LIAO ZHIQIANG AND OTHERS v. CHEUNG SIN LING, VICKKI AND OTHERS

HCA 1886/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1886 OF 2013

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(by counterclaim)

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J U D G M E N T

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INTRODUCTION

1. The plaintiffs are all shareholders of the 5^th defendant, China Northern Newenergy Investment Limited (“the Company”).  The plaintiffs collectively hold 53.71% of the issued shares of the Company.  The 3^rd plaintiff (“Rong”), the 4^th plaintiff (“Bun”), and the 5^th plaintiff (“Wang”) are directors of the Company as well.

2. The 1^st defendant (“Cheung”) and the 2^nd defendant (“Chow”) are also directors of the Company.  Cheung and Chow wholly own Jackpot Development Limited (“Jackpot”), which holds 33.12% of the issued shares of the Company and is its largest single shareholder.  Cheung and Chow are wife and husband.

3. The rest of the issued shares of the Company are held by one He Yangjun (“Mr He”) – as to 8.15%; and one Wong Yun Kuen (“Dr Wong”) – as to 5.02%.

4. The 3^rd defendant (“Fan”) and the 4^th defendant (“Yeung”) are (on the defendants’ case) also directors of the Company. However, the plaintiffs dispute their appointment as directors.

5. This is the plaintiffs’ application to continue two interlocutory injunctions (“the Injunctions”) until determination of the present proceedings or further order: -

(1) Injunction granted ex parte by Deputy High Court Judge Marlene Ng on 16 October 2013 restraining the defendants from convening a board meeting of the Company, insofar as the board seeks to resolve to forfeit the plaintiffs’ shares in their Company (“the Board Injunction”); and

(2) Injunction granted by Deputy High Court Judge Lok on 18 October 2013 to restrain the defendants from convening an AGM of the Company, insofar as the shareholders seek to resolve that the Company’s directors be retired and new directors be elected (“the AGM Injunction”).

6. The plaintiffs’ application is based on the following grounds:-

(1) There is a serious issue to be tried that:

(i) the Company, via Cheung, is in breach of the Company’s Articles of Association (“the Company’s Articles”) in the forfeiture of the plaintiffs’ shares in the Company; and

(ii) the Company, via Cheung, has, in breach of the Company’s Articles, wrongfully deprived, and will wrongfully deprive, the plaintiffs of their right to vote as shareholders in shareholders’ meetings.

(2) The plaintiffs will suffer irreparable damage if their shares are wrongfully forfeited at the proposed board meeting because their rights to vote as shareholders will consequentially be wrongly deprived of at the proposed AGM.  Should the plaintiffs be deprived of their rights to vote in the proposed AGM, Rong, Bun and Wang will almost certainly not be re-elected as directors.

(3) The balance of convenience is in favour of preserving the status quo, namely, the existing shareholding and directorship structure of the Company.

7. On the other hand, the defendants contend that the Injunctions should be discharged for the following reasons: -

(1) The plaintiffs’ case does not meet the applicable merits threshold.

(2) Damages would not be an adequate remedy for the defendants.

(3) The plaintiffs were guilty of material non-disclosure in obtaining the Injunctions.

FACTUAL BACKGROUND

8. The Company was incorporated in Hong Kong on 20 April 2010.  The Company was principally formed to carry on the business of installing infrastructure for the provision of heating supply in Jinzhou, the People’s Republic of China (“PRC”).

9. This business was to be conducted through a PRC joint venture vehicle (“the PRC JV”). The PRC JV was to be owned: (i) 80% by the Company; and (ii) 20% by a local joint venture partner (“the JV Partner”).

10. Under the Articles of Association of the PRC JV, the Company was required to contribute RMB 16 million to the PRC JV’s capital.

11. Throughout the period between 3 August 2011 and 24 May 2013, the Company had fully injected RMB 16 million to the PRC JV.  It amounted to approximately HK$19,687,207.

12. According to Cheung, Jackpot had injected HK$10,005,078 into the Company up to September 2012.

13. On the plaintiffs’ case, the balance, in the sum of HK$9,682,129 (ie HK$19,687,207 – HK$10,005,078) must have been injected and paid by the plaintiffs and other shareholders.  This is not accepted by the defendants.

14. It is not in dispute that, up to the date of hearing, the 2^nd to 5^th plaintiffs have not paid in full for their respective shares in the Company.

15. The plaintiffs’ case is that:

(1) There was an express agreement, made between the 2^nd plaintiff (“Ju”) (on behalf of the board) and the so-called “Core Shareholders” (namely, Rong, Ju, Wang, Mr He, Bun and one Wu Fei), that the allotments of shares in the Company to the Core Shareholders would only be payable in full by the end of 2014 (“the Alleged Deferral Agreement”); and

(2) This agreement was evidenced by a board resolution dated 3 August 2011, written in Chinese and signed by Ju (“the Alleged Board Resolution”).

16. The defendants take issue with the plaintiffs as to the existence of such agreement and the extent of their respective capital contributions to the Company.

17. In March to August 2013, conflicts began to emerge between Jackpot and the Company’s other shareholders.

18. On 16 August 2013, a board meeting of the Company took place.  Only Cheung and Chow were present.  It was resolved, inter alia, that all shareholders of the Company should provide proof of capital payment to the Company’s accountants within 7 days.

19. On 12 September 2013, a shareholders’ meeting of the Company was held.  The meeting was attended by Cheung as the representative of Jackpot.  A Mr Loong showed up and attempted to lodge a proxy form signed by Bun, but (as admitted by the plaintiffs) that proxy form was invalid. A Madam Chan also purported to attend as proxy for the 1^st plaintiff (“Liao”), Ju, Rong, Dr Wong and Mr He.  Madam Chan’s vote was disallowed by Cheung (who chaired the meeting).  The meeting then resolved, inter alia, that Fan and Yeung be appointed as directors.

20. On the defendants’ case, Cheung was justified in disallowing Madam Chan’s vote because Liao, Ju, Rong, Dr Wong and Mr He had not provided any proof that they had paid up the capital on their shares, and hence under the Company’s Articles they were not entitled to vote (except for Dr Wong to the extent of 900,000 out of his 1,517,000 shares).  The plaintiffs, on the other hand, claim that Liao, Ju, Rong, Dr Wong and Mr He should all have been allowed to vote, and that the appointment of Fan and Yeung as directors is therefore invalid.

21. On 19 September 2013, a board meeting of the Company was held.  It was resolved (Cheung, Chow, Fan and Yeung all voting in favour) that all shareholders should provide proof of capital payment to the Company’s accountants within 14 days, failing which their shares would be forfeited.  The plaintiffs dispute the validity of this resolution on the ground that Rong, Wang and Bun had already passed a written resolution the day before (18 September 2013) resolving to cast a negative vote.  However, as pointed out by the defendants, this objection must fail if Fan and Yeung were validly appointed as directors on 12 September 2013 (since Rong, Wang and Bun would have been outvoted in any event).

22. On 19 September 2013, Cheung (on behalf of the board) issued written notices to each of Liao, Ju, Rong, Bun, Wang, Dr Wong and Mr He (“the Notices”) demanding that they: -

(1) pay up the unpaid capital on their shares, together with interest; and

(2) provide proof of such payment

by 10 October 2013, failing which the relevant shares may be forfeited.

23. The plaintiffs contend that Cheung was not entitled to issue the Notices.

24. On 30 September 2013, Cheung issued a notice to convene an AGM on 25October 2013.  Among other things, it was proposed to resolve that all directors retire, and new directors be appointed.

25. On 11 October 2013, Cheung issued a notice to convene a board meeting on 17 October 2013.  It was proposed to resolve to: (i) forfeit the shares of Rong, Bun, Ju, Mr He and Wang forthwith; and (ii) forfeit the shares of Liao and Dr Wong unless they provided proof of capital payment within 10 days.

26. It was the issuance of the two notices referred to in paragraphs 24 and 25 above that precipitated the plaintiffs’ obtaining of the Injunctions on 16 and 18 October 2013.

RELEVANT LEGAL PRINCIPLES

27. It is not in dispute that in considering an application for an interlocutory injunction, the court is usually required to apply the well‑settled principles of American Cyanamid Co v Ethicon Ltd [1975] AC 396.  There are three issues which call for examination– (i) serious issue to be tried; (ii) adequacy of damages as a remedy; and (iii) balance of convenience.

28. However, in a case where the practical realities are such that the grant of an injunction would in effect dispose of the action (because, for example, there is no real prospect of the trial taking place before the period of restraint is over), the plaintiff must demonstrate that he is “very likely to succeed at trial”.  The rationale is that, in such circumstances, the plaintiff is effectively asking the court to grant him judgment summarily [See: Chinaplus Wines Ltd v Berry Bros & Rudd Ltd, HCA 1818/2012 (Judgment of Anthony Chan J dated 13/12/2012), at paragraphs 31-33; Fast-Link Express Ltd v Falcon Express Ltd, HCA 2040/2005 (Judgment of Deputy High Court Judge Carlson dated 30/12/2005, at paragraphs 5-9; Cayne v Global Natural Resources plc [1984] 1 All ER 225, at 236b-f].

29. I agree with Mr Wilson Leung, counsel for the defendants, that, in the instant case, the plaintiffs’ claim is premised on their contention that, by virtue of the Alleged Deferral Agreement, they have no obligation to fully pay up their capital contribution until the end of 2014.  However, as a matter of practical reality, there is little prospect of any trial taking place before the end of 2014.  At this stage, the parties have not even conducted discovery, let alone serving any witness statements. Thus, if this court continues the Injunctions, that will in all likelihood dispose of the action.  Whilst the injunctions are not the only relief sought in the action, the injunctions lie at the heart of the matters for these parties.  In the circumstances, the Injunctions should only be continued if the court finds that the plaintiffs are very likely to succeed at trial.

MERITS OF THE PLAINTIFFS’ CASE

The Alleged Deferral Agreement

30. The plaintiffs’ case in this regard has been set out in paragraph 15 above.

31. I agree with Mr Leung that the existence of the Alleged Deferral Agreement is really the crux of the plaintiffs’ case. Although the plaintiffs also complain that the defendants adopted an incorrect procedure in forfeiting the plaintiffs’ shares (which will be dealt with in the next section below), such arguments cannot sustain the Injunctions if the court is not with the plaintiffs on the existence of the Alleged Deferral Agreement.  This is because if the plaintiffs are not entitled to defer payment, then (even if the incorrect procedure had been used in the past) the board is always entitled to issue fresh notices calling upon the plaintiffs to pay up share capital, failing which forfeiture would take place.  To put it simply, the Injunctions really stand or fall with the merits of the plaintiffs’ case on the Alleged Deferral Agreement.

32. In this regard, on the evidence before the court, I am not at all satisfied that the plaintiffs have an overwhelming case or that they are “very likely to succeed” at trial.

33. First, I agree with Mr Leung that the Alleged Deferral Agreement and the Alleged Board Resolution are completely at odds with the contemporaneous documents (many of which were signed by the plaintiffs).

34. As stated in the share application forms, all of the shares owned by the plaintiffs (and by Dr Wong and Mr He) had been allotted on the same basis, namely, that they would be fully paid for upon allotment. Each of the share application forms contained an undertaking by the allottee “to pay in full for the share(s) upon allotment”.

35. The same thing was stated in the board resolutions (all of which were signed by Ju) which approved the various allotments. The first resolution stated that Ju had “taken up and paid for” her one share.  All of the other resolutions stated that the allottee had applied for allotment of shares “fully paid up at par and to rank in pari passu with all existing issued shares”.

36. Further, in all of the Annual Returns of the Company, all issued shares of the Company are stated to be fully paid.

37. Further still, in all of the Return of Allotments, all allotted shares are stated to be fully paid.

38. Second, even though it is common ground that Cheung made numerous demands in August and September 2013 for proof of capital payments from the plaintiffs (even going so far as to block the plaintiffs’ proxy from voting at the shareholders’ meeting on 12 September 2013), a great deal of correspondence passed between the parties without the plaintiffs (some of whom were legally represented at the time) mentioning anything about an agreement to defer payment of capital.  It was only on 27 September 2013 that the Alleged Deferral Agreement was mentioned for the first time.  If the Alleged Deferral Agreement existed, it is hard to believe that the plaintiffs would not have raised it immediately or soon after Cheung started making her demands.

39. Even more astonishingly, the Alleged Board Resolution was not mentioned until 16 October 2013, when it raised for the first time in the Affirmation of Bun.  Indeed, even in the Statement of Claim dated 4 October 2013, there is no mention of the Alleged Board Resolution.  I agree with Mr Leung that there can be no sensible explanation why such a crucial document was not mentioned earlier.

40. Third, Cheung has obtained from the Company’s previous company secretarial firm (one Victon Registrations Ltd) all of the corporate documents in their possession.  However, no copy of the Alleged Board Resolution can be found.

41. After the above was pointed out by the defendants, the plaintiffs then asserted that the Alleged Board Resolution was drafted by Ju herself in Chinese and not by the company secretary.  However, what the plaintiffs have not been able to explain is why the Alleged Board Resolution was not drafted in the same way as every other resolution of the Company (ie in English, by the company secretary). Indeed, if the Alleged Board Resolution was such an important document, then all the more reason why Ju would have left the drafting to professionals.

42. Ju further explains that after signing the Alleged Board Resolution, she kept a copy and put the original into the company kit.  However, the Alleged Board Resolution has never been seen by Cheung who was given the company kit in August/September 2012.

43. Fourth, Bun and Wang only became shareholders of the Company on 19 April 2012, which was: (i) after the Alleged Deferral Agreement (supposedly made in August 2011); and (ii) after Jackpot had become a shareholder.  That being the case, it made no sense that Bun and Wang were “Core Shareholders” who were entitled to defer payment of capital until the end of 2014, whereas Jackpot was not.

44. It was only after the defendants had raised this issue that the plaintiffs put forward (for the first time) a contrived explanation about how Bun did not “formally” apply for shares at the time but “knew all along that [he] would take some shares as and when Woo arranged.”  I agree with Mr Leung that this explanation not only makes little sense, but is scarcely credible given how it was raised by the plaintiffs.

45. In conclusion, for the reasons stated above, the plaintiffs’ case lacks credibility and I am not at all satisfied that the plaintiffs are “very likely to succeed” at trial on the issue regarding the Alleged Deferral Agreement.  That is sufficient for the Injunctions to be discharged.

Alleged incorrect procedure in forfeiting the shares

46. The plaintiffs argue that the defendants adopted an incorrect procedure in forfeiting the plaintiffs’ shares.  The plaintiffs’ argument is based on their interpretation of the combined effect of Articles 21, 40 and 41 of the Company’s Articles.

47. In my view, the plaintiffs’ argument rests on an erroneous reading of the Company’s Articles, and thus is highly unlikely to succeed at trial.

48. I agree with Mr Leung that it is Article 25 of the Company’s Articles (and not Article 21) which is applicable to the facts of this case. Article 25 provides as follows: -

“Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed dates ... shall for the purposes of these Articles be deemed to be a call duly made and payable on the date on which by the terms of issue the same becomes payable, and in case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture or otherwise shall apply as if such a sum had become payable by virtue of a call duly made and notified.” (Emphasis supplied)

49. Article 25 clearly provides that if any sum is due from the shareholder to the Company upon allotment, then it is deemed to be a call.  Therefore, there is no need for the board to separately issue a call under Article 21, since the call is deemed to have been made. 

50. Article 25 also provides that if a shareholder does not pay such sum, then the other provisions in the Company’s Articles as to forfeiture, interest etc are applicable as if a call had been duly made.

51. One then looks at the other provisions in the Company’s Articles which govern calls; -

(1) Article 40:

“If a member fails to pay any call or instalment of a call on the day appointed for payment thereof, the directors may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued.”

(2) Article 41:

“The notice shall name a further date (not earlier than the expiration of 14 days from the date of service of the notice) on or before which the payment required by the notice is to be made, and shall state that in the event of non-payment at or before the time appointed the shares in respect of which the call was made will be liable to be forfeited.”

(3) Article 42:

“If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the directors to that effect.”

52. Thus, it can be seen that the forfeiture of shares for non-payment of calls involve three steps: -

(1) Step 1: a call is made under Article 21 or is deemed to have been made under Article 25.

(2) Step 2: if a call is made or is deemed to have been made, and the amount is not paid, the board can serve a notice demanding him to pay up by a certain day (not earlier than 14 days from the date of serving the notice), failing which the shares will be liable to be forfeited (Articles 40 and 41).

(3) Step 3: if the shareholder does not pay by the said deadline, the board can resolve to forfeit the shares there and then (Article 42).

53. In the present case, as stated in paragraph 34 above, each of the share application forms for the shares owned by the plaintiffs contained an undertaking by the allottee “to pay in full for the share(s) upon allotment.”  Therefore, Article 25 was engaged (Step 1).  To effect forfeiture of the shares for unpaid calls, the board must serve a notice and give the shareholder at least 14 days to pay up (Step 2), failing which the board may then resolve to forfeit their shares (Step 3).  That is exactly what the defendants did: the Notices issued on 19 September 2013 gave Liao, Ju, Rong, Bun, Wang, Dr Wong and Mr He until 10 October 2013 (ie 21 days) to pay up.

54. In other words, the defendants have fully complied with the Company’s Articles in issuing the Notices.

Amount of the plaintiffs’ unpaid share capital

55. The plaintiffs attempt to argue that they have paid some of their share capital (ie HK$9,682,129) and therefore the Notices were not calculated properly.

56. On a factual level, the plaintiffs’ contention cannot get off the ground.  What is remarkable is that the plaintiffs have not produced a single document to support their allegation that they paid HK$9,682,129 as share capital to the Company.  There is not one bank statement, remittance form or accounting voucher.  If the plaintiffs did transfer such a significant sum of money to the Company, there would undoubtedly be at least some documentary evidence – but none has been adduced.

57. All that the plaintiffs can point to by way of evidence is the fact that Jackpot’s injection of capital was insufficient for the Company’s agreed contribution to the PRC JV.  But contrary to the plaintiffs’ argument, it does not follow that the difference was contributed by the plaintiffs’ payment of share capital; there is no reason why loans could not have been used to fund the difference.  Indeed, this possibility was foreshadowed in the evidence adduced by the plaintiffs - in paragraph 8a of the Affirmation of Dr Wong filed on 29 January 2014, Dr Wong stated that as part of the strategy adopted by the Core Shareholders:

“...if the Core Shareholders could not afford to pay the subsequent payments, they would borrow money from other sources, either in the name of the Company or under their own names”. (Emphasis supplied)

Conclusion on the merits of the plaintiffs’ case

58. For the reasons stated above, I am not satisfied that the “very likely to succeed at trial” test has been met by the plaintiffs. With this conclusion, the plaintiffs’ application must be dismissed.  However, for completeness, I shall very briefly deal with the rest of the issues.

ADEQUACY OF DAMAGES AND BALANCE OF CONVENIENCE

59. I have no difficulty in finding that damages will not be an adequate remedy for either the plaintiffs or the defendants.  On the one hand, damage to the plaintiffs from losing control of the board of directors of the Company cannot be sensibly quantified and recognised in damages.  On the other hand, if the Injunctions were continued, the practical reality is that the Company would be unable to exercise any control over the PRC JV, which is effectively now being run by the JV Partner. There is equally no cogent way of calculating how much the Company would lose as a result of this situation.

60. The inadequacy of damages as a remedy would call for consideration of the balance of convenience.

61. The strength of the evidence is relevant here also.  Where the court is able to come to a view as to the strength of the parties’ cases on credible evidence, then it can do so and factor that into the discretion. [See: Centalic Technology Development Ltd v Worldwide Industrial Ltd [1996] 3 HKC 498, at 510D-F]

62. In the present case, the inadequate nature of the plaintiffs’ case as discussed above drives me to the conclusion that a refusal of interlocutory injunctive relief carries with it the lowest risk of injustice.  In the premises, had I been required to do so, I would have held that the balance of convenience is in favour of rejecting the plaintiffs’ application.

MATERIAL NON-DISCLOSURE

63. The defendants also contend that the Injunctions should be discharged by reason of the plaintiffs’ breach of their duty to make full and frank disclosure.

64. The law on material non-disclosure is trite. A helpful summary was given by Anthony Chan J in UES International (HK) Ltd v Maritima Maruba SA, HCA 632/2011 (Judgment dated 19/11/2013), at paragraphs 51-54.  The following principles are of particular relevance here: -

(1) A party applying for an ex parte injunction must proceed with the highest good faith.

(2) The duty to disclose includes the following aspects:

(a) The applicant must make proper enquiries before making the ex parte application.

(b) “Material” means all matters which are material for the judge to know and which are necessary to enable him to exercise his discretion properly.

(c) The disclosure must be made in the affidavit and the skeleton submissions, and not merely in the exhibits.

(3) An applicant has a continuing duty to inform the court as soon as he becomes aware that the court has been misinformed or given incomplete information earlier.

(4) If material non-disclosure is established the court will be astute to ensure that a plaintiff who obtained an ex parte injunction without full disclosure is deprived of any advantage he may have obtained by that breach of duty.

(5) The court retains a discretion not to discharge the ex parte order, or to re-grant the order on terms. However, it would be rare for the court to exercise such discretion if the non-disclosure has neither been shown to be innocent nor properly explained.

65. I agree with Mr Leung that the plaintiffs, in obtaining the Injunctions, failed to mention a number of matters which were relevant to the merits of its case on the Alleged Deferral Agreement and thus should have been put in the scales: -

(1) The plaintiffs failed to mention that in all of the Annual Returns and Return of Allotments, the Company’s allotted shares were stated to be fully paid.  Although the plaintiffs exhibited these returns in their affirmation, no mention was made about these features.

(2) The plaintiffs failed to mention that all of the share application forms and board resolutions which approved the various allotments stated that the shares would be fully paid.  This omission is particularly striking given that most of these documents were signed by one or other of the plaintiffs.

(3) The plaintiffs failed to mention that, despite extensive correspondence with the defendants, they had made no mention of the Alleged Deferral Agreement until 27 September 2013 and no mention of the Alleged Board Resolution until 16 October 2013 (and indeed had not even mentioned the Alleged Board Resolution in the Statement of Claim).

(4) The plaintiffs failed to mention that the Alleged Board Resolution was entirely different from all of the Company’s other resolutions (which were prepared in English by a professional company secretarial firm).

(5) The plaintiffs failed to make clear that Wang and Bun only became shareholders in April 2012, ie significantly after the Alleged Board Resolution and after Jackpot had become a shareholder.

66. In light of the above, I would discharge the Injunctions on the basis of material non-disclosure alone.

CONCLUSION

67. For the reasons stated above, the plaintiffs’ application is dismissed.  I further order that the Injunctions be discharged.

68. I order that the costs of the application be paid by the plaintiffs to the defendants.  Such costs shall be taxed on the party and party basis, if not agreed.

69. The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

70. Lastly, I thank counsel on both sides for their helpful assistance in this matter.