MACAU FIRST UNIVERSAL INTERNATIONAL LTD v. DING XIAOHONG AND OTHERS

HCA992/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 992 OF 2010

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BETWEEN

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D E C I S I O N

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1.  There are 5 summonses before me:

A.  By DG and Macau First for an order that the Receivership Order be discharged or replaced by less intrusive and more economical means to preserve the status quo, or that the Receivers be replaced by someone else (“the Discharge Summons”); (Paras 27 to 120 below)

B.  By DG and Macau First for an order to stay the execution of the Receivership Order pending appeal (“the Stay Summons”); (Paras 121 to 140 below)

C.  By DG and Macau First for an order that DY fortifies his undertaking as to damages, failing which the Receivership Order be discharged and replaced by less intrusive and more economical means to preserve the status quo (“the Fortification Summons”); (Paras 141 to 160 below)

D.  By the Receivers for directions and sale of properties (“the Receivers’ Summons”); (Paras 161 to 202 below)

E.  By DG and Macau First prohibiting the Receivers from bringing legal proceedings against DG (“the Prohibition Summons”)(Paras 203 to 215 below)

All abbreviations (unless otherwise defined) follow those in my previous decisions in this case.  A deponent’s affirmation is described by a number in brackets after his name.  All references to Reports are to those filed by the Receivers.

BACKGROUND

2.  Before analyzing each of the summons, it will be useful to outline the important events in the development of these proceedings and analyze a central theme in DG’s applications. 

2.7.2010	Ex parte injunction by Au J against DXH, DY and Hong Kong First, restraining them from, amongst others, dealing with shares of Hong Kong First and restraining Hong Kong First from taking steps to replace Yu Xiaan (“YXA”) as legal representative of Shanghai Bading.
9.7.2010	Order of Suffiad J, by consent, whereby Hong Kong First shall not remove or replace YXA as legal representative of Shanghai Bading (“the Consent Order”)
8-10.2.2011	Hearing of DY’s summons for appointment of receivers and managers (“the February hearing”).
10.3.2011	Decision appointing the Receivers (“the March Decision”).
10.3.2011	Receivership Order to preserve the assets of Hong Kong First and Macau First pending trial.
7.4.2011	Decision dismissing DG’s summons for interim stay pending substantive hearing of an application for (i) interim stay, and (ii) variation and clarification of the Receivership Order (“the April Decision”).
19.5.2011	Decision dismissing DG’s applications for adjournment, stay pending appeal, variation and clarification of the Receivership Order and leave to appeal (“the May Decision”).  The issue of whether the Receivership Order superceded the Consent Order and whether the Receivership Order should be expressly clarified to be so (“the Issue”) was reserved for argument.
26.7.2011	The Issue was argued. Court considered itself functus and declined to vary the Receivership Order (“the July Decision”).
20.9.2011	Receivers’ 4th Report setting out DG’s non-compliance of the Receivership Order.
23.9.2011	The Court of Appeal granted DG leave to appeal against the Receivership Order.
28.9.2011	The Court of Appeal’s reasons for granting leave to appeal (“the CA’s Decision”).
28.9.2011	DG’s notice of appeal filed.
30.9.2011	Receivers’ Summons.
10.10.2011	CMC.  Trial dates fixed for March to May 2013.
11.10.2011	DG’s Stay Summons.
12.10.2011	DG’s Discharge Summons.
12.10.2011	DG’s Fortification Summons.
13.10.2011	Call over hearing of the 4 Summonses.
23.12.2011	DG’s Prohibition Summons.
3-4.1.2012	Hearing.

3.  DG is not resident in Hong Kong but submitted to the jurisdiction of the Hong Kong Court.  He gave a personal undertaking not to dispose of the assets of Hong Kong First and Shanghai Bading, including Citigroup Tower on the basis that he was the real and only beneficial owner.  It was upon his undertaking and that of DY that the Consent Order was made.  

4.  At the time of the February hearing, DG was aware that appointment of receivers would necessarily lead to a change in legal representative and management of Shanghai Bading (para 84 of the March Decision). However, his then legal team did not take the point that the Consent Order prevented the removal of YXA as legal representative upon making of a Receivership Order.  The arguments that a Hong Kong court had no jurisdiction to make receivership order over a Mainland entity or that a receivership order was not recognized in the Mainland were not raised either.

5.  After the Receivership Order was made, DG changed his solicitors (to Herbert Smith) and senior counsel (Mr Manzoni QC).  He sought leave to appeal, applied for interim stay of execution and variation and clarification of the Receivership Order.  It was raised for the first time that the Consent Order was binding on the parties and YXA could not be removed.  The interim stay application failed.

6.  At the main hearing for stay of execution and the variation and clarification, DG changed yet to another firm of solicitors (the current firm, LCP) and senior counsel (Mr Tong SC) on the ground that the previous solicitors have charged exorbitant fees.  Mr Ronny Tong SC, then appearing for DG, applied for adjournment and orally advanced different grounds of appeal.  The applications failed. 

7.  Upon hearing arguments on the Issue, I have declined to expressly hold that the Consent Order was superseded by the Receivership Order, because I considered myself functus and the matter should be left for argument on appeal (paras 4 , 11 and 12 of the July Decision).  The net position is that both the Consent Order and the Receivership Order remained in force pending the appeal.

8.  DG then applied to Court of Appeal for leave to appeal and was granted leave.  He then took out the present series of summonses.

9.  In the meantime, DG openly flouted the Receivership Order.  Not only DG but the Macanese lawyer acting for Macau First, YXA and Chen Zhi-Quang (“CZQ”) the legal representative of the Management Company also refused to recognize the effect of the Receivership Order and would not cooperate with the Receivers.  DG did everything he could to obstruct the implementation of the Receivership Order.  (There will be more concrete examples when I discuss the Receivers’ Summons below.)

10.  Because of DG’s obstructive stance over the past 9 months the Receivers had to take a circuitous approach (Yen (6) and 4^th Report) to try and implement the Receivership Order.  They could only have one meeting with DG and one with YXA and CZQ.  They are still unable to gain control of Shanghai Bading and the Management Company. They are able to achieve very little in terms of collection of books and assets or ascertain the true financial position, other than what DG and YXA chose to reveal to the Receivers in their affirmations.

11.  The central theme to the behaviour of DG and his Summonses has been that the Consent Order was binding on the parties so that YXA could not be removed as a legal representative and the Receivers who purported to do so acted in breach of the Consent Order (“the central theme”).  In reliance on this, DG claims that the Court of Appeal “accepted” that he had strong grounds of appeal.

The central theme

12.  This central theme reflected a shift in DG’s stance as regards YXA from time to time.  Before the Receivership Order was made, he claimed that he was the sole beneficial owner and that YXA was a trusted nominee appointed by him (DG (11)).  YXA has even previously granted a letter of authorization in favour of DG.  YXA obviously saw no problem in “delegating” “his” responsibilities and his alleged duty as legal representative to DG.  DG was the person who exercised the powers as the legal representative and had de facto control over Shanghai Bading (DG (1), (3), (6)).  Retention of YXA as a legal representative was clearly inseparable from DG’s claimed beneficial ownership of Shanghai Bading.

13.  After the Receivership Order and the April Decision, on 20.4.2011, Herbert Smith claimed that DG had lost control over YXA.  The PRC lawyers asked about the letter of authorization.  To that simple question, Herbert Smith had no answer (meeting memo dated 20.4.2011).  On 27.4.2011, Herbert Smith informed the Receivers that DG was willing to remove YXA as legal representative.  DG was even willing to facilitate the Receivers’ visit to the office, inspect books and arrange an interview with YXA.

14.  DG later reneged in July 2011 after instructing the present team of lawyers (although one junior counsel has remained unchanged ever). 

15.  During submission at this hearing, Mr Tong SC would not commit himself when I asked him whether YXA was “neutral”.  He said YXA was acting in the interests of the company, not taking sides with DG or DY. 

16.  However, the undeniable fact is that since the commencement of the receivership, DG has been the only one who could get in touch with YXA.  He was able to procure YXA to file affirmations in support and disclose information which YXA claims it would be against PRC law to disclose to the Receivers.  DG offered to give the undertakings in DG (10) to provide monthly management reports of Shanghai Bading and the Management Company (collectively “the PRC Companies”) in place of receivership.  Apparently, DG has the backup of YXA and CZQ to meet that undertaking. YXA was anything but “neutral” or “not taking sides”. 

17.  Whatever emphasis DG wants to put on the Consent Order to his liking, the Consent Order, at best, affects only one power of the Receivers under para 4(7) of the Receivership Order to prevent the removal of YXA as a legal representative of only Shanghai Bading, but not CZQ as legal representative of the Management Company.

18.  DG has also overlooked an important paragraph in the Receivership Order:

“6. Each of the Defendants by counterclaim [i.e. DG and Hong Kong First] do within 14 days from the date hereof give the Receivers all such information and/or documents concerning the Companies and/or Shanghai Bading and/or the Management Company, their promotion, formation, businesses, dealings, affairs or properties to the Receivers.”

Paragraph 6 of the Receivership Order imposes personal obligations on DG and Hong Kong First, whether or not YXA remains as a legal representative.  Apart from handing over title deeds of Citigroup Tower, DG has not done much in furtherance of these obligations.  Any arguments on the Consent Order, if successful, would exempt DG from compliance with one part of para 4(7), but not the other parts of the Receivership Order.

Strong grounds of appeal?

19.  Mr Tong SC submits that in granting leave to appeal, the Court of Appeal “accepted” (para 31 of CA’s Decision) that the Consent Order represented a true contract between the parties such that it may not be set aside unless one of the grounds for invalidating or varying a contract was established.  The Court of Appeal was further of the view that the concept of receivership was not recognized in Mainland China (para 33 of CA’s Decision).  It may exercise the discretion afresh.

20.  With respect to Mr Tong SC, all that the Court of Appeal did was to express preliminary views as the test was only one of reasonable prospect of success (para 29 of CA’s Decision).  DG merely satisfied the minimum requirement for leave to appeal.  It was far from saying that the CA has accepted his views on the merits.

21.  Given the background set out in paras 3 to 18 above, I doubt if the appeal based on the central theme was on strong grounds.  I agree with Ms Sit that the Consent Order was not a “true contract” and not intended to be so.  It would only last till trial or further order.  It did not determine the action one way or another.  Whether DG or DY wins after trial, it can never be suggested that the winner cannot ever remove YXA as a legal representative and if he does so, the loser could sue him for breach of “contract”. The Consent Order contained a provision for “liberty to apply” and that must have been attached to the removal or non-removal of YXA.  Being interlocutory in nature, the court’s jurisdiction over the Consent Order cannot be ousted by the consent of the parties: Yuk Wah Ho v Gao Jiaren, [1999] 3 HKLRD 862; Zuckerman on Civil Procedure : Principles of Practice, 2^nd ed, 22.50 to 22.52.  DG and his first team of lawyers contemplated the need to remove YXA.  Their stance was consistent with the lack of reliance on the Consent Order to resist the receivership application at the February hearing.

22.  As for the Court of Appeal’s preliminary view that the concept of receivership was not recognized in Mainland China, para 33 of CA’s decision must be understood in the proper context.  Mr Chan SC draws to my attention that the point was not raised in the arguments at the hearing before the Court of Appeal and DG did not even rely on it in his notice of appeal.  It was raised for the first time in the CA’s Decision itself.  In any case, at the February hearing, the court was not asked to impose a receivership order directly against Shanghai Bading or the Management Company (collectively “the PRC Companies”) but to exercise a personam jurisdiction over DG and the Companies which have submitted to the jurisdiction of Hong Kong, directing them to comply with a receivership order : McDonald v Golden Dynasty Enterprises Ltd [2008] 5 HKLRD 569.

23.  Viewed in the light of paras 19-22, I am unable to agree that DG has strong grounds of appeal.

A preliminary point on contempt

24.  At this stage, I will add that Mr Chan SC for DY takes a preliminary point that DG, having failed indisputably to comply with the Receivership Order, is in contempt of court and should not be heard on his summonses.  He relies on a decision of mine in K& L Gates v Navin Kumar Aggarwal, unrep, HCA 1061/2011, 18.8.2011.

25.  With respect to Mr Chan SC, I do not think the circumstances in K&L Gates v Navin Humar Aggarwal are comparable to the present case.  There, the defendant had admitted stealing the plaintiff’s money and he has not begun to demonstrate that he had an arguable defence.  The same comment cannot be made of DG where he seeks to put forth defences to alleged non-compliance with the Receivership Order and applies to have it overturned.  The court should not refuse to hear a person when the purpose of his application is to appeal against the very order disobedience to which has put him in contempt.  This is necessary to satisfy considerations of fairness.  See Motorola Credit Corporation v Uzan (No. 2) [2004] 1 WLR 113, at para 48-53.  Accordingly I have proceeded to hear full arguments from DG.

26.  Against the above backdrop, I consider the applications now before me.  I have considered all the evidence, the background materials and Receivers’ Reports.  In the following analyses, I follow the heads of complaint of DG and the Receivers for ease of reference.

A. THE DISCHARGE SUMMONS

27.  DG relies on the following grounds:

A1. The original appointment should not have been made since DY has fabricated evidence in support of his application.

A2. The Receivers are guilty of actual or apparent bias.

A3. The Receivers are guilty of misconduct in that they have failed to act lawfully or honourably;

A4. The Receivers are guilty of incurring exorbitant costs and thereby prejudice the interests of the parties.

If the Receivers are not discharged, DG asks that they be replaced or that there be alternative accounting duties.

Ground A1: DY’s fabrication of evidence

28.  There is no dispute as to principles.  The court will refuse to grant interlocutory relief, or set it aside if granted, if the applicant has not come to the court with clean hands.  It is no answer for the applicant to say that the court eventually did not accept or rely on that particular piece of evidence to make its decision.  This is because the applicant had tendered that piece of evidence with the expectation that the court would rely on it.

29.  One of the grounds on which the Receivership Order was granted was the evidence of attempted sale of 5/F of Citigroup Tower (para 47-55 of the March Decision).  Two pieces of evidence relied on by DY, (a) information from one Ms Chow (or Ms Zhou); and (b) investigator’s conversation with one Ms Shen, were allegedly fabricated.

30.  At the February hearing, Ms Zhou’s evidence was that she had seen an advertisement for sale of 5/F Citigroup Tower on the internet.  That triggered a recorded conversation between Ms Zhou and DY’s solicitor.

31.  As recorded in para 47 of the March Decision, Ms Zhou’s evidence emerged less than 2 weeks before the hearing.  The intervening Chinese New Year holidays left DG without a reasonable time to respond. Accordingly, DG was deprived of the chance to file evidence to contest the case put forth by DY in that aspect.  I had eventually held that Ms Zhou’s evidence alone was not sufficient to find attempted sale (para 49 of the March Decision).

32.  On 3.3.11, Ms Zhou was said to have given a statement completely refuting what she had told DY’s side but she refused to give evidence for DG.

33.  In September 2011, Ms Zhou changed her mind and affirmed effectively that she had been couched by DY; she never had any interest in the business and operation of the Citigroup Tower.  DG sought to adduce her evidence before the Court of Appeal but the Court of Appeal would not deal with it. 

34.  DY challenges the credibility of Ms Zhou, pointing out that she could not tell the truth since her father was working at Shanghai Bading.  For present purposes, I prefer YXA and CZQ’s direct evidence that Ms Zhou’s father did not work for the PRC Companies to DY’s hearsay evidence.

35.  Ms Zhou’s information given for the February hearing was in the form of question and answer between DY’s solicitor and her and not in narrative form.  I expressly took note of the fact that there had been no leading questions from the solicitor.  (para 49 of the March Decision)

36.  Even accepting that Ms Zhou was not willing to give a statement back in March, I find it hard to believe that she had just said anything that Uncle DY had told her to say to someone whom she was told was a lawyer without asking why.  It was especially astonishing when she “suspected” that the conversation was taped.  Without her evidence tested in the box, it is simply impossible to say that her latest version was true: San Want Media Holdings Ltd v Cha Mou Shing, unrep, HCA 317/2010, 30.4.2010,at para 142(3), per Barma J.  DG fails to discharge his burden of proof of fabrication of evidence.

37.  With regard to Ms Shen’s evidence, DG’s case is even weaker.  It is said that DY misled the court by omitting to transcribe some important words (underlined) towards the end of the recorded conversation between Ms Shen and the investigator: “关键是我们老板不想卖”.

38.  Well before the February hearing, the recording of the conversation between Ms Shen and the investigator was given to DG.  Shen’s statement was available within DG’s legal team.  His lawyers could have counterchecked the transcript against the recording. 

39.  During the course of the hearing, DG (4) was filed, emphasising the omitted words.

“17. … I have been informed by my legal advisers that while the conversations recorded in the audio recording produced by Ding Yu in support of this allegation are quite difficult to follow, it is nevertheless audibly clear from the video recording that our Ms Shen expressly told the investigator that Shanghai Bading had no intention to sell and that her boss (that is, me) had no intention to sell the remaining floors of the Citigroup Tower.”

40.  I do not think the omitted words were material. In any case the court was not misled because para 52 of the March Decision stated that Ms Shen made it clear that the boss was not keen to sell.  The omitted words would have strengthened my view but would not have altered it. 

41.  What is more important is that DG had not taken timely action to re-open the February hearing on the ground of fabrication or apply for discharge of the Receivership Order.  Mr Tong SC explains that when he first appeared before me in May 2011, he expressly told me that he did not have the papers so he was not able to make the application.  That might well be true.  But one must not forget that, prior to his involvement, Messrs Iu, Lai & Li already saw the importance of the new evidence.

42.  The statements of Ms Zhou and Ms Shen were available before handing down of the March Decision.  On 9.3.2011 (the day before handing down), Messrs Iu, Lai & Li, wrote to my clerk, enclosing, amongst others, those statements.  Messrs Iu, Lai & Li stated that they would take out an application very soon to re-open the hearing because of the false evidence presented by DY.  This court was asked to defer the handing down of the decision until after 14 March.  At that stage, I had declined reading that letter and the enclosures.  The March Decision was handed down on the following day.  What followed was a discussion on the terms of the draft receivership order.  DG missed the opportunity to re-open the arguments once, before the Receivership Order was perfected. 

43.  DG’s explanation was that the 1^st of Shen’s statements had been delivered to Messrs. Iu, Lai & Li before the February hearing.  The 2^nd Shen’s statement was only made on the last day of the hearing and hence there was no opportunity to submit it to the court for consideration.  DG was not told by Messrs Iu, Lai & Li why the 1^st Shen’s statement was not used at the hearing.  His present legal team considers both Shen’s statements highly important in discrediting DY’s case and the allegations against DG repeatedly raised by the Receivers in their Reports.  Messrs Iu, Lai & Li has never been invited to comment on these. 

44.  Moreover, Messrs Herbert Smith and Mr Manzoni QC had no difficulty in laying hands on the papers before launching the applications for leave to appeal, stay, and variation and clarification.  They were “robust and fearless” in seeking to protect DG’s interest (para 7 of the May Decision).  So DG missed the opportunity to re-open the arguments a second time. 

45.  Litigation will have no end when a party can rely on change of legal representation to re-litigate issues or defer raising issues. 

46.  I am not satisfied that DY has fabricated evidence or omitted material evidence to justify discharge of the Receivership Order.  Nor should the Court allow DG to re-open arguments after he has missed 2 opportunities.  Ground A1 fails.

Ground A2 : Receivers’ actual or apparent bias

The legal principles on discharge of a receiver

47.  A receiver appointed by the court is an officer of the court who has to observe high standards of conduct:

A receiver appointed by the court is an officer of the court, and his powers and authority are derived from the court’s order.  A receiver, as an officer of the court, is subject to the general supervisory jurisdiction of the court.  He is not in any sense an agent or trustee of the party at whose instance the appointment is made.  An exacting standard of fair conduct and         high-mindedness is to be expected from a receiver as an officer of the court under the rule in Ex p James.  They are obliged not only to act lawfully but fairly and honourably.  The court is sensitive about the conduct of its officers and requires of them strict standards of conduct.  It requires any receiver appointed by the court to observe a high degree of equitable conduct.

Kwan: Company Law in Hong Kong (Insolvency), 2007,para 11.008.

48.  A receiver must act in accordance with principles of justice: Lightman and Moss on the Law of Administrators and Receivers of Companies, 4^th ed, para 29-011.

49.  A receiver has a fiduciary duty to protect and get in assets of the company: Kwan on Company Law in Hong Kong (Insolvency), 2007, para 11.11.

50.  Where he is appointed to manage the business, he should enable the business of the companies to be carried on in a way that enabled both parties to the dispute to be reasonably confident that neither was benefiting at the other’s expense, and that payments and receipts were in order and properly monitored.  Beatrice Tsang Sau Hing & anor v Yeung Man Loong Maxly & ors, HCCW49-52/2006, 7.1.2009, Brama J at para 69.

51.  A receiver is expected to act with commercial judgment:  Mirror Group Newspapers plc v Maxwell [1998] 1 BCC 324;Kwan on Company Law in Hong Kong (Insolvency), 2007, para 11.11.

52.  The court may discharge a receiver if it is just to do so, e.g. if the original appointment should not have been made or if default, misconduct or other ground for unfitness is shown: Lightman and Moss on the Law of Administrators and Receivers of Companies, 4^th ed, para 29-016. For instance, a receiver may be discharged if his conduct has been such as to impede the impartial course of justice as to amount to a gross dereliction of duty.  He may also be discharged for any default or misconduct of such a degree as will forfeit the confidence of the court or which is liable to prejudice the interests of the parties: Kwan on Company Law in Hong Kong (Insolvency), 2007, para 11.015; Picarda on The Law Relating to Receivers, Managers & Administrators, 4^th ed, at 533-534; Mitchell v Condy [1873] WN 232.

53.  Assessment of default has to be justified and reasonable: Re Legend International Resorts Limited, HCCW1139/2004, 7.3.2011 at paras 32, 35, Fok JA (sitting as additional judge).  Where the receiver has honestly done his best but failed to discharge his duties by reason of their onerous and irksome nature, the court will be slow to condemn or discharge him: Re St George’ Estate (1887) 19 LRIr 566, at 567.

54.  If misconduct of a receiver is caused by the conduct of a party, that should not be visited upon the receiver: Kerr and Hunter on Receivers and Administrators, 19^th ed, para 12-6.

55.  The court does not lightly remove its own officer and will, amongst other considerations, pay due regard to the impact of a removal on his professional standing and reputation: Re Legend International Resorts Limited, HCCW1139/2004, 7.3.2011, Fok JA (sitting as additional judge) at para 33.

56.  The onus of proof on an applicant will not be easy to discharge where the liquidator has become well acquainted with the business and affairs of the company.  Even if grounds for removal are made out, it is also necessary to take into account the disadvantages that would arise from the removal of the liquidator in terms of costs and delay: Re Legend International Resorts Limited, HCCW1139/2004, 7.3.2011, Fok JA (sitting as additional judge), at para 34.

57.  Mr Tong SC relies on the case of Beatrice Tsang Sau Hing & anor v Yueng Man Loong Maxly & ors, HCCW49-52/2006, 7.1.2009, Barma J, as an illustration of how the above principles applied to the removal of the provisional liquidators.  There, the learned judge expressly noted the difficult position in which the provisional liquidators found themselves, namely a complete breakdown in the relationship between the parties – the Tsangs and the Yeungs. The animosity and hostility between the 2 camps was such that it could be expected that almost any decision which had the appearance of taking the part of, or giving credence to the views of, one side rather than the other could be expected to provoke complaints from the other which felt that its interests had been neglected (para 28 of the judgment.)  The provisional liquidators sought funding from the Yeungs’ camp and operated the business through Yeung Senior’s personal accounts, and later through a company on terms involving commission to the Yeungs, without informing the Tsangs or seeking the sanction of the court. 

58.  Barma J recognized the need for prompt resolution by the provisional liquidators in the circumstances (para 63).  The decision to give the Yeungs a commission could have been commercially justified on the basis that some such arrangements would eventually have to be entered into.  There was no suggestion that the course adopted has necessarily caused loss to the companies.  It may be that all funds passing through the personal accounts of Yeung Senior and later through Yeung’s company, have been accounted for.  It may prove to be the case that the amount of additional expense was insignificant.  Still the Court considered that the provisional liquidators had acted in a way that compromised their function and caused one party to lose confidence in them (para 69). The provisional liquidators had forgone the monitor they would otherwise have over the receipts and payments.  They benefited the Yeungs at the expense of the Tsangs.

59.  The learned judge also weighed the removal of the provisional liquidators from office against the disadvantages that might arise as a result of the removal.  Such disadvantages included the additional cost and expense that would arise as the result of the introduction of new liquidators, and any other disadvantages that might arise to the orderly conduct of the liquidation.  Barma J did not consider the perceived disadvantages as sufficient to tip the balance in favour of retention of the provisional liquidators as liquidators.  The main task for the liquidators would be to conclude the sale of the business of the companies on the best terms achievable.  He did not see why new liquidators could not carry out that task (para 87).  He therefore discharged the provisional liquidators and replaced them by new ones.

The complaints

60.  DG complains that ever since the making of the Receivership Order, the Receivers had been conducting themselves in a way which was, or reasonably perceived to be, unfair and biased against DG.  Mr Tong SC relies on the following matters:

A2.1  Close collaboration with DY’s camp instead of maintaining a neutral position.

A2.2  Abuse of position to oppress DG for the benefit of DY by bringing action against DG to recover sums which form the subject matters of DY’s counterclaim.

A2.3  Unfair exclusion of DG from participation in the management of the companies but allowing DY and DHX to participate in the same.

A2.1 Close collaboration with DY’s camp instead of maintaining a neutral position

61.  It is said that the timing and contents of the Receivers’ Reports gave rise to perception of collaborating with and support of DY when the Receivers should have maintained a neutral stance.

62.  Mr Tong SC submits that the contents of the Reports tilted in favour of DY and was relied on heavily by DY at the April, May and Court of Appeal hearings.  The Receivers also misled the Court in stating that Shanghai Bading had defaulted in making payment to the designated account of the Huaxia Bank and in failing to bring to the Court’s attention in its 4^th Report the existence of a Huaxia Bank Supplemental Agreement dated 7.9.2011 (“the Huaxia Bank Supplemental Agreement”) which was given to the Receivers on 9 September. That Supplemental Agreement would have clearly shown that nothing was outstanding to the Huaxia Bank, and that there was no risk of penalty or foreclosure of the Citigroup Tower as the Receivers wanted the court to believe.

63.  The Receivers have to provide periodic reports to update the court and the parties on the progress of the receivership.  They were supported by documentary evidence whenever available.  The Receivers have filed 4 Reports so far.  The frequency of first 3 Reports was at the request of DG.  After seeing the first 3 Reports and with a view to saving costs, I then directed the Receivers to file reports on a 6-month basis.  Notwithstanding that direction, the Receivers filed their 4^th Report on 20 September 2011 about 5 months after the 3^rd, shortly before the hearing before the Court of Appeal.  The 4^th Report was prepared because the Receivers wanted to seek the Court’s directions.  It expressly stated that it dealt with matters up to 31 August 2011 and therefore did not cover the Huaxia Bank Supplemental Agreement.  Filing of the 4^th Report was followed by a draft summons for directions to the parties.  The Receivers were not required to attend the hearing before the Court of Appeal and there was no reason for them to draw to that court’s attention any matters in the 4^th Report. The Court of Appeal also had its own rules on adducing evidence.  It declined to deal with matters in the 4^th Report.  The complaint as regards timing of the Reports was unjustified.

64.  Further, the Receivers had not misstated the position in the 4^th Report. The statement that Shanghai Bading had defaulted in meeting the requirement to pay no less than RMB 8,000,000 into the designated account in Huaxia Bank each month was based on letters from the Huaxia Bank and its lawyers and it was recorded in the preamble to the Huaxia Bank Supplemental Agreement.  The Receivers needed to investigate that Supplemental Agreement and, as can be seen below under the Receivers’ Summons, it raised more questions than it answered. There was no basis to say that the Receivers omitted to mention it in the 4^th Report or that they misled the court on the true financial position.

65.  Collaboration with DY’s camp is a serious allegation and DG (13) relies on such matters as the Receivers’ discussion with DY before they filed their respective affirmations and the Receivers filed their Reports.  It is alleged that Yen (6) shared a common theme and similar complaints as DY (7).

66.  There is nothing to show that the Receivers had shown the drafts of their Reports or affirmations to DY.  DG was in possession of the bulk of the information and the Receivership Order was directed against him and the Companies.  Any party could use the information in the Receivers’ Reports. That DY relied on information that came to light as a result of the Receivers’ investigation and sharing a similar view with the Receivers did not, per se, point to collaboration.  Anyone reading the Reports would have come to the view that DG was in breach of the Receivership Order.

67.  Reliance by DG on case management matters (e.g. the Receivers’ refusal to vacate hearing dates, DY being heavily involved in preparation of bundles, re-using of hearing bundles) to show collaboration reveals how hollow and desperate the allegation is.

68.  DG even alleges that the Receivers were eager to attend hearings.  This is totally unfounded.  Their first attendance at the hearing in April was uninvited but I was eventually satisfied that it was due to allegations of breach of the Consent Order by the Receivers.  That allegation triggered the directions that the Receivers should attend the May and July hearings.  In the end, I made no findings on misconduct against the Receivers after hearing the parties on the Issue.

69.  DG also relies on the Receivers’ conduct in the application for anti-suit injunction.  Mr Tong SC submits that notwithstanding Hong Kong First was never a party to any foreign proceedings, it was named as one of the applicants.  The application was doomed to failure and was abandoned one week before the hearing.  The Receivers had chosen to do nothing to stop Hong Kong First from participating in it, apart from asking DY and DXH why.  In not stopping the proceedings, the Receivers have thereby exposed Hong Kong First to unnecessary costs.  Mr Tong SC submits that it was also an attempt to pressurize DG when he was appealing to the Court of Appeal.  Even if there were good reasons behind their move, there was still a perception of bias and partiality.

70.  I accept the Receivers’ explanation that para 4(5) of the Receivership Order precluded them from intervening in the conduct of any proceedings between DY and DG of which the anti-suit injunction application formed one.  I cannot see how there can be an inference that the Receivers’ abiding by the Receivership Order can give rise to an inference of pressurizing DG.

71.  DG then complains that whilst turning a blind eye to DY’s wrongful act of causing Hong Kong First to engage in unnecessary court proceedings, the Receivers never failed to challenge everything DG did in relation to Macau First.  He relies on the challenge to appointment of Macanese lawyers as an example.

72.  However, the Receivers’ enquiries in relation to Macau First were not over court proceedings but over the application for change of legal representative, when DG purported to exercise his power as a director which had ceased.  It was a legitimate enquiry under the Receivership Order.  The Receivers did not interfere in Macau proceedings.

73.  This complaint fails.

A2.2 Abuse of position to oppress DG for the benefit of DY by bringing action against DG to recover sums which form the subject matters of DY’s counterclaim

74.  DG says that the Receivers have abused their position by issuing the writ in HCA 1933/2011 (“the writ”) and the statutory demand against him in respect of 2 sums, HK$30,000,000 and US$3,000,000 (“the 2 Sums”) which form the subject matter of DY’s counterclaim in this action.  DG submits that the Receivers have no power to do so and acted for the benefit of DY.

75.  Further, notwithstanding that DG has continuously provided funding each month to HKFUIGL repay the mortgage, the Receivers caused another demand to be issued by HKFUIGL for DG to return HK$1.29 million.

76.  Mr Tong SC has shown me a small bundle of correspondence between the Receivers and DG on the one hand and the Receivers and DY and/or DXH on the other between 21 October 2011 and 23 December 2011.  There was an apparent discrepancy in treatment towards DG and DY.  In respect of the former, the Receivers went to the full extent of issuing a writ and statutory demand despite LCP’s request to withhold proceedings.  In respect of the latter, the Receivers merely corresponded with DY.  No action was commenced by the Receivers on behalf of Hong Kong First against DY to seek recovery of HK$13 million from DY notwithstanding the Receivers had once demanded for the same.  Nor had the Receivers demanded HK$5 million from DY and DXH.  The Receivers have not demanded DY or DXH to produce documentary proof of what the Companies owed to each of them in set off against amounts which the Receivers said were owing from DY or DXH.  The Receivers issued a demand letter dated 23 December 2011 to DY allegedly only after seeing DG’s skeleton submission for the present hearing. DG complains of this leniency in treatment towards DY.

77.  As will be analyzed under the Prohibition Summons, I am not satisfied that the Receivers had acted outside their powers in making those claims.  They were merely discharging their duty to collect in assets.  Any money recovered would not be for the benefit of DY but the relevant company.

78.  As for the statutory demand, it appeared to have been issued erroneously since DG is not a resident of Hong Kong.  The fact that the Receivers (or solicitors) wrongly issued a set of proceedings for want of jurisdiction or failed to take into account a potential defence of set off may be an error of law but does not necessarily evidence misconduct or bias on the part of the Receivers.  This error can be corrected by an appropriate order for costs against the Receivers after hearing representation from them.

79.  The Receivers have explained that DY and DXH have provided substantive replies and explanations as opposed to DG who refused to provide any explanation.  That the Receivers took time (about 2 months) to consider should not form a cause for DG’s complaint, I do not think the evidence is sufficient to establish bias in the Receivers.

A2.3 Unfair exclusion of DG from participation in the management of the companies but allowing DY and DXH to participate in the same

80.  DG points to 4 examples:

(i) DXH was appointed as an additional director of two subsidiaries HKFUIGL and FUIL.  On the other hand, DG was not appointed as a director of Hong Kong First with the effect that Hong Kong First, being the sole shareholder of Shanghai Bading, was under the exclusive control of the Receivers, DY and DXH. 

(ii) Appointment of DXH to execute important documents for HKFUIGL such as a new account and contracts on behalf of Shanghai Bading.

(iii) Notwithstanding that DG remains a director HKFUIGL and FUIL, the Receivers failed each time to give DG notice of board meetings in a timely manner (for example, only one working day before the meeting).

(iv) Despite the Consent Order and my view that DG should not be ousted from the management of Shanghai Bading, the Receivers together with DY and DXH signed a board resolution on behalf of Hong Kong First seeking the removal of YXA as the legal representative of Shanghai Bading. 

81.  The allegations of exclusion from management could not, in my view, be further from the truth.  The Receivers did not act stealthily.  All along, they have wanted to obtain control of the Companies. All along they have been willing to involve DG in the management, in accordance with the letter and spirit of paragraph 87 of the March Decision.  Such willingness was met with an uncooperative attitude from DG in refusing to hand over control.  Mr Tong SC accepts that his client was not free from blame.

82.  Receivers are to exercise commercial judgment.  Although it would have been better had they come to court to seek directions (see McDonald v Golden Dynasty Enterprises Ltd [2008] 5 HKLRD 569), it was not erroneous for them to seek Hong Kong and PRC legal advice on how to implement the Receivership Order.  The legal advice received was for the Receivers to become the shareholders of Hong Kong First and pass a board resolution to remove YXA as the legal representative (which was subsequently proved to be correct and in accordance with the requirements of the State Administration for Industry and Commerce, “AIC”, the PRC authority). The advice was also that the Consent Order was not binding on the Receivers and was an interlocutory order that had been superseded by a further order, the Receivership Order.  (2^nd Report)

83.  In relation to Hong Kong First, DG was not a director.  He could not be contacted (1^st Report).  The Receivers tried to “reconstruct” its board of directors to maintain the status quo at the commencement of this action and to ensure that the Receivers gained control.  DY and DHX were then engaged to sign the board resolutions dated 18 March 2011 to permit the Receivers to gain control.  Messrs Herbert Smith made no comment on the proposal for restructuring despite notice from the Receivers.  At one stage, DG and Messrs Herbert Smith even agreed to the change of YXA.  The Receivers had in April and June 2011 made clear their willingness to consider appointing DG as director of Hong Kong First if he would cooperate with the Receivers to facilitate their taking control of the assets, but cooperation was not forthcoming.

84.  The Receivers acted honestly in accordance with legal advice and acted under the notion that the Consent Order had been superseded.  The views of Ms Sit as stated in paragraph 21 above was consistently held by the Receivers and Ms Linda Chan SC acting for them at the July hearing.  The Receivers, of course, had no say on the validity of the Receivership Order.  Their views were, however, relevant to explain why they passed the resolution to remove YXA and purported to implement that resolution.  Their acts should not be treated as excluding DG from management. The Receivers’ views were sustainable, at least up to the July Decision.

85.  After the resolution to remove YXA, DG remained uncooperative.  Notwithstanding that DG has never been removed as a director of any of the boards he sat on, he has failed to render assistance to the Receivers.  He ignored notices of board meetings when he could have given proxies, engaged in telephone conferencing or suggested alternative arrangements, and despite the Receivers’ willingness to provide further documents on request of his solicitors.  

86.  Insofar as DXH has been asked to execute documents, it was because she was the only non-receiver director present. Before the meeting, the Receivers had given notice to DG about the intended opening of the bank account and that 2-3 directors of HKFUIGL would be authorized signatories.

87.  Permeating DG’s case on bias was the assertion that the Receivers did the acts complained of to pressurize him and to give advantage to DY.

88.  The parties (not just DG) have to face 2 fronts – one under the action and the other under the Receivership Order.  The Receivers have a duty to implement the Receivership Order.  They cannot sit back because an appeal, the present summonses, and the action are ongoing.   In discharging their duties, it was legitimate for them to approach the parties for assistance and take actions necessary to preserve assets of the Companies. Such approaches, one can expect, will exist alongside DG’s preparation of this case and “pressure” on DG in terms of time and energy will be inevitable. However, that is far from saying that the Receivers acted with the ulterior purpose of pressurizing DG.

89.  The result of the steps taken by the Receivers was to gain control.  I cannot see control surrendered by the Receivers or any benefit falling into the hands of DY or DXH.

90.  I am not satisfied that the complaint of actual or apparent bias was made out.

Ground A3 : Misconduct of the Receivers

91.  Mr Tong SC relies on 6 matters to show that the misconduct of the Receivers is of such a degree that wholly forfeits the confidence of the court and fully justifies their immediate discharge :

A3.1  Acting in breach of the Consent Order to remove YXA from his position as the legal representative of Shanghai Bading;

A3.2  Making false representations to third parties that David Yen of the Receivers had already replaced YXA as the legal representative of Shanghai Bading when his application for replacement was in fact rejected by the relevant authority in the PRC;

A3.3  Acting in breach of the Receivership Order by commencing new actions;

A3.4  Acting in blatant disregard of PRC court order;

A3.5  Acting in unlawful and disreputable manner by criminally assaulting Mr Tang, a PRC lawyer retained by Shanghai Bading;

A3.6  Charging exorbitant fees.

A3.1 Acting in breach of the Consent Order to remove YXA from his position as the legal representative of Shanghai Bading;

92.  Mr Tong SC’s view is that a truly independent and impartial receiver should have respected the Consent Order, the July Decision and that under the Mainland law the Receivership Order has no effect. Yet they have pressed on removing YXA especially in the last 6 months before this hearing.  They applied to the Mainland authorities to seek administrative review of their refusal to replace YXA.  It gave rise to an impression of pressurizing DG and to give advantage to DY.  Shanghai Bading is doing well under YXA’s control and the Receivers should not intervene.

93.  The views taken by the Receivers were, in my view, sustainable up to the time of the July Decision.  I had not then made adverse findings on misconduct against the Receivers.  The Receivers had even been given costs of their assistance on the Issue.

94.  Three days after the July Decision, AIC has rejected the application for change of legal representative.  Despite that, the Receivers still held the view that they could pursue the change in legal representative.

95.  In their solicitor’s letter to DG’s solicitor dated 11.8.2011 (E2/880), the Receivers relied on my “intention” in the July Decision for YXA to be replaced as a legal representative; that I did not state whether the Consent Order was still in force; and that I simply said I had no jurisdiction to decide the matter.  They clearly overlooked my ruling that superseding the Consent Order should be done expressly rather than by implication; and the Consent Order was not expressly superseded by me.  The effect of the July Decision was to confirm the existence of both the Consent Order and the Receivership Order pending the appeal.  The Receivers have breached the Consent Order after the July Decision.

A3.2 Making false representations to third parties that David Yen of the Receivers had already replaced YXA as the legal representative of Shanghai Bading when his application for replacement was in fact rejected by the relevant authority in the PRC

96.  YXA was removed as a legal representative by virtue of a board resolution.  However the legal formalities in the PRC have not been completed. After the July Decision and notwithstanding that AIC has rejected the application for change of legal representative, the Receivers still represented themselves to be legal representatives of Shanghai Bading.  This head of complaint is sustainable.

A3.3            The Receivers acted in breach of the Receivership Order by commencing new actions

97.  This is similar to the complaint under A2.2 above.  This complaint is unsustainable, in the light of the analyses under the Prohibition Summons.

A3.4 Acting in blatant disregard of PRC court order

98.  DG’s complaint is that notwithstanding the Receivers’ representatives were told to comply with the PRC court order (that the chops stolen by DY were to be returned to the PRC court for custody), the Receivers have chosen to ignore that order.

99.  The Receivers have explained to the PRC court the situation and the officers involved confirmed that the PRC court would not request the surrender of the chops of Shanghai Bading as the new legal representative was not bound by the civil judgment.  The PRC court would consider taking action against DY who had not communicated with them effectively: 3^rd Report, at para 2.7.7.

100.  This complaint is unsustainable.

A3.5 Acting in unlawful and despicable manner by criminally assaulting Mr Tang, a PRC lawyer retained by Shanghai Bading

101.  According to YXA, 4 persons appearing to be triad members turned up at the office of Mr Tang on 3.5.2011.  They claimed to have come by order of DY, the boss of Shanghai Bading.  They claimed that their people were assaulted by Mr Tang’s people.  (我們的人在4 月 30 日的時候被你們的人打了。)  Mr Tang asked if they meant people of Ernst & Young (the Receivers).  The reply was in the affirmative.  Mr Tang says that the police was handling matters concerning Ernst & Young.  When Mr Tang said he was not prepared to talk further with them, the 4 persons verbally abused and threatened him.  One of them even assaulted Mr Tang.

102.  The Receivers have chosen to avoid answering this serious allegation in their affirmation in opposition but in their 4^th Report referred to “defamatory articles” on websites which they have successfully demanded removal of.

103.  This piece of evidence shows that the 4 persons did not come by order of the Receivers.  That the former regarded the latter as “their people” (我們的人) should not be treated as the fault of the Receivers.  There did not seem to have been any follow up actions by the police against the Receivers.

104.  I am not satisfied that this head of misconduct is established. 

A3.6 Charging exorbitant fees

105.  This complaint will be discussed under Ground 4.

106.  On Ground 3, I am of the view that the complaints of breach of the Consent Order after the July Decision and, related thereto, the false representation that Yen had replaced YXA as legal representative are made out.

Ground A4: Charging exorbitant costs

107.  The Receivers are said to be guilty of misconduct in charging exorbitant fees and in irresponsibly incurring costs outside the ambit of their powers under the Receivership Order or the Consent Order.

108.  There is no dispute that up to 31 July 2011 (around 4½ months after the making the Receivership Order), the Receivers have already billed HK$7.3 million which is exclusive of the disbursements paid by the Receivers to the lawyers in Hong Kong and the PRC.

109.  To Mr Tong SC, that was an astounding figure having regard to the fact that Shanghai Bading was not a trading company but was only involved in the collection of rent; and the Receivers have not yet taken over the management and control of Shanghai Bading.  They have not shown the exorbitant costs were incurred or were necessary for the purpose of preserving the assets of Shanghai Bading which was their primary responsibility.  The Receivers have refused to provide the court with a detailed breakdown of their costs. 

110.  Mr Tong SC also submits that the Receivers have no hesitation in unnecessarily or unreasonably blowing up the cost of the receivership.  For example, they deliberately instructed a separate firm of solicitors to bring action and issue statutory demands against DG to recover sums against him. They have taken a lot of steps with a view to removing YXA in contravention of the clear terms of the Consent Order.  They have also incurred substantial costs in perusing documents and preparing for hearings in which they should have minimal involvements. 

111.  Mr Tong SC also submits that the irony lies in the fact that whilst the Receivership Order is supposed to serve the purpose of preserving assets, it turns out that it leads to the depletion of assets, to the extent that the Receivers are even proposing to sell Lippo Centre to foot their own exorbitant bill.  The continued existence of the receivership will not only lead to duplicity of proceedings, but will also cause irreparable harm to the parties. 

112.  Costs can hardly be used as a ground for discharging the Receivers as costs are subject to approval of the court: para 7 of the Receivership Order.  Any costs unnecessarily incurred or those incurred in breach of duties will be disallowed and the assets will not be adversely affected: Re Peregrine Investments Holdings Ltd, [1998] 2 HKLRD 670 at 679A-680D.  The proper forum for considering these matters is the taxation hearing: Mirror Group Newspapers plc v Maxwell, [1998] BCC 324 at 342F.  The court can require notice of taxation to be given to DG (and DY) who can then challenge the incidence or quantum of costs.  Of course, where the Receivers have to attend court hearings, the court may also assess and allow only reasonable costs, as was done in previous hearings.  Engagement of a second firm of solicitors is permissible under para 18(a) of the Receivership Order, and their costs are equally subject to control of the court.

113.  DG’s obstruction has caused the Receivers to adopt a more circuitous approach to implement the Receivership Order, eg liaising with banks and authorities, performing physical checks on regular basis to monitor transfer of properties, forensic analyses of the financial position, contacting lawyers for YXA, CZQ and Macau First and did a lot more work.  The increase in costs was partly self-induced.

114.  This ground of complaint is unsustainable.

Discharge on the ground of bias and misconduct

115.  Of all the complaints, the ones I find established was the Receivers’ continued efforts in pressing for removal of YXA after the July Decision and the false representation that Yen had replaced YXA as legal representative.

116.  Discharging a receiver on the ground of misconduct is discretionary.  In deciding whether to exercise this power, I have considered the difficult circumstances in which the Receivers were placed.    Their task was onerous and irksome, effectively having to implement a receivership order beyond the jurisdiction.  The Receivership Order was made against DG’s wish, so it was not surprising that every step taken by the Receivers would be viewed by DG with scepticism and resistance.  The Receivers’ conduct may not be ideal in the eyes of anyone.  A finding that they have breached the Consent Order pending appeal is already a blemish on their reputation.  They have nevertheless kept DG and the Court informed of the steps taken as can be seen from the various Reports.  Attempts to gain control were aimed at the benefit of the Companies and not DY.  Although the Receivers have not done much in terms of gaining control, the information they have obtained has given them a degree of acquaintance with the affairs of Shanghai Bading. They have brought to light problems in the management of Shanghai Bading’s assets by DG/YXA.  Overall, the situation reflected more of the Receivers’ zealous attitude in obtaining control in the face of the continued risk of dissipation of assets, than deliberate flouting the Consent Order.  The situation was not such as to wholly forfeit the confidence of the court in the Receivers.  Instead of discharging them, I consider a firm direction that they should not pursue the removal of YXA as a legal representative pending the appeal shall suffice. Failure to comply with this direction may result in their discharge and wasted costs order against them personally.  I stress that this direction is not a stay pending appeal but to recognize the co-existence of the Consent Order and the Receivership Order.

Replacement of the Receivers

117.  It is true that the Receivers have not been able to do much in terms of taking over management of the companies but that was due to the hindrance of DG.  At this stage, with an appeal to be heard in 3 months’ time and thereafter a trial in 9 months’ time, changing to another firm of receivers will just cause chaos and generate more costs.  This is particularly so where there is no indication that DG and YXA will be ready to cooperate with a new firm of receivers.  I therefore decline to replace the Receivers.

Alternative accounting duties

118.  The alternative accounting duties as set out in the Discharge Summons (“the accounting duties”) to replace the Receivership Order are to procure the management of the PRC Companies:

(i) To provide monthly reports to DY in respect of their finance, operation, management, with all up-to-date bank statements from time to time.

(ii) To give not less than 14 days’ prior written notice to DY in the event either Company shall enter into any transaction involving an amount of over RMB 500,000 together with all relevant commercial documents relating thereto.

These will be more economical and less intrusive to preserve the status quo.  DG also claims that YXA has been playing the role of the Receivers well in accordance with Mainland law.                  

119.  These accounting duties have in fact been proposed by DY at the February hearing.  In the end, I chose to impose the Receivership Order.  Since I decline to discharge the Receivership Order, it is not necessary to consider the accounting duties again.  In any case, I cannot trust DG to provide reliable accounts pending trial.  Disclosure by DG and YXA has been selective.  There was rental income that DG has hidden or otherwise failed to account for and risk of dissipation continued -the very cause for the imposition of the Receivership Order.  His attitude oscillated with change in legal representation.  Support of YXA (or CZQ) also provides no comfort to the court as he is not subject to the Hong Kong court’s jurisdiction.

Summary on the Discharge Summons

120.  On costs, the bulk of the complaints have not been made out.  I dismiss the Discharge Summons with a direction that the Receivers should not pursue the change of YXA as legal representative pending appeal.  I order, nisi that DY and the Receivers’ costs should be borne by DG.

B. THE STAY summons

121.  DG has applied for stay of execution of the Receivership Order but failed on 2 occasions (the April Decision and the May Decision).   When he successfully obtained leave to appeal from the Court of Appeal in September, he had not renewed his application for stay or appealed against the refusal of stay there and then.  It is an abuse of process for him now to seek a stay for the third time.  On this ground alone, the Stay Summons can be dismissed.

122.  The only change of circumstances, which Mr Chan SC accepts, is that the Court of Appeal has now granted leave to appeal.  Mr Tong SC, relies on 3 matters in support of the stay application:

B1. Strong grounds of appeal;

B2. That the appeal will be rendered nugatory if a stay is refused and loss will be suffered by DG and Macau First that cannot be compensated for by damages;

B3.    That the Court of Appeal granted costs in favour of DG in the leave application.

DG offers undertakings to assure DY and the court that there will be no dissipation of assets in relation to the PRC companies.

Ground B1: Strong grounds of appeal

123.  An applicant for stay has to demonstrate good reason as to why the court has to do so.  The existence of a strong ground of appeal or strong likelihood of success of appeal is by itself a good reason for stay. 

124.  I have, in paras 19-23 above, expressed my doubts as to the strength of the appeal.  The appeal remains only arguable. 

Ground B2: Appeal will be rendered nugatory in absence of stay

125.  Where there exists only an arguable appeal, the appellant would need to provide the court with additional reasons as to why a stay is justified, which include the fact that an appeal will be rendered nugatory if no stay is granted.

“An appeal being rendered nugatory does not mean in all cases that without a stay, the appellant faces financial ruin or the loss of all his property. Demonstrating that the failure to grant a stay would have a serious deleterious effect is enough.” Star Play Development Ltd v Bess Fashion Management Co. Ltd., [2007] 5 HKC 84 at para 9(4), per Ma J (as he then was).

126.  There is nothing to show that the appeal will be rendered nugatory or that anything is irreversible if the appeal is allowed (para 34 of the April Decision).  If DG is successful before the Court of Appeal, the Receivership Order can be discharged.  All loss incurred can be recovered from DY.  All company chops, seals, title deeds, etc. can be returned to DG.  Legal representatives, if removed, can be reinstated.

127.  DG seeks to persuade me that the following events may render the appeal nugatory:

(i) The Receivers are seeking to dispose of the unique Lippo properties, contrary to their goal of appointment - to preserve assets of the Companies.  They have not resorted to a less drastic option of raising loans than selling the Lippo properties.  Since the Receivership Order, DG alone has been shouldering all mortgage repayments for the Lippo properties whereas DXH and DY will no longer be financially capable of funding the Receivers’ operations.

(ii) The Receivers are attempting to serve a statutory demand on DG for the 2 Sums.  In the absence of a stay, substantial costs and time will have to be spent by DG to resist it.  It would be unfair and unjust if a bankruptcy order is obtained before conclusion of this action.

(iii) YXA and CZQ have indicated that they will seek other business endeavours unrelated to the Citigroup Tower and will not return even if the PRC Companies wish to reinstate them in future.  Other senior employees will resign if the PRC Companies are taken over by the Receivers.

(iv) Some of the tenants of Citigroup Tower may hesitate in renewing their leases if the building were to be taken over by the Receivers.  Many of the tenants have indicated that they had been greatly confused by the various notices issued by the Receivers so far.

(v) The astronomical costs of the Receivers without fortification of DY’s undertaking as to damages may cause loss to DG.

128.  The events occurring after the Receivership Order shows that DG did all in his power to make sure that the Receivers could not lay their hands on the cash-rich PRC Companies.  He did not even hand over any residue rental income (after payment of expenses) to the Receivers.  He put the Receivers into the financial strait.  If he were allowed to continue, he may take further steps to dissipate assets of Shanghai Bading.  Therefore, with regard to (i), it was DG who created the situation whereby the Receivers have to propose a sale of the Companies’ assets. Raising loans is impracticable because the Companies lack the means to repay. It is no answer for DG to say that he alone (without assistance of DY and DXH) has been shouldering all the mortgage repayments to the Lippo properties because he alone controlled the finance of Shanghai Bading despite the Receivership Order.

129.  With regard to (ii), DG can, on good grounds shown, apply to stay the Receivers’ steps in relation to the statutory demand.  However, he cannot have the whole Receivership Order stayed.

130.  With regard to (iii), if there is any truth in it, DG would not have waited until this 3^rd application for stay to raise it.  The Receivership Order contained a provision for change of legal representative which DG’s lawyers had not commented on before sealing.

131.  With regard to (iv), Citigroup Tower is fully leased out.  The only loss of rent on the evidence was wavier of a month’s rent of UBS and that is something that may be compensated for by DY’s undertaking as to damages.  Confusion to tenants was, again, caused by DG’s refusal to comply with the Receivership Order.  He cannot rely on his own fault.

132.  With regard to (v), DG cannot rely on the costs of the receivership in support of his application for stay.  The expensive nature of a receivership was anticipated when the March Decision was made.  Reasonable loss may be covered by an order for fortification (see under the Fortification Summons).  Any further loss caused by DG being uncooperative was self-induced by DG.

133.  In summary, I am not satisfied that refusal of a stay will render the appeal nugatory.

Ground B3: Grant of costs by the Court of Appeal in favour of DG in the leave application

134.  Mr Tong SC submits that the strength of DG’s appeal was further evidenced by the fact that the Court of Appeal saw fit to depart from the usual order of “costs in the cause of the appeal” and awarded DG costs in his application for leave to appeal.

135.  In my view, this is a desperate argument.  The Court of Appeal did not give reasons for the costs order.  The costs order was nothing more than an indication that DY should not have resisted the application for leave.  It was not an indication of the strength of the appeal.

Undertakings offered by DG

136.  Apart from the accounting duties in para 118 above, DG also undertakes in paragraph 27 of DG (10):

(i) Not to cause sale or disposition of any part of the Citigroup Tower.

(ii) To procure the management of Shanghai Bading to make timely repayments to Huaxia Bank to avoid breach of loan agreements.

137.  It was partly because this court found risk of dissipation of Citicorp Tower that the Receivership Order was made.  Undertaking (i) is not helpful.

138.  Undertaking (ii) sounds reasonable but it does not get over the problem now surfaced - where DG has put the rental income from tenants; and where the surplus over expenses has gone.

139.  I decline to accept the undertakings even if a stay is granted.

Summary on the Stay Summons

140.  The grounds of appeal are not so strong as to merit a stay.  There is nothing to show that the appeal will be rendered nugatory if no stay is granted.  The undertakings proposed by DG are not acceptable.  If a stay is granted, the risk of dissipation of assets will continue.  The balance of convenience lies in refusing the Stay Summons.  Costs should follow the event and be to DY.

C. FORTIFICATION SUMMONS

141.  DG seeks fortification in the amount of HK$54,000,000 and premises his application on 2 grounds:

(i) The costs of the Receivers incurred/to be incurred;

(ii) The loss of rentals from Citigroup Tower.

The principles

142.  The court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order: Chow Chor Leung v Rafaella Sportswear Inc [1990] 1 HKLR 449 at page 453H.

143.  The burden of showing need for fortification and the appropriate quantum falls on the party seeking fortification, in this case, DG. Whilst there is no obligation on the plaintiff (in this case, DY) to give full and frank disclosure of his own financial means, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle the drawing of an adverse inference as to his ability to meet his cross-undertaking in damages: Hui Chi Ming v Koon Wing Yee [2011] 1 HKLRD 260, at para 45.

144.  I will add that, unlike many types of interim orders (e.g. injunctions where the loss in value of a property or business is not immediately apparent), monetary “loss” to a company subject to receivership is almost a certainty when receivers are paid out of company assets.  The “loss” grows with the time taken for litigation. Therefore, although fortification was not ordered when the receivership order was first made, the court can always do so subsequently when the applicant puts forth sufficient evidence in support. 

145.  Even where an application for fortification is subsequently made, the same test applies: Hui Chi Ming v Koon Wing Yee [2011] 1 HKLRD 260, at para 35. 

Just and proper to order fortification?

146.  Mr Chan SC submits that at the February hearing, DG had, through his leading counsel, already asked for fortification but failed.  DG can only re-litigate this if there is a significant change of circumstances.  Mr Chan SC, however, agrees with me that the Court has power to order fortification at any time. 

147.  Fortification was not ordered in the March Decision as there was no evidence of potential loss or its extent.  The point raised by Mr Edward Chan SC that DY might not have the means to meet his undertaking as to damages was in the context of persuading the court not to make a receivership order.  That was met with DY’s suggestion of paying HK$15,000,000 into court. No order was made at that time.  The arguments then could not be taken as an application for fortification.  The present summons was therefore the first application by DG. 

148.  DG claims that there was loss of rental. However, at best he could only show loss of one month’s rent of an unknown amount payable by UBS.  Citicorp Tower is fully leased out.

149.  At the February hearing, the scale of potential costs of the receivership was everyone’s guess until the Receivers gave their estimation of HK$300,000 per month in the 1^st Report.  To date, costs of HK$12.5m have been incurred on the Receivers, about RMB 1.13m on PRC lawyers and about HK$3m on Hong Kong lawyers.   All such costs do not include additional costs that the Receivers will incur in the event of their taking over the management and operation of Shanghai Bading and the Management Company.

150.  The trial has been set down to start in March 2013.  This means the Receivership Order should last for 27 months from its first making up to end of trial.  On the basis that DG is cooperative, that should have cost HK$8,100,000.

151.  Mr Tong SC submits that despite DY’s claim that he is the ultimate owner of Shanghai Bading, only DG but not DY has agreed to fund the operation of the Companies upon the Receivers’ request. The absence of funding from DY clearly demonstrates that he must either be in a precarious financial position or be disingenuous in claiming himself to be the ultimate owner of the Companies.  

152.  With respect to Mr Tong SC, I am unable to agree.  Inability of DY to honour his undertaking has not been accepted in the March Decision.  The Receivership Order contemplates that costs should in the first place be borne by the Companies.  Had it not been for the non-cooperative attitude of DG in handing over the finance of the Companies to the Receivers, there is no question of DG or DY having to fund the operation of the Companies.

153.  What I agree with Mr Tong SC, however, is that DY had placed reliance on two properties in Hong Kong owned by himself and DXH respectively, which are said to be worth HK$16,000,000.  Only DY (and not DXH) has given a cross-undertaking in damages.  In addition, DY has already spent HK$12 million on his lawyers.  Therefore, even if he was able to come up with HK$15,000,000 in February 2011, one questions whether the same can be said of him today.

154.  The only other asset of DY disclosed is his property in Australia.  DG claims that DY has been trying to sell this property.  This has been denied by DY with documentary proof that he is still the registered owner of the Australian property.  However, the fact that DY has property outside the Hong Kong of unknown value gives no assurance that he will be able to fortify his undertaking.  There are always difficulties and inconvenience in enforcement against a foreign property. 

155.  In my view, the costs incurred so far, the anticipated costs, the costs already incurred by DY and the disclosure of only one Hong Kong and one Australian property of his make it just and proper to order fortification.

Quantum for fortification

156.  In determining the quantum to be put up by way of fortification, the court has to take a broad view without resolving all the arguments and counter-arguments on the amount to be fortified: Chow Chor Leung v Rafaella Sportswear Inc [1990] 1 HKLR 449 at page 453I.  However, the loss will not qualify for compensation under the cross-undertaking unless it has been caused by the grant of the receivership. Though normally that is an issue decided on an enquiry as to damages at the end of the day, the causation issue must also be examined in forming an intelligent estimate of likely loss at the fortification stage: Sectrack NV v Satamatics Limited [2007] EWHC 3003 (Comm) at para 99.

157.  DG claims that DY and the Receivers have only themselves to blame for incurring all those costs when the points that they have no power to remove YXA was raised by DG as early as April 2011.  Based on billings of the Receivers (HK$7.3m about 4½ months after the making of the Receivership Order), he estimates the receivership cost to be at least HK$2 million per month.  He asks for fortification in the sum of HK$54 million.

158.  It is unrealistic to adopt $2m as multiplicand. More costs would have been incurred at the initial than later stage.  It will be an affront to justice to allow DG to rely on his own failure to cooperate with the Receivers to jag up the amount to be fortified.  I take into account the hearing dates of the appeal and the trial.  I also bear in mind that the Receivers have been awarded costs for certain hearings already against DG.

Summary on the Fortification Summons

159.  I order DY to fortify his undertaking as to damages by paying HK$10m into court or providing security in like amount as follows:-

(i) Paying HK$6,400,000 into court [in the absence of agreement between the parties as to time, within 28 days] to cover the period from making of the Receivership Order up to and including 31 May 2012; and

(ii) If the Court of Appeal is to uphold the Receivership Order, paying an additional HK$3,600,000 [in the absence of agreement between the parties as to time, within 28 days of the Court of Appeal’s decision on the appeal] to cover the period thereafter up to and including completion of the trial in May 2013.

160.  Failure to fortify the undertaking will cause the Receivership Order to be discharged.  There will be liberty to apply.  Costs should follow the event and be to DG.

D. The Receivers’ Summons

161.  By their summons, the Receivers seek an order:

(i) Against DG for production of books and records, to execute declarations for the purpose of appointment of the Receivers in place of YXA and CZQ as the legal representative of Shanghai Bading and the Management Company respectively and to consent to the commencement of legal proceedings against YXA.

(ii) To sell Unit 3509 of Lippo Centre and to apply the proceeds of sale in reduction of bank loans, and to repay Hong Kong First and that payments received by Hong Kong First from HKFUIGL shall be applied for payment of monthly deficit of Hong Kong First and payment of costs and expenses incurred by the Receivers under the Receivership Order.

(iii) Alternatively, to sell Unit 3705 of Lippo Centre and apply the proceeds in payment of mortgage loans and to meet the costs and expenses of the Receivers under the Receivership Order.

(iv) Subject to the sanction of the court, to be granted powers to dispose of the assets of Macau First and Hong Kong First as the Receivers think fit to raise funds to repay all bank loans due to the mortgagees in respect of the properties currently owned by and registered in the names of Hong Kong First and HKFUIGL and to meet the costs of the Receivers.

162.  The Receivers base their application on:

D1. Substantial and repeated non-compliance with the Receivership Order;

D2. Continuing risk of dissipation of assets; and

D3. Inability to raise the funds otherwise to service the outstanding mortgages.

Ground D1: Substantial and repeated non-compliance with the Receivership Order

163.  Ms Sit has set out in her skeleton submission the non-compliance and obstruction on DG’s part to impede the proper discharge of the Receivers’ duties.  Examples are,

(i) DG (as director) purported to appoint Macanese lawyers as attorney of Macau First; the Receivers have been unable to obtain Macau First's books and records due to objection from the Macanese lawyers.

(ii) The Receivers have not been provided with documents.

(iii) The Receivers have not been given access to office. Their attendance at the office was under heavy surveillance.

(iv) The Receivers have not been able to take control of bank accounts, rental collection for Citigroup Tower and the car parks.

(v) The Receivers have been unable to obtain financial, letting and staff information of Shanghai Bading and relevant documents.

(vi) DG obstructed the change of legal representatives and resiled from his agreement to facilitate change of legal representatives of Shanghai Bading.

(vii) The Receivers have been unable to obtain the business registration documents of Shanghai Bading.  They have to issue proceedings in the PRC which have since been suspended by the court due to unresolved ownership issue of Shanghai Bading.

(viii) DG refused to provide information as to Fushan Lu premises even though some units were registered in his name.

(ix) DG refused to attend interviews but one.

(x) Shanghai Bading’s auditors first declined to provide information, and later provided limited information as regards 2009 financial statements (4^th Report).

(xi) Only a few chops are with the Receivers.  It transpired from YXA’s affirmation that there are other chops with other banks and YXA has been using them. He uses his signature to bypass the need for some chops.

164.  The clear stance of DG, YXA and CZQ is that they do not recognise the effect of the Receivership Order outside Hong Kong and will not cooperate with the Receivers. This went well beyond the ambit of the Consent Order.

165.  Even respecting that YXA must act in accordance with PRC law, and even assuming that receivership is not recognised in PRC law, there is nothing to show that his enabling DG to comply with the Receivership Order will be in conflict with his role in acting in the best interest of the real beneficial owner (DG who is subject to the Receivership Order, or DY who does not oppose the assistance of YXA).

166.  It matters not that YXA asserts that Shanghai Bading has been doing well under his control and there is no need for receivers. A party should not be permitted to flout the court’s order.

“It is not competent for anyone to interfere with the possession of a receiver on the ground that the order appointing him ought not to have been made: for persons who feel aggrieved by an order of the court may question its validity in proper proceedings, but while it lasts it must be obeyed.” Russell v East Anglian Railway (1850) 3 Mac & G 104 at 117

167.  DG has also breached his personal obligations under para 6 of the Receivership Order.

Ground D2: Continuing risk of dissipation of assets

168.  For present purposes, there is low risk of dissipation of Citicorp Tower since the title deeds have been deposited with the court.  However, the liquid assets including cash, rental income of Shanghai Bading and loan facilities are at risk of dissipation.  Examples of such risk are:

(i) Unaccounted for shortfall in rental income from the Citigroup Tower since December 2010;

(ii) Unaccounted for rental income from car parks of Citigroup Tower;

(iii) Unaccounted for cash outflow from Shanghai Bading’s accounts at Bank of Shanghai (“BOS”);

(iv) Unaccounted for rental income not subject to the rental collection agreement;

(v) Unaccounted for funds in Agricultural Bank of China (“ABC”).

169.  According to the 4^th Report, the dissipation is in the region of RMB 14.5 million within a period of 4 months from March to July 2011.

170.  Shanghai Bading has also failed to cause monthly rental income (RMB 8,000,000) to be deposited into the Huaxia Bank account.  There were demand letters from Huaxia Bank and its lawyers dated 2.6.2011 and 4.8.2011 respectively.  As a result of these demands, Shanghai Bading entered into the Huaxia Bank Supplemental Agreement on 7.9.2011.  This supplemental agreement was signed by CZQ using the contract seal. This was a clear indication that YXA was able to authorize someone to act on his behalf and that by producing the Huaxia Bank Supplemental Agreement in the present proceedings, DG was clearly adopting what his nominee YXA had done.

171.  The Huaxia Bank Supplemental Agreement raised a lot of issues:

(i) It has never accounted for the default stated in the preamble;

(ii) It did not account for the whereabouts of the rental payments which ought to have been but were not deposited into the Huaxia Bank;

(iii) The consideration for this Agreement, an upfront payment of RMB 140 million by Shanghai Bading, was from an unknown source;

(iv) The monthly payment into the designated account was reduced from RMB 8,000,000 to RMB 5,000,000.  The difference of RMB 3,000,000 can now be channelled into other bank accounts not known to the Receivers.

172.  According to the latest information available to with the Receivers from Mr Zhu of the Huaxia Bank, Shanghai Bading has defaulted in its deposit obligation under the Huaxia Bank Supplemental Agreement: Yen (7).

173.  According to the financial statements for the year ended 31 December 2010, Shanghai Bading had cash or its equivalent of about RMB 163,000,000.  Net profit for 2009 was over RMB 40,000,000 according to the profit and loss account.  The loan facility available at BOS stood at RMB 309,250,000 as at 2.9.2011.  The unaudited statement for the period up to 14.6.2011 shows liquid assets of RMB 185,000,000.  However, YXA(4) claims that Shanghai Bading just managed to make ends meet and there was not much liquid cash.

174.  Mr Tong SC submits that the Receivers have not been fair by alleging that DG had a huge mountain of cash which he sought to hide from the reach of the Receivers and the problem would disappear if YXA were removed.  He sought to demonstrate from the audited reports on the balance sheet dated 31.12.2010, profits table for 2010, cash flow statement and financial report that the surplus of trading income less trading costs and repayments to Huaxia Bank and BOS was less than RMB 1,000,000 per month.  There were no huge figures that could be siphoned away.  As for the cash of RMB 153,000,000, there had been repayments of RMB 140,000,000 under the Huaxia Bank Supplemental Agreement and substantial payment to BOS.

175.  The problem with this line of submission is that the Receivers were simply in no position to verify for lack of documents.

176.  Initially, DG (11) asserted that there was no risk of dissipation:

“… the Receivers tried to mislead the court at page 48 of the 4^th Receivers' Report, by saying that Shanghai Bading can possibly utilise the cash at banks by other channels even [though] the company chop and the finance chop are physically with the Receivers. The allegations are naïve and wholly inaccurate, and none of the 5 channels [one of which was to draw money with the authorized chops of various bank accounts] would work for the purpose of dissipating the cash of Shanghai Bading as suggested by the Receivers. In any event, the Receivers have produced no evidence to show that the management of Shanghai Bading have resorted to or even attempted to resort to the said 5 channels.”

DG (11) simply dodged the Receivers’ assertion that they were unable to ascertain the whereabouts of most of the monthly rental.

177.  That statement in DG (11) proves to be false.  The evidence shows that YXA has been manipulating the flow of rental income.  According to YXA, he has been using the finance chops Shanghai Bading has with various banks to withdraw money.  The only finance chop which is not in his possession is that for the account of Huaxia Bank.  To bypass the difficulty, YXA has directed tenants to deposit rental to ABC and BOS instead of Huaxia Bank so as to maintain control over the rental income.  He also used his signature for day to day running of Shanghai Bading.  However, the Receivers are unable to identify any rental deposit in the BOS bank statements and YXA has instructed ABC not to release any information to the Receivers (4^th Report).  YXA’s explanation was that he feared that surplus after repayment of the Huaxia Bank’ loan could not be applied for salaries, insurance premiums, operating expenses and other liabilities.  He also explained in YXA(3) that because the company chop (公章) of Shanghai Bading and the finance chop at the Huaxia Bank had been stolen, he was afraid that their rental income deposited by tenants would also be stolen by DY.  He wanted to try his best to maintain the proper running of the companies.

178.  These explanations are unacceptable, for the Receivers would have been obliged to honour those obligations had they obtained control.  There was no room for DY to steal the rental income.

179.  YXA also affirmed to the fact that Shanghai Bading was concerned that the rental to be deposited into the Huaxia Bank account for the month of September would not be sufficient to comply with the Huaxia Bank Supplemental Agreement, so a sum of RMB 1,000,000 was remitted from the SOC to the Huaxia Bank account.  This was a clear withdrawal of funds belonging to Shanghai Bading without the approval of the Receivers.

180.  Further, YXA has actively make use of his effective control over Shanghai Bading’s funds to put them out of reach of the Receivers. He admitted he had not distributed RMB 9,720,000 dividends of Shanghai Bading to Hong Kong First: DG (13). He confirmed that the sum is still in the accounts of Shanghai Bading and that it was because he saw the astronomical costs incurred by the Receivers that he made the decision to retain those dividends.

181.  It is of importance to remember that some of the reasons I relied on for the making of the Receivership Order were, (a) failure to comply with the terms of the loan agreement with Huaxia Bank in not depositing the rental income into the Huaxia Bank account (paragraph 57 of the March Decision); (b) the genuine doubt as to the integrity and propriety of the accounts (paragraph 74 of the March Decision).  Money is easier to dissipate than landed properties and the risk could not be underestimated given DG’s past conduct (paragraph 15 of the May Decision).  The current state of evidence points undoubtedly to persistent dissipation after the making of the Receivership Order.

Power of the court to give further directions

182.  If the powers given under the Receivership Order turned out to be inadequate, the court will equip the Receivers with additional power to ensure that they can discharge their duties effectively under the order for appointment: McDonald v Golden DynastyEnterprise Ltd [2008] 5 HKLRD 569, at paras 43-45. 

183.  However the court should not make an idle and ineffectual order: Snell’s Equity, 32^nd ed at para 18-038.  It will also not make an order requiring a party to do something which is beyond his power to do: Spry on Equitable Remedies, 8^th edpages 493-494.

The proposed directions

184.  I have tabulated the proposed directions and DG’s grounds in opposition:

Paragraph in Receivers’ summons	Directions sought against DG		DG’s grounds in opposition
1.1	Provide access to books and records of Macau First, Shanghai Bading, Management Company and HKFUIGL’s Shanghai representative office		DG does not have possession or control; contravene Consent Order; no control over YXA and CZQ who acts in accordance with PRC laws
1.2	Provide letters of authorization for release of documents
1.3	Provide list of current offices and accompany Receivers on inspection
1.4	Deliver all seals and chops of Macau First, Shanghai Bading, Management Company and HKFUIGL’s Shanghai representative office
1.5	Provide current contact details of DG and staff of Macau First Shanghai Bading and Management Company		Receivers able to communicate with DG through his solicitors; not shown how this will assist Receivers in carrying out their duties; aggressive conduct of Receivers’ representatives makes it prudent not to provide DG’s contact details DG does not have contact details of staff
1.6	Set up meetings with staff of the above companies		Shanghai Bading and Management Company are under control of YXA and CZQ who managed them in accordance with PRC laws; DG has no official position; Macau First does not have staff
1.7	Convene and attend board meetings of Management Company		CZQ is only prepared to operate the Management Company in accordance with PRC laws
1.8	Attend meetings including those with banks, tenants and AIC as requested		Term of order vague and oppressive; puts DG at risk of contempt simply because he is unable to attend meeting requested by Receivers; past notices of meetings given at eleventh hour Purpose of meeting to enable removal of YXA in breach of Consent Order
1.9	Execute 4 declarations to give consent to:-
	(a) & (b)	remove YXA as legal representative of Shanghai Bading and to register the change with AIC	Will assist Receivers to breach Consent Order. Amount to pre-determination of some live issues before the CA
	(c)	remove CZQ as legal representative of the Management Company	Decision to remove CZQ to be made by 2 shareholders, FUIL (90%) & Shanghai Bading (10%) in control of YXA.  Can’t make order without flouting the Consent Order and pre-determining live issues before the CA
	(d)	commence proceedings against YXA so that the stayed PRC proceedings for return of business licence could be resumed
	(e)	co-operate with the Receivers and comply with his undertakings given
1.10	Execute documents as may be required to enable the Receivers to obtain control and management of subsidiaries		Same as for 1.9; oppressive, too broad and too vague
1.11	Provide list of advisers, agents and representatives of Macau First, Shanghai Bading and Management Company		Shanghai Bading and Management Company under control of YXA; no evidence DG has knowledge of the advisers, etc. Macau First’s advisers known to the Receivers; they refused to cooperate with the Receivers because they did not acknowledge the effect of the Receivership Order in Macau

185.  As I have stated in the Background section above, at this stage, one has to live with the existence of the Consent Order. The Consent Order was directed at Hong Kong First, of which the Receivers are receivers.  To avoid its breach, the directions concerning removal of YXA as a legal representative will not be given pending the appeal.

186.  In my view, however, this Court in exercising its personam jurisdiction over DG has no difficulty in requiring him to procure YXA to do certain acts.  This has nothing to do with removal of the title of YXA but is based on DG’s own case as to beneficial ownership and nomineeship.  The Consent Order existed to preserve that status quo pending trial.  That DG does not have physical possession of books and accounts, seals, chops, staff lists etc is irrelevant.  He clearly is in control of those items through YXA (and indeed CZQ).  DG’s excuse of not having official position in Shanghai Bading and Management Company and cannot set up meetings is unacceptable.  DG has no difficulty issuing a statement in April 2011 to the staff of the PRC Companies giving directions to the staff to comply with the Receivership Order in accordance with the laws of PRC and the truth. 

187.  I fully recognize that a legal representative is to discharge his duties owed to the 2 PRC companies in accordance with PRC laws.  I cannot see how a legal representative can be said to be in breach of PRC laws to be required to disclose to the person whom he regards as the beneficial owner (DG) to prevent him from acting in breach of the Receivership Order.

188.  I will not insist on having DG provide his contact details for as long as he has solicitors on record.  He has a right to engage lawyers although he may have to suffer the risk as to delay and increased costs if he does not provide direct contact details.  However he has to provide the contact details of the staff as the Receivers may wish to obtain information on the running of the PRC Companies from them.  YXA has already volunteered the names and positions of various staff in YXA(2).  

189.  Meetings can be arranged at reasonable, mutually convenient times and through telephone conferencing.  These meetings are necessary for gathering of information and collecting assets of the Companies.

190.  Item 1.9 is not too oppressive, vague or broad as it is similar to para 5(4) of the Receivership Order.

191.  In respect of item 1.11, other than the Macanese attorneys there is also a secretarial company holding some of the books of Macau First.  It is not known whether there are such other agents.  Since the Macanese attorneys were appointed by DG, he can certainly procure them to supply such information.  Although there are ongoing proceedings in Macau and documents are filed with the Macau court, there is no evidence to show that DG cannot produce copy documents to the Receivers.

192.  The directions sought are not idle or ineffectual.  They are within DG’s power to comply.

Ground D3: Inability to raise funds otherwise to service the outstanding mortgages

193.  The mortgages in Hong Kong are over HK$50 million. The Receivers are completely cut off from assets and income of the PRC Companies.  YXA deliberately withheld RMB 9,720,000 dividends belonging to Hong Kong First.  Rental income in Hong Kong and limited bank balances are not sufficient to cover the mortgage repayment and running expenses.  It is also unlikely for the Receivers to obtain a second charge on the Lippo properties and DG objects to borrowing.  Even if the Receivers are to accept DG’s offer of a monthly sum of HK$60,000, that is still insufficient to cover the monthly deficit of about HK$100,000.  The Receivers are not able to cut the leases which are due to expire in September 2012.  The employees are kept because they are useful to the Receivers and cheaper to hire than the Receiver’s own staff.  The Receivers propose selling unit 3509 so as to preserve the connected units at 3705 and 3706.

194.  DG opposes the application on the ground that it is beyond the scope of the Receivership Order and contrary to its underlying spirit.  Mr Tong SC points out that I had expressly refused to give the Receivers a power of sale (which was proposed in para 4(10) of DY’s summons for receivership; see paragraph 104 of the March Decision).  The Lippo properties are unique, sale of which will cause irreparable damage.  He suggests that the likely reason for the proposed sale is to foot the Receivers’ bills. 

195.  The power of sale was not granted because Mr Edward Chan SC submitted at the February hearing that it was the same as the power in para 4(9), although it was not.  It does not matter, though, because the court retains power to give directions in the course of receivership.  Since there is no viable funding option because of the conduct of DG and YXA, there is reason for sale of the Lippo properties.  To foot the bill of the Receivers as provided for under the Receivership Order is justified.

196.  It is no answer for DG to ask why DY has not contributed to the mortgage repayments when DG is the person in de facto control of the finance of the PRC Companies and they have failed to render the proper assistance to the Receivers.

197.  I am of the view that the application for sale of the Lippo properties is made out.  At this stage, I will make an order for the sale to proceed only with Unit 3509 upon satisfaction of 2 conditions: (i) DY’s payment of the first of the 2 instalments for fortification of his undertaking; and (ii) lapse of 42 days from the date of this order.  The parties are, of course, at liberty to make proposals to the Receivers in the meantime to avoid the sale, by e.g. providing appropriate undertakings or funding to the Receivers to discharge the expenses of the Companies and HKFUIGL incurred in the ordinary course of business and the cost of the Receivers.

Power to dispose of assets of Macau First and Hong Kong First

198.  The power sought is too general and too wide. At the time of the Receivership Order, it was not anticipated that a power of sale is needed for a cash rich Shanghai Bading.  The Receivers’ should apply to court as and when the circumstances warrant.

Summary on the Receivers’ Summons

199.  I make an order in terms of paragraph 1 of the Receivers’ Summons save that:

(i) under para 1.5: the reference to DG be removed;

(ii) under para 1.9: the reference to the removal of YXA as the legal representative of Shanghai Bading and the appointment of Yen as the legal representative of Shanghai Bading effective from 18 March 2011 be removed;

(iii) under para 1.9: item (b) regarding the application to AIC for change of legal representative from YXA to Yen be removed;

(iv) under para 1.9: item (d) regarding commencement of legal proceedings against YXA be removed;

Parties are at liberty to agree the time for compliance, failing which the time shall be 7 days from the date of handing down of this decision.

200.  I also make an order in terms of paragraph 2 of the Receivers’ Summons subject to (i) DY’s payment of the first of the 2 instalments for fortification of his undertaking; and (ii) lapse of 42 days from the date of this order. 

201.  I make no order under paragraphs 3 and 4.

202.  There will be liberty to apply.  Costs of this summons shall be borne by DG.

E. THE PROHIBITION SUMMONS

203.  DG seeks directions that, without prejudice to the restrictions contained in paragraph 4(5) of the Receivership Order:

E1. The Receivers shall not bring or prosecute any action whether in Hong Kong or in any other jurisdictions to seek recovery of assets from the parties to this action in respect of matters forming the subject matter of this action;

E2. The Receivers shall not, without leave of the Court, exercise its powers given under paragraph 4(5) of the Receivership Order to bring against the parties to this action or any other third parties in respect of transactions, dealings or matters which occurred before the making of the Receivership Order.

Only DG (14) was filed in respect of this Summons.  DY or the Receivers had no opportunity to file any affirmation as this Summons was filed only one working day before the hearing.

204.  DG objects to the Receivers’ taking out of proceedings on the ground of harassment to him, duplicity of proceedings and waste of costs.  The Receivers consider that any “harassment” was due to DG’s own fault in refusing to hand over assets; a fight on two or more fronts is the result of his own making.

E1. Prohibition against legal proceedings for recovery of assets forming subject matter of this action

205.  Paragraph 4(5) of the Receivership Order provides that the Receivers may bring or defend any action in name and on behalf of the Companies provided that such power “shall not be used to intervene in the conduct of this action and any proceedings between [DY] and [DG] in respect of the ownership over the Companies and/or Shanghai Bading and/or the Management Company pending in Mainland, including those proceedings set out in paragraph 50 of the Defence and Counterclaim.”  This power, in my view, is clear enough to render item E1 unnecessary.

E2. Receivers not to bring action re transactions occurring before the Receivership Order without leave

206.  The existing proceedings or likely proceedings against DG (collectively “the Receivers’ proceedings”) include the following:

(i) The writ which has been served in relation to the 2 sums;

(ii) The statutory demand issued by Hong Kong First but not yet served;

(iii) A demand from HKFUIGL to recover HK$1,290,685 which was a balance of directors’ loan entered in the ledger before the date of the Receivership Order. 

(iv) Raising issue on dividends declared by Shanghai Bading but not paid to Hong Kong First.

207.  DG is of the view that whether or not he is liable to return those monies to the relevant Company depends on the outcome of this action.  There is no reason why the Receivers should try to steal a march in this action.  Under paragraph 4(5) of the Receivership Order, the Receivers are only given power to bring such legal proceedings which are necessary for the “protection” (as opposed to “recovery”) of the assets.  More importantly, the Receivers are expressly directed that their power to bring legal proceedings shall not be used to intervene in the conduct of this action.  By bringing proceedings covering the subject matter of DY’s counterclaim, the Receivers have blatantly acted against the terms of the receivership.  It is all the more serious in view of the fact that such proceedings were brought and pursued oppressively and unfairly against DG at a time when the discharge application and the appeal against the Receivership Order were pending.

208.  To protect assets, a receiver may be obliged to take out the necessary recovery action.

209.  Only the 2 Sums have been expressly pleaded. There may be sums siphoned away by DG not ascertained before commencement of the action.  DG cannot pray in aid prayer no. 5 and 6A in the counterclaim (for accounts, inquiries and tracing) and say that other claims by the Receivers form the subject matter of the counterclaim. (para 32 of DG (13)).

210.  I agree with Ms Sit that the core issue in the present action is the beneficial ownership of DG or DY over the Companies.  DY’s counterclaim is in the nature of a claim against DG qua trustee for breach of trust, for which DY seeks equitable relief of account. 

211.  On the other hand, the Receivers’ proceedings serve a different purpose.  They are to fulfil the duties of ascertaining, taking possession of and collecting any money and assets of Shanghai Bading including but not limited to demanding all debts due or which may fall due to Hong Kong First and/or Shanghai Bading: para 4(1) of the Receivership Order.  There is no restriction as to time of when the debts fell due or may fall due.  The Receivers’ proceedings do not affect how the issue of beneficial ownership is to be decided, and hence not an intervention in the conduct of this action.  At this stage, the 2 Sums belong to Hong Kong First and indisputably there was no consideration for their diversion to DG.  The sum of HK$1,290,685 belongs to HKFUIGL, a subsidiary.  The declared dividends belong to Hong Kong First.  The Receivers’ proceedings are for the benefit of the relevant company, not DY.  Anything recovered will be handed over to the real beneficial owner as determined by the Court after trial.  The Receivers’ proceedings are therefore justified (subject to the question of jurisdiction on the statutory demand which it is not necessary to resolve here) as a matter of principle.

212.  However, I have taken into account the fact that some transfers (e.g. the 2 Sums and HK$1,290,685) were made pre-action when DG’s beneficial ownership was not under challenge and there was no threat of any legal action from DY.  Taking out Receivers’ proceedings at this stage may be wasteful when one can anticipate the defence to be DG’s beneficial ownership. On the other hand, there may be subject matters of transactions occurring before the making of the Receivership Order that had never fallen into the hands of DG but need to be dealt with by the Receivers immediately, e.g. dividends of RMB 9,720,000 declared before the Receivership Order but withheld from Hong Kong First by YXA in breach of the Receivership Order.  It is thus difficult to generalize.

213.  However, I agree that some kind of control by the court over what action the Receivers may bring will prevent satellite litigation.  Using the date of the writ (as opposed to the making of the Receivership Order) as a watershed is more appropriate because by that date DG should have been aware of DY’s assertion of ownership. I grant the order sought under item E2 subject to this amendment.  The factors in the preceding paragraph, amongst others, will be relevant in the exercise of discretion in granting leave.

Summary of the Prohibition Summons

214.  I direct the Receivers not to proceed with the writ action, the statutory demand and the claim for HK$1,290,685 until further order.

215.  On costs, it should, on a nisi basis, be costs in the cause of this action as this Summons forms part of the management of the receivership.  The Receivers have not erred in principle in taking the Receivers’ proceedings and they should, on a nisi basis, have their costs out of the Companies.

OTHER MATTERS

216.  I have not perused materials given to me by correspondence after the hearing and have not replied to the solicitors concerned.  I have been informed by my clerk that the 2^nd affirmation of CZQ filed after the hearing differed in contents from the copy affirmation handed up to me at the hearing.  I make clear that I have only relied on what was placed before me at the hearing, including the copy affirmation.

CONCLUSION

217.  With regard to the Discharge Summons, I am not satisfied that DY has fabricated evidence or omitted to include material parts of transcript to justify discharge of the Receivership Order.  Nor should the court permit DG to re-open arguments after he has missed 2 opportunities.  Of his complaints of bias or misconduct against the Receivers, breach of the Consent Order after the July Decision and false representation as to change of legal representative are made out.  I direct the Receivers not to remove YXA as legal representative of Shanghai Bading pending the appeal instead of discharging the Receivers or replacing them.  The summons is otherwise dismissed.  I order, nisi that DY and the Receivers’ costs should be borne by DG.

218.  With regard to the Stay Summons, the grounds of appeal are not so strong as to merit a stay.  The Court of Appeal’s grant of costs for the leave to appeal was no indication of the strength of DG’s appeal.  There is nothing to show that the appeal will be rendered nugatory if no stay is granted.  If a stay is granted, the risk of dissipation of assets will continue.  I therefore refuse a stay, decline DG’s undertakings and make an order nisi that costs should be to DY.

219.  With regard to the Fortification Summons, the loss was not about rental but the need to incur costs of the receivership for about 27 months.  DY has disclosed only one Hong Kong property and one Australian property.  It is just and proper to order fortification but the quantum should not cover costs incurred by DG’s own failure to cooperate.  I order DY to fortify his undertaking as to damages by paying $10m into court (or providing security in like amount) in 2 tranches of (i) $6.4m within 28 days to cover the period up to 31.5.2012 and (ii) $3.6m within 28 days of the Court of Appeal’s decision on appeal (if the Receivership Order is upheld) to cover the period up to completion of the trial.  Failure to fortify the undertaking will cause the Receivership Order to be discharged.  There will be liberty to apply.   I order, nisi, that costs be to DG borne by DY.

220.  With regard to the Receivers’ Summons, there is failure on the part of DG to comply with the Receivership Order.  There is continued risk of dissipation of assets.  I make an order in terms as sought by the Receivers save that any direction concerning disclosure of contact details of DG and removal of YXA as a legal representative are disallowed.  I also make an order for sale of Unit 3509 of the Lippo Centre subject to DY complying with the fortification order in relation to the first tranche of payment in and lapse of 42 days from the date of this order.  No order is made on paragraphs 3 and 4 of this summons.  There shall be liberty to apply.   Costs of this summons shall, on a nisi basis, be borne by DG. 

221.  With regard to the Prohibition Summons, there shall be an order in terms of paragraph 2 so that the Receivers shall not, without leave of the court, exercise its powers given under paragraph 4(5) of the Receivership Order to bring against the parties to this action or any other third parties in relation to transactions, dealings or matter occurring before the date of the writ in this action.  I also direct the Receivers not to pursue the action in HCA 1933 of 2011, the statutory demand and the claim for HK$1,290,685 until further order.  There shall be an order, nisi, that costs be in the cause and that the Receivers’ costs be paid out of the Companies, in the first instance.

222.  There shall be certificates for all counsel on all summonses and in the case of DG and DY, certificates for 2 counsel.

223.  All costs (including those in favour of the Receivers) are to be summarily assessed on 12 April 2012 at 4:30pm on the papers. Parties are at liberty to agree the quantum or set off one sum against another.  Where no agreement can be reached, the receiving parties shall lodge and serve costs statements by 21 March 2012.  The paying parties shall lodge and serve grounds in objection by 10 April 2012.

224.  I thank all counsel for their industry and able assistance.