TAN MAN KOU AND ANOTHER v. CHIME CORPORATION LTD. AND OTHERS

CACV 106/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 106 OF 2002

(ON APPEAL FROM HCMP NO. 4146 OF 2001)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal by the 2nd respondent, Nina Kung alias Nina T.H. Wang ("Madam Wang") against the judgment and order of Deputy High Court Judge Gill given on 14 December 2001 and appeals by way of respondents' notices of both the petitioners and the 1st respondent. The matter before the judge was an application for interim relief in respect of a petition presented under the provisions of section 168A of the Companies Ordinance, Cap. 32.

2. The judge accepted undertakings given on behalf of the 1st to 3rd respondents which in part satisfied the relief sought by the petitioners in respect of dealing in or issuing B shares in the 1st respondent and paying future dividends. The judge then went on to order that the 2nd respondent should procure that an amount equivalent to the dividends received by her in respect of 15 million B shares, which had been issued to Madam Wang, be paid into an escrow account; that various information should be provided to the petitioners which included details of identity, ownership and control of subsidiary, associated and related companies; that audited accounts of the 1st respondent should be provided for the years 1990 - 2001 and that the minutes of general meetings of the 1st respondent and the various companies should be provided for the period since 10 April 1990. At the conclusion of the hearing of the appeal, this court reserved its judgment which we now give.

Background

3. The petitioners are the joint administrators of the estate of Mr Wang Teh Huei ("Mr Wang") who was kidnapped on 10 April 1990. His father swore to his death, pursuant to leave, on 23 September 1999. Subsequently joint administrators were appointed and since then one administrator has been replaced. In the first place, the administrators' duty is to preserve the assets of the estate. As part of carrying out that duty the administrators sought directions from the court on various occasions and, in particular, in July 2001 the court approved the presentation of the petition herein.

4. The following facts are taken from the petition. The 1st respondent, Chime Corporation Limited ("Chime"), is a major company in a group of companies which is known as the Chinachem Group. Chime was incorporated in 1973 and, until his disappearance, was controlled by Mr Wang as the majority shareholder. There were both A and B shares which were issued by Chime. Article 35 of Table A, which applied in respect of Chime, provided that all new shares which would be issued should be offered to persons who were existing shareholders in the proportion of their existing shareholding.

5. The substance of the complaint in the petition is that Madam Wang had engaged in a course of conduct designed to expropriate Mr Wang's majority shareholding in Chime in her favour and had obtained other benefits as a result. The expropriation of the majority shareholding was effected by an allotment of 15 million B shares and by taking over of 19,998 A shares which had previously been registered in the name of Mr Wang. The table below shows the shareholding as registered on the register of members and declared on the annual returns as of the relevant dates.

A Shares

Shareholder	31/12/88	31/12/89	31/12/90	Date of petition
Wang Teh Huei ("Mr Wang")	2,002	22,000	2,002	-
Nina T H Wang ("Madam Wang")	2,000	2,000	21,998	2,000
Gong Xian Xin ("Mr Gong")	3,000	3,000	3,000	3,000
Liu Yuan Chun ("Madam Liu")	3,000	3,000	3,000	-
Tai Ching Ping ("Mr Tai")	19,998	-	-	-
Forum Ever Limited	-	-	-	3,000
Tan Man Kou/Cheung Yat Ming				2,002

B Shares

Shareholder	31/12/88	31/12/89	31/12/90	Date of petition
Mr Wang	12,000	12,000	12,000	-
Madam Wang	12,000	12,000	15,012,000	15,012,000
Mr Gong	3,000	3,000	3,000	3,000
Madam Liu	3,000	3,000	3,000	-
Focus Profit Limited	-	-	-	3,000
Tan Man Kou/Cheung Yat Ming				12,000

6. It is said in the petition that the allotments of B shares to Madam Wang which took place in August and September 1990 were made in breach of Chime's constitution and were made for an improper or collateral purpose and in breach of the directors' duties. Specific complaint is made that Madam Wang did not make an adequate declaration of her interest in the matter at the meeting at which the 15 million B shares were allotted, that no B shares were offered to Mr Wang, whether in proportion to his shareholding or at all, that the shares were allotted to Madam Wang for an improper or collateral purpose and that there had been no valuation of Chime to establish the proper premium which should have been paid for the 15 million shares. Complaint was also made in respect of the transfer of the 19,998 A shares. For present purposes it is sufficient to record the fact that those shares have now been transferred to the petitioners albeit the petition contains a complaint that the petitioners still have not been registered as shareholders.

7. The net effect of the transfer of the A shares to Madam Wang would be to dilute Mr Wang's shareholding in Chime from 56.67% to 23.3%. When the issue of 15 million Chime B shares is taken into account the shareholding attributable to Mr Wang's estate would be reduced to 0.09%.

8. Finally, reference is made in the petition to the distribution in the year ended 30 June 1998 of a total dividend of $135,540,000. It might be noted that the evidence shows that nearly $1.5 billion was received by Madam Wang from 1992 to 1998 by way of dividends in respect of the 15 million B shares.

9. The relief sought in the petition was that the allotment of the B shares should be set aside and that an account should be taken as to the benefits, being dividends or otherwise, that have accrued to Madam Wang on account of the 15 million B shares.

10. As indicated above, the first part of the Order made by the judge was that Madam Wang should pay into an escrow account the amount of all the dividends received by her in respect of the 15 million B shares or otherwise provide security for the amount to the satisfaction of the court. It was this aspect of the case which formed the primary focus of the matters raised on the appeal. A bank guarantee in the sum of $380 million had by the date of the appeal already been secured and it would seem that other guarantees of $550 million and $570 million were likely to be forthcoming. Madam Wang has in the mean time offered interim security in respect of shares in another company, Parasia Limited.

11. At this point, it would be convenient to mention Chime's challenge to the decision below on the basis that there was no evidence before the court to establish a serious question to be tried. This was founded on the fact that there was no verifying affidavit as required by Rule 26 of the Companies (Winding-up) Rules. Further, the filed copy of the Petition was not exhibited as required by Form 7 to the 3rd affidavit of Tan Man Kou filed on 3 June 2002. The challenge is misplaced. This is an interim application. So long as the petitioners adduce sufficient evidence to substantiate their claim to interim relief, such relief should not be refused simply because certain requirements, technical or otherwise, have not been complied with which might disentitle them to relief at the substantive hearing.

12. In any event the argument is based upon the premise that the provisions of the Companies (Winding-up) Rules are equally applicable in respect of section 168A petitions. That is because Rule 1(1) of the Companies (Winding-up) Rules so provide. However, unlike the other Rules, Rule 26 which requires verification of the petition by an affidavit, relates specifically to petitions for winding-up. Therefore on a strict interpretation of the Rules, Rule 26 does not apply to section 168A petitions. Moreover, there is good reason why this should be so. Whether or not a formal affidavit is filed on a section 168A petition is in truth irrelevant. A section 168A petition would have to be supported by substantial evidence, which except in the most exceptional circumstances would have to be considerably more detailed than the petition and would almost always be supported by exhibits. This supporting evidence would have to be filed in time for the first hearing of the petition, since if there were no supporting evidence the court could well dismiss the petition at the outset. In contrast many of the grounds for winding-up a company, for example the ground of insolvency, may require little more than a short confirmatory affidavit. In this case, at least by the time the application for interim relief was heard there was ample evidence to support the petition.

13. The judge approached the granting of interim relief on the basis of the principles enunciated in American Cyanamid Co. v Ethicon Ltd [1975] AC 396. In my view, that is unexceptionable. Indeed, those principles are equally relevant whether the relief sought is a mandatory or a prohibitory injunction. The judgment of Hoffmann J (as he then was) in Films Rover International Ltd and Others v Cannon Film Sales Ltd [1987] 1 WLR 670 makes clear that in considering the grant or refusal of an interlocutory injunction the court must consider where the balance of justice lies. Obviously in many cases, mandatory injunctions may entail a consequence which cannot be remedied in future. What has to be considered is the effect of the grant or refusal of the particular injunction sought.

14. In considering the question in this case the judge below expressed himself in terms of whether the petitioners would be adequately compensated in terms of damages should an injunction not be granted. Issue was taken on behalf of the respondents because it was said that damages were an irrelevant consideration in this case. In the first place, it was doubted that damages could be awarded as relief on a section 168A petition. In the second place, it was said that any loss by reason of the issue of shares leading to wrongful payments of dividends was a loss to the company and not a loss to individual shareholders. See Johnson v Gore Wood & Co (a firm) [2001] 1 All ER 481, 503a. Indeed, Mr Lunn SC, on behalf of the petitioners, did not seek to support paragraphs 32 and 33 of the judgment, in this respect. It also seems clear to me, on considering the skeleton arguments filed for the hearing below, that this was not the basis upon which the case was presented in that court.

15. In my view, the judge should have considered the case on the basis that if the allotments were set aside, and there is clearly an arguable case for setting aside the allotment of the 15 million B shares as well as challenging Madam Wang's claim to the 19,998 A shares, the payment of, if not also the declaration of, the dividends may be set aside. In those circumstances, the money received in respect of dividends for the 15 million B shares would have to be returned to the company, whether or not the dividend were maintained and paid out in different proportions. Such relief is well within the court's powers under section 168A not least because of the power under subsection (2)(b) to order that a derivative action be brought and the relief would preserve the status quo.

16. Many of the details of the financial position of Chime are obscure, to say the least. It was the respondents' case that the 15 million B shares were issued in order to repay a loan from a Panamanian Company, Christoban Enterprises SA ("Christoban"). It was said that the Christoban loan had caused concern amongst Chime's bankers. Quite apart from the suspicion cast as to whether there was any true concern by any bankers, Chime's solicitors stated in an appendix to a letter of 11 September 2001 that Madam Wang had at all times been the beneficial owner and controller of Christoban. The petitioners have raised doubts as to the source of the $1.5 billion which Madam Wang is said to have paid in respect of the 15 million B shares. As the judge stated at para 32 of his judgment "But it is not all one-way traffic, for Madam Wang says she paid $1.5 billion for the shares. However, there is a difficulty about this. She did not, it seems, pay cash and it is at least arguable that the money was not hers to use." Until the matter is fully investigated it cannot be taken any further. Nevertheless it does not seem to me to be an answer to the suggestion that security should be provided in respect of the payment of the dividends, that the consideration for the issue of the 15 million B shares might have to be repaid. There are grounds for considering that any repayment may not be to Madam Wang.

17. Then it is said that it was excessive that security should be provided to the full extent of the payment of the dividends on the 15 million shares. I do not see that the security required is, in the circumstances, excessive. The dividends were declared out of profits. It remains to be seen what orders the court may make on the hearing of the petition. If the allotment of the 15 million B shares is set aside it is possible that the declaration of the dividends may also be set aside and not reinstated. By that stage Chime might not be in a position where the payment of such a heavy dividend would be advisable.

18. Moreover, the evidence shows that there are other matters which require investigation, to put it at its lowest. According to the unconsolidated audited accounts, as at 30 June 2000 Chime had a net asset value of $7.8 billion. From the consolidated accounts Chime had a value of $14.8 billion. However, most of the assets were loans to subsidiary, associated and related companies which were unsecured, interest free and with no fixed repayment terms. The balance sheet of Chime shows that there are loans to subsidiary companies of $3.3 billion. However, note 3 of the accounts shows the total amount due as being more than $5 billion but that there was a provision for a loss of $2.6 billion. The balance sheet also shows a loan to a related company which has now been revealed as Chinachem Agencies Ltd of $4.5 billion. There is no provision in respect of this loan. It is somewhat alarming to consider that nearly half the loans to the subsidiary companies have been written off.

19. The question of the $4.5 billion loan to Chinachem Agencies Ltd does not arise on the petition, but, as noted, this arises out of the evidence which has been filed on this application. I would also note that it is the subject of a proposed amendment to the petition which is at present being sought by the petitioners. No reason has been put forward as to why this amendment should not be allowed. In my view, in the present context there is ample justification for the requirement of security of the amount sought.

Disclosure orders

20. In paragraph 2 of the order the judge ordered that Chime and Madam Wang should take all necessary steps to procure the delivery to the petitioners of:

(1) details of the identity, ownership and control of the subsidiary, associated, related and invested companies which were referred to in the audited accounts of Chime as at 30 June 2000;

(2) audited accounts of Chime and companies referred to in the schedule to the summons for the years 1990 to 2001; and

(3) minutes of all general meetings of Chime and the companies referred to in the schedule to the summons since 10 April 1990.

21. On the other hand, the judge did not order that management accounts (accounts prepared monthly, quarterly or at other regular intervals for each company's management) and support schedules for Chime and the companies referred to in the schedule should be produced for the period from September 1999. Neither did he order that minutes of all meetings of the Board of Directors of Chime and the companies referred to in the schedule since 10 April 1990 should be produced, nor that details of the nature and whereabouts of any assets including details of any encumbrances over such assets now owned by any of the companies in the schedule which have a value of over HK$10 million or more should be procured, nor that details of all and any liabilities (present, future or contingent, including contractual commitments) which individually exceed 10% of the relevant company's net asset value should be delivered to the petitioners.

22. In respect of these rulings by the judge there are appeals and cross-appeals. The judgment in this respect is contained in a few short paragraphs. Essentially the judge considered that the petitioners were entitled to sufficient discovery to enable them to ascertain what was happening in respect of Chime. In this respect I entirely agree with the judge. The information which has been provided by the respondents seems to be partially conflicting, in particular, in respect of the interests which Madam Wang claims to hold and as to whether Chime or Chinachem Agencies Ltd acts as bankers of the group. The audited accounts in part raise as many queries as they provide information.

23. In respect of the management accounts it is said that no such accounts exist. For my part, I find it difficult to understand how a company can continue to operate without some form of periodic statements from which the financial position of the company can be ascertained. In my view, an order should be made for their production and if it be the case that there are no such documents, then, so be it. I do not consider it adequate that the audited accounts alone should be provided, as suggested by the judge in paragraph 41 of the judgment. In respect of the disclosure of assets of the value of more than HK$10 million and those which exceed 10% of the relevant company's net asset value, I do not consider that the information contained in the audited accounts would necessarily be or would likely to be sufficient.

24. Whereas disclosure orders made for the purposes of interim protection should not constitute in themselves a fishing expedition to enable those obtaining the order to discover some wrongdoing of which they know nothing, in this case I consider that the details of Chime's finances are so obscure and the details of its subsidiary and associated companies which are listed in the summons are even more obscure, such that it is appropriate in the present circumstances that disclosure should be made of all matters specified in paragraphs 4.1.3, 4.2 and 4.3 of the summons of 2 August 2001.

Appointment of directors

25. The final matter in dispute between the parties is whether an order should be made which would have the effect that the joint administrators or their representatives should be appointed to the boards of Chime and the other companies listed in the schedule to the summons. The judge refused the order on the basis that he did not consider that a successor-in-title to Mr Wang would have a right to be appointed as a director. He also considered that the appointment of the administrators to the board would be far more intrusive and was inappropriate for interlocutory relief.

26. Whilst not disagreeing with the judge in this respect I, for my part, also consider that it would be inappropriate for an order of that nature to be made. Although it is possible that the court could make an order which would have the effect of determining the composition of a board of directors as a matter of final relief on a 168A petition, I consider that it probably would only do so in very special circumstances. A company is a trading entity and those appointed to the board are there to supervise the company. The court would be in a difficult position to select those who were appropriate to conduct the commercial affairs of a company. A court should only interfere in the current management of a company if it is absolutely essential to do so. At the moment the petitioners have shown a need to be given information. They have not, as yet, shown any need to interfere. The appointment to the boards is put largely on the basis of the need to have information. In my view, it is unnecessary at the moment for the administrators to be appointed to the board and I would not be disposed to grant any order in this respect.

Conclusion

27. I would therefore dismiss the appeal and allow the cross-appeal on the petitioners' respondents' notice to the extent indicated. In my view, having regard to the way the issues arose and the time involved I consider that there should be an order nisi that the petitioners should have 75% of their costs to be taxed if not agree.

Hon Le Pichon JA:

28. I agree.

Hon Rogers VP:

29. There will therefore be an order as indicated in paragraph 27.