CHINA MINSHENG BANKING CORP. LTD (SHENZHEN BRANCH) v. DICHAIN HOLDINGS LTD AND ANOTHER

HCCT58/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 58 OF 2006

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J U D G M E N T

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1. I have before me an application by the 1^st and 2^nd Defendants to discharge the Mareva orders that have first been granted by Yam J in August of this year which were then further extended by A. Cheung J shortly afterwards.

2. The argument today ranged over a wide area.  Due to the lateness of the hour, I will try to be as brief as I can in giving my reasons for reaching my decision.

3. The short story, if I may put it briefly, is that the plaintiff bank had made previously a loan to a company associated with the 1^st defendant.  That loan was somewhere in the region of HK$16 million.  In December 2005, that loan was agreed to be extended to the company and two securities for that loan of December 2005 were given, one was in a form of a guarantee given by the 1^st defendant and the other was the guarantee given by the 2^nd defendant.  The 2^nd defendant being a shareholder as well as a director of the company and therefore has an interest in the company.

4. Prior to the giving of the loan in December 2005, various discussions were held between the plaintiff and the company, and various representations or promises were made which are now being relied upon by the plaintiff as showing conduct of low morality.  This is an expression which would feature a great deal in my subsequent judgment.

5. The loan was for a period of 10 months.  There was apparently default and the guarantors were called upon to honour their respective guarantee, and this was in about mid February 2006.  Around that time, things were happening.  The 1^st defendant has a major asset in the form of a controlling large block of shares in a company which, for the purposes of the proceedings, we have been calling “CMDA” (a public company).  The majority stake of the 1^st defendant’s holding in CMDA was sold to, what we have been calling, “White Knight” investors, led by Mr Wong Kwan, which gained control of CMDA and some 1.4 billion shares were sold by the 1^st defendant and something like 1 billion shares were still retained by the 1^st defendant.  As a result of this transaction which was publicly announced and was subject to Stock Exchange scrutiny, the 1^st defendant became the minority shareholder.  The price of CMDA shares which had previously languished at a very low price rose substantially, so that, as I understand it, the present value of the 1 billion shares is worth something like HK$60 million.  

6. The sale of the large block of shares by the 1^st defendant did not result in any payment by the 1^st defendant to the plaintiff.  Instead, as I understand it from the evidence, the proceeds of sale went to pay off the mortgagees of the shares : Kingsway S.W. Securities Ltd and Quam Securities Co. Ltd.

7. The story went on.  The plaintiff found out about the sale of the shares by doing company searches and, as a result of it not being able to find information it was seeking, it was alarmed into thinking that the 1^st defendant had sold all its shares in CMDA, dissipated the money or frittered away with the money instead of paying the bank.  It took several steps.  First, the plaintiff commenced arbitration in China; secondly, it went to the Chinese court and obtained an order freezing the assets in China of the 1^st defendant.  Then in August, it obtained from Yam J the Mareva order.  The Mareva order, in its usual form, is basically to restrain any disposal of the assets within the Hong Kong jurisdiction up to the value of the amount claimed.

8. The debate that is before this court today really centres on three questions : two questions of fact and one question of law.  The two questions of fact are two separate questions although they are connected.  The first question is whether the facts now disclosed show that, in the present circumstances, it requires the court to make or to continue the interim order of a Mareva injunction against the 1^st defendant, having regard to the large amount of material of facts now known to the court and put before the court by the parties in their various affidavits and evidence.  The second, of course, is a separate question, that is, whether in relation to the 2^nd defendant, the present facts known about the situation requires an interim order of Mareva in aid for an arbitration against the 2^nd defendant.  The third question is really a question of law, and it has only been lightly debated.  I suspect at the end of the day it is not going to be the central focus of the case.  The question is what is the scope of our present provision in section 2GC(1) of the Arbitration Ordinance, Cap.341?  Whether there should be some sort of either jurisdictional or discretionary restraint, when there is pending foreign arbitration, in relation to the exercise of the power under that provision?  I will consider the first factual issue.

9. There is now a large amount of common ground between the parties.  The first common ground would be that there were, in February, 1.4 billion shares sold by the 1^st defendant and I think that is in fact the exercise of the sale of the majority stake to the White Knight investors.  There is also common ground that of the sale of the 1.4 billion shares, a large part of this was pledged to Kingsway, and that the sale proceeds of the shares pledged to Kingsway were used to pay off Kingsway. 

10. There is also evidence that arising out of the involvement, if I may call it neutrally of Quam Securities,a sum HK$4 million or 271,000,000 shares were involved.  Ms Yiu for the plaintiff seemed to suggest that there is a question mark over whether there were pledging of shares to Quam Securitiesand whether the 1.4 billion shares sold also comprised of the alleged Quam Securities’ pledged shares.  It is not disputed that 1 billion shares, worth about now some HK$16 million, are still held by the 1^st defendant.  

11. There is also evidence (which is not challenged because it is exhibited as part of the public documents) that as part and parcel of the sale to Mr Wong Kwan investors, a warranty was given by the 1^st defendant and that in support of the warranty that pending release of relevant securities, there was a lock-out, if I may call it loosely that way, of the 1 billion shares for a period up to a year from the time of the transaction.  I would say very little about the detailed provision of that lock-out having regard to the fact that there is pending proceedings between the 1^st defendant and the investors as to the proper interpretation of the warranty.  But there is no doubt that the true position today as set out below is not quite as originally presented to the court by the plaintiff that :

(1)    the 1^st defendant has not sold all the shares of CMDA;

(2)    the proceeds of sale had in fact gone to the mortgagees of the shares; and

(3)    the 1^st defendant still has a large bloc of shares (1 billion shares).

12. The position now therefore is very different from when the plaintiff went before Yam J, and I think the parties accept the suggestion that we should look at the position now to see whether there is still a compelling reason for this Mareva injunction.

13. Ms Yiu, in her able and firm submissions to me, says that notwithstanding that there had been “errors” — I think I should put it neutrally in that way — committed on the plaintiff’s part, and notwithstanding the present true factual situation, she says, that the court should still grant a Mareva injunction even on the basis of the material now known.  She puts it largely upon three bases.  She says that there is a serious risk of dissipation of assets firstly because of the low commercial morality of the 1^st defendant and to a certain extent the 2^nd defendant; secondly, because of the evasiveness of the 1^st defendant in its conduct; and thirdly, because of the nature and the financial standing of the 1^st defendant and its business.  I will deal with each aspect in turn, and I hope to do this as briefly as possible.

14. So far as the low commercial morality is concerned, this is of course based upon the passage in Honsaico Trading Ltd v. Hong Yiah Seng Co. Ltd [1990] 1 HKLR 235.  I think considerable caution must be exercised in not applying too strictly or too literally to what is said to be the decided principle to be extracted from that case.  It was an extemporary judgment of Godfrey JA whose judgments always command high respect.  But on the other hand, it is not a decision which is widely echoed by other similar reported decisions in Hong Kong or elsewhere.  So while I must give due weight to that judgment I think certain caution must be exercised in applying that judgment. 

15. The low commercial morality that Ms Yiu seeks to rely upon really consists of, what I may call, representations (two written proposals and one meeting) made on various dates in November.  These were all prior to the December loan.  And these were more in the nature of business plans or projects of what the 1^st defendant hoped to do rather than representations as to fact, if I may put it that way.  As I understand it, the way Ms Yiu seemed to put it was that because the 1^st defendant promised to sell all its shares and then realize the money and pay back, and it had not done that, not keeping its promise and therefore it was low commercial morality.  I am putting it very crudely, and I hope Ms Yiu would forgive me for putting it in that stark form.  But that seemed to be what was said to be objectionable. 

16. In my view, promises of business people are subject to change of circumstances and must not be held too strictly.  Obviously from November to March when the sale took place, things have changed considerably.  CMDA was not doing well and required White Knight investors.  The CMDA shares had to be sold and the 1^st defendant perceived that it was possible to savage as much as it could by selling only 1.4 billion shares and yet still retaining 1 billion shares.  As I perceive the evidence to be, I think the evidence is overwhelmingly in favour of the defendants’ version that all the sale proceeds had gone to the mortgagees and it had not kept anything for itself.  I do not see how the 1^st defendant could be faulted for being accused of low commercial morality.  The 1^st defendant might not have told the plaintiff about the sale.  It might have kept the plaintiff in the dark, but if the plaintiff had been more astute and had engaged financial advisors in investigating this case, they could have found out a lot more and of what the true position was because a lot of this was public knowledge and were known to the financial community.  The plaintiff would not have charged forward blindly and precipitously before Yam J on a substantially false basis.  I therefore find nothing in that point.

17. Then there is said to be evasiveness by the 1^st defendant in not answering to the letters of demand, in not responding to the arbitration proceedings, so on and so forth.  I do not see that as sufficiently material or where the court should draw really too much of an adverse inference.  So far as the non-responding to arbitration is concerned, I certainly do not have any material before me as to show when, according to Ms Yiu, the papers on arbitration were served on the 1^st defendant.  I do not know when it was done and what were the details of these.  Unfortunately a different Chinese legal team was representing the 1^st defendant in the Chinese arbitration matter and therefore counsel for the 1^st defendant cannot assist me today.

18. So far as the nature and the financial standing of the 1^st defendant is concerned, instead of finding it against the 1^st defendant, I think I find the factors are in the 1^st defendant’s favour against the plaintiff.  If one goes through the nature and financial standing of the 1^st defendant’s business, it was obviously very substantial.  It may have fallen somewhat on hard times and therefore require the financial assistance of the plaintiff and the White Knights, but it could not be said to be one of those which require the drastic order of Mareva orders.  The 1^st defendant was the controlling shareholder of a public company; it also had an American technical venture which resulted in their shares being traded in America, CTGC.  It is present in Hong Kong as well as in China; its present financial standing is somewhat more solid than what the plaintiff believed it to be when they went before Yam J in August because it is no longer indebted to the two financial institutions, Kingsway and Quam; it has a bloc of 1 billion shares; it has the American shares which could have done better (this is part of the story about the defamation with the claim of the 1^st defendant against the plaintiff and its auditors).  These American shares are alleged to be worth some US$10 million, according to the affirmation of Fu Li, paragraph 24.  So I do not believe that the financial position is a factor against the 1^st defendant. 

19. If one however stands back a little bit and looks not just at the three factors argued by Ms Yiu and relied on by her, but looks at all the circumstances as we should do in granting or refusing a Mareva, then the following facts are relevant :

(1) What is the nature of the assets in Hong Kong :

The nature of the assets is Hong Kong shares.  These are Hong Kong shares in a public company.  However those shares are presently held, as I understand it, under the warranty by custodian solicitors, and there is no present indication that they will be freely available to the 1st defendant so that they can be immediately sold, and so there is no immediate risk of disposal or dissipation.

(2) The length of time the defendants have been doing business :

The 1st defendant is not any sort of overnight company; it has been here for sometime.

(3) Domicile or residence of the defendant :

It is resident in Hong Kong as well as in Shenzhen, again, factors in favour of the defendant.

(4) The past or existing credit record :

In my view, its credit record in February was its low point and that was why it sold its valuable asset at HK$0.015 per share.  But I do not think there is anything in its past or present credit record that speaks adversely against the 1st defendant.  In fact, the fact that it sold those shares and repaid the mortgagees in February and March was to its credit.  If it had wanted to dissipate its assets to avoid its obligation to the plaintiff, it might have done something more at that time with its sales but it did not. 

20. So if one considers all the circumstances, it seems to me that this is really at the outer fringe or the margin of a case of a solid evidence of dissipation of assets.

21. I think when one is dealing with a company like the 1^st defendant that has been a majority shareholder of a public company, one has to be very careful to suggest that this is the sort of company that is going to deliberately sell its assets, try to put away the money in order to avoid any judgment or award.  And this is in the context of plaintiff’s loan transaction where the plaintiff has chosen not to have any shares pledged, where the plaintiff and its guarantors have chosen to have a Chinese arbitration clause in the loan agreement and where the currency was in Renminbi and where the parties have gone to arbitration in China?  This is the case where I think the court should particularly require to scrutinize the high level of evidence before it should grant a Mareva injunction.  It seems to me, therefore, on the substantial merits of the factual situation that the plaintiff clearly has not made out a case against the 1^st defendant. 

22. If one moves on to consider the legal aspect, then the case law, whether one looks at the case of The Lady Muriel or TASA International, the judgment of Le Pichon J (as she then was), they all seemed to suggest that particular caution should be exercised by the court in relation to interim relief in aid of foreign arbitrations.  And this is even more so when it is now currently pending.  There is foreign arbitral body which can deal with any interim measure that is required to be taken.

23. It seems to me that having regard to what has happened and if Ms Yiu is correct in that the plaintiff is going to be shortly successful, then the proper body that the plaintiff should apply for interim protection is the arbitrators in Shenzhen and not the court in Hong Kong.  They may have certain restrictions in their powers, I do not know, but I am sure they can give adequate protection to whatever measures that needs to be taken. 

24. It seems to me therefore, on both the factual side in relation to the 1^st defendant as well as the legal side, the order of Mareva cannot stand and must be discharged. 

25. So far as the 2^nd defendant is concerned I think the case of the plaintiff is a fortiori is even weaker.  It is weaker because the 2^nd defendant is a separate legal entity.  It is a person.  I think the errors the plaintiff had fallen into in this case is to equate the 1^st defendant to the 2^nd defendant and therefore to assume that everything that has happened in relation to the 1^st defendant’s conduct can automatically be applied to the 2^nd defendant.  It does not follow.  It is a separate entity.  A separate case has to be made out.  There is really very, very little weighty evidence against the 2^nd defendant.  I do not see how the Mareva injunction can possibly stand in relation to the 2^nd defendant, especially having regard to my conclusion against the plaintiff in relation to the 1^st defendant.  

26. In the circumstances, I must make the order sought by the 1^st and 2^nd defendants that the originating summons be set aside and that the ancillary orders granted, including the orders of A. Cheung J and the ex parte Mareva order be set aside.