ACHIEVE GOAL HOLDINGS LTD v. ZHONG XIN ORE-MATERIAL HOLDING CO LTD

CACV 324/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 324 OF 2008

(ON APPEAL FROM HCA NO. 1987 OF 2005)

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REASONS FOR JUDGMENT

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Hon Tang VP (giving the reasons for judgment of the Court):

Introduction

1.  On 27 October 2008, Chung J dismissed the application by Clarigain Enterprises Limited (“Clarigain”), Zhong Xin Ore-Material Holding Company Limited (“Zhong Xin”) and Bai Jun Tian Cheng Limited (“Bai Jun”) (hereinafter referred to collectively as “the applicants”), for the appointment of interim receivers and managers of Zhong Xin.  After the application was dismissed, the court was asked as a matter of urgency to hear the appeal.  At the time we were informed that the mainland had adjourned the matter for a month from 14 October 2008.  We agreed to hear this appeal on 7 November 2008 at 10.00 am. 

2.  The applicants were represented by Mr. Alan Leong, SC and Mr. Lee Tung-ming.  Mr. Dennis W. H. Kwok, appeared for the 2^nd and 3^rd defendants.  Mr. Lawrence Cheung, appeared for the 1^st and 4^th defendants.  The 1^st defendant Achieve Goal was neutral in the appeal as well as on the application.

3.  The applicants’ appeal was allowed by us on 7 November 2008.  These are our reasons.

Background

4.  Clarigain holds 50% of the shares in Zhong Xin.  The other shareholder is Angola Group Holdings Limited (“Angola”).  There is a joint venture agreement dated 1 December 2004 but signed on 21 December 2004 (“the joint venture agreement”) under which in return for a 50% interest in Zhong Xin, Angola agreed to provide the equivalent in USD of RMB 50 million to Zhong Xin.  An important dispute between Clarigain and Angola is over the nature of the RMB 50 million to be provided.  According to Clarigain, the RMB 50 million was capital.  According to Angola, they were only obliged to provide finance to the extent of RMB 50 million.  This is not the occasion to decide which version is correct.  For the purpose of the appeal, we cannot and do not make any finding of fact. 

5.  The persons behind Angola are Zhao Bing (“Zhao”) and Ng Chi Kong (“Ng”) and those behind Clarigain are Xie Her Ping (“Xie”) and his wife Madam Gao Hai Yan (“Gao”). 

6.  Xie and Madam Gao held the entire shareholdings in Zhong Xin on trust for Bai Jun.  They were appointed by Bai Jun to act as directors of Zhong Xin.  Since about 30 December 2004 and pursuant to the joint venture agreement, 50% of the shareholdings in Zhong Xin were transferred to Angola, and Zhao and Ng were appointed by Angola to act as directors of Zhong Xin.  Xie and Gao, and, Zhao and Ng, are the only directors.  It is common ground that there is a deadlock.

7.  The joint venture agreement envisaged the established a sino-foreign joint venture company in the Shaanxi Province, namely, Yulin Changlebao Mining Corporation Limited (“CLB”). 

8.  There is a sino-foreign joint venture agreement dated 12 December 2004 (“the CLB JV contract”) made between 榆林巿榆陽區常樂工貿有限責任公司 (“the Yulin company”) and Zhong Xin.  Under the CLB JV contract, the parties agreed to invest a total of RMB 71 million into CLB, of which the Yulin company was to contribute RMB 21.3 million for 30% of the capital, and Zhong Xin RMB 49.7 million for a 70% share.  Zhong Xin’s share of RMB 49.7 million was to be contributed by 3 instalments.  The 1^st instalment being RMB 20 million payable upon the registration of CLB, the 2^nd instalment to be provided after the establishment of CLB, and the remaining RMB 9.7 million to be provided two years after the establishment of CLB.  According to the applicants, the 1^st instalment was due to be provided by 18 January 2005, the 2^nd instalment 18 January 2006, and the 3^rd 18 January 2007.

9.  Under clause 2.2 of the joint venture agreement, Angola was to provide the equivalent of RMB 20 million to Zhong Xin for the 1^st instalment payment under the CLB JV contract. Although the joint venture agreement was not explicit about when the remainder of the RMB 50 million was to be paid, presumably they were to be provided in time for the payments under the CLB JV contract.  To cut a long story short, the 1^st instalment was provided to Zhong Xin, but by way of a loan from Achieve Goal Holdings Limited (“Achieve Goal”).  This is the subject of Achieve Goal’s claim in the present action against Zhong Xin. 

10.  We will not go into the detail regarding Achieve Goal’s claim nor the counterclaim which it has spawned in relation to the provision of the RMB 20 million.  Sufficient to state that in the applicants’ counterclaim, for example para. 29A(d), they have complained that because of the failure by Angola to provide any further finance for the 2^nd and 3^rd instalments:

“By 1^st and 2^nd February 2008, Bai Jun injected US$ 4,172,590 (equivalent to RMB 29,567,600) into CLB as injection in respect of the 2^nd and 3^rd Capital Instalments in satisfaction of the balance capital of CLB to be injected by Zhong Xin pursuant to the CLB JV Contract.”

11.  Para. 29A(e) of the counterclaim went on to claim, inter alia, that pursuant to clause 4.3 of the JV agreement, which provided that:

「若甲方（Angola）未能按期支付合资公司注册资本金余额，将由乙方（Bai Jun）出资补上，甲方在中信矿业公司（Zhong Xin）的股份则按比例相应降低。」

Angola was holding 59.49% of the 50% of the shareholdings in Zhong Xin on trust for Bai Jun. 

12.  The legitimacy of the payment of the 2^nd and 3^rd instalments by Bai Jun to CLB is the subject of dispute in the mainland.  The Yulin company has started proceedings in July 2008 in the陝西省榆林巿中級人民法院 (“the mainland proceedings”), with Zhong Xin as the 1^stdefendant, Bai Jun the 2^nd defendant, where the Yulin company claimed that the capital contribution in the sum of USD 3,560,000 made by Bai Jun in the name of Zhong Xin was invalid and that the Yulin company had the right to acquire 42% of Zhong Xin’s shares.

13.  Briefly stated, in the mainland proceedings, the Yulin company alleged that Angola had never given up its right （Angola公司從來沒有放棄其出資權利）nor authorise Bai Jun to provide capital on behalf of Zhong Xin.  It was also alleged that because Madam Gao had not given to CLB the外匯登記證, the 2^nd and 3^rd instalments had never been paid into the account of CLB and they were never available to CLB.  Furthermore, because of the failure to provide the 2nd and 3^rd instalments, Zhong Xin had already lost its right to provide the capital, and that the Yulin company had a right of pre-emption under certain mainland legislation as follows:

「…根据《公司法》第199条、第200条的规定，原告要求法院判决百浚天成的出资为虚假出资，出资无效，同时确认中信矿业违约出资、转让出资的情况下，原告根据《公司法》第72条之规定，享有股东的优先购买权。原告为此诉之法院，请法院依法受理，公正判决。」

14.  Not surprisingly, Bai Jun wishes to contest the Yulin company’s claim.  Angola has also been made a party to the mainland proceedings.  There is a deadlock over what role Zhong Xin should play.  Also, as will be seen, because of the deadlock, Zhong Xin was not in a position to instruct lawyers to defend its interests, should it be proper to do so. 

15.  That there is a deadlock in Zhong Xin is common ground.  The applicants have also alleged that Angola has sided with the Yulin company in trying to obtain control of CLB. 

16.  Under the CLB JV contract, Zhong Xin was entitled to nominate 5 out of 7 directors and the legal representative of CLB and hence control. Of the 5 directors nominated by Zhong Xin, 2 were from the applicants and 3 from Angola. Because of the deadlock, the 2 directors in CLB from the Yulin company became the “critical minority”. 

17.  The applicants alleged that in or about November 2005, Ng and one 汪新生, the financial controller of CLB who was allegedly appointed upon the insistence of Ng and Zhao, had filed certain documents which led Xie to being replaced as the legal representative of CLB.  The applicants alleged that those documents contained, inter alia, a forged signature of Xie.  According to the 5^th affirmation of Siu Yat Fung Anthony (“Anthony Siu”), the applicants’ solicitor, dated 29 September 2008, following complaints to the relevant mainland authorities a penalty notice was issued:

“(e)    … That led to penalty notice being issued by the authorities for Ng's attempt to change the Legal Representative of CLB by concealment of facts to the authorities. That had led to administrative litigation between Ng and the 陝西省工商行政管理局. Despite the appeal of Ng, the 陝西省西安巿中級人民法院upheld the finding that Ng had concealed facts from the authorities in effecting the change of Legal Representative, and affirmed the decision to impose administrative penalty on Ng. The litigation dragged on for a long time, and the decision of the Intermediate Peoples' Court was delivered only on 11 December 2007.”

18.  According to Anthony Siu, there was allegedly a second attempt to remove Xie.  Anthony Siu said in his 5^th affirmation:

“61.   I have been instructed by Xie and I verily believe that on 20 May 2008, there was an incident when the assistant to Xie, Mr. 王琳, had a fight with Zhang because of differences in opinion about conducting further audit of the accounts of CLB. I have further been instructed by Xie and I verily believe that the said differences between the 2 persons came about in this way:- (1) Due to the internal conflicts and disputes between Bai Jun's camp and Angola's camp in Zhong Xin, the people of the Yulin Company, including Zhang as the General Manager of CLB, had seized upon the opportunity to gain control of the management of CLB, and tried to usurp the function of the representatives of Zhong Xin in CLB; (2) As a result, the daily management of CLB had for quite some time largely fallen into the bands of the people of the Yulin Company; (3) As a result, Xie was not absolutely confident about the accuracy of the accounts of CLB, and had always wanted to have a further audit of the accounts; (4) 王琳wanted to push ahead with such further audit, but Zhang strongly opposed to it; and (5) In the end, the 2 had the fight on 20 May 2008.

62.    Xie and Gao have further instructed me and I also verily believe that because of this incident, the Yulin Company, with their close relationship with the public authorities in 陝西省榆林巿, made use of the incident as an excuse to cause the public authorities to have both Xie and Gao arrested in late May 2008 for being suspected of causing other people to intentionally cause injury to others, and had both Xie and Gao remanded in custody till now. The allegations of aggression are strenuously denied by Xie and Gao. As I understand it, neither Xie nor Gao has been formally charged with any offence, not to mention having been put before the Mainland Court for trial. According to Xie and Gao, which I verily believe to be true, their arrest was actually part of the scam of the Yulin Company to gain control of CLB and to force Xie and Gao out of the highly profitable coal mines projects undertaken by CLB.

63.    I should also point out that the attempt of the Yulin Company has partly succeeded in that, as I have been instructed by Xie and Gao and I verily believe to be true, after their arrest Xie and Gao, in fear of their own personal safety and considering that they would have better chance of getting released if they ceased to have any interest in the coal mines or in Zhong Xin, had had their interest in Bai Jun and Clarigain sold to third parties, namely, Keeneye Holdings Limited and New Purple Golden Resources Development Limited, which are now represented by a Mr. Wang Li (王李) ("Wang") and a Madam Lu Ying (呂瑩) ("Lu"). There is now produced and shown to me marked "SYFA-36" the latest register of shareholders of Bai Jun.

64.    After the arrest of Xie and Gao, it appears that somehow the Yulin Company and Angola acted in concert to make use of the arrest of Xie, in particular, to have Xie removed as the Legal Representative of CLB.”

19.  We were told that both Xie and his wife have been detained since May 2008.

20.  According to the affirmation of Chan Mok Wo (a director of Angola) dated 16 October 2008, Angola had received legal advice that CLB could appoint a legal representative, alternatively, a deputy managing director and that a board meeting of CLB has been convened for 14 November 2008 for that purpose and that:

“51.   These solutions as proposed by our PRC legal advisers would effectively take care of the problem regarding the ‘vacuum’ created by Mr Xie’s arrest and his inability to continue to act as Legal Representative / Managing Director.”

21.  In his 5^th affirmation Anthony Siu also said:

“86.   I have been instructed by Xie and Gao, and also Wang and Lu, that in the meantime, Xie as a director of Zhong Xin has been giving instructions to Zhong Xin's PRC lawyers to defend the claim by the Yulin Company on behalf of Zhong Xin. However, I have also been advised by Zhong Xin's PRC lawyers, Mr. 馮波, and I verily believe that such representation of Zhong Xin with authority coming from Xie can be problematic and is not built upon solid ground, because with the deadlock in the board of Zhong Xin, no board resolution of Zhong Xin has been obtained or procured to appoint PRC lawyers for Zhong Xin in defending the claim by the Yulin Company, and therefore if the Yulin Company were to challenge the authority of the PRC lawyers to act for Zhong Xin in the Mainland litigation, the challenge would probably be upheld by the Mainland Court and the PRC lawyers of Zhong Xin would no longer be able to act for Zhong Xin in the litigation any more.

87     Further, I have been advised by Zhong Xin’s PRC lawyers, Mr. 馮波, and I verily believe that one line of defence which Zhong Xin could potentially run is to contend that the capital contribution made by Bai Jun, through Clarigain, was actually made on behalf of Zhong Xin, but to do so one would need a board resolution of Zhong Xin to confirm that the capital contribution was to be considered as Zhong Xin’s capital injection to CLB. However, with the deadlock in the board of Zhong Xin, it is quite impracticable for such resolution to be obtained.”

22.  At the hearing in the mainland on 14 October 2008, Angola had indeed challenged the authority of mainland lawyer engaged to act for Zhong Xin.  As a result of this challenge, the mainland court agreed to adjourn the matter.  According to the statement of Mr 馮波 dated 15 October 2008 of HAN Horizon Law Firm, who was then acting for Zhong Xin:

「…雖然在庭审中本人作為中信公司的律师代表资格被质疑，在我的積極爭取下，法院同意休庭延期审理，給中信公司一點時間办理委托律师应诉的相关事宜，不至令中信公司在庭审中无人或律师代表应诉以至中信公司在訴訟中的利益不但未能得到保障，甚至可能被損害。该案虽然延期审理，但给予的时间大约有30天，假使第二次开庭时中信公司仍未办理合法的委托律师应诉手续，就会使中信公司无人应诉，法院依然会开庭审理，即缺席审理，将会对中信公司造成非常不利的后果。」

23.  As noted, the mainland hearing had been adjourned to enable Zhong Xin to appoint lawyers. 

The application

24.  It was against such background that the applicants applied on 30 September 2008 for, inter alia, the appointment of interim receivers and managers which was supported by, inter alia, the 5^th affirmation of Anthony Siu.  The need to protect Zhong Xin’s interest in CLB which included the proper appointment of a legal representative, as well as the defence of the mainland proceedings were the main reasons for the application:

25.  The application was heard by Chung J on 20 October 2008.  By his decision dated 27 October 2008, the application was dismissed.

26.  Essentially, the learned judge dismissed the application because he believed there was an adequate alternative remedy.  This is what he said:

“14.   The opposing parties changed their stance at the hearing before me (albeit only after some encouragement from the court).  In short, they offer to give an undertaking in the following terms:-

‘[The opposing parties] … agree to instruct a qualified PRC Lawyer to act for and represent the interests of [Zhong Xin] in the PRC Litigation currently ongoing against [Yulin] in the Intermediate People’s Court of Shaanxi Province, PRC (the ‘PRC Litigation’)”;

“In relation to [the] above, [the opposing parties] shall nominate one firm of PRC Lawyers known as ‘King and Wood PRC Lawyers’ to act for and represent the interests of [Zhong Xin] in the PRC Litigation”;

“[The opposing parties] further undertake to fully co-operate to cause the Board of [Zhong Xin] to formally instruct the said PRC Law Firm to represent and act for the interests of [Zhong Xin] in the PRC Litigation, and shall provide all necessary instructions to enable the said PRC Law Firm to defend the rights and interests of [Zhong Xin] in the PRC Litigation’.”

27.  In response to the applicants’ submission that the undertaking was inadequate because conflicting instructions would be given by opposing parties, making it impossible for any lawyer so appointed to present a proper defence in the mainland, the learned judge said:

“16.   There is no evidence that such will necessarily be the case.  One, the main complaint in the supporting affirmation is the opposing parties’ challenge to the lawyer’s authority to appear, as well as the deadlock in management.  Two, the reasons given in the opposing affirmation for taking a neutral stance are unrelated to the merits of the Mainland litigation.

17.    Moreover, the undertaking offered by the opposing parties to:-

‘provide all necessary instructions to enable the [PRC lawyers] to defend the rights and interests of [Zhong Xin] …’  (emphasis supplied)

should mean that any instructions which may be given ought to promote that end.  Giving conflict instructions to the lawyers is unlikely to meet the objective of that undertaking.  But whether the opposing parties will provide instructions consistent with those to be given by the applicants, or will merely refrain from providing instructions, is not a matter for this court to comment on.”

28.  The learned judge also thought that:

“19.   … merely because there is a deadlock in management is not a sufficient ground for appointing interim receivers.”

29.  Although interim receivers are typically appointed when there is a deadlock, we agree that if there is a satisfactory alternative, the court may in its discretion refuse to appoint an interim receiver. 

30.  The power to appoint interim receivers is found in section 21L of the High Court Ordinance, Cap. 4:

“(1) The Court of First Instance may by order (whether interlocutory or final) … appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so.”

31.  According to The Law of Administrators and Receivers of Companies(4th ed), 2007 by Lightman and Moss at para 29-003:

“The court may also appoint a receiver or receiver and manager of the company itself in cases where the company is incapable of managing its own affairs by reason of the absence of a properly constituted board or deadlock on the board of directors.”

And:

“… court-appointed receivers and managers, such as those appointed pending resolution of litigation to determine who should manage the company, may have far-reaching powers of management.”  29-014.

32.  The learned judge also said:

“18.   In any event, should conflicting instructions in fact be given by the applicants and the opposing parties, the appointment of interim receivers is unlikely to improve the situation.  It will be asking too much of the interim receivers to make them decide which of the conflicting instructions should be treated as Zhong Xin’s (as the applicants contend is what they should do).”

33.  But, the interim receivers may apply to the court for direction under  O. 30 r. 8.  We agree with Mr Leong that the interim receivers are bound to do whatever is necessary to protect the interests of the company, if necessary, with the assistance of directions from the court. 

34.  The learned judge also noted that the management had been in a deadlock since at least May 2008 if not earlier, and he said:

“21.   The importance of the delay in this application is that there is no evidence that the interests of Zhong Xin have been prejudiced by the deadlock, whether by way of a dissipation of its assets, or any diminution in asset value, or a disruption to its daily operation: see Re Full Billion Shipping Ltd., HCMP 2423/2002 (28 March 2003), para. 35 to 42, especially para. 36.  (The flooding of the coal mine will be discussed under the heading “Resumption of Coal Mine Operation”)

22.    The above observations apply equally to the lack of a legal representative (of both Zhong Xin and CLB) since the incarceration of Xie in May 2008.”

35.  It is quite clear from Mr Alan Leong’s submission that there has been no delay in the application.  As Mr Leong submitted:

“… (a) … Xie was removed as CLB's Legal Representative by Angola's side acting in concert with Yulin, (b) The 3 subsequent board meetings of Zhong Xin attempted on 18-7-08, 10-8-08 and 26-8-08 for nomination of a Legal Representative of CLB in place of Xie all failed and have led to 2 other High Court Actions, and (c) The PRC litigation was only commenced by Yulin against Zhong Xin in July 2008 with PRC court's notice requiring Zhong Xin to take steps to defend given to Zhong Xin only in late August 2008 [CBII 332].”

36.  We will not go into the details of the various matters referred to by Mr Leong in his aforesaid submission.  They show the depth of the deadlock and the degree of mistrust between the parties.

37.  Since the hearing before the learned judge, Angola has submitted the 2^nd affirmation of Chan Mok Wo dated 5 November 2008.  It appeared that the mainland court had given notice that the hearing will resume on 7 November 2008 at 8.30 am.  We were given to understand that lawyers instructed on behalf of Bai Jun would attend the mainland hearing.  At the time of our hearing we did not know what might have happened in the mainland proceedings.  In any event, whatever might have happened before the mainland court, Mr Leong has informed us that the appointment of an interim receiver would nevertheless be necessary because in the event of any adverse finding, the interim receiver might wish to consider appealing.

38.  In the 2^nd affirmation of Chan Mok Wo, we were provided with a copy of an advice given by Messes King & Wood, mainland lawyers.  Mr Yu Feng of King & Wood has said by way of preliminary advice that the Yulin company’s claim that the 2^nd and 3^rd instalments had not been properly provided might be correct.  As for the claim for the right of pre-emption, in King & Wood’s preliminary view such a claim was unlikely to succeed, although Zhong Xin might be liable for damages for failure to contribute the capital timorously. 

39.  Mr Dennis Kwok, for the 2^nd and 3^rd defendants by counterclaim, submitted that insofar as Yulin’s claim is based on a right of pre-emption, there is no or little conflict of interest between the applicants and Angola.  However, we note that in King & Wood’s advice, it appeared Angola had also put forward a claim to a right of pre-emption.  Insofar as Angola does not seem to have abandoned that claim, the potential for conflict continues.

40.  Furthermore, so far as the legitimacy or validity of the provision of the 2^nd and 3^rd instalments is concerned, there is a real conflict between the applicants’ and Angola’s stance.  We understand that Angola was of the view that the payment by Zhong Xin was invalid.

41.  There is, also, of course, the question of the appointment of the legal representative or deputy managing director for CLB. 

42.  Having regard to all the circumstances, we had no doubt that this was a suitable case for the appointment of interim receivers and managers.  We felt able to disagree with the learned judge because, with respect, we believe he erred when he thought that the appointment of lawyers to represent Zhong Xin in the mainland proceedings was an adequate alternative remedy.  We also believe he had also underestimated the ability of the interim receivers, supported by directions of the court, if necessary, to do what is in the best interest of Zhong Xin notwithstanding the deadlock.

43.  For the above reasons, we allowed the appeal and made the necessary appointments with costs.