RE BIRMINGHAM INTERNATIONAL HOLDINGS LTD

HCMP 395/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 395 OF 2015

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DECISION
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1.  On 16 February 2015, Deputy High Court Judge Wilson Chan granted a receivership order (“Order”) in respect of Birmingham International Holdings Ltd (“Company”) on an ex parte application by the Company itself.

2.  The following applications are before this court :

(a) The application of Mr Carson Yeung (“Yeung”) dated 23March 2015 to discharge or vary the Order (“Discharge Application”).

(b) The application of 8 minority shareholders (“Minority”) dated 24 July 2015 seeking:

i. Leave to intervene in these proceedings; and

ii. An order that the receivers appointed under the Order (“Receivers”) continue in office until the resumption of trading of the Company’s shares on the Hong Kong Stock Exchange Ltd (“HKSE”), or until further order (“Minority’s Application”).

3.  The Discharge Application was first heard on 1 April 2015. At that hearing, this court gave directions, inter alia, that :

(a) The Discharge Application be adjourned for argument with an estimate of 3 hours[1];

(b) The Discharge Application be advertised, with directions that any interested shareholder wishing to participate should take out an application to intervene at least 7 days before the adjourned hearing date.

4.  In the course of this hearing, leave was granted, without resistance, to both Yeung and the Minority to intervene in these proceedings.

Background

5.  The Company was incorporated in Cayman Islands. It is an investment holding company. The principal activities of its main subsidiaries are professional football operation, entertainment and media services. The Company’s shares are listed on the HKSE.

6.  The Company holds 96.64% of the shares in Birmingham City Plc (“BC”), which in turn holds 100% of Birmingham City Football Club Plc (“BCFC”). The latter operates the Birmingham City Football Club (“Club”), which is a professional soccer team playing in the Championship League in England. The Company’s principal asset and business is the Club and its related business, which account for essentially the entire turnover of the Company in the year ended 30 June 2014.

7.  Yeung is a significant shareholder of the Company, personally holding 27.89% of the issues shares in the Company. In February 2014, Yeung was convicted of criminal offences commonly known as money laundering involving vast sums of money, and for which he was given a 6-year term of imprisonment[2]. Yeung resigned from all the positions he held in the Company and its subsidiaries shortly before he was convicted. Mr Wong SC, appearing on behalf of Yeung with Mr Lau, was at pains to highlight that under Hong Kong law the property rights of even a convicted criminal have to be respected and protected. I agree.

8.  One of the circumstances (probably the key factor) giving rise to the receivership application was that serious disagreement had arisen amongst the directors of the Company concerning how the Company should be managed and whether certain transactions should be investigated.

9.  The board of directors of the Company (“Board”) was fractured into 2 camps. One side consisted of 7 directors. The leading figure of that camp appears to be Mr Ma Shiu Cheong (“Ma”), who was the Vice Chairman, an executive director, CEO[3] and MD[4] of the Company (he was appointed as CEO and MD on 27 January 2015). The Chairman of the Board (“Chairman”) (also an executive director), 2 other executive directors and 3 of the 4 INEDs[5] belonged to this group. The other camp was made up of 3 executive directors and the remaining INED. Mr Peter Pannu (“Pannu”), one of the executive directors and a close associate of Yeung, was apparently the leader. Pannu was the CEO and MD of the Company until his appointments were terminated by the Board on 12 December 2014.

10.  Yeung requisitioned twice for an EGM. The 1^st was dated 23 December 2014 by which Yeung sought to have the Chairman, Ma and 1 other executive director removed and replaced by 3 new appointees (“New Appointees”), amongst whom was a lady who has been referred to as the de facto wife of Yeung (“Ms Wang”) and a person who worked as Yeung’s, and later his son’s, bodyguard (“Mr Gurung”).

11.  On the following day, there was a requisition in identical terms from a shareholder called U-Continent Holdings Ltd (“U-Continent”), who is holding 15.5% of the issued shares of the Company (1.5 billion shares). The shareholder and director of that company is Mr Wang Lei (“Lei”), who is the brother of Ms Wang. Indue course, the Board wrote to Yeung and U-Continent expressing concern on, inter alia, the relationship between the 2.

12.  The 2^nd requisition of Yeung was made on 13 January 2015, by which he sought a vote by the shareholders to decide, inter alia, whether the Chairman, Ma and the directors supporting them (collectively, “7 Directors”) ought to be removed. The alleged reasons for the proposed removal included mismanagement of the Company and failure to monitor the Company’s accounts. It was proposed that the 7 Directors be replaced by the New Appointees.

13.  On 14 February 2015, at a Board meeting, which the 4 directors led by Mr Pannu (“4 Directors”) objected and did not attend, 5 directors (including Ma and the Chairman) passed a resolution to instruct lawyers “to consider and, if so advised, to apply for the appointment of receivers for the Company”.

14.  On 16 February 2015, the Company obtained the Order on an ex parte application. Three professionals from Messrs Ernst & Young Transactions Ltd were appointed joint and several receivers of the Company pursuant to the Order.

15.  On 9 March 2015, shortly before the EGM requisitioned by Yeung (to be held on 12 March 2015), all the 7 Directors resigned from the Board. The Receivers took 2 actions in respect of the 4 Directors : (i) removed Pannu and 1 other executive director from the Board and (ii) suspended the duties of the other executive director and the INED.

16.  On the same day, the Receivers appointed themselves as executive directors of the Company, and appointed 3 other persons as INEDs. Since then, the Board has been functioning with the Receivers as executive directors and 3 INEDs.

17.  On 11 March 2015, the Board published an announcement expressing the view that there was no proper notice for the forthcoming EGM; that the proposed appointment of the New Appointees might be in breach of requirements imposed by the Football League Association in the UK (“League”) on Owners’ and Directors’ Test (“OADT”) thereby jeopardizing both BCFC and the Club; and made clear that invalidly appointed directors would be removed to safeguard the interest of the Company and the shareholders as a whole.

18.  The EGM on 12 March 2015 went ahead despite the aforesaid. The New Appointees were elected as directors (each voted in by 90.55% of the votes cast). It appears from the evidence that those 90.55% were made up primarily of Yeung’s shares (2.7 billion) and the affirmative votes cast by HKSCC Nominees Ltd (1.5 billion shares). It is reasonably clear that the votes cast by the latter were on behalf of U-Continent (see para 11 above).

19.  By an announcement of the Company dated 13 March 2015, the appointment resolutions passed at the EGM were declared invalid, and the New Appointees were removed as directors of the Company.

20.  The Discharge Application was taken out on 23 March 2015.

21.  On 1 April 2015, it was ordered by this court with the agreement of the parties that Yeung’s complaints regarding the Receivers’ conduct be adjourned pending the determination of the Discharge Application. The Receivers indicated that they would adopt a neutral stance at the hearing of the Discharge Application. However, at the invitation of the court, the Receivers agreed to assist the court with factual matters.

22.  In response to the advertisement (see para 3(b) above), the Minority (8 shareholders collectively holding just under 6.1% of the Company’s ordinary shares) came forward and took out their application on 24 July 2015. The Minority has had no management role in the Company and played no part in the application for the Order.

The course of this hearing

23.  This court was much troubled by the task of resolving these applications in a 3 hour hearing. There are altogether 14 box files of papers in the hearing bundles. The skeleton arguments filed on behalf of Yeung consist of 24 pages in single-line spacing. The approach taken is one where every conceivable argument is deployed. To give a flavour of the arguments, paras 9 and 10 of Yeung’s skeleton arguments stated as follows :

“9 The grounds for setting aside/discharging the Receivership Order can be broadly grouped under 2 heads: (i) that there was material non-disclosure and/or lack of urgency; and (ii) that receivers ought never to have been appointed over the Company in the first place. These shall be dealt with separately below.

10. The Applicant’s alternative case is that the Receivership Order be varied so that (i) the Receivers cannot remove directors voted in by shareholders in general meeting and cannot appoint directors without the approval of the shareholders in general meeting; and (ii) the Receivers’ powers are restricted to conducting investigations into the Company’s affairs.”

24.  Despite having spent no less than 1 day in preparing for the hearing, it was simply impossible for the court to master the facts and the arguments with the available time. Consequently, the court would require considerable assistance at the hearing.

25.  Mr Wong did not disagree with the above observations. Ifthe hearing of full argument went ahead, it would inevitably result in a part-heard hearing. Given the state of the court’s diary and the need to make reasonable accommodation on the availability of counsel, the resumed hearing would be many months away. This would be highly unsatisfactory.

26.  The alternative would be to re-fix the hearing to a 2 day[6] hearing. Mr Wong was content to leave the decision to the court whether to re-fix the hearing, save that he would ask for an early hearing in such event. However, re-fixing the hearing would also mean delay to the resolution of these matters. The delay was likely to be lengthy because of the state of the court’s diary and the need to make reasonable accommodation on the availability of counsel. Delay in the resolution of dispute is generally undesirable, especially where it concerns a public company. It will be seen from the circumstances of this case laid out below that delay in resolving these matters should be avoided if possible.

27.  There was another feature of this case which gave rise to concern. As a result of the Receivers’ neutral stance, there is no representation of the Company and no rebuttal evidence from it in respect of the allegations made by Yeung.

28.  One week before the hearing, on 24 July 2015, the Receivers obtained and sent to Yeung an affirmation from Ma which addressed his allegations. Unsurprisingly, Mr Wong complained about the lateness of the evidence and challenged its admissibility. However, it is quite undesirable for these matters to be determined without the participation of the Company, which applied for the Order, and its rebuttal evidence.

29.  When the court is concerned with a public company which is in a parlous state (see below), it has a duty to uphold the interest of that company and its shareholders as a whole. There is a great deal to be said that this court should adopt a forward-looking and constructive approach in this case, and decide on the existing evidence what is best for the Company and the shareholders as a whole without delay (“Forward-looking Approach”).

30.  It is accepted by the parties that even if the Order were to be discharged as contended by Yeung, the court retains a discretion to re-grant an order where the justice of the case so demands. On one view, it may be said that even if the Order were discharged, there are strong reasons for the court to re-grant an order in light of the circumstances of this case.

31.  The parties were invited to address the above matters so as to assist the court on how best to deal with these applications in the circumstances.

32.  On the Forward-looking Approach, whilst submitting that a receivership order should never have been granted in the first place, MrWong indicated that he was happy to deal with, at the hearing, the argument whether such an order can be justified on the existing state of affairs. Mr Joffe, appearing for the Receivers with Mr Leung, maintained his neutrality. Mr Jonathan Wong (“Mr J Wong”), who appeared with MrLung for the Minority, invited the court to resolve these matters by adopting the Forward-looking Approach.

33.  Having considered the submissions, this court decided to adopt the Forward-looking Approach notwithstanding that this was not the usual course, and it might be said that it involved a conceptual difficulty in that the Discharge Application has not been determined. On balance, the circumstances of this case are such that the court should make the best use of the hearing to resolve as much of the disputes as it can so as to enable the Company to focus in the struggle for its survival.

34.  I have been referred by Mr J Wong to Cheung Kam Wah v Cheung Hon Wah [2005] 1 HKC 136, p 152A, where the following dictum of Kempster JA in Shenzhen University Enterprises & Trade Co Supplies v Wei Bun Trading Co Ltd [1989] 1 HKLR 470 at 475 was cited by Woo VP :

“I agree with the Vice-Chancellor that the relevant question at an inter partes stage when the continuation or renewal of injunctions is in issue is, indeed, ‘not what had happened in the past but what should happen in the future’.”

Parlous state of the Company

35.  Three reports have been submitted by the Receivers dated respectively 30 March 2015 (“1^st Report”), 10 July 2015 (“2^nd Report”) and 24 July 2015 (“3^rd Report”). Mr Wong complained about the lateness of both the 2^nd Report and 3^rd Report.

36.  I see little substance in the complaint. In respect of the 2^nd Report, it sought to inform the court about the development of various matters, including the investigation by the Receivers over a number of irregularities involving, inter alia, Yeung and Pannu. Much, if not all, of those matters had been identified in the 1^st Report, and therefore would not have taken Yeung by surprise. The 3^rd Report is a fairly short one to provide an update to the court. Most importantly, certain legal actions which had been alluded to in the previous reports have been issued after the 2^nd Report. The existence of those actions is an indisputable fact, and I am unable to see any prejudice to Yeung in that regard. The remainder of that report may be ignored for the present purpose.

37.  The parlous state of the Company is set out in fairly comprehensive manner in the 1^st and 2^nd Reports. I need only provide a summary below.

38.  The trading of the Company’s shares has been suspended since 4 December 2014. It was brought about by a leak of inside information in respect of the Company by Pannu. It appears that the termination of Pannu’s appointments (see para 9 above) was related to these matters.

39.  The suspension of trading was followed by a number of events which adversely impacted upon the Company. A summary of those events can be found in para 5.1 of the 1^st Report :

“On 19 January 2015, the Company issued an announcement in relation to a suspected misappropriation of at least HK$30 million belonging to the Company which was not raised by the former auditor during their audit of the Company’s accounts for the year ended 30 June 2014.

On 20 January 2015, the Company received a letter from the former auditor stating that they were withdrawing their auditor’s report in respect of the consolidated financial statements of the Company for the year ended 30 June 2014 (the “Withdrawal”). An announcement to this effect was made by the Company on 21 January 2015.

On 22 January 2015, the Company issued a further announcement in relation to a suspected further misappropriation of HK$8 million belonging to the Company. A total of HK$38.95 million is suspected to have been misappropriated from the Company (the “Misappropriation”).

Throughout December 2014 to January 2015, the HKEx had received various complaints against the Company and its directors and the HKEx had sent a number of enquiries to the Company in respect of the complaints. However, the Company had only provided some replies to the HKEx’s enquiries.

In view of the above, the HKEx sent a letter to the Company on 4 February 2015 imposing the following resumption conditions:

(i) conduct an appropriate investigation on the Misappropriation and the Withdrawal, disclose the findings, assess their impact on the Company’s financial and operational positions and take appropriate remedial actions;

(ii) publish all outstanding financial results, and address any audit qualifications;

(iii) demonstrate that the Company has put in place adequate financial reporting procedures and internal controls systems to meet its Listing Rule obligations;

(iv) demonstrate that the Company has sufficient working capital for its operation for at least twelve months from its expected resumption date; and

(v) address the allegations against the Company and the directors received by the HKEx during December 2014 to January 2015 and inform the market of all material information for the shareholders and the investors to appraise the Group’s position.”

40.  Para 1.2 of the 1^st Report summarised the efforts being made by the Receivers to meet the Resumption Conditions imposed by HKSE :

“The Receivers are currently working on the resumption conditions imposed by the HKEx, including, investigations on a suspected misappropriation of a total of HK$38.95 million belonging to the Company and the withdrawal of the auditor’s report for the year ended 30 June 2014; publication of all outstanding financial results; adequate internal controls systems; and sufficient working capital.”

41.  The suspected misappropriation of over HK$38 million belonging to the Company involves its former Financial Officer (“Ko”) who was later promoted to become the Corporate Accountant (head of Finance Department). Ko was working under the direct supervision of Pannu, according to information obtained by the Receivers from some former directors of the Company.

42.  The Financial Statements for the year ended 30 June 2014 (“Financial Statements”), which were subsequently withdrawn, revealed a precarious state of affairs. Paragraph 2 of the disclaimer by the auditors stated as follows :

“Fundamental Uncertainty Relating to the Going Concern Basis

As explained in Note 2(b) to the consolidated financial statements, the Group incurred a loss attributable to the owners of the Company of approximately HK$153,114,000 for the year ended 30 June 2014 and had net current liabilities of approximately HK$96,855,000 as at 30 June 2014. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern, the validity of which is dependent upon future funding available.

The consolidated financial statements do not include any adjustments that would result from the unavailability of future funding. We consider that appropriate disclosures have been made. However, the uncertainty surrounding the outcome of future funding available (sic) raises significant doubt as to the Group’s ability to continue as a going concern.

The consolidated financial statements do not include any adjustments that may be necessary should the future funding be unavailable. We consider that appropriate disclosures have been made in the consolidated financial statements concerning this situation, but we consider that this fundamental uncertainty relating to whether the going concern basis is appropriate is so extreme that we have disclaimed our opinion.”

43.  One of the reasons for the withdrawal of the Financial Statements had been stated in a letter from the auditors dated 20 January 2015 to the Board :

“Our position and decision to withdraw

We regret that despite continuous and repetitive requests to the Company’s Board of Directors for the return of signed letter of representation, directors’ declarations regarding their remuneration and the Company’s audited financial statements for the year ended 30 June 2014 for our completion, there had never been any response from the Company or the Board.”

44.  It is surprising, to say the least, that the Financial Statements were published without the necessary representation letters provided to the auditors.

45.  The precarious financial state of the Company is fully reflected by what the Receivers have found as summarised in para 1.1 of the 1^st Report :

“The main and substantial assets of the Company are the [Club] which is estimated to worth HK$360 million and the Company’s listing status … which is worth approximately HK$400 million.

[The Club] can run till 31 May 2015. The 2015/2016 budget suggests that [the Club] needs HK$10 million a month. The cash on hand in Hong Kong is approximately HK$16 million as at 30 March 2015 which is not enough to support [the Club’s] 2015/2016 budget. The required amount is about HK$300 million (including HK$120 million for [the Club’s] operating budget and some large debts due to various parties).

If no investor can be found to provide such funding by 31 May 2015 to [the Club], [the Club] would be at serious risk of being put into administration, which would affect the value of [the Club] substantially and in the worst case scenario, the administrator will dispose of [the Club] on a liquidation basis and the listing status of the Company will be lost.

Therefore, it is the Receivers’ top priority to rescue [the Club] in order to maximize and protect the value of the Company and its assets which is in the interests of the shareholders. If the required funding cannot be obtained, say by mid-April 2015, the Receivers will have to consider the last resort which is to sell [the Club] as a going concern basis in order to protect the interests of the shareholders, subject to any such offer from interest parties.”

Restructuring of the Company

46.  Since their appointment, one of the most important tasks undertaken by the Receivers is to procure investors to inject emergency capital into the Company in order to sustain its operations, particularly that of the Club.

47.  The Receivers had invited potential investors to put forward proposals to acquire assets of the Company. They received non-binding offers from 7 parties in total. A financial advisor was engaged to evaluate the merits of the respective proposals.

48.  After sifting through the proposals, the Receivers procured the Company to enter into an exclusivity agreement (“Exclusivity Agreement”) with Trillion Trophy Asia Ltd (“Trillion Trophy”) in relation to a subscription and/or purchase of shares in the Company and BC. The Exclusivity Agreement stipulates that the Company would provide an exclusivity period of 24 months for Trillion Trophy to consider the investment and to negotiate terms with the Company.

49.  As a result of the Exclusivity Agreement, Trillion Trophy has agreed to provide funding to the Company : (a) a cash collateral of approximately HK$9.8 million; and (b) a revolving loan facility totalling HK$153 million.

50.  Such funding has provided the Company and the Club with the necessary finance to operate for the coming football season (2015/2016). Importantly, as a result, the Receivers have been able to demonstrate to the League that the Company has sufficient funding to meet its financial commitments for the 2015/2016 season, thereby obviating the threat from the League of a 10-point league deduction. Moreover, the League has lifted the player transfer registration embargo. Had this funding not been provided, the Club would almost certainly have been unable to operate in the 2015/2016 season, and the 10-point deduction might well have applied.

51.  Negotiations between the Company and Trillion Trophy are continuing and are expected to be concluded in early 2016.

52.  Yeung complains that the continuing appointment of the Receivers deters any genuine investors for the Company and that the conduct of the Receivers has restricted the options available to the Company. However, the evidence before the court demonstrates a strong case that the Company was in desperate need of funding to carry it through the 2015/2016 season, and the Receivers had little option but to move quickly to secure the interest of potential investors and funding. It should be noted that despite the Receivers’ repeated inquiries, Yeung has been unable to furnish concrete information on any third party investor. Inshort, these are hollow complaints.

Resumption of trading

53.  One of the resumption conditions is that the Company must have sufficient working capital for at least 12 months from the date of expected resumption. Thus, the resumption of trading in the Company’s shares is closely connected with the pending transaction to be entered into with Trillion Trophy.

54.  Another major issue to resolve is HKSE’s concern that Yeung is acting in concert with other shareholders and “will continue to exert substantial influence over the operation and management of the Company which may not be in the shareholders’ interest”. Paragraph 1 of the letter from HKSE dated 15 July 2015 stated as follows :

“Upon completion of the Subscription Agreement and the Open Offer, Mr Yeung and U-Continent (who are parties acting in concert) will remain as the Company’s substantial shareholder and would become its controlling shareholder assuming full subscription of the Open offer. Besides, their shareholdings would be further increased upon conversion of the convertible bonds. In light of Mr Yeung’s criminal conviction and the various allegations received by the Company concerning Mr Yeung, we have concerns that Mr Yeung will continue to exert substantial influence over the operation and management of the Company which may not be in shareholders’ interests. Your letter of 31 March 2015 addressed to the Securities and Futures Commission also acknowledges that Mr Yeung has been influencing the Company’s affairs as a shadow director. However, your proposal is yet to address this issue.”

55.  The Receivers are continuing to work with HKSE with the aim of allowing the Company’s shares to resume trading.

56.  The relationship between Yeung, Ms Wang and U-Continent (and/or Lei) also caused concern to the League. Such relationship may fall foul of the OADT with serious consequence for the Company. Para 6.4 of the 1^st Report stated as follows :

“3) The proposed appointment of the three new directors by Mr Yeung, namely Ms Wang, Mr Gurung Arjun Kumar and Mr Li Wen Jun being in breach of the OADT

The [League] is aware of the proposed EGM convened by Mr Yeung to appoint the above three persons as EDs of the Company … According to the regulations of the [League], any person who is deemed to be a “Relevant Person” and is subjected to a disqualifying condition would be in breach of the OADT, a test used to assess whether a person is deemed fit and proper to be involved in the management or ownership of a football club. Such a breach may also result in the service of Notice of Withdrawal of Membership …

…

It is of the [League]’s concern that due to the close relationship between Mr Yeung (a convicted criminal who is subject to a disqualifying condition) and Ms Wang (who is the de facto wife of Mr Yeung) and the influence that Mr Yeung is likely to exercise over Ms Wang as a director of the Company, the proposed appointment could constitute as a breach of the OADT which is required to be rectified within 28 days, failure of which may make [the Club] liable to sanction under the regulations of the [League] where the power of the [League] to bring disciplinary proceedings under the regulations shall apply. As at the date of this report, the OADT application of Ms Wang is still outstanding and has been put on hold by the [League] as there was insufficient information collected by the [League].

In considering the issue of ‘control’, the [League] also expressed their concern on the identity of Mr Wang Lei, the owner of U-Continent, the substantial shareholder of the Company who appears to be acting in concert with Mr Yeung.

…”

57.  The Receivers are putting considerable effort into meeting the conditions imposed by HKSE and having the trade suspension lifted. In that regard, there is a timetable proposed by them to HKSE in a letter dated 17 April 2015 pursuant to which it is hoped that the trading of the Company’s shares can resume in round February 2016. There is plainly no time to lose.

Legal actions commenced by the Company

58.  The Receivers have, through investigating the affairs of the Company, uncovered a series of irregular contracts and transactions under which funds of the Company and BCFC were apparently misappropriated by Yeung and Pannu.

59.  After taking legal advice, the Company and BCFC have commenced an action on 13 July 2015 in Hong Kong against Yeung and the two companies (owned and managed by Pannu and/or Yeung) which received the misappropriated assets of the Company and BCFC.

60.  Further, upon the advice of its lawyers in England, BCFC is also contemplating legal proceedings action against Pannu. A letter before action (enclosing draft particulars of claim) prepared by BCFC’s solicitors was sent to Pannu on 17 July 2015.

61.  Furthermore, the Receivers have discovered that U-Continent, which has acquired HK$175 million of convertible bonds in the Company pursuant to two convertible bond subscription agreements entered into in about November 2013, was in fact acting in concert with Yeung, contrary to representations made by U-Continent in the two agreements.

62.  After obtaining legal advice, the Receivers have procured the Company to rescind the convertible bond subscription agreements and commence an action against U-Continent on 21 July 2015.

63.  It should be noted that U-Continent’s shares in the Company were obtained under the conversion (at heavily discounted price) made pursuant to the 2 subscription agreements. The Company is seeking the return or cancellation of those shares.

Yeung’s son

64.  It must be pointed out that the investigations conducted by the Receivers have revealed a very disturbing picture which suggests that Yeung was treating the Company as his cash dispenser. The point is well-illustrated by looking at what has been uncovered about the payments and expenses incurred for Yeung’s son (“Ryan”).

65.  Ryan was on the payroll of the Company as a consultant with a monthly salary of HK$80,000. Mr Gurung was on the payroll at HK$40,000 per month as a body guard/personal assistant. Another person, Mr Uttam, was a body guard and driver who was paid HK$18,000 per month. Ryan is a full-time student studying in the UK. He provided no service to the Company or its subsidiaries despite his position as director of BC and BCFC. Neither Mr Gurung nor Mr Uttam provided any service to the Company. Instead, they served Ryan personally in the UK[7].

66.  In addition, Ryan was provided with an expensive vehicle and an apartment for his use in the UK. Both of which were funded by BCFC[8].

Yeung’s arguments

67.  There are 3 arguments. The first argument is purely technical. It was submitted that any re-grant of the Order must be made on application, and there is no such application before the court. This is incorrect because of the Minority’s application to have the Order continued.

68.  Secondly, it was submitted that a receivership order is a remedy of last resort. Further, shareholders have a right to elect directors to run their company and the court does not normally interfere with the exercise of such right or the decisions of the elected directors.

69.  These are well-established principles of law and not disputed by the Minority. I bear in mind the need for great circumspection in granting or continuing a receivership order : see Bond Brewing Holdings Ltd & Ors v National Australian Bank Ltd & Ors (1990) 1 ASCR 445, 456-458.

70.  Relying on these principles, Mr Wong submitted that the way forward is for an EGM to be called so that the shareholders can elect a new Board to run the Company. It is perfectly plain that Yeung is unhappy that the Company has been taken out of his control, and he would like to restore it by exercising his voting right and electing new directors to run the Board.

71.  In respect of the issue concerning the legitimacy of U-Continent’s entitlement as one of the major shareholders of the Company, Mr Wong suggested that appropriate legal action can be taken to resolve the same. With respect, it is difficult to see how an EGM can take the Company forward in a constructive manner if U-Continent’s entitlement to vote at the EGM is going to be challenged.

72.  As regards the legal action by the Company against Yeung and the potential actions which may be instituted against him after further investigations, Mr Wong submitted that the action may be continued as a derivative action and that the Receivers may be allowed to continue to carry out the investigations. I shall return to this point later when I review the situation as a whole.

73.  On the other hand, Mr J Wong submitted that the jurisdiction of the court in appointing receivers is not open to doubt. Such power can be exercised where there is no proper board of directors.

74.  This court was referred to Company Law in Hong Kong (Insolvency) 2015, §11.006 :

“The Court may appoint a receiver of the company where the company is incapable of managing its own affairs by reason of the absence of a proper board or the inability of the board of directors to function properly but the interference of the Court will be continued only until a governing body is duly appointed.”

75.  At footnote 10 of that passage, it was stated :

“In June 2003, the Court appointed receivers in respect of Shanghai Land Holdings Ltd on the application of the directors in circumstances where the chairman and managing director of the company had apparently disappeared.”

76.  Mr J Wong emphasised that this was precisely the basis upon which the Order was sought, and Shanghai Land Holdings Ltd was cited as an example (see skeleton arguments used in the ex parte application, §8).

77.  There is no issue between the two Mr Wong on the jurisdiction of the court. Their difference lies in whether a proper Board can be constituted in the near future. This brings me to the 3^rd argument.

78.Mr Wong strongly resisted the suggestion that a proper Board cannot be constituted in the near future. He argued that the court ought not to assume that Yeung wants to appoint people of his choice to the Board.

79.  With respect, this is to ask the court to put on blinkers. Iagree with Mr J Wong that the repeated effort by Yeung to have MsWang and Mr Gurung elected onto the Board speak volumes. TheMinority does not resist an EGM to elect a new Board if suitable persons can be proposed by Yeung.

80.  On the other hand, a new Board elected by Yeung, probably acting with U-Continent, cannot be regarded as a proper Board. Putting aside the satellite litigation which is likely to be generated by reason of the issue over the shares held by U-Continent, there is a real risk that such a new Board will meet neither the requirements of HKSE nor the League. The works done by the Receivers to save the Company will be undone.

81.  It is often helpful for the court to take a step back and review the macro picture, especially when it is being swamped by the details and weight of the evidence.

82.  The evidence demonstrates that the Company might have been abused by Yeung and Pannu. It was in danger of becoming insolvent. It appears that the Receivers are doing a good job in keeping the Company afloat, and taking actions to recover its losses from the wrongdoers. On the other hand, to allow Yeung to meddle with the running of the Company will result in more litigation(s), and probably hinder the legal action and investigations against him.

83.  After demonstrating the parlous state of affairs of the Company, Mr J Wong summarised the position of the Minority in para 18 of his skeleton arguments, in which I find considerable force :

“The position faced by [the Minority] is this. They can discern no material from [Yeung] to indicate what remedial steps would have been taken by his nominated directors if the receivership was not put in place. They can discern no material from [Yeung] to indicate whether any of the steps taken by the Receivers which are in the interests of [the Company] … will be unravelled by his nominated directors and if so how such unravelling can remotely contribute to the satisfaction of the resumption conditions or the best interests of [the Company]. They have every reason to believe that any action against [Yeung] may not be pursued rigorously if the Receivers are discharged. Any remedial action (for example the existence of a white knight) proposed previously by [Yeung] has not materialized or was even non-existent.”

84.  The court does not lightly deprive a shareholder of his rights to nominate and vote for directors. However, unusual circumstances call for unusual action to be taken. Where the merits of the case so demand, the court does not shrink from acting with a firm hand.

85.  In my view, the circumstances of this case dictate that the Order must be continued, subject to 1 variation (see below). In so deciding, I have taken into consideration that it is expensive to retain the service of receivers (the Receivers’ remuneration is subject to taxation under the Order); the Company is making progress in the hands of the Receivers; and the business of the Company is relatively simple such that the adverse effect of having it run by outsiders is contained.

Variation

86.  It is common ground between Yeung and the Minority that the Order should be limited in terms of duration. Given the existing circumstances, I agree with the Minority’s proposition that it should be limited to run until the trading of the Company’s shares is resumed or further order.

Conclusions

87.  In the premises, I make an order in terms of para 2 of the Minority’s summons dated 24 July 2015 (continuation of the Order).

88.  Paragraphs 2 and 3 of Yeung’s summons dated 23 March 2015 (discharge of the Order) are only relevant on costs in light of this decision. The sensible course may be to adjourn the hearing of the same sine die with liberty to restore. However, the parties should be allowed an opportunity to consider the matter. I allow them 14 days from the date of this decision to do so with a view to agreeing the course forward, failing which a short joint letter be written to the court to set out the competing proposals.

89.  I make an order nisi that the costs of the Receivers and the Minority be borne by Yeung with certificates for 2 counsel.

90.  Finally, I thank counsel for their assistance.