SUPER MASTER INVESTMENTS LTD v. POWER APEX LTD AND ANOTHER

HCMP 2496/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 2496 OF 2011

(ON AN INTENDED APPEAL FROM HCA NO. 1704 OF 2011)

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BETWEEN

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JUDGMENT

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Hon Tang VP:

1.  These proceedings concern 360,000,000 shares in Dejin Resources Group Company Limited ("Dejin") (formerly known as Bright International Group Limited) (Stock Code No. 1163) which were registered in the name of the Plaintiff ("the Shares"). The Shares were transferred by the Plaintiff to, Pachmar Ltd, the 2^nd Defendant in October 2010. The 1^st Defendant, Power Apex Ltd, is wholly owned by the 2^nd Defendant. Both these companies are incorporated in the British Virgin Islands.

2.  The dispute between the parties primarily concerns the circumstances under which the shares were transferred by the Plaintiff to the 2^nd Defendant.

3.  Mr Cheng Pak Lung ("Cheng") is the sole director and the shareholder of the Plaintiff, which is also a BVI company.  According to an extract from the Annual Report of Dejin for the year ended 31 December 2010, as of that date, the Plaintiff was the beneficial owner of 815,000,000 shares in Dejin which represented 9.93% of the issued capital of the company, and the Plaintiff was a controlled corporation of Cheng.  Put briefly, the Plaintiff's case is that the Plaintiff was, at all material times, the beneficial owners of these shares. 

4.  According to the Plaintiff, the shares were delivered to the Defendants as security for a new facility in the sum of HK$135,000,000 to be granted by the 1^st Defendant to Trade Honour Limited ("Trade Honour"), a BVI Company, of which $100,000,000 would be used to repay the existing indebtedness of Trade Honour to the 1^st Defendant.  The balance of the HK$35,000,000 would be new money to be provided by the 1^st Defendant to Trade Honour. 

5.  The facts are complicated and I will state them as simply as possible for the present purpose.

6.  According to Cheng, he was asked in or about early October 2010 by a Mr Ho Pui Tsun ("Ho") to help Ho's friend, a Mr Ke Jun Xiang ("Ke") who was the chairman of CIL Holdings Ltd ("CIL"), a company which was listed on the main board of the Stock Exchange of Hong Kong (Stock Code No. 479).

7.  Cheng was told by Ho that Ke was the sole director and shareholder of Trade Honour which held 3,500,000,000 shares in CIL which represented 56.68% of its issued share capital.  Trading in CIL shares had been suspended since 1 April 2004 but the application for the resumption of trading was at the final stage.

8.  Cheng was also told that Trade Honour was indebted to the 1^st Defendant in the sum of $140,000,000 secured by a mortgage over the CIL shares.  The 1^st Defendant intended to exercise its power of sale over the CIL shares and accordingly, Ke had entered into negotiation with a Mr Choi of the 1^st Defendant ("Choi") to restructure the debt.  The 1^st Defendant was agreeable to grant a new facility to Trade Honour to repay the existing indebtedness in part and make a further advance to Trade Honour, but only on condition that further security by way of a personal guarantee of a third party together with a share mortgage over shares of a listed company was provided.  Thus, Ho asked Cheng to help Trade Honour by providing the required security.  Cheng was agreeable and Ho was authorized to handle this matter on behalf of the Plaintiff.  Messrs Johnny K K Leung & Co ("JKKL"), Solicitors, were instructed to advise on the "anticipated transactions and documentations".  Thereafter, on 12 October 2010, Ho and Ke met with Johnny Leung at JKKL's office, and instructed JKKL to act for Trade Honour, the Plaintiff and Cheng. 

9.  Johnny Leung, who has made an affirmation in support of the Plaintiff, has produced an attendance note recording the conference which took place on 12 October 2010, set out below:

"Conference in office

- Ke, Peter Ho, JL

Loan – 135 M

100M in full and final settlement of existing debt

- Right to dispose of 100 M 1163 shares at price of $0.4 for partial repayment

- 1163 share pledge only 100 M can be disposed

No disposal of 260 M of 1163 until exercisable

- 3 directors to resign upon repayment of loan

- Resignation letter in escrow to be deposited with sol.

- 伍世榮，鄒揚郭，陳文偉

- Prepare receipt for 360,000,000 shares of 1163

- Prepare certified copy of receipt to Ke

- Prepare letter to Lender's sol.

- Prepare certified copy Stamp Office memo for Transfer form of 360,000,000 shares"

10.  On the same day, Johnny Leung called Ms Shirley Lau of Troutman Sanders ("TS"), Solicitors for Power Apex who confirmed she had instructions to act for the 1^st Defendant.  Ms Lau told Johnny Leung that she had prepared a first draft of a term sheet[1] for discussion.  After that conversation, JKKL wrote to TS by letter of 13 October 2010 and told TS that the Plaintiff had deposited 22 share certificates representing 360,000,000 Dejin shares with JKKL and enclosed a certified true copy of JKKL's receipt for those share certificates.  The letter went on to say:

"Please let us have the revised term sheet for the intended loan for HK$136 Million and the draft loan documentations for our approval on behalf of the intended Borrower."

11.  The intended borrower was identified in the letter as Trade Honour.

12.  A few days after 26 October 2010, Ke gave a receipt for the Shares to Ho dated 26 October 2010, the translation of which reads:

"According to the Loan, the Repayment and Security Agreement signed by the 3 parties, received from Trade Honour Limited and Ke Jun Xiang and Party C SUPER MASTER INVESTMENTS LIMITED (1163 Stock Code) shares totaling Three Hundred Sixty Million Shares (360 million shares) … The aforesaid shares shall be executed according to Agreement."

13.  A copy of an undated "Loan, Repayment and Security Agreement" was provided by Mr Ke to Mr Ho, apparently signed by Ke on behalf of Trade Honour and Choi on behalf of the 1^st Defendant.  Trade Honour was therein referred to as Party A and 1^st Defendant referred to as Party B. The name of the third party Party C was left blank, but it is obvious by its content (which refers to the Shares, that Party C would be the Plaintiff).  Where relevant, it reads:

"After friend negotiation between Party A, Party B and Party C regarding resolving the existing debt problem of Party A, Party B and Party C consensus was reached: Party C arrange to provide 360 million shares of company 1163 (now worth 140 million Hong Kong dollars) for mortgage to Party B, Party B arrange to lend a new loan of 135 million Hong Kong dollar to Party A, amongst which 100 million Hong Kong dollars will be used as repayment of old debt by Party A to Party B, the remaining 35 million Hong Kong dollars will be remitted to the bank account designated by Party A[2]. Party B shall immediately release and return to Party A the 3,500,000,000 shares of CIL Holdings Limited (hereinafter referred to: CIL) mortgaged by Party A.  By reason of time constraint, without affecting arrangements and trusts of Party A, Party B and Party C, Party C agree to proceed with transfer of security and Party A, Party B and Party C set out in brief the promise of Party A, Party B and Party C for observance:-

1. Party C arrange for transfer of 360 million shares of 1163 company to Party B.

2. Party B promise to abide by its covenant to co-operate with Party A to complete the steps for resumption of trading of CIL, and shall not for any reason interfere with the normal works of Party A.

3. Party A agree to covenant and undertake to repay 135 million Hong Kong dollars to Party B within 6 months from resumption of trading of shares of CIL, and before full repayment to Party B shall not maliciously or without the consent of Party B change the shareholding structure or dissipate assets, or else shall be in breach.

4. Party C agrees unconditionally to give Party B a 65 million Hong Kong dollars personal guarantee, and agrees Party B to sell 100 million shares of 1163 company within 30 working days after signing of the formal agreement.

5. Party C promise that if the shares of 1163 company shall fall below HK$0.40, immediately make up the shortfall with additional shares to ensure the value of the security not fall below 140 million Hong Kong dollars.

6. If Party B shall sell 100 million shares of 1163 company the proceeds shall be applied towards settlement of the debt of 135 million Hong Kong dollars owed by Party A and reduction of the amount of personal guarantee of Party C.

7. This agreement is the principal terms of the formal agreement between party A, B and C with the view of entering into a formal agreement between the 3 parties within 10 days."

14.  On 3 November 2010, TS sent to JKKL a copy of a letter from TS to JKKL dated 3 November 2010 enclosing (i) 2^nd draft of Loan Agreement; (ii) 2^nd draft of Share Mortgage (I); (iii) 2^nd draft of Share Mortgage (II); and (iv) 2^nd draft of Guarantee (I) and (II).

15.  I will not refer to these documents in any detail.  It suffices to say in the 2^nd draft Loan Agreement, Trade Honour was called the Borrower; the Plaintiff, the Obligor; and the 2^nd Defendant the Lender.  The facility to be made available was HK$135,000,000 and

"The proceeds of the Facility shall be used exclusively for repaying part of the Existing Loan owed by the Borrower to Power Apex."  Clause 2.2

16.  The 2^nd draft of Share Mortgage (I) was to be made by Trade Honour in relation to 3,500,000,000 shares in CIL.  The 2^nd draft of Share Mortgage (II) was to be executed by the Plaintiff therein described as Beneficial Owner in respect of the Shares.

17.  By an email from JKKL to TS dated 25 November 2010 (i) revised Loan Agreement; (ii) revised Guarantee (I); (iii) revised Guarantee (II); (iv) revised Share Mortgage (I); and revised Share Mortgage (II) were supplied to TS, "approved by us as amended in red for your discussion with the Lender".

18.  Clause 2.2 of the Loan Agreement was amended to read:

"HK$100,000,000.00 of the proceeds of the Facility shall be used exclusively for full and final settlement of the Existing Loan owed by the Borrower to Power Apex."

19.  However, the appendix for "Form of Notice of Drawing" to the Loan Agreement was amended to read:

"HK$100,000,000.00 … should be disbursed to [Power Apex Limited] …"

"… HK$35,000,000.00 by way of a cashier order …"

20.  The 2^nd Share Mortgage II (revised by Borrower 23 November 2010) contained a new 7A as follows:

"7A. AUTHORITY TO SELL

The Mortgagor hereby grants to the Lender, a right but not an obligation, to sell not more than 100,000,000 Shares at any time 92 days after the Facility is fully utilized and at a price of not less than HK$0.40 per share to repay part of the Secured Indebtedness and the provisions in Clause 7 shall apply, mutatis mutandis, to any of such sale."

21.  And in Schedule 1 of the 2^nd Share Mortgage II under Particular of Shares the Registered Holder was amended to Pachmar ("the 2^nd Defendant") from Super Master ("the Plaintiff"), and the latter continued to be described as Beneficial Owner[3].

22.  According to Cheng, the new loan, which was to be secured by the Shares did not materialize.  Subsequently, the Plaintiff discovered that the 1^st Defendant had sold some of the shares.  As a result JKKL wrote to TS on 22 July 2011[4] as follows:

"We act for Super Master Investments Limited ('Super Master').

As you may recall, there was a purported loan transaction in November last year for the sum of HK$135,000,000 (the 'Loan') in which you acted for Pachmar Limited ('Pachmar') as the purported lender (the original purported lender was Power Apex Limited ('Power Apex')) and we acted for Trade Honour Limited as the purported borrower and for Super Master as the purported obligor in charging the Bright Shares to Pachmar as security for the Loan.

The purported loan transaction (including the purported charging of the Bright Shares) eventually fell through.  But before it fell through, Super Master had delivered the Bright Shares to Pachmar or Power Apex on behalf of Pachmar in escrow pending and subject to completion of the purported loan transaction and execution of the loan documents.

We are instructed that the Bright Shares were not and still have not been delivered back to Super Master despite the purported loan transaction had fallen through.

In the circumstances, we are instructed to hereby call upon your client to deliver back the Bright Shares to Super Master or to us on behalf of Super Master forthwith.  Failing that, Super Master will take the appropriate legal actions to protect its rights and interests against Pachmar/Power Apex without any further prior notice."

The Proceedings

23.  The present proceedings were commenced on 10 October 2011.  On the same day, an ex parte Mareva Injunction was granted by Saunders J against the 1^st and 2^nd Defendants and following that on 11 October 2011, the Plaintiff issued an inter partes summons.

24.  On 13 October 2011, the 1^st and 2^nd Defendants applied for the Mareva Injunction Order of Mr Justice Saunders dated 10^th October 2011 be varied to the extent that the entire para 2 entitled "Disclosure of Information" be discharged.

25.  The matter went for hearing before Sakhrani J who made an order dated 14 October 2011 continuing the Mareva Injunction granted by Saunders J and made certain other orders.

26.  Eventually, the matter was heard before Yam J on 16 November 2011, who discharged the ex parte order of Saunders J, and dismissed the Plaintiff's summons.  Yam J refused leave to appeal on 18 November 2011.

27.  The Plaintiff then applied for leave to appeal to this court.  On 18 November 2011, I continued the injunction in relation to the remainder of the 360,000,000 shares[5] so that they could not be disposed of until the hearing.  I adjourned the hearing of the application for leave to appeal to a date to be fixed and directed that, at the hearing of the application for leave to appeal, if leave were granted, the court would then proceed to hear the appeal itself.

The appeal

28.  The matter came before us on 23 March 2012, when, with the agreement of the parties, we dealt with the application for leave to appeal and the appeal together.  At the end of the hearing we reserved our decision, but continued the order of 18 November 2011 until the disposal of this application or further order.

29.  Yam J decided against the Plaintiff because he regarded the Defendants' case as "much more credible and consistent"[6].

30.  The learned judge, however, acknowledged:

"43.  I understand it is not a trial on affidavit.  However, in assessing the plaintiff’s case, I found it to be poor, inconsistent and quite incredible.  I cannot accept that it has a good arguable case."

31.  This is what he said about the Defendants' case

"42. On the other hand, the defendants’ case is much more credible and consistent : there was no new loan to be arranged. No money would change hands pursuant to the Agreement reached with Trade Honour in October 2010.  The Debt owed by Trade Honour October 2010 was in the approximate sum of $135 million, which is the same amount to which the plaintiff alleged to be a new facility loan.  The defendants merely asked for the additional collateral to be provided by Trade Honour for the Debt, or the defendants would foreclose the CIL shares.  Trade Honour then provided the Dejin Shares as additional collateral and hence the defendants did not sell the CIL shares and did not sue Ke’s on personal guarantee.  That is also why the repayment period of the Debt was also extended."

32.  Yam J appeared not to have appreciated that the Plaintiff's case was that the 1^st Defendant would provide Trade Honour with a new facility of HK$135,000,000, HK$100,000,000 of which would be used to repay part of the existing indebtedness of Trade Honour, and that the balance of the HK$35,000,000 would represent fresh funds made available to Trade Honour, and that the new facility would be formalized by the documentations to be exchanged between JKKL and TS.  Thus, the learned judge described the Plaintiff's case in these words

"36.  The plaintiff’s case was that a new facility loan was to be granted by the 1st defendant to Trade Honour in the sum of $135 million and the Dejin Shares were meant to be part of the securities provided for the new facility loan.  But eventually the negotiation 'fell through' in around June 2011 and the defendants, according to the plaintiff, should return the Dejin Shares."

33.  What was the evidence before Yam J in support of the Defendants' case which shows that their case was more credible and consistent?

34.  Choi, who is the sole director of the 1^st Defendant, in his affidavit, after narrating Cheng's case, did not refer to or explain any of the contemporaneous documents produced by Cheng some of which emanated from TS, the Defendants' solicitors.  Nor had he dealt with the undated "Loan Repayment and Security Agreement" referred to in para 13 above which bore what appeared to be his signature.

35.  Choi went on to deal with the restructuring of Trade Honour's indebtedness with Ke, in paras 23-43 of his affirmation, and said that the 360 million Dejin shares were provided as additional collaterals.  Choi said:

"36. It was an express term agreed between Ke on behalf of Trade Honour and myself that the additional collaterals were provided to Power Apex (through its nominee Pachmar) to:

(1) compensate the anticipated significant drop in the value of the CIL Shares;

(2) exchange for Power Apex's forbearance to foreclose the CIL Shares; and

(3) exchange for Power Apex's forbearance to sue Ke for the Existing Debt.

37. It was also expressly agreed between the parties that in the event that the value of Dejin Shares fell below HK$0.40, Power Apex could immediately sell the additional collaterals, i.e. the Dejin Shares, and the proceeds of the sale would be applied towards repayment of the Existing Debt."

Accordingly some of the Shares have been sold.

36.  Choi also referred to JKKL's letter of 22 July 2011.  He said:

"47 Not knowing what this was about, I contacted Ke who assured me that Cheng was 'his man'".

37.  Choi then provided 2 letters or certificates from Ke as follows:

"Mr. Choi,

Since the original repayment agreement signed with your company will expire soon, and the share of my company has dropped drastically, I am unable to make repayment as scheduled.  After negotiations, it is agreed that your company further sells the shares of 1163 and the sale proceeds in the sum of HK$20 million is used to repay my outstanding loan so as to continue to extend my outstanding loan owed to your company.  Your company is not allowed to sell the shares of 0479 under my company privately.  This letter serves as a record.

Ke Jun Xiang

07/07/2011"

and

"POWER APEX LTD

Your company passed me a letter from Messrs. Johnny K.K. Leung & Co. to your company, the contents of which are noted.

In the solicitors' letter, your company is requested to reply, explain and return the shares etc and I hereby reply this matter to your company:

All matters mentioned in the solicitors' letter, including the request for return of shares certificates, are matters between me and Super Master and unrelated to your company.  I am responsible and liable for resolving these matters with that company.

Ke Jun Xiang

03/08/2011"

38.  Ke had also made an affirmation in support of the Defendants (dated 1 November 2011) in which Ke said Ho was his close personal friend and that Ho agreed to assist him by providing the shares as additional collaterals: para 22.  He said Ho had assured him that the shares "were in fact … beneficially owned by himself" through a nominee, the Plaintiff.  That has been denied by the Plaintiff.  For the present purpose, I must proceed on the basis that the Plaintiff is the beneficial owner of these shares.

39.  Then Ke said in para 27, that he agreed with Ho to buy out the shares[7], and that because the shares were delivered on 26 October 2010, he had to pay $109.8 million being HK$0.305 per share by 25 April 2011.  Ke also said eventually a settlement agreement was made which he did not produce.  And that the Shares were paid for by the transfer of certain shares in a mainland company.

40.  Ho filed an affirmation dated 10 November 2011 refuting Ke's allegations. He said Cheng was an old friend who was doing him a favour by providing the Shares, that Ho agreed (after obtaining Cheng's consent) on 13 October 2010 to have the shares stamped

"… on the understanding that everything would be subject to contract or in escrow": para 29

and that on 26 October 2010,

"… Ke informed me that Choi requested the Stamped Standard Form of Transfer and the Share Certificates be delivered to the 1^st Defendant to hold them during the course of negotiation on the Purported New Facility."

which he did after securing Cheng's permission: paras 42 and 43.

41.  Cheng filed a 2^nd affirmation dated 10 November 2011, in which after referring to the contemporaneous documents, he said:

"5. It is therefore inconceivable for Power Apex to allege that the Shares were additional collateral for the Existing Debts.  In fact, Choi did not even bother to mention or refer to the above documents in Choi Affirmation."

"Unreasonable denial of knowledge of the Purported New Facility

6. In ¶46-47 of Choi Affirmation, Choi alleged that he did not have any knowledge of the Purported New Facility.  This is simply unbelievable.  All documentations related to Purported New Facility, i.e. the term sheet (Exhibit 'CPL-11'), were drafted by TS (¶31 of Choi Affirmation).  Power Apex must have given instructions to TS, otherwise they would not have done so.  As stated above, Pachmar was named as the purported lender in the draft loan agreement, draft mortgages and draft guarantee.  (Exhibit 'CPL-12') If the parties were not negotiating, why would TS sent draft loan documents and draft share mortgages to JKKL?  Choi's denial regarding his knowledge of the Purported New Facility is an affront to logic and commonsense.  The facts deposed to in ¶46-47 of Choi Affirmation are undoubtedly untrue."

42.  Having regard to the evidence narrated above, I am unable to agree with the learned judge that the Plaintiff's case is "quite incredible" or that the Defendants' case is "much more credible and consistent".  I am of the view that on the available evidence, the Plaintiff has a good arguable case.  I do not mean to say that the defence is less credible.  I will not go on to deal with the strength of the Defendants' case.  That must await trial.  It is sufficient to say that the Plaintiff has a good arguable case.

43.  The Plaintiff put its case on the basis of a trust.  The Plaintiff is the beneficial owner of the shares and that unless the Defendants are bona fide purchasers of these shares without notice, the Plaintiff's beneficial interest endures.  On the evidence, I believe the Plaintiff has a good arguable case that the Defendants had actual or constructive notice of Plaintiff's beneficial interest.  That is notwithstanding that Choi has said:

"35.      Given that the relevant shares certificates of the Dejin Shares were brought to us by Ke with the duly completed Standard Form of Transfer, and given that Ke had successfully arranged for the Dejin Shares to be transferred to Pachmar's name and stamped the Standard Form of Transfer, I did not for one second have any doubt over Ke's representation when he said Cheng was his people and the Plaintiff was his company.  At Ke's request, Power Apex and Pachmar agreed to drop their request for a personal guarantee from Cheng."

44.  Given the document referred to earlier in this judgment, I believe the Defendants had at least been put on enquiry. 

45.  Yam J also took the view that the Plaintiff was guilty of material non-disclosure.  That view was principally based on Ke's allegations which Ho has denied.  With respect, I agree with Mr Rimsky Yuen, SC, for the Plaintiff that the complaint of material non-disclosure cannot be made out simply on the basis of the Defendants' factual allegations which have been denied.

46.  Mr Coleman, SC, for the Defendants, submitted that the Plaintiff is appealing an exercise of discretion.  That is so.  But, with respect, the exercise of discretion was not based on solid ground.

47.  Mr Coleman also submitted that since the Plaintiff would buy Dejin shares in the market, damages would be an adequate remedy.  The Plaintiff's claim is proprietary.  In relation to shares already sold, the Plaintiff is entitled to trace its proceeds.  Moreover, even if the claim is for damages only, that would not stop a mareva injunction being granted when the facts justify it.

48.  Both the Defendants are BVI companies.  There is only Choi's assertion in para 50 of his affirmation that:

"… both Defendants are financially capable of paying the damages claimed …".

49.  Since the Plaintiff's claim to the shares is proprietary, I believe the injunction[8] granted by Saunders J against both Defendants should be restored. 

50.  That is because:

"… The purpose of the injunction based on a proprietary claim is to preserve those assets so that they can be made over to the claimant as his property if this is the case. …"  3.029 Commercial Injunctions, 5^th edn., Steven Gee QC

51.  The Plaintiff also seeks disclosure of information.

52.  Goff J (as he then was) said in A v C [1981] Q.B. 956 at 958:

"… In such cases, there is good authority that the court may make orders with the purpose of ascertaining the whereabouts of the missing trust fund." 

"… that, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court not only has jurisdiction to grant an injunction restraining the disposal of that property; it may in addition, at the interlocutory stages of the action, make orders designed to ascertain the whereabouts of that property. In particular, it may order a bank (whether or not party to the proceedings) to give discovery of documents in relation to the bank account of a defendant who is alleged to have defrauded the plaintiff of his assets; and it may make orders for interrogatories to be answered by the defendants or their employees or director."

53.  The Disclosure of information sought can be found in Saunders J's order[9] and the same information is sought against each of the Defendants.

54.  We have had no submissions on the disclosure sought. 

55.  However, I would not make an order in terms of 2(1)(a) which requires:

"a) All corporate information of the 1^st Defendant including the details of its shareholders and directors, its registered address and all addresses of its places of business whether in Hong Kong or not."

56.  Nor the similar order sought against the 2^nd Defendants under 2(5)(a).

57.  I would not make such orders because at the moment I do not see the need for them.  I would not preclude the Plaintiff from seeking such an order in the event that after the other disclosures have been made, it can be demonstrated that further disclosure is necessary to give effect to the injunction order granted.

58.  It follows for the above reasons I would allow the appeal.  Naturally, leave to appeal would also be granted.

59.  I will also make an order nisi in favour of the Plaintiff both here and below.

Hon Fok JA:

60.  For the reasons given by Tang VP, I too would grant leave to appeal, allow the appeal and make the various orders proposed by him.