RE LUCKY MONEY LTD AND OTHERS

HCMP 505/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 505 OF 2006

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D E C I S I O N

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The application

1.  This is an application by an originating summons issued by Kwong Ian (Hong Kong) Construction and Real Estate Development Company Limited ("Kwong Ian"), a minority shareholder of each of the 3 respondents.  I shall call the respondents "the Lucky Companies".

2.  The application is made under section 168BC of the Companies Ordinance, Cap. 32, for leave to intervene in HCA No. 447 of 2006 and to conduct the defence on behalf of the Lucky Companies.  The writ in that action was issued on 1 March 2006 by Tianjin Jinfu Expressway Company Limited ("Jinfu").  The only defendants are the Lucky Companies.  I call this action "the Jinfu Action".  According to the re-amended statement of claim in the Jinfu Action, the Lucky Companies are indebted to Jinfu in the sum of RMB 177,961,986.24, after setting off various sums against a loan of RMB 250 million made by Jinfu to the Lucky Companies on 19 March 2001.

3.  On 13 March 2006, on the ex parte application of Kwong Ian, on its undertaking as to damages, I had made an order dispensing with the requirement for Kwong Ian to serve written notice on each of the Lucky Companies under section 168BD(4) and granted relief to Kwong Ian to file an acknowledgement of service of the writ in the Jinfu Action on behalf of the Lucky Companies.  I decided to dispense with the requirement to serve written notice of 14 days before the application was made due to the urgency of the matter.  The last date for filing an acknowledgement of service would appear to be 14 March 2006, Kwong Ian has satisfied me it had reasonable grounds to apprehend that a default judgment might be entered if the Lucky Companies should fail to file an acknowledgement of service within time.

4.  I directed that the rest of the relief sought in the originating summons be adjourned to 16 March 2006.  On 16 March 2006, the originating summons was further adjourned to 23 March 2006 to give an opportunity to the majority shareholder of the Lucky Companies, Golden Tree Investment Limited ("Golden Tree"), and 2 of the directors of the Lucky Companies, Ho Kai Cheong ("Ho") and Cheung Mui Seung Emily ("Emily Cheung"), to file evidence in opposition if they so wish.  Ho and Emily Cheung are husband and wife and practising solicitors in Hong Kong.

5.  At the adjourned hearing of the originating summons on 23 March 2006, 2 additional affidavits were placed before the court.  One was an affidavit of Emily Cheung, filed on her own behalf and on behalf of Ho.  The other was an affidavit of Cheung Miu Mei Amy ("Amy Cheung") filed on behalf of Golden Tree.  Amy Cheung is Emily Cheung’s sister.  She adopted the 1^st affidavit of Emily Cheung and made supplementary points.  The position taken by Golden Tree, Ho and Emily Cheung in the affidavits was that the originating summons should be dismissed, alternatively they seek an order that the conduct of the Jinfu Action should be committed to the following directors on behalf of the Lucky Companies – Emily Cheung, Amy Cheung, Jin Hui Xiang ("Jin") and Cheung Kwai Woon ("KW Cheung").  KW Cheung is the father of Emily and Amy Cheung.

6.  Although in an application for leave to intervene under section 168BC the court is not required to resolve questions as to the merits of the case advanced by the applicant, because of the seriously conflicting evidence filed by Kwong Ian, Ho, Emily Cheung and Golden Tree, I decided to exercise my power under section 168BG(1)(d) to appoint Mr Derek Lai, a partner of Deloitte Touche Tohmatsu, as the independent person to investigate and to report to the court on 3 matters raised in the conflicting evidence.  I further directed the directors of the Lucky Companies to give such information and assistance as may be required by Mr Lai in his investigation.  Directions were given for further evidence to be filed by the parties and the originating summons was adjourned to today.

7.  On 29 March 2006, I made an order in the Jinfu Action extending time to file and serve a defence until after the determination of the originating summons in these proceedings.

8.  One further affidavit of Emily Cheung was filed.  Like her 1^st affidavit, it was filed on behalf of Ho as well.  Ho has never filed any affidavit in these proceedings.  Kwong Ian filed an affidavit in reply.

9.  Mr. Lai furnished his report to the court on 10 July 2006.  Copies of his report have been provided to all parties.

10.  What I need to determine today in the originating summons is which party should have conduct of the defence on behalf of the Lucky Companies in the Jinfu Action.  Kwong Ian maintains it should have the conduct of the defence.  Golden Tree, by its counsel Mr Alfred Liang, appears to have taken a different line from that adopted earlier in its affidavit.  Golden Tree’s present position is that the conduct of the defence should be given to an independent person.  I will come back to the question whether I have power to make this order.  Emily Cheung and Ho would also seem to have taken a different line today.  In the 1^st affidavit of Emily Cheung, it was contended that the Lucky Companies might be able to raise an arguable defence in the Jinfu Action that the debtors of the loan from Jinfu of RMB 250 million were not the Lucky Companies but were Guangzhou Chung Kin Engineering Company ("GZCK") and one Shi Yuan Bing ("Ms Shi").  In this hearing, Miss Linda Chan for Ho and Emily Cheung contended that the Lucky Companies have no arguable defence in the Jinfu Action, so any application for leave to conduct the defence should be refused.

11.  Other matters I need to address relate to the costs of the originating summons and costs to be incurred in the conduct of the defence in the Jinfu Action, if leave should be granted to any party to conduct the defence.

The background

12.  I will endeavour to set out the background as briefly as possible, for a proper understanding of this decision, and firmly bearing in mind it is no part of my function in the hearing of this application to determine rights or enter into the merits of claims in a substantive way.

13.  Kwong Ian is a minority shareholder in each of the Lucky Companies, holding 43.33% of the shares in each.  It is a company incorporated in Hong Kong.  It was set up by a company in the PRC, Guangzhou Municipal Construction Group Company Limited ("Guangzhou Municipal Construction"), to carry on construction business and property investment in Hong Kong.  One of the many other subsidiaries of Guangzhou Municipal Construction is GZCK, also a company set up in the PRC.

14.  Golden Tree holds 51.67% in each of the Lucky Companies.  It was incorporated in the British Virgin Islands.  Nothing is known as to its shareholder or shareholders.  It is alleged by Kwong Ian that Golden Tree is controlled by Ho.  This allegation has not been dealt with in any of the affidavits of Emily Cheung or Amy Cheung.  I understand from Mr Liang that Ho, Emily Cheung, Amy Cheung and KW Cheung are directors of Golden Tree.  I do not know if Golden Tree has any other directors.

15.  The Lucky Companies were all incorporated in Hong Kong in 1996.  The purpose of establishing the Lucky Companies was to hold an interest in 3 joint venture companies in the PRC, they are Jinfu, Tianjin Yuanhong Expressway Company Limited and Tianjin Langdao Expressway Company Limited (collectively "the Joint Venture Companies").  The Lucky Companies held 60% of the interest in the Joint Venture Companies as the foreign side.  The Chinese side held 40% in the Joint Venture Companies.

16.  Currently, there are 8 directors in the Lucky Companies.  3 are directors appointed by Kwong Ian, they are Ms Shi, Hou Yong Quan and Lao Yuan Han.  4 are appointed by Golden Tree, they are Ho, Emily Cheung, Amy Cheung and KW Cheung who is an alternative director for one of the directors.  The 8^th director is Jin, he holds 1.67% of the shares in each of the Lucky Companies.

17.  Kwong Ian used to be represented on the board of directors of the Joint Venture Companies.  Some time in 2004, its two appointees were removed.  The 4 directors serving on the board of the Joint Venture Companies as directors of the foreign side were all appointed by Golden Tree, they include Ho, Emily Cheung and Jin.  The Chinese side in the Joint Venture Companies appointed 3 directors to the board.

18.  Kwong Ian has alleged that Ho and Emily Cheung, with the Chinese joint venture partners, control the Joint Venture Companies, and Jinfu is the plaintiff in the Jinfu Action.

Events leading up to the commencement of the Jinfu Action

19.  Miss Chan submitted that it is not relevant for the court to take into consideration other disputes and proceedings between Kwong Ian, Golden Tree, and other shareholders and directors of the Lucky Companies.  I disagree.

20.  The alleged outstanding debt in the Jinfu Action of RMB 177 million odd is a very substantial sum.  A demand for repayment was made against the Lucky Companies for the first time on 10 February 2006, after a lapse of nearly 5 years, without any explanation from those who are in a position to explain why Jinfu should suddenly perceive a need to take recovery action.  The timing of the demand and the commencement of the Jinfu Action is a relevant consideration.

21.  On 8 February 2006, Kwong Ian brought 3 derivative actions on behalf of the Lucky Companies in HCA Nos. 260 to 262 of 2006 ("the Kwong Ian Actions").  Kwong Ian claims that without its knowledge, the interest of the Lucky Companies in the Joint Venture Companies had been transferred to another entity known as Glorious Sun (Highway Development) Limited ("Glorious Sun"), the directors of which are Ho and Emily Cheung.  The shareholders of Glorious Sun are the same as those in the Lucky Companies, save that Kwong Ian is replaced by Ho.  There are 10 defendants in the Kwong Ian Actions, they include Glorious Sun, Golden Tree, Ho, Emily Cheung, Amy Cheung and KW Cheung.  The primary relief in the Kwong Ian Actions is the recovery of the shares of the Lucky Companies in the Joint Venture Companies from Glorious Sun.

22.  On the same day the writ was issued in the Kwong Ian Actions, Kwong Ian obtained an ex parte injunction from Waung J to restrain Glorious Sun from disposing of the shares in the Joint Venture Companies.  The injunction was endorsed with a penal notice to Ho and Emily Cheung as the directors of Glorious Sun.

23.  On 10 February 2006, a letter of demand was issued by a law firm in Tianjin, David Liu & Partners, to the Lucky Companies, demanding payment of RMB 177,961,986.24 by 28 February 2006.

24.  Miss Chan submitted that the demand letter of David Liu & Partners was sent to all directors of the Lucky Companies, including the 3 directors appointed by Kwong Ian, by David Liu & Partners and subsequently by Messrs. Ho & Ip, the Hong Kong solicitors for Jinfu.  I find to the contrary.

25.  At the inter partes hearing of the injunction on 17 February 2006, neither Glorious Sun, Ho nor Emily Cheung attended, despite the attempts to serve them with the papers.  The ex parte injunction was continued by Deputy Judge To on 17 February 2006.

26.  The day after the ex parte injunction was continued, on 18 February 2006, Ho & Ip wrote to each of the Lucky Companies stating that they have instructions from David Liu & Partners to send them the demand letter of 10 February 2006 for the debt aforesaid and that action would be commenced without further notice if no payment should be received by the end of the month.  The letter of Ho & Ip was copied to all the directors of the Lucky Companies.

27.  Kwong Ian received copies of the letters from Ho & Ip on 27 February 2006, but not the enclosed letter of David Liu & Partners.  Kwong Ian’s solicitors wrote to Ho & Ip on 28 February 2006 seeking information of the alleged debt and a copy of the letter of David Liu & Partners.  It was stated in this letter that Kwong Ian was not aware of any debt owed by the Lucky Companies as alleged.  Kwong Ian’s solicitors also requested Ho & Ip to withhold commencing proceedings so that Kwong Ian could look into the matter.

28.  On 1 March 2006, the writ in the Jinfu Action with a statement of claim was issued by Ho & Ip.

29.  No mention was made of this writ when Ho & Ip wrote to Kwong Ian’s solicitors on 2 March 2006.  In their letter, Ho & Ip even refused to supply a copy of the demand letter of David Liu & Partners, stating that their clients would only deal with the authorised representatives of the Lucky Companies.  Ho & Ip further stated they have no instructions to withhold commencing legal proceedings as requested. This statement is disingenuous to say the least, as they have already issued proceedings the day before.

30.  Kwong Ian only learned about the writ when its solicitors discovered the issue of the writ from newspaper reports on 3 March 2006.  So the solicitors searched the court file and obtained a copy of the writ endorsed with the statement of claim.

31.  On 10 March 2006, Kwong Ian by a letter sought to convene an urgent board meeting of the Lucky Companies on 13 March 2006 to discuss steps that should be taken for the companies to properly defend the Jinfu Action.  On the same day, Kwong Ian’s solicitors also wrote to Ho & Ip informing the latter they intended to apply to court for leave to intervene in the Jinfu Action and requested information how and when the service of the writ was effected on the Lucky Companies.  In the reply of Ho & Ip on 11 March 2006, they refused to answer a perfectly simple question as to the service of the writ, merely stating that they were taking instructions from client and would reply in due course.

32.  None of the directors appointed by Golden Tree turned up at the board meeting on 13 March 2006.

33.  Amy Cheung filed an affidavit on behalf of Golden Tree stating that she had been busy and involved with the Kwong Ian Actions, she claimed she had intended to file an acknowledgement of service if the other directors of the Lucky Companies would not do so.  Filing an acknowledgement of service is a very simple matter.  There is no suggestion that she did not receive notice of the board meeting sought to be convened by Kwong Ian on 13 March 2006.  The easiest thing for her to do would be to inform Kwong Ian that an acknowledgement of service would be filed to defend the Jinfu Action.  No steps were taken by Golden Tree up to the afternoon of 13 March 2006, when Kwong Ian obtained an ex parte order giving leave to filean acknowledgement of service on behalf of the Lucky Companies.  No reason was stated by Amy Cheung why she had intended to wait until 14 March 2006 to file an acknowledgement.  It seems to me to be a lame excuse on her part for the failure of Golden Tree to act.  I am satisfied that the Lucky Companies have not diligently defended the Jinfu Action.

34.  No steps have been taken by the majority shareholders, who are in control of the Lucky Companies, to defend the Jinfu Action.  But for the application of Kwong Ian for leave to file an acknowledgement on behalf of the Lucky Companies, it is likely that a default judgment would have been obtained.

35.  It is not just the failure of the Golden Tree directors to act.  On 10 March 2006, Ho wrote to Ho & Ip on behalf of the Hong Kong side of Jinfu.  Oddly enough, his letter bore the caption of the Kwong Ian Actions.  Ho admitted and confirmed that Jinfu made a loan of RMB 250 million to the Hong Kong side on 19 March 2001 at the request of the latter.  This letter was not exhibited to any affidavit of Emily Cheung and Amy Cheung in these proceedings, but it was exhibited to an affirmation of a director of the Chinese side of Jinfu in the Jinfu Action made on 26 June 2006.  Ho’s letter was relied on by Jinfu in its application taken out on 26 June 2006 for summary judgment and for judgment on an admission based on his letter.

36.  On 12 July 2006, I gave leave to Kwong Ian to seek an adjournment of the said application of Jinfu until after the determination of the originating summons.  I understand that on 17 July 2006, a Master gave leave to file evidence in opposition to the summons of Jinfu 14 days after the determination of the originating summons.

37.  For relief to be granted in the originating summons, Kwong Ian must fulfil these requirements under section 168BC(3):

(1)     it appears to be prima facie in the interest of the Lucky Companies that leave to intervene be granted to Kwong Ian; and

(2)     the Lucky Companies have not diligently defended the Jinfu Action.

38.  I am satisfied that the second requirement is fulfilled, I turn to the first.

The allegations made by the directors appointed by Golden Tree

39.  Ho, Emily Cheung, Amy Cheung and KW Cheung adopt the same position.  They say that a loan of RMB 250 million was made by Jinfu to the Lucky Companies in March 2001 and the proceeds of this loan were wrongfully diverted by Ms Shi, a director appointed by Kwong Ian, mainly to GZCK as well as other recipients.  It is alleged that there is a clear conflict of interest between Kwong Ian and the Lucky Companies.  Hence, Kwong Ian should not have conduct of the defence in the Jinfu Action, quite apart from the question whether there is any defence at all.

40.  Kwong Ian is required only to show that its intended intervention in the Jinfu Action is prima facie in the interest of the Lucky Companies.  This burden is not a high one.  It is not required to show its conduct of the defence is in the interest of the company, unlike the legislative requirement in Australia, or that it is acting in good faith, unlike the legislative requirement in Australia, Canada and Singapore.

41.  The good faith requirement was removed in an earlier version of the bill considered by the Bills Committee of Legislative Council.  The idea is that there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes.

42.  Mr Liang submitted in reliance on decisions in Canada and Singapore it must be shown that the defence sought to be conducted by the applicant is legitimate or arguable.  This application is not a trial run for an Order 14 application, this battle will be fought elsewhere.  In my view, the threshold to be surmounted by the applicant should be low.  If it is shown there is plainly no arguable defence, it would not prima facie be in the interest of the company to give leave to a party to conduct its defence.  I have considered Miss Chan’s submission in this respect, suffice it for me to say I do not think that is the case.  It would not be appropriate for me to go into the details of the evidence, particularly as there is a pending application for summary judgment.  I also reject the approach of Mr Liang and Miss Chan that there may be matters in the evidence raised not satisfactorily answered by Kwong Ian or that there are discrepancies not explained.  I do not consider these matters of significance to the present application.

43.  I am assisted by the report of Mr Lai.  He was ordered to report to the court on 3 matters: (1) the alleged loan made to the Lucky Companies on or about 19 March 2001 being the subject of the Jinfu Action; (2) the payment and receipt of the funds in respect of the alleged loan in March 2001; and (3) the alleged diversion of funds to various recipients as alleged by Emily Cheung and Amy Cheung and the reasons therefor.  Mr Lai’s report is not an audit and his observations and conclusions on each of the 3 matters are based on the information made available to him.  Significantly, Ho has indicated to Mr Lai that he was unable to obtain relevant documents in relation to the Joint Venture Companies.

44.  Mr. Lai has made a careful analysis of the available information and documents.  It is not necessary to set out all his observations and conclusions, except to say that they are well reasoned, well balanced and supported by the documents made available.  On the alleged loan, subject to further provision of any relevant supporting documents and further explanation of the management, Mr Lai is of the view that the existence of the alleged loan of RMB 250 million appears to be questionable.  On the payment and receipt of funds in respect of the alleged loan in March 2001, Mr. Lai traced the payments and remittances, and prepared charts of the actual fund flows; suffice it to say that there was no actual flow of funds between the Joint Venture Companies and the Lucky Companies.  On the alleged wrongful diversion of funds to GZCK and other recipients, Mr Lai is of the view that it appears plausible that the making of the substantial part of the remittances totalling RMB 258 million was consistent with the intended course of action stipulated in the debt restructuring agreement dated 17 March 2001, entered into 2 days before the alleged loan of RMB 250 million was made.  The debt restructuring agreement was signed by various parties including Kwong Ian, Golden Tree, Ho and a company called Inter Ease International (Highways) Limited.

45.  I am satisfied Kwong Ian has established that it appears to be prima facie in the interest of the Lucky Companies that the Jinfu Action should be defended.

46.  Mr Liang submitted that the defence should not be given to Kwong Ian but to an independent person.  He referred to section 168BG(1) to say that the court is empowered to make any order and give any direction considered appropriate regarding any proceedings intervened in by a member of the company under section 168BC(1), including directions relating to the conduct of the proceedings.  It does not appear to me the court is empowered under this provision to appoint an independent person to have conduct of the proceedings intervened in by a member.  I note that section 168BG(1)(d) gives power to the court to appoint an independent person, that power is restricted to appointing an independent person to investigate and report to the court on the matters specified in sub-sections (i) to (iii).  The application under section 168BC(1) is for a member, not an independent person, to intervene in proceedings.  As for the Australian decision cited by Mr Liang, Hawksford v Hawksford [2005] NSWSC 463, I do not think this is an authority in support of Mr Liang’s proposition.

47.  Mr Liang further submitted that conditions should be imposed if Kwong Ian is given the conduct of the defence, in that Golden Tree should be supplied with copies of all documents issued or receivedby Kwong Ian on behalf of the Lucky Companies in the course of the Jinfu Action, for Golden Tree to keep track of the progress of litigation.  Mr Jason Pow, SC for Kwong Ian informed the court that if other shareholders or directors should request a report on the progress of the action, Kwong Ian’s solicitors would comply with such a request.  I do not think it is necessary to make an order in the circumstances.

48.  I order Kwong Ian be given leave to conduct the defence on behalf of the Lucky Companies in the Jinfu Action.  There will be an order in terms of paragraphs 2, 3, 4 and 7 of the originating summons.

Costs in the proceedings

49.  Kwong Ian seeks an order that the costs to be incurred by it in the defence of the Jinfu Action are to be indemnified out of the assets of the Lucky Companies.

50.  In F & S Express Ltd [2005] 4 HKLRD 743 at 7471 to J, I declined to make such an order at the stage of the leave application, there being no evidence as to the company’s ability to pay costs of the proposed action, following the Australian decision of Swansson v RA Pratt Properties Ply Ltd & Another (2002) 42 ACSR 313 at 326.

51.  Kwong Ian has relied on a statement in Mr Lai’ s report that the Lucky Companies should have RMB 17 million odd as in 2001 in the form of undistributed profit from the joint venture project.  But one cannot look at assets in isolation.  It does not appear from the audited financial statements of the Lucky Companies as at 31 December 2004, although they are heavily qualified by the auditors, that the Lucky Companies are at present in a position to meet any payment as to costs.

52.  I decline to make the order sought by Kwong Ian at this stage.  It would have liberty to apply on this issue.

Costs of the application

53.  Kwong Ian seeks an order that its costs in this application should be borne by Ho, Emily Cheung and Golden Tree, on the basis that they have unjustifiably opposed the application.  It was further submitted that their conduct in this application is scandalous, vexatious and motivated by ulterior motives, and costs should be awarded against them on an indemnity basis.

54.  I would say right away I am not satisfied that the conduct of Golden Tree, Ho and Emily Cheung is such as to justify an award of costs on an indemnity basis.

55.  Golden Tree seeks an order that its costs in the application should be paid out of the assets of the Lucky Companies, on the basis it has acted reasonably.  I do not think there is any case for awarding costs to Golden Tree, quite apart from the question if the Lucky Companies are in a position to pay such costs.

56.  Ho and Emily Cheung seek an order that their costs of their application should be paid by Kwong Ian.  I cannot see any basis for such an award either.

57.  The only matter left for my consideration is whether I should make a costs award against Ho, Emily Cheung and Golden Tree at this stage in respect of Kwong Ian’s costs in this application, or whether this question should be deferred.

58.  Under section 168BI(3), the court may make an order about costs in the application in favour of the member if it is satisfied that the member is acting in good faith, and had reasonable grounds for making the application.  I note that these requirements are somewhat different from the requirements to be satisfied in giving leave to intervene.

59.  I was referred by Mr Pow to Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, paragraphs 33, 35 and 36.  The court there was not dealing with costs but with the good faith requirement in giving leave to defend proceedings on behalf of the company under the Australian statute.  On balance, I am not persuaded that I should determine the question now.  The question would need to be resolved on a subsequent occasion, there will be liberty to apply.

60.  As for the costs of engaging the independent person, Kwong Ian has made a payment into court as security for such expenses.  These costs should be treated as part of the costs of the application, to be borne by the party against whom an order for costs is made.  There is no reason why payment should not be released to the independent person at this stage, to pay his reasonable costs.  I will deal with this by further directions on the application of the independent person.