TONG HOK TAK DAFFY AND OTHERS v. BEVERLY CONSULTANTS LTD AND OTHERS

CACV 225/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 225 OF 2003

(ON APPEAL FROM HCA NO. 2617 OF 2003)

____________________

____________________

____________________

J U D G M E N T

____________________

Hon Rogers Ag CJHC:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This is an appeal from the order dated 1 August 2003 made by Chu J granting interlocutory injunctions against the 1st and 2nd defendants in favour of the 3rd plaintiff.

Background

3. Before turning to the terms of the injunction granted, it is necessary to set out some background facts and the relationship between the parties.

4. The late Leslie Cheung ("the deceased") who was a well-known singer and actor died on 1 April 2003. The 1st and 2nd plaintiffs are the executors named in his will. It is common ground that at the time of his death, the deceased was the sole shareholder and director of Rhodes Investment Limited ("Rhodes"), a BVI company. Rhodes itself was the sole shareholder of another BVI company called Golden Valley Agents Limited ("Golden Valley") which was incorporated on 8 January 1999. It would appear that the deceased had acquired Rhodes no later than 8 November 1990: that was the date when the deceased, the 2nd plaintiff and one Ian Francis Macpherson became registered as the directors of Rhodes.

5. The 2nd defendant is the sole beneficial owner of the 1st defendant a BVI company called Beverly Consultants Limited ("Beverly"). On 1 May 1999, Golden Valley and Beverly entered into a shareholders agreement ("the Shareholders Agreement") relating to Apex Music Production Limited O/B Star World International Limited ("the Company").

6. The primary object of the Company as stated in clause 2.2 of the Shareholders Agreement was the making of master recordings embodying the performances of the deceased on an exclusive basis for the purpose of their commercial exploitation, the Company having been granted the exclusive services of the deceased. In summary, the main provisions of the Shareholders Agreement were as follows:

*	Golden Valley and Beverly were to subscribe for 5,100 and 4,900 shares respectively within 7 days of the Shareholders Agreement, thereby becoming entitled to 51% and 49% of the issued capital of the Company respectively (clauses 3.1 and 3.2)
*	so long as it was a shareholder of the Company, Beverly was to be appointed consultant to the Company (i) to give appropriate advice on all matters relating to technical and quality control of the master recordings and master tapes to be made from them and (ii) to liaise with the record companies (clause 4) and so long as it was consultant to the Company, Beverly was to be its managing director (clause 5.2)
*	during the continuation of the Shareholders Agreement, the board should consist of not more than two directors: Beverly to appoint Beverly as a director and Golden Valley to appoint the deceased as a director (clause 5.1)
*	a quorum for a board meeting was two directors (clause 6.2)
*	the board would be responsible for determining overall policy and the general business of the Company (clause 8.1)
*	Beverly was to manage and develop the business of the Company and execute the policy of the board during the period of its engagement as consultant to the Company (clause 8.2)
*	dealings in and transfer of shares were prohibited save that a Shareholder (defined as meaning Golden Valley or Beverly) proposing to transfer all of his holding of shares must make an offer in writing to sell the same to the other Shareholder. If accepted, the purchase was to be at a fair market value as determined by a firm of independent certified public accountants (clauses 13.1 and 13.2)
*	any transfer of shares to outside persons was to be conditional upon the transferee entering into an agreement with the existing Shareholder whereby such transferee must agree to be bound by and to observe and perform the terms and conditions of the Shareholders Agreement (clause 13.3)
*	the Shareholders Agreement was to remain in full force and effect as between the holders of shares so long as Golden Valley or Beverly was a registered holder of any shares and the termination of the agreement should not operate to affect those provisions intended to have effect after such determination (clause 14)
*	the provisions of the Shareholders Agreement were to prevail over the articles in case of conflict (clause 15)
*	the Shareholders Agreement was made non-assignable and personal to the parties (clause 17)

7. Notwithstanding clause 2.2 of the Shareholders Agreement, the exclusive services of the deceased were only granted to the Company 5 days later, on 6 May 1999, when it entered into an agreement with Golden Valley and the deceased ("the Star World Agreement"). By that agreement, Golden Valley which was entitled to the exclusive services of the deceased, at the request of the deceased, made available to the Company the exclusive services of the deceased to enable the Company to make the master tapes embodying the performance of the deceased on an exclusive basis during the term of the agreement which was for two years expiring on 5 May 2001 with an option to the Company to extend the term for a further two years. Under the Star World Agreement, the copyright subsisting in the master tapes and the master recordings produced by the Company came to be vested in the Company absolutely. The Company was also given an absolute right to grant to record companies the sole and exclusive right or licence or any other rights to exploit the copyright of the master tapes as produced by the Company.

8. That the Company did on the very same day when it entered into an agreement ("the Universal Agreement") with Universal Music Limited ("Universal") and the deceased. The Company as sole and exclusive owner of the master tapes and of the copyright and other rights therein, granted Universal an exclusive licence for the period from 1 May 1999 until 31 October 2000 ("the term") to manufacture, make, import, export, distribute, market or sell records derived from the master tapes. Universal was also granted distribution rights for a period of 5 years after the expiration of the term i.e. until 31 October 2005 ("the further distribution period"). It was further provided (by clause 9.2) that all master tapes DAT and negative films be returned by Universal to the Company within one month after the expiration of the term and the further distribution period.

9. By a supplementary agreement dated 25 July 2000 ("the Supplementary Agreement"), Universal, the Company and the deceased extended or renewed the Universal Agreement for a further term of 21 months commencing 1 November 2000 and expiring 31 July 2002, subject to the terms and conditions set out in the Supplementary Agreement. The term of the further distribution period of the records made from the master tapes under the Supplementary Agreement was for a period of 5 years, commencing 1 August 2002 and expiring 31 July 2007.

10. By letter dated 24 June 2002, Universal requested an extension of the term under the Supplementary Agreement for one year to 31 July 2003 to enable the outstanding albums to be fulfilled. This request apparently resulted from the deceased's "sudden disappearance" which meant the delay of a scheduled album. What response was given to this letter was not in evidence.

11. The 1st and 2nd plaintiffs claimed to have become the joint sole shareholder of Rhodes with effect from 22 May 2003. In support of that, what appears to be computer printouts of Rhodes' Register of Members obtained from its BVI agents have been exhibited. The 1st plaintiff also claimed to have been appointed the sole director of Rhodes and the sole director of Golden Valley with effect from that date. Also on 22 May 2003, the 1st plaintiff as sole director of Golden Valley resolved to appoint himself as the authorised representative of Golden Valley to deal with all matters relating to the Company.

12. On 26 May 2003, Golden Valley acting by the 1st plaintiff made a request to inspect "the books of accounts and corporate materials and records" of the Company. On the same day, Golden Valley acting by the 1st plaintiff gave notice to Beverly and the 2nd defendant that Golden Valley would not ratify any resolution or action taken on behalf of the Company that did not have its prior written approval.

13. Correspondence ensued between the solicitors for Beverly and the 2nd defendant ("PWC") and the solicitors for the 1st and 2nd plaintiffs ("FCLK"). On 12 June 2003, PWC wrote to FCLK in the following terms:

"... your clients may wish to consider the matter globally and explore the possibility of purchasing our clients' minority shareholding in the Company on reasonable terms. Likewise, our clients are considering the purchase of your clients' majority shareholding in the Company. In this connection, we are initially instructed to put forward the following:

1.	[Golden Valley/Beverly] do purchase the shares of the Company standing in the name of [Beverly/Golden Valley] at a fair value, that is, a value representing an equivalent proportion of the total issued share capital;
2.	The value of the shares in the Company held in the name of [Beverly/Golden Valley] be determined by professional independent auditors, to be nominated by the President of the Hong Kong Society of Accountants;
..."

There followed a number of proposals concerning the basis of the valuation. The letter concluded thus:

"We trust you agree that it is necessary for our clients to consider a pragmatic approach to the matter, to resolve the matter commercially and cost-efficiently."

There was no response to this letter from FCLK.

The proceedings below

14. On 15 July 2003, the 1st and 2nd plaintiffs issued a writ seeking various declarations and permanent injunctions against the 1st and 2nd defendants. On the same day, they took out a summons returnable 3 days later for interlocutory relief. The substantive hearing for the interlocutory injunctions took place on 1 August 2003 before Chu J. Meanwhile, on 30 July 2003, Beverly presented a petition to wind up the Company on the just and equitable ground in that with the demise of the deceased, the substratum of the Company had gone.

15. The judge made the following order ("the Order") at the conclusion of the hearing. Paragraph 1 restrained the 1st and 2nd defendants until the conclusion of the trial or further order from doing or causing to be done the following acts or any of them, in the absence of resolutions properly passed at duly constituted meetings of the directors comprising both Golden Valley and Beverly or otherwise without the written consent of Golden Valley (or the 1st and/or 2nd plaintiffs on behalf thereof) namely:

(i)	authorising payments on behalf of the Company or operating or in any way dealing with any of the accounts of the Company;
(ii)	disposing of, transferring or delivering or otherwise dealing with any of the assets of the Company;
(iii)	whether in writing, verbally or by conduct, holding itself out as representing or otherwise acting on behalf of company.

Paragraph 2 required Beverly and the 2nd defendant within 24 hours of the receipt of any monies by on behalf of the Company until the conclusion of the trial or further order, to deposit such money into a separate bank account which could only be operated by specific resolutions passed at duly constituted meetings of the directors comprising both Golden Valley and Beverly or otherwise on the joint authorisation in writing of Beverly and Golden Valley (or the 1st and 2nd plaintiffs on behalf its). Paragraph 3 required Beverly to place all master tapes and/or copies held by the Company in the safe custody of the plaintiffs' solicitors within 7 days. (Pausing there, the basis for granting an injunction in terms of paragraph 3 is unclear given the terms of clause 9.2 of the Universal Agreement as extended by the Supplementary Agreement: see paragraph 8 above.)

16. Paragraph 4 ordered Beverly to cause the Company to give discovery of the Company's audited accounts, management accounts, bank statements, cheque stubs, bank mandates, contracts and agreements, draft audited accounts for the year ended 31 March 2003, company records and all accounting vouchers and ledgers, receipts and invoices. Paragraph 5 ordered Beverly to disclose to the plaintiffs' solicitors in writing the particulars of all accounts of the Company and the identity of the authorised signatories for each of them.

17. Stripped of verbiage, the injunctions prevent the 1st and 2nd defendants from managing the Company and in particular from operating its accounts and dealing with its assets without the written consent of the 1st and/or 2nd plaintiffs.

18. The written decision was handed down on 22 October 2003, the day after the filing of the Statement of Claim. (As to the latter, suffice it to say that as indicated at the hearing, the pleading is less than satisfactory and appears to transgress the rules as to what a pleading should contain.) The judge came to the conclusion that there were serious issues to be tried with regard to whether (1) the 1st plaintiff was validly appointed to act for Golden Valley in its affairs and in relation to the Company; and (2) whether Beverly is entitled to act unilaterally with regard to the affairs and management of the Company. Although as a matter of law it is permissible to maintain a personal claim and the derivative claim in the same action, the judge came to the conclusion that the 1st and 2nd plaintiffs did not appear to have any claim against the 1st and 2nd defendants in their own right. So far as Golden Valley was concerned, she considered it at least arguable that it had a separate personal cause of action against the 1st and 2nd defendants because it was a director and shareholder of the Company and also as party to the Shareholders Agreement. The judge also rejected the 1st and 2nd defendants' submissions that the derivative action was demurrable.

19. In granting the injunctions, despite the indication from counsel for the plaintiffs that his clients had no objection to offering a cross-undertaking as to damages, the judge did not require one on the basis that the 1st and 2nd defendants had not shown any loss or damages that necessitated such a cross-undertaking.

20. Following the injunctions granted on 1 August, an inspection of the Company's books and accounts was carried out. This revealed, inter alia, that in April 2003 after the death of the deceased, a sum of over $2.2 million belonging to the Company had been transferred into the 2nd defendant's personal current account. On 30 September 2003, a sum of over $1.7 million had been paid by the 2nd defendant into the HSBC account of the Company. The plaintiffs took out a summons requiring the 1st and 2nd defendants to deposit this sum into a separate bank account within the terms of paragraph 2 of the Order. On 13 October 2003, the summons came before Cheung J who came to the view that the Company's HSBC account was not a "separate bank account" for the purposes of paragraph 2 of the Order. The parties were accordingly directed to open a separate bank account for the proper working out of paragraph 2 of the Order. Whilst acceding to paragraph 1 of the amended summons that a separate bank account be opened by the 3rd plaintiff and the 1st defendant and the payment into that account of the sum of $1.7 million odd from the Company's HSBC account, Cheung J declined to grant a further and substantive injunction sought by paragraph 2 of the amended summons. Cheung J accepted the offer of an undertaking as to damages from the plaintiffs in respect of the order made by him but not as to the original order because he doubted whether he was in a position to accept any such offer.

This appeal

21. At the heart of this appeal is whether the 1st and 2nd plaintiffs in their capacity as the executors named in the will of the deceased are entitled to step into the shoes of the deceased upon his death in respect of the deceased's rights and interests in Rhodes and Golden Valley and if so entitled, to assume the deceased's mantle via his corporate vehicles under the Shareholders Agreement, that being the net effect of the injunctions granted. Moreover, it would appear that the injunctions granted would have the added result of changing the way in which the Company had been operated from May 1999. In effect the injunctions sought would alter, rather than preserve, the status quo.

Rhodes and Golden Valley

22. Rhodes and Golden Valley are international business companies for the purposes of the International Business Companies Act 1984 ("the 1984 Act") of the British Virgin Islands. The papers before this court included the articles of Golden Valley. Under the rubric "Transmission of Shares" are the following articles:

"	41.	The executor or administrator of a deceased member ... shall be the only person recognised by the Company as having any title to his share but they shall not be entitled to exercise any rights as a member of the Company until they have proceeded as set forth in the next following three regulations.
	42.	The production of the Company of any document which is evidence of probate of the will, ... shall be accepted by the Company even if the deceased ... member is domiciled outside the British Virgin Islands if the document evidencing the grant of probate ... is issued by a foreign court which had competent jurisdiction in the matter. For the purpose of establishing whether or not a foreign court had competent jurisdiction in such a matter the directors may obtain appropriate legal advice. The directors may also require an indemnity to be given by the executor, administrator, guardian or trustee in bankruptcy.
	43.	Any person becoming entitled by operation of law or otherwise to a share or shares in consequence of the death ... of any member may be registered as a member upon such evidence being produced as may reasonably be required by the directors. An application by any such person to be registered as a member shall for all purposes be deemed to be a transfer of shares of the deceased ... and the directors shall treat it as such.
	44.	Any person who has become entitled to a share or shares in consequence of the death, ... of any member may, instead of being registered himself, request in writing that some person to be named by him be registered as the transferee of such share or shares and such request shall likewise be treated as if it were a transfer."

Whilst the articles of Rhodes are not before the court, it would appear that they are identical to those of Golden Valley as regards the transmission of shares on the death of a member: see the letter dated 19 August 2003 from BVI lawyers retained by the 1st and 2nd defendants who have obtained copies of the articles of Rhodes and Golden Valley. That was not challenged by the plaintiffs.

23. It is common ground that, to-date, there has been no grant of probate. Article 42 cannot therefore assist the 1st and 2nd plaintiffs. Nor do articles 43 and 44 since, with the death of the deceased, Rhodes has had no board of directors. It would follow that by reason of article 41, the 1st and 2nd plaintiffs are not as yet entitled to exercise any rights as a member of the Company. In the circumstances, it is not readily apparent how and by what authority the 1st and 2nd plaintiffs came to be the joint sole shareholder of Rhodes on 22 May 2003, some 7 weeks after the death of the deceased who, at his death, was the sole shareholder and director of Rhodes. That is a question that the 1st and 2nd plaintiffs have studiously avoided answering. I would add that the numerous registrations effected at the Company's Registry in Hong Kong (apparently accepted at face value by the judge) do not take matters further since their validity stands or falls with the entitlement of the 1st and 2nd plaintiffs to be registered as the sole joint shareholder of Rhodes on 22 May 2003.

24. It is of course accepted that upon obtaining a grant of probate or taking such other appropriate steps under BVI law (and it has been suggested that it is open to the executors to apply to the BVI courts under section 29 of the 1984 Act for rectification of the share register of Rhodes), the 1st and 2nd plaintiffs as executors would become entitled to be registered as members of Rhodes and thereby be in a position to operate Golden Valley by appointing one or more of themselves as the authorised representative of Golden Valley. It has to be recognised that the 1st and 2nd plaintiffs are in a position to put matters right in due course. For this reason, for present purposes, I am prepared to disregard any procedural 'irregularities' and proceed on the assumption that the 1st and 2nd plaintiffs as executors had been properly registered as the shareholder of Rhodes and appointed to act as the authorised representative of Golden Valley.

25. On that basis, was Golden Valley entitled to the injunctions granted? A number of considerations are material to that question.

No wrongdoing

26. No allegation of fraud or dishonesty is being made against the 1st and 2nd defendants. This is so even after the plaintiffs have, as a result of paragraph 4 of the Order, obtained discovery of the Company's documents. At the appeal hearing, Mr Griffiths SC, who appeared for the plaintiffs, confirmed that this was the case. It was then said that whilst no allegation of fraud or dishonesty or wrongdoing was being made, there had been 'inappropriate conduct' on the part of the 1st and 2nd defendants. However, Mr Griffiths was unable to expand upon what was meant by 'inappropriate conduct'. Whatever is meant, it is neither fraud, dishonesty or wrongdoing.

The Shareholders Agreement

27. The principal provisions of that agreement have already been summarised: see paragraph 6 above. Whilst the shareholders to the Shareholders Agreement were corporate entities, at all material times, each of the corporate entities involved i.e. Rhodes and Golden Valley on the one hand and Beverly on the other were nothing but the respective alter egos of the deceased and the 2nd defendant. It is to be noted that whilst the 2nd defendant and Mr Macpherson had been directors of Rhodes when the deceased first acquired it, they had ceased to be directors of Rhodes as from 1 March 1997 and 28 November 1998 respectively and as from 29 November 1998 until his death, the deceased remained throughout as the sole director and shareholder of Rhodes. Therefore by the time Golden Valley was acquired by Rhodes, only the deceased and no one else had any interest or role to play in Rhodes. From that date until the deceased's death, the position remained unchanged: no third party had any interest in Rhodes or Golden Valley either as director or shareholder.

28. For a period of almost 4 years until the deceased's death, the Shareholders Agreement had been in place and implemented according to its terms by the deceased and the 2nd defendant through wholly-owned corporate vehicles which were their alter egos. It is the 2nd defendant's case that the Company was formed upon the personal relationship and mutual trust between the deceased and the 2nd defendant and that, in substance, it was a quasi-partnership between them. Whilst that is disputed by the plaintiffs, it is a fact that from May 1999 until the deceased's death, the 2nd defendant through Beverly ran and managed the affairs of the Company. Not only was Beverly consultant to the Company, it was also its general manager: clauses 4 and 5.2 of the Shareholders Agreement so provided. These matters are consistent with the Company being a quasi-partnership between the 2nd defendant and the deceased and, indeed, support such an inference. The judge noted that notwithstanding the provisions of clause 5.1 which provided for the appointment of the deceased to the board, he had never been so appointed. This overlooked the fact Golden Valley and for that matter, Rhodes, were but corporate manifestations of the deceased as explained above and that, for all practical purposes, the board meant the deceased and the 2nd defendant. The minutes of the annual general meetings of the Company during the deceased's lifetime show that each of them was attended by the 2nd defendant and the deceased, being the respective representatives of Beverly and Golden Valley. Each of these meetings was also chaired by Beverly.

29. More importantly, the implementation of the Shareholders Agreement of which the Star World Agreement and the Universal Agreement formed an intrinsic part could not have come about but for the collaboration that existed between the deceased and the 2nd defendant. Those agreements point to a personal relationship underpinning that collaboration, culminating in the production and distribution of the recordings of the deceased.

30. The effect of the injunctions sought and granted by the judge was to require the 2nd defendant, in the guise of its alter ego Beverly, to operate the Company on the basis that the 1st and/or 2nd plaintiffs were/was entitled to assume the mantle of the deceased through corporate vehicles which had been the alter egos of the deceased. In this connection, the Shareholders Agreement and its framework assume importance since the Company was formed on that basis. It is to be noted that the provisions of the Shareholders Agreement were given precedence over the articles (clause 15). Apart from that, one finds a provision against non-assignment (clause 17) and express provisions relating to dealing in and transfer of shares (clause 13). These merit closer examination.

31. The Shareholders Agreement was made "non-assignable" and "personal to the parties". Prima facie, such a provision (clause 17) would make little sense unless "parties" was referable to the actual persons in interest behind the corporate entities who were formally parties to the Shareholders Agreement. This is reinforced by the prohibition against dealings which granted rights of first refusal to the other shareholder. It is also to be noted that under article 43 of the articles of Rhodes and Golden Valley, an application by a person becoming entitled by operation of law to a share to be registered is deemed to be a transfer of shares. In my view, it is plainly arguable that the Shareholders Agreement was intended to be personal to the real parties in interest, namely, the deceased and the 2nd defendant and that it was never contemplated that a third party could be foisted upon an original party to the Shareholders Agreement without his consent. That the plaintiffs themselves recognise this is evident from the fact that the injunctions were sought not only as against Beverly one of the shareholders of the Company and party to the Shareholders Agreement but also against the 2nd defendant personally although he is not a shareholder in name or a formal party to the Shareholders Agreement. The effect of the injunctions granted was thus to drive a coach and four through the Shareholders Agreement. It would also, seemingly, cause the manner in which Beverly performed the function of general manager to be substantially altered.

The buyout offer

32. As noted in paragraph 13 above, prior to the present proceedings, the 1st and 2nd defendants had offered to either sell their minority interest to the plaintiffs or to acquire the majority shareholding from the 1st and 2nd plaintiffs. It would have been thought that that 'pragmatic' approach would have commended itself to the 1st and 2nd plaintiffs. That, however, was not the case. Rather, it would appear that the 1st and 2nd plaintiffs' objective was to obtain control of the Company through the 51% shareholding of Golden Valley regardless of the terms of the Shareholders Agreement and certainly contrary to the spirit of the non-assignment and prohibition against dealings provisions.

Conclusion

33. It would not appear that the judge was alive to the matters addressed in paragraphs 26 to 32 above. In my judgment, given those circumstances, there had to be compelling reasons for granting the injunctions. I can discern none. To the contrary, there appears to have been good reason not to have acceded to the application for interim relief. Having regard to those matters, I am of the view that the injunctions ought not to have been granted. I would therefore allow this appeal and set aside the orders made on 1 August and 13 October 2003. I would also make an order nisi that the costs here and below be to the 1st and 2nd defendants.

Cross-undertaking as to damages

34. There is one final matter that needs to be mentioned. As noted in paragraph 19 above, the judge did not require the cross-undertaking as to damages notwithstanding the plaintiffs' offer on the basis that the 1st and 2nd defendants had not shown any loss or damages. The judge's approach to the question of the cross-undertaking invites comment. The general rule is that the claimant is almost invariably require to give an 'undertaking in damages'; and an undertaking to this effect would be implied if the court grants an injunction or accepts an undertaking in lieu thereof. See Snell's Equity, 30 Edn, at 45 - 45 and Colledge v Crossley, The Times, March 18 and 1975 (CA). The requirement is modified in only three categories of cases (set out in Snell at 45 - 46), none of which is applicable here. In my view, it was wrong not to have required an undertaking as to damages. The error was placing upon the 1st and 2nd defendants the burden of making out a case for the undertaking when, in fact, the undertaking should have been 'automatic'. At the end of the day, it may be a good ground for refusing an enquiry as to damages if the party injuncted cannot demonstrate the likelihood of proving damage, but that is a different matter.