (“Restructuring Harm”).[2] In particular, on the Plaintiffs’ evidence, recourse to the Synergy Funds would be required “imminently” for the acquisition (“the Acquisition”) of Royal Electronic Factory (Thailand) Co. Ltd (“Royal Ohm”) by Royal Technology (Thailand) Co., Ltd (“Royal Tech”), a Thai affiliate of the UR Group. The Acquisition is said to be part of the Restructuring,[3] and the Plaintiffs have estimated the costs of the Acquisition to be above RMB 252 million (or US$39,612,877.67 million).[4] It is further said that these Thai entities have limited access to funds.[5]

13.  Third, the Plaintiffs say that, because the Synergy Funds are to be used as “emergency operating funds” per the Alleged Purposes, to wind up Synergy and distribute the Synergy Funds to the Beneficiaries would destroy the safety net constituted by the Alleged Nominee Arrangement and expose the UR Group to “greater financial and/or corporate risks” (“Emergency Harm”).[6]

14.  Fourth, it is suggested (the Plaintiffs’ Skeleton §83(e)) that the winding up of Synergy may constitute an event of default under charges granted to E Sun Bank over the Synergy Funds, and that the bank may take enforcement actions against the Beneficiaries (creating “spill over effects” on their finance) (“Liquidity Harm”).[7] It will be noted that in the Plaintiffs’ camp only the 2^nd Plaintiff’s owed money to E Sun Bank,[8] so it is the 2^nd Plaintiff’s position that would have to be considered.

15.  Fifth, the Plaintiffs claim (their Skeleton §83(f)) that the Hsieh family would use their portion of the Synergy Funds to fund two businesses allegedly competing with the UR Group (“Alleged Competing Businesses”),[9] and that this would cause loss and damage to the UR Group which is difficult to quantify (“Competition Harm”).[10]

B2.  Unsound premise: wrongful distribution to the Hsiehs

16.  Mr Shieh’s primary line of attack against the Plaintiffs’ case portrays it as resting on a “fundamentally erroneous” and indeed simply “false” premise, namely that absent the Interlocutory Injunctions, the Synergy Funds would be wrongfully distributed to Hsieh family members.

17.  More particularly, Mr Shieh says that the Dissolution Harm, the Restructuring Harm, the Emergency Harm and the Competition Harm are all premised on the assumption that, without the Interlocutory Injunctions, the Beneficiaries in the Hsieh family would receive their portion of the Synergy Funds before this action is determined, but that such a distribution may turn out to be wrongful.

18.  That such a premise permeates the Plaintiffs’ case on harm is (it seems) not itself disputed and in any event plain. But is it fatally flawed?

19.  While one might nitpick over whether the premise can be starkly described as “false”, the premise is in my assessment indeed unsound in being insufficiently supported by the evidence to hand, and is therefore insufficient to support the Plaintiffs’ ultimate contentions on harm.

20.  As the 1^st and 2^nd Defendants noted:

(1)  In the ordinary course of liquidation, any distribution of Synergy’s assets would be to its sole shareholder, Alliance, and not to the Beneficiaries. The 4^th and 5^th Defendants, represented by counsel for this application, have not indicated any intention to directly distribute to the Beneficaries, and any such course would be subject to the Court’s supervisory jurisdiction.

(2)  There is no suggestion that a distribution to Alliance would itself cause any immediate and significant harm to the Plaintiffs, and any such suggestion cannot be sustained on the current evidence.

21.  Against this it might be said that, if Synergy’s assets were distributed to Alliance, there would then be the risk of the 1^st Defendant passing a members’ resolution to wind up Alliance. Given the intense and wide-ranging nature of the conflict between the Two Families, I would not go so far as to brush off any chance of this happening. But the evidence is in my view far from enough to show that any such risk is pressing and substantial. In particular, I see no solid evidential basis for assuming that the 1^st Defendant, as the undisputed nominee shareholder of Alliance, would pass a members’ resolution to wind up the company. I specifically record here the submission made in writing on behalf of the 1^st Defendant by her counsel, that any such suggestion would be “extraordinary” (Skeleton for the 1^st and 2^nd Defendants §68.4); a position further affirmed by counsel for the 1^st Defendant at the oral hearing.

22.  As accepted by all the parties, the applicant has to show that, if he succeeds at trial, damages would not be adequate to compensate for loss caused by the refusal to grant the injunction. In my view, the theoretical possibility of Alliance being wound up further down the line does not on the present evidence warrant the conclusion that there would be irreparable harm should the Injunctive Relief be refused, enabling the liquidation of Synergy to proceed.

B3.  Insufficient evidence for each specific type of harm

23.  In any event, the Plaintiffs’ case on each type of harm is in my judgment not adequately made out on the evidence. I accept in this regard the following points made on behalf of the 1^st and 2^nd Defendants, which have been advanced without prejudice to their primary stance above.

The Dissolution Harm

24.  Synergy does not have any operating business nor goodwill. Its raison d’être is to hold the Synergy Funds. As such, so long as the Synergy Funds are intact, Synergy’s continuing existence has no independent significance and Synergy’s dissolution cannot itself constitute harm to the Beneficiaries, far less irreparable harm.

25.  The “loss of control” over the Synergy Funds harm-scenario is similarly flawed. On the winding up of Synergy, the Synergy Funds will naturally be distributed to Alliance, and will only be distributed to the Beneficiaries in the event of a court order.

The Restructuring Harm

26.  The prospect of any Restructuring Harm may be divided into two parts: pre- and post- judgment.

27.  Any Restructuring Harm between now and judgment, which would appear on the Plaintiffs’ case to cover the costs of the Acquisition (described as being “imminent”), is irrelevant since this cannot constitute harm flowing from a refusal to grant the Interlocutory Injunctions.

28.  As Mr Shieh noted, the matter may be tested by asking: if the present injunction application were allowed, could the Synergy Funds be applied towards pre-judgment restructuring costs which, according the Plaintiffs, is “imminently” required?

29.  The answer is “no”. On the Plaintiffs’ own case, use of the Synergy Funds require unanimous consent from all Beneficiaries. Those in the Hsieh family have already indicated that they would not consent to Restructuring uses because they maintain the view that the Synergy Funds are reserved for their personal use.

30.  As regards post-judgment Restructuring Harm, the Plaintiffs allege that if the relevant portions of the Synergy Funds are wrongfully distributed to the Hsieh family Beneficiaries, they may not be recoverable after judgment, and there may be a permanent loss of those portions of the Synergy Funds for use in the Restructuring.

31.  However, it must be borne in mind that (on this premise) the Shih family would receive their (53.43%) share of the Synergy Funds (ie US$29,093,209.38). It has not been said that this would be insufficient to meet any “unexpected and urgent” costs incurred in the course of the Restructuring. The Plaintiffs have themselves said that “it is expected that the companies involved in the Restructuring process will apply or source their own funds to cover the relevant Restructuring costs”.[11] In other words, recourse to the Synergy Funds would only be made for unexpected and extraordinary expenses, and there is no reason to think that Shih family’s US$29-odd million would not suffice to that end.

32.  Moreover, the Plaintiffs’ essential premise that the Synergy Funds would be required for the Restructuring is open to doubt. In their initial round of evidence in support of the Interlocutory Injunctions, the Plaintiffs mentioned no difficulties in raising funds for the Restructuring. Even in their later evidence, the Plaintiffs only go so far as to suggest that some fundraising methods are unavailable. The viability of certain common avenues of raising funds for the Restructuring has not been addressed in the evidence. For example, while a subsidiary can usually borrow with a guarantee issued by its parent, there is no evidence that this is an unviable course for Royal Tech or Royal Ohm. There is moreover no evidence of the Thai affiliates’ loan applications being rejected.

33.  In all, the Plaintiffs have not shown that recourse to the Synergy Funds (or in any event the Hsieh family’s portion) is necessary or expected. Any interest payable on bank borrowings is easily compensable by damages. The Plaintiffs have provided no evidence of any difficulties, whether as already experienced or reasonably expected, in obtaining loans from banks in order to meet the alleged imminent needs for funds.

The Emergency Harm

34.  Save in the context of the Restructuring (which has already been addressed), no details have been provided in the evidence of what the “emergency” expenditure might involve, which entities would for these purposes be covered by the Synergy Funds, and why such entities do not have (or would otherwise be incapable of seeking) their own independent funding to cover any such urgent expenditure.

35.  Even if as the Plaintiffs assume, the liquidation process results in distribution of the Synergy Funds to the Beneficiaries, the Plaintiffs’ portion of those funds would reach their pockets. Insofar as any relevant emergency arises, the Plaintiffs could simply use their shares of the funds to address it, there being no suggestion that this would be insufficient for emergency “safety net” purposes.

36.  Again, if the Plaintiffs were to borrow the amount which had been distributed to the other Beneficiaries, the loss would simply be the cost of borrowing that amount, which could be easily compensated in damages.

The Liquidity Harm

37.  The Liquidity Harm finds little if any support in the evidence. There is in particular no evidence of any clause in the Bank Charges or any other relevant loan documentation that allows E Sun Bank to go after the 2^nd Plaintiff in the event of Synergy’s winding up. Clause 12 of the Bank Charges[12] is not such a clause: it only allows E Sun Bank to get in its security in the event of Synergy’s winding up and has nothing to do with the 2^nd Plaintiff.

38.  Even if it could be shown that enforcement of the E Sun Bank loans would pose liquidity problems for the 2^nd Plaintiff, the evidence discloses no reason why he could not borrow monies from other banks to resolve them. Any interest payable on such borrowings is easily compensable by damages.

The Competition Harm

39.  The 1^st and 2^nd Defendants complain that this alleged harm was raised for the first time in reply evidence filed by the Plaintiffs on 31 January 2022, more than four months after their Summons was issued, and that they therefore have had no proper opportunity to respond.

40.  Leaving the procedural complaint to one side, the 1^st and 2^nd Defendants rightly note that there is just a bare assertion that it would be “highly likely” that the Hsieh gamily would apply their portion of the Synergy Funds to fund the Alleged Competing Businesses, with no real identification or explanation of the resultant loss (which is simply said to be “difficult to quantify”).[13]

41.  Moreover, this alleged harm ignores the 1^st and 2^nd Defendants’ evidence that their intention has all along been to use the funds for personal investments in financial products. As things presently stand, there is no cogent reason for disregarding this evidence.

C.  BALANCE OF CONVENIENCE AND “FUTILITY”

42.  Given my conclusion on the failure to show irreparable harm in this case, it is strictly unnecessary for me to address whether there is any serious issue to be tried or the balance of convenience.

43.  With the prospect of a full trial on the Plaintiffs’ underlying claims against the Defendants, I propose to say nothing further on the substantive merits of the claims.

44.  As to the balance of convenience, I see some force in the 1^st and 2^nd Defendants’ point that, on the Plaintiffs’ own case, the Synergy Funds could only be used with the unanimous consent of all the Beneficiaries. Mr Shieh submitted that, because of this, it would be “pointless” to seek to “hold the ring” by way of the Interlocutory Injunctions in order to ensure that the full amount of the Synergy Funds would be available for use in the event of the Plaintiffs prevailing at trial.

45.  Mr Shieh relies here on:

(1)  the decision of Madam Recorder Linda Chan SC (as she then was) in Chan Shu Chun & Ors v Right Margin Limited [2015] 3 HKLRD 409 at §26, where her ladyship stated that it is “well established that equity does not act in vain and will not grant an injunction which is futile”; and

(2)  this observation of DCHJ Paul Lam SC at the last hearing of the Summons:

“Now, it's quite clear that there's now a deadlock between the two camps. And the big question is, what should happen to the [Synergy Funds], so to speak? And I think the defendant's point -- I mean, they make various points, but I think there’s a very practical point that ... [the Shih family] need to face somehow someday. That is, on your case how the funds should be used would require the unanimous consent of both camps. So in the light of the present relationship between the parties, it seems quite unlikely that the parties can come -- can reach some sort of agreement. So in the absence of agreement, apart from winding up the company, what alternative solution [is there]?”

46.  The Plaintiffs do not contest the principle stated in Chan Shu Chun. While the learned judge in that case did not say so expressly, it seems to me that where a proposed injunction is shown to be futile on the facts, then that is a matter that could affect the balance of convenience, where that question arises. This broadly aligns with what I understood Mr Shieh to be saying at the oral hearing, when he said that his futility point went into “the discretionary mix”. Put simply, if a proposed restraint would indeed be futile, then the balance of convenience (or any broader discretionary assessment) can hardly be said to favour it. In such a case, the futility factor may well be in itself decisive.

47.  In the present case, however, I am not persuaded that the need for unanimous Beneficiary consent itself means that the Interlocutory Injunctions would necessarily be wholly pointless or futile.

48.  The futility contention rests on the assumption that “it is entirely fanciful”to suppose that the unanimous consent of the Beneficiaries would ever be forthcoming (1^st and 2^nd Defendants’ Skeleton §99.2). While the prospect of any such consent is indeed remote, for present purposes I do not think it can at this stage be entirely excluded such that any interim relief would necessarily be entirely futile. Amongst other things, circumstances between now and any judgment following trial (c.f. the pre-trial position addressed at §§28-29 above) may well yet further shift, such that reasons for consent may emerge – even if driven purely by individual (or familial) interest.

49.  That said, since I agree that as things currently stand, the requisite consent for use of the Synergy Funds seems a far prospect, this would in my judgment be a strong additional factor against the grant of the Interlocutory Injunctions in terms of the balance of convenience and the comparative risk of injustice.

D.  CONCLUSION AND COSTS

50.  For the above reasons, the Plaintiffs’ Summons is dismissed. I make a cost order nisi that the costs of this application be the Defendants’ costs in the cause, to be taxed if not agreed. I also grant a certificate for two counsel in relation to the 1^st and 2^nd Defendants.