RE CHINA SOLAR ENERGY HOLDINGS LTD

HCCW 108/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 108 OF 2015

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D E C I S I O N

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1. This was the substantive hearing on the issue of costs and only insofar as it was left unresolved following the consent summonses for the withdrawal of the summonses dated 15 and 29 September 2015 (respectively “the 1^st summons” and “the 2^nd summons” and collectively “the summonses”) issued by Larm Cheung Hon Peter (“Mr Larm”) and Lo Chun Kit Ken (“Mr Lo”) (collectively “the 1^st opposing contributories”) and Chong Cheng Keat Patrick, Shi Yu Han, Yang Xin Yu and Yang Mao Zhong (“the 2^nd opposing contributories”) (collectively “the opposing contributories”) in circumstances outlined below.

BACKGROUND

2. The company is a listed company but trading in its shares was suspended by the Stock Exchange of Hong Kong on 16 August 2013. 

3. It was engaged in two businesses: the solar business and the hog business carried on through a number of subsidiaries in the PRC. 

4. Its management has changed several times since 2011 as follows:

(1) Yeung Ngo and his associates (“the Yeung board”) from March 2011 until Yeung and others were arrested in the PRC in October 2013.

(2) Antonio Maria Santos and his associates (“the Santos board”) from October 2014 until they were removed at a Special General Meeting (“SGM”) on 15 May 2015.

(3) Crown Master International Trading Co Ltd (“Crown Master”) appointed a new board effective 15 May 2015 (“the Crown Master board”) until 12 June 2015 when Ankang Ltd (“Ankang”) acquired Crown Master’s shares.

(4) Ankang appointed Yue Hong Wei (“Mr Yue”) and Ms Yu Kuo (“Ms Yu”) (collectively “the current board”) to replace the Crown Master board on 12 June 2015. Ms Yu is the wife of Felix Wong, the 100% beneficial owner of Ankang.

5. Crown Master became a shareholder of the company in late June 2014.  It presented a petition on 26 March 2015 to wind up China Solar Energy Holdings Ltd (“the company”) on the basis of an unsatisfied statutory demand.  The debt arose from a debt under convertible notes that had been issued by the company (“the convertible notes”). 

6. Meanwhile, by 5 January 2015, first stage of delisting had occurred.

7. In about May/June 2015, both the 1^st opposing contributories and Ankang competed for control of the company through acquiring Crown Master’s shareholding in the company as well as the convertible notes. 

8. Ankang succeeded in so doing on 12 June 2015 and became the holder of approximately 14.6% of the company’s shares.  On the same day as earlier noted Ankang appointed the current board to replace the Crown Master nominees.  Its shareholding was increased to 16.9% in July by exercising rights under the convertible notes.

9. Meanwhile, on 23 June 2015, the 1^st opposing contributories became shareholders by acquiring a shareholding of 11.04% in the company from other shareholders.

10. On 3 July the 1^st opposing contributories requisitioned an SGM to be held on 4 September 2015 for the appointment of a new board. That initiated a new phase in the struggle for control of the company between (1) the opposing contributories and (2) Ankang.

11. On 21 August 2015 the company successfully applied ex parte for the provisional liquidators to be appointed (“the provisional liquidators”). 

12. The summonses filed in September sought identical relief, namely: (1) the discharge of A Chan J’s order dated 21 August 2015 appointing provisional liquidators; and (2) relief relating to an SGM held on 4 September 2015.

13. The summonses were set down for hearing on 16 and 17 February 2016.

14. Following the filing of consent summonses dated 25 January and 5 February 2016 for the withdrawal of the summonses and the opposing contributories having agreed to pay the costs of the provisional liquidators, the only matter left outstanding was the question of costs between the 1^st and 2^nd opposing contributories, the company and Ankang (substituted as petitioner on 18 January 2016) upon discontinuance. 

THE APPLICABLE LEGAL PRINCIPLES

15. Where a party withdraws or discontinues an action or counterclaim the general rule is that he has to bear the costs of the other party.  That is the starting point. 

16. While the court may exercise its discretion to do justice, the fact that the discontinuance had been caused by the issues becoming academic does not of itself justify departure from this starting point.  Good reason must be shown: see Trend Publishing (HK) Ltd v Vivien Chan & Co (a firm) [1996] 2 HKLRD 227 at 229J–230D; Sawlani v Sawlani, HCA 2231/2011, unreported, 9 May 2013 at §§12 and 15. 

17. A convenient summary of the applicable principles is to be found in §6 of Moore‑Bick LJ’s judgment in English Court of Appeal decision in Brookes v HSBC Bank plc [2011] EWCA Civ 354:

“(1) when a claimant discontinues the proceedings, there is a presumption by reason of CPR 38.6 that the defendant should recover his costs; the burden is on the claimant to show a good reason for departing from that position;

(2) the fact that the claimant would or might well have succeeded at trial is not itself a sufficient reason for doing so;

(3) however, if it is plain that the claim would have failed, that is an additional factor in favour of applying the presumption;

(4) the mere fact that the claimant’s decision to discontinue may have been motivated by practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of the case will not suffice to displace the presumption;

(5) if the claimant is to succeed in displacing the presumption he will usually need to show a change of circumstances to which he has not himself contributed;

(6) however, no change in circumstances is likely to suffice unless it has been brought about by some form of unreasonable conduct on the part of the defendant which in all the circumstances provides a good reason for departing from the rule.”

THE OPPOSING CONTRIBUTORIES’ CASE

18. Being the party discontinuing, the opposing contributories had the burden of showing why the general rule should not apply.  Mr Kwong (who appeared for the 1^st opposing contributories) put forward four grounds that are considered below.  Ms Po (who appeared for the 2^nd opposing contributories) did not disassociate herself from those grounds although in certain respects she sought to distinguish the position of her clients from that of the 1^st opposing contributories.  Further, her position was that Mr Kwong’s grounds (2) and (4) were not suitable for determination at this hearing. 

19. Pausing here, I would observe that only the first of the four grounds is within Brookes. 

(1)  CHANGE OF CIRCUMSTANCES

20. In this regard as the relevant background (part of which has been outlined in §§2–10 above) is obviously important, I will resume the narrative. 

21. By the time the 1^st opposing contributories became shareholders, the current board was already in place.  As earlier noted, the 1^st opposing contributories lost no time in firing the first salvo.  

22. The salient events were as follows:

(1) On 3 July 2015 the 1^st opposing contributories served a notice requisitioning an SGM to be held on 4 September 2015 for the current board to be replaced by a new board consisting of four former members of the Santos board and Mr Lo.

(2) On 8 July 2015 the company was placed in the second delisting stage.

(3) On 30 July 2015 the 1^st opposing contributories increased their aggregate shareholding to 16.51% by acquiring a further 5.47% shareholding but on 7 August 2015 the current board refused to register the 1^st opposing contributories’ additional shareholding.

(4) On 21 August 2015 the company successfully applied ex parte for the appointment of the provisional liquidators.

(5) On 4 September 2015 the SGM which took place was heated and controversial and adjourned sine die and within a short time thereafter, on 15 September 2015 the 1^st summons was issued.

(6) On 5 October 2015 the 1^st summons came before A Chan J who gave directions and on 9 October 2015 the substantive hearing of the summonses was fixed for 16 – 17 February 2016.

23. Mr Kwong who appeared for the 1^st opposing contributories stressed that his clients’ change of position was due to subsequent developments.  The first matter to note is that the reasons for taking out the 1^st summons as discerned from Mr Larm’s 1^st affirmation dated 14 September 2015 was that the 1^st opposing contributories believed the current board to be under Ankang’s control, that what Ankang wanted was to thwart the SGM by appointing provisional liquidators to wind up the company and so frustrate any corporate rescue and further that the 1^st opposing contributories had to be appointed to the board for a corporate rescue to be carried out.  

24. I make two comments.  First, it was the company rather than Ankang who made the application for the appointment of provisional liquidators.  Second, Mr Larm’s perception is a trifle difficult to reconcile with the express powers sought for the provisional liquidators that became part of their terms of appointment.  Those powers included an express power to consider and enter into negotiations for the purpose of restructuring the company or rescheduling the company’s indebtedness: see §4(11) of the order dated 21 August 2015. 

25. Mr Kwong submitted that notwithstanding that power, the duty of provisional liquidators is to wind up the company and not to avoid a winding up.  Reference was made to Re Legend International Resorts Ltd [2006] 2 HKLRD 192at §35.  Properly read, the distinction being made there was between the appointment of provisional liquidators on the basis that the company was insolvent and assets were in jeopardy (which is the present case) and the appointment of provisional liquidators solely for the purpose of enabling corporate rescue to take place.  It does not follow that where it is appropriate to appoint provisional liquidators who are then given the requisite extra powers, they may not exercise those powers and explore whether corporate restructuring proposals are viable and in the interests of the creditors and the company. 

26. Turning to Mr Larm’s 4^th affirmation (“Larm 4”) which explained the reasons for discontinuance, the 1^st opposing contributories considered (at §11), that pending the substantive determination, “it would be pragmatic … to liaise with the [provisional liquidators] about the possibility of restructuring the [company]” (emphasis added). It was also said that the 1^st opposing contributories “were given to understand” that the provisional liquidators “were actively trying to locate potential white knights/investors”.  But when exactly they gained that understanding was not stated and is not apparent from the evidence filed.

27. At some point in time (and again this was left vague), the 1^st opposing contributories managed to “convince a friendly investor” to invest in the company. 

28. They effected the introduction to the provisional liquidators which bore fruit and culminated in the provisional liquidators entering into an exclusivity agreement with the white knight on 17 December 2015.  On 21 December 2015 a comprehensive resumption proposal was submitted to the Stock Exchange as appears from the company’s announcement made on 22 December 2015.

29. I apprehend that the ‘subsequent developments’ referenced are the matters stated in the preceding paragraph.  Further, according to §16 of Larm 4, “notably” it involves a white knight the 1^st opposing contributories support.  In other words, it was critical to the decision to discontinue that the white knight involved in the restructuring was a person acceptable to the 1^st opposing contributories.

30. It is also clear that it was not until 18 January 2016 that the 1^st opposing contributories notified the other parties that they no longer wished to prosecute the 1^st summons.

31. Has there been a “change of circumstances” that would justify a departure from the general rule?

32. In this regard, applying the Brookes principles, it is clear that “practical” and/or “pragmatic” considerations motivating the opposing contributories to discontinue proceedings are insufficient.  Moreover, the “change” would not have come about but for the fact that the 1^st opposing contributories considered the white knight they were instrumental in finding, acceptable or “friendly”. 

33. It should be mentioned that the 2^nd opposing contributories sought to draw distance themselves from the 1^st opposing contributories in this regard.  Ms Po, counsel for the 2^nd opposing contributories, submitted that the 2^nd opposing contributories were not involved in facilitating or bringing about the proposed restructuring and so did not contribute to the change of circumstances.

34. But the plain fact is that the 2^nd opposing contributories, like the 1^st opposing contributories, find the friendly white knight acceptable or, at any rate, they are not prepared to pursue the 2^nd summons on their own.  At best, they made a pragmatic decision in view of their strategy from the outset of playing no more than second fiddle to the 1^st opposing contributories’ tune and latching onto the coattails of the 1^st opposing contributories’ application for what it was worth.

35. Importantly, neither the 1^st nor the 2^nd opposing contributories are able to show that some form of unreasonable conduct on the part of the company or Ankang had brought about the “change in circumstances”.  That inability is generally fatal to any attempt to justify a departure from the general rule.

36. I  agree with Mr Hui (who appeared for Ankang) and Mr Tang (who appeared for the company) that there has been nothing more than a change of heart or change of mind or change your intention on the part of the opposing contributories.  Having taken the position at the outset that the provisional liquidators were the ‘enemy’, they are no longer of that persuasion because the provisional liquidators have come up with what they consider to be a viable restructuring proposal and, importantly, the white knight turns out to be a “friendly” one. 

37. In my view a change of heart or of mind or of intent would not amount to a “change of circumstances” within Brookes.  It has nothing to do with supervening events rendering the summonses unnecessary.  Accordingly, applying Brookes, I have no hesitation in concluding that the opposing contributories have not succeeded in showing that there has been a “change in circumstances” within Brookes to justify a departure from the general rule.

(2)  THE SUMMONSES WERE JUSTIFIED

38. The thrust of the opposing contributories’ submissions is that the issuance of the summonses was justified in that the company’s application for the appointment of provisional liquidators should have been made on notice rather than on an ex parte basis.  It was said that there was no urgency in the company’s application to justify it being made ex parte. 

39. As noted in §19 above, this ground is independent of and has nothing to do with Brookes. 

40. It is common ground that the judge who heard the ex parte application did consider a fax sent by the solicitors for the 1^st opposing contributories to the court asking for the hearing to be adjourned to 28 August 2015.  The request notwithstanding, the judge evidently considered that the evidence before him warranted the immediate appointment of provisional liquidators. 

41. It is to be noted that by 8 August 2015 the second stage of delisting had occurred with the inevitable consequence that the third stage of delisting would follow on 7 January 2016, absent a viable resumption proposal by 21 December 2015 and the evidence put forward persuaded the judge to make the appointment. 

42. Plainly it is not for this court to second guess the judge’s considered decision that provisional liquidators should be appointed on an ex parte basis.  

43. The relief sought in the summonses was twofold: (1) to discharge the appointment of the provisional liquidators; and (2) for relief in relation to the SGM held on 4 September 2015.  The provisional liquidators were severely criticised for their conduct at the SGM and their neutrality questioned.  Despite that, it should be noted that the opposing contributories have now not only withdrawn the summonses vis‑a‑vis the provisional liquidators but have also agreed to pay their costs.

44. Various criticisms have been directed at the ex parte aspect of the application including the fact that it did not provide for a return date.  In that regard, the order did expressly provide that any creditor or contributory who had given notice to appear were at liberty to apply to vary or discharge the order on three days’ written notice to the provisional liquidators and the company.  So, whether or not good reason existed that warranted the issuance of the summonses, unless the opposing contributories can show that they were bound to succeed (which is not the case) — that being the third of the principles in Brookes — I do not see how this ground could assist them. 

45. In any case a more pertinent question is when the summonses could have been withdrawn.  By the end of November 2015, the company, Ankang and the provisional liquidators had already filed their lengthy affidavits in response to the summonses, incurring costs in the process.  The opposing contributories did not inform the other parties of its intention to withdraw until mid‑January 2016.

46. As earlier noted, it is not possible to discern from Larm 4 when precisely the opposing contributories gained the understanding that the provisional liquidators were actively trying to locate potential white knights/investors.  That is a matter for the opposing contributories to establish but that they have not done. 

47. Rather, the complaint (particularly on the part of Ms Po) was that the provisional liquidators did not pursue “letters of intent” of potential loans of $80 million being available to rescue the company.  It was said that it was a matter that was brought to their attention as early as 4 September 2015.

48. I do not accept the submission that the opposing contributories “had already made available a fund of $80 million” which was “more than sufficient for rescuing” the company at the date of the ex parte application.  Suffice it to say that the letters of intent were “subject to contract” and their terms entirely at large.  They were neither enforceable nor binding. 

49. It was the development “after mid/late December 2015” that appeared to mark the turning point: see §39 of the 1^st opposing contributories’ written submissions.  As Mr Kwong frankly acknowledged, the identity of the white knight was “important” in the decision to withdraw.  That being the case, I cannot see that the decision to withdraw could have been taken before costs had to be incurred by the company and Ankang in preparing the evidence in opposition to the summonses and in attending court hearings.

(3)  DUPLICATION OF LEGAL COSTS

50. The complaint is that there has been unnecessary duplication of legal representation by the company and Ankang instructing separate legal teams.  The premise of the complaint is that Ankang is in control of the current board. 

51. Although Ankang appointed the current board, Ankang itself is not a director of the company nor is Felix Wong.  While Ms Yu is the wife of Felix Wong so there is a connection, there is no evidence to show that she or Mr Yue could not and did not exercise her/his powers and duties freely and independently but was subject to Ankang’s control.  

52. The company and Ankang are separate and independent companies.  Their interests in the proceedings are not identical.  I see no reason why each of them should not be entitled to their own legal representation.  In any event, this factor cannot and does not impinge on the application of the general rule. 

(4)  AUTHORITY OF THE COMPANY’S DIRECTORS

53. The opposing contributories have included in the hearing bundles an affirmation dated 14 January 2016 filed by Ms Lam Yee Man Natalie (“Ms Lam”) on their behalf four days before the opposing contributories decided to withdraw the summonses.  It was filed for the hearing on 18 January 2016 concerning the substitution of Ankang as petitioner and not for the hearing of the summonses.

54. Ms Lam’s affirmation is directed at showing that under Bermuda law, after the SGM of 4 September 2015, the current board no longer had authority to represent the company.  It was said that because the SGM was adjourned indefinitely without the current board being re‑elected, its authority ceased with the consequence that the current board did not have authority to act on behalf of the company to contest the summonses.

55. Since the withdrawal of the summonses followed hard on the heels of Ms Lam’s affirmation, Ankang cannot be criticized for taking the view that costs should not be incurred in putting in evidence in reply on the Bermuda law point.  That is a reason why the court should not entertain the Bermuda law point at this hearing.

56. Additionally, an application relating to costs only is not the appropriate occasion for determining a point of foreign law and I do not propose to do so particularly when that point was never even raised in the affirmations of the opposing contributories filed in support of the summonses.

THE SUCCESSFUL PARTY APPROACH

57. Ankang submitted that it would be entitled to the costs of the discontinuance summonses adopting the Brookes approach.  The same outcome is reached if the successful party is determined by what the parties have achieved in the proceedings. 

58. Mr Hui referred to the decisions in Re Chinese United Establishments Ltd, HCCW 391/1994, unreported, 5 October 1995 at §8; Re Chinese United Establishments Ltd, CACV 214/1995, unreported, 24 April 1996 at §§13‑15; and Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550 at §14 where the approach adopted on the question of costs was to assess whether a party did substantially obtain the relief sought.

59. It is clear that Ankang and the company did substantially obtain the relief sought.  On the successful party approach, they also succeed and should be awarded costs.

CONCLUSION

60. For all those reasons, I grant the opposing contributories leave to withdraw their respective summonses.  I order that the costs of each of the company and Ankang of and arising out of (1) the 1^st summons be paid by the 1^st opposing contributories and (2) the 2^nd summons be paid by the 2^nd opposing contributories, such costs to be taxed if not agreed with certificate for counsel.