張才奎所託管中國山水投資有限公司股份及另一人 v. 張才奎及另一人

HCA 1661/2014,
HCA 1766/2014,
HCA 2191/2014,
HCA 623/2015 &
HCA 939/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 &
623 AND 939 OF 2015

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(Heard together)

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D E C I S I O N

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1.  I have before me applications by summonses dated 3 June 2015 in each of the 5 actions for leave to appeal against my decision on 20 May 2015 to appoint interim receivers in respect of certain shares in CSI. There are also applications by summonses dated 5 June 2015 for stay of execution pending appeal, if leave to appeal is granted.

2.  There are some new affirmations (signed but not yet affirmed) which have been placed before me.  The receivers have also submitted their first report.  For the purposes of the applications I have looked at them de bene esse.  I remind myself, however, that this is not a re-hearing of the receivership application based on further evidence, nor a general review of my decision generally.  This is an application for leave to appeal against an interlocutory order, on the sole ground that the intended appeal has reasonable prospects of success: s 14AA(4)(a). The authorities show that leave is “not lightly granted”, and that the 1^st defendant here must show, not merely an arguable or not fanciful case, but “an appeal that has merits and ought to be heard”, though he does not have to show that the intended appeal will probably succeed: Wynn Resorts (Macau) SA v Mong Henry [2009] 5 HKC 515, §19; SMSE v KL [2009] 4 HKLRD 125, §17; Ho Yuen Ki Winnie v Ho Hung Sun Stanley (HCMP 1009/2009; 24 August 2009), §16.

3.  As is well established and accepted by Mr Paul Lam SC who appeared on behalf of the 1^st defendant today (though he did not appear in the receivership application), see eg the Court of Appeal’s decision in Compania Sud Americana de Vapores SA v Hin-Pro International Logistics Ltd (HCMP 1932/2014; 16 October 2014), the appointment of receivers is an exercise of discretion with which the appellate court will only interfere in limited circumstances.  As Ms Eu SC pointed, the question is not whether I could have taken a different view or whether the Court of Appeal, if they were asked to exercise the discretion themselves, might come to a different conclusion on the materials available.  The grounds on which an exercise of discretion at first instance might be impugned were set out by Lord Diplock in Hadmor Productions Ltd v Hamilton [1983] 1 AC 191 at 220B-F:

“The function of the appellate court is initially one of review only. It may set aside the judge’s exercise of his discretion on the ground that it was based upon a misunderstanding of the law or of the evidence before him or upon an inference that particular facts existed or did not exist, which, although it was one that might legitimately have been drawn upon the evidence that was before the judge, can be demonstrated to be wrong by further evidence that has become available by the time of the appeal; or upon the ground that there has been a change of circumstances after the judge made his order that would have justified his acceding to an application to vary it. Since reasons given by judges for granting or refusing interlocutory injunctions may sometimes be sketchy, there may also be occasional cases where even though no erroneous assumption of law or fact can be identified the judge’s decision to grant or refuse the injunction is so aberrant that it must be set aside upon the ground that no reasonable judge regardful of his duty to act judicially could have reached it. It is only if and after the appellate court has reached the conclusion that the judge’s exercise of his discretion must be set aside for one or other of those reasons, that it becomes entitle to exercise an original discretion of its own.”

4.  Six grounds of appeal have been set out in the draft notice of appeal.  I shall deal with them in sequence, primarily with reference to the submissions of Mr Lam SC and Mr Wou, although their emphasis has been on Grounds 5, 3 and 4.

5.  Ground 1 states that I misapprehended the 1^st defendant’s case on the plaintiffs’ entitlement.  It is difficult to understand this ground.  Mr Lam was unable to tell the court whether on the 1^st defendant’s case the plaintiffs have any enforceable right to the so-called economic benefits.  As Ms Eu pointed out, in his first affirmation at paragraph 10(ix), the 1^st defendant’s stated case was that he as trustee had an absolute discretion under the BVI trusts, that the letters of wishes are not binding on the trustee, and that he as trustee can, when he deems appropriate, alter the suggested proportions of interests in the letters of wishes.  The expert opinion on BVI law relied upon by the 1^st defendant in his jurisdictional applications also stated that the BVI trusts are discretionary trusts in that no beneficiary has an immediate entitlement to the trust property and that the trustee has overriding powers which can be exercised in the trustee’s discretion.  The skeleton argument of leading counsel for the 1^st defendant for the hearing of the receivership application on 18 May 2015 also stated at §33.1:

“The 1^st Defendant’s case is that the Plaintiffs are beneficiaries under a discretionary trust. … [T]hey have no proprietary interest in the trust assets …”

6.  Mr Lam referred me to paragraphs 6 and 9 of the 1^st defendant’s 3^rd affirmation.  I do not think they painted a different picture; see also paragraph 26 of the same affirmation where the 1^st defendant relied on the BVI legal opinion. 

7.  I was at all times aware of the limited constraints that the law places on discretionary trustees, such as referred to in the authorities including Lewin on Trusts placed before me for the 1^st defendant’s jurisdictional applications, but I do not think that detracts from the description of the 1^st defendant’s case in my judgment.  I do not think this ground has any reasonable prospects.

8.  Ground 2 alleges that I conducted a mini-trial on affidavit.  I did not do so.  Paragraph 30 of my judgment made clear that I made no findings of fact.  I had, however, to make a qualitative assessment of the risk of jeopardy based on the evidence before me and that is what I did.  I am not satisfied that Mr Lam SC has raised reasonable prospects for impugning the approach in paragraphs 22 to 29 of my judgment.

9.  By Ground 3 the 1^st defendant complains that I under-estimated the degree of interference with the management of CSI and Shanshui Cement that would be caused by the appointment of receivers.  I do not agree – see paragraphs 32, 33, 37, 38 and 39 of my judgment.  The 1^st defendant relied on the new affirmations in alleging that it is part of the plaintiffs’ agenda to remove him from management of the listed company.  But in the hearing on 18 May, the 1^st defendant contended that an order appointing receivers would not be efficacious.  In paragraph 23 of his 3^rd affirmation the 1^st defendant emphasised that the receivers would only have voting rights in respect of approximately 38.5% of the shares of CSI, that CSI only holds 25.09% of issued shares of Shanshui Cement, that CSI is a holding company with no actual business operations, and that the receivers as officers of the court would exercise voting rights having regard to the interests of CSI without being accountable directly to the plaintiffs. 

10.  In any event, the plaintiffs’ wishes do not dictate how the receivers should perform their function as I made clear in paragraph 38 of my judgment.  I shall further deal with the question relating to directorship of Shanshui Cement and CSI when I come to Ground 5 below. 

11.  Ground 4 complains that I erred in principle in appointing receivers because injunctive relief would have been sufficient.  Mr Lam SC annexed to his skeleton argument a schedule of undertakings that the 1^st defendant is willing to give pending the appeal if leave is granted.  At the hearing he further told the court that the 1^st defendant is prepared to give the same undertakings pending the trial.  He recognised that there was no such undertaking offered at the hearing on 18 May and that he could not therefore say that I was wrong in appointing receivers rather than accepting these undertakings.  Nevertheless he submitted that injunctions in similar terms would have been sufficient.  Essentially the technique used is to focus on each complaint made by the plaintiffs and then contend that it could have been dealt with by a specific injunction restraining the 1^st defendant from doing the particular thing complained of.

12.  Quite apart from the fact that a main argument advanced by the 1^st defendant at the previous hearing was that damages was an adequate remedy, I did not think in the circumstances of this case that the force of the complaints as a whole could be as effectively addressed by a set of disparate injunctions, each crafted narrowly by reference to the acts that the plaintiffs identified, as by the appointment of receivers.  I formed the view that the appointment of receivers was justified because of the risks demonstrated by the evidence as a whole: see paragraphs 30, 36 and 46 of my judgment.  Such risks could arise from as yet unidentified and unforeseeable matters. For example, the receivers have by letter to the 1^st defendant dated 4 June 2015 identified certain matters revealed by the accounts of CSI that they consider to require investigation, such as “dramatic decrease of cash of over RMB70 million for the first four months of 2015”, in relation to which the 1^st defendant has yet to respond.  Mr Lam SC accepted that those matters prima facie justifiably raise concerns and that it was proper for the receivers to pursue their inquiry. 

13.  Overall I am not persuaded that I failed “faithfully” to apply the relevant principles or that my decision was so egregiously wrong that no reasonable judge would have come to it.

14.  Ground 5 complains that I ignored the prejudice to Shanshui Cement or its subsidiaries and that I was wrong to do so.  First, paragraph 45 is my conclusion about “the group’s financing arrangements” – a culmination of paragraphs 40 to 44 in which I dealt with the specific matters relied upon by the 1^st defendant.  There is no complaint in the draft Notice of Appeal against my rejection of the 1^st defendant’s evidence in that regard.  Further, I consider I was correct to draw the distinction between receivers over the listed company and receivers over a parcel of shares in CSI, when the 1^st defendant himself in his evidence for the receivership hearing emphasised that CSI is merely a company with no trading actual business operation. 

15.  Then it is said that I erred in underestimating the adverse impact of the appointment of receivers over shares in CSI on the listed company.  However this is a question of perception and degree and it is not clear how it is said to amount to a valid ground for attacking the exercise of my discretion.  Moreover, Mr Lam SC disarmingly submitted that the group and his client – the 1^st defendant – had themselves underestimated the risk of adverse impact of the order for receivers and that he could not therefore blame the court.

16.  Mr Lam relied on the new affirmations which referred to concerns being expressed by banks, suppliers and joint venture partners and the steps they were taking or proposed to take as a result.  From the new materials it seems to me that the third parties’ worries, such as have been expressed, have arisen, not from concerns about creditworthiness or solvency, but primarily from rumours that the management of the listed company will be completely changed as a result of the appointment of receivers.  That, as I have said in paragraphs 38 and 39 of my judgment, is not necessarily a correct assumption to make. 

17.  As such the concern is really about what the receivers would do rather than about the appointment of receivers.  In that connection I recall having specifically asked at the hearing on 18 May whether the parties would wish to address me on the terms of the order if I should decide to appoint receivers.  That offer was not taken up; the parties were content that I should simply hand down my decision whichever way I decided.  Nor was any submission made to me about the proposed terms set out in the plaintiffs’ draft minutes of order.

18.  Even so, on the footing, as it seems to me, that the principal concern appears to be the question of management and specifically the directorship of the listed company, that is a matter that can be addressed by directions about the steps to be taken by the receivers.  In my judgment I have expressly given the parties liberty to apply.  In any event the receivers as officers of the court have to act in accordance with the court’s directions. The appointment of receivers is a flexible power: Chinese United Establishments Ltd v Cheung Siu Ki [1997] 2 HKC 212 at 223.  The primary concern of the court in appointing receivers was to protect and preserve the trust assets including their value, not to achieve a complete change of management of the listed company.  The receivers are there to hold the ring, not to act for one of the parties.  As can be seen from paragraphs 32, 33, 34, 37, 38 and 39 of my judgment, I had not when appointing receivers contemplated an immediate change of management of all the companies.  The shareholding distributions in CSI and Shanshui Cement are delicate, there being other significant shareholders who are not party to this litigation as well as minority shareholders in CSI who are involved in separate litigation with the 1^st defendant.  In the circumstances that have arisen it seems to me appropriate at this stage that the court should direct, which I do, that without obtaining further directions of the court, the receivers do not seek to alter the composition of the board of directors of Shanshui Cement.

19.  Moreover as Ms Eu SC pointed out, the concerns of third parties arising from the appointment of receivers can often be allayed: Re HK Sindy Footwears Ltd [2007] 1 HKC 64 §§37-38; Wilton-Davies v Kirk [1998] 1 BCLC 274, 280.  There is no documentary evidence of the content of the explanation given by the 1^st defendant or the group to the third parties about the appointment of receivers. 

20.  In all the circumstances I do not think this ground has reasonable prospects of success given the limited scope for an appeal of this nature.

21.  Ground 6 says that since only 335 of the 489 plaintiffs referred to in paragraph 23 of my judgment have re-confirmed their instructions to K&L Gates, the number of shares subject to receivership should be reduced by 21,423 shares.  The question of the precise number of shares did cross my mind before I made the order in question, but no submission had been made on behalf of the 1^st defendant in that regard.  The position at that time was that there was evidence of intimidation and pressure leading to certain revocation letters being issued, and that in the time available up to the filing of evidence in reply by the plaintiffs (ie 6 May 2015), 335 of the plaintiffs had issued written confirmation of K&L Gates’ authority.  K&L Gates, a Hong Kong solicitors firm, had continued to act for the plaintiffs in question, warranting that they had authority to do so.  In these circumstances I do not think that there is a reasonable argument that I was plainly wrong in connection with the number of shares.  Of course if any plaintiff does indeed clearly voluntarily withdraw from the proceedings, steps should be taken forthwith to discontinue the action so far as he is concerned, and the receivership order will automatically be discharged pro tanto since the receivers are appointed pending determination of the action.  I do not therefore think that this is reasonable ground of appeal.

22.  In conclusion I am not satisfied that there are grounds of appeal with reasonable prospects.  The applications for leave, and with them, the applications for stay, are therefore dismissed.  I give a direction to the receivers as stated at the end of paragraph 18 above.  There will be an order nisi that the 1^st defendant do pay the plaintiffs the costs of these applications forthwith with a certificate for two counsel.

Postscript

23.  After the above decision was prepared I received a letter from the receivers in the afternoon of 16 June 2015 copied to the parties.  In reaching my decision I was unaware of and did not take into account the matters referred to in that letter or its attachment.