RE EAPOWER RESOURCES INTERNATIONAL LTD

HCCW 1325/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1325 OF 2001

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J U D G M E N T

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1. This is an application by the Applicants, Leader Glory Holdings Limited and Mr Nixon Pang Man Kin, for leave to commence proceedings against Seapower Resources International Limited ("the Company") pursuant to section 186 of the Companies Ordinance. Such leave is required because the Company is currently in provisional liquidation, a winding up petition having been presented in respect of it on 11 December 2001, with provisional liquidators being appointed under the order of Hartmann J dated 31 December 2001.

2. The Company is a listed company, listed on the Stock Exchange of Hong Kong. After their appointment, it appears that the provisional liquidators took the view that there was scope for recovery of some value for the benefit of the Company's creditors by causing the Company to enter into a scheme of arrangement and capital restructuring which would have the effect of enabling a new investor to come in and acquire a controlling interest in the Company and thus to take advantage of its listed status. There has for some time been a market in such transactions, and the price paid reflects the value to the potential investor of the listing of such a company. It is of course possible that other underlying assets of the company may influence a potential investor in his decision as to whether or not to invest, and if so, how much to pay for the shares of such a company.

3. With that in mind, the provisional liquidators issued an invitation, seeking expressions of interest in the possibility of a restructuring of the capital of the Company, on 7 March 2002. A number of potential investors responded to this invitation, one such investor being the 1st Applicant, which is a vehicle, as I understand it, for the 2nd Applicant, Mr Pang.

4. In the information memorandum supplied with the invitation for expressions of interest, there was an indication that among the Company's subsidiaries was a subsidiary known as Pentagon Profits Ltd, which was said to be the owner of 24 townhouses in Beijing ("the Beijing property"). It was said in the information memorandum that the value of these townhouses was approximately $135 million. It is said by the Applicants that, in the course of negotiations as to the amount that was to be paid as consideration for the restructuring exercise and the acquisition of a controlling interest in respect of the Company, certain statements were made to a Mr Sun (who represented the Applicants) by Mr Borrelli, one of the provisional liquidators of the Company. It is said that these representations or statements were to the effect that the Company did not have the title documents to the Beijing property in its possession (or perhaps more accurately that Pentagon Profits Ltd did not have those documents). But it is said that assurances were given that there should be little difficulty in realising the value of the Beijing property, particularly if those in control of the Company had connections and relationships in China, which would enable the lack of documentation to be overcome, and the assets in question to be realised.

5. Thereafter, on 22 June 2002, an agreement for the restructuring of the Company was signed. That agreement provided for the payment of a consideration of slightly in excess of $70 million by the 1st Applicant in order to acquire some 94% of the issued shares in the Company. The restructuring agreement is a detailed document, and of particular importance are clauses 12.1(a) and 9.8. Clause 12.1(a) provides that the agreement may be terminated by the provisional liquidators by written notice to the investor in the event that the closing date under the agreement does not occur on or prior to the long-stop date, as a result of the 1st Applicant failing to comply fully with its obligations under the agreement. It is, I think, common ground that the long-stop date was 18 December 2002, and that no express agreement had been reached as to any extension thereof. Among the obligations of the investor was an obligation under clause 9.8(a) of the agreement which required that a sum of, in the event, I think, some $69 million, representing the balance of the purchase price should be paid into an escrow account at least three business days prior to the hearing of applications for the confirmation or sanction of schemes of arrangement by Courts in Hong Kong and the Cayman Islands.

6. The difficulty that has arisen in this case is that it now appears that the Company does not in fact have any title, through its subsidiary Pentagon Profits Ltd, to the 24 townhouses in Beijing that were mentioned in the information memorandum. It is a matter of some dispute as to whether, and if so, when, the investor was first informed of this problem. The Applicants' case is that the first that the Applicants became aware of the absence of such title to the townhouses was in February 2003, in answer to an apparently routine request for confirmation as to the status of the title of the Beijing properties which it made in mid-February this year.

7. The Company's case is that the question of title to the Beijing property was in fact appreciated as being problematic from quite some time earlier, and that information as to these problems had been supplied to the Applicants as early as 7 June 2002, before the entering into of the restructuring agreement. Reference has been made also to a letter of 12 June 2002 in which solicitors then acting for the Applicants appear to have confirmed receipt of documentation which, it is said, contains disclosures as to doubts as to the title of Pentagon Profits Ltd to the properties in question.

8. Be that as it may, as at December this year, when the applications for the sanction of the schemes of arrangement were pending in the courts both in Hong Kong and the Cayman Islands, and also, I note, at a time when on the Applicants' case, it is said that the Applicants were not aware of any problems as to title, funds were not in fact put up by the 1st Applicant, as required by clause 9.8(a) of the agreement, prior to the hearing of applications for sanction of the schemes of arrangement by the Hong Kong Court or the Cayman Islands Court. Under the terms of the agreement such funds should have been put up no later than, I think, 9 December 2002, or possibly a day or two earlier.

9. An application for sanction was heard by the Hong Kong Court on 10 December 2002, and an application for sanction to the Cayman Islands court was granted on 12 December 2002. At that time, the funds that should have been provided in advance by the 1st Applicant had not been provided. Despite this apparent breach of clause 9.8(a), no steps were taken by the provisional liquidators to invoke their rights to terminate the agreement pursuant to clause 12.1(a) at that stage.

10. Upon becoming aware, it is said for the first time, of the problems as to title to the Beijing property in mid February this year, steps appear to have been taken by the Applicants to ascertain whether or not regulatory approvals that had been provided in connection with the proposed listing of the shares in the Company following completion of the schemes of agreement and capital restructuring were still valid in the light of what was said to be the newly discovered information. It appears from correspondence that the relevant regulatory authorities, whose confirmation as to the validity of approvals provided earlier, towards the end of 2002, was sought, in fact confirmed the continued validity of those approvals, notwithstanding the information as to the absence of title to the assets in question, within a matter of days and, between 28 February and 3 March 2003, it appears that all relevant approvals were re-confirmed.

11. Upon receipt of such re-confirmation, the provisional liquidators, through their solicitors, demanded that the 1st Applicant comply with its obligation to provide the funding that it should have done in December last year and set a rather short time limit of a day, or a day and a half, in which to do this. The Applicant failed to provide the funding within the time stated and accordingly, on 5 March 2003, the liquidators wrote to the 1st Applicant, informing them that by reason of its breach of its obligation to provide such funding, the liquidators regarded the restructuring agreement as having been terminated. Thereafter there appear to have been some discussions as to whether or not a restructuring proposal in some form involving the Applicants and the Company might be revived, but these do not appear to have come to anything, and in the event, the provisional liquidators entered into separate arrangements, with a new investor, by a contract dated 18 June 2003.

12. Following the making of that contract, the Applicants, through their solicitors, wrote to the provisional liquidators insisting that their arrangements with the provisional liquidators were still on foot and complaining of the new arrangements that had been made. Following a letter of complaint on 27 June 2003, this application was taken out on 30 July 2003.

13. So far as the law is concerned, it seems to me that the position is accurately stated in the decision of Jonathan Parker J in Re Bank of Credit and Commerce International SA (No. 4) [1994] 1 BCLC 419. It seems to me that the upshot of that decision is that it is not for the court, on the hearing of this application, to go into the detailed merits of the case put forward by the Applicants but that, provided that the court is satisfied that it is not a case which has no realistic hope of success, the court's consideration should focus on the question of whether or not such claim should be brought by way of separate action, or in some other manner, whether in the liquidation of the Company concerned or (as in this case perhaps) in the course of a scheme of arrangement in respect of that company.

14. The proposed claim by the Applicants is contained in a draft pleading which has undergone a number of versions, and in its latest version it seeks specific performance of the restructuring agreement of 22 June 2002 together with various alternatives as to the manner in which such specific performance is to be carried out, focusing primarily on the question of the value to be attributed to the Beijing properties which it turns out are not in fact owned by Pentagon Profits Limited.

15. An injunction is also sought to restrain the Defendants, the provisional liquidators, from carrying out any restructuring proposal other than one with the proposed Plaintiffs, the Applicants. Further and alternative relief is sought, and that is the claim for damages. I must say that on reading the pleading, the pleading appears to be directed primarily if not exclusively at a claim in misrepresentation. There are indications that the Applicants consider that they are entitled, still, to perform the contract, or the restructuring agreement, of 22 June 2002. With respect, these claims are not particularly clearly pleaded.

16. However, it seems to me, having considered the terms of the restructuring agreement in question, that the question of whether or not the 1st Applicant should have put up funds pursuant to clause 9.8 is not a matter that is readily apparent as being one which was capable of being suspended by the subsequent revelation, some two months later, on the Applicants' case, that approvals that had been obtained might have been obtained on a basis that was founded, to some extent perhaps, on incomplete information. It seems to me that the agreement itself provided in clause 3.2 that such approvals should remain complete, current and in full force and effect, as a condition precedent, and it seems to me that that clause provides the Applicants with the measure of protection that they needed in the event that the information on which approvals were obtained proved to have been mistaken in some material respect.

17. It seems to me that the 1st Applicant, having failed to put up funds, as it was required to do by 9 December 2002, was in breach of the relevant terms of the agreement and that, notwithstanding the information said to have been subsequently discovered, all that was necessary, at best, would have been for confirmation of the continued validity of those approvals to be obtained in order that closing could take place. That confirmation, which is what the Applicants themselves sought, was duly obtained and thereafter it seems to me that there was no further excuse for the 1st Applicant not to put up the funds that it was required to.

18. It seems to me, therefore, that in the circumstances of this case, the provisional liquidators were indeed entitled to terminate the agreement as they indicated they were doing on 5 March 2003, and that being the case, it seems to me that however the case were pleaded on behalf of the Applicant, it would be difficult, if not impossible, for the Applicant to make good a case of breach of contract by the provisional liquidators in terminating the agreement when they did.

19. I would add that in any event, I am far from satisfied that this is a case in which there is any realistic prospect of the Applicant succeeding at the end of the day in obtaining either an injunction or an order for specific performance, having regard to the fact that following the termination of the agreement, a considerable period had elapsed, during which the provisional liquidators had entered into alternative agreements and arrangements with the new investor, and that the Company's creditors will be looking towards those new arrangements to provide a measure of recovery for their benefit.

20. In these circumstances, it seems to me that it is extremely unlikely that the court would contemplate making an order for specific performance, and would in all probability leave the Applicants to their claim in damages for what it is worth. In my view, there is no realistic prospect of an order for specific performance or an injunction being obtained. It therefore seems to me that the only claim which might be realistically pursued is that for damages, principally, I think, for misrepresentation - although it may be that, if I am wrong in my conclusion on the first point as to the validity of the provisional liquidators termination of the restructuring agreement of 22 June 2002, there might be a claim for damages for breach of contract as well.

21. That being the case, I ask myself whether or not the circumstances of this case are such that a claim for damages of either sort should be brought outside of the statutory scheme in the event of the Company going into liquidation or under the scheme of arrangement in the event that that goes through under the revised restructuring proposals with the new investor. It seems to me that in either of those cases, whether the damages claim is adjudicated in the course of the scheme of arrangement or in the course of the liquidation, there is no reason to think that it will not be fairly disposed of and accordingly, I do not think it appropriate for me, at this stage, to go into the underlying merits, such as they may be, of the claim in misrepresentation. I therefore dismiss the application and do not grant leave for these proceedings to be commenced.