ZHU BIN v. THOUSAND VANTAGE INVESTMENT LTD AND OTHERS

HCMP 1673/2023

[2024] HKCFI 70

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1673 OF 2023

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REASONS FOR DECISION

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1.  On 1 November 2023 I dismissed an application by Zhu Bin (“Plaintiff”) for the following interlocutory injunction:

“1. Until trial or further order of the Court, the 1^st Defendant (whether acting by itself, its officers, servants, agents or otherwise howsoever directly or indirectly) is restrained from proceeding with, carrying into effect, completing, or otherwise performing the terms of or taking steps in furtherance of the proposed issue of up to 8,228,571,432 ordinary shares as proposed in the 1^st Defendant’s board meeting notice dated 18 September 2023 and purportedly approved by the Company’s board at the board meeting on 28 September 2023 (‘Proposed Issue’);

2. Until trial or further order of the Court, the 2^nd to 5^th Defendants (whether acting by themselves, their servants, agents or otherwise howsoever directly or indirectly) being directors of the Company are restrained from procuring, effecting or taking steps in furtherance of the Proposed Issue.”

2.  The application is made in proceedings commenced by originating summons issued on 3 October 2023 seeking essentially the same relief, but as a final order, which would include a declaration that the proposed allotment is voidable.

3.  Despite the filing of very lengthy evidence by the Plaintiff the relevant matters are limited.

4.  On 28 September 2023 the Board of Thousand Vantage Investment Limited (“Company”) passed a resolution to make a rights issue (“Rights Issue”).

5.  The purpose of the Share issue is primarily to raise funds to settle the liability for construction costs of the Company’s 75% owned subsidiary GX Guangming to a third party, CCCC, under a settlement agreement dated 6 March 2023 (“Settlement Agreement”).  GX Guangming in principally engaged in construction and operation of petrochemical terminals and warehousing in Guangxi (“Facility”).  The March 2023 settlement agreement is not the only one that GX Guangming has entered into with CCCC.  GX Guangming and CCCC did reach a settlement earlier in May 2022 (“Earlier Settlement Agreement”). GX Guangming had defaulted on the Earlier Settlement Agreement. Eventually, the parties concluded the Settlement Agreement in early 2023, whereby GX Guangming would need to pay RMB 30 million on or before 30 June 2023; and the remainder of RMB 29.9 million together with the corresponding interest, by 31 December 2023.  In the event of any breach of those obligations, CCCC was entitled to revive a right of “compulsory enforcement” and liquidate GX Guangming.

6.  The Plaintiff was the founder of the Company.  By reason of a series of dealings between the Plaintiff and PT International Development Corporation (“Listco”), which is listed on the Hong Kong Stock Exchange, eventually the Plaintiff had to sell 65% interest in the Company to PT OBOR (a subsidiary of Listco). The acquisition was completed on 11 October 2021.  The Plaintiff lost control of the Company. The Plaintiff currently owns 34.99% of the Company.  The balance of the shares in the Company are owned by Listco.  The Company is, therefore, a partly owned subsidiary of Listco.  The Defendants are directors appointed to the Company’s Board at Listco’s instigation.

7.  Its shareholding in GX Guangming is the Company’s main asset.  The other 25% is owned by SH Jianchen, which the Defendants say is controlled by the Plaintiff’s brother-in-law’s wife and most of its officers are the Plaintiff’s relatives.  The Plaintiff is a director of Hongze Global Logistic Holdings Pte. Ltd, the shareholder of Lian Wei (Shanghai) Finance Lease Limited, which is the largest creditor of Guangming.  The Defendants say that SH Jianchen is the Plaintiff’s nominee.  The immediate relevance of this, say the Defendants, is that SH Jianchen will not contribute to the payment of the sums outstanding under the Settlement Agreement, because the Plaintiff wishes GX Guangming to go into liquidation, the Defendants assume as part of a scheme to retake control of the Facility.  The Defendants’ position is that the Plaintiff has consistently tried to prevent the financing of completion of the Facility and that the only realistic way of doing so is through the Rights Issue.  In order to fund the Rights Issue Listco itself needs to has a rights issue to raise the finance necessary to inject new capital into the Company.

8.  The Settlement Agreement between GX Guangming and CCCC, had been entered into at a time when the Plaintiff was the majority shareholder of the Company, and the liability which led to the Settlement Agreement was incurred at a time when the Plaintiff managed the Company.   

9.  The contract with CCCC was for the construction of a second terminal at a location at which GX Guangming operates the Facility for the handling and storage of liquid dangerous products.  It is the Plaintiff’s case that the Facility is not viable.

10.  On 16 June 2023 the Plaintiff successfully obtained an injunction in HCMP 829/2023 from Linda Chan J on the hearing of an inter partes summons preventing completion of the originally proposed rights issue.  There are no written reasons for that decision, although I have been provided with a copy of a transcript, which records the judge as stating in what appears to be short ex tempore reasons: “on the, uh, basis of the evidence before the court is quite clear that the directors of TV did not consider, all the other alternative available, uh, to TV in terms of raising funds to pay the debt, nor do they ever consider the obvious, fact that, um, the other, equity holder of Guangming, namely SH, would also have - should also be, uh, required to contribute...”.  The Judge also added that “once the directors had gone through the due process by laying out all relevant information and discussing all relevant – all viable alternatives, including the pros and cons, and reach a decision at the end of ….. such meeting, it would be very difficult for anyone in future to complain about the propriety of such decision.”

11.  The Defendants say that they took on board the Judge’s comments.  The first important board meeting of the Company after GX Guangming had failed to meet the payment deadline on 30 June 2023 was the board meeting on 5 July 2023 (“5 July Board Meeting”).  At the meeting, the Board passed a resolution to appoint AmCap as the financial advisor to the Company to make fundraising options recommendations.  At the 5 July Board Meeting, the Board concluded that the Company should provide funds to GX Guangming, and the AmCap was appointed and tasked to advise on funding options.  There was no suggestion to liquidate GX Guangming.  Eventually, on 28 September 2023, a board meeting was convened to discuss the Rights Issue (“28 September Board Meeting”).  The Board approved the Rights Issue.

12.  The Plaintiff’s complaints about the way the Board had proceeded and resolved that there should be a Rights Issue, divide into parts. The first is that the Board should have considered liquidating GX Guangming as its viability is in question.  The second is that the Board should have been looking for a contribution from SH Jianchen.

13.  Before considering these complaints in more detail I will address the relevant principles.

14.  It is an established principle of Company law that the court does not to interfere with a management decision unless it is demonstrated that it has been made in bad faith or involves a breach of fiduciary duty.  A convenient summary of the components of these principles and their application is to be found in [41]–[42] of the decision of Recorder Manzoni SC in Fountain II Ltd v Ping An Securities Group (Holdings) Ltd[1].

“41. I find it difficult to accept that the conduct complained of is indeed unfair or improper. I am very conscious of the general propositions of law that the court should be very slow to interfere in the internal affairs of a company. The principles are summarised by Mr Wong in para.40 of his skeleton argument:

(1) It is a well-established principle of company law that the court will generally not second-guess the correctness of bona fide commercial decisions of the board: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 832; Passport Special Opportunities Master Fund LP v eSun Holdings Ltd [2011] 4 HKC 62 at [150].

(2) The allegation that the Proposed Rights Issues was not bona fide is a very serious one; it necessarily impugns the conduct and motives of most of the Board: Kwok Hiu Kwan v Convoy Global Holdings Ltd [2018] HKCFI 1729, [2018] HKEC 2068 at [15], per Harris J.

(3) Where more than one purpose for the exercise of a power can be identified, a decision can only be set aside where the dominant or primary purpose was improper: Wootliff v Rushton-Turner [2018] 1 BCLC 479 at [110].

(4) Fountain II’s burden is to be discharged by ‘evidence, not by assertion and speculation’: Able Success Asia Ltd v China Packaging Group Co Ltd (HCMP 1091/2014, [2014] HKEC 914, 15 May 2014), per G Lam J at [63].

(5) The fact that it might be arguable that an inference may be drawn from primary facts does not necessarily dictate that the petitioner has established an arguable case (and a fortiori, is likely to succeed at trial): SCIC Ltd v Tomei International (Holdings) Ltd (HCA 11427/1995, [1996] HKLY 194, 21 November 1995), per Rogers J (as he then was) at [38].

42. I also add reference to Giant Crystal Ltd v Energy International Investments Holdings Ltd (HCMP 1903/2015, [2015] HKEC 1811), decision of Queeny Au Yeung J dated 31 August 2015, at [52], where she stated that:

‘Once it is shown that a company does need funds, it is a matter for its management and its commercial decision on whether those funds should be raised by way of placement or other methods. The Court should not interfere with bona fide management decisions and substitute its own opinion for that of the management: Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811, per Yuen J (as she then was) at [73].’”

15.  The evidential burden on a shareholder seeking to interfere in the decision of a board is, as consequence of these principles, considerable.  It is not sufficient to demonstrate that an alternative decision may be commercially more attractive or that a board may not have had regard to all possible options[2] or obtained all possible information.  Business decisions will often involve commercial judgment and a board is likely to have regard to considerations such as the cost of obtaining professional input and the need for timely decision making in deciding how to determine whether to proceed with a transaction and how it is to be structured.  It is well established that if, as will normally be the case, the articles vest the management of a company in the hands of the directors, as Article 3 of the Company’s Articles do, they do not have to justify their management decisions to shareholders.  The only way in which a shareholder can interfere with management decisions is as part of the general body of shareholders exercising rights conferred by the articles or the Companies Ordinance, Cap 622 to, for example, change the constitution of the board[3].

16.  If a shareholder believes that a decision is impeachable because a board has acted in bad faith or in breach of fiduciary duty and wishes to obtain an interlocutory injunction to prevent a board completing a transaction the shareholder faces a further hurdle.  A decision, as in the present case, to enjoin an allotment of shares until trial will commonly have the effect of determining the claim as if a transaction cannot be completed in the originally contemplated time frame its commercial purpose may be undermined and a board or a counterparty may see no purpose in completing the transaction.  This is probably the case here because the allotment is intended to raise finance to settle the liabilities of a subsidiary, which will otherwise be unable to pay its current debts and be at risk of liquidation and the diminution in value of a valuable asset.  This being the case the Plaintiff has to demonstrate that he is likely to succeed at trial rather than, as is normally the case, a serious issue to be tried[4]. Although in my view it matters not which test applies in the present proceedings, because for reasons that I explain below the Plaintiff in my view has not demonstrated a serious issue to be tried let alone that he is likely to succeed at trial.

17.  The Rights Issue will dilute the Plaintiff’s shareholding.  The Plaintiff suggests that the purpose of the Rights Issue is to reduce his shareholding below the level at which he is entitled to nominate a director to join the Board.  To avoid this he will have to pay HK$14.5 million to take up a pro rata proportion of the Rights Issue.  There is no direct evidence that this is what Listco intends.  I am invited to infer this from what the Plaintiff suggests is the commercially unsound decision to finance GX Guangming.  Necessarily if I take the view, as I do, that it has not been demonstrated that the decision was made in breach of fiduciary duty I cannot infer (particularly given the high burden placed on a party inviting the court to draw such an inference[5]) that the decision was made in bad faith.

18.  In my view the suggestion that the failure to obtain a liquidation analysis was a breach of fiduciary duty is plainly wrong and smacks of a complaint dreamt up to support another attempt to interfere with the payment to CCCC.  If the Board thought that the Company could not continue to finance the expansion of the Facility and operate GX Guangming what I would have expected is for the Board to consider selling the underlying assets.  This is the normal course for a company which decides to dispose of a business, not first to put the company into liquidation.  The reason for this is well known: the return on the sale of assets by a liquidator is commonly less than the sum obtained if the company disposes of its assets under its own management.  Also, it is cheaper to liquidate a company once its assets have been sold.  I also note that the Plaintiff’s own director on the Board did not suggest that there be a liquidation analysis.

19.  On the evidence it also seems to me that it was perfectly reasonable for the Board to proceed on the basis that SH Jianchen would not contribute to payments to CCCC.  I note that there is no evidence to suggest that it is willing to do so despite what I accept is the evidence that the Plaintiff is involved with SH Jianchen.  If he genuinely thought that SH Jianchen would contribute I would have expected him to have come forward and say so.  He has not.

20.  In my view the Plaintiff’s application comes nowhere near satisfying the criteria I have described earlier.  On the contrary it has all the hallmarks of an attempt to interfere for collateral commercial reasons with the Board’s decision.

21.  I will make a costs order nisi that the Plaintiff pays the Defendants’ costs with a certificate for two counsel, such costs to be taxed if not agreed.

22.  The originating summons should be restored before a Judge unless the parties are able to agree how it should be disposed of.