FRESH GAIN LTD v. CHINA VOCATIONAL EDUCATION CO LTD AND OTHERS

HCCT 45/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 45 OF 2011

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BETWEEN

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D E C I S I O N

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1.  This is a decision on the 5th defendant’s application to strike out the claim in the originating summons as against the 5th defendant. There were an alternative relief sought by the 5th defendant for discharge of an ex parte Mareva injunction granted by Saunders J on 7 October 2011 and an application by the plaintiff to continue the injunction. The matters in relation to the injunction have been settled.

The plaintiff’s claim for return of US$33.8 million

2.  The plaintiff entered into a Share Purchase Agreement with the 1st defendant and various other persons and entities.  The agreement is dated 22 April 2011.  By this agreement, the plaintiff was to acquire a block of shares in the 1st defendant for US$33.8 million.   This sum was paid by the plaintiff to the 1st defendant on 31 May 2011.  The 1st defendant was in the education business. 

3.  By the close of the share purchase transaction, the plaintiff alleged that it was induced to enter into the agreement by some false and misleading representations made to it by the 1st defendant’s representatives.

4.  The 1st defendant through a subsidiary was able to exercise control over one Beijing Beike Haoyue Technology Company Limited (“Haoyue”).  Haoyue’s business was in the investment and management of educational institutes in the mainland.  The plaintiff alleged that the misrepresentations made to it were about the financial position of the 1st defendant or its subsidiaries and Haoyue.

5.  The plaintiff then decided to rescind the Share Purchase Agreement and claim the return of the US$33.8 million paid thereunder.  The plaintiff has now started arbitration proceedings against the 1st to 3rd defendants.  The 2nd and 3rd defendants are wholly owned subsidiaries of the 1st defendant. 

Payment of US dollars equivalent to RMB144,276,812.31 to D5

6.  The 5th defendant is an indirectly wholly owned subsidiary of Legend Holdings Limited, a company listed on the Hong Kong Stock Exchange.  Legend Holdings has another subsidiary, Beijing Legend Star Capital Company Limited (“Beijing Star”). 

7.  Beijing Star entered into a loan agreement dated 7 February 2010 with Haoyue agreeing to advance RMB200 million to Haoyue for 6 months.  In order to comply with or get around the mainland’s financial registrations, the Shanghai Pudong Development Bank was also involved in this loan transaction.  But these proceedings do not concern the bank. 

8.  Haoyue could not repay the loan to Beijing Star on time and a loan extension agreement dated 3 August 2010 was then made to extend the repayment date to 8 November 2010.  Haoyue still failed to repay by that date.  An arrangement was then made to give Haoyue more time to pay. 

9.  The arrangement was put in place by the making of three agreements all dated 8 July 2011, which involved Beijing Star, Haoyue and the 3rd and 5th defendants (“the Three Agreements”).  The scheme required the 3rd defendant to pay the 5th defendant a sum of US dollars equivalent to RMB 144,276,812.31 as security for repayment of the loan by Haoyue or as “Comfort Money”, as the plaintiff prefers to call it.

10.  Of the US$33.8 million paid by the plaintiff to the 1st defendant, a sum of US$25,399,900 was transferred to the 2nd defendant and then to the 3rd defendant on 29 June 2011.  Out of this sum, US$22,297,629.60 (equivalent to RMB144,276,812.31) (“the Sum”) was transferred from the 3rd defendant to the 5th defendant pursuant to the Three Agreements on 12 July 2011. 

11.  This transfer was done with the agreement of the plaintiff and the plaintiff was then fully aware of the terms of the Three Agreements under which the transfer was made. 

12.  The arrangement under the Three Agreements provided for certain waivers of interest and default payments by Beijing Star in favour of Haoyue.  These waivers were conditional upon repayment by Haoyue of the loan to Beijing Star, as provided in the Three Agreements. 

D5’s rights and obligations to the Sum under the Three Agreements

13.  The terms of the Three Agreements also gave the 5th defendant all the powers to use the Sum in investment or business projects as the 5th defendant may deem appropriate during the period when it is kept by the 5th defendant.  This period is referred to as the entrustment period. 

14.  The 5th defendant can keep all the profits to be generated by the use of the Sum, and need not pay any interest for its use. However, when the entrustment period expires, the 5th defendant would have to transfer the Sum to the bank account of the 3rd defendant.  This transfer was guaranteed by Beijing Star in Clause 5.3 of an agreement called the Funds Entrustment Management Agreement, which is one of the Three Agreements.

15.  The 3rd defendant would then have to transfer the Sum to a bank account of another company which had not yet been set up at the time of the Three Agreements.  This company is called Beijing Wanbopeng Technology Company Limited (“Wanbopeng”). 

16.  This bank account of Wanbopeng was to be jointly managed by Wanbopeng and Beijing Star.  Wanbopeng should then pay the Sum together with all outstanding interest into an account of Haoyue.  This account was to be jointly managed by Haoyue and Beijing Star.  There is no dispute on the meaning of the terms of the Three Agreements up to this point. 

The dispute over the meaning of the Three Agreements

17.  The dispute between the plaintiff and 5th defendant is on whether the Sum plus interest received by Haoyue from Wanbopeng should be used to repay the part of the outstanding loan and interest due from Haoyue to Beijing Star.  The 5th defendant says that Haoyue should do so per the terms of Three Agreements, but the plaintiff says that the Sum should remain in the account of the 5th defendant pending repayment of the loan by Haoyue to Beijing Star (see paragraph 38 of the Plaintiff’s skeleton). 

18.  The 5th defendant no doubt has the power to keep and use the Sum pending repayment of the loan by Haoyue to Beijing Star, but this is subject to the 5th defendant’s obligation to transfer the Sum to the 3rd defendant at the end of the entrustment period.  I also agree with leading counsel for the 5th defendant that at the end, Haoyue is obliged to pay the Sum and the interest it received from Wanbopeng to Beijing Star as repayment of the loan. 

19.  However, this dispute between the plaintiff and the 5th defendant is irrelevant to these proceedings as the 5th defendant under the Three Agreements cannot pay the sum to Beijing Star as repayment on behalf of Haoyue.  The 5th defendant can and has to transfer the Sum to the 3rd defendant’s bank account when the entrustment period ends.  Under the Three Agreements, this period will end upon Wanbopeng opening the bank account which would be jointly managed by it and Beijing Star. 

These proceedings and the ex parte Mareva injunctions

20.  The plaintiff, after having decided to rescind the Share Purchase Agreement and resort to arbitration against the 1st to 3rd defendants, then instituted these proceedings against the 1st to 3rd defendants and the 5th defendant.  The relief against the 5th defendant is for an injunction to enjoin the 5th defendant from (1) removing from Hong Kong any of its assets which are within Hong Kong, whether in its own name or not and whether solely or jointly owned by it up to the value of the Sum or (2) in any way disposing of or dealing with or diminishing the value of any of it assets which are within Hong Kong, whether in it own name or not, and whether solely or jointly owned up to the value of the Sum.  The relief specifically refers to the Sum in the bank account of the 5th defendant maintained with the Hongkong bank into which the Sum was deposited by the 3rd defendant previously.  The relief is prayed for as an interim measure under section 45 of the current Arbitration Ordinance, Cap. 609. 

21.  The Plaintiff also applied ex parte for Mareva injunctions against the 1st to 3rd defendants and the 5th defendant.  The injunction as against the 1st to 3rd defendants is for the US$33.8 million.  The injunction against the 5th defendant is for the Sum.  The injunction is in the same terms as prayed for in the originating summons, but is subject to further order of this court or until final award in the pending arbitration proceedings. 

22.  The learned judge relied on the explanation of the plaintiff’s counsel on the meaning of the terms of the Three Agreements because the Three Agreements are in Chinese.  Unfortunately, counsel took the view that the 5th defendant was merely a bare trustee in holding the Sum.  This view is obviously incorrect as the 5th defendant can under the terms of the Three Agreements apply the Sum in investment or business projects as it may deem appropriate. It can also keep the profit generated therefrom.  There is also no geographical limitation for the application of the Sum.

D5’s undertaking and the discharge of the Mareva injunction

23.  The Mareva injunction as granted clearly prevented the 5th defendant from exercising such right over the Sum.  Furthermore, the plaintiff was fully aware of the terms of the Three Agreements which required the 5th defendant to pay the Sum to the 3rd defendant at the expiry of the entrustment period.  The Mareva injunction also prevented the 5th defendant from complying with this obligation.    

24.  The plaintiff in agreeing to allow the Sum to be transferred by the 3rd defendant to 5th defendant was fully aware of the terms of the Three Agreements which required the transfer to be made. 

25.  Since the transfer was made, neither the 5th defendant nor Beijing Star nor any company in the Legend Group has committed any conduct which could diminish the 5th defendant’s right over the Sum or qualify its obligation to transfer it to the 3rd defendant at the end of the entrustment period.  The plaintiff has no justification at all to seek the injunction against the 5th defendant. 

26.  At the hearing, the 5th defendant gave an undertaking to the court that it would abide by the terms of the Three Agreements in accordance with the parties’ rights and obligations thereunder until further order.  Leading counsel for the 5th defendant made it clear that the undertaking was made merely to give some comfort to the plaintiff that the 5th defendant would abide by the terms of the Three Agreements in dealing with the Sum.  The undertaking was made without any admission of any wrongdoing. 

27.  The plaintiff then consented to the discharge of the Mareva injunction as against the 5th defendant.  However, the plaintiff insists that its claim for interim relief against the 5th defendant in the originating summons should remain.  

Striking out the plaintiff’s claim against the 5th defendant

28.  The 5th defendant disagrees and says that there is no basis for the interim relief sought.  I agree with the 5th defendant.  On the undisputed facts before the court, there is no reason why the 5th defendant cannot continue to make use of the Sum per the Three Agreements until the end of the entrustment period. There is also no reason why the 5th defendant can refrain from transferring the Sum to the 3rd defendant at the end of the entrustment period.  There is therefore no basis whatsoever for the interim relief as sought against the 5th defendant. 

29.  The plaintiff then tried to rescue the situation by proposing to replace the existing relief with an amended relief in the same terms as the undertaking given by the 5th defendant to the court.  However, the 5th defendant objects to this amendment on the ground of futility as the proposed relief has already been satisfied by the 5th defendant’s undertaking to the court.  I agree with the 5th defendant that there is no basis for the existing or proposed relief against it.  I therefore strike out the plaintiff’s claim against the 5th defendant. 

Costs order nisi

30.  On the question of costs, I think there is no basis for the ex parte application for injunction against the 5th defendant and the injunction should be discharged regardless of the 5th defendant’s undertaking. 

31.  The claim against the 5th defendant has also been struck out without prejudice to the 5th defendant’s undertaking to the court. 

32.  Leading counsel to the plaintiff has referred to some passages in the 5th defendant’s affirmations and skeleton submissions to justify its conduct.  I agree that some statements from the 5th defendant may appear to overstate the 5th defendant’s case.  However, the plaintiff did not apply ex parte because of these statements.  It also cannot create grounds to support its case by referring to misstatement of its opponent.  On the facts of this case, if the plaintiff has no ground to raise and maintain its case, it has no ground. 

33.  I therefore make a costs order nisi that the plaintiff should pay the 5th defendant the costs of the claim including the striking out of the claim, the opposing of the continuation and the setting aside of the Mareva injunction.  I also certify the matter fit for leading and junior counsel.  I, however, do not consider that it is appropriate to order the indemnity scale of costs as I do not think this case would warrant such treatment.  I do not think there was any deliberate abuse of the process of the court.